Are you a frustrated first time home buyer in Toronto?Affordability can be a challenge, however here is a plan for home buyers trying to get into Toronto’s real estate market.
The latest mortgage rules: the good, the bad and the ugly and how it will impact your own mortgage
On February 28, 2014, CMHC announced mortgage insurance premium will increase effective May 1, 2014 for homeowners, self employed and 1-4 rental properties.Here is a chart of the current and new insurance premiums for owner occupied homes
What exactly does this increase translate into dollars and cents? Here is an example based on 5% downpayment, 3.49% mortgage amortized over 25 years
As you can see the increase is moderate ($8.98 per month) and should be manageable by homebuyers. It will be interesting to see what happens in the future since CMHC stated they will review insurance premiums annually and make announcements in the first quarter moving forward.
Genworth wasted no time in announcing similar increases to their premiums effective May 1, 2014. Canada Guaranty took a few days to mull over their decision but they will increase their insurance premiums as well.
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Buying a home is an exciting and sometimes can be a nerve racking experience whether you are a first time home buyer or have owned multiple homes in the past. Getting excited about how to furnish the new home, fixing a few items, putting on a fresh coat of paint, addressing issues that came up in the inspection is part of the process. There are many costs to consider during the home buying process and they do add up.
Here is a list of costs to budget for at closing above and beyond the downpayment
Toronto & Ontario Land Transfer Tax
Two land transfer taxes are paid if one is buying in Toronto (Ontario & Toronto land transfer taxes). First time home buyers can be eligible for up to $2,000 credit from Ontario and $3,725 from the City of Toronto.
Legal Fees, Disbursements and Title Insurance
It is prudent to budget for $1,300 for legal fees and $300 for title insurance. HST is added to the legal fees.
If the mortgage is insured (less than 20% downpayment), the appraisal is covered by insurer (CMHC, Genworth or Canada Guaranty). In cases such as private sales, regardless of the downpayment, an appraisal will always be required. The cost of an appraisal is between $250 to $350 plus HST.
Once the home owner takes possession of the property, other costs to take into account are: moving costs, repairs, furnishings, utility setup and deposit fees. The repairs cost will vary depending on the condition of the home whether it is a fixer-upper or requires minor touch ups.
- Mortgage rules restricting maximum amortization to 25 years with less than 20% dowpayment
- Home prices have increased faster than inflation and income rise
- Supply of homes (excluding high rise condos) such detached, semi-detached and townhomes is lower than demand, creating bidding wars in areas of Toronto
So how can you buy your first home?
First Time Home Buyer? Buy A Duplex
There are a number of properties in the city with a basement suite. Having rental income from the basement would offset some of the homeownership costs for first time home buyers. Here is a real example:
- Purchase Price: $447,000
- Downpayment: 5% ($22,350)
- Basement Rental Income: $850
- Monthly Mortgage Payment: $2,222.44 (10 year mortgage, 3.69% amortized over 25 years)
- Monthly Property Tax: $223
- Total Monthly Mortgage Payment and Property Tax Less Rental Income: $1,595.44
The first time buyer is living in a 3 bedroom/2 bathroom house for just under $1,600 a month. Yes, there are additional living expenses such as hydro, heat, cable, internet and home insurance, however for $1,600 a one bedroom plus den can be rented in downtown Toronto and there the additional costs of hydro, cable & internet. The first time home buyer is getting into the market and building equity into their home as opposed to paying their landlord's mortgage.
Using their RRSPs, through the Home Buyer's Plan, the first time home buyer is able to buy their first home.
You might be wondering why the first time home buyer chose a 10 year fixed mortgage. Since they plan on moving up the homeownership ladder within 4 to 5 years, they plan on renting their existing home (rent main unit & basement unit). With this strategy, they will avoid renewing the mortgage in 5 years at a higher interest rate which would eat into their monthly cash flow.
If you are first time home buyer, please contact Nawar to discuss how you can own a home and start building long term wealth through real estate.
RRSP Home Buyer's Plan is a great tool for first time home buyers to access money for the downpayment of their first home. The maximum allowed withdrawal is $25,000 per person which has to be paid back over 15 years. I will save the details of the RRSP Home Buyer's Plan for another blog post.Here is a controversial idea: Don't payback your RRSP Home Buyer's Plan back! Let me explain.
RRSP Home Buyer's Plan Scenario
- Mortgage amount: $300,000
- Interest Rate: 5% (mortgage rates are much lower now, but I want to use a reasonable interest rate over the life of the mortgage)
- Amortization: 25 years
- Required RRSP Home Buyer's Plan Payback: $138.89 monthly ($25,000/15 years/12 months per year)
My suggestion is not to payback into the RRSP but rather put the $138.89 into the mortgage above and beyond the normal monthly payment. If one pays $138.89 extra into the mortgage, after 15 years the results would be:
- Mortgage balance would be at $127,929 vs $164,894 (savings of $36,965 in principal and mortgage amortization is reduced to 22 years & 4 months from 25 years)
- 47.86% Return on investment: $25,000 of RRSP Home Buyer's Plan generated mortgage principal savings of $36,965
- First time home buyers saving 32 months of mortgage payment (25 years less 22 years & 4 months): $1,744 x 32 months = $55,808 which could be invested into RRSPs then
Since the first time home buyer is not paying the RRSP Home Buyer's Plan back, their income tax would rise by $1,666.68 ($138.89 x 12) annually. Assuming they are in the 45% income tax bracket, their income tax would rise by $750.
I realize this concept might be controversial and some might disagree with, but I hope the above numbers present a case for consideration. Paying down or paying off debt is an important step in achieving financial freedom. I would love to hear from you whether you agree or disagree.
Disclaimer: I am not a licensed financial planner and you should consult with your own financial advisor/planner prior to making any investment decisions. This is article is my personal opinion.
As mortgage lending rules have become more strict and real estate prices have appreciated over the last few years, it's becoming more challenging for some first time home buyers to qualify for a mortgage without a co-signer.
I was approached by a first time home buyer who was interested in buying her first home, a condo in downtown Toronto, and she needed her mother to co-apply in order to qualify for the mortgage. As a first time home buyer in Ontario, she would qualify for up to $2,000 land transfer tax rebate and up to $3,725 from the City of Toronto depending on her purchase price. Since her mother, who is a homeowner, is on title, the first time home buyer would have lost 50% of the rebates (since she's 50% owner in the property).
In order to save the buyer a few thousand dollars, with the lender's approval, the buyer was registered with 99% interest in the property and her mother with 1% interest. This setup allowed the first time home buyer to maximize the land transfer rebates available from the Province of Ontario and the City of Toronto.
It's important to work with a professional who is experienced and understands how to reduce their clients homeownership costs.
To discuss your personal mortgage needs, please contact me.
When buying a home with 5% downpayment, the mortgage has to be insured per Government requirement. The insurance premium is 2.75% (for 25 year amortization) or 2.95% (for 30 year amortization) which equates to the homeowner having 2.25% to 2.05% equity in their home at the day of closing. In the first few years of homeownership, the majority of the mortgage payment pays for the interest portion and minimal mortgage principal is paid down. It's important to keep in mind that if one is planning to move in 5 years (outgrow the 1 bedroom condo), once the costs (realtor fees, legal fees, downpayment requirement for new home & closing costs) are taken into account, the seller might find themselves to be short of funds which will mean they have to stay for a longer period of time in their current home.
It's important to have a plan to paydown the mortgage principal which fits a person's long term goals. Afterall, getting a mortgage, setting the payment and forgetting about it is not a sound approach to financial freedom.
To discuss your personal mortgage financing needs, please contact me.
Keep in mind the next time you are looking for a home or an investment property in a city, to take a look at job creation activities such as companies relocating or expanding, infrastructure investment or a city that is diversified in multiple industies. Afterall, having all the city's eggs in one basket is risky!
To discuss your personal mortgage needs, please contact me.
Toronto and GTA's real estate values have increased significantly over the last 10 years. The prices continue to increase as the global economy struggles to emerge out of the slowdown since late 2008. There are 2 factors that can negatively affect the housing market in Toronto, GTA as well as Canada: Interest rate and/or unemployment spike.
For the last 3 years, Canadian homeownerns and real estate investors have enjoyed historically low interest rates which have resulted in record sales and prices. Interest rates have remained low to stimulate consumer spending and promote GDP growth. As Canadians reach record debt levels (approximately $1.50 of debt to $1 earned), Canadians are running out of steam for further debt accumulation. Many Canadians have fixed mortgages in the 3.3%-3.8% and variable mortgages at the prime minus level.
In order to save the global economy from a depression, governments around the world took on aggressive stimulus (printing money) since late 2008 which will result in high inflation sometime in the future. As inflation becomes the primary objective of governments, interest rates will have to rise to control and moderate inflation. Canada is already experiencing high inflation numbers, however the Bank of Canada is choosing to keep its benchmark rate low due to the uncertainty originating out of Europe.
A spike in interest rates would effect Canadians since mortgages will renew at higher interest rates and unsecured loans would cost more. Based on August 2011 data, the affordability index in Toronto for 2 storey homes and bungalows is at 61.4% and 51.9% respectively (http://goo.gl/8rK5B). If one assumes that an income earner is taxed at 40%, it means that in order to buy a 2 storey or bungalow in Toronto, 2 incomes are required. Condos are a more affordable option in Toronto at 34.2%.
A spike in interest rates which diminish the ability of many to qualify for a mortgage especially insured since qualification is based on posted rates. Demand would therefore be reduced since less buyers can qualify for a mortgage.
The main point to take away from this post is to have a plan regarding mortgage/debt paydown and plan to renew ones mortgage at a 6% level. For more information, click here.
My next post will discuss unemployment spike.