BUYING A HOME FOR THE FIRST TIME

Pre-Approved Mortgage

Simply call your financial institution and book an appointment to meet with the mortgage loan officer. This meeting will determine the amount of mortgage you can comfortably afford before you start to shop.

The mortgage amount, plus whatever downpayment you have saved, will clarify how much you can spend on your first home. It will also give you the confidence to make an offer when you find the right property. Ultimately, the bank will need to approve the actual property you are buying.

Your Baker Representative will be pleased to introduce you to several banking connections.

Downpayment -

This is the amount of "cash" you can put towards your purchase price. Naturally the more "cash" you can gather the less mortgage money you need – the less your monthly payments are.

• This downpayment can be as little as 5% if you qualify for a 95% mortgage. This type of mortgage is known as a hi-ratio mortgage and requires loan insurance from Canada Mortgage & Housing Corporation (C.M.H.C.) or GE Capital Mortgage Insurance Canada.

• Mortgage insurance premium is steep – 3.75% of the mortgage amount plus Ontario’s 8% insurance tax.

• 1^st time home buyers with only 5% downpayment available to them must have a minimum of financial assets equal to 5% of the price of a home from their own resources.

• Maximum Gross Debt Service (GDS) Ratio, including heat is 32%. This is annual principal, interest, taxes, heat, plus 50% of any condominium fees, divided by annual income.

• Maximum Total Debt Service (TDS) Ratio is 40%. This is GDS plus other annualized debt payments (car loans, credit cards etc) divided by annual income.

• The mandatory minimum Mortgage/Loan term is 3 years with Loan qualification based on the higher of the 3-5 year rate (normally the 5 year rate but not necessarily).

• At the time of application, borrowers are required to demonstrate their ability to cover closing costs equal to at least 1.5% of the purchase price.

• When the minimum equity requirement is being met by way of a non-repayable financial gift, the funds must be in possession of the borrower before making an offer to purchase.

• The Property must be used as your principal residence and not exceed a pre-established price ceiling of $250,000 in Toronto.

R.R.S.P’s As Downpayment (Home Buyers Plan) -

First-time buyers (plus non-home-owners since Jan. 1^st 1995) can withdraw up to $20,000 tax free from their R.R.S.P toward their downpayment. A spouse can also withdraw up to $20,000 for a total of $40,000 under this Government Home Buyers Plan. These funds may be used to buy or build your principal residence. Once all HBP conditions are met the funds can be used as downpayment, legal fees, Land Transfer Tax or home improvements.

If you don’t have $20,000 in your R.R.S.P’s you may be able to arrange a "catch-up" loan from your bank. You may have unused RRSP contribution room if you have not contributed the maximum in past years. This loan money is deposited in your R.R.S.P. account, which will result in a significant tax refund to you at tax time. Use this refund to pay down the loan and you have just arranged a more substantial downpayment for yourself. Tax refunds generated by these loans can only be added to the borrower’s 5% saved funds.

Naturally there are rules:

Only funds in an R.R.S.P at least 90 days are accessible, also money withdrawn from your R.R.S.P must be repaid over a period of not more than 15 years. Your payments of 1/15 per year begin the second year in which you make the withdrawal. If you do not repay this annual amount, whatever portion is left unpaid will be taken into income for that year and taxed accordingly.

About Mortgages

There are two types of mortgages:

1. Conventional Mortgages: The Lender provides up to 75% of the appraised value or purchase price, whichever is less. This means you must be able to finance at least 25% of the cost of the property on your own.
2. High Ratio or Insured Mortgage: This applies to any mortgage which finances between 75% to 95% of the appraised value or purchase price of the property, whichever is less. By law, this type of mortgage must be insured against nonpayment by either Canada Mortgage and Housing Corporation (C.M.H.C) or Mortgage Insurance Company of Canada (M.I.C.C). This insurance protects the lender if the borrower fails to pay.

Costs Involved -

Application Fee C.M.H.C - $235.00 (Non redeemable)

Mortgage Payments

You can choose to make monthly, bi-weekly or weekly payments. The more frequent your payments, the sooner you pay off your mortgage, and the less interest you pay.

Arranging your payments to coincide with pay cheques is a popular choice. Other options would include a shorter amortization period or taking advantage of prepayment privileges usually once per year on the anniversary date. Prepayment privileges are voluntary payments you make in addition to your regular payments. The prepayment is applied directly against the principal owing, so you pay down your mortgage faster. This also significantly reduces your interest paid.

Amortization Period

The most common amortization period is 25 years. The longer the amortization the higher the amount of interest you will pay. There are tremendous savings to be had in the amount of interest paid by shortening the amortization period.

Term

This is the length of time the interest rate is fixed for. Most financial institutions offer terms ranging from 6 months to 7 years. Some are offering 10 year terms.

Interest rates tend to rise with the length of the term. A longer term is recommended if you have limited income or if you want to keep your mortgage payments stable for a period of time. If interest rates are falling, a shorter term might be indicated, but if rates are rising, locking in for 3-5 years may be the most sensible route to take.

Pre-approved mortgages usually guarantee their rate for 90-120 days. If interest rates rise you are protected; if they fall you get the benefit.

Closing Costs - those hidden extras that you need to provide for:

• Legal Fees: Your lawyer is an essential part of your closing, and there is a fee for this work. i.e. searching title and registering it in your name. We can recommend several reasonable lawyers for you to choose from.
• Home Inspection: A qualified home inspector can set your mind at ease as to the structural and mechanical soundness of the house you are buying and possible future costs you may have to face. Again, we can make reasonable recommendations.
• Ontario Land Transfer Tax: Applies to anyone buying property in Ontario. The following formula applies:
  • Up to 55,000 x .5% of total property value
  • From 55,000 to 250,000 x 1.5% of total property value
  • From 250,000 to 200,000 x 1.5% of total property value
• Toronto Transfer Tax: Applies to anyone buying property in the Metropolitan Toronto area. The following formula applies:
  •  0.5% on the first 50,000
  • then 1% on $50,001 to $400,00 and
  • 2% on any amount over $400,000.

First time homebuyers receive a rebate up to $3,725

• Property Insurance: This insurance covers the replacement value of your home and contents. Your mortgage lender will require proof that you have insurance before processing a mortgage.
• Property Taxes: You will have to budget for annual municipal property taxes which are based on the assessed value of your home. New construction is currently assessed at approximately 1.259% of the purchase price. In some cases your lender may include property taxes with your monthly mortgage payment.
• Survey Fee: Your lender will require an up to date survey. The Vendor may be able to provide one or agree to pay to have one done, or you may have to pay for one yourself- approximately $800.
• Service Charges: There will be service charges to set up new service and utilities at your new home i.e. telephone, cable, hydro etc.
• Maintenance Fees: If you are purchasing a condominium, you will be charged monthly maintenance fees that cover the upkeep of the building, concierge salary, and any necessary repairs. These fees often include your utilities. Be very clear on what is included in your maintenance fee.
• Moving Costs: Movers cost money and need to be booked in advance of moving day.

General rule of thumb is to have 2.5% of your purchase price set aside to cover all of the above costs.