• AN INTRODUCTION TO BUYING A HOME

Whether you are buying your first home, or a replacement, the entire process can be a time of continuing excitement and anticipation. Keeping in mind that old expression, "AN INFORMED BUYER IS A HAPPY BUYER", the purpose of this Buyer’s Guide, and the time we spend together discussing your   housing requirements (and showing you properties), is intended to assist you in making an informed decision; one which will allow you to look back, after you have closed the transaction, and feel comfortable that you have purchased wisely and that your new home meets most, if not all, of your needs.

It is difficult (and sometimes impossible) to find a home which is the "perfect fit" for everything that you want or can afford, regardless of how long you take in the process and how many homes you look at. The number of variables which can come into play in the property search are extensive when one considers such things as location, size, color choices, style, layout, property characteristics, heating and air treatment systems, age, construction, maintenance factors, and of course, price, just to name a few.

Having said all of this, home selection is usually an exhilarating experience, and once the deal has been accepted and the moving truck arrives at the front door, you just know that you made the right choice.

Back to Top

• MORTGAGES - AN INTRODUCTION

For the average buyer or seller, there is probably no single area of a real estate transaction which is so poorly understood as the mortgage arrangement. The seller or buyer tends to regard the word "mortgage" simply as a loan or debt. This basic misunderstanding leads to an incorrect perception of the obligations involved in a mortgage transaction.

In general terms, a mortgage can be defined as "A Transfer of Some Interest in Real Property as Security for a Debt." By it's very nature, a mortgage is not a loan. It is instead the security for the loan. The two parties to a mortgage transaction are referred to as the Mortgagor and the Mortgagee.

The Mortgagor is the person who "gives" the mortgage (usually the buyer). In return, the mortgagor usually receives the funds, makes the required payments and maintains possession of the property. This individual also reserves the right to reclaim the interest in the property from the Mortgagee once that debt has been paid off. The Mortgagee (the Lender or Bank) "receives" or "takes back" the mortgage and has an interest in the property until the debt is fully repaid and the mortgage security is discharged from the public records.

Obtaining a mortgage from a lender is generally a standard procedure, regardless of whether the lender is a bank, trust company, insurance company, private individual, etc. The lender will always want to ensure that his security (the Mortgagor's covenant or promise to pay and the property being mortgaged) satisfies his lending criteria, and therefore he will perform a credit check on the Mortgagor as well as performing an appraisal of the home to ensure that it is worth the amount that the buyer has agreed to pay to the seller.

Through programs initiated by the Federal Government, homes can now be purchased with a mortgage of up to 95% of the purchase price of the property. The conditions under which the amount of the down payment, the maximum purchase price allowed, and the carrying costs of the home (principal, interest, heating, taxes) are governed by a set of guidelines established by Canada Mortgage and Housing Corporation of Canada (C.M.H.C.). Generally speaking, all lending institutions follow these guidelines and therefore, their use, relative to the loan applications in support of the mortgage, have become universal.

Back to Top

• BUYER'S FINANCIAL RATIOS - G.D.S. and T.D.S.

Lending institutions utilize various criteria in assessing a borrower's willingness, ability and capacity to repay loans. As it applies to mortgages, there are two ratios which are universally accepted within the industry and form the basis of most lending decisions including those accepted by Canada Mortgage and Housing Corporation (C.M.H.C.) for loan insurance purposes.

The first of these is known as the Gross Debt Service Ratio (G.D.S.) which measures the relationship of the borrower's total costs for mortgage principal and interest payments, municipal taxes, and heating costs to the total gross family income before any deductions. Depending upon the lender's policies, the maximum that this ratio may reflect is a range of 30% to 32%. In other words, a maximum of approximately one third of a family's gross income is allowed to be spent on meeting the cost of buying and heating their home. The second of these ratios is known as the Total Debt Service Ratio (T.D.S.) which measures the relationship of the borrower's total costs for all debts including mortgage principal and interest payments, municipal taxes, heating and hydro, loans, car payments, charge card payments, etc. to the total gross family income before any deductions. In most cases, lenders will allow a maximum ratio of 42% for this calculation.

When a borrower is completing an application for a loan, it is imperative that complete and accurate information is provided to the lender since any discrepancies and/or omissions are likely to be disclosed as part of the credit bureau report customarily obtained by the lender. Such discrepancies will only result in a delay in the processing of the application as well as creating an environment of mistrust between the lender and the borrower.

Back to Top

• HIGH RATIO MORTGAGES AND C. M. H. C.

In addition to other functions, C.M.H.C. provides mortgage loan insurance to a lender of mortgage funds in order to assist homebuyers who are purchasing properties where the value of the mortgaging is greater than 75% of the purchase price. As in all insurance programs, there is a premium charged by C.M.H.C. for this payment protection being given to the lender, and the cost is charged to the buyer of the property as a one-time fee at the time the loan is extended (the date of closing).

The buyer has the option of paying this premium up front or adding it to the value of the mortgage loan created. In addition, an application fee is also charged which the buyer must pay at the time of application for the mortgage. This fee is set at $75 or more, depending upon who is providing the appraisal for the property. The insurance premium varies according to the relationship of the loan size to the cost of the property purchased, as shown in the following table:

Mortgage Value as a              Insurance Premium as a

  up to   65 %                                              .50%  

  up to   75 %                                              .65%

  up to   80 %                                            1.00%  

  up to   85 %                                            1.75%             

  up to   90 %                                            2.00%  

  up to   95 %                                            2.75%

The premium rates referred to above are based on a single advance, for employed individuals, with a mortgage amortization period of no more than 25 years. For further detailed information on other loan and insurance provisions, visit the C.M.H.C site.

With reference to the 95% loan program, the property must have no more than two dwelling units, and the applicant for the 95% insured loan must intend to occupy the property as his or her principal residence. For a two-unit property, such as a duplex or semi-detached house, only one of the units is eligible for 95% financing. The maximum financing for the second unit is 90% of the purchase value. The entire two-unit property may be financed to a maximum of 92.5% of the purchase price.

In addition to the costs as outline above, Ontario Provincial Sales Tax will apply to these amounts since they fall under the definition of insurance premiums, which are taxable at the prevailing rate.

Back to Top

• R. R. S. P. WITHDRAWALS

The Federal Government introduced and administers a Home Buyer's Plan designed to allow the use your R.R.S.P. funds for a down payment. The following is intended to be an overview of this program. Advice should be sought from your accountant, lawyer, or financial advisor if you have any doubts as to the advisability of utilizing these funds as a means of achieving home ownership. First Time Buyers under this program are defined as those who have not owned a home within the past five years. In the case of a married couple, this can apply to one or both of the individuals.

1. The program applies to the purchase of a re-sale home or the building   of a new home.

2. The home must be in Canada (not previously owned by you or your spouse) and be used as your principle place of residence.

3. You must be committed to purchasing a specific home before you can apply for a withdrawal. In other words, you must have negotiated an Agreement of Purchase and Sale on a home of your choice.

4. The home must be acquired (the deal closed) not more than 30 days after receiving the withdrawal under the R.R.S.P. Home Buyer’s Plan.

5. Each eligible person may withdraw up to $20,000 as a down payment. Only the "annuitant" may withdraw from the R.R.S.P.

6. To apply for a withdrawal, you have to complete a Home Buyer's Plan Withdrawal Application which you can be obtained at your district Revenue Canada Office, and give the completed form to the institution that issued your R.R.S.P.

7. You will not pay income taxes on these funds as long as you repay the R.R.S.P. in the future. Such payments must be made annually over a maximum fifteen (15) year period, where the first repayment is due by December 31st of the second year following your withdrawal. Repayments that are not made on time are taxable at the prevailing rates.

8. The money that you repay back into your R.R.S.P. under the plan is not tax deductible since you will have already received a tax credit when you opened the R.R.S.P. originally.

You can still continue to contribute to your annual allowable R.R.S.P. levels in addition to the repayment schedule under this program.

Back to Top

• TARION - ONTARIO NEW HOME WARRANTY PROGRAM

If you are considering the purchase of a new home, you may be required to pay a warranty fee (another form of insurance) to Tarion, the Ontario New Home Warranty Plan provider. Under the respective Act, all new homes must be registered under the plan, and some builders will include the fee in the price of the home, while others will treat the fee as an additional cost to the buyer at the time of closing. The costs of this program are as follows, for both residential freehold and condominium units

  Purchase Price                 Current

Range Value                        Fee

Less than $100,000           $ 325

100,001 to 150,000               350

150,001 to 200,000               400

200,001 to 250,000               450

250,001 to 300,000               500

300,001 to 350,000               550

350,001 to 400,000               600

400,001 to 450,000               650

450,001 to 500,000               700

500,001 and over                  750

NOTE: The above costs  do not include the Federal Goods and Services Tax and the Ontario Provincial Sales Tax, both of which will apply at the prevailing rates.

Back to Top

• GOODS AND SERVICES TAX (G.S.T.)

As Revenue Canada has stated, "everything attracts the Goods and Services Tax...unless it is exempt!" With regard to residential housing, and to keep a complicated matter simple,

" NEW HOMES ARE TAXABLE WHILE RE-SALE HOMES ARE EXEMPT "

Having made this statement, however, New Homes selling at less than $450,000 are also eligible for a New Housing Rebate which is calculated on a formula basis and has the effect of reducing the net G.S.T. (see below).

Buyers should also be aware that some builders will advertise new homes for sale at G.S.T. INCLUDED prices. This does not mean that the tax has not been applied; it simply indicates that the G.S.T. is included in the price being offered and that the actual selling price of the home is lower than that being advertised and that the builder will be paying the tax, upon closing, out of the funds he receives from you as the buyer.

An information guide is available from Revenue Canada which explains this topic in greater detail should it be necessary.

The G.S.T New Housing Rebate Program

You may be eligible to claim a rebate for a part of the G.S.T you pay on the purchase price or cost of building your home if:

• you buy a new or substantially renovated home (including the land or if you lease the land) from a builder;

• you buy a new mobile home (including a modular home) or a floating home from a builder or vendor;

• you buy a share of capital stock of a co-operative housing corporation;

• you construct or substantially renovate your own home, or carry out a major addition (or hire another person to do so); or

• your home is destroyed in a fire and is subsequently rebuilt.

Details

For additional questions on the G.S.T rebate program, call Revenue Canada's toll-free-enquiry service at 1-800-565-9353 or contact your Revenue Canada tax services office listed in the blue pages of your telephone book

Back to Top

• ONTARIO LAND TRANSFER TAX

This cost is an Ontario Provincial tax which is applicable to all conveyances (changes in ownership) of property including land, buildings, fixtures, goodwill, options, leases, interests in an agreement of sale for real estate, leasehold interests or options, and structures to be constructed as part of an arrangement relating to a change in ownership of land. Land Transfer Tax must be paid upon closing every time real estate changes title from one owner to another, regardless of the frequency that this occurs. The Tax is based on the value exchanged for the property between the buyer and seller according to the following table:

Effective December 31, 2007, the Province of Ontario introduced a rebate program which applies specifically to First Time Buyers. This rebate applies to all residential dwellings (new and re-sale), and has the effect of providing a rebate of up to a maximum of $2,000.00 towards the actual tax paid, providing the buyer meets the definition of a First Time Buyer as set out under provincial guidelines.

To Use A Land Transfer Tax Calculator Click Here

            PURCHASE VALUE                                          TAX CALCULATION

Up to a value of         $55,000                   

From $ 55,001 to    $250,000         

$10.00 per $1,000 of value (value X 1.000 minus $275)

From $250,001 to   $400,000

Over $400,000                                  

NOTE: The last rate shown ($20.00 per $1,000 etc.), applies only if the property is a duplex or single family residence, otherwise, the prior rate of $15.00 per $1000 of value continues to apply. This tax is a "closing cost" and all buyers should be prepared to have sufficient funds to cover this expenditure deposited with their lawyer.

Chattels which are negotiated in the price of a home (e.g.. appliances, garden tractors, furniture, etc.) are not included in the base values for calculating Land Transfer Tax but do attract Ontario Retail Sales Tax at the prevailing rate.

Also note, that the preceding information applies specifically to those individuals who are considered Residents of Canada under the Income Tax Act. If you have any questions on this matter, you should discuss them with your lawyer and/or financial advisor.

Back to Top

• TITLE INSURANCE

Title insurance is a relatively new form of protection for homebuyers in Canada, as opposed to the United States where it has been used extensively for many years. The insurance is put in place at the time of purchase to cover the buyer, his/her heirs and executors, and the lender against any defects in title which may occur as a result of errors or omissions on behalf of their lawyer, the inadequacies of a survey, and many other specific land title issues. With this insurance in place, it is possible that disbursements on closing may be reduced, but at a minimum, peace of mind of the legitimacy of title is assured.

Back to Top

• THE NEED FOR A LAWYER

We are sometimes asked if is necessary to use a lawyer to close and otherwise deal with a real estate transaction. Without any hesitation whatsoever, we recommend that every buyer engage the services of a lawyer to look after the many and varied routines associated with the purchase and/or sale of real estate. The cost of this is far less than the penalties, which can accrue, should a deal not close on time or should issues of title, conveyance, liens, and adherence to the law be overlooked. The need for and use of a lawyer, in our opinion, is paramount and directly related to the peace of mind and security which a buyer achieves when the job is done correctly and on time.

Furthermore, if at any time during the process of negotiating the Agreement of buyer and Sale, the buyer is uncomfortable with clauses contained within the offer, the advice of the lawyer may be obtained. This only makes good sense since the purchase of a home is usually the largest single investment that an individual or couple will make in the normal course of their lives.

Back to Top

• CLOSING COSTS

These are costs, which a buyer may incur at the time of closing, which are over and above the basic cost of the property that he/she has purchased. They are normally handled through the buyer's lawyer and typically communicated to the buyer days (and sometimes weeks) prior to the actual date. The following is a list of those items, which a buyer should review for possible applicability to their particular situation. While it is not intended to indicate that these costs are incurred on every transaction, the list will at least act as a means of "ball parking" the magnitude of funds which must be available for disbursement.

• Legal Costs

Lawyer's Fees

City Tax Certificate

Zoning Report

Engineering Reports

Sheriff's Certificate

Registry Office Searches

Utility Searches

Registration of Deed

Registration of Mortgage

Photocopies, Fax Costs, Postage & Courier

• Survey Costs

• Title Insurance Costs

• Land Transfer Tax

• Fire and Liability Insurance

• Ontario New Home Warranty Program Fees

• Hydro or Gas Deposits

• Oil Tank Refill (oil heated homes only)

• Appraisal Fee

• C. M. H. C. Fees

• Mortgage Broker's Fees

• Goods and Services Taxes (G.S.T.)

• Interest Adjustment Costs

• Municipal Taxes

• Provincial Sales Taxes (P.S.T.) on chattels included in the deal, and on C.M.H.C. insurance Premiums and New Home Warranty Costs).

• Bridge Financing Interest Costs

Back to Top

• BUYER REPRESENTATION

In most residential real estate transactions, the listing agents commission is paid by the seller of the property. The listing agent is employed, under contract, by the seller to sell the property for him/her and by law, is working for the seller.

The listing agent also has an obligation to the buyer: to treat him/her fairly and to disclose information which is germane to the quality or condition of the property and any other facts which might have a bearing on the buyer's intended use of the property (e.g.. zoning, rights of way, restrictions on uses of the lands, etc.).

It is now common practice for the Selling agent to work as an agent of the buyer providing the buyer with the comfort of knowing that this agent has his/her, and only his/her, vested interests and fiduciary responsibilities in mind.

Back to Top

• THE PURCHASE AND SALE AGREEMENT

When you have found the home you want and you are ready to purchase, the next step is the drafting of an Offer. This is typically performed by the agent with whom you are working and subsequently the negotiating process begins. The Offer is a standard Ontario Real Estate Association Form and therefore, the "fine print" is universally accepted as the "norm" in most residential real estate transactions. Customizing of the Offer is achieved when the specifics of the property being purchased are added to the standard form along with any clauses, which are unique to the buyer, seller, or property.

At the time of creating an offer, we will review with you the issues related to the purchase, and explain any custom clauses, which may apply, and their impact on your rights, and your obligations. Remember our advice at the beginning of this guide... "AN INFORMED BUYER IS A HAPPY BUYER"

And now, let's find your new home… together!

Back to Top