For first-time buyers, the combination of six-figure dollar amounts, taxes, closing costs and the mortgage negotiation process itself can be intimidating. Here are some tips – and a few breaks – that the novice buyer can use to sail through the storm.
Use your Registered Retirement Savings Plan for your down payment. The RRSP Homebuyers Plan allows you – and your spouse or partner – each to withdraw $25,000 from your RRSP to build or buy a first home. There are conditions: The money must have been in your RRSP for at least 90 days, you must occupy the home as a principal residence within a year and you must repay it to your RRSP at the rate of 1/15 per year within 15 years, starting two years after the withdrawal. If you miss a year, the missed amount is considered to be income for that year.
Decide how much you are willing to spend on a monthly or bi-weekly mortgage payment. The lender will help you determine the upper limit of what you can afford, but it’s what you are willing to pay within that range that should rule, says David Cole, an RBC mortgage specialist in Burnaby, BC. “It’s one thing for the bank to approve you for an $800,000 mortgage, it’s another to absorb the change in lifestyle that mortgage may require.”
Get pre-qualified for your mortgage. Don’t make an offer without knowing whether your lender will give you the money, even if you’re sure you’ll qualify.
Your lender will gather all the necessary data: employment, assets and liabilities, and current loans and obligations. They will then project a maximum mortgage – and then your maximum property price – based on your preferred monthly payment and your down payment. “We can then look at your debt-to-income ratio and say whether we are comfortable lending this amount or more,” says Mr. Cole. “If not, we look at steps that can be taken to qualify at a later date. That could be a reduction in your credit card debt, getting rid of a car lease, paying off a collection item, correcting any errors with the credit rating agencies, or bringing in a guarantor.”
And that’s why pre-qualifying is necessary, he adds. “Any of these things can take more than five days to clear up, and that’s the period that most offers allow for you to remove your conditions. So lack of preparation can cost you the dream home.”
The best part, he adds, is that pre-qualifying is free.
Take advantage of taxpayer relief. First-time home buyers may be eligible for several breaks on taxes. Land transfer taxes, for instance, can amount to several thousand dollars and financial institutions may not allow them to be rolled into the mortgage – meaning you usually pay them out of your cash available for a down payment.
But first-time buyers in Ontario get a refund of land transfer tax of up to $2,000 – which is a full rebate for houses selling for up to $227,500. In Toronto, which levies another land transfer tax on top of the provincial one, first-time buyers also get a full rebate of up to $3,750, which is a full refund for homes selling up to $400,000. The full Ontario land transfer tax on a $500,000 home is $6,475. The Toronto tax is another $5,725.
In B.C., first-timers may qualify for a refund of property transfer tax on homes valued up to $425,000 with an additional graduated refund on properties up to $450,000.
First-time buyers also get income tax credits. Federally, the non-refundable home buyers’ tax credit is worth $750 in 2012. Provincially, Saskatchewan has just introduced an additional credit of up to $1,100, while B.C. has launched a temporary one-time refundable tax credit of five per cent of the purchase price up to $10,000 for first-time buyers, with reductions for those with income over $150,000. The B.C. measure expires March 31, 2013.