Home Buyer

One of the biggest challenges facing first time home buyers is saving the downpayment. Here are 6 tried-and-true ways of saving money to buy a house or condo:

• Found Money  Found money is my favourite kind of money and can really help pad your downpayment. From bonuses to birthday cheques from Grandma to money from your beer bottle returns to my favourite: that magical date when you max out on your EI and CPP contributions and your pay suddenly goes up by hundreds of dollars until the end of the year. You won’t miss found money – just pretend you never had it in the first place. Cash those cheques and deposit them immediately to a safe place.
• The Latte Factor  I know you’ve heard this one before, but making a bunch of small changes in your lifestyle can help you save literally thousands of dollars. From cancelling magazine subscriptions and gym memberships you don’t use, to yes, forgoing your daily venti americano and bringing your lunch to work, making small changes now will help you buy your first home faster. Figure out what you can live without and direct that money automatically to your savings account
• The Bank of Mom and Dad  If you’re fortunate enough to have a family with a little extra cash, the Bank of Mom and Dad can be a lifesaver. It’s not easy being a first-time buyer in Toronto where starter houses cost over $500,000. Parental help can often mean the difference between buying what you want and buying a 400 sqft condo with no windows in a bad part of town. Of course, parental contributions generally come with strings attached, so be prepared for guilt trips and unsolicited advice about what you’re buying.
• The Home Buyer RRSP Plan  The government allows first-time Buyers to take up to $35K from their RRSP tax-free to use towards the purchase of a first home. If you haven’t been regularly contributing to an RRSP, consider taking the money you’ve saved and flipping it through an RRSP for 90 days. You’ll be eligible for a tax refund for the contributions you make, which you can use to help pay closing costs. It’s an easy way to increase the size of your downpayment by up to 40%. Of course, this strategy works best for spring purchases when you get your tax refund in time to help with the costs.
• Practice Mortgage Payments  If you’re currently living with your parents, consider banking the money you’d otherwise be paying in rent. Better yet, figure out how much your mortgage payments/taxes/condo fees will be when you do buy a home and start putting that money away now. It’s a great way to increase your downpayment – plus you’ll already be used to the payments when you actually do get your house or condo.
• Better to Be Safe Than Sorry  Save your downpayment in a separate bank account, ideally one not accessible from a bank machine so that you won’t be tempted to dip into it for a last-minute vacation or a spontaneous round of drinks. Talk to your financial planner or bank about where you should invest it – while it might be tempting to try to make some quick money in the stock market, you might end up losing your hard-earned cash. Back when I was a first-time Buyer, I saved my downpayment in a GIC RRSP – the interest rate was ridiculously low but at least I knew the amount I saved wouldn’t decrease.

Saving money for a downpayment isn’t fun but it’s a necessary evil on the path to home ownership. If you’re a first time Buyer in Toronto, the sooner you start saving for a home, the better.

Mortgage Basics

Mortgages can seem intimidating, especially for the first-time buyer. Once you’ve qualified for a mortgage, there are some basic decisions you will have to make: Mortgage term, amortization, interest rate and type of mortgage. Read on to find out what all of that means, or use our handy calculators . to estimate what your payments would be.

Mortgage Term and Amortization

The mortgage term and amortization period affect the amount of money you can borrow (and thus the price of the home you can buy) and dictate how much your monthly payment will be.

Mortgage term

A mortgage term is the amount of time a lender will loan you money for – typically from 6 months to 5 years. When the term is up, the remaining amount is payable in full unless you arrange new financing for another term.

Mortgage term

A mortgage term is the amount of time a lender will loan you money for – typically from 6 months to 5 years. When the term is up, the remaining amount is payable in full unless you arrange new financing for another term.

Choosing a mortgage term is tricky and requires you to be knowledgeable about trends in the marketplace, as well as having a sense as to the  amount of risk  you’re willing to endure. If you choose a six-month term, and interest rates increase drastically in that time frame, will you still be able to afford your home?

Amortization

Few (if any) of us can pay off the entire principal of a large mortgage in a six month or even a five-year term. Imagine how big your payments would be! To help you out, lenders calculate or amortize, the mortgage payments over a much longer time, often as long as 25 years. They aren’t loaning you the money for a single 25-year period–they’re just calculating the payment schedule as if it will take you that long to pay back the principal plus interest. You will probably renew the mortgage several times during the amortization period, and you always have the option to change the amortization depending on market conditions or your financial situation. The longer the amortization period, the lower your payments  will be – but this also means you’ll be paying more in interest.

Amortization

Few (if any) of us can pay off the entire principal of a large mortgage in a six month or even a five-year term. Imagine how big your payments would be! To help you out, lenders calculate or amortize, the mortgage payments over a much longer time, often as long as 25 years. They aren’t loaning you the money for a single 25-year period–they’re just calculating the payment schedule as if it will take you that long to pay back the principal plus interest. You will probably renew the mortgage several times during the amortization period, and you always have the option to change the amortization depending on market conditions or your financial situation. The longer the amortization period, the lower your payments will be – but this also means you’ll be paying more in interest.

Payments

Most mortgage payments consist of two parts:  principal and interest. This is known as a blended mortgage payment. Each payment reduces the balance owed on the mortgage by the portion of the payment that is credited to the principal. Over time, the proportion of your payment that reduces the principal balance will increase. The faster you can pay down the remaining balance, the less total interest you’ll pay. There are many ways you can pay down your mortgage faster, from accelerating your payments (i.e. 26 payments per year instead of 24) to making lump sum payments on your mortgage; your lender can help define the right strategy for you.

Interest Rates

The interest rate is one of the biggest contributing factors to how much you end up paying for your home both on a monthly basis and over the life of your mortgage.

Interest is the  cost of borrowing money. Interest rates fluctuate with the economy. The interest rate you commit yourself to at the beginning of the term can have a significant effect on the amount you pay each month for your mortgage. There are two basic types of interest rates used in mortgage products: fixed-rate and variable-rate.

• Fixed-rate mortgage – Essentially, this means committing to a single interest rate that will not change for the term of your mortgage. This strategy equalizes how much of your monthly payment repays the principal vs. interest. Fixed-rate mortgages are great in an economy where interest rates are going up, as you never have to risk paying higher interest rates. But in an economy where interest rates are going down, you could be stuck paying more in interest than the going rate.
• Variable-rate mortgage – With most variable rate mortgages, your monthly payments float in relationship to the bank’s prime interest rate. If rates go up, your payment goes up. Variable rate mortgages can protect you if interest rates are high at the time you arrange your mortgage; when rates fall, you’re not stuck with high-interest payments. In some instances, lenders will allow you to convert to a fixed-rate mortgage in this kind of situation.

Types of Mortgages

• Conventional mortgage – Aptly named because they are the most common type of mortgage. The lender will loan you up to 80% of the appraised value or purchase price of the property (whichever is lower), and you need to come up with the other 20% as a down payment.
• Second (and third) mortgages – These are additional financing arrangements behind an existing mortgage, also secured by your property. Secondary financing is generally arranged at a higher interest rate and for a shorter term than the first mortgage.
• High ratio mortgage – When you don’t have the 20% down payment required to get a conventional mortgage, a high ratio mortgage can advance you up to 95% of the home’s appraised value or purchase price. However, since you are borrowing more than the usual 80%, the government insists that the mortgage is insured against default and that you pay the cost of the insurance. That cost can be a few percent of the mortgage amount and is added to the mortgage principal.

Government Programs 

Home Buyer Plan for First Time Home Buyers (HBP)

The federal government’s Home Buyers’ Plan (HBP) is a program that allows you to withdraw money from your registered retirement savings plan (RRSPs) to buy or build a qualifying home. This money is not taxed as income as it would normally be, but you do have to pay it back. You have 15 years to repay the money, starting two years after the initial withdrawal. The maximum for such withdrawals is $35,000.

The conditions:
 The purchase must be for a principal residence, you can take the cash out up to 30 days after buying the home, or if you take it out beforehand, you must own or build the home by October 1st of the following year.

N.B.: For this plan the government defines a first-time buyer as someone who has not owned a home that they occupied as their principal place of residence during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal. So basically, if you owned a home five years ago, or had a property that wasn’t your principal residence, you are still considered a first-time home buyer.

For more info on the HBP, go to the Canada Revenue Agency’s website at  www.craarc.gc.ca

Land Transfer Tax Refunds for First Time Home Buyers

The Ontario government also helps first time home buyers (which it defines more strictly as having never owned a home ever, anywhere) by offering a refund on the land transfer tax in Ontario, up to a maximum of $2000 (equivalent to the Provincial Land Transfer Tax on a $227,500 home).

If you are buying in the City of Toronto, it has an additional Municipal Land Transfer Tax as well, with an additional rebate for first-timers that maxes out at $3,725.

First Time Home Buyer Tax Credit (HBTC)

The costs associated with purchasing a home can be a particular burden for first-time home buyers, who must pay these costs on top of saving the money for a down payment. Closing costs include one-time items such as lawyer fees, HST (on newly constructed homes), and adjustments (e.g. taxes or utilities prepaid by the seller) that allow you to complete the house purchase.

To assist first-time home Buyers with these costs, the government created the FirstTime Home Buyers Tax Credit, a $5,000 non-refundable income tax credit that results in up to $750 in federal tax relief.

Canada Mortgage and Housing Corporation Insurance (CMHC)


The Canada Mortgage and Housing Corporation helps buyers by providing mortgage loan insurance so that a Bbuyer can buy a home sooner–with as little as 5% down payment. To find out all about the programs, including the costs of insurance, visit the  CMHC website.

Understanding Closing cost

As you go through the process of buying a home, you’ll naturally want to know how much money this will cost you. Your lawyer, accountant, and real estate agent can help you estimate your costs. Some of the things you can expect to pay are:

Before Closing

• Deposit  (usually 5% of the purchase price in Toronto, paid within 24 hours of your offer being accepted)
• Property Appraisal  ($400- $500, often paid by the lender)
• Home Inspection  ($400-$600, paid to the home inspection company at the time of the inspection)

After Close

• Moving Expenses  ($1,000+)
• Utility Connection Charges  (varies)
• Redecorating and Renovating Costs  (varies)
• Immediate Repair and Maintenance Costs  (varies)

Your lawyer will calculate the final amount that is owing, and you will need to provide him/her with a certified cheque for the full amount before the property comes into your possession.

On Closing

• The balance of the Purchase Price  – the purchase price less your initial deposit. Usually, the bulk will come from your lender and become your mortgage.
• Legal Fees  – amount varies depending on purchase price and lawyer (approximately $1,800 for a $500,000 purchase)
• Title Insurance – sometimes included in your legal fees ($250-$400)
• Mortgage Broker Commission  – if applicable, usually paid by the lender
• Property Survey  – if required  ($1,000-$2,000)
• Ontario Land Transfer Tax  – varies depending on purchase price
• Toronto Land Transfer Tax  (varies depending on purchase price
• Property Tax Adjustment  – reimbursement to Seller of property taxes they paid beyond the closing date
• HST  – generally only applicable on new construction condos and houses and commercial properties
• Tarion Warranty  Fees – warranty on new construction condos and houses only, not resale.
• Provincial Sales Tax  – only applicable on chattels purchased from vendor (amount varies)
• Adjustments for Utilities/Condo Fees/etc. – reimbursement to Seller for prepaid utilities, etc. (amount varies)
• CMHC Insurance Premium  – insurance premium charged if you have less then 20% down payment (click here to estimate CMHC insurance)

Basics of Bidding war for first time home buyers

Multiple offers (often referred to as “bidding wars”) are a regular feature in the Toronto real estate market, a situation that can be a source of apprehension and doubt for many Buyers. To reduce that apprehension, we’ve compiled this how-to guide that aims to take the mystery out of the bidding war process, as well as to arm you with knowledge that will increase your chances of coming through bidding wars with positive results.

Realty Check


Bidding wars don’t actually involve bids like an auction, and they aren’t actually wars. The term ‘bidding war’ is used to describe a situation where when more than one Buyer makes an offer on a property at the same time. Understanding the basics about multiple offer situations and having the knowledge to play the game will go a long way in making you feel more comfortable and help you get what you want.

Who’s in Control

Multiple offers generally present themselves in a Seller’s market, when Sellers are in control. In the words of my old economics Prof – a Seller’s market is when there are too many Buyers chasing too few properties.

When to Expect a Bidding War

In the current Toronto market, anything is possible. Some hot properties in hot neighbourhoods will generate multiple offers after being on the market only a day or two–and in some cases, in mere hours. For the most part though, when a Seller is trying to generate multiple offers, they will set a specific date to review offers (known as “withholding offers”) – usually 7 days from the date they listed their house on the market.

The Seller’s Goal


The Seller’s wants to expose their property to as many potential buyers as possible, then force anyone interested enough to make an offer to show up at the same time. If the strategy works, the result is multiple offers, and often a selling price above what they might have otherwise have received. It’s important to note that not all properties that have an offer date get multiple offers – but it’s best to be prepared just in case.

How It Works

Bidding wars in Ontario are blind – meaning you’ll never know how much any other offer is. Your offer may be $1 below the highest offer, or $50,000 above the next-highest bid.  Only the Sellers know what all the offers are – and only the winning sales price will be made public.

As a potential Buyer, you are entitled to know how many offers you are competing with. When a Buyer signs an offer, their Realtor ‘registers’ the offer with the Listing Brokerage. The number of registered offers must be shared with other registered Buyers – but not the content of the offers.

Most multiple offer situations involve Realtors presenting their clients’ offer to the Sellers and the Listing Realtor in person. There is usually a time set – for example, 7 PM on Monday, and offers are presented in the order in which they were registered.  Potential Buyers and Realtors wait for the process to run its course, sometimes over coffee, often over beer.

Generally, Sellers will select the best of all the first offers that have been presented to them. ‘Best offer’ of course is a subjective decision, based on the Seller’s specific situation, but which is usually a combination of the most attractive closing date, price and conditions. In most bidding wars, Sellers do not negotiate with Buyers, so it’s important that your first offer is your best offer. In some situations though, negotiations are necessary. Sellers are only allowed to negotiate with one offer at a time – meaning they can’t sign-back 2 or 3 offers at the same time, at higher prices, in the hopes that someone accepts it. If two or more offers are very close, potential Buyers may be asked to both improve their offers – though again, this will be a blind process  and one that your Realtor will need to carefully walk you through.

At some point, the Seller will accept an offer, and all other potential Buyers will be notified via their Realtors.

Understanding Offer

About to make your first offer on a house or condo? No idea what the heck that means?

After Close:

• Decisions, Decisions   Once you’ve found the house or condo you want to buy, you need to decide the terms and conditions of what you want to offer the Seller (price, closing date, conditions, etc.) There’s more than just a number to think of! Your real estate agent will help in determining a fair price and will give you guidance on what other terms and conditions you should include.
• Agreement of Purchase and Sale  There’s a ton of paperwork to sign, most importantly, the Agreement of Purchase and Sale – it’s your official offer to the Seller.
• Irrevocable Period  Your offer is only valid for a certain amount of time – we call this the irrevocable period – this is the time period that the Seller has to consider your offer. After the irrevocable period has expired, if the Seller hasn’t accepted your offer (or made a counter-offer), your offer bursts into flames and you aren’t committed to it any more. Irrevocable periods vary, but we’ve seen everything from one hour to 72 hours. Typically in a hot real estate market (like Toronto’s), offers are valid for only a few hours, so the whole process could happen very quickly once the offer is signed.
• Offer Registration  Once signed, your REALTOR will ‘register’ the offer with the Selling agent’s office (the Listing Brokerage) – essentially telling the office that they have a signed offer from a Buyer. None of the terms, conditions or price are revealed to anyone at this point. REALTORS register offers so that there is an easy and fair way to track offers–especially important if there are multiple offers on one house or condo.
• Offer Presentation  The real estate agents for both the Buyer and the Seller generally make plans for a formal offer presentation – either in person (at the subject house or condo or at the Listing Broker’s office) or by fax or e-mail. We prefer to present our offers in person. The Buyer’s real estate agent presents the offer to the Seller and his/ her real estate agent together. The Buyers are not generally present for this part (though it’s a good idea to be nearby in a cafe or pub in case of any negotiations). In most cases, the formal presentation takes less than 10 minutes – every Realtor presents offers differently, but the presentation is the opportunity for a Realtor to sell and justify their Buyer’s offer.

Negotiations: 

• Accept the offer as is  They agree to the terms and conditions you’ve offered and sign it. Congrats!
• Sign back the offer with different proposed terms  (for example, at a higher asking price, with different closing date, etc.). This now becomes a counter-offer from the Seller back to the Buyer. This is the most common scenario–usually, a number of back-and-forth negotiations take place with each side making concessions until hopefully a mutually agreeable contract is reached.
• Decline the offer  If your offer is totally unacceptable to the Seller, they have the option of simply declining it–no negotiation, no anything. We’ve seen Sellers decline low-ball first offers, and we’ve seen offers declined mid-negotiation.

If an accepted Agreement of Purchase and Sale is reached, the Buyer will need to provide a deposit (in trust) to the Listing Broker (usually around 5% of the purchase price and usually paid within 24 hours of the agreement being reached). Any conditions then need to be met before the agreement is considered “Firm.” If there aren’t any conditions, the agreement is firm as soon as the agreement is signed and deposit paid. Yay! You now own a new home.

Making an offer on a house or condo is an exciting but crucial (and often stressful) part of the process; as a good REALTOR I can help you to reduce the stress by preparing you for potential scenarios ahead of time, helping choose a strategy, guiding you through the process and advising you of your options (and possible outcomes) at each step. It may be the biggest financial step of your life, but remember, I do this every day!