STEPS TO BUYING A HOME
"A home is more than just a house or condo. It's the place you will build memories with family and friends and take pride in the home that you have created. Doesn't it make sense then to work with an agent that understands this in addition to the typical real estate transactional services?"
THE 7 STEPS TO BUYING A HOME
STEP 1 – Getting Ready
BUYER'S BINDER – Making It Easier For Lenders to Say "YES!"
STEP 2 – Making the Decision to Buy
STEP 3 – The Search
STEP 4 – The Offer
STEP 5 – "Waivers" - Removal of Conditions
STEP 6 – Pre-Closing
STEP 7 – Closing
USING YOUR RRSPS TO BUY A HOME IN ETOBICOKE
I recently had a conversation with a client who was asking how he could use his RRSPs to buy real estate. I've been asked enough times that it's led me to realize that the typical first time home buyer is not aware and is worthy of mentioned here.
Let's assume you are buying a home in one of the up and coming neighbourhoods in south Etibicoke (Mimico, New Toronto, Long Branch and Alderwood) which I've highly recommend in other articles on my web site. Many people are aware that first time home buyers can use up to $25,000 from their RRSPs (or up to $50,000 per hosuehold) to buy their residence. The stipulation that Canada Revenue makes however is that over the next 15 years the home buyer will have to repay that amount back into their RRSPs. So in the event the full $50,000 is used, that would equal to a repayment of $3,333.33 per year back to their RRSP plan.
Are you aware that a first time home buyer is defined as one not having bought within the last 5 years? So even if you previously bought your home and still live in it, you are now considered a first time home buyer - if at least 5 years has elapsed.
The benefits of using your RRSPs as a source for your downpayment for a home purchase are at least threefold: 1) it will have enabled you to buy that first home, 2) your home will start to appreciate over time that is all tax free as your principle residence and 3) the rate of return from this appreciation will be multiplied due to the fact that you leveraged the purchase. In other words, if your downpayment from RRSPs was only 10% of the purchase price (ie. a 90% mortgage), then your overall percentage appreciation would be magnified 10 times! This is one of the things that makes real estate really exciting.
Buy New or Resale?
The simple answer is it depends. Each has it pros and cons and ultimately comes down to personal preference, lifestyle choices and financial means. Typically new builds are located in new subdivisions but with the increase in property values, an increasing numbers in in-fills are occurring especially in older established neighbourhoods such as Mimico, New Toronto, Long Branch and Alderwood areas of South Etobicoke.
New Home Advantages
New Home Disadvantages
Resale Home Advantages
Resale Home Disadvantages
DOWN PAYMENT ON AN ETOBICOKE HOME
With the incredibly low interest rates, buying a home in Etobicoke or anywhere in Toronto for that matter has become ever more appealing. The price increases in Etobicoke over the last several years has eroded some of that affordability, but the housing market continues to post positive price gains albeit modest ones. Home ownership continues to be very desirable especially among the increasing number of immigrants to Canada most of whom decide to make Toronto their home. Despite the low interest rates and relative affordability, the two main challenges that every home buyer must face is coming up with 1) the downpayment and 2) then getting approved for the mortgage. Let's focus on the former for the purpose of this article.
Downpayment is used loosely here to include 1) the deposit required with the offer, 2) the funds necessary in addition to the deposit to make up the Buyer's equity in the purchase and 3) the Closing Costs such as land transfer tax, legal fee, appraisal fee, home inspection, adjustments made on closing, and others.
Let's do some math. But before we get into that, let's review the two types of mortgages available based on what ratio of mortgage to home price you require. The benchmark is 80%. So a mortgage that is 80% or less of the purchase price is referred to as a Conventional Mortgage. As soon as the ratio exceeds 80% all the way up to 95%, it's referred to as a High Ratio Mortgage and requires mortgage insurance available from three insurers: Canada Mortgage and Housing Corporation (CMHC), Genworth and AIG.
Ok, so now let's do some math. The average price of a home in Etobicoke is rapidly approaching $500,000, so let's use $500,000 as an example. Subject to the Buyer qualifying for the mortgage, the Buyer can put as little as 5% of the purchase price (subject to mortgage qualification) or $25,000. The benefit of a low downpayment such as 5% is that it allows the Buyer to get into home ownership sooner rather than later. This is especially advantageous in a rising market when the annual price increases far exceed what the typical household can save after tax towards their downpayment. So it makes sense to buy even with a lower downpayment and the associated insurance fees than wait until you have the conventional 20% down.
In addition to the 5% or $25,000 in our example, there will also be the usual Closing Costs as already mentioned which usually can be estimated at 3% of the purchase price or in this case approximately $15,000. So the Buyer in this case needs $40,000.
So with only a 5% downpayment and a 95% mortgage the Buyer would need $40,000 and in the case with a 20% downpayment and an 80% mortgage, the Buyer would need $115,000.
The question that every Buyer asks at this point is where can they access those funds from? As it turns out, Buyers will characteristically resort to one or more of the following:
1. Personal Savings
2. Gift from a relative (which requires a Gift Letter)
3. RRSPs using the First Time Home Buyer Plan.
4. Cash in other liquid assets – ie stocks, bonds, etc.
5. Borrowing from self
Let's take a look at each one of these more closely.
1. Personal Savings – this is self explanatory and may be the old fashioned way of doing things. The problem with this is that with the cost of living today, most people are not able to save quickly enough to outpace the inflation rate or rate of increase of home prices. Looking back, for this reason it made a lot of sense for especially first time home buyers to buy their first home at the earliest opportunity so long that they could qualify for the mortgage.
2. Gift from a relative – a mother or father for example, could give their son or daughter a lump sum for the purpose of a down payment provided that they also provided a letter (known as a Gift Letter) that stipulated that this was not a loan and that there was no repayment or interest on it.
3. Using a Buyer's own RRSPs under the First Time Home Buyer Plan – This option is not available to move up buyers who already own a home, but for first time homebuyers, each partner can take up to $25,000 each (or $50,000 per household) from their RRSP provided that its repaid back into the RRSP plan in equal installments over the next 15 years.
4. Cash from other assets – the sale of other liquid assets such as ie stocks, bonds or from less liquid assets such as art and collectibles or real estate. One could argue that if the Buyer had these types of assets that they probably could otherwise come up with the downpayment.
5. Borrowing from self – this assumes that the Buyer has a very good income and credit rating. Essentially the Buyer borrows money from a line of credit for example and puts it in a bank account (savings or chequing it doesn't matter) for a period of at least three (3) months after which period the banks view it as the Buyer's own money since the Buyer was able to service it during those months.
LAND TRANSFER TAX
So you've bought a home in Etobicoke in one of those up and coming neighbourhoods of Mimico, Long Branch, New Toronto and Alderwood. Are you aware that because they are located within Toronto that you will have to pay two land transfer taxes?
Here's a brief history and explanation of the tax. Back around the time of WWII and as a measure to raise funds for the war, this tax was introduced and was intended to be a temporary measure. However, it was never repealed after the war and here we are more than three quarters of a century later and it's still in effect. In addition to this province wide tax, a new tax for the Municipality of Toronto was introduced and became effective February 1, 2008. So if you buy a property in the 416 area code you pay two land transfer taxes as opposed to just the provincial one if you buy in the 905 area code or anywhere outside of Toronto but within Ontario.
The tax is applicable to the purchase of all property whether it's residential or commercial and it's applicable whenever there is a transfer of title/ownership of property into another person's name and is payable when the new owner is registered on title at the Land Title Office. The exception is the transfer of title to a spouse or common law partner as well as the transfer of title from Trustee to Beneficiary. The tax is payable by the Buyer and not the Seller and typically the Buyer gives their lawyer sufficient funds to pay for it on the Closing Date.
First time home buyers may qualify for up to a $2,000 refund off the Ontario tax (and up to a $3,750 refund if the purchased property is in Toronto up to $400,000), but your lawyer at time of Closing of the transaction will be able to properly advise you on the details.
Here is how the two taxes are calculated:
1. Ontario Land Transfer Tax
Up to $55,000 x 0.5% of the Property's Value
From $55,000.01 to $250,000 x 1.0% of the Property's Value
From $250,000.01 to $400,000 x 1.5% of the Property's Value
From $400,000.01 and up x 2.0% of the Property's Value
2. Toronto Land Transfer Tax
Up to $55,000 x 0.5% of the Property's Value
From $55,000.01 to $400,000 x 1.0% of the Property's Value
From $400,000.01 and up x 2.0% of the Property's Value
Here's the link to the Land Transfer Tax Calculator that will give you the exact Ontario and Toronto taxes payable. All you need to enter is the property value and the calculator does the rest.
CLOSING COSTS TO HOME BUYING IN ETOBICOKE
Home buying can be a fun and exciting time. However, there are many costs associated with buying an Etobicoke home that on the onset may not be obvious especially if you are a first time home buyer. They do add up and are a significant sum which is all the more reason to be fully aware and avoid getting unexpectedly surprised.
As a very approximate rule of thumb, factor in about 2% of the purchase price for other add-ons in addition to the down payment you will need with your offer. Here is a more detailed account of what you can expect.
If the Buyer is seeking a mortgage, the lender will typically require an independent third party to perform an appraisal and give an unbiased valuation for the property. The negotiated purchase price is not sufficient in itself to prove the home's value and often lenders will require the appraisal. Some lenders will absorb the cost while others may require that the Buyer pay for it. This will depend on the location and size/type of home but in general is in the range of $250 to $400.
Mortgage Application Fee
The process of applying for a mortgage will typically result in a fee of $150 to 200 or so.
Mortgage Broker's Fee
This may or may not apply depending on whether the Buyer went to a traditional bank or to mortgage broker.
High Ratio Mortgage Insurance
Mortgages that represent more than 80% of the value of the home's value are referred to as high ratio mortgages and are required to be insured against default by the Buyer for whatever reason. The actual cost depends on the actual ratio in excess of 80% but the fee can be expected to be in most cases between 2 to 4% of the mortgage amount. The good news is that the amount can be added to the mortgage amount and therefore be repaid over the life of the mortgage rather than all up front.
Mortgage Life Insurance
This is an optional life insurance policy that the home buyer can take out. There are various life insurance policies available but generally aim at taking care of the Buyer's mortgage payments and commitment in the event the Buyer is unable to whether it be illness or death.
Land Transfer Tax
In Etobicoke (including the up and coming neighbourhoods of Mimico, New Toronto, Long Branch, and Alderwood), and in fact in the entire 416 area code, there is not only the Provincial Land Transfer Tax, but also the Municipal Land Transfer Tax.
Home Inspection Fee
It is highly advisable that all Buyers get a home inspection done on the property either before the offer or during their conditional period. This is to uncover any potential defects or issues significant and material in nature to warrant the buyer to consider whether they still want to proceed with purchasing the home, or to walk away.
For the purchase of a typical home in Etobicoke, the range is between $1,200 and $1,800 more or less including the law firm's disbursements.
Any utilities, oil remaining in the oil tank (if applicable) and realty taxes that were prepaid by the Seller will be adjusted for and Seller given a credit.
If there are any immediate repairs that were identified during the home inspection especially safety or health related, you will want to attend to this as soon as possible upon taking possession of the property. The actual amount may have been higher and negotiated downwards during the offer stage, but may nevertheless still be a significant sum.
This tax is payable at closing on all the professional services for example.
Buyer Beware When Buying a Former Grow Op
Regardless how good a deal it is
Toronto regrettably has the distinction of being rated #1 in North America for the number of active marijuana growing operations ("grow ops"). Local police authorities have estimated as many as 10,000 grow ops in the GTA at any given time. Only a small percentage get caught, but when they do, what to do with the property afterwards which likely has extensive mold issues which are expensive to remediate as well as the stigma that in itself lessens the value of such a property ?
There is an interesting case that emerged. A Buyer wanted to buy such a grow op and acknowledged in the Offer that the property had been previously used as a grow op. In addition, the buyer was willing to assume the existing tenants. The Sellers had bought the property 7 years earlier but approximately after 4 years of ownership and renting it, the police discovered it was being used by a tenant as a grow op. Not only were the Police involved, but they notified the City of Toronto who registered an "Unsafe Property" work order on the property's title.
The consequences of this action to the unsuspecting buyer can be serious. In this case, the buyer thought they were getting a great "low bid" offer deal and offered a firm offer without any financing conditions and so they have no way to back out of the transaction. Meanwhile, the Buyer will find it impossible to get a mortgage for the following reasons:
CAUTION TO BUYERS OF GROW OPS
The fact that a property was previously (in this case 3 years ago) a grow op does not automatically mean that all the remedial work was done by the prior owner, or that it was done properly and according to health and safety guidelines regarding mold removal. If the City has registered a work order, be particularly cautious as there is no quick fix and the City will be especially watchful that remedial work is completed and in the proper manner. This can contradict with how some Buyers feel they can remediate the problem.
WHAT TO DO IF YOU ARE CONSIDERING BUYING A FORMER GROW OP PROPERTY
If buying a former grow op, Buyers should take extra care and not be enticed by the attractive price to enter into a quick negotiation. Here are some guidelines.
The ideal manner of acquiring such a property would be for a Buyer to pay all cash or use a line of credit to buy the subject property without arranging a mortgage and in so doing being able to close quickly. Then the Buyer would complete all the required remedial work and following inspection by the City have the work order removed. With a clean property and clean title, now the Buyer can seek fire insurance and a mortgage, and with the proceeds from a new mortgage, pay off the line of credit and the remedial costs.
For more information on identifying such properties for purchase and how to negotiate the best terms in your favour please contact me
KOLBE for COuples
Yes, home buying can be fun. A whole lot of fun.
But, home buying is one of the biggest decisions couples make and so can be very stressful. It becomes even more challenging if you have different approaches to making decisions and taking action on goals than your partner.
Luckily, there is a tool available called the KOLBE Relationship Index™ (KOLBE R Index™) that helps you understand you and your partner's similar and different approaches to making decisions.
Understanding how you each make decisions will help you understand where conflict may arise in the home buying process. It stands to reason that if you are better able to understand how your partner thinks and makes decisions, that will lead to less conflict and less stress.
KOLBE'S© approach to relationships explains your instincts and those that drive your partner and provides practical advice on how to reduce relationship stress. You can more easily discuss your differences in your individual approaches to decision making, laugh about them and develop techniques for dealing with them.
And have fun searching for a home together!
© 2016 Edward Frezza, Broker for RE/MAX Professionals Inc.