Monthly Archives: July 2011

If you’re a first-time buyer with a home purchase in your near future, you might want to consider taking advantage of the Federal government’s Home Buyers’ Plan (HBP).

In a nutshell, the HBP allows each buyer (provided they’re both first-timers) to use up to $25,000 of their RRSPs as a down payment towards a home that is going to be their primary residence. This is a great opportunity for first-time buyers to accumulate a larger down payment than they would have been able to otherwise. That’s because any money you put into an RRSP is tax-deductible. If you sock money away in it – and then sock away your respective tax return – the amount will quickly add up. It’s also forcing you to save for retirement – something you may not be thinking about right now.

As for the details, the program is pretty straight-forward. Here’s how it works:

- You’re not required to pay taxes on the $25,000, as long as you pay the balance back within 15 years. You’re required to start making payments in the second year after you purchase the home. Minimum annual payments are 1/15 of the total amount borrowed.

- If you’re buying a home as a couple, and one person has already owned a home, then only one half of the couple is considered a “first-time homebuyer” and eligible for the program. The one exception is if the previous homebuyer sold their home a minimum of four years earlier and hasn’t owned another one since. In that case, they’re eligible again.

- The home has to be a primary residence, so you have to plan to live in the home yourself within one year of purchasing it or building it.

For more information on the HBP, visit the Canada Revenue Agency’s website at: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html or feel free to give me a call!

By Julie Green, The Windsor Star
Many people are surprised to learn that the costs of owning a home can be substantially lower or comparable to those of renting. A more moderate real estate market and interest rates that continue to hover at all-time lows are making now an ideal time for people to buy their first home.

The following information on buying your first home, courtesy of the The Windsor-Essex County Real Estate Board, and your local real estate agent, can help you prepare for one of the biggest investments of your life.

Before you start searching for a home, you will need to determine how much you can afford to pay for a house. For many people, the modest home they can afford is a far stretch from their “dream home,” but it is a start and will require far less cash as a down payment.

You can learn a lot about buying your first home by talking to a real estate agent.

An agent will help you to determine what you can afford, identify what you want and take you to homes and neighbourhoods that reflect your lifestyle, needs and budget.

He or she will also help you understand property financing, taxes, insurance and the steps you will have to take as a first-time buyer to complete a real estate transaction.

It’s very rare for a first-time buyer to purchase a home without assistance from a bank or other lender. Most people will need to arrange a special type of loan, known as a mortgage.

Before a lender will give you a mortgage, they will need to determine how much you can afford to pay.

A lender will look at how much you will need for the initial purchase of your home including your down payment and other costs such as legal fees, inspection fees and taxes.

They will also look at the ongoing costs of paying back the mortgage along with monthly costs for utilities, maintenance, insurance and annual property taxes.

Most lenders will not permit a borrower to take on a debt load the borrower can’t carry. That’s why reputable lenders “qualify” potential borrowers before lending mortgages.

Usually, lenders say that your monthly housing expenses (mortgage payment and taxes), plus condominium fee, if applicable, should not exceed 30 per cent of your monthly gross family income.

This is called your gross debt service ratio.

Lenders also use a second calculation called total debt service ratio. Generally speaking, no more than 40 per cent of your gross family income can be used when calculating the amount you can afford to pay for mortgage payments and taxes plus other fixed monthly expenses.

These other fixed costs are your ongoing commitments and can include auto, student or personal loans as well as credit card payments.

The hardest part about buying a home for most first time buyers is saving the down payment. You may have the ability to keep up with the monthly financial obligation (mortgage payment, insurance, utilities, property taxes, maintenance), but finding a down payment may be a problem.

Once you decide what you can afford and find the home you want in the right neighbourhood at the right price, here are some of the sources you can tap into for a down payment: Savings and investments, loans or gifts from your family or relatives and Registered Retirement Savings Plan – you can withdraw $20,000 per individual ($40,000 per couple) without any tax penalty as long as you pay the amount back within 15 years.

To qualify for a conventional mortgage, you will need at least 20 per cent of the purchase price.

To put down less than 20 per cent, a buyer has to qualify for a high-ratio mortgage.

By law, this type of mortgage must be insured against default in payment. The cost of this mortgage insurance depends on the value of the house and the size of the loan. Although mortgage insurance doesn’t help you come up with the down payment, it can certainly help you get into your own home faster.

When it comes to debt, it turns out that it’s not how much you have that affects your ability to repay it, but instead how comfortable you are with it and the overall concept of debt. That was one of the findings of the Genworth Financial International Mortgage Trends Report.

The report revealed that, among other things, members of developed countries are much more comfortable with accumulating debt (particularly mortgage debt), and as a result are more likely to pay it back. Case in point is Australia, where the country’s homeowners spend 45% of their after-tax income on servicing debts (compared to 38% average of other countries). At the same time, Aussies are much more likely than any other country to make extra payments on their home loans – with 45% making extra payments on their mortgages, compared to the average 26% of other countries (Canada, India, Ireland, Italy, Mexico, the UK and United States).

Canadians, on the other hand, are right up there when it comes to debt accumulation, spending 45% of their after-tax income on debt servicing. Positive attitudes regarding the country’s strong economy (32%) and housing market (47%) seemed to fuel the accumulation of mortgage debt and increase Canadians’ appetite for it. With costs of living increasing, 28% of Canadians said they were comfortable taking on an LTV greater than 80% compared to the 20% average.

The higher debt levels haven’t seemed to affect Canadians’ ability to repay, however, with 79% saying they either made prepayments or easily met their repayments, and 83% expecting to easily make repayments over the coming year. Canadians were the most optimistic about their ability to meet mortgage payments behind only India. Only 19% were actually exceeding their payments, however, compared to the eight-country average of 26%.

Low interest rates also seem to play a huge role in this sense of debt confidence. With Canada’s target overnight rate set at 1%, compared to an average of 2.4% of other countries, Canadians are experiencing very low mortgage rates. Of the 47% who believed that now is a good time to buy a home, two thirds said it was due to low interest rates. Of those who said now wasn’t a good time, 23% cited high property prices.

Remember all the work and research that went into finding the best rate for your first mortgage? Whether you spent months making sure your credit was as good as can be, or spent hours on the Internet searching for the best rate, it seems silly to waste that effort by blindly renewing with your existing lender when your first term is up.

The truth is, the best lender is only as good as the term that you sign with them. When it comes time to renew, many offer their clients an inflated rate hoping that you’ll be complacent enough to simply sign it back. Other clients particularly the new ones, or those that take the time to negotiate receive the lender preferred rate, which can sometimes be as much as half a percentage point lower.

While that may not seem like much now, it adds up over the life of the mortgage and almost certainly overrides any savings you experienced in that first term. For example, if you had a 25-year, $200,000 mortgage at the posted rate of 4.08% you would be paying approximately $1057 per month, compared to approximately $1,018 per month at the discounted rate of 3.72%. While this isn’t a lot if you look at it from a monthly perspective, if you look at the long-term, you’re paying $118,220 in interest on the higher rate mortgage, compared to $106,572 on the lower rate mortgage. That’s a difference of $11,672.

Obviously you’re likely not going to keep the entire rate for the life of a mortgage, but if the interest costs could be even greater if you merely renew at the going rate, term after term. That’s why it’s important to employ the services of a mortgage broker throughout your entire mortgage lifespan. Not only will this ensure you’re getting the best possible rate available, but it will also give you the opportunity to see if there are other mortgage products in the market that are better suited to your changing needs.