In a move to help BC citizens and residents buy their first home, the BC government announced today that it is launching a new program to augment down payments for first-time buyers. The B.C. Home Owner Mortgage and Equity Partnership program contributes to the amount first-time homebuyers have already saved for their down payment, providing up to $37,500, or up to 5% of the purchase price, with a 25-year loan that is interest-free and payment-free for the first five years. Through the program, the Province is investing about $703 million over the next three years to help an estimated 42,000 B.C. households enter the market for the first time.

During the first five years, no monthly interest or principal payments are required as long as the home remains the homebuyer’s principal residence. After the first five years, homebuyers begin making monthly payments at current interest rates. Homebuyers will repay the loan over the remaining 20 years, but may make extra payments or repay it in full at any time without penalty. The loan must be repaid in full when the home is sold or transferred to another owner.

To be eligible, buyers must be preapproved for an insured high-ratio first mortgage (mortgage down payment is less than 20% of the home price). On completion of the sale, program funds will be advanced and the loan will be registered as a second mortgage on the property’s title.1Íž

Applications will be accepted starting January 16, 2017. This will be a three-year program with loans advanced from February 15, 2017 until March 31, 2020.

ELIGIBLE HOMEBUYERS

All individuals with a registered interest on title must reside in the home and:

• Be a first-time homebuyer
• Have been a Canadian citizen or permanent resident for at least five years
• Have resided in BC for at least 12 months
• Have a combined gross income of $150,000 or less
• Have saved at least half of the minimum down payment they will require
• Must be pre-approved for the first mortgage before applying

The first mortgage must be high-ratio insured from an NHA approved lender for more than 80% of the purchase price.

ELIGIBLE PROPERTIES

Any legal, self-contained, mortgageable residence located in BC

• Must be used as a principal residence for the first 5 years
• Rental properties and seasonal or recreational properties are not eligible
• The purchase price cannot exceed $750,000

HOME PARTNERSHIP LOANS

• Up to 25-year term, registered as a second mortgage
• No interest or principal payments for the first 5 years
• Monthly principal and interest payments begin in year 6, amortized over remaining 20 years
• Interest rate for years 6 to 10 set near first mortgage rate at time mortgage is registered
• Interest rate reset to near first mortgage rate at years 10, 15, and 20
• Homeowner may repay in full or part at any time without penalty.

The loan is due and payable in full upon

• The home ceasing to be the primary resident in the first 5 years
• Default on the first mortgage
• Sale of home or change of ownership
• Any other default on the Home Partnership second mortgage

Bottom Line: This is a bold and innovative step to help potential new buyers to meet the greatest hurdle of first-time homeownership—the down payment. The Federal Government’s new mortgage regulations released in October hit first-time homebuyers hard, so this program will be welcome relief for B.C. residents. The B.C. government estimates that it will make more than 42,000 new loans over the three-year life of this program, amounting to $703 million in new funding available for qualified first-time homebuyers to come up with their down payments. This is particularly important for BC, which has the highest home prices in Canada.

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

 

It is well known that when you are a First Time Home Buyer you can use up to $25,000 from your RRSP without paying any personal taxes. However, you will have to repay any amount withdrawn from your RRSP for down payment of a home purchase.

Who is a First Time Home Buyer?

Normally, you have to be a first-home buyer to withdraw funds from your RRSPs to buy or build a qualifying home.

You are considered a first-time home buyer if, in the four year period, you did not live in a home that you or your current spouse or common-law partner owned. This condition is particularly important because even if the house where you live is not in your name but your spouse or common law partner, you don’t qualify for this benefit.

Even if you or your spouse or common-law partner has previously owned a home, you may still be considered a first-time home buyer.

The four-year period:

Begins on January 1 of the fourth year before the year you withdraw funds; and

Ends 31 days before the date you withdraw the funds.

Example:

If you withdraw funds on March 31, 2016, the four-year period begins on January 1, 2012 and ends on February 28, 2016.

If you have a spouse or common-law partner, it is possible that only one of you is a first-time home buyer.

RRSP withdrawal conditions

* You have to be a resident of Canada at the time of the withdrawal.

* You have to receive or be considered to have received, all withdrawals in the same calendar year.

* You cannot withdraw more than $25,000.

* Only the person who is entitled to receive payments from the RRSP can withdraw funds from an RRSP. You can withdraw funds from more than one RRSP as long as you are the owner of each RRSP. Your RRSP issuer will not withhold tax on withdraw amounts of $25,000 or less.

* Normally, you will not be allowed to withdraw funds from a locked-in RRSP or a group RRSP.

* Your RRSP contributions must stay in the RRSP for at least 90 days before you can withdraw them under the HBP. If this is not the case, the contributions may not be deductible for any year.

When do you I have to repay the amount withdrawn?

Generally, you have up to 15 years to repay to your RRSP(s) the amount you withdrew from them for you down payment. However, you can repay the full amount into your RRSP at any time.

Example:

If you withdrew $15,000 from your RRSPs for the down payment of your house you will have to repay to your RRSPs $1,000 per year for the next 15 years.

For more information feel free to contact me or visit www.cra-arg.gc.ca.

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.

A “Gifted” Down Payment is very common for first time buyers. Essentially, a buyer’s family member, usually the parents or grandparents will offer up money to go towards the down payment. Often this is done because their son or daughter doesn’t quite have enough funds saved up for the full 5% down payment. Or, because they want to make sure their child has enough money to make up 20% for a down payment to avoid CMHC premiums.

All that is required for documentation is a signed Gift Letter from the parents, which simply states that the money does not have to be re-paid, and a snapshot of the son or daughter’s bank account showing that the gifted funds have actually been transferred.

A gifted down payment is viewed as an acceptable form of down payment by almost all lenders. Talk to me to make sure that your lender accepts “gifts” as an acceptable down payment.

Not long ago, someone contacted us wishing to refinance their mortgage. They presently held a mortgage from one of the big banks. When this homeowner originally obtained her mortgage, the bank offered her a discounted rate of 2.99%. It matured in July of 2016, however, when they contacted us at Dominion Lending Centres, they wanted to refinance to improve their cash flow because of recent major renovations. The mortgage was over $600,000.

At first thought, an Interest Rate Differential (IRD) penalty might seem to be so small because of the effective rate of 2.99%, that only a 3 month penalty would apply to break their existing mortgage. Wrong. Because the rate for the original mortgage was discounted from 4.64%, 4.64% was used when calculating the IRD penalty. So, instead of paying $5,157 dollars, the client was told they had to pay over $23,000 in order to break their mortgage with the bank.

A mortgage broker-channel lender, and there are many, uses the contract, or effective rate, when they calculate the IRD penalty on fixed rate mortgages, unlike the banks. Because they use the actual contract rate, the penalty would have been the lower one in the example above. An amortization scenario would determine if breaking the existing mortgage would be worth it by seeing the crossover point in time for making up the difference in savings. In the case above, it was not worth breaking, and the client had to wait until their mortgage matured.

The banks have, in recent years, implemented a new way of registering mortgages to assist in these situations. They often now register the loan as a collateral charge loan rather than a mortgage. This allows the bank to refinance the home loan on a house without a penalty if the client needs extra cash in the future. The disadvantage to this is that in order to break the loan agreement, even at maturity, the client either has to pay a lawyer or title insurance company to help break the loan agreement, costing approximately $600-$1000. Aware of this, at renewal, the bank can price the renewal rate accordingly, as they are aware that the client must pay this fee in order to leave the bank.

When purchasing a home or renewing or refinancing, it pays to ask details about pre-payment privileges and the costs associated with discharging your mortgage before the maturity date, as well as how the loan is going to be registered, ie. as a regular mortgage or a collateral charge loan.

When you are new to Canada and establishing credit, deciding on the best way to create a good credit history can be difficult.

You need a good credit rating in Canada if you are planning to rent or buy a home, buy a car or borrow money. By taking some important first steps to get your financial matters in order, you can establish a solid foundation for future credit worthiness.

The first steps when you are new to Canada and establishing credit are:

• Open a chequing and savings account with a local bank or credit union
• Get a cell phone through one of the local providers. Your payments on that account will report to the credit bureau.
• Apply for a secured credit card. Even if you start off with a limit of $500 you can always increase it at a later date. Pay some of your regular monthly bills (such as your cell phone or cable bill) through this credit card so you can start to show consistent repayment behaviour.
• Aim to establish a minimum of $2,000 credit limit with two credit cards or a loan and credit card. Lenders and the credit bureau consider two years of active credit use as a good foundation for credit worthiness.

I recommend you check your own credit report on an annual basis or within six months of making any major purchase. Visit www.Equifax.ca for more information.

For more information on establishing credit and managing your money visit www.mymoneycoach.ca.

Buyer Beware

There are many options available to people needing credit and some of them will get you into financial trouble if you are not careful. There are companies offering alternatives to credit cards. They often advertise online, by phone or flyers through the mail. They offer to provide loans that will help borrowers establish good credit. These programs all sound good until you look closely at the numbers. For more details, contact your local Dominion Lending Centres mortgage professional.

When you are searching for a mortgage, you shouldn’t only base your decision on rate. It is important to search for the “best mortgage”. A mortgage that not only provides the best interest rate, but also the one with the best terms and conditions. By understanding mortgage terms and what they mean in dollars and sense, you can save the most money and choose the term that is best suited to your specific needs.

With a closed term mortgage, you can’t pay off your mortgage before the end of the term without having to pay a penalty.

The pre-payments without penalty clause is one of the conditions that can save you a considerable amount of money in the long run. This clause allows you to make payments on the principal of your loan, or increase the amount of your periodic payments (monthly, bi-monthly, etc.) without a penalty. Each lender has different programs for pre-payments, they usually vary from 10% to 20%, i.e., you can pay any amount within the approved percentage of the original value of your mortgage or increase your periodic payments once a year without paying a penalty.

Many people don’t take advantage of this clause because it is generally difficult to save the extra money to make additional payments.

Here is an easy way to take advantage of this benefit – “The Java Factor”. This is something that is very easy to follow and can save you thousands of dollars by paying down your mortgage.

Usually everyone buys a cup of coffee or two during their work day. When you see the cost of a cup of coffee at Starbucks or any other establishment, you realize that maintaining this habit can be very costly.

Suppose that you spend at least $5 per day, 5 days a week in “coffee, donuts, chocolates, snacks, etc.”, this would amount to approximately $108 per month; if you apply them to your monthly mortgage payments, the savings can be considerable.

For example:

In a $100,000 mortgage at a rate of 3.39% and 25 years amortization, you would reduce the total payment of your mortgage by 5 years and 4 months with savings of $13,185 in interest. For this calculation, we considered that the interest rate did not change during the life of the mortgage.

This calculation would vary case by case but depending whether you have a pre-payment clause with your mortgage or not, it is important to emphasize that by making a small sacrifice you can have significant long-term savings.

So remember “The Java Factor” next time you are thinking of stopping by for a coffee on your way to work and take a cup of coffee brewed at home.

• Effective today (Wednesday), newly-built homes up to $750k will be property transfer tax exempt, but only for Canadian citizens and permanent residents. This exemption will apply to homes that are owner-occupied for at least a year after purchase date (qualifications for this do not include relatives). This is in addition to the existing First Time Home Buyers’ Program for properties up to $475k.
• Homes over $2 million have an increase in property transfer tax of 1% bringing the total tax to 3%. This tax applies to both new and used homes.
• Buyers will be required to provide their citizenship information – this will be monitored by the government, which hasn’t been done since 1998.
• The premium on MSP is going up $3 per adult (new total of $78) and the discount for couples is being eliminated, which will effectively increase a two-adult family by $14. However, children will now be exempt. Changes will begin in January of 2017.
• The economy is anticipated to grow 2.4% and the budget is expected to have a $264 million surplus. The tax-payer supported debt is expected to increase as well to $43.2 billion, which equates to 3.7 cents per dollar of government revenue.
• Provincial debt is expected to increase to $67.7 billion.
• The disability income assistance rate will see a small increase of $77 per month, assuming there is no buss pass or transportation allowance already in place, which will alter the increase for that individual. The welfare rate is unchanged.

Some good news in this for First Time Home Buyers’ and those looking to upgrade to brand-new homes without paying the property transfer tax. Talk to you Dominion Lending Centres Mortgage Professional to discover your mortgage options!