The end of harsh winter weather customarily marks the arrival of the spring home-buying season. Despite talk of a real-estate market slump or crash, this sales cycle will continue because the next generation of Canadians has embraced our national love affair with home ownership. According to a recent Royal LePage Real Estate survey, 55% of the cohort now forming new family units, Generation Y (those born between 1980 and 1994) plan to purchase their next primary residence.
Stepping across the great divide between renting and owning a home is the biggest financial move many Canadians will ever make. Before signing any purchase offer, it's essential that prospective buyers understand the costs involved, and know how they will finance the purchase. Doing your homework on home-buying costs and financing before you buy will mean less stress and more enjoyment as a home owner.
Besides the purchase price, buying a home entails a surprising number of additional expenses. There are the professional fees and disbursements for a real-estate lawyer, a home inspector and, in the case of a house purchase, for a property surveyor if the seller does not provide an up-to-date survey.
Arranging a mortgage usually involves property appraisal and loan-processing fees and, for a mortgage representing more than 80% of the purchase price, the premium for default insurance from the Canada Mortgage and Housing Corporation. Property insurance must be in place before the closing date and you will need title insurance.
The tax hit on a home buyer is steep, although some tax relief may be available for first-time buyers. You will pay provincial, and sometimes municipal, land-transfer tax based on the purchase price. If your home is newly built or substantially renovated, GST/HST applies to the sale, and you may be charged a new-home-warranty premium and development fees and levies. As well, there is GST/HST to pay on any goods and services related to the purchase.
Home-closing costs include adjustments to reimburse the seller for costs they have paid that apply to your ownership, such as pre-paid property taxes. There are also the usual relocation expenditures such as utility transfer and connection charges, mail-forwarding fees and moving costs.
Any planned renovations must be factored into your budget. Make sure to include a contingency fund of at least 10% to cover unforeseen costs.
As you settle into your new home, there may be expenses incurred for new appliances, paint and window coverings and other decor, landscaping and home maintenance.
How will you pay for all this? Most buyers use a combination of savings and mortgage money. A tax-free savings account is an excellent place to save money for a down payment. Your savings grow and there is no tax owed on any profits earned within your TFSA.
If you are a first-time buyer, your RRSP could be a source of home-buying cash. Under the federal government's home buyer's plan (HBP), you and your spouse could each borrow up to $25,000 from your respective RRSPs to buy or build a qualifying home that will be your principal residence. At least one-fifteenth of the loan must be repaid each year. Any missed annual payments are deemed taxable income for that year.
Before signing up for an HBP, take the time to understand its many rules. If you do participate, be aware that the process for accessing the funds could take several weeks.
Some individuals are fortunate enough to have parents, other family members or friends willing to give or lend them money toward purchase of a home. The terms of any gift or loan (amount borrowed, interest rate, repayment schedule, etc.) should be formally documented to protect both the borrower and the lender and avoid any misunderstandings.
Buyers should aim for a down payment of 20% or more of the selling price to avoid the extra expense of mortgage-default insurance. The rest of the required funds will come from a mortgage on the new home.
Finding the right mortgage can be a daunting task. There are many potential lenders (not just the big banks) and the many features and options available are constantly changing. Hiring an independent mortgage broker to shop on your behalf is likely to yield the best mortgage for your personal circumstances.
There is usually no direct cost for the broker's service and you avoid spending hours searching for a mortgage. Look for a well established mortgage brokerage that is suitably licensed by the financial regulator in your province, and ask to deal with an experienced agent.
It is possible to hold your mortgage inside your RRSP. Your plan must be self-directed and large enough to cover the amount you need to borrow. There will be set-up fees, default insurance and annual administration fees to pay, but you will earn the mortgage interest, not a financial institution. Given the costs, the numerous rules and the impact on your personal financial plan, getting professional advice is essential before deciding whether to invest your RRSP funds this way.