FIRST TIME BUYING
WHY USE A REALTOR®?
This is it. The time has come. You're ready to buy your first home. You understand the value of home ownership - building equity in a property that belongs to you, improving it, making it your own, and taking comfort in the refuge of your own home. Now all you need to do is find it.
But you don't have to do it alone. A home is, for many people, the single largest purchase they will ever make. The process can be long and complicated. Make it easier: work with a REALTOR® - a qualified real estate professional who is a member of the Canadian Real Estate Association, the Ontario Real Estate Association and their local real estate Board and, as such, subscribes to a high standard of professional service and to a strict Code of Ethics.
A REALTOR® has the knowledge and experience necessary to not only help you find the home you want, but walk you through making your offer, examining your financing options, and drawing up a legally binding contract. He or she can help you identify what kind of home you want, and can take you to homes and neighbourhoods that reflect your lifestyle, needs and price range.
FINDING THE HOME YOU WANT
Most people begin thinking about their first home long before they can afford to buy it. Many have a clear idea of the type of home they want, what features it will have, and where it will be located. If you know all that, tell your REALTOR® so that they can help you find that dream home. But if you're not sure what you want or need in a home, here are some things to think about before you buy.
Priorities. Make a list of needs that your house must fulfill, and put them in order of priority (number of bedrooms, proximity to schools or transit, accessibility for disabled, etc). Now add to the bottom of that list those things that would be nice to have (finished basement, renovated kitchen, or central air, for example). Your REALTOR® can help you refine the list around your budget and what's available on the market.
Location. It really is the most important factor, because where you live affects everything else in your life. Do you prefer the city, or the country? Do you need space for a garden, or storage for a motorbike? An espresso bar down the street, or a lake down the lane? Where and how you work should also play a role in your decision - are you willing to commute, or have you always wanted to walk to work? Will you need a home office? All og these factors will affect which homes and neighbourhoods you look at.
Lifestyle. Think seriously about how much home maintenance you are willing and able to do. A new home can be built and styled to your specifications, without you lifting a finger except to sign the deed. An older home might have more character, large trees, and an established neighbourhood. A condominium apartment is perfect for those who don't have the time or inclination to do outdoor maintenance. If you have children, think about proximity to schools and recreation.
Taste. "Dream Home" is a subjective thing. Everyone has an idea of what their dream home will look like, whether it's contemporary, Victorian, ranch-style or something in between. But be sure to carefully consider a home's features before ruling it out based purely on taste. Decide whether you really want to pass up a home that fulfills your every need simply because it's a bungalow instead of a two-storey, or modern instead of Craftsman. Keeping an open mind regarding style and turning a blind eye to decor could be key to finding the ideal home for you.
AFFORDING AND FINANCING YOUR FIRST HOME
When looking for a home, probably the first thing you will do is establish a price range. After all, what's the point of looking at houses that cost $400,000 if you can only afford to pay half that? Setting a price range is easier said than done, however, and a number of factors come into play. The two main things to consider are how much of a down payment you can afford to make, and how much of a mortgage you can afford to carry.
Down payment. A mortgage covers the difference between the purchase price and your down payment. The larger the down payment, the less you have to borrow, the smaller your monthly mortgage payment, and the lower your cost of interest over the term of the mortgage. If you can afford to put down 25 per cent of the purchase price, the Canada Mortgage and Housing Corporation (CMHC) will not require you to take out mortgage insurance against your mortgage, further reducing the cost of your home over time.
You should also have a cash reserve for unexpected expenses and post-purchase expenses such as land transfer tax, legal fees, mortgage arrangements, moving expenses, new furnishings and appliances.
Mortgage. The other cost to consider is the amount you can afford to pay monthly towards your mortgage. Financial institutions do this by calculating your debt-service ratio. To calculate your debt-service ratio, list all your loans (car, personal loans, monthly credit card balances). The sum of these loan payments and your mortgage payment (including principal, interest and taxes) should not exceed approximately 40 per cent of your gross income. The mortgage payment and taxes should not exceed approximately 30 per cent of your gross income.
The size of the mortgage you can arrange, based on payments you can afford, depends on interest rates. The lower the rates, the larger the possible mortgage and the more affordable housing becomes. Also consider how open the mortgage is - can you choose a variable rate and then lock it in when rates begin to rise? Would prepayment be allowed? Is the mortgage portable should you need to move before the term is up?
The usual source of mortgage funds is a lending institution such as a bank or trust company - and it is the particular policy of the lending institution that determines the maximum loan allowed. But there are other sources of funding, too, and a REALTOR® can help you choose the best lender at the best rate and terms.
RRSP Home Buyers' Plan
When buying your first home, consider the CMHC's RRSP Home Buyer's Plan (HBP) as a possible source for your down payment. It allows participants to withdraw $20,000 from their RRSPs to purchase or build a house. No income tax is deducted from these funds, as long as they are repaid to an RRSP according to the government's repayment schedule.
You may participate in the plan if you or your spouse has not owned a home which you occupied as your principal place of residence in any of the past five calendar years.
Generally, you can only participate in the RRSP Home Buyers' Plan once. Conditions of the HBP include the following:
- The home you purchase must be located in Canada ;
- It must not have been acquired more than 30 days before receiving the withdrawal under the HBP;
- It is intended to be your principal place of residence within one year after buying or building it (that is to say, not as a second home or investment property).
Once you enter into an agreement to buy or build a qualifying home, you may withdraw funds from your RRSPs under the plan. You must acquire the home before October of the year following the year of withdrawal. After entering into the agreement, you must complete Form T1036. You can download and print a copy of the form, or you can complete it online in PDF format. Click here for those options: http://www.cra-arc.gc.ca/E/pbg/tf/t1036/README.html
You can also order a printed copy of the form by calling 1-800-959-2221. This form should then be submitted to your RRSP issuer.
Once approved, the form gives you permission to withdraw funds from your RRSP without any taxes being withheld. You may make contributions to the plan from more than one RRSP, as long as the $20,000 limit is not exceeded.
In addition, if you have a spouse who is also eligible, you can each withdraw up to $20,000 towards the down payment, for a total of $40,000. You may withdraw money from your RRSP tax-free if that money was deposited at least 90 days prior to withdrawal.
The money you withdraw from your RRSP must be repaid over a period of not more than 15 years to retain your tax deferred status. If you choose to pay less than your scheduled annual payments, the amount that you don't repay must be reported as income on your tax return for that year.
If you are interested in participating in this plan, a REALTOR® can help you understand how it works and ensure that you maximize its benefits.
For more information on the RRSP Home Buyer's Plan, visit www.cmhc.gc.ca
MORTGAGE TERMS (Glossary)
The amount of money paid for a property.
Amount of the Mortgage:
The amount of money borrowed from a lending institution to help pay for a property.
The amount of money put forward by the purchaser. It represents the difference between the purchase price and the amount of the mortgage loan .
The length of time which a mortgage agreement covers. Payments may not fully repay the outstanding principal by the end of a term because the amortization period is longer.
The number of years it will take to repay a mortgage loan in full. This period can be greater than the term of the loan. For example, mortgages often have a five year term but a 25 year amortization period.
Gross Debt Service Ratio (GDSR):
The percentage of gross 1 annual income required to cover payments associated with housing (mortgage principal and interest, taxes, secondary financing, heating and 50% of condominium fees if applicable). Most lenders have established that GDSR should not exceed 32% of gross annual income.
Total Debt Service Ratio (TDSR):
The percentage of gross 1 annual income required to cover payments associated with housing and all other debts and obligations, such as payments on a car loan. Most lenders have established that the TDSR ratio should not exceed 40%2 of gross1 annual income.
1 Net income may apply in some circumstances.
2 The maximum for mortgage approval may vary. For CMHC's First Home Loan Insurance Program, the GDSR requirement is 35%.