Real Estate Tips

HOME OWNERSHIP

A Great Investment

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.

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.

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.

The Advantages of a Resale Home

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. That means recreational facilities, transportation links, support services, schools and shopping centres are already in place.

HOME OWNERSHIP

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.

FOR BUYERS

How Much Money Is Needed To Close?

“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 HST) and disbursements (plus HST), 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.

Mortgage

Qualifying for a Mortgage

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% to 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.

If Interest Rates are Down

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:

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.

Short and Long Term Mortgages

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.

Home Insurance

Everybody needs to insure their home but some people actually over insure it. 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.

FOR BUYERS

From Contract to Closing

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 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.
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.
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.