Buying your first home can be a daunting task and if done incorrectly, it could cost you money. By the end of this article, you will be educated on some basic real estate concepts as well as all programs and credits a first time homebuyer should apply for to make sure you don’t miss out on free money.
The programs/concepts we will detail are:
1) Getting preapproved for a mortgage
2) Typical monthly mortgage payment
3) 5% down & mortgage insurance
4) First time home buyers plan
5) First time home buyer’ tax credit
6) Land transfer tax refund for first-time homebuyers
A mortgage pre-approval is a written commitment by a lender that tells you what they are prepared to lend you, at what rate and terms, subject to their acceptance of the house you intend to purchase. Lenders will typically guarantee interest rates for 90-120 days. Once you’re pre-approved for a mortgage you know the max amount you are eligible to spend on your home purchase and this will help you in determining your own personal budget.
Typical monthly mortgage payments will be determined by two primary factors, the amount of money you can put down and the mortgage pre-approval terms. We will illustrate these concepts through the chart below, where we compare downpayments of 5%, 10%, 15%, & 20% down when buying a $180k house (trust me these do still exist). We will also observe the impact of paying your mortgage down monthly or on a biweekly basis. I will cover important fundamentals of mortgage financing in a later article, as I will only vary the downpayment and payment frequency in the below example. For the example I assumed the other mortgage pre-approval terms (amortization length & nominal interest rate) were the same in all cases.
With down payments lower than 20%, you are required to buy mortgage insurance (offered by Genworth Financial & the CMHC), which is a tax on not having the necessary down payment. This premium will typically be added onto your mortgage.
|Situation A – 5% down||Situation B – 10% down||Situation C – 15% down||Situation D – 20% down|
|Cost of Home||$180,000.00||$180,000.00||$180,000.00||$180,000.00|
|Capital required on closing date||$13,500.00||$22,500.00||$31,500.00||$40,500.00|
Comparing the 5% & 20% payments you can see there’s a $150 dollars a month difference in monthly mortgage payment due to the combination of lower down payment & higher insurance premium. I will not expand further on the advantages of paying biweekly as compared to monthly, as I will cover this in a separate article. An important note to make is that in the example the house cost $180,000 but if you are buying a house worth more than $500,000 different rules will apply.
TL;DR – Try to get closer to 20% to save some extra money however by doing this, you lose out on the yearly gain that we’ve become accustomed to in the GTA. Talk to your local GTAREguy for more details ;).
Now we will touch on the first time homeowner incentive program where you can take out $25,000 for single people ($50,000 for couples) out of your RRSP to put money down on your first home purchase. The chart below summarizes some important details:
|You can put an additional 25k towards your downpayment. This can save you interest||Lose out on compound interest earned on cash since you take money out of your RRSP|
|This money is pretax income since it comes from your RRSP. This can save you tax dollars||May requires planning ahead as money must sit in your RRSP account for 90 days before you can take it out to be used in this program|
|Helps some people avoid 20% downpayment rule. This can save you mortgage premium||The full amount must be paid back eventually|
|15 year interest free loan & 2 years before you have to make any payments at all. Increasing buyer flexibility|
As you can see the Home Buyer’s Plan, allows for free tax money to be used for a home purchase. In today’s market with the S&P making negligible gains for calendar year 2015 and the first quarter of 2016, it only makes sense to pull that money out and invest in the industry that’s tried and true (aka real estate). However saying real estate is is a better asset, is relative. If you appreciate greater control over what you’re investing in, you’d probably like real estate over stocks/bonds. If you appreciate liquidity in your investment, you’d prefer stocks and bonds.
Another Federal Program aimed at helping new first time homebuyers is the First time home buyer’ tax credit. This is a federal program that allows you to claim $5000 in your next income tax return after you buy your first home. This could transfer to potentially $750 in direct savings for first time homebuyers.
The last government program I wanted to touch on is a provincial program for Ontario residents and it is the Land transfer tax rebate for first-time homebuyers in Ontario. This is a program aimed at refunding the provincial land transfer tax on land purchases in the province of Ontario. The way it works is any provincial land transfer taxes paid up to $2,000 for first time home owners would be subject to the rebate (caps out for houses around 225k). Note that the city of Toronto has a separate land transfer fee and this is not the subject of this tax rebate. For the city of Toronto, they have a program that provides a rebate of $3725 for their municipal land transfer tax. This would provide a full refund for the municipal tax for home purchases up to $400,000. The balance of the the land transfer fee is payable upon closing***
***Note: After your first home purchase you join the legion of other Ontarians who pay this every time they buy a new property
See you guys next week!
Article was written by gtareguy (Greater Toronto area real Estate guy) . I release a new article every Friday and I write about economics, the nba and real estate in the GTA.