The Largest Financial Commitment of Your Life
Those may seem like dramatic words, however buying your first house is generally the largest purchase of your life. It can also mean the combining of financial futures for many couples as they start their lives together. With ultra-low interest rates for the foreseeable future, many clients and friends have been asking, “Is now the right time to buy our first home?” The answer is multifaceted and there is no “one size fits all” answer, but mortgage rates in Canada are currently as low as 2.14%, and this attractive rate can be locked-in for up to 5 years, depending on the type of mortgage that you choose.
Let’s look at the other factors and considerations before making the largest financial commitment of your life:
1) Government programs to help individuals buy their first home (these vary by province. We will be looking at Ontario). The first- time homebuyer’s program regulated by the Federal Government allows individuals to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to use as a down payment. It must be repaid over the next 15 years. If you have been contributing to a RRSP regularly, there is a good chance you have been receiving a yearly tax refund. This can further help increase the down payment you could have available for your first home. Saving that tax refund in a Tax-Free Savings Account (TFSA) can help further compound those savings without the government taxing the income or capital gains. This can allow you to accumulate a down payment above the $35,000 RRSP limit in a tax efficient manner.
2) Another question we hear often is “How much money to put down on a first home?”. It’s great the government allows the RRSP withdrawal; but how far does $35,000 go? The rule of thumb is 20% down payment to avoid buying mortgage insurance. A deposit of less than 20% results in having to buy mortgage insurance (an extra cost in addition to mortgage, taxes, utilities, etc.), and should be avoided, if possible. For simple math, let’s use the example of a $500,000 home purchase, 20% of $500,000 is a $100,000 down payment. For a couple buying their first home, they can use $70,000 from their RRSPs, plus your growing tax refunds in their TFSAs.
3) On top of the down payment there is Land Transfer Tax. The Land Transfer Tax calculation depends on the amount you are paying for the home, as per the table below:
|Purchase Price of a Home||Marginal Tax Rate|
|$55,000.01 to $250,000||1.0%|
|$250,000.01 to $400,000||1.5%|
|$400,000.01 to $2,000,000||2.0%|
First time home buyers are eligible to apply for up to a $4,000 tax rebate. For example, the Land Transfer Tax for a $500,000 home is $6,475 and is eligible for the maximum $4,000 rebate. If you are considering buying a home in Toronto (Steeles Ave is the North border, Etobicoke is the West, Scarborough is the East and Lake Ontario is the South border), you will have to pay an additional land transfer tax on top of and identical to the Provincial Land Transfer Tax. Again, using a $500,000 home purchase, that is an additional $6,475 in taxes but as a first-time home buyer you will receive a maximum rebate of $4,475. There are also on-going property taxes, on a property of $500,000 in Toronto that would amount to $2,998.52 annually (all the above numbers are sourced from the Government of Ontario and Toronto websites). Each Province has different rates for land transfer costs (it could be a tax or a title transfer fee). For a summary of all provincial taxes/fees and the rebates available, check out:
4) There are additional one- time costs of legal fees, moving costs, home inspection, and home appraisal fees. The on-going costs of a home include mortgage payment, utilities, property taxes (see above), property insurance, condominium or association fees, and life insurance. We recommend life insurance vs mortgage insurance to help cover the cost of the mortgage liability in the event of one of the property owners passing away.
5) How the property is owned should also be considered. There are two forms of legal ownership of a house, Joint Tenancy With Right of Survivorship (JTWROS) or Tenancy in Common. Most couples will opt for JTWROS; if one person passes, the house can pass to the surviving spouse without the home going through the probate and estate settlement process. Tenancy in Common is more a form of partnership and can be used when buying a property with another party (ie. two couples buy a rental property together). Condominiums are also an option and be sure to review the by-laws to make sure that you know your rights as a condominium owner.
6) “Do I need a real estate agent?” can be a complicated question. A good agent can vastly improve the real estate transaction process. Going through the process for the first time can be scary and daunting. Having a trusted person that has been through this process several times can be a huge asset when trying to complete your first real estate transaction. Their advice can also be helpful when it comes to bidding wars, relative prices for the area, bully offers, and recent area transactions. They should know the area that you are buying in as well.
7) Now you are armed with a lot of information, how much can you afford and how much of your income should go towards a mortgage payment? A good rule of thumb is no more than 30% of your gross annual income should go towards a mortgage payment and the associated housing costs. You should also review your Gross Debt Service Ratio and Total Debt Service Ratio (they look at your total financial costs) which can be done here:
Make sure you are comfortable with this payment, as it is a commitment you are making for up to 25 years. Finally, your payments will be stress tested (the B 20 stress test) to ensure monthly mortgage payments can be made in the event interest rates rise and suddenly your mortgage payments are higher in the future than they are now.
Buying your first home can be a daunting task but generally leads to forced savings for the owner(s), and property appreciation that can be used for future retirement or investing. It is one of the first steps people make to investing in their family and future wealth creation.