Embarking on the journey to buy your first home as a dentist in Canada is an exciting milestone. This article aims to cover crucial aspects like down payment requirements and leveraging unique income programs tailored for dentists.
Down Payment Requirements
The minimum down payment varies based on the home’s purchase price. For homes priced:
- ≤ $500,000 = 5% of the purchase price.
- $500,001 – $999,999 = 5% on the first $500,000 + 10% on the remainder.
- ≥ $1,000,000 = 20%.
For example, the minimum down payment for a home priced at $999,999 is $74,999, while for a home priced at $1,000,000, it jumps to $200,000; illustrating the impact of crossing the $1,000,000 threshold.
These are simply the minimum down payment requirements. Buyers may need to put down more depending on the mortgage size they are approved for. Moreover, if the property is for rental/investment purposes, a minimum of 20% down is required, regardless of the purchase price.
There are other important factors in purchasing a home and qualifying for a mortgage, such as the type of income earned (self-employed, incorporated, etc.), debt payments, and credit score, which will be outlined below, but the primary determinant of mortgage affordability is one’s down payment.
Default Insurance Premiums
If your down payment is less than 20%, you’ll need to purchase default insurance. The primary goal of mortgage default insurance is to protect lenders from the risk associated with lending a large amount of money for home purchases with low down payments. It’s important to note that this insurance protects the lender, not the borrower.
The insurance premium can be paid in a single lump sum when the mortgage is obtained or added to the mortgage amount and included in the monthly payments. Most borrowers choose to add the premium to their mortgage to spread out the cost over the term of the loan.
While it might seem like an added cost, mortgage default insurance enables borrowers to purchase a home with a smaller down payment, which can be particularly beneficial for first-time homebuyers who might not have a large amount of savings. This insurance makes it possible for buyers to enter the housing market sooner than they otherwise might be able to.
Interestingly, these mortgages often come with lower interest rates compared to those with a 20% down payment. The premium, which is added to your mortgage balance, allows lenders to mitigate the risk of lower down payments.
Utilizing RSP and FHSA
The Registered Retirement Savings Plan (RRSP) and the First-Time Home Buyer Savings Account (FHSA) help first-time homebuyers save for down payments tax-efficiently. Contributions to both the RRSP and FHSA offer immediate tax benefits by reducing one’s taxable income, thereby directly lowering the contributor’s income tax.
When purchasing a first home, individuals can withdraw up to $35,000 from their RRSP and up to $40,000 from their FHSA, both tax-free. The RRSP requires the withdrawn amount to be repaid within 15 years, whereas the FHSA does not require repayment.
The RRSP contribution limit is 18% of the previous year’s income, up to a maximum of $32,490 in 2024, while the FHSA allows an annual contribution of $8,000, capped at $40,000 over five years. Unused RRSP contribution room rolls over indefinitely, offering flexibility for future savings, whereas unused FHSA contribution room can only be carried forward for one year.
Together, these accounts provide a robust framework for first-time homebuyers to maximize their savings and tax advantages for their down payment.
Debts & Mortgage Affordability
Lenders assess mortgage affordability using two primary ratios:
- Gross Debt Service Ratio (GDS): Measures the percentage of gross annual income dedicated to housing costs.
- Total Debt Service Ratio (TDS): Measures the percentage of gross annual income dedicated to housing costs + mandatory debt payments.
Generally, a GDS under 39% and a TDS under 44% are preferred by most lenders. Debt obligations such as student loans, car loans/leases, and professional student lines of credit (PSLOC) significantly impact the TDS, and consequently, your mortgage affordability.
Adhering to these ratio guidelines is essential for mortgage approval, though lenders may vary in their flexibility regarding debt-to-income ratios and calculations, especially for buyers with at least a 20% down payment. For those with less than a 20% down payment, strict adherence to the GDS and TDS guidelines is required.
Projected Income Programs
Projected income programs allow young dentists to use future earnings for mortgage approval, even as early as their final dental school year or residency. This bypasses the common requirement for 1-2 years of tax returns for income verification, a hurdle for many dentists.
Under this program, a minimum of 10% down payment is usually required, and not all of it can be gifted. Each bank has its own rules around the program, especially concerning how they calculate the payments for existing debts like the PSLOC. These programs are designed to be flexible, accommodating the unique financial situations of early-career dentists.
Steps in Purchasing a Home
Pre-approval: Obtaining a mortgage pre-approval to determine affordability based on a review of tax returns, financial statements, credit checks, down payment sources, and financial goals.
Searching for a Home: Collaborating with a real estate agent to find a home that aligns with your needs and budget.
Accepted Offer: Making an offer on a home and moving forward with the process upon acceptance, transitioning the mortgage from pre-approval to live approval. This stage may include additional conditions like property appraisal and inspection.
Lawyer Signing/Possession Process: After fulfilling all offer conditions, a lawyer manages the legal aspects of the home purchase, such as title transfer and registration.
Conclusion
Understanding the home-buying process and using financial tools like the RRSP, FHSA, and projected income programs can help Canadian dentists achieve homeownership. Careful planning and leveraging these programs allow confident navigation toward purchasing a first home. Partnering with specialists like White Coat Financial Inc. offers access to various mortgage lenders and programs, ensuring the best fit for your financial needs and goals.
About the Author
Gurtej Varn, BA, CFP®, CLU® is Canada’s leading Wealth Advisor for Dentists. Named Canada’s top wealth professional under 40 for 2023, Gurtej is also the host of “The Dollars & Doctors Show” and the founder of White Coat Financial Inc., a full-service private wealth advisory firm for Dentists.
