Tag Archives: First Time Home Buyers’ Plan
Getting the goods on mortgage costs
Careful planning; First-timers need to understand process better
Denise Deveau, Canwest News Service
There’s nothing like the excitement you feel when signing your first mortgage — until you start discovering all those extra costs you hadn’t counted on. Taxes, lawyers’ fees, inspections and surveys are all part of the mortgage picture, and each one carries a price tag that has to be factored into your plans.
Sarah White and her husband Peter Turnbull definitely did their homework before they purchased their first home in Toronto. “We made sure we asked a lot of questions and sat down with a mortgage specialist regularly,” she says.
Even at that, they still discovered that some things cost more than they estimated — like the real cost of repairs to the electrical system and roofing. “We knew they needed to be done — we just didn’t realize how expensive it would actually be,” she says. “We didn’t know about mortgage insurance either.”
One big surprise she discovered was the added expense of a 10% versus a 20% down payment. “There’s a huge amount of costs associated with that, so we did all we could — including selling my car — to get that 20%.”
Ms. White and Mr. Turnbull played it smart when it came down to taking on their first mortgage. Yet according to Anne Marie Froud, a mortgage agent with Invis in Oakville, Ont., “First-time homebuyers usually don’t know a heck of a lot. They often go in before they understand the process and end up getting in way over their heads.”
Legal fees and land transfer tax for example are big factors in the equation, since they can run into the thousands of dollars. That’s despite the fact that first-time homebuyers may qualify for a rebate on a portion of their land transfer tax.
“Legal fees are usually between $1,200 and $1,500,” Ms. Froud estimates. “And if you don’t have 20% down, you have to pay a premium through CMHC (Canada Mortgage and Housing Corporation) or Genworth.”
John Turner, director of mortgages with Bank of Montreal in Toronto, confirms that there are all sorts of incidentals that can quickly add up. “Appraisal costs can run up to $400. A CMHC application fee could be $200 to $300. If there is no survey available, the lender may ask for one. If you need title insurance, that can cost a few hundred as well. Then there are disbursements over and above the lawyers’ [base] fees.”
There are a number of things first-time homebuyers can do to keep their heads above water, Mr. Turner says. First, assemble a team of experts that can work with you and keep your best interests in mind. That can include a lawyer, real estate agent, lender and mortgage specialist, among others.
Get a pre-approved mortgage so you know what types of homes you can consider — but be careful, Mr. Turner advises. “While you may qualify for [a mortgage amount], we don’t encourage you to go out and borrow the maximum. Keep a cushion for repairs and other expenses.”
Mortgage calculators should also be approached with caution, Ms. Froud adds. “They give you the maximum you can afford based on principal, interest payments, condo fees and heating costs. But they don’t factor in things like insurance, RRSP deductions, day care, phone bills, hydro, etc.” The accepted rule of thumb for a person’s total debt ratio is 40% of gross income.
Take your time. “It’s a much friendlier environment for the homebuyer,” Mr. Turner says. “Activity is down, borrowing costs are lower, and you won’t be dealing with multiple offers. That means you can afford to take the time to find the right house and negotiate hard for the price you want.”
Make sure there is a home inspection and that you have a clear picture of its overall condition. In certain cases, you can negotiate with real estate companies to purchase a home warranty to cover major mechanicals such as plumbing and furnaces.
Practice saving before you buy. By way of example, if you are paying $800 a month in rent but qualify for a $1,200 a month mortgage, start banking the $400 difference to see if you can manage it. “That avoids the ‘payment shock’ experience, because you know what you are getting into ahead of time,” Mr. Turner notes.
If you don’t have a credit history, start establishing one. “A great way to create a credit history is to take out an RRSP loan and use that money for the federal government’s First Time Home Buyers’ Plan in the future,” Mr. Turner says.
For Ms. White, the ideal place to start was talking to anyone she knew who had gone through the experience.
“We knew nothing when we went into it so we talked to our friends. They definitely pointed us in the right direction.”
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