I was updating some of the information in our Buyer’s Package and thought a quick round-up of information for Buyers would be timely seeing as how we’re experiencing a market correction in the Greater Vancouver and Fraser Valley markets and Buyers are able to be a bit more choosy in terms of properties they want to see and the price ranges they’re able to access. If you wish to have a hard copy of the topics covered in this post, click Home Buyer Quick Facts for a PDF copy.
The Down Payment
Lending institutions will require you to make a down payment or at least 5% to 10% of the purchase price of the home. The federal government has made recent changes to the Canadian Mortgage and Housing Corporation (CMHC) rules and amortization periods which are important to understand.
The Low Down Payment
If you are looking to purchase a home with only 10% as a down payment, you are able to do so. The loan is then insured by the CMHC for a premium of between 0.5% and 2.5%, and this premium can be added to the mortgage and paid along with your monthly mortgage payment.
If you have only 5% for a down payment, you must not have owned a home in the last five years. The CMHC insurance premium is then higher, from between 2.5% to 3% of the loan, and one of the changes to CMHC insurance rules is that in order to qualify for CMHC insurance, the total purchase price for a home with a high-ratio loan (loans with a loan-to-value percentage of 80% or higher) must not exceed $1,000,000.00.
The RRSP Home Buyers Plan
First-time home buyers may withdraw up to a maximum of $25,000 on a tax-free basis from their RRSP, and couples may withdraw up to $50,000. Taxpayers who have little or no money in their RRSPs may contribute to their own or to their spouse’s RRSP, wait 90 days, withdraw the funds, pay back the low-interest loan used to purchase the RRSPs, and then use those funds for their down payment.
Almost everyone who purchases a home borrows some of the money needed to pay for it. The easiest way to determine how much money you will be able to borrow is to consult with one or two lending institutions, or a mortgage broker, who will use certain criteria to determine how much money you can borrow.
As a Rule of Thumb…
Allow no more than 30% of your gross monthly income (before deductions) to make your monthly housing payments. This is generally referred to as the Gross Debt Service ratio (GDS). To determine your GDS simply add:
Your Gross Monthly Income
+Spouse’s Gross Monthly Income
+Other monthly income (e.g. rent, trust account)
Total Monthly Income
Total Monthly Income x 30% = Total Monthly Maximum Payment
If you have other monthly financial obligations, such as a car loan or credit card payments, you must add these to your total monthly maximum payment. This is your Total Debt Service Ratio and it must not exceed 40% of your gross monthly income.
With this information, many lenders will pre-qualify you for a specific size and type of mortgage loan before you begin searching for your new home. Taking the time to apply for a pre-approved mortgage will give you the security of knowing how much you can afford to spend.
The Canadian federal government announced last year that they would be changing some of the rules regarding Canadian mortgages in an effort to help Canadians reduce their household debt load and encourage building and maintaining equity in their homes (www.fin.gc.ca/n11/11-003-eng.asp). As of March 2011 the maximum amortization period for high-ratio loans (loan-to-value rate of 80% or higher) was lowered from 35 years to 30 years.
The second change affected homeowners looking to refinance their mortgages, reducing the maximum value that they can borrow from 90% to 85% of the value of their home. This is to ensure that homeowners retain greater value in their homes as an asset.
The third change was that as of April 2011 the federal government would no longer guarantee non-amortizing lines of credit where the home is used as security. That is, home equity loans or home equity lines of credit that do not require a monthly payment on the principal and interest will no longer be eligible for government-backed insurance. This does not mean that they are entirely ineligible for insurance, just that the CMHC will not be insuring these types of loans or lines of credit without scheduled principal and interest payments.
One of the best ways to borrow money at lower rates than those posted by major banks is by securing your financing through the services of a mortgage broker. When dealing with a bank you only have one lender, whereas mortgage brokers deal with multiple lenders at any given time – including banks – providing customers with a wider range of services and options.
Bank employees work on a salary basis and can only offer services provided by their own financial institution, while mortgage brokers work on a finder’s fee basis and can offer services and low rates from a variety of lenders. This, in turn, allows them to design a mortgage which best suits your needs and can often save you money.
Mortgage brokers have daily updates on mortgage rates and are able to easily set up your mortgage with an institution that has the lowest rate and/or the best options for a buyer.
Since a mortgage broker does a large-volume business with several institutions they often have access to lower interest rates and faster approvals for their clients.
It’s free. Mortgage brokers offer their services free to borrowers as their fee is paid by the investors and financial institutions that they work with.
Applying for a Mortgage
To process your mortgage application, the following information is usually required by the lender to process your application:
- Confirmation of employment – a letter from your employer(s) on their letterhead, indicating your position or job title, length of employment, gross income, etc.
- Confirmation of income – the front pages of your tax returns (or T4 slips) for the past two years, and one current pay stub. Written confirmation of other income being used as support (e.g. suite or rental income, spousal support, government pensions, etc.)
- Confirmation of down payment – photocopy of your bank statement, or a recent copy of an RRSP statement, or a gift letter indicating the down payment is a gift, or copy of the contract of sale for your present home plus a copy of the mortgage statement for that home
- If you are self-employed – statement of income and balance sheets for the past three years, Revenue Canada Assessments for the past three years, or your tax returns filed (T1 General) for the past three years
- Additional information – Social Insurance Numbers (SIN) for each borrower; address, telephone number, and contact information for confirmation of employment, and a cheque to pay the application fee
It is easy to count your available cash as the entire amount you are able to spend on the purchase price of a new home, but you should not use all of this money as your down payment. There are other costs that you will need to consider and budget for in the purchase of a new home, referred to as the “closing” costs.
- Property Transfer Tax (PTT) – the provincial government imposes a property tax which must be paid before any property can be legally transferred to a new owner. The tax is 1% on the first $200,000 of the purchase price and 2% on the amount over $200,000.
- First-time Home-Buyer’s Exemption – Qualifying first-time buyers may be exempt from paying the PTT on homes priced up to $425,000. There is a proportional exemption for homes priced up to $450,000.
- Transitional HST/PST Rules for BC – BC returns to the PST + GST format for sales taxes on April 1, 2013 but there are rules governing the handling of HST versus GST during the transition period. If the ownership and possession transfer on or after April 1, 2013, HST will no longer be charged. If the property is a resale house, neither HST nor GST will be charged on the purchase price. If the property is a new home, a transition tax of 2% on the sale is calculated on the total negotiated sale price to be paid by the Buyer to the builder and paid on the date that the GST becomes payable (April 1, 2013).
- Property Tax – If the Sellers have already paid the full year’s property taxes to the municipality, you will have to reimburse them for your share of the year’s taxes. This is one of the costs that is calculated by your lawyer or notary public.
- Appraisal Fee – when your lending institution requires an appraisal of the property before approving your loan, it may be your responsibility to pay the appraiser’s fee.
- Survey Fee – The lending institution may also require that a survey certificate be presented to them. If the current owner cannot provide a recent survey certificate, it will be your responsibility to pay the surveyor’s fee.
- Fire & Liability Insurance – The mortgage lender will insist that you purchase an insurance policy which guarantees that, in the event of fire, the lender will receive the monies owed.
- Legal Fees – the fees paid to your lawyer or notary public to represent your interests in this sale.
- Other last-minute costs – these may include a home inspection, moving expenses, deposits for utility companies, locksmith, etc.
Grants and Rebates for Property Buyers
GST/HST Rebate on New Homes – new home buyers can apply for a rebate of the federal portion of the HST (the 5% GST amount) if the purchase price is less than $350,000. The rebate is up to 36% of the GST to a maximum rebate of $6,300. There is a proportional GST rebate for new homes priced between $350,000 and $450,000. Visit www.cra-arc.gc.ca and enter “RC4028” in the search box, or call 1.800.959.8287.
Enhanced New Housing Rebates – if you purchase a new home (house, condo, apartment; something considered “real” property) with a purchase price of up to $850,000 as your principal residence and the HST becomes payable son or after April 1, 2012 and before April 1, 2013 (the transition period) you are entitled to a rebate of 71.43% of the provincial component of the HST paid on the purchase price up to a maximum of $42,500. This rebate is also applicable to the purchase of a secondary “vacation” or recreational home (e.g. cabin, cottage, etc.) outside the Greater Vancouver and Capital (Victoria) regional districts (such as Kelowna, Kamloops, the Interior, etc.) also priced up to $850,000.
This means that if you are purchasing a new home under $350,000 you are eligible for both the federal AND provincial rebates. However if your new home is priced over $350,000 you may not be eligible for the federal rebate, but until April 1, 2013 you are still eligible for the provincial rebate.
First-Time Home Buyer’s Tax Credit – this is a non-refundable tax credit for qualifying buyers of detached, attached, apartment, condominium, mobile home, or share(s) in a cooperative housing corporation, including existing homes or new homes under construction. It is calculated by multiplying the lowest personal income tax rate for the year (15% in 2011) by $5,000. For 2011, the maximum credit was $750. Disabled persons do not need to be first-time home buyers in order to qualify for the credit. Visit www.cra-arc.gc.ca/hbtc, or call 1.800.959.8281.
BC First-Time New Home Buyer’s Bonus – this is different from the tax credit described above. Eligible buyers can qualify for a bonus of up to $10,000. Criteria for the bonus are:
- purchase or build a new home located in BC
- you (or you and your spouse/common law partner) must never have previously owned a primary residence
- to be a resident of BC (file a 2011 BC personal income tax return, or if you moved to BC after December 31, 2011 you file a 2012 BC personal income tax return)
- you are eligible for the BC HST New Housing Rebate (as described above)
- you live in the property as your primary residence
If your individual net income is over $150,000 (see line 236 of your income tax return), that bonus is reduced by $0.20 for every dollar over $150,000 and is eliminated at $200,000. For couples with a family net income over $150,000 the bonus is reduced by $0.10 for every dollar over $150,000 and is eliminated at $250,000 family net income. You are required to submit an application to the BC government with documentation to demonstrate your eligibility for this bonus and application forms are available on the BC Ministry of Finance website at www.gov.bc.ca/fin
CMHC Mortgage Loan Insurance Premium Refund – Provides home buyers who have CMHC mortgage insurance with a 10% refund on their premiums and possible extended amortization without surcharge when buyers purchase an energy efficient home, or make energy-savings renovations. Visit www.cmhc.ca/en/co/moloin/moloin_008.cfm#reno, or call 604.731.5733.
RBC Energy-Saver Mortgage – Homeowners who have a home energy efficiency audit within 90 days of receiving an RBC Energy Saver ™ Mortgage may qualify for a $300 rebate credited to their RBC account. Visit www.rbcroyalbank.com/products/mortgages/energy-saver-mortgage.html, or call 1.800.769.2511.
If you wish to discuss any of these topics or would like any assistance in purchasing a new home, please feel free to contact Dennis at 604-585-4343 or firstname.lastname@example.org.