|Everything About Buying A Home
February 24, 2012
Top Five Questions to Ask
Property Transfer Tax
Home Buyer's Plan
Tips to Increase Your Credit Score
Paying Your Mortgage Off Faster
Interest Rates - Fixed vs. Variable
Buying your first home can be a stressful but exciting time. The key is to arm yourself with as much knowledge as possible so you can feel eased about making such a grand decision. The first step is to learn about how much it is truly going to cost you and what exactly are the benefits for being a first time home buyer.
During the pre qualifying process; we will work out figures in conjunction with your gross annual income to calculate how much you can qualify for. This will be closely tied to the amount of down payment that you plan to put down. We also have access to longer amortizations which allow for higher qualification of your pre-approved mortgage amount. Armed with the knowledge of your plans and analysis of your financial situation, we will work out the most appropriate mortgage amount that will suit you.
The costs are specific to every purchase. As a general rule of thumb, you should budget for about 1.5% of purchase price for closing costs.
You want to surround yourself with good positive people to build your real estate team. I would always start with getting yourself pre-qualified. At this time, we will also offer you a 120 day ratehold. A ratehold is a guarantee that you will be entitled to the lowest current rate particularly in the event that rates go up. If the rates go down within the 120 day period, we will make sure that you get the lowest possible rate within that interval. Once this is established, you can begin to search for your new home.
When you find a place and decide to make an offer, make sure that you allow at least 5 full business days before removing subjects. This will give us time to get an appraisal, and work out the details for your financing. Your offer should be conditional upon what is important to you; financing, inspection, strata minutes. You should always conduct an inspection and view all of the strata minutes and Annual General Minutes. Read through them carefully and make sure that there are not any special assessments coming up.
Once we remove all subjects and you are still happy with your place, it is time to find yourself a notary or a lawyer. The solicitor will receive the instructions from the bank and begin to prepare the papers for you to sign. They will go over all the implications and legal ramifications of the mortgage. They will also register your mortgage and ownership in land titles.
Buying a house is probably one of the most expensive and most important purchases you will ever make. There are many practical things you should consider when looking for the perfect house such as location, square footage, number of bedrooms, and number of bathrooms. Once you have narrowed down your search to just one or two houses you are prepared to make an offer on, there are other questions that you should ask. Here are the top five questions you should ask before submitting an offer.
How much are the Average Utility Bills?
Heating and cooling your home can add several hundred dollars to your monthly budget, so it is important to know what the average amount of the previous owner's utility bills were. Some people have their utility bills averaged out over the course of a year so that they pay the same amount each month, while others have bills that vary greatly during the year. Your water and energy consumption is likely to be slightly higher or lower than that of the previous owner, but knowing their average costs will give you an idea of what to expect.
Are There Any Association Fees?
Some neighborhoods belong to homeowner’s associations, local boards or assessment districts that each household must pay dues for in order to live there. These associations may include benefits such as lawn care or neighborhood watch programs, but may have rules that you will find difficult to follow. It is a good idea to get a copy of the rules and make sure you are willing to abide by them before making an offer on a house that is part of that association.
How Much Are The Property Taxes?
Property taxes are another cost that varies each year, but it is a good idea to find out how much the previous owner paid and how much you will be required to pay each year. You can get this information from the current owner or talk to the county assessor's office for local tax information.
Has the House Been Updated?
Sometimes remodeling can add value to a house, while other times it can take away from the home's original character. It is a good idea for you to ask when the house was built and if any parts of the house were added after the original construction. Carefully inspect the areas that were added to the home to make sure they were properly insulated and no water or insects have crept into the walls in areas where construction has taken place.
How Noisy is the Neighborhood?
Most house showings are scheduled during business hours, but this is a time when the majority of the neighbors are probably at work or school. Before making an offer on a home it is a good idea to visit the home at many different times of the day. Driving by around the time you will be going to bed will give you an idea of any issues such as barking dogs that are likely to keep you awake. It is also a good idea to drive by on the weekend evenings to see if your neighbors are likely to have loud parties late at night.
Bio: Proliability is a nation-wide provider of professional liability and errors and omissions insurance for real estate and other professionals
How much will you put down? The minimum required down payment from banks and other traditional lenders is 5%. As a borrower, you will be subject to an insurance premium on the amount borrowed for any mortgage with less than 35% as a down payment. This is essentially default insurance where the insurance company will pay the bank in case you don’t make your mortgage payments. The fees vary depending on the amount of down payment. See chart below for more details.
In British Columbia, when you purchase a property or a transfer of title has taken place, you are subject to PTT. It is 1% of your first 200K and 2% of the remainder of purchase price. If you are a first time home buyer, you may be exempt if your property value is under $425,000.
Property Transfer Tax is a provincial tax applied against purchases of real estate in the province at the rate of 1% on the first $200,000 of the purchase price and 2% of the remainder. This has to be paid at the time of closing. There is a full or partial exemption for “first time buyers”. You must fall under the following criteria:
- Must be a Canadian citizen or permanent resident of Canada;
- Have resided in B.C. for a least 12 months or filed income tax returns as a resident of B.C. for 2 of the 6 taxation years immediately prior to registration of the transfer;
- Never previously owned a principal residence anywhere in the world.
- Property must be $425,000 or less and a proportionate exemption is available for properties with a purchase price between $425,000 and $450,000. (For a comprehensive discussion see The First Time Buyers’ Guide.)
The BC Harmonized Sales Tax in a Nutshell – A Quick Overview of the B.C. HST 12% Tax and How It Influences New Home Buyers of Real Estate. Watch our 2 minute video about HST and rebates here.
- The Harmonized Sales Tax (also known as the new BC HST) is 12% tax applicable to most goods and services, including new homes, real estate, and property.
- The new B.C. HST 12% Tax is the combination of the Federal Goods and Services Tax (5% GST) and the Provincial Sales Tax (7% PST).
- Implementation of the BC Harmonized Sales Tax will take place on July 1, 2010.
- The BC HST is NOT a 12% real estate tax, but a provincial harmonized tax on most goods, services and consumer products including new homes.
- Currently, new BC and Vancouver homes are subject to 5% GST (federal tax) in which first time homebuyers or investors can receive GST rebates. This 5% GST will be replaced with the higher 12% B.C. Harmonized Sales Tax (HST), a 7% difference in taxes on the total purchase price of a new British Columbia home or property.
- The B.C. HST program will give partial rebates for new BC homes priced up to $400,000. The government will give these homebuyers a partial five per cent BC HST rebate on the provincial tax side which makes any new B.C. home or Vancouver property $400,000 or less no more expensive than it is today.
- Homebuyers looking to buy new Vancouver property over $400,000 will receive a maximum BC HST rebate of $20,000, but will see the purchase price above that level subject to the extra five per cent tax rate system.
- The British Columbia Harmonized Sales Tax of 12% HST is also applicable to any costs and fees associated with your property/home purchase including legal/notary fees, commissions and other closing costs.
- The BC HST transition rules are unclear at this time. It is unknown whether new Vancouver home sales contracts written before July 1, 2010 but completed after the harmonized sales tax HST launch date will be subject to the current 5% GST only or the entire 12% HST new tax.
- The cost of new home ownership will increase significantly in British Columbia due to the new BC HST tax of 12%. Not only will your new home or real estate cost more up front, but the 12% HST harmonized sales tax is also applicable to such things like strata fees, residential heating fuel, commercial rents, smoke detectors, fire extinguishers, repairs, cable TV, internet, electricity, gas, renovations, painting and other professional services.
Appraisal - $300
Legal - $800-$1200
Survey - $500 (if needed)
Inspection - $500
The Home Buyers’ Plan (HBP) is available to “first time buyers”. The Home Buyer’s Plan lets you withdraw up to $25,000 in RRSP’s without paying tax on the withdrawn amount. You simply have to repay the balance withdrawn within 15 years. The minimum payment is 1/15 of the withdrawn amount. The neat thing about this product is that it resets every 4 years. If you have not owned in 4 years, you can take advantage of this program all over again. The property must be a principal residence.
All withdrawals must be repaid to your RRSP's within a period of no more than 15 years. Generally, you will have to repay an equal amount to your RRSP's each year until you have repaid the entire amount withdrawn. If you do not repay the amount due for a year, it will be included in your income for that year.
A number of conditions have to be met to participate in the HBP. These include the following.
- There must be a written agreement to buy or build a qualifying home. This means a Contract of Purchase and Sale, not a pre-approved mortgage.
- The qualifying home must be intended to be used as the principal place of residence by the borrower no later than one year after buying or building it. Once the home is occupied, there is no minimum period of time that it must remain occupied as a principal residence. Also, there may be situations where the qualifying home is not occupied by the end of the 12-month period after being bought or built. The borrower may still be considered a participant in the HBP because he or she intended to occupy the home as their principal place of residence no later than one year after buying or building it.
- The individual must be a first-time home buyer. For the HBP, a home buyer is not considered a first time home buyer if, at any time during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal, the home buyer or their spouse owned a home that they occupied as a principal place of residence. The definition of a first time home buyer for the HBP is different than the definition of a first time home buyer for purposes of the Property Transfer Tax. To be eligible as a First Time Home Owner for the Property Transfer Tax you must have never owned a home at any time, not just in the last 5 years.
- The HBP balance on January 1 of the year of withdrawal has to be zero. In other words, if a borrower has used the plan before, the withdrawal that was made in the past must be repaid entirely.
- Neither the borrower nor his or her spouse can own the qualifying home more than 30 days before the withdrawal. This means that a withdrawal may be made for a qualifying home purchased in the last 30 days, but not more than 30 days. If the RRSP is locked in and funds are not available for more than 30 days after completion, a withdrawal under the HBP is not allowed.
- The borrower must be a resident of Canada when he or she receives funds from their RRSP's under the HBP and up to the time a qualifying home is bought or built.
- All withdrawals from your RRSP's must be in the same year and certain forms are required to be completed for Revenue Canada.
To view the government information brochure, please visit the federal government website at:
So many clients are working on the age old debate of whether to go variable or fixed. As with most options, there are positives and negatives. This is precisely what makes the decision so frustrating. Add in the fact that we’re dealing with hundreds of thousands of dollars and we've got a pretty big choice to make. I am going to take you through two comparisons that will hopefully make your decision a little bit easier. I will run the analysis based on what history has told us. History is quite a clean cookie and has managed to tell me the truth over the years. The other analysis will be the brass taxed numbers. It will be based on running relevant current numbers and analyze what will be for the future. Since we do not know what the exactly future will bring, some assumptions will be made.
Fixed mortgages offer piece of mind. Once you select your term, you can sit back and not think about the bugger until your term runs out. You know what your payments are and do not have to worry about what the bank of Canada does with fluctuating rates, inflation, blah blah blah.. The downside of a fixed mortgage is the fact that you could be taking advantage of how low prime is by paying down a whole bunch of your principal.
The variable mortgage has been a real sweet deal for the past years. As far as a historical principle is concerned, about 77% of borrowers in variable mortgages will save over their 5 year fixed counterpart. The history of the fixed versus variable analysis is reflected in the attached chart entitled “the history - fixed versus variable.” The blue line represents the 5 year fixed mortgages. The white line is the moving average of the variable mortgage. The variable white line beats the 5 year fixed 77% of the time. Although about 23% of the time, the 5 year fixed claimed a few victory dances of his own. So as far history is concerned, the variable mortgage has better odds to save money over a 5 year term. Check out where prime was during the approximate year of 1982. This is why most parents think variable mortgages are like a dirty swear word. My dad smacked me on the mouth when I suggested a variable for my sister.
The next comparison is running actual numbers of a fixed versus variable mortgage with speculation of what prime will be over a 5 year term. I will run some numbers of a 5 year fixed mortgage and then run a variable mortgage with the same payments in order to set a control. We will then work in various increases of prime over the 5 year term. This will give us an idea of the actual savings going variable versus fixed. But first, a few assumptions:
- I am using a 5 year fixed rate of 3.89%. This is for a 30 days quick close rate, with a few stipulations. It is a good rate but we might even be able to do better or not as good; I’m just not interested in writing cheques that my butt can’t cash.
- I am using a variable discount of Prime -.60%. The discounts are decreasing and a good variable might drop to Prime -.70% but I just like being conservative because that’s what I’m into these days. Being conservative is like polka dots for the fall season.
- I am using a mortgage amount of 300K.
- There are no CMHC or Genworth premiums.
I simulated a few scenarios of what prime will increase to over a 5 year term. If you think prime will steadily increase to 6% over the next 5 years, you are better off with a variable. You will save about $6100 over your term. From the second page, we set prime to increase to 6.50%. In this scenario, you are still better off going variable as you are saving about $2400.The third page runs numbers if prime increases to 6.75%. This is the sweet spot; whatever that means. This is where savings are quite minimal for choosing variable over fixed. You are still saving $660 but over the full 5 year term. And if we go up to 7%, you are better off going fixed. The tricky part lies in the fact that no one knows where prime will be in 5 years; not even the finance minister himself. I’ll bet he wishes that he had a crystal ball along with a rabbit’s foot for good measure. Those rabbit foot key chains were weird. Man, I just dated myself.
So there you have it; some numbers and history to put in your pipe. I hoped you enjoyed the heck out of our latest rendez-vous. I can’t be sure when the next one will be because time has gotten a strange hold on me. She’s holding me tight and letting me go all at the same time.
So don’t forget to call me 120 days before you come up for renewal or are planning to refinance. Give me a shout to see if we can take advantage of the current lower than low interest rates to save you some money. Don’t be lazy and renew with your current lender. And referrals; remember to send all friends and family my way. I’ll take care of them like no other.
Thanks to Zamir at www.ratehold.com for this article.
- Try to keep your balances on your debt at 50% of available credit. If your cash on hand doesn’t allow you to do this, try to distribute the debt amongst other open credit cards. You can also consider opening a new line of credit and transferring part of the balance off a card that is close to being “maxed out”
- Even if you are done using a credit account, do not close out credit card accounts. The credit history gives you creditability and strength.
- Without using the actual debt, increase your available lines of credit. This reduces the overall debt ratio. Make sure the bank will do this without a credit bureau inquiry.
- Do you have errors in your credit report? Request the credit bureau delete any outstanding debt that is incorrectly charged, or things that should have been removed that have already paid. They have an obligation to reconcile this within 30 days.
- If you have items on your report that are less than two years old and you have the money to pay them off now, simply mark the back of your payment check with the following notation: “Accepting this check is evidence that the transaction is complete and this charge will be deleted from my credit record.” If necessary, you can use this cancelled check as proof of the transaction in the event the outstanding debt is not removed promptly and interferes with the closing of your mortgage or loan.
For starters, set your payments to bi weekly accelerated. This will shave off about 3 years off of your total amortization. Also set your payments as high as you can without feeling stressed. You will be only charged your actual interest rate and the difference goes straight to paying down your principal.
The faster you reduce the outstanding balance on your mortgage, the more you will save in interest charges. This is particularly important as mortgage interest is not tax-deductible in Canada (unless the mortgage is for a business purpose). Mortgage payments are made with money that you have already paid tax on – after tax dollars.
You can also make balloon payments at one time during a year without penalty. Doubling up your payments is also a good option.
Making your mortgage tax deductible
As stated above, mortgage interest is not tax-deductible in Canada. Mortgage payments are made with money that our clients have already paid tax on – after tax dollars.
The exception to a mortgage not being tax-deductible is if the money is borrowed for a business purpose, in other words, to create more money. Generally, interest on borrowed money is deductible if the money is borrowed to earn investment or business income.
To make the interest deductible on an existing mortgage on your house, you must have income producing assets. The idea is to take these assets and swap them for mortgage debt. Please discuss with your accountant.
Once this asset swap is completed, you will own an equal amount of investment assets, and you still have a mortgage on your home. But because you borrowed against your home (in the form of a mortgage) in order to buy assets that create wealth, the interest on your mortgage is now tax-deductible. You have just given yourself a giant tax break.
Home Buyer's Plan
HST new housing rebate
Homeowner Residential Rehabilitation Assistance (RRAP)
Emergency Repair Program (ERP)
Home Adaptations for Seniors' Independence (HASI)
First-Time Home Buyers' Tax Credit
Home Renovation Tax Credit
BC Home Owner Grant
Property Transfer Tax
Property Tax Deferment & Financial Hardship Property Tax Deferment