Buying a home for the first time can be one of the most exciting and most daunting experiences in your life.
Finding your perfect home can be difficult enough, especially in a highly competitive market like Toronto. Add in to that negotiations, closing, and actually moving in and things can quickly stress you out.
If you’re a first time home buyer, what are the costs and credits you should be aware of?
There are actually many different financial considerations to take into account when looking at making that first big purchase. Let’s take a look at all the things you need to be aware of when closing that deal.
Mortgages: Fixed or Variable?
The single largest factor for most people when buying their first home will be the kind of mortgage they choose to go for.
A mortgage is a loan and an agreement between yourself and your lender. It will cover the cost of purchasing your home, and will be the single longest credit relationship you are likely to have in your life.
Mortgages take place over set terms, which are a certain number of years over which the repayment details will be valid. Mortgage terms can be anywhere from one year to 10 years, with the majority of Canadians going for five year terms. At the end of your term, you can choose to renew with your current lender, renegotiate, or shop around for a better rate elsewhere.
Aside from the term length, you will also want to decide on whether you want to get a variable or fixed rate mortgage.
A fixed mortgage will have an interest rate that does not change over the course of the mortgage term. This rate will generally be higher than a variable interest rate, but it will be locked in and stable. This is a good option for people who do not have high risk appetites, or if the economy is booming and the Bank of Canada is likely to increase the key interest rate.
A variable mortgage has an interest rate that is subject to change over the course of the term. It will be tied directly to the key interest rate as determined by the Bank of Canada. Any increase in this key interest rate will likely result in an increase to your variable interest rate. Conversely, any fall in the rate can also mean a decrease in your rate. This is good for people who are willing to risk paying more for the chance to pay less, or if the economy is slowing down and the Bank of Canada is more likely to lower the key interest rate.
Land Transfer Tax
Land Transfer Tax is one of those costs associated with buying property that can be forgotten about until you receive a huge bill for it.
This tax is a fee payable to the Ontario government that covers the transfer of legal ownership from one person to another. It is calculated as a percentage of the value of your new home shown here. Additionally, if you are purchasing within the GTA, there will be an additional municipal land transfer tax approximately equal to the provincial land transfer tax as well.
Fortunately for first home buyers, there are rebates available in Ontario. The Land Transfer Tax Refund is available for first home buyers in Ontario up to a maximum rebate of $4,000. Depending on how much your land transfer tax was, this could cover a significant proportion of your bill.
Even better for people looking to purchase within the GTA, there is an additional land transfer tax rebate available for first time home buyers. The maximum rebate is an additional $4,475, which adds up to a $8,475 rebate. This should hopefully go some way to helping first time home buyers to get into the housing market in the highly competitive market in Toronto.
Home Buyers Plan
Saving for a downpayment on your first home can be gruelling, especially when housing markets in Toronto keep heating up and prices keep soaring.
First home buyers are actually entitled to withdraw up to $25,000 from their Registered Retired Savings Plan (RRSP) per calendar year to put towards the purchase of their home without penalty. This can be a huge help to many first home buyers, as it allows them to tap into another source of savings to help them get into their home sooner.
Any withdrawals from your RRSP must be repaid over a period of 15 years to avoid penalties from the CRA. Ultimately this is still putting money towards your retirement so should be strongly considered as a viable option for any first home buyers.
First Time Home Buyers Tax Credit
First home buyers are also entitled to claim the Home Buyers Tax Credit (HBTC) on their tax returns.
Up to $5,000 of your down payment can be claimed on your tax return with the CRA, which will translate into a rebate of up to $750. This isn’t a game changing amount of money in the grand scheme of things, but when you’re buying your first home every cent counts!
GST/HST New Housing Rebate
Another important initiative to be aware of when buying your first home is the GST/HST New Housing Rebate.
This is a tax rebate program for first time home buyers who purchase a new property off the plan, built it themselves, or extensively renovate an existing property. It involves claiming back some portion of the GST/HST that was charged when paying for the property.
In Ontario, the maximum available GST/HST rebate is $24,000, which can be substantial for any first time home buyer. Exactly how much you will be entitled to will depend on the purchase price and the date of closure, so ensure you do your research to maximise the amount you can claim back.
There are many programs in place to help Ontarians get into their first home faster, you just need to know where to look. If you are looking to become a first home buyer in Toronto, you’ll need an experienced real estate agent to help you find the home of your dreams. My name is Dariya Zinchenko and I am a passionate real estate professional with years of experience working in Toronto’s fast paced market. Contact me today and let me find your forever home.