With plenty of activity in the real estate market and more new building slated over the next few years, here is my list of “Things to Consider When Buying in a New Development”.

Representation

Some buyers attend the display suite and consider a purchase directly with the developer sales person or the developers Realtor. Regardless of which kind of property you choose to purchase – new or existing – I always suggest you have a Realtor represent you. I have seen contracts where the buyer has not reviewed the details properly and they are not fully informed before they sign. The developer’s agent or Realtor is acting on behalf of their client – the seller. You should also have your own representation.

Interest Rates

If you are buying a home more than a year or more before completion, you may not know your actual fixed costs for the mortgage until well after you have signed your purchase agreement and paid your deposits. Depending on the lender and timeline, your costs may be unclear for several months. Even if you have a rate hold – things can change along the way with financing rules or the market. I always keep in touch with my clients and within a few months of completion we revisit the overall plan and make some decisions. Your down payment may need to change, the property value may shift or you may have experienced a life changing event (please don’t quit your job). Remember: Keep your mortgage broker in the loop.

Goods and Services Tax (GST)

When you buy a newly built home pay special attention to the contract price. In Canada Goods and Services Tax (GST) of 5% is payable on the purchase of a new home. In many cases the purchase price is set excluding GST so you need to add that tax amount to determine the total purchase price. If the home price is under $450,000 and will be your primary residence, you are eligible to receive a rebate equivalent to 36% of the GST. The rebate will be deducted and the new purchase price will be set Net of GST. There are many online calculators to determine this number and it should also be clear on the purchase agreement. Your mortgage broker will also calculate to confirm. For example a $400,000 purchase price excluding GST will result in an actual purchase price of $416,850. ($20,000 in GST minus the rebate of $3150). A purchase price of $500,000 excluding GST will result in an actual purchase price of $525,000 ($25,000 GST and no rebate).

Allowances and Discounts

In some cases you will have the option to upgrade the home with higher quality items such as flooring or a basement. These items can be included in the purchase price with no additional cost. The agreement will clearly outline the details and no cost will be associated for these items. However, if the contract states there was an allowance as a credit with a cost associated this will be considered a buyer credit and the amount on the contract will be deducted from the purchase price by the financial institution. There will be no financing on these items and the buyer will be responsible for the additional cost. This is common when buyers want to include furnishings such as in a display home. This can be a surprise to buyers as they are not fully clear on the purchase price and what is really included. It is important to review the contract closely with your own buying agent (Realtor) and if any financing questions arise – with your mortgage broker – to ensure you know your options.

Property Taxes

When a developer applies to the local city for a building permit the city will set the municipal taxes for the entire development. Once the developer is near completion and applies to the city for occupancy permits or submits the strata plan (for condo developments) it can still take some time for the city to determine the property tax for each home or condo unit. More and more lenders are using a percentage of the purchase price to determine the property taxes at the time of application unless confirmation of taxes can be provided by the city. In some cases this can be .5%-1.75% of the purchase price which can make a difference to qualify for financing. Your Dominion Lending Centres mortgage broker can review options with you to select the best overall financing solution for your purchase and avoid delays in securing an approval.

Strata fees – start low and grow

Since the strata plan on a new condo development isn’t in place when you make an offer to purchase a new home the strata fees on the purchase agreement will be set low. I recently had a client purchase a condo for $750K and the strata fees were under $170 per month. My clients understood this strata fee will increase to a higher level once the operating budget is set by the strata council and they should set their personal budget accordingly to expect an increase. For more details on the process and to understand the responsibilities of the developer, the strata corporation and the new buyer, click here.

Assignments

When a developer sells their houses or condo units well in advance of completion some original buyers may decide not to complete on the purchase and choose to assign the property to a new buyer. In this case there may be a lower or higher new purchase price. If there is a lower price the GST on the original price will apply. If the price is higher the GST on the original purchase price will apply. The property purchase transfer tax will apply to the new purchase price. The final property purchase transfer tax will be determined depending on the details of the transfer and the value of the property within limits for exemption is typically set by provincial government. For financing purposes, not all lenders will consider an assignment as the new purchase contract is between the original buyer and the new buyer and not with the developer. Some lenders will only consider the original price and the new buyer will have to pay the difference between the two amounts as the down payment to complete the purchase. Lenders who consider the new price will require a full appraisal to confirm the current value of the property. They will also need the original contract in addition to the new purchase contract and want to know details on the relationship between the seller and the buyer. There are many things to consider when you purchase a new home. Always consult your professional advisers, including your Realtor, Mortgage Broker, Financial Planner, Accountant and Lawyer to ensure the purchase helps to meet your lifestyle and financial goals. 

One cost that can be overlooked by home buyers is mortgage default insurance.

So, what exactly is mortgage default insurance and why do you need it?

If you’re buying an owner-occupied home with less than 20% down payment, you are required to purchase mortgage default insurance in order to arrange your financing.  When buying a rental property, some lenders require you to purchase this insurance if you put down less than 35% towards your purchase.

As real estate values in Metro Vancouver continue to soar, many home buyers, especially first time home buyers, often have less than 20% of the purchase price available as a down payment.  The average price of a new home is now well above $500,000 meaning a 20% down payment can easily exceed $100,000.  This is a lot of money for most people and it’s understandable why many fall short of this 20% down payment.

Conventional vs. High-Ratio Mortgage

Borrowers who have a payment of 20% qualify for conventional mortgage financing.  For your lender this means the property has sufficient equity to protect the lender from any shortfall should you, the borrower, default on your mortgage.  Having a higher down payment also means you have more “skin in the game”, making it less likely you’d default and walk away.

A high-ratio mortgage means the borrower has anywhere from 5% – 19.99% towards their down payment.  Financing can still be obtained but in this case you will be required to purchase mortgage default insurance.  The higher loan-to-value (LTV) percentage of a high-ratio mortgage means you have less equity at stake and thus a higher potential of default.

The lender wants to protect their investment and they do this through mortgage default insurance.  This is an additional cost to the borrower but it also makes it possible for those with limited savings, particularly first time homebuyers, to get into the market sooner.

Mortgage Default Insurance Providers

There are three major insurers in Canada.  The Canadian Mortgage & Housing Corporation (CMHC) is a Crown Corporation and the largest provider of mortgage default insurance in Canada. Genworth Canada and Canada Guaranty also provide this type of insurance to the lenders.

Your lender or financial institution will arrange and pay for your insurance, but this cost is typically passed on to the borrower and is incorporated directly into your mortgage payments.   Insurance premiums are tiered and based on the amount borrowed and the size of your down payment.

Feel free to contact me with any questions.