First Time Home Buyer

Are you financially ready to buy your first home? We will be giving you some tips to help you become ready, and inform you about the costs most first time home buyers don’t think of. We will be discussing mortgage rates, down payments, upfront costs, and government programs to help you pay for these costs.

Before you search for a house, get to know your credit score. It will be helpful to know if you have a high or a low credit score, so you can figure out what your mortgage interest rate will be, and if you will have trouble receiving a loan. To check your credit score, we recommend you use http://www.consumer.equifax.ca/home/en_ca. It is worth the $23.95 and should be done roughly every three years. (Or if you have the patience, you can send it in by mail and receive a credit report for free, your credit score is only $11.95, and you will receive it in 5-10 days).

There are two types of mortgages: open, and closed. Open mortgages are ideal for home buyers who don’t plan on living in the house until the mortgage is fully paid off. They have flexible rules that will allow you to pay off all or part of the mortgage at anytime without a penalty. If you are considering paying large lump sums at any given time due to excess funds, a bonus, or just because you want to pay it off as quickly as possible, look into an open mortgage. A down side to an open mortgage is that the majority of them come with a variable mortgage interest rate. A variable mortgage interest rate means that the interest you will be paying on your mortgage will fluctuate. The market will determine the interest, therefore creating a risk in your payments.

A closed mortgage is different. Instead of the luxury of paying off your mortgage using lump sums, you have a fixed payment plan. The way that closed mortgages work, is that you set up a fixed monthly plan which can be beneficial when budgeting. Throughout the year you are allowed to pay an extra 15% (depending on your contract agreement) on your principle without penalties. If you pay over the agreed amount, the bank will charge you an additional fee. The closed mortgage usually comes with a fixed mortgage interest rate. This means they will come with less risk because the interest will stay the same throughout the years of payment agreed upon. It isn’t impossible to come across an open-fixed rate, or a closed-variable rate, it is just less likely to find one with good interest rates.

The amortization (payment of debt over a period of time) of your mortgage will last 25 years on average but you can find longer terms. Keep in mind that although having a longer amortization means you pay less per year, you will pay more at the end because of interest. You will have multiple meetings with the lender with regards to your mortgage. The contracts of a mortgage payment may last anywhere between 6 months-10 years. At the end of each contract year you have to renegotiate your payment plan and choose the one that makes sense for you. This all takes place within the 25 year agreement between you and the lender.

So all you need is your 20% down payment when buying a house right? This is a common mistake among first-time home buyers. In fact, there are multiple costs you have to take into consideration while saving and house hunting. The costs might be shocking, but they are important to calculate when ready to purchase a home. Here is a rough breakdown of additional costs.

Home Inspections: it is important to hire an inspector when you have decided on a house. They will come through, check inside and outside to make sure everything is working right, give you estimates on how long appliances will last, and will give you all the information on the house that you need to know to make sure you are getting what you’re paying for. They can help you realize that your house just became a fixer-upper and save you on committing to an extremely large purchase, which will become more of a headache and burden. If there are little parts that need a bit of fine tuning, they can give you leverage in negotiating your deal by either making them fix it or by reducing their price. The cost of a home inspector varies and usually depends on the size of the home. Your average cost for the home inspector will usually be $300-$500.

Legal Fees: It is important to hire a lawyer to review the sales agreement and make sure you understand everything that is stated in the contract. They will also deal with the mortgage detail, do a title search, register a new title, and get the documents to figure out the adjustment costs. The average cost for a lawyer will be between $1,300-2,500.

Land Transfer Tax: On the first $55,000 you pay 0.5%, from $55,000-$250,000 you pay 1%, from $250,000-$400,000 you pay 1.5%, and $400,000+ you pay a total of 2%. If you are considering a move to Toronto, you will have an extra Toronto land transfer tax added. For an estimated calculation visit http://www.landtransfertaxcalculator.ca/ (minus Toronto taxes if not moving to Toronto). For first time buyers you may receive a $2,000 refund on these taxes, to see if you qualify visit http://www.fin.gov.on.ca/en/refund/newhome/index.html.

Taxes: HST is used for newly constructed homes or substantially renovated homes, but does not apply to resale homes. If you are looking at purchasing a new home, you will receive a rebate of up to $24,000 regardless of the new home price.

Property Survey: Indicates boundaries and measurements of your property and makes sure you have all the land you are entitled to. The cost of this survey is around $750-$1,000.

Appraisal Fee: For a cost of $150-$250, it is well worth getting an appraisal. The second opinion could give you leverage while negotiating (and help you save more money).

Realtor Fee: Your average realtor fees will be around 5-6% of the price of the house. This does not include the fees above. The percentage is usually split between the seller and buyer so on average you’re looking at a 2.5-3% out of your own pocket. Realtors will arrange showings, complete paperwork, and be your advocate.

Total house cost Down payment Lawyer fees Land transfer Taxes Appraisal fee Realtor fees @2.5% Home inspector Total upfront payment
200,000 40,000 1,300 1,725 2,000 200 5,000 300 50,525
300,000 60,000 1,300 2,975 15,000 200 7,500 375 87,350
400,000 80,000 1,300 4,475 28,000 200 10,000 450 124,425

**note: taxes are taken out if it is a resale house, if looking in Toronto your land transfer fees will be higher, may be entitled to a refund on land transfer tax. Also this is just a rough estimate, prices are subject to change.

Now that you are saying how am I ever going to afford my own place? I’ve got some tricks to help you get there. If you have already started saving for your retirement and contributed money into your RRSP’s, you are in luck! Although you are normally not allowed to take out money from this account without taking a big tax hit, the government created a Home Buyers Plan (HBP) for first time home buyers. You are entitled to withdrawal $25,000 tax free, with proof of purchase for first time buyers. This rule is not just for one person in your household. If you are purchasing with your spouse, they can withdraw $25,000 also as long as it is from a separate account and they are a first time home buyer also. If one spouse is a first time home buyer and the other is not, only the person who is the first time home buyer can withdraw funds from their account. This is extremely helpful when trying to find the funds to purchase your house. You should note that the money taken out of the account does have to be paid back within 15 years. Every year you have a set amount that has to be paid back. If you do not pay the amount due, the balance will have to be included as income on your taxes. For more information on other requirements to be approved for the HBP contact us for a one page document. Another Helpful tip to be aware of is that you are entitled to a tax break under the First-Time Home Buyers Tax Credit (HBTC). The government has offered up to a $750 tax credit for first- time home buyers.

If you do not have the funds to put down 20%, you can put down a minimum of 5%. The only problem with paying less than the 20% is that you have to pay for Canada Mortgage and Housing Corporation (CMHC), which is mortgage insurance. This is to protect lenders against mortgage default, and keep you with comparable interest rates to those with a 20% down payment. You have to keep the mortgage insurance until the entire mortgage is paid off. This is not recommended because you will have yearly amount to pay to the insurance companies also, and in the end pay even more. If this is the option you have chosen here is a calculator to give you an estimate on your costs http://www.ramforhomes.com/cmhc_premium_calculator.

Once the house is purchased, you still have to keep planning for your upcoming housing costs. Think about furnishing the home, maintenance, utilities, moving expenses, house insurance and hook-up fees. These fees will become costly and it’s recommended you save up another $2,000-$3,000 to get you started.

This might be a bit overwhelming but, it is better to know about all these costs before you start looking for your own place. This way you can become financially ready to own your own house and start saving properly. Good luck and start saving!


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