VICTOR FERREIRA
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In the 1950s, young Canadian brides in their late teens or early twenties usually moved directly from their parents' homes into the rented premises they would share with their new husbands. Almost half a century later, brides tend to be a little older. They may have lived on their own for some years and even with their intended spouses. They are likely to have careers of their own and some money put aside, possibly in an RRSP. With biological clocks ticking away, today's bridal couple may desire living space large enough to accommodate a prospective family. For all of these reasons, and because real estate remains a good investment, more and more bridal couples perhaps like you -- are considering becoming first-time home buyers. In fact, you may already have done some looking around for that dream home, and you've decided! You're going to buy a home of your own!
But before you whet your appetite for more than you can afford, it's a good idea to figure out just how much money you can get together between you for the down payment. That's the money you need to pay "up front" for the house of your eventual choice. Getting the money together for a down payment is the first challenge. It requires a little teamwork.
How much do you need for a down payment?
It's time to evaluate your combined resources, consult financial experts, and explore first-time buyer help offered by both the federal and provincial governments. "You can buy a house for as little as 5% down," CIBC advisors comment, "but remember that the larger the down payment, the easier the other expenses will be to manage." CIBC suggests that an ideal down payment is 25% of the purchase price and cautions that "part of your down payment will be used as a deposit once you're ready to put an offer on a property, so remember to keep some of it available in easily accessible funds."
First-time home buyers' plans developed by both the federal government and the Ontario government are making it easier to "get it all together". For example, if you are a first-time buyers, you may be able to use your RRSP savings toward the purchase of a home. You may be eligible for the government approved RRSP Home Buyers Plan.
Getting it all together!
The federal government's Home Buyers' Plan is available to brides and grooms, providing they haven't owned a home in the last five years. It allows first time buyers to borrow up to $20,000 each, interest free, from their own RRSPs. This loan is interest free, as long as the funds have been in the RRSP for at least 90 days. Also, the money must be paid back within 17 years. Royal Bank financial consultant Alan Silverstein advises first time buyers to take full advantage of unused RRSP limits. Borrow money, he suggests, from your family or friends to deposit to your RRSP and keep it on deposit for 90 days or more. Then, when you buy your house, says Silverstein, simply remove the money, repay the loan, and collect an income tax refund!
The Ontario Home Ownership Savings Plan (OHOSP) was created by the Provincial Government to help Ontario residents save for a first home. (An explanatory booklet is readily available at TD Bank.) If your net income is less than $40,000 or if you and your mate-to-be have a combined income of less than $80,000, you can take advantage of this program aimed at helping you buy a home. What this all means is that if you open a plan (each person, not jointly) with a recognized financial institution (such as a bank, credit union, trust company, or provincial savings offices), your money not only earns interest at current rates but you also can qualify for an OHOSP tax credit of up to $500 per person or $1,000 per couple. The tax credit is deposited into your plan during the year, and receipts for income tax purposes will be issued. You can put as much money as you like into the plan but your tax credit is based on not more than $2,000 per person per year. But, in order to withdraw your OHOSP funds, you must buy a home. Otherwise, you'll have to repay your tax credits. If you are buying your first home, your OHOSP funds will be released to buy an eligible year-round home that you must live in for 30 consecutive days within two years of buying it. If you are planning to build a home, you can also use the money you have saved through your OHOSP plan to buy the home -- but not the lot.
If you've taken advantage of either or both of these options, you're ahead of the game. Maybe you haven't, and you're starting from square one. In any case, now you're ready to look at all your assets and figure out just what you can get together as a down payment. Royal Bank publications suggest considering all savings such as deposits, stocks and bonds, retaining a cushion to cover unexpected expenses, selling assets you can live without, such as a second car. The next step is to estimate the amount of sale closing costs and extras (a rule of thumb is up to 10% of the purchase price). Unless you have generous relatives who want to add a little to the kitty, whatever you have left is your available down payment.
Getting pre-approved!
Now comes the hard part, being realistic about what you can afford. You have to ask yourselves good questions. Lots of questions. A mortgage, after all, is a loan that you have to repay. Even with some down payment money to offer, can you really afford the expenses a house will entail? In general, your household expenses should not exceed 32% of your gross income. This is called Gross Debt Service Ratio, and it is one of the things a financial institution will want to know in pre-approving a mortgage.
Why get pre-approved?
Because then you will know how much money will be available to you to buy your first-time home, and vendors will consider you serious buyers a plus when it's time to negotiate. A pre-approved mortgage is an agreement, provided that you and your property qualify, that a specified amount will be available to you at a guaranteed interest rate for 60 days (90 days for new homes). Funds must be advanced during this period. (If interest rates go down, you get the lower rate.) If you are able to put 25% or more down, you can apply for a Conventional Mortgage. With less than 25% down, you will be applying for a High Ratio Mortgage, which must be insured (for a premium you pay) by CMHC or GEMI. Depending on the amount of your down payment, the insurance premium ranges from 1.25% to 3 % of the total mortgage. This premium may be paid in cash, or added to the mortgage amount. It's usually better, as first-time buyers, to opt for the security of fixed, longer term mortgages so that you know what you have to pay every month especially with interest rates holding low and steady. Just add the pre-approved mortgage to your available down payment, and you know exactly what price range you are looking for. Put on blinkers if necessary, but look only in that price range. That's your comfort zone.
Finding It!
Now comes the exciting part! You'll be looking with a reputable real estate agent who understands both your price limitations and your needs. Don't be afraid to ask your agent for references. Things you'll want to discuss with the agent are not only your present but also your future housing needs. You'll need to evaluate the neighbourhood, any proposed development plans, and the zoning regulations. You'll want to consider which facilities are close by, and whether public transportation is available. Some of these things will be more important to you than others. You'll certainly want to know "what comes with the house?"— the lighting fixtures, the appliances, the blinds? Don't take anything for granted. Personal movables or removables are called chattel and should be specified in writing in the offer to purchase.
You love it! This is the house for you!
Sure you're delighted buying your first house is an emotional experience -- but this is the time to let your head rule your heart! When you do make an offer to purchase, take it to a lawyer (or notary in Quebec) before you sign. No matter how much you trust the real estate agent, you are bound by all the fine print in the offer. A deposit (5%) of your hard-earned money will be required, and your real estate agent is not a lawyer working in your interest. This is also the time to make sure just what the "extra costs" rule of thumb: about 10% of the selling price, remember -- will be.
ASK MORE QUESTIONS! Additional costs may include: upfront costs (to start the process); closing costs (or disbursements); and fact of life expenditures (it's recommended to add 1.5% to 3.5% of total cost of home.). There will also be an Appraisal Fee (so the mortgage company knows what kind of property it is lending you money on), an Inspection Cost (so that you can be sure your property is in good shape and adheres to building codes), a Property Survey (so that you know where your land begins and ends), Insurance Costs for High Ratio Mortgages, Home Insurance, Land Transfer Tax, Interest Adjustments, Prepaid Property Tax, and Utility Adjustments. You also have to think about Legal Fees and Disbursements, Sales Taxes, Moving Expenses, Service Charges, Immediate Repairs, and Appliances (if they're not included), and Decorating Costs (you don't have to do it all at once). Make a check list and find out the answers before you sign the offer. Only then do you take the plunge! And, with a few negotiations back and forth, you'll have your very first housewarming gift your own home!