To calculate the price of the house you can afford, taxes, rebates and hidden expenses must be factored in
By: Kristin Kent Special to the Star, Published on Thu Apr 11 2013
“If somebody gets excited about a house they can’t afford, that’s not good" David Larock mortgage broker
When Tony Clark and his wife, Faye, started looking for a house two years ago, they had big plans: save like mad; buy a house, start a family.
“We were both putting aside 10 to 15 per cent of our income from our overall paychecks. We managed to pile away a little more than $20,000,” he says.
Infographic: The Super Savers
“We thought that would be a great down payment. And we both have great credit. But that wasn’t enough.
“We have a new little girl now, she’s 3 months old,” he says. “This has made our housing search a little more imminent.”
Tighter mortgage rules came into place last year, and, so far, it seems they have succeeded at cooling a hot market.
“Sadly, due to the circumstances for first-time home-buyers, it’s really difficult to find something that’s decent and in a good area.”
Clark says lowering the amortization period from 30 to 25 years has had a direct impact his plans. Paying higher monthly mortgage payments with a newborn isn’t feasible. Moving out of the city may come with a lower price tag, but isn’t desirable either.
“We now have to figure out what and where we can afford, where the best schools are, what areas we can live in safety-wise,” he says.
Finance Minister Jim Flaherty admits there can be an initial sting for some first-time home-buyers. But lowering the amortization by five years also means those who do enter the market will save thousands of dollars in interest paid to the lender.
Flaherty also imposed a limit on how much debt a potential buyer can carry compared to their earnings. Lenders have assessed this information in the past, but they’ve not been given a maximum.
Now, to qualify for a mortgage, the amount you pay in mortgage expenses (principal, taxes, condo fees) cannot exceed 39 per cent of your annual income.
The debt you carry (credit cards, personal loans and car loan) cannot exceed 44 per cent of your annual income.
Getting into the housing market takes work, but it’s not impossible.
It is, however, important to get your finances in order before you go shopping for a home.
“People tend to start on MLS,” says David Larock, a Toronto-based mortgage broker. “They go to open houses and they meet agents. It’s understandable and a natural evolution.
“But an experienced real estate professional will want to involve a mortgage professional as early as possible.
“If somebody gets excited about a house they can’t afford, that’s not good for anybody,” he says.
To avoid any disappointment, start by checking your own credit report to make sure the information is accurate. Only then should you approach your bank to request a mortgage pre-approval.
This is also a good time to ask your bank what costs go along with a mortgage, so you can plan accordingly.
Closing costs alone can really stretch your budget. Expect an extra 1.5 to 4 per cent of the purchase price paid in legal, appraisal, inspection, land transfer and adjustment costs.
The minimum down payment in Canada is 5 per cent. But if you’re buying with a down payment of less than 20 per cent, your mortgage has to be insured with a mortgage default insurer, such as Canada Housing Mortgage Corp.
Expect a one-time premium based on a sliding scale of how much of a down-payment you have. There’s PST on top of that insurance premium, which can come as a surprise at closing time.
To counter some of the costs of purchasing a home, first-time homebuyers are encouraged to take full advantage of rebates and offers available to them.
For those who’ve stashed their earnings into an RRSP, they are entitled to borrow up to $25,000 as part of Canada Revenue Agency’s Home Buyers Plan (HBP). Remember that this amount must be repaid in full within 15 years.
First-time buyers should also cash in on the $750 Home Buyers Tax Credit (HBTC), also offered by Canada Revenue Agency.
Provinces, territories and some municipalities may also offer their own tax credits or rebates. In Ontario, first-time homebuyers may be entitled to a Land Transfer Tax refund of up to $2,000. If you live in the city of Toronto, you may be eligible for a Municipal Land Transfer Tax rebate of up to $3,725.
It may be prudent to seek advice from a mortgage specialist who can help navigate rules, regulations and lending lingo.
You can go to your bank or seek advice from a mortgage broker.
Both are free to consumers and come with their own perqs.
“Brokers have access to multiple lenders,” says Kerri-Lynn McAllister of Ratehub.ca.
“They evaluate the products that suit your needs best. They do the work and the [mortgage rate] shopping for you.”
They are free to consumers because they’re paid a finder’s fee from the bank.
If you prefer working with a company you’ve established to be trustworthy, going with your bank may be the best bet.
It can also offer “product-bundling,” which may save you money in the end, so give it thought.
No matter what path you choose, “ask as many questions as you can as early as you can,” says Clark.
Not only will a mortgage specialist help you save for your down payment, but he or she can help find savings through the life of your mortgage.
Watch out for these costs
Don’t let any cost come as a shock. Aside from closing costs, Canadian Mortgage Housing and Housing Corporation warns you may have other costs to consider.
They may be small, but they do add up and can take a bite from your budget.
Moving expenses: Will you use a moving company? Muscling the move yourself or with friends may save you money. But is it worth it?
Appliances: Will you need to buy a new fridge, stove or washing machine? Many times, a homeowner will take his or her own appliances with them as replacing them can be expensive. It may be up to you to purchase your own.
Window treatments: Do they come with the house or condo? Depending on the size and number of windows, this little thought-about-cost can really add up.
Outdoor enhancement: Will you need gardening gear in the summer and snow removal equipment in the winter?
Decorating: Will you need to repaint vintage trimmings or outdated wallpaper? Do you have all the hand tools you need to get the job done?