Saving For A Down Payment In An Expensive Real Estate Market - Part 1

[00:00:00] Welcome to the Canadian Real Estate Investor, where hosts Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio.

[00:00:12] Okay, welcome back to the Canadian Real Estate Investor Podcast. Today I am not joined by the wonderful Nick Hill, I'm joined by a far handsomer Canadian friend.

[00:00:21] Simone, how are you from the Canadian Investor Podcast, our podfathers, the podfather himself. Welcome to the show, always a pleasure to have you.

[00:00:31] How are you doing? What are we talking about?

[00:00:33] Yeah, I'm doing good. We've been meeting to do this episode for quite some time.

[00:00:38] So, I mean the theme, we always try to focus a bit more on real estate when we do something together, but we kind of try to mix it between real estate and investing.

[00:00:47] We've done like REIT's episode before and this one is not different.

[00:00:51] We're going to be looking at saving for putting a down payment either on a home, a house you want to buy or even like I know a lot of your listenership,

[00:01:00] it's more about investment properties. So that would apply as well if you want to get started and get an investment property.

[00:01:06] So we'll look at the different type of accounts, different kind of consideration.

[00:01:10] I know, you know, you guys talk a lot about, you know, especially when it comes to investment properties, but I guess it would apply for a home.

[00:01:17] There are some more affordable markets. You remind me of that all the time.

[00:01:22] It's not just GTA and greater Vancouver area and the big cities.

[00:01:26] There are some smaller markets where it makes sense, but yeah, different type of accounts and different kind of strategies you can use to build that down payment.

[00:01:35] And because I think you will echo me in saying that this episode is probably more a symptom of the unaffordability that a lot of Canadians are facing right now for housing.

[00:01:47] Yeah, for sure. And I think Canadians are really forced to maximize the programs that are available, which are numerous.

[00:01:54] Like, I mean, there's a ton of the registered programs and then there's a ton of assistance that's evolved as a result of changes to CMHC policy, extended amortization, extended buying power.

[00:02:04] And it's interesting because, you know, you mentioned our audience is a lot of real estate investors, but the reality is we also have a ton of homeowners and home buyers who listen to the show.

[00:02:14] The way like most people, the first real estate investment or real estate asset that they own is their primary residence.

[00:02:21] And I'm not really a fan of how much the primary residence has become considered an investment in Canada.

[00:02:28] I think that it's a little bit, you know, I think it's a little bit of an issue.

[00:02:31] Tell that to my father-in-law, but yeah.

[00:02:34] But the reality is for most Canadians where, you know, I mean, the average person isn't as an experienced of an investor as you would be as an example.

[00:02:44] I would be a good example of that as well.

[00:02:47] And they don't have the knowledge that is required, personal finance or investing knowledge, to really be successful and create outsized returns and beat the market.

[00:02:58] And real estate is one of the few places where you get forced savings, which Canadians need based on our household savings rates.

[00:03:04] You know, it forces you to pay a mortgage each month and it gives you leverage.

[00:03:10] And so it's hard for even if the house goes up in value at inflation of 3%, the leverage, the fact that in most cases with a 20% down payment, you have the same leverage that a hedge fund would get.

[00:03:21] And actually, I was sitting with a hedge fund yesterday in Toronto who he said, he's like, it's very tough for the average person to beat the primary residence.

[00:03:30] And so this is where we've evolved to the point where most Canadians consider their house an investment.

[00:03:35] And that's why we're going to talk about what we're going to talk about today.

[00:03:38] Yeah, I mean, I think it's and I made a joke about my father in law, but I think you you know, there's that a lot of baby boomers have done quite well, right?

[00:03:47] Well, real real estate over time.

[00:03:49] So a lot of the value over time, I mean, a lot of them are dependent on that value on the equity they have in their home just for their retirement, for example.

[00:03:58] So I think a lot comes there.

[00:04:00] And that's knowledge that, OK, when you're renting, you're not paying off like it's just going in the abyss.

[00:04:06] You're not getting any value in return where you own a home.

[00:04:09] Your mortgage actually brings down your total mortgage outstanding and people.

[00:04:15] That's kind of the main argument with no other context around that.

[00:04:19] That's what I've noticed.

[00:04:20] And, you know, there is no comparison whether you invest that money and there are some simple ways.

[00:04:26] And I will go over that in the second part of this episode.

[00:04:30] I will be on the other podcast.

[00:04:31] Some simple strategies that you can do to be able to build a down payment.

[00:04:36] But I think, yeah, I don't know what it is.

[00:04:38] I think it's just because a lot of people have done so well in real estate and, you know, people we trust oftentimes are parents.

[00:04:44] Yeah. And I think the other piece is like, you know, in comparison to the US as well, giving it that Canadian context in the US, the primary residence is subject to capital gains after a certain point.

[00:04:54] You know, there's a there's it depends on if it's individual or spousal, but there's different gates that, you know, you have like 250 K that's exempt from capital gains in Canada.

[00:05:04] The primary residence is 100 percent capital gains exempt.

[00:05:07] And so, you know, there was a recent poll that I saw that came out around, you know, biggest economic issues that people feel need to be tackled by politicians in the upcoming election and income tax and just taxes in general reduction in taxes was the leading issue actually above housing affordability.

[00:05:22] And so to me, like that is one of the things that when you think of net after tax return, that's one of those really compelling advantages of the primary residence.

[00:05:31] It's also the compelling primary advantage of the registered accounts that we're going to talk about today, which is the FHSA, the TFSA and the RRSP as vehicles for you to save and then deploy your down payment.

[00:05:44] Yeah, exactly. So the FHSA was introduced by the current liberal government on April 1st, 2023.

[00:05:53] It's only for first time homebuyers. So if you also qualify if you have not home a home as your principal residence in the last four calendar years.

[00:06:02] So, you know, it's not just for first time homebuyers.

[00:06:05] You basically have had to not have had a home in some time.

[00:06:09] And I was reading up on it.

[00:06:11] Born again, first time homebuyers.

[00:06:12] Yeah, those exactly. And it applies to as long as you you live in the units like I was looking on the website on the government website and you can get some pretty big multiplexes that would qualify for that.

[00:06:26] Yeah, I guess it depends. I don't know how much of it though.

[00:06:29] Like it would vary on a case by case basis.

[00:06:31] But in a lot of in a lot of those cities where you could get a multi unit, they certain lenders will not look at the subject units as like primary residence.

[00:06:41] Right. So they'll say, OK, that part's a rental property.

[00:06:43] CMHC does have a program for multi units and there's new programs evolving for multi units.

[00:06:47] But the details are still a little blurry.

[00:06:50] So I'm reluctant to give a clear answer to that question.

[00:06:54] OK, that's fair.

[00:06:55] Yeah, I was looking.

[00:06:56] I mean, I was looking at it more thinking about like duplex and triplex.

[00:07:00] Right. But it seems like anyways, maybe the information is a bit vague, but I was surprised to see kind of bigger multi units as well on the list there.

[00:07:08] But to get back to the account, so you must be 18 years of age.

[00:07:12] There's a contribution limit of $8,000 a year.

[00:07:15] So it's essentially a mix of an RSP and TFSA, which we will talk about, you know, shortly as well.

[00:07:22] I guess the easiest way to explain it without going into too much detail for RSPs and TFSA.

[00:07:27] So RSP, you when you make a contribution, you get a tax credit.

[00:07:30] So it reduces your taxable income and TFSA.

[00:07:34] It's for income that's already been taxed.

[00:07:36] So what how this account works is essentially you get a tax credit when you make a contribution to the FHSA.

[00:07:42] Anything that you earn within it is tax free as long as you use it to buy a home within the prescribed time period.

[00:07:49] So it's a fantastic vehicle for that.

[00:07:52] I mean, if you're looking to buy a home for the first time and you don't have an FHSA, I don't know what you're doing, but you're doing it wrong.

[00:08:00] I'll just say flat out like that.

[00:08:02] Income and gains, like I said, inside the FHSA, as well as withdrawals will be tax free.

[00:08:07] You can contribute up to $40,000 for a lifetime.

[00:08:11] But that's not just you if you're a couple, right?

[00:08:13] It could be your it's your spouse and yourself as well.

[00:08:17] You can carry over up to $8,000 of unused annual contribution to use in a later year.

[00:08:23] Carry forward amounts don't start until you've actually opened an FHSA.

[00:08:27] So I don't think I've told you this, but Braden, the co-host of the Canadian Investor podcast, it was late last year.

[00:08:35] I was like, oh, I know he like eventually wants to buy a home.

[00:08:38] He doesn't have a set time frame.

[00:08:39] Make sure you open an FHSA account before the end of 2023 if you want to have the $8,000 contribution room.

[00:08:48] So he ended up doing that.

[00:08:50] Now, essentially an example of this.

[00:08:52] So if you open an account in 2024, so this year and you contribute $4,000 this year, that means you'll carry over $4,000 the next year.

[00:09:01] So next year, you'd be able to contribute $12,000, four plus eight.

[00:09:04] You can hold the same type of investment you would own in a TFSA or RRSP.

[00:09:10] So for the withdrawals, like I mentioned, withdrawals to buy qualifying home purchases are not taxable.

[00:09:17] The withdrawal must meet the following criteria.

[00:09:20] So you must be a first time home buyer when you make the withdrawal.

[00:09:23] You must have a written agreement to buy or build a qualifying home before October 1st of the year following the year of the withdrawal.

[00:09:30] You must intend to occupy the home as a principal place of residence within one year after the purchase.

[00:09:36] If you have any funds left over after the withdrawal, they can be transferred to an RRSP or a RRIF penalty free.

[00:09:45] A RRIF is a registered retirement income fund.

[00:09:49] It's typically something that you'll transfer.

[00:09:52] It's essentially for an RRSP when you want to start drawing income on it.

[00:09:56] You are forced to transfer RRSPs to RRIF when you turn 71 without going into too much detail.

[00:10:03] That's more of a retirement thing.

[00:10:04] The funds must be used to buy a home within the following time frame, whichever one comes first.

[00:10:10] By the end of the 15 year that the plan was open or the end of the year in which you turn 71.

[00:10:17] One, I'm going to assume the 71 is just because I mentioned that because once you hit 71, you have to convert RRSPs to RRIF.

[00:10:24] So I'm sure they kind of made the accounts with that in mind.

[00:10:28] Last thing here, and I know you'll be adding a few more things.

[00:10:31] So if you withdraw the money from the account and end up not using it on a home purchase,

[00:10:35] you'll have to pay taxes on it just like you would if you contributed money to an RRSP and you withdrew that.

[00:10:42] So it adds to your taxable income.

[00:10:45] Yeah, the only other things I would add in regards to the withdrawal portion on the FHSA is that I've seen it criticized a lot in Canada.

[00:10:55] And I'm in the GTA and so my context is probably a little bit skewed, but people are saying,

[00:11:01] oh, you know, it's only a $40,000 lifetime value.

[00:11:04] And that seems like a really small amount.

[00:11:06] But when it's combined with a spouse, because most people buy households with a partner now and with the spouse's RRSP,

[00:11:14] which we're going to get to, it can be meaningful.

[00:11:16] Like when you double that amount and add it to your RRSP,

[00:11:19] which you should be stacking these tax advantaged investment programs,

[00:11:24] you can actually amass a pretty meaningful down payment.

[00:11:27] And you can save a lot of tax in the process of doing that.

[00:11:31] The average Canadian would save something like $12,000 in taxes over the five-year period.

[00:11:35] So right there, like it's a pretty good return on your investment.

[00:11:39] That's assuming a 30% tax rate.

[00:11:41] Obviously, if you're in a higher marginal tax rate, those savings would be higher as well.

[00:11:46] Yeah, yeah, exactly.

[00:11:48] And I know and I think it's important to remember, and I think we'll discuss that is,

[00:11:52] you know, there's more than just the GTA and the greater Vancouver area.

[00:11:57] Obviously, you know, I'm in Ottawa.

[00:11:59] Like, it's not that homes are very cheap in Ottawa either.

[00:12:01] So the 40K would be, 4K alone would be quite small for most options in Ottawa.

[00:12:07] But again, I think you can stack them together.

[00:12:10] You can also, you know, it's easy for us to say here,

[00:12:13] but we also assume that people have enough money to max out the FHSA.

[00:12:17] And that's where we'll get into different, you know, strategies you can take with investment,

[00:12:22] depending on whether you're able to save a lot per month or not.

[00:12:26] For sure.

[00:12:28] Okay, so now we'll go on to the TFSA.

[00:12:32] TFSA was introduced in 2009.

[00:12:34] You can start accruing contribution room once you turn 18, as long as you're a Canadian resident.

[00:12:39] Any unused contribution room is carried over indefinitely.

[00:12:43] You know, my personal opinion on TFSA, regardless if you want to use the money to buy a home or not,

[00:12:49] it's one of the best investment vehicles out there.

[00:12:53] The U.S. has something somewhat similar, but it's a retirement account.

[00:12:57] There is more restrictions on withdrawal than a TFSA.

[00:13:00] So TFSA is great because it's flexible.

[00:13:03] Of course, with flexibility, you need to have discipline as well.

[00:13:06] So that's important to note.

[00:13:09] The funds that go into a TFSA have already been taxed, like I mentioned earlier.

[00:13:13] There's no tax credits for contribution.

[00:13:15] I do say that because in my regular job, that's a confusion that I see from time to time,

[00:13:20] is people think there is a tax credit.

[00:13:22] There is not because the money has already been taxed.

[00:13:25] Any gains within the account on eligible investment is tax-free.

[00:13:30] However, there are some caveats on that is, first of all, don't start day trading

[00:13:34] because the CRA will likely come after you.

[00:13:37] They do not define what or they say high frequency trading.

[00:13:41] But as the CRA is usually is, they keep things very vague.

[00:13:46] So just be careful.

[00:13:48] It should be used more as a buy and hold.

[00:13:50] Doesn't mean you can't buy a stock and sell it a few months later.

[00:13:54] I don't think they would come after you for that.

[00:13:56] But high frequency trading, they can basically tell you, well, we consider that business income

[00:14:00] and we will tax you.

[00:14:02] There's also dividend income.

[00:14:04] If it's outside of Canada, there's a good chance it will be a tax.

[00:14:08] It will be a withholding tax applied.

[00:14:10] For example, in the US, it would be applied by the US government.

[00:14:14] That's because there is no tax treaty for this type of account because it is not a retirement account.

[00:14:19] The withholding tax would not apply for an RRSP.

[00:14:22] For 2024, the contribution room is $7,000.

[00:14:25] You can hold cash, stocks, bonds, ETF, GICs, for example.

[00:14:30] For stocks, you have to make sure it is listed on eligible exchange,

[00:14:34] which most of the major exchanges do qualify for that.

[00:14:39] Now, one caveat I would say is if you make a YOLO investment.

[00:14:43] So, I mean, talking about a long shot investment.

[00:14:47] Yeah, exactly.

[00:14:47] The GameStop were those VIX options.

[00:14:53] In your TFSA and you lose all the money you've contributed,

[00:14:57] that contribution room is lost forever.

[00:15:00] You'll still have access to the new contribution room that will come up in subsequent years.

[00:15:06] For example, say you contributed the maximum last year to your TFSA

[00:15:10] and that was $80,000 for you based on when you turn 18.

[00:15:13] You lose it all.

[00:15:14] Next year, you would have $7,000 in contribution room because that's the new amount that you will get next year,

[00:15:21] assuming it's still $7,000.

[00:15:23] So, keep that in mind because, in my opinion, it is very valuable to have that contribution room.

[00:15:29] So, making sure you balance kind of growth and risk is quite important here.

[00:15:34] And, you know, do not over contribute.

[00:15:36] Keep track of your contribution because there is a 1% penalty per month on the over contribution amount.

[00:15:42] That will apply until the over contribution amount has been withdrawn.

[00:15:47] Yeah, I think the contribution room thing matters,

[00:15:51] especially if you end up becoming one of those 29 Canadians who have a tax-free savings account with over $5 million in it.

[00:16:00] Have you heard about that?

[00:16:01] Isn't that crazy?

[00:16:02] No.

[00:16:04] There's some Globe article of these people who are making like, I don't know,

[00:16:07] $250,000 or $300,000 a year on dividends tax-free.

[00:16:10] And I was just like, that's the TFSA right there.

[00:16:13] That's the dream.

[00:16:14] There you go.

[00:16:15] Like, I mean, I think mine has done pretty well, but I'm nowhere near that.

[00:16:20] Yeah, same.

[00:16:21] Same.

[00:16:22] The, I guess we'll move on to the RRSP piece.

[00:16:28] The RRSP has an interesting element that's called the Home Buyers Plan or HBP,

[00:16:34] which basically allows first-time home buyers and I think the born-again buyers that you were mentioning as well

[00:16:40] to withdraw up to $35,000 from their RRSP, Registered Retirement Savings Plan, tax-free to put it towards a home purchase.

[00:16:48] Now, there are some exceptions to that rule.

[00:16:50] Like, you have to pay it back within a certain period of time, but I'll get to that.

[00:16:53] So, the eligibility is basically you must be a first-time home buyer or have not owned a home in the last four years.

[00:17:00] So, again, that's that born-again first-time home buyer.

[00:17:03] We'll call them that.

[00:17:04] You need a written agreement to buy or build a qualifying home.

[00:17:07] So, very similar to the FHSA, you must intend to occupy the home as your principal residence within a year of purchase.

[00:17:15] Then, to maximize your tax benefits, you would want to make an RRSP contribution over time, probably before withdrawing under the HBP.

[00:17:24] This would reduce your taxable income for the year in the same way that the FHSA does,

[00:17:29] where basically any income that you put into your RRSP is income that you're not paying tax on at your marginal tax rate.

[00:17:38] But you do have to pay tax when you take it out at your tax rate then.

[00:17:43] And so, you're almost loaning yourself the money, I suppose, when you do it for the HBP, which we'll explain.

[00:17:48] So, ideally, you would make the RRSP contributions in the year of, so you can really maximize on that tax saving,

[00:17:58] or the couple of years prior to, again, really beef up your savings program and claim the tax deduction in those couple of years leading up to buying the house.

[00:18:06] In order to withdraw the money, you fill out the T1036 form, HBP request to withdraw funds from an RRSP.

[00:18:12] I think if you, most of the platforms, just when they ask you in like kind of your KYC process,

[00:18:19] I think when you're making a withdrawal, like it's kind of within an automated program,

[00:18:23] or you just talk to your banker, or there's like a button on the website in most of those RRSP management platforms,

[00:18:30] where you can do it in an online setting.

[00:18:34] You can withdraw up to 35K individually.

[00:18:36] So, again, a couple would be able to do 70K.

[00:18:38] So, now when we're adding the 2x40,000, assuming you maxed out your FHSA in five years,

[00:18:46] and then you've got 2x35,000, you know, it's like I would say that's a pretty meaningful amount of money

[00:18:53] towards a down payment of the average Canadian house.

[00:18:56] And I have some examples later on as well.

[00:18:58] With the RRSP withdrawal, you have up to 15 years to repay the amount withdrawn.

[00:19:03] And each year you must repay at least 1 15th of the withdrawn amount,

[00:19:08] or it will be added to your taxable income for that year.

[00:19:12] You can make repayments directly into your RRSP and designate them as HPP repayments.

[00:19:18] Did, yeah, for the maximum amount, I thought the, did the Liberals increase that this year?

[00:19:24] I thought it was, or when is it, when is the increase coming into effect?

[00:19:27] I think, I think you're right.

[00:19:29] I think it's for 25.

[00:19:30] 25.

[00:19:31] I'll look, I'll look that up.

[00:19:32] Okay, yeah.

[00:19:33] And then, yeah, the only, the only like advice I really have around this one is contributing early.

[00:19:39] Obviously, do it as early as you can to kind of get the growth in the RRSP on some of that capital.

[00:19:46] And also, again, maximize on the tax benefit towards your savings program.

[00:19:51] So, any of that money that you would have saved on taxes, try and put that towards the,

[00:19:56] towards the savings towards your down payment,

[00:19:59] assuming you want to put some cash from outside of these registered accounts towards your down payment as well.

[00:20:05] Or other investments or whatever.

[00:20:07] Yeah, I did find it.

[00:20:08] So, it was, yeah, it's in degrees to 60.

[00:20:10] Right.

[00:20:11] Yeah, sorry.

[00:20:11] I forgot.

[00:20:12] Does it start in, oh, it's of April of this year.

[00:20:15] April 16th.

[00:20:15] Oh, April of this year.

[00:20:16] Okay.

[00:20:17] So, small correction.

[00:20:18] Yeah.

[00:20:18] Editor Maya, remove all of that.

[00:20:20] Just kidding.

[00:20:21] It's okay.

[00:20:22] It's all good.

[00:20:23] So, yeah.

[00:20:23] So, 60,000.

[00:20:24] So, that's pretty meaningful when you start combining that.

[00:20:26] So, now you've got 120 plus 80.

[00:20:28] I mean, 200K.

[00:20:29] If you can't find a decent starter home with a 200K down payment between a couple,

[00:20:33] I think you're, maybe you're looking in the wrong place.

[00:20:38] Yeah.

[00:20:38] Well, I mean, it could also be, you know, if you have a big down payment, but you may

[00:20:43] not have the income to match.

[00:20:44] Right, yeah.

[00:20:44] So, then you require a larger down payment.

[00:20:47] So, I guess that could be part of the issue.

[00:20:49] Yeah, it's true.

[00:20:49] Yeah.

[00:20:50] If you couldn't qualify for that, for a mortgage of that size, you know, assuming like a million

[00:20:55] dollar purchase, but you can't qualify for an 800K mortgage.

[00:20:59] Although, my guess would be if you maxed out both of those programs, you probably aren't

[00:21:02] doing too bad in the income category either.

[00:21:05] No, that's fair.

[00:21:06] That's fair.

[00:21:07] Unless you're just eating like Kraft dinner for a day.

[00:21:09] Yeah, that low expense college diet lifestyle.

[00:21:13] You've been reading my diet plan, right?

[00:21:16] Yeah.

[00:21:17] So, I guess the idea of like stacking these things is really where, from my perspective,

[00:21:23] you get the meaningful benefit, like we kind of just mentioned.

[00:21:25] So, I think if you combine the down payment calculation for a couple, the HPP would be

[00:21:33] again, that 60 plus 60, so 120K.

[00:21:37] And then the FHSA is 40K each, so 80,000.

[00:21:42] So, that would give you a total maximum down payment.

[00:21:43] My math here uses the previous limit.

[00:21:46] But even then, I mean, let's just say you only had 35K because I feel like 60-

[00:21:49] I was going to say you're on this spot.

[00:21:51] Math is quite good.

[00:21:52] I'm impressed.

[00:21:52] But the previous math, like even if each person had 35K in, you have 70,000 RRSP plus 80,000

[00:22:02] FHSA, $150,000.

[00:22:04] It's a great down payment, honestly.

[00:22:05] Like I would say that you should be proud if you're going into your purchase with that

[00:22:08] much down payment.

[00:22:09] So, you're- and again, tax-free when you take it out.

[00:22:13] You know, if you assume that you are buying with an insured mortgage, you have 5% on the

[00:22:19] first 500,000 of the purchase price, 10% on the amount between 500,000 and a million dollars.

[00:22:25] Properties today, as of October 2024, over 1 million require 20% down payment.

[00:22:32] That's going to change in December.

[00:22:33] So, that could also extend that buying power a bit.

[00:22:37] I'm imagining the borrowing power at that point over a million, I would say, is really where

[00:22:41] you bump into the issues when you're starting to say, okay.

[00:22:43] Yeah.

[00:22:44] But now you'll be able to buy up to 1.5 million with an insured mortgage.

[00:22:48] We don't know what the down payment structure is, but it sounds like it's going to be 10%

[00:22:51] all the way up to 1.5 mil.

[00:22:53] So, assuming a conventional insured mortgage where the down payment is less than 20%, let's

[00:22:57] say you do 150K down.

[00:22:59] So, that's 25,000 on the first 500 and then 10%, so 50,000 on the next 500 with $150,000

[00:23:07] down payment.

[00:23:08] This would cover the required amount for a purchase of up to 950,000.

[00:23:13] So, that's if you're using an insured or if you offer a 20% down payment to avoid mortgage

[00:23:18] insurance and you'd end up with a higher interest rate, which is kind of crazy from my perspective

[00:23:22] that our highest leverage borrowers get the lowest interest rates.

[00:23:26] But anyway, I'll set that one aside.

[00:23:27] Although, actually, this is worth thinking about from a personal finance perspective.

[00:23:31] Your real cost of borrowing is actually higher because your CMHC premium, like the insurance,

[00:23:37] gets added to your principal.

[00:23:38] So, you technically get a cheaper rate, but you're actually paying more because you're

[00:23:41] paying 4% baked in cost and then you pay interest on that for the rest of your mortgage, right?

[00:23:46] So, just worth...

[00:23:47] Does it ever...

[00:23:48] Is it ever advantageous to say like, I'll put 19% down?

[00:23:54] I have 20%.

[00:23:55] I will put 19% down, get the CMHC insurance.

[00:24:00] But because I'm putting 19% down, I know the ratio for CMHC insurance will be lower.

[00:24:05] So, does it ever even out where you're...

[00:24:08] Yeah, it's more advantageous to do that because you're benefiting from the lower rate?

[00:24:12] I guess it could, yeah.

[00:24:14] I mean, if you looked at the CMHC insurance premiums, basically, maybe from like the difference

[00:24:22] between 20% and like 12.5% or whatever it is, could make sense because your premium's not

[00:24:29] really that high at that point.

[00:24:32] But for like when you go to like 90% or like 95%, it's like a 4% CMHC premium.

[00:24:39] And so, in order to offset that cost by getting a better rate, it would have to be a really

[00:24:43] compelling rate, like a delta on the rate.

[00:24:46] But if you're at the 2.8%, which is the CMHC premium for 80% to 85%, so that's at like

[00:24:53] 10 to 50% or sorry, the difference between 20 and 15, it's only 280 or sorry, 2.8% interest

[00:24:59] rate, which would be easier to beat again over the interest rate on your first mortgage

[00:25:05] term.

[00:25:06] But yeah, I guess you just run a cost benefit on it.

[00:25:08] I would say in most cases.

[00:25:09] Yeah, exactly.

[00:25:10] Yeah.

[00:25:10] Yeah.

[00:25:11] So, let's look at the 20% down payment here.

[00:25:13] So, if you had 150% down or sorry, 150,000 down, it would let you purchase a property up

[00:25:18] to 750,000 at a 20% down payment.

[00:25:21] So, again, like, so that kind of gives you your scope is like, okay, if you want to be

[00:25:24] the lower loan to value borrower, have more equity in your house, your low end of purchase,

[00:25:29] assuming you can qualify on the income side is 750K.

[00:25:33] If you max out these programs at 150K, and then your high end would be 950,000, let's say.

[00:25:40] So, I would assume that that's now going to extend with these new changes that have come

[00:25:45] into place of that 60K.

[00:25:47] You know, that would extend probably to an 800 to like over 1 million, which is probably

[00:25:52] why they're extending these insurable mortgages above a million because basically they've realized

[00:25:58] that you've created this new class of borrowers that can afford a lot more and they need to

[00:26:02] tailor the mortgage environment to make sense.

[00:26:05] Anything you want to add to that?

[00:26:06] No, I think that's a good overview of just kind of using the different vehicles.

[00:26:11] And I think this, you know, you know this stuff pretty well too.

[00:26:14] So, I'll let you continue if I have some comments.

[00:26:17] I'll say that as you go along.

[00:26:21] Yeah, so I guess I would use that to kind of segue to these new programs that are coming

[00:26:26] out with CMHC mortgages.

[00:26:29] So, again, I typically don't really encourage people to think too much of their primary residence

[00:26:33] as an investment, mostly just because like investments are things that you can lose.

[00:26:37] And I wouldn't want people to lose their investment or lose their home because they

[00:26:42] made an investment and their investment didn't materialize the way they wanted to.

[00:26:45] But you've got this new environment where the government's really making an effort to

[00:26:51] get housing created and to make housing more attainable, not really affordable, but attainable

[00:26:57] for first-time buyers especially.

[00:26:59] And so, in the less affordable markets in Canada, so I would say your big four cities,

[00:27:05] right?

[00:27:05] Your Toronto, Lower Mainland, Calgary, and Ottawa, and Montreal, I guess five.

[00:27:12] That $1.5 million CMHC cap is probably actually going to unlock a lot of homes for your kind

[00:27:21] of like high earning two income households that just haven't been able to save 20% down to

[00:27:28] buy above that million dollars yet.

[00:27:31] And now, all of a sudden, they can buy with a reduced down payment between a million and

[00:27:36] 1.5.

[00:27:36] That comes out in December of 2024.

[00:27:41] So, TD's Rishi Sandi, their economist actually did a study basically saying he expects almost

[00:27:47] all of the growth from this policy to be front run into the first half of next year.

[00:27:51] And basically, it'll completely push that, like your demand curve will get moved up so

[00:27:56] much that it'll push that affordability out in that segment of the market, that one

[00:28:00] to one and a half million.

[00:28:01] So, that basically price growth will be almost muted for the remaining half of the year and

[00:28:05] probably indefinitely.

[00:28:06] So, you'll see a lot of people basically be like, oh, I can finally buy that $1.25 million

[00:28:11] house.

[00:28:12] I can finally buy the house in Toronto.

[00:28:13] I was renting before because I couldn't find anything or I can buy the house in Vancouver.

[00:28:17] I was renting before because I could never find a house in Vancouver.

[00:28:21] And now, all of a sudden, you can because you can go up to 1.5.

[00:28:25] Maybe Vancouver is a bad example.

[00:28:26] But in Toronto, that's achievable.

[00:28:27] And in Ottawa, that's achievable.

[00:28:28] And yeah, so they've made that now where, again, you're smart, high earning people with

[00:28:38] tax advantage, personal finances using the mechanisms that we just explained have kind

[00:28:43] of unlocked this whole new world of purchases.

[00:28:47] Anything you want to add to that?

[00:28:48] Or I can continue on to like kind of the back end piece, which is the refinancing on the

[00:28:52] multi-plexes.

[00:28:53] Yeah.

[00:28:53] I mean, the only thing I'll mention is, yeah, like I think we share similar views to an

[00:28:57] increase to 1.5 million.

[00:28:59] I think at the end of the day, as we were talking about this before we started recording

[00:29:04] because I just sold my house in Ottawa conditionally.

[00:29:08] But when you get approved, pre-approved for a mortgage, it doesn't mean that you need to

[00:29:14] go to the maximum amount.

[00:29:15] Like make sure you actually do the calculations yourself on what you can afford because, you

[00:29:22] know, I find they're pretty generous with those approvals.

[00:29:27] That's just my personal view.

[00:29:29] Even despite the stress that's just based on personal experience.

[00:29:34] And at the end of the day, think about it.

[00:29:37] Like a lot of people kind of just say, oh, yeah, we'll be fine.

[00:29:40] They kind of look at the amounts of they only look at the monthly payment.

[00:29:44] That's what I've noticed as well.

[00:29:45] Not at the actually purchase pride.

[00:29:47] That tends to be the trend of homebuyers.

[00:29:50] And I know that's how you qualify.

[00:29:51] You will qualify on the monthly payment.

[00:29:53] But, you know, remember that things happen.

[00:29:57] You know, you could go on disability.

[00:29:59] You could have loss of income.

[00:30:02] You know, the payment might be manageable right now.

[00:30:05] But what happens if these things like happen?

[00:30:08] It's probably not great.

[00:30:10] And if you're really going to the master of your budget, I'm going to go on a limb and

[00:30:13] say you're probably don't have a massive emergency fund.

[00:30:17] So I just wanted to kind of give that cautionary tell here.

[00:30:22] No, I would agree.

[00:30:23] I think that that's one of the biggest issues that we see in the GTA and in the lower mainland

[00:30:28] is, well, that's the reason why those two markets recoiled the fastest when interest rates

[00:30:34] went up is because they were incredibly credit sensitive markets.

[00:30:37] Like all of your buyers were buying at their max borrowing power.

[00:30:41] And so as soon as rates went up, the max borrowing power of those markets started to

[00:30:46] contract.

[00:30:47] And the prices literally came down one to one with what rates reduce borrowing power by.

[00:30:53] And so it adds a layer of volatility to the market as well when you've got a really credit

[00:30:58] dependent market.

[00:30:59] I think especially, and we're kind of on like the last frontier of what the end of this credit

[00:31:03] cycle looks like in Canada.

[00:31:04] I won't use the R word or any of these other, you know, economic terms.

[00:31:09] Or the fourth turning or anything.

[00:31:11] But, you know, I think that there's this, obviously we're going from a low rate environment into

[00:31:17] a, you know, historically average rate environment.

[00:31:20] And we, the last thing that ends up to respond to those rates is your unemployment.

[00:31:28] This is where you've got like what you described, the real risks of, you know, everybody can underwrite

[00:31:34] your mortgage based on the payment and whatever.

[00:31:37] But what the stress test doesn't really account for is like, how likely are you to, you know,

[00:31:42] be laid off or, and we're in a rising unemployment environment.

[00:31:44] And these are the things that people really need to consider now ahead of making their purchase

[00:31:48] decisions.

[00:31:49] Like, do I have real job security?

[00:31:51] Right.

[00:31:52] Am I, could, how long could I continue paying this mortgage if we went down from a two income

[00:31:59] household to a one income household and it took me three or six months to get a new job?

[00:32:04] Because that, that to me is the economy that we're in.

[00:32:06] Right.

[00:32:07] And remember that dream home that you bought in the max of your budget that you can no

[00:32:11] longer afford, it doesn't look as good when you can no longer afford it.

[00:32:16] Yeah, for sure.

[00:32:16] For sure.

[00:32:17] Maybe nicer to cry in.

[00:32:18] Who knows?

[00:32:18] They say that.

[00:32:19] What is it?

[00:32:19] Yeah.

[00:32:20] To cry in a Lamborghini or whatever.

[00:32:22] Yeah.

[00:32:23] So I guess the last piece I'll mention here is, and this kind of goes towards that, that

[00:32:27] piece where I like this policy, but I think it adds a bit of a hedge against like what

[00:32:33] we were just describing where the government basically changed mortgage insurance rules

[00:32:38] to enable homeowners to add secondary suites.

[00:32:41] So they're coming with another class of insured mortgages basically where you can refi up to

[00:32:45] 90% of a $2 million valuation, which honestly is pretty crazy when you think about it.

[00:32:51] So if you've added suites to your property, so if you're a homeowner and you're willing

[00:32:56] to live, share your space with another family, not share your space, but like you have a

[00:33:02] large building with two or three units in it, a multiplex.

[00:33:06] Yeah.

[00:33:07] Yeah.

[00:33:07] You can live in this.

[00:33:09] We're calling them ownerplexes.

[00:33:11] That's our creative name for them.

[00:33:12] But you can live in an ownerplex and you can get to a higher leverage point.

[00:33:16] So you can take on a lot more debt.

[00:33:17] And the logic being that you're creating rental housing and the rents are subsidizing that

[00:33:22] mortgage payment.

[00:33:22] So now all of a sudden, like, again, I never really felt it was appropriate for the government

[00:33:27] to be backstopping taxpayer insuring 90% loan to value mortgages of any kind, to be honest

[00:33:33] with you.

[00:33:33] Like, I don't think we should be in the business of creating high leverage real estate debt,

[00:33:37] but if they're going to do it, I would actually prefer that they do it on multiplexes,

[00:33:42] where there's four incomes paying that loan, then one or two.

[00:33:46] Right.

[00:33:46] And so that's kind of my perspective in that matter.

[00:33:49] Yeah.

[00:33:49] I mean, yeah.

[00:33:50] But then again, it's not like you're obviously renting it out.

[00:33:54] Right.

[00:33:54] And it's, you know, some, you know, it's been known to happen where tenants don't pay their

[00:34:00] rent.

[00:34:00] So that's something else you have to keep in mind too.

[00:34:03] That's kind of another way to see loss of income.

[00:34:05] No, it's true.

[00:34:05] I mean, that is, that is certainly a, like a real scenario.

[00:34:09] I'm dealing with one right now where I haven't seen a rent check.

[00:34:11] It's October of 24 and I haven't seen a rent check since April.

[00:34:15] So it's certainly, certainly real what you're describing.

[00:34:18] And this is where it becomes a bit of a breakdown between the federal and provincial policies

[00:34:22] where like you do need an Ontario policy to steady that or the Ontario landlord and tenant

[00:34:27] system to steady that, that, but it just hasn't happened.

[00:34:31] So there's a bit of a dislocation from the policy environment in that regard.

[00:34:36] But frankly, banks are still underwriting a rent agreement as if it's a fully collectible,

[00:34:41] like they're not, you know what I mean?

[00:34:42] They don't like a bank will say, okay, show me the lease.

[00:34:46] And it's like, well, I know this lease is as good as nothing because the person could just

[00:34:49] stop paying and it'll take me eight months to take them to the landlord and tenant board.

[00:34:52] But the banks seem to still see them as pretty.

[00:34:55] I mean, eventually you can collect that money.

[00:34:56] You can get a judgment against them and take them to court.

[00:34:59] But yeah, they're not super enforceable documents.

[00:35:02] You have to stay solvent until then.

[00:35:02] Yeah.

[00:35:03] Yeah.

[00:35:04] You have to stay solvent.

[00:35:05] And I've heard, and I know you, you, you've probably, you've must know tons of stories from

[00:35:10] a personal experience and from other people, but I've heard the stories too, where it takes

[00:35:15] years to get, uh, get something from the landlord and tenant board in Ontario.

[00:35:19] And I'm sure that, um, in Quebec, it's not that much better.

[00:35:22] And the other provinces too.

[00:35:24] Yeah, for sure.

[00:35:25] For sure.

[00:35:25] Okay.

[00:35:26] So I guess, um, the last one here, so non-registered accounts.

[00:35:30] And I guess after this, we will switch over to the Canadian investor podcast.

[00:35:35] Cause I think, I think it's a good spot to, um, to kind of transition.

[00:35:39] So non-registered account, they're also called taxable accounts.

[00:35:44] If it's an investment account, you may also see the name margin accounts.

[00:35:47] Uh, these are all synonym.

[00:35:49] Uh, the main thing here to know is that gains made in this account are taxable, including

[00:35:53] dividend income, interest income, capital gains, a few rules of thumb.

[00:35:58] Interest income is taxed as normal income.

[00:36:00] Dividends are taxed more favorably than interest income, but are still taxed.

[00:36:05] Uh, capital gains inclusion rate is 50% under 250 K anything above is 66.67% inclusion rate.

[00:36:13] If you're not familiar with the inclusion rate just means that the portion that is taxable

[00:36:18] on those gains on those profits.

[00:36:19] So if you made a thousand dollars profit on an investment, $500 of that thousand dollars

[00:36:26] in profit is taxable.

[00:36:28] Uh, so that would be the 50% inclusion rate.

[00:36:31] So the same reasoning, if you're doing pretty well and you're over that 250 K would be 66.6%.

[00:36:37] Now, if you have substantial sums of money in a taxable account, I would recommend working

[00:36:42] with the tax professional to make sure that your investment are as tax efficient as possible.

[00:36:47] Uh, because in the long run that will make a huge difference.

[00:36:51] Um, and when would you use these type of accounts?

[00:36:54] I mean, typically I would say when, you know, for whatever reason you can't use any of the

[00:37:01] other registered accounts, especially if you're, um, you're buying a home, you may want, you can

[00:37:06] always look at potentially incorporating and investing in that situation as well.

[00:37:12] I'm not an expert when it comes to that, but these are the main type of accounts that you'd

[00:37:16] be able to build a down payment with.

[00:37:18] A hundred percent.

[00:37:19] Yeah.

[00:37:20] I don't have much more to add in that regard, but I think, I guess that it is worth noting

[00:37:24] while we're still on, on the Canadian real estate investor show that this is a two part

[00:37:29] episode and we're going to do a second part with the Canadian investor on, on their channel,

[00:37:34] um, about building a down payment to purchase a property.

[00:37:38] So we're going to talk a little bit about, Simone's going to dive in more on the, the

[00:37:41] nitty gritty and technical side of, um, portfolio strategy.

[00:37:44] And then I'm going to talk a little bit about strategies that you could use in, in real estate

[00:37:48] to build a down payment, which is basically, you know, things like house hacking, flipping

[00:37:53] properties, rent to owns, or if you want exposure to real estate through REITs or private lending

[00:37:58] and then use it.

[00:38:00] So, you know, for, for the people who, who want real estate or prefer real estate rather

[00:38:05] than, than equities or, or, um, there are ways to do that while building a down payment

[00:38:11] to become a primary, uh, residence owner.

[00:38:14] Yeah.

[00:38:14] Well put.

[00:38:15] So, uh, let's see everyone will see you on the Canadian investor podcast.

[00:38:19] So we will be linking a link to each of the episodes, um, on the show description.

[00:38:24] So if you missed whichever one, just go on the episode description, you'll see it there.

[00:38:28] The Canadian real estate investor podcast is for entertainment purposes only, and it is

[00:38:34] not financial advice.

[00:38:36] Nick Hill is a mortgage agent with premier mortgage center and a partner in the G and

[00:38:41] H mortgage group license number one zero three one seven agent license M two one zero zero

[00:38:49] four zero three seven.

[00:38:51] Daniel Foch is a real estate broker licensed with rare real estate, a member of the Canadian

[00:38:58] real estate association, the Toronto real estate board and the Ontario real estate association.