Home Buyer

One of the biggest challenges facing ﬁrst time home buyers is saving the downpayment. Here are 6 tried-and-true ways of saving money to buy a house or condo:

Found Money Found money is my favourite kind of money and can really help pad your downpayment. From bonuses to birthday cheques from Grandma to money from your beer bottle returns to my favourite: that magical date when you max out on your EI and CPP contributions and your pay suddenly goes up by hundreds of dollars until the end of the year. You won’t miss found money – just pretend you never had it in the ﬁrst place. Cash those cheques and deposit them immediately to a safe place.
The Latte Factor I know you’ve heard this one before, but making a bunch of small changes in your lifestyle can help you save literally thousands of dollars. From cancelling magazine subscriptions and gym memberships you don’t use, to yes, forgoing your daily venti americano and bringing your lunch to work, making small changes now will help you buy your ﬁrst home faster. Figure out what you can live without and direct that money automatically to your savings account
The Bank of Mom and Dad If you’re fortunate enough to have a family with a little extra cash, the Bank of Mom and Dad can be a lifesaver. It’s not easy being a ﬁrst-time buyer in Toronto where starter houses cost over $500,000. Parental help can often mean the diﬀerence between buying what you want and buying a 400 sqft condo with no windows in a bad part of town. Of course, parental contributions generally come with strings attached, so be prepared for guilt trips and unsolicited advice about what you’re buying.
The Home Buyer RRSP Plan The government allows ﬁrst-time Buyers to take up to $25K from their RRSP tax-free to use towards the purchase of a ﬁrst home. If you haven’t been regularly contributing to an RRSP, consider taking the money you’ve saved and ﬂipping it through an RRSP for 90 days. You’ll be eligible for a tax refund for the contributions you make, which you can use to help pay closing costs. It’s an easy way to increase the size of your downpayment by up to 40%. Of course, this strategy works best for spring purchases when you get your tax refund in time to help with the costs.
Practice Mortgage Payments If you’re currently living with your parents, consider banking the money you’d otherwise be paying in rent. Better yet, ﬁgure out how much your mortgage payments/taxes/condo fees will be when you do buy a home and start putting that money away now. It’s a great way to increase your downpayment – plus you’ll already be used to the payments when you actually do get your house or condo.
Better to Be Safe Than Sorry Save your downpayment in a separate bank account, ideally one not accessible from a bank machine so that you won’t be tempted to dip into it for a last-minute vacation or a spontaneous round of drinks. Talk to your ﬁnancial planner or bank about where you should invest it – while it might be tempting to try to make some quick money in the stock market, you might end up losing your hard-earned cash. Back when I was a ﬁrst-time Buyer, I saved my downpayment in a GIC RRSP – the interest rate was ridiculously low but at least I knew the amount I saved wouldn’t decrease.

Saving money for a downpayment isn’t fun but it’s a necessary evil on the path to home ownership. If you’re a ﬁrst time Buyer in Toronto, the sooner you start saving for a home, the better.

Mortgage Basics

Mortgages can seem intimidating, especially for the ﬁrst-time buyer. Once you’ve qualiﬁed for a mortgage, there are some basic decisions you will have to make: Mortgage term, amortization, interest rate and type of mortgage. Read on to ﬁnd out what all of that means, or use our handy calculators . to estimate what your payments would be.

Mortgage Term and Amortization

The mortgage term and amortization period aﬀect the amount of money you can borrow (and thus the price of the home you can buy) and dictate how much your monthly payment will be.

Mortgage term

A mortgage term is the amount of time a lender will loan you money for – typically from 6 months to 5 years. When the term is up, the remaining amount is payable in full unless you arrange new ﬁnancing for another term.

Mortgage term

Choosing a mortgage term is tricky and requires you to be knowledgeable about trends in the marketplace, as well as having a sense as to the amount of risk you’re willing to endure. If you choose a six-month term, and interest rates increase drastically in that time frame, will you still be able to aﬀord your home?

Amortization

Few (if any) of us can pay oﬀ the entire principal of a large mortgage in a six month or even a ﬁve-year term. Imagine how big your payments would be! To help you out, lenders calculate or amortize, the mortgage payments over a much longer time, often as long as 25 years. They aren’t loaning you the money for a single 25-year period–they’re just calculating the payment schedule as if it will take you that long to pay back the principal plus interest. You will probably renew the mortgage several times during the amortization period, and you always have the option to change the amortization depending on market conditions or your ﬁnancial situation. The longer the amortization period, the lower your payments will be – but this also means you’ll be paying more in interest.

Amortization

Few (if any) of us can pay oﬀ the entire principal of a large mortgage in a six month or even a ﬁve-year term. Imagine how big your payments would be! To help you out, lenders calculate or amortize, the mortgage payments over a much longer time, often as long as 25 years. They aren’t loaning you the money for a single 25-year period–they’re just calculating the payment schedule as if it will take you that long to pay back the principal plus interest. You will probably renew the mortgage several times during the amortization period, and you always have the option to change the amortization depending on market conditions or your ﬁnancial situation. The longer the amortization period, the lower your payments will be – but this also means you’ll be paying more in interest.

Payments

Most mortgage payments consist of two parts: principal and interest. This is known as a blended mortgage payment. Each payment reduces the balance owed on the mortgage by the portion of the payment that is credited to the principal. Over time, the proportion of your payment that reduces the principal balance will increase. The faster you can pay down the remaining balance, the less total interest you’ll pay. There are many ways you can pay down your mortgage faster, from accelerating your payments (i.e. 26 payments per year instead of 24) to making lump sum payments on your mortgage; your lender can help deﬁne the right strategy for you.

Interest Rates

The interest rate is one of the biggest contributing factors to how much you end up paying for your home both on a monthly basis and over the life of your mortgage.

Interest is the cost of borrowing money. Interest rates ﬂuctuate with the economy. The interest rate you commit yourself to at the beginning of the term can have a signiﬁcant eﬀect on the amount you pay each month for your mortgage. There are two basic types of interest rates used in mortgage products: ﬁxed-rate and variable-rate.

Fixed-rate mortgage – Essentially, this means committing to a single interest rate that will not change for the term of your mortgage. This strategy equalizes how much of your monthly payment repays the principal vs. interest. Fixed-rate mortgages are great in an economy where interest rates are going up, as you never have to risk paying higher interest rates. But in an economy where interest rates are going down, you could be stuck paying more in interest than the going rate.
Variable-rate mortgage – With most variable rate mortgages, your monthly payments ﬂoat in relationship to the bank’s prime interest rate. If rates go up, your payment goes up. Variable rate mortgages can protect you if interest rates are high at the time you arrange your mortgage; when rates fall, you’re not stuck with high-interest payments. In some instances, lenders will allow you to convert to a ﬁxed-rate mortgage in this kind of situation.

Types of Mortgages

Conventional mortgage – Aptly named because they are the most common type of mortgage. The lender will loan you up to 80% of the appraised value or purchase price of the property (whichever is lower), and you need to come up with the other 20% as a down payment.
Second (and third) mortgages – These are additional ﬁnancing arrangements behind an existing mortgage, also secured by your property. Secondary ﬁnancing is generally arranged at a higher interest rate and for a shorter term than the ﬁrst mortgage.
High ratio mortgage – When you don’t have the 20% down payment required to get a conventional mortgage, a high ratio mortgage can advance you up to 95% of the home’s appraised value or purchase price. However, since you are borrowing more than the usual 80%, the government insists that the mortgage is insured against default and that you pay the cost of the insurance. That cost can be a few percent of the mortgage amount and is added to the mortgage principal.

Government Programs

Home Buyer Plan for First Time Home Buyers (HBP)

The federal government’s Home Buyers’ Plan (HBP) is a program that allows you to withdraw money from your registered retirement savings plan (RRSPs) to buy or build a qualifying home. This money is not taxed as income as it would normally be, but you do have to pay it back. You have 15 years to repay the money, starting two years after the initial withdrawal. The maximum for such withdrawals is $25,000.

The conditions:  The purchase must be for a principal residence, you can take the cash out up to 30 days after buying the home, or if you take it out beforehand, you must own or build the home by October 1st of the following year.

N.B.: For this plan the government deﬁnes a ﬁrst-time buyer as someone who has not owned a home that they occupied as their principal place of residence during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before your withdrawal. So basically, if you owned a home ﬁve years ago, or had a property that wasn’t your principal residence, you are still considered a ﬁrst-time home buyer.

For more info on the HBP, go to the Canada Revenue Agency’s website at www.craarc.gc.ca

Land Transfer Tax Refunds for First Time Home Buyers

The Ontario government also helps ﬁrst time home buyers (which it deﬁnes more strictly as having never owned a home ever, anywhere) by oﬀering a refund on the land transfer tax in Ontario, up to a maximum of $2000 (equivalent to the Provincial Land Transfer Tax on a $227,500 home).

If you are buying in the City of Toronto, it has an additional Municipal Land Transfer Tax as well, with an additional rebate for ﬁrst-timers that maxes out at $3,725.

First Time Home Buyer Tax Credit (HBTC)

The costs associated with purchasing a home can be a particular burden for ﬁrst-time home buyers, who must pay these costs on top of saving the money for a down payment. Closing costs include one-time items such as lawyer fees, HST (on newly constructed homes), and adjustments (e.g. taxes or utilities prepaid by the seller) that allow you to complete the house purchase.

To assist ﬁrst-time home Buyers with these costs, the government created the FirstTime Home Buyers Tax Credit, a $5,000 non-refundable income tax credit that results in up to $750 in federal tax relief.

Canada Mortgage and Housing Corporation Insurance (CMHC) 

The Canada Mortgage and Housing Corporation helps buyers by providing mortgage loan insurance so that a Bbuyer can buy a home sooner–with as little as 5% down payment. To ﬁnd out all about the programs, including the costs of insurance, visit the CMHC website.

Understanding Closing cost

As you go through the process of buying a home, you’ll naturally want to know how much money this will cost you. Your lawyer, accountant, and real estate agent can help you estimate your costs. Some of the things you can expect to pay are:

Before Closing

Deposit (usually 5% of the purchase price in Toronto, paid within 24 hours of your oﬀer being accepted)
Property Appraisal ($400- $500, often paid by the lender)
Home Inspection ($400-$600, paid to the home inspection company at the time of the inspection)

After Close

Moving Expenses ($1,000+)
Utility Connection Charges (varies)
Redecorating and Renovating Costs (varies)
Immediate Repair and Maintenance Costs (varies)

Your lawyer will calculate the ﬁnal amount that is owing, and you will need to provide him/her with a certiﬁed cheque for the full amount before the property comes into your possession.

On Closing

The balance of the Purchase Price – the purchase price less your initial deposit. Usually, the bulk will come from your lender and become your mortgage.
Legal Fees – amount varies depending on purchase price and lawyer (approximately $1,800 for a $500,000 purchase)
Title Insurance – sometimes included in your legal fees ($250-$400)
Mortgage Broker Commission – if applicable, usually paid by the lender
Property Survey – if required ($1,000-$2,000)
Ontario Land Transfer Tax – varies depending on purchase price
Toronto Land Transfer Tax (varies depending on purchase price
Property Tax Adjustment – reimbursement to Seller of property taxes they paid beyond the closing date
HST – generally only applicable on new construction condos and houses and commercial properties
Tarion Warranty Fees – warranty on new construction condos and houses only, not resale.
Provincial Sales Tax – only applicable on chattels purchased from vendor (amount varies)
Adjustments for Utilities/Condo Fees/etc. – reimbursement to Seller for prepaid utilities, etc. (amount varies)
CMHC Insurance Premium – insurance premium charged if you have less then 20% down payment (click here to estimate CMHC insurance)

Basics of Bidding war for ﬁrst time home buyers

Multiple oﬀers (often referred to as “bidding wars”) are a regular feature in the Toronto real estate market, a situation that can be a source of apprehension and doubt for many Buyers. To reduce that apprehension, we’ve compiled this how-to guide that aims to take the mystery out of the bidding war process, as well as to arm you with knowledge that will increase your chances of coming through bidding wars with positive results.

Realty Check 

Bidding wars don’t actually involve bids like an auction, and they aren’t actually wars. The term ‘bidding war’ is used to describe a situation where when more than one Buyer makes an oﬀer on a property at the same time. Understanding the basics about multiple oﬀer situations and having the knowledge to play the game will go a long way in making you feel more comfortable and help you get what you want.

Who’s in Control

Multiple oﬀers generally present themselves in a Seller’s market, when Sellers are in control. In the words of my old economics Prof – a Seller’s market is when there are too many Buyers chasing too few properties.

When to Expect a Bidding War

In the current Toronto market, anything is possible. Some hot properties in hot neighbourhoods will generate multiple oﬀers after being on the market only a day or two–and in some cases, in mere hours. For the most part though, when a Seller is trying to generate multiple oﬀers, they will set a speciﬁc date to review oﬀers (known as “withholding oﬀers”) – usually 7 days from the date they listed their house on the market.

The Seller’s Goal 

The Seller’s wants to expose their property to as many potential buyers as possible, then force anyone interested enough to make an oﬀer to show up at the same time. If the strategy works, the result is multiple oﬀers, and often a selling price above what they might have otherwise have received. It’s important to note that not all properties that have an oﬀer date get multiple oﬀers – but it’s best to be prepared just in case.

How It Works

Bidding wars in Ontario are blind – meaning you’ll never know how much any other oﬀer is. Your oﬀer may be $1 below the highest oﬀer, or $50,000 above the next-highest bid. Only the Sellers know what all the oﬀers are – and only the winning sales price will be made public.

As a potential Buyer, you are entitled to know how many oﬀers you are competing with. When a Buyer signs an oﬀer, their Realtor ‘registers’ the oﬀer with the Listing Brokerage. The number of registered oﬀers must be shared with other registered Buyers – but not the content of the oﬀers.

Most multiple oﬀer situations involve Realtors presenting their clients’ oﬀer to the Sellers and the Listing Realtor in person. There is usually a time set – for example, 7 PM on Monday, and oﬀers are presented in the order in which they were registered. Potential Buyers and Realtors wait for the process to run its course, sometimes over coﬀee, often over beer.

Generally, Sellers will select the best of all the ﬁrst oﬀers that have been presented to them. ‘Best oﬀer’ of course is a subjective decision, based on the Seller’s speciﬁc situation, but which is usually a combination of the most attractive closing date, price and conditions. In most bidding wars, Sellers do not negotiate with Buyers, so it’s important that your ﬁrst oﬀer is your best oﬀer. In some situations though, negotiations are necessary. Sellers are only allowed to negotiate with one oﬀer at a time – meaning they can’t sign-back 2 or 3 oﬀers at the same time, at higher prices, in the hopes that someone accepts it. If two or more oﬀers are very close, potential Buyers may be asked to both improve their oﬀers – though again, this will be a blind process and one that your Realtor will need to carefully walk you through.

At some point, the Seller will accept an oﬀer, and all other potential Buyers will be notiﬁed via their Realtors.

Understanding Oﬀer

About to make your ﬁrst oﬀer on a house or condo? No idea what the heck that means?

After Close

Decisions, Decisions Once you’ve found the house or condo you want to buy, you need to decide the terms and conditions of what you want to oﬀer the Seller (price, closing date, conditions, etc.) There’s more than just a number to think of! Your real estate agent will help in determining a fair price and will give you guidance on what other terms and conditions you should include.
Agreement of Purchase and Sale There’s a ton of paperwork to sign, most importantly, the Agreement of Purchase and Sale – it’s your oﬃcial oﬀer to the Seller.
Irrevocable Period Your oﬀer is only valid for a certain amount of time – we call this the irrevocable period – this is the time period that the Seller has to consider your oﬀer. After the irrevocable period has expired, if the Seller hasn’t accepted your oﬀer (or made a counter-oﬀer), your oﬀer bursts into ﬂames and you aren’t committed to it any more. Irrevocable periods vary, but we’ve seen everything from one hour to 72 hours. Typically in a hot real estate market (like Toronto’s), oﬀers are valid for only a few hours, so the whole process could happen very quickly once the oﬀer is signed.
Oﬀer Registration Once signed, your REALTOR will ‘register’ the oﬀer with the Selling agent’s oﬃce (the Listing Brokerage) – essentially telling the oﬃce that they have a signed oﬀer from a Buyer. None of the terms, conditions or price are revealed to anyone at this point. REALTORS register oﬀers so that there is an easy and fair way to track oﬀers–especially important if there are multiple oﬀers on one house or condo.
Oﬀer Presentation The real estate agents for both the Buyer and the Seller generally make plans for a formal oﬀer presentation – either in person (at the subject house or condo or at the Listing Broker’s oﬃce) or by fax or e-mail. We prefer to present our oﬀers in person. The Buyer’s real estate agent presents the oﬀer to the Seller and his/ her real estate agent together. The Buyers are not generally present for this part (though it’s a good idea to be nearby in a cafe or pub in case of any negotiations). In most cases, the formal presentation takes less than 10 minutes – every Realtor presents oﬀers diﬀerently, but the presentation is the opportunity for a Realtor to sell and justify their Buyer’s oﬀer.

Negotiations The Seller can now do one of 3 things with the oﬀer:

Accept the oﬀer as is They agree to the terms and conditions you’ve oﬀered and sign it. Congrats!
Sign back the oﬀer with diﬀerent proposed terms (for example, at a higher asking price, with diﬀerent closing date, etc.). This now becomes a counter-oﬀer from the Seller back to the Buyer. This is the most common scenario–usually, a number of back-and-forth negotiations take place with each side making concessions until hopefully a mutually agreeable contract is reached.
Decline the oﬀer If your oﬀer is totally unacceptable to the Seller, they have the option of simply declining it–no negotiation, no anything. We’ve seen Sellers decline low-ball ﬁrst oﬀers, and we’ve seen oﬀers declined mid-negotiation.

If an accepted Agreement of Purchase and Sale is reached, the Buyer will need to provide a deposit (in trust) to the Listing Broker (usually around 5% of the purchase price and usually paid within 24 hours of the agreement being reached). Any conditions then need to be met before the agreement is considered “Firm.” If there aren’t any conditions, the agreement is ﬁrm as soon as the agreement is signed and deposit paid. Yay! You now own a new home.

Making an oﬀer on a house or condo is an exciting but crucial (and often stressful) part of the process; as a good REALTOR I can help you to reduce the stress by preparing you for potential scenarios ahead of time, helping choose a strategy, guiding you through the process and advising you of your options (and possible outcomes) at each step. It may be the biggest ﬁnancial step of your life, but remember, I do this every day!