Financing Your New Home

Karen KesselAdvice, Real Estate News

The purchase of a new home is the largest purchase most people make during their lifetime! Whether you are purchasing a home for the first time, or moving up, buying a new home involves planning and saving – plain and simple. If you do you not understand all the costs and fees associated with the purchase of a new home, you are not alone. The business of buying and selling real estate is changing all the time. Be prepared and leave nothing to chance!

So let’s review some key points as you work through the process. First and foremost, how much home will you be able to afford and how are you going to finance your purchase? Let’s start with the deposit:

Have you heard about the Home Buyers Plan (HBP) and the Tax-Free Savings Account? These might be the best home financing options for you. Check this out:

  1. The HBP allows a first time homebuyer to make a tax-free withdrawal of up to $25,000 from a Registered Retirement Savings Plan (RRSP) for a down payment. Eligibility requirements are strict, including meeting the definition of a ‘first time home buyer’ and the amounts withdrawn from the RRSP must be repaid over a 15-year period to avoid being taxed on the full amount of the withdrawal.

  2. Your RRSP contributions are tax deductible but your TFSA contributions are not so the funds you need for a down payment can accumulate more quickly in an RRSP than in a TFSA.

  3. On the other hand, there are no ‘first-time home buyer’ restrictions when you use a TFSA withdrawal to fund your down payment, there are no dollar limits on the amount you can use, and there is no requirement to repay your TFSA withdrawal so you won’t encounter tax issues down the road. Your TFSA withdrawal will create more contribution room in the year following the withdrawal and that could be a benefit.

  4. If you are able to maximize your RRSP contributions, you might consider using those tax savings to make TFSA contributions and eventually make your down payment using a combination of the HBP and a TFSA withdrawal.

Mortgage Financing

While you shop for a new home, also shop for a mortgage. This step is so crucial to your financial well-being. Lending institutions can prequalify you for a mortgage so you have a better idea of affordability. This will allow you to shop with confidence!

To get a good mortgage deal, a deposit of up to 25% of the home’s value is needed. Any more than that and you may qualify for the cheapest deals in the market – some of the best deals require 30% or even 40% deposits.

Most first time buyers will look to get a 90% ‘loan to value’ mortgage. This means that you are borrowing 90% of the value of the property you want to buy, and will need a deposit equivalent to 10% of the property’s value. On a property valued at $200,000, this means you’ll need a deposit of $20,000.

Note that 90% mortgages will have higher interest rates than those with a lower loan to value.

Closing Costs

So now you are ready to close the purchase of your new home and move in! Meeting with your solicitor to sign all the legal documentation and review the Statement of Adjustments is the final step in the legal process. In the Agreement of Purchase and Sale with a builder there is typically a paragraph that highlights adjustments, closing costs and financial obligations of the buyer. Review this carefully and ask the Sales Representative to explain all “closing costs” to you. Depending upon the size and value of your new home and/or condo, the following is a list of typical closing costs:

  1. Cost of a survey

  2. Reserve Fund Contribution (2 months of your common expense payments)

  3. Hydro and/or water meter connection fees

  4. Tarion Enrolment Fees

  5. Property Taxes

  6. Land Transfer Tax

  7. Solicitor’s Closing Fees

  8. Moving Charges

I have noted Land Transfer Tax above. If you are a first-time homebuyer you may be eligible for a refund of all or part of this tax. Applications for a refund are available through the Ontario Government and must be made within 18 months after the date of the transfer.

Home ownership has great advantages for your financial growth and security. It is a forced savings plan because your mortgage principal payments are retained as your equity in the home. Do your research and take advantage of government programs available for first-time and low to modern-income home buyers.

Decisions, Decisions, Decisions – whether it’s buying your first home, figuring out how to pay for it … or any other aspect of your financial life, I encourage you to speak with a professional advisor who can help you make the right choices for your situation.