First time home buying guide
Owning a home may be your dream, but in order for the purchase to be the happy and satisfying experience it was meant to be, you need to ensure that you are financially and mentally prepared for the responsibilities that come with it.
Some people have a notion that home ownership is like renting, but with the power to have pets and paint the walls whatever color you like. However, while these privileges are available to homeowners in most municipalities, they come with the responsibilities of a mortgage, taxes and home maintenance. Preparing for home ownership requires you to take critical stock of your finances and your expectations.
Are you financially ready?
1. Down payment
2. Closing Fees (land transfer tax - LTT, LTT rebate if applicable, lawyer's fee, title insurance, adjustment, and property registration fees)
3. Approved for a mortgage?
The minimum down payment amount depends on the purchase price of the property
♦ If the price is $500,000 or less, the minimum down payment required is 5% (if the price is $400,000, the minimum down payment is $20,000)
♦ If the price is between $500,000 to $999,999, the minimum down payment required is 5% of the first $500,000, plus 10% for the portion of the purchase price above $500,000 (if the price is $850,000, the down payment minimum is $25,000 + $35,000 = $60,000)
♦ If the price of is above $1 Million, the minimum down payment required is 20% of the purchase price (if the price is $1,200,000, the down payment minimum is $240,000)
** mortgage insurance is required when a down payment is less than 20%** see below
2. Closing Fees:
Land Transfer Tax (LTT)
♦ Total LTT = Provincial LTT + Toronto Municipal LTT
♦ Buying a property outside of Toronto: only pays Provincial LTT. Peel Region (Mississauga, Brampton, etc.), York Region (Vaughan, Markham, Richmond Hill, etc), Durham Region (Ajax, Pickering, Whitby, etc.) and anywhere else outside of Toronto in Ontario
♦ Buying a property in Toronto: a buyer also has to pay the Toronto Municipal LTT
♦ For first time buyers, it means you only have to pay half LTT if you are buying a property outside of Toronto (* you also only the provincial rebate - see below)
First Time Buyer Land Transfer Tax Rebate
♦ Total Rebate = Provincial Rebate + Toronto Municipal Rebate = $4,000 + $4,475 = $8,475
♦ Both the provincial and the municipal rebate apply when you buy a property in Toronto; only the Provincial rebate applies when you buy a property outside of Toronto.
♦ It is a rebate, not a cashback - extra rebate amount cannot be cashed nor will be passed on to your next home purchase
♦ This refund is usually claimed at the time of title registration. Therefore, if you're buying a property in Toronto for $450,000, LTT payable on closing is $2,475 = $10,950 - $4,000 -$4,475; if you're buying a property outside of Toronto for $450,000, LTT payable on closing is $1,475 = $5,475 - $4,000
Closing with a lawyer
♦ Lawyer's fee for closing a property usually cost around $1200 - $2500 (lawyers charge differently, property price also matters)
♦ Title insurance: is purchased through the lawyer during closing, the insurance is to protect you if there's a problem with your title, such as title fraud, un-discharged liens on the property, encroachments, etc. Many lenders also require it
♦ Insurance premium depends on the value of your home
♦ Property price of $500,000, the insurance will cost around $250; Property price of 1.5 Million, insurance premium may go up to $1,400
♦ Other mandatory fees: Registration of Deed and Execution Certificate ($90), Electronic Registration ($87), MLTT Admin Fee ($85)
♦ Adjustments: often, the seller has already paid some property taxes, an adjustment will be made on closing where the buyer has to pay back the seller the adjusted property tax amount. Same for the maintenance fees already paid by the seller.
What is your debt-to-income ratio? GDS - gross debt service ratio and TDS - total debt service ratio.
CMHC - Canada Mortgage and Housing Corporation normally restricts debt service ratio 35% (GDS) and 42% (TDS). Your debts should not be more than a percentage of your income, or it will be considered risky. Lenders look at this ratio pretty seriously.
How to calculate them?
Note: 50% of the *condo maintenance fees must be included in the GDS and TDS calculations.
Let's say annual salary is $84,000, that makes $7,000 per month.
GDS - 35% of your monthly income = $2,450, can be used for principal + interest + taxes + 50% condo fees + heat;
TDS - 42% of your monthly income = $2,940, can be used for principal + interest + taxes + 50% condo fees + heat + other debt obligations.
an annual salary of $75,000 = a monthly income of $6,250. Estimated mortgage payment $1,700/month, property taxes $200/month, heating cost $75/month, condo/maintenance fees $450/month, credit card payments $200/month and a car loan $300/month.
GDS: $2,250 / $6,250 = 36% (1% higher than the standard 35%)
TDS: $2,750 / $6,250 = 44% (2% higher than the standard 42%)
Remember: these ratio percentages are industry guidelines and will vary from lender to lender.
Mortgage Default Insurance
also known as CMHC insurance, is mandatory in Canada for down payments under 20%, costs home buyers 2.8% - 4% of their mortgage amount. It does not apply to properties purchased for more than $1 Million since a 20% down payment is required on those homes.
Mortgage insurance is financed through your mortgage, added to your mortgage amount and paid off over the life of your loan.
Down payment percentage vs. mortgage insurance rate
♦ 5% - 9.99% -> 4%
♦ 10% - 14.99% -> 3.10%
♦ 15% - 19.99% -> 2.8%
The only way to minimize your mortgage default insurance is to increase your down payment as a percentage of your home price. Two things you can do: 1) increase the down payment you put down or 2) purchase a less expensive property
Lenders use appraisers to appraise property values. The cost will be passed on to the buyer. An appraisal will usually cost around $300 to $500.
Next step: do you know the buying process?
There are tons of websites out there where you can search for listings, they all have the same listings imported from the MLS (Multiple Listing Service) systems. The thing is, can you find the right property. This is why our website is created, to help people find the right properties.
Make an offer
An offer is a buyer signed Agreement of Purchase and Sale, sent to a seller. It is a legally binding document which contains everything about this transaction:
price, deposit, closing date, conditions to be met, etc. Offers can be conditional or unconditional, all conditions have to be met for the deal to go through. Common conditions include buyer financing, buyer hires an inspector to conduct a home inspection, buyer's lawyer review of all documents.
The process can be frustrating for both sides and can take a long time, or even falls apart. Negotiation strategy is one of the most critical skills to have as a real estate agent.
Provide deposit and meet conditions
A deposit has to be provided by the buyer to the listing brokerage within 24 hours after both sides reached an agreement. The deposit amount can be negotiated, but it is usually 5% of the purchase price. A deposit is held in the listing brokerage's trust account until closing.
♦ Check the closing costs above
♦ Meet the lawyer and sign all the documents
♦ Pack up, pick up the keys and move to your new home!
Are there any other programs helping first-time home buyers?
♦ Home Buyers' Plan (HBP) is a program that allows you to withdraw up to $25,000 in a calendar year from your registered retirement savings plans (RRSPs) to buy or build a qualifying home for yourself or for a related person with a disability. A couple could withdraw up to $50,000 together in a calendar year. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html
♦ First-time Home Buyers' Tax Credit (HBTC): around $750 tax credit. http://www.cra-arc.gc.ca/gncy/bdgt/2009/fqhbtc-eng.html