First Time Home Buyers Savings Guide

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First Time Home Buyers Savings Guide: Save Money When Buying Your Dream Home

Congratulations on finally buying your first home. We know buying your first home can make you stressed.  Don’t worry – we are here to guide you to maximize your savings on your first home.

The most obvious way to save money is to negotiate a lower purchase price for your new home, which your realtor helps you with. 

Is Your Real Estate Agent Sharing These 4 Tips With You? (If Not, Look for Another Agent) >>

This guide is for Canadian first time home buyers and covers several topics.

First Time Home Buyers Savings Guide: Tips for First-Time Home Buyers in BC, Canada

  1. How much down payment to expect 
  2. Hidden and Unexpected costs of buying
  3. How to Keep Mortgages at a Manageable Percentage of your Net Income.
  4. Available Government Rebates and Tax Exemptions
  5. How to Speed up Mortgage Repayment

How Much Down Payment to Expect on Your Home? 

A down payment is the amount of money that you put towards the purchase of a home. Rest of the purchase price is covered by the mortgage. 

The minimum down payment required depends on the purchase price of the home you’re buying.

If the purchase price of your home is $500,000 or less, the minimum down payment is 5% of the purchase price.

Suppose the purchase price of your home is $400,000. You’ll need a minimum down payment of 5% of the purchase price, which in this case comes to a total of $20,000.

If the purchase price of your home is between $500,000 and  $999,999, the minimum down payment is 5% of the first $500,000 of the purchase price, and 10% for the portion of the purchase price above $500,000.

Suppose the purchase price of your home is $600,000. Your minimum down payment will be a total of $25,000 (5% on the first $500,000) and $10,000 (10% on the remaining $100,000). Adding both numbers, your minimum down payment would be $35,000.

If the purchase price of your home is $1 million or more, the minimum down payment is 20% of the purchase price.

Hidden and Unexpected Costs of Buying a Home: 

First time home buyers often miss unexpected hidden costs of buying a home, which can increase the buying budget by thousands of dollars.

Unexpected Hidden costs:

  • Insurance for properties with < 20% down payment: Mortgage insurance is required by the federal government for high-ratio mortgages with less than 20 percent down payment. This insurance is calculated as a percentage and is added to the mortgage.  So nothing out of pocket or upfront here.
  • Legal fees:  Basically the cost of hiring a lawyer or notary to prepare the legal portion of the home buying process.  All funds are transferred through this office, and any cost of preparing the mortgage is done here. This includes title searches, title insurance, mortgage registration and explaining the legal end of the transaction.  
  • Title insurance: This protects a buyer against loss caused by defects of title to the property, including real estate title fraud. This is very important.
  • Appraisal fees: The lender may require a property evaluation by a professional appraiser to confirm the market value of the property.  This happens during the mortgage process
  • Home inspection: A home inspection is often a condition of an offer. Some home inspectors charge extra for older homes and homes with crawl spaces and/or secondary suites.  Getting a good home inspector is crucial. There are many parts of the house that you can’t see and you need a home inspector with the right tools, to see what’s behind those walls, the pipes, and ensure that the electrical wiring is in good shape. 
  • Insurance costs: Insurance, which must at a minimum cover the home against fire or significant damage for at least its replacement cost. 
  • Goods and Services Tax: GST on a newly built home is five percent of the price (available rebates are discussed later in this guide).  Don’t worry, this price can also get added to the purchase price. You suddenly won’t have a bill for $30,000 to grapple with. 
  • Maintenance/Services: Include costs for moving, maintenance, and utility hook-ups etc. Plus any renovation you want to do.  You are moving into your first home, enjoy it. Buy the paintings, paint the walls, buy the furniture and fully enjoy the process.  But just make sure you budget for it.  

Talk to your realtor and mortgage broker to discuss these costs and adjust your budget accordingly.

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Keeping the Mortgage at a Manageable Percentage of Your Income

First-time home buyers often wonder how they can keep their monthly mortgage payment low. 

Don’t forget extra costs like property taxes, private mortgage insurance (PMI), and property insurance (property insurance that covers losses and damages to a home, along with furnishings and other assets in the home).

Here are a few ways to keep your monthly payment percentage low:

  • Extend your repayment term

The best way to reduce your payments is by maxing out your amortization.  When you have a longer amortization, say of 30 years, your payments reduce, however you pay more interest.  The lower the amortization the higher your payments and you pay more onto the principal. For first time home buyers we usually focus on affordability, that means reducing those payments to a manageable amount. However, everyone is different. Talk to your broker they will help work this out for you. 

  • Make a larger down payment

When buying a home, consider putting down a large down payment in order to keep your monthly mortgage low. 20 percent down or more will decrease your mortgage payment.

The more you put down on your home, the lower your mortgage will be. If you put at least 20 percent down, you won’t have to pay CMHC mortgage insurance, which will save you quite a bit of money as well. Keep in mind though, sometimes getting into the market is more beneficial than trying to save money on insurance.  Talk to us and we will explain why

Available Government Rebates and Tax Exemptions

Here are some programs available to all Canadians nationally, and some that are available to certain provinces. 

The following three programs are available to all Candians.

First-Time Home Buyers’ Tax Credit (HBTC)

The First-Time Home Buyers’ Tax Credit allows you to get a small portion of your down payment back. This tax credit offers a $5,000 non-refundable amount when you file your tax return the following year, which translates to about an extra $750 in your pocket to help cover those new-home expenses.

Home Buyers’ Plan (HBP)

The Home Buyers’ Plan (HBP) is designed to assist first-time home buyers in saving up the funds needed to purchase or build their first home.

Under the HBP, you can withdraw up to $25,000 (or up to $50,000 combined, if you’re buying with a partner) from registered retirement savings plans (RRSPs)  in a single calendar year to put towards a down payment on a home. The Home Buyers’ Plan can make it significantly easier to save up what you need for the purchase of a qualifying property for yourself or someone with a disability. 

GST/HST New Housing Rebate

If you’re buying a home that is newly built, you generally have to pay HST or GST. Some builders will include this cost in the price of the home, and others won’t.You may be eligible for a tax rebate on a portion of the GST or HST you paid as part of the purchase or construction of a new home. There are multiple housing rebates you can claim, and the value of this rebate will vary based on which ones your home purchase qualifies for.

These are the Programs Available to BC Residents: 

First Time Home Buyers’ Program

Exclusive to British Columbia, the First Time Home Buyers’ Program is intended to exempt first-time buyers from paying property transfer tax. The program reduces or eliminates the amount owing for tax, depending on certain qualifications. This is a huge savings for first time home buyers. 

Newly Built Home Exemption

Similar to B.C.’s First Time Home Buyers’ Program, the Newly Built Home Exemption helps to lower or eliminate the property transfer tax you’re required to pay on a new house. The difference is that this exemption applies to newly built homes, whether or not you’re a first-time buyer.

The First-Time Home Buyer Incentive 

The First-Time Home Buyer Incentive helps qualified first-time homebuyers reduce their monthly mortgage payments without adding to their financial burdens. It’s a shared-equity mortgage with the Government of Canada. It offers:

5% or 10% for a first-time buyer’s purchase of a newly constructed home

5% for a first-time buyer’s purchase of a resale (existing) home

5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home

The Incentive’s shared-equity mortgage is one where the government has a shared investment in the home. As a result, the government shares in both the upside and downside of the property value.  This has its pros and cons, personally my thoughts are if you can avoid giving equity in your home to the government, you should avoid it. However, if it’s the difference between getting into the market or staying out… get in. 

BC Home Owner Grant

Property values must fall under the threshold for a homeowner to be eligible for the full amount of the grant. Threshold for 2020 has been set at $1.525 million.

The grant is reduced by $5 for every $1,000 of assessed value above the threshold, meaning eligible homeowners with properties assessed above the threshold receive a partial grant until it is fully phased out.

Seniors or people with disabilities can apply for a supplement that replaces any grant amount they lose due to the value of their home being over the threshold.

Homeowner grant amounts are as follows:

  1. up to $570 for the basic grant
  2. up to $770 if the home is located in a northern or rural area, or if they live with a disability or a relative who has a disability
  3. up to $1,045 for homes in northern or rural areas where the homeowner is 65 years or older, or the homeowner is a person with a disability.

Home Buyers’ Plan

Qualifying home buyers can withdraw up to $35,000 (couples can withdraw up to $70,000) from their RRSPs for a down payment. Home buyers who have experienced a breakdown in their marriage or common-law partnership even if they are not first-time buyers and those  who have repaid their RRSP may be eligible to use the program a second time.

Alberta has Two Programs:

The Peak Initiative

PEAK is a down payment assistance program designed to help middle-income Albertan families to save up for a home. Launched in 2009 as a joint effort between Trico Residential, the Government of Alberta Municipal Affairs, CMHC and Habitat for Humanity, PEAK stands for public, essential and key workforce.

Through the PEAK Initiative, you’re provided a second mortgage for up to 5% of the price of your home, which is interest free for the first five years. Repayment is not due until you sell your home, and these funds are then directed back into the PEAK Initiative for the benefit of future buyers.

First-Place Program

Edmonton’s First Place program teams with banks and builders to develop attractive townhouses on land declared surplus by school boards. The homes are market priced, with a five-year deferral on the land portion of the mortgage, making them more accessible to first-time buyers.

Other Provinces: 

Ontario

Land Transfer Tax Refund for First-Time Home Buyers

Like most other provinces, when purchasing real estate in Ontario, you’re required to pay land transfer tax. To help with the financial burden, the Ontario government offers a refund on all or part of your land transfer tax, if you’re an eligible first-time home buyer.

Quebec

Home Ownership Program

Currently being revamped for 2018, the Home Ownership Program is intended to help facilitate new homeownership for individuals and families in Montreal, Quebec. Households without children are eligible for a lump sum of up to $5,000, and those with at least one child under 18 are eligible for up to $15,000.

Newfoundland and Labrador:

The Home Purchase Program

In early 2018, the provincial government in Newfoundland and Labrador announced some changes to their home-buying incentive programs. The Home Purchase Program is a new initiative to make it easier for the average first-time buyer to save up a down payment for a newly built home. The program is expected to help hundreds of residents over the next year, while stimulating economic growth in the province.

Prince Edward Island

Real Property Transfer Tax First-Time Home Buyers Exemption

Similar to the land transfer tax rebates in Ontario and B.C., the PEI government offers a refund on all or part of your land transfer tax, if you’re an eligible first-time home buyer. In other words, the Real Property Transfer Tax that normally applies to the registration of a deed of conveyance in Prince Edward Island may be waived if the buyer, as specified on the deed, is a first-time home buyer.

How to Speed up Mortgage Repayment? 

The main consideration when choosing your mortgage payment frequency is whether paying more each month can be absorbed by your household budget.

After months of perusing houses for sale, you’ve found your dream home and have qualified for a mortgage with a broker who has your best interest at heart. You’re officially on the path to homeownership, making those mortgage payments, and eventually going mortgage-free.

Pay Off Your Mortgage Faster with Accelerated Payments

The default is to make your mortgage payments on a monthly basis, an option many borrowers choose. However, you have other mortgage payment options, such as switching up the timing and size of your payments or even accelerating their frequency. This can shorten your mortgage’s amortization and save you thousands of dollars in interest over its lifetime.

To take advantage of accelerated payments, it’s important to make sure the terms of your mortgage allow you to pay it off more quickly, with the ability to pay more up to a certain percentage with each payment, and/or with a lump sum each year. The percentage is identified where prepayment privileges are outlined in the mortgage agreement. Here’s a look at how accelerated mortgage payments work.

Mortgage Payment Options

In Canada, there are six types of mortgage payment options that lenders offer. Note that major banks only offer accelerated options on weekly and bi-weekly payment frequencies (there’s no option to have accelerated monthly payments).

Monthly: This is the most common, and is the default payment schedule offered by your lender. You’ll make 12 payments per year, on the same day each month.

Semi Monthly: With a semi monthly option, you’ll pay your mortgage twice a month, on either the 1st and 15th, or the 16th and end of month. Multiply your monthly payment amount by 12 and divide it by 24 to get the semi monthly payment amount. The total amount paid per year will be the same as the monthly option.

Bi-Weekly: With a bi-weekly payment, you’ll multiply your monthly amount by 12, and then divide by 26 pay periods. The total amount paid per year will be the same as the monthly option.

Bi-Weekly Accelerated: With a bi-weekly accelerated option, you’ll divide your monthly payment amount by 2, and then pay over 26 pay periods. With this option, payments are higher, amounting to roughly one extra payment made per year. This is an effective way to whittle down your amortization and reduce interest cost.

Weekly: With this option, you’ll make a mortgage payment each week. Multiply the monthly amount by 12, and then divide by 52 pay periods in a year. The total amount paid per year will be the same as the monthly option.

Weekly Accelerated: With this option, the monthly payment amount is divided by 4, and then paid over 52 payments. As with the bi-weekly accelerated option, each payment will be a little higher than with the typical weekly option.

What’s Next?

You may be feeling overwhelmed or confused.  We’d like to help you further. 

Some of the common questions asked by first time home owners include:

  • What should I avoid when buying a house?
  • How to get a mortgage as a first time home buyer?
  • What questions should a first time home buyer ask?
  • What are the benefits of being a first time home buyer?
  • How much money should I save before buying a house?
  • What are “closing costs,” and how much money should I set aside for them?

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