Financing FAQs for New Home Buyer
Homeownership Assistance Programs
There are some programs and policies in place that will help make buying a little easier. These are listed below.
GST / HST rebate for new homes
Individuals who buy new or substantially renovated homes may qualify for a rebate of part of the federal GST or HST paid on the purchase price. If your house is located in Nova Scotia, you may qualify for an additional rebate.
In Québec, this program is administered by Revenu Québec. If you build or buy a new house in Quebec, contact Revenu Québec at 1-800-567-4692. Manitoba and Ontario also have provincial programs. Information on the federal program can be found at: www.cra-arc.gc.ca/tax/individuals/topics/gst-hst-rebate/menu-e.html.
How do I know what I can afford?
First you will have to calculate your net worth. This is the difference between your total assets (what you own) and total liabilities (what you owe). Your mortgage lender will certainly want this information and it will give a quick insight into how much down payment you can afford. Along with your net worth, you”ll also need to add up your non-discretionary monthly expenditures. This will help you see how much you can manage for mortgage payments.
Mortgage lenders follow two simple rules to determine what you can afford in monthly housing costs: The first is that your monthly mortgage payments shouldn”t be more than 32% of your gross household monthly income. This is called the Gross Debt Service Ratio. The second is that your total monthly debt load shouldn”t be more than 40% of your gross monthly income. This is your Total Debt Service ratio.
What information is needed to apply for a mortgage?
- a completed mortgage application form
- a copy of the listing with a property photo,
- a copy of the accepted agreement of Purchase and Sale
- income verification letter from your employer and some recent pay slips
- evidence of the source of your downpayment
What kind of mortgage should I get?
There are different types of mortgages available to suit individual needs, resources and preferences. You can choose fixed rate or variable rate, short term or long term, closed or open. Here are some general rules of thumb to help you decide on the mortgage structure that”s right for you.
When considering a fixed rate versus a variable rate mortgage, the current interest rate and whether you believe it will rise or fall in the future is a key determining factor. If rates are low, it may be best to lock into a fixed rate mortgage. If rates are likely to decrease, however, a variable rate mortgage would be advantageous. In this case, your monthly payments would stay the same but the amount of principle you pay would increase. An adjustable rate mortgage will change the amount of your monthly payments based on market conditions.
Short-term mortgages are preferable if you think interest rates are likely to remain low or fall in a few years. Long-term mortgages are the better bet if you foresee interest rates rising over the long term. Long term mortgages are typically 3 or more years and often have higher interest rates than shorter term mortgages.
Your third option is an open or closed mortgage. Open mortgages allow you the freedom to make prepayments and lump sum payments without penalties. Closed mortgages offer lower interest rates but have the disadvantage of not allowing you to contribute extra money over and above your regular monthly payments.
We recommend that you contact a mortgage specialist for more details and to find out what mortgage option best suits your needs.
What are some of the extra costs?
Once you have decided on the price range of your home and calculated your mortgage payments, you”ll still need to assess all the associated costs of home buying to ensure you can manage the financial load.
The first possible extra is mortgage insurance. If you pay less than 25% of the property”s value for your down payment, you”ll have to get insurance from CHMC. It usually costs between 3.4% and 0.65% of the mortgage amount depending on the amount of your down payment.
Next is the appraisal fee. Your mortgage lender may require that the property be appraised at your expense. A Home Inspection Fee may also be a condition of your Offer to Purchase. These fees could add up to $500 to $600 on the purchase price.
Property insurance is another additional cost. The mortgage lender requires the home to be insured because it is security for the mortgage. Also your Legal Fees and Disbursements must be paid upon closing and they”ll cost a minimum of $500. Other up-front costs may include Property Transfer Tax and pre-paid vendor costs such as fuel and utility bills.
If you”re buying new, the builder may offer optional upgrade packages. This will increase the price of the home but can be rolled into the mortgage and be amortized over the life of the mortgage. After final completion, you”ll be facing ongoing payments such as annual property taxes. And if you”re moving into a strata corporation, monthly strata maintenance fees are obligatory.
Do I have to pay the Property Transfer Tax and how much will it be?
It depends. First time homebuyers are exempt from paying this tax if the property is priced under $325,000. For other buyers, the fee is 1% on the first $200,000 and 2% on the balance.
Can I use my RRSP”s for my down payment?
One way to add to your down payment amount is to tap into your RRSP’s. While it’s true that normally you’d probably pay penalties and income tax on any RRSP withdrawal, there is an exception to the rule. As a first time homebuyer you may withdraw up to $20,000 ($40,000 per couple) from your RRSP”s under the Home Buyers” Plan. These funds can be used to increase your down payment and are not counted as income and subject to income tax. But there are some conditions attached that you should be aware of:
The amount withdrawn must be repaid within 15 years from the date of withdrawal. You must purchase your home by October 1st in the year following your withdrawal. You must start repaying your withdrawal in the second year after your withdrawal. Repayments are not tax deductible.
Do I have to pay GST?
Yes, GST is inevitable even on something as essential as having a roof over your head. New homebuyers are subject to GST on their purchase, which will vary from 4.48% to 7%. The variation is determined by the price of your new home. If it is under $350,000 and is self-occupied the GST is 4.48%. If the price is over $350,000 a sliding scale is used to determine GST up to 7% at $450,000. Investors are subject to 7% GST at any price.
What taxes are applicable on a real estate purchase or sale?
- Land transfer tax is usually the largest tax payable and it is paid by the buyer on closing to the Ontario government to register the transaction.
- GST is payable on services such as laywer’s fees, realtor”s commission, surveyor’s fees etc.
- GST is payable on the purchase of new homes and condominiums; substantially renovated homes; some vacant land.
- GST is NOT payable on resale homes.
- The sale of your principal residence is exempt from capital gains tax but capital gains tax may be payable on income properties or additional properties other than your principal residence.
- Non resident tax on income or capital gains by non-residents must be withheld at source.
When do I make my first mortgage payment?
Because of high demand, you may want to put a deposit on a home in the pre-construction or pre-completion stage. Mortgage payments, however, only commence on the completion of the home – you don”t have to make payments immediately after you pay the deposit. A good thing too as it could be some months before you can move in.
What are the Usual Adjustments?
In every resale offer, the purchase price is payable “subject to the usual adjustments”. Adjustments fine-tune the income and expenses of a real estate transaction as of the day of closing so that each party is responsible for the time that they actually own the house.
Municipal property and school taxes are always adjusted, so if a seller paid too much, the buyer pays the excess back to the seller and vice-versa.
The principal amount of the mortgage is adjusted to the day, together with any interest adjustments and any money held by the lender in a tax account for the property.
Condominium fees, utilities, fire insurance and first and last month”s rental deposits on a rental property are also adjusted.
These are the extra closing costs you need to budget for so be sure you have your lawyer give you an estimate prior to closing.
I recommend that you contact a mortgage specialist for more details and to find out what mortgage option best suits your needs Here are two specialists that I work with. Give them a call to get a second opinion – you probably could build a more efficient home financing / mortgage plan: