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How often have you heard the real estate lament: "How I wish I'd have known at the beginning what
I know at the end?"
These real estate tips have been designed to give buyers, borrowers and homeowners
the basics on buying a home and getting a mortgage in Canada today. |
Buying Tips |
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Borrowing Tips |
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Tips for Homeowners |
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According to a Canada Mortgage and Housing Corporation study, resale house prices
rose faster than inflation in 23 of 27 major Canadian cities between 1971 and 1996
- even in years when inflation ran rampant throughout Canada.
The principal residence tax exemption makes the capital gains from that increase in
prices tax-free too. And the power of leverage magnifies that return even more,
since you've earned those gains on your down payment, not on the purchase price.
If you buy a $150,000 house and five years later it's up
5%, you've made 1% a year; but that assumes you paid all cash for your house.
With a 25% down payment, you've really earned 4% a year
tax-free on the money you've invested. And if you buy a house with only 10% down, over
five years your annual tax-free return is 10%. Of course, if you can avoid it, never
buy a house with the smallest possible down payment, as mortgage interest is not tax-deductible.
But the tax-free capital gains are added to the power of
leverage, real estate remains a good investment.
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While many buyers shy away from used cars, that's not the case with "used"
or resale homes. As a resale home exists, you don't have to visualize what it
will look like - you see what you get, and get what you see.
Also, resale homes are usually sold in more established communities and neighbourhoods.
nbsp; That means recreational facilities, transportation links, support services, schools
and shopping centres are already in place.
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Why Buy A Brand New Home? Newly-built homes have enormous appeal. Buyers are
captivated by the enchanting thoughts of a home that's bright, fresh, clean,
modern and, of course, new. Buyers can customize it to taste-interior
colours, decor and finishings. Often you can choose from a variety of models
and styles, instead of having to simply buy "what's there".
Unlike resale homes, many brand new homes have a warranty covering defects in materials
and workmanship, and leaky basement. And a new survey is almost always available.
Buyers can get good value buying from a builder-by including extras, options and
upgrades in the price plus, in some cases, special mortgage financing offers However,
before you purchase a brand new home, be sold on the builder; investigate its reputation,
its background, and the quality of its work. Check with the local home builders association
or provincial warranty program for information. And don't be afraid to bang on doors
and ask other buyers what they think of their builder.
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"How Much Money Is Needed To Close?" is a question high on every buyer's
list. Besides the basic purchase price, buyers face legal fees (plus GST)
and disbursements (plus GST), which are the out-of-pocket expenses a lawyer/notary
incurs. Then there are closing adjustments with the seller-taxes, rental income,
condominium maintenance, and some utility charges. And don't forget about the
costs of arranging a new mortgage- which can include application and appraisal fees.
On top of that, in some provinces a property transfer or "Welcome"
tax is levied-another hefty closing expense. For a resale home, these "extras"
can easily add11/2% t0 2% onto the basic purchase price. For brand new homes, that
figure can easily reach 2 1/2%- especially if the home is enrolled in a provincial new home
warranty program. The time to check out these charges is before the offer is
signed, not afterwards. Surprises are for birthdays, not real estate deals.
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When approving borrowers for a mortgage, lenders look at two factors down payment and
income. If the down payment is 25% or more, it's a conventional mortgage.
If not, it's a high-ratio mortgage requiring default insurance from Canada Mortgage
and Housing Corporation or GE Capital Mortgage Insurance Canada (GE). As for
income, lenders look at two ratios
One is the "GDS" or Gross Debt Service ratio.
No more than 30% to 32% of a borrower's gross annual income should go to "mortgage
expenses" principal, interest, property taxes and heating costs (plus maintenance
fees for condo mortgages). The "TDS" or Total Debt Service ratio looks
at the gross annual income needed for all debt payments house, credit cards, personal
loans and car loan. Depending on the lender, TDS payments should not exceed
37% t0 40% of gross annual income. The combined incomes of both spouses are usually
considered, but not rental income. Armed with this information, borrowers can crunch
their own numbers before applying for a mortgage. Or your lender can do it for you when
you get a pre-approved mortgage.
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People who booked long-term mortgages several years ago may find their interest rate
lower on maturity. Here's a strategy to save you money.
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Instead of reducing your payment to reflect the lower rate, make the same payment
as before or pay something in between.
- If your payment was 5800 a month, and it now should be
5700, because interest rates have dropped, still pay 5800 (or as close to it as possible)
despite the lower rate
Why? Every dollar more than 5700 a month that you pay
will reduce the balance owing. That will slash years off the time needed to retire
the mortgage, while saving you thousands of dollars in interest costs. And since
interest is a non-deductible expense, the savings in terms of your gross income are
even higher.
Keeping the same payment after a cut in interest rates
is an effective way to prepay your mortgage.
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Should you go short-term or long-term on your mortgage? That's one of the
toughest decisions borrowers face. Much depends on your unique needs and
circumstances, your character and personality Are you a first-time buyer anxious
for the security a long-term mortgage offers? Or are you a homeowner with
equity, who can afford to take a chance going short-term? Are you a risk-taker,
prepared to face the interest rate merry- go-round every six months? And
how long do you plan to own the house? A lot depends on market conditions, too.
If rates are falling, you might opt for a short-term or variable-rate
mortgage. If they are climbing, long-term may hold more appeal
And if the rate spread between long and short-term mortgages is small, does it
make more sense to go long-term? When choosing a term, there's no "
right" or "wrong" answer it all depends on you.
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Everybody needs to insure their home but some people actually over insure it.
As the land on which a home sits won't burn, only the building must be insured.
If the amount outstanding on your mortgage is
less than the value of the building, there's no problem. But if the balance
owing on your mortgage exceeds the value of your home, insuring the mortgage amount
means you're over insuring the building.
Insurance coverage should be determined by the value of the building not the size of the
mortgage. One way to avoid this dilemma, is by having a "replacement cost
endorsement" for the building indicated in your insurance policy.
Replacement cost coverage guarantees that the insurer will pay the full cost of
rebuilding the home, even if the loss is greater than its insured value.
This endorsement is available at nominal and sometimes at no additional
cost. But it's limited to owner-occupied homes, not income-producing
properties. And don't forget your fire insurance must be in place at
the time of closing.
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First-time home buyers often complain: "How I wish I'd known at the beginning what
I know at the end!" To avoid that, here's a practical check list of 10 things buyers
should do between signing an Agreement of Purchase and Sale and the closing.
- Choose a lawyer/notary (if not already done) and arrange
for the signed offer to be delivered to him/her as soon as possible. Review the fees and
disbursements (including GST on both), anticipated adjustments, property transfer tax, mortgage deductible and other
closing costs. Depending on the province and the property,
these items can total 2% of your purchase price even more for a newly-built home. Also review
with your lawyer/notary how you want to be registered on title.
- Satisfy any outstanding conditions such as financing or
a home inspection within the time frame set by the offer. Be sure you fully understand
how to keep the contract alive, or cancel it if the conditions can't be satisfied.
- Once your mortgage application has been approved, have
the mortgage commitment sent to your lawyer/notary.
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Only funds on deposit for at least 90 days can be withdrawn under the Home Buyers'Plan
the RSP program,so make the maximum contribution to your RSP as early as possible.
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