Buy Your First Home Faster

Excerpted from 24 Hours Toronto
Article rank

• 9 Jul 2013
• 24 Hours Toronto
• DOUG RIDING
• Special to 24hrs — Doug Riding BA, CFP, FMA, is a senior associate with Investment

Get Some Help Buying your first home faster

Find out how the Home Buyer’s Plan enables first-time homebuyers to use money from RRSPs as a down payment.

 

Are you looking to buy your first home? If so, why not let the government help you pay for it? With housing prices as high as they are, it is difficult to come up with the down payment required to avoid the high costs of CMHC (Canadian Mortgage and Housing Corporation) insurance. You can buy a house with as little as 5% down, but the insurance costs will run you as much as 2.9% of the loan. To get around this high cost, many first-time homebuyers will try to come up with 20% of their house price as a down payment and use their RRSPs to do that.

FOTOLIA With housing prices as high as they are, it is difficult to come up with the down payment required to avoid high costs of CMHC insurance. Why not let the government help you pay for it? The Home Buyers’ Plan is a program that enables firsttime homebuyers to use up to $25,000 from their RRSPs as a down payment. If you and your spouse or commonlaw spouse are interested in using this program, you can pool your resources and fund up to $50,000 from your RRSPs combined ($25,000 each). This will give you enough funds to purchase a $250,000 home and carry a conventional mortgage.

You will have to repay these amounts to your RRSP over a 15-year time frame, starting the second year after you borrowed the funds at a rate of one-fifteenth of the amount borrowed per year. A $25,000 loan from your RRSPs would create a $1,667 per year repayment over 15 years and if you do not repay that amount in any given year, you would include that $1,667 as income for the year and pay the income tax on that amount.

This is an excellent way to help you generate enough funds to realize the dream of owning your own home and it is another reason to make sure you are contributing to your RRSPs as much as you can and as early as you can. The amount you can contribute to your RRSP is dependent upon your income.
 

If you do not contribute in any given year, you can carry forward that RRSP contribution room to future years. This is why we encourage young people to make sure they submit a tax return every year they have earned income, even if they are earning a minimum amount of money. A $10,000 annual income will create RRSP contribution room of $1,000 that can be used later on in the Home Buyers’ Plan.

There are some restrictions on who qualifies as a first-time homebuyer, but you can participate in this program more than once if you have not owned your own home for at least five years. The money also needs to be in your RRSP for at least 89 days prior to using it for a down payment under this program, so planning ahead is important.

Outside of the tax-deferred compounding effect of an RRSP, you will also generate a tax refund on all amounts contributed to your plan. So, if you are in a 31% marginal tax bracket at around $50,000 income and contribute $9,000 to your RRSP, you will get a refund of $2,790.

These funds can be rolled into a Tax Free Savings Account to also go toward your new home or can be contributed to your RRSP in the next year to go toward the Home Buyers’ Plan — and get another 31% on that money.

Buying your first home is a huge decision and it takes good planning to come up with the money needed. This is not something you will be able to do on the spur of the moment, so keep your options open and use your RRSP to its full potential. Generate the tax breaks and benefit from tax-deferred compound growth and, if you do not own a home, try to make sure you have at least $25,000 in your RRSP and your spouse’s RRSP so you can take advantage of the Home Buyers’ Plan.
 

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Toronto House Sales Down in June, but Prices Up!

Toronto Star

Business / Real Estate

Excerpted from Toronto Star

Toronto house sales down in June, but prices up

Greater Toronto Area housing sales were down less than 1 per cent in June and prices rose year-over-year.

Aaron Harris / Toronto Star

Greater Toronto Area housing sales were down less than 1 per cent in June, 2013 and prices rose year-over-year.

By:Susan PiggBusiness Reporter, Published on Thu Jul 04 2013

 

The much-hoped-for June rebound in home sales failed to materialize in Toronto, according to figures released Thursday by the Toronto Real Estate Board.
 

While sales across the GTA were down less than 1 per cent in June compared to a year earlier, it was a far cry from Vancouver, which showed signs of a turnaround last month with an almost 12 per cent jump in sales, the biggest increase in two years.
 

GTA prices were up 4.7 per cent year-over-year to an average $531,374, while Vancouver prices slipped by 3 per cent.
 

Realtors had been expecting a flurry of activity in June. The winter that would not end put a damper on house hunting and buying through the usually busy spring market months of April and May.
 

Some economists had expected that the recent inching up of interest rates might also push a lot of potential buyers, armed with pre-approved fixed-rate mortgages, off the fence in June.
 

Some veteran housing analysts believe the June numbers are yet more evidence that the Canadian housing market is gliding to a soft landing, rather than heading for a crash. But Scotiabank economist Derek Holt cautioned Thursday that the numbers look more hopeful because they are being compared to last June, one of the weakest Junes on record.
 

Most of the 4.7 per cent price growth in the GTA was driven by the sale of detached and semi-detached homes, especially in the City of Toronto, notes TREB, plus the fact that new listings declined by 6.1 per cent, driving competition for too few houses to meet demand.
 

Even condo prices held steady, with GTA sales prices averaging $343,546 across the GTA ($366,532 in the 416 region and $288,604 in the 905 regions), despite the fact the inventory of condos for sale remains at unusually high levels and sales were down 3.5 per cent.

Toronto Home Prices Could Fall as Interest Rates Creep Up

Toronto Star

Business / Real Estate

Excerpted from Toronto Star

Toronto home prices could fall as interest rates creep up

Even a half point rise in rates could translate into a 9 per cent slump in sales and a 2.6 per cent drop in prices by 2015, says a veteran housing analyst.

Aaron Harris / Toronto Star

A sustained rise in interest rates could affect the broader economy in unpredictable ways, says veteran housing analyst Will Dunning. “It could be that once consumers start to expect prices to fall, the reduction in demand will be larger than it needs to be (based on economic fundamentals) and therefore price reductions will be larger than they need to be.”

By:Susan PiggBusiness Reporter, Published on Wed Jul 03 2013

 

A sustained rise in interest rates of just one per cent could cause Toronto area home sales to tumble by 15.3 per cent and prices to decline by 5.8 per cent by 2015, predicts a veteran housing analyst.
 

Even a half point rise in rates, which have been edging up incrementally the last few weeks, could translate into a 9 per cent slump in sales and a 2.6 per cent drop in prices by 2015, compared to where the market stood in 2012, notes economist Will Dunning in a rates-impact assessment released Wednesday.
 

“Once house prices start to fall, the outcome is unpredictable,” depending on how consumer confidence is affected, he says.
 

“It could be that once consumers start to expect prices to fall, the reduction in demand will be larger than it needs to be (based on economic fundamentals) and therefore price reductions will be larger than they need to be.”
 

“Moreover, because “housing wealth” is a very strong driver of job creation, what starts as a small drop in house prices can turn into a major event for the broader economy.”
 

Dunning is chief economist for the Canadian Association of Accredited Mortgage Professionals, the umbrella group for mortgage brokers.
 

But he stresses that he did this analysis on his own because he’s been asked so many times lately what could happen to the housing market – which has already suffered a slump in sales and an easing of growth in prices since tougher mortgage lending rules were introduced last summer – if interest rates inch up from historic lows.
 

Many economists believe Toronto’s decade-long housing boom has been largely credit-driven and that, as rates start climbing, the bubble could burst, especially in what the Bank of Canada has warned is the city’s over-supplied condo sector.
 

Dunning recently cautioned that Ottawa’s attempts to cool Toronto and Vancouver’s overheated housing markets, by making it tougher for first-time buyers to qualify for financing, is likely to result in a 25 to 30 per cent decline in housing starts by 2015 and 150,000 fewer construction jobs across the country.
 

And that dire prediction came before many of the big banks had started incrementally increasing rates on their fixed-term mortgages in the wake of market reaction to U.S. Federal Reserve Chairman Ben Bernanke’s recent warning that $85 billion (U.S.) in monthly bond buying may be coming to an end this year.
 

As of Friday, BMO’s five-year fixed mortgage climbed 0.20 per cent to 3.59 and RBC’s was set at 3.69.
 

Dunning believes the rate increases aren’t justified and that they could retreat somewhat in the next few months. But he adds that “if the rises persist, the risks (to the housing market) are increased.”
 

Dunning says that Toronto Real Estate Board sales numbers for June, being released in a few days, will likely show there has been a rush of buyers into the market recently, trying to fast-track house purchases armed with pre-approved mortgage rates negotiated before rates started increasing.

He calls that “borrowed activity from the future.”
 

“The real test will come in the fall,” says Dunning, when those pre-approvals have expired, especially if rates hold at their new or even slightly higher levels.

Prognosis Grim for Toronto Condo Investors

The Globe and Mail

Excerpted from The Globe and Mail

18 Toronto

 

Condominium development in the Liberty Village area of Toronto on June 25, 2013. Even before rates began to spike in May, Toronto condo sales were flagging, with sales down a whopping 55 per cent in the first quarter of 2013 versus a year ago.
The Globe and Mail

Prognosis grim for Toronto condo investors

SHERYL KING

Published Tuesday, Jul. 02, 2013 05:00AM EDT
Last updated Tuesday, Jul. 02, 2013 12:44PM EDT

Warren Buffett is fond of saying that “you never know who is swimming naked until the tide goes out.” Well, when interest rates start to climb, Toronto’s condominium investors may be about to get a lesson in the perils of swimming in the buff.

Bond yields worldwide jumped in recent weeks as the Federal Reserve hinted its bond-buying program could soon begin to wind down. The Canadian bond market has not been immune to this force, with 5-year government bond yields up from 1.33 per cent five weeks ago to 1.84 per cent last week.

Ten-year yields are up 80 basis points over the same short time span. (A basis point is 1/100th of a percentage point.) Posted mortgage rates in Canada have moved higher in lock-step, with the cheapest five-year fixed mortgage rate up 65 basis points over the same period, putting it back above 3 per cent.

This puts significant pressure on Toronto condo investors. Yet a recent blog post on Urbanation, a website that tracks Toronto’s condo market, touted the invest-to-rent option – presumably because the previously popular invest-to-flip option is no longer profitable – noting that the average rent for a Toronto condo is now $1,856, handsomely up 10 per cent from two years ago.
Based on the average condo sale price of about $330,000, this appears to be a healthy rental yield of 6.7 per cent – on the surface, it’s a tidy sum compared to the low-risk option of parking money in a “return-free” savings account at a chartered bank. What the report failed to mention, however, were the carrying costs.

So, here are the sober math facts of the net rental yield. Interestingly, banks do not charge a premium for an investment-property mortgage (under a puzzling assumption that there is no added default risk to investment properties versus owner-occupied purchases) so the posted rates apply to an investor.
Based on a 3.05 per cent mortgage rate, a five-year fixed mortgage with 20 per cent down-payment and 25-year amortization period requires a payment of $1,265 per month or $15,187 a year on an average condo, a 7-per-cent increase from just one month ago. Monthly maintenance, including utilities, will set the investor back conservatively $4,000 per year on a one-bedroom downtown condo. Take another $2,600 per month off for real estate and income taxes.
All that is left is $535 per year, for a net rental yield of 0.16 per cent. And a repair or a paint job could wipe out that profit in a flash.

The question becomes, why would an investor take on the risk of owning a condo for virtually no annual return?

The answer: They are not. Even before rates began to spike in May, Toronto condo sales were flagging, with sales down a whopping 55 per cent in the first quarter of 2013 versus a year ago. Diminished affordability was no doubt a contributor to the sales slump as the market felt the pinch from the new regulations requiring a shortened amortization period – the equivalent of a 100-basis-point increase in the five-year mortgage rate.

However, potential buyers are also worried about a price correction. Price gains in the condo market were a skimpy 1.2 per cent in May, which is a far cry from the 10-per-cent-plus returns investors had come to expect before the federal government’s mortgage crackdown. Double-digit returns made condo purchases worth the risk; 1 per cent annual returns, not so much.

Added to the reduced affordability and flagging price expectations that have beaten down demand is that builders are using flawed demand projections. Urbanation cites the latest household formation number for Toronto of 34,000 units per year, according to the Census published by Statistics Canada, as the expected annual sales figure for condominiums.

The problem is that – at best – only half of those households are interested in high-rise living. According to the same Census report, the true household formation rate for condo demand is 17,000. This 50/50 split between single-family households and multi-unit dwellers has not changed in Toronto in the past 10 years. As such, the often-heard argument that shifting demographics will absorb this excess inventory does not stand up to the facts.

With these facts in mind, the pipeline of condo construction becomes much more daunting. Condominium builders completed 17,000 units in the past year, yet still have more than 50,000 units under construction. As such, the facts are that builders are sitting on more than three years’ supply at a time when it will only take another 50 basis point rise in mortgage rates to put a rental investor into a position of negative carrying costs.

From oversupply, to reduced price expectations, to surging mortgage rates, the Toronto condo market is feeling the squeeze from all sides now. Here’s hoping the spike in mortgage rates is short-lived.
 
 
Sheryl King is an independent macroeconomic strategist with more than 20 years experience in the international financial industry and central banking.

© 2013 The Globe and Mail Inc. All Rights Reserved.

New Condo Buyers Could Face Big Bills at Move-in Time

Toronto Star

Business / Real Estate

Excerpted from the Toronto Star

Toronto real estate: New condo buyers could face big bills at move-in time

Plan to double fees for condo construction in the City of Toronto likely to be downloaded onto buyers.

If Toronto city council goes ahead with a proposal to double condo development charges, those extra costs — some $7,671 on the average one-bedroom unit and $10,624 on the average two-bedroom — are likely to land right in the laps of unsuspecting buyers, warns an industry lawyer. CARLOS OSORIO/TORONTO STAR

By:Susan PiggBusiness Reporter, Published on Thu Jun 27 2013

 

Thousands of people who’ve bought preconstruction condos in the City of Toronto over the last two years or so could find themselves faced with an unexpected extra bill when it eventually comes time to move in.
 

If city council goes ahead with a proposal to double development charges, those extra costs — some $7,671 on the average one-bedroom unit and $10,624 on the average two-bedroom — are likely to land right in the laps of unsuspecting buyers.

Related:

· Interactive: Development charges in the GTA

“Most new condominium contracts provide that the buyer is responsible for any increased development charges that the developer incurs after the date that the agreement (of purchase and sale) is signed,” says veteran real estate lawyer Mark Weisleder, who writes about real estate law for The Star.
 

MORE ON THESTAR.COM

Canada’s housing construction still booming, thanks mostly to condos

Bank of Canada warning on Toronto condominium market focuses attention on investors

Consumer confidence in Toronto’s condo market remains healthy: BMO survey

The get-rich-quick mentality that became the hallmark of the condo boom of the last few years may have also left thousands of buyers of preconstruction units vulnerable.
 

Some buyers became so convinced they could make a quick buck by the time the unit was built and ready to occupy, they didn’t have lawyers even review the complex sale documents and may not know the clause even exists, says Weisleder.
 

Real estate lawyers have been able, in many cases, to negotiate a cap on any potential increases from developers keen to make the sales targets needed to get bank financing, but others have simply refused to assume the possible risk, he notes.
 

“I always recommend the cap, and while many developers agree, some developers still refuse to give it.”
 

While it’s almost impossible to determine exactly how many buyers of preconstruction units could be impacted if city council supports staff recommendations to double development charges, there were more than 20,000 condos in the preconstruction phase across Toronto as Q1 of 2013, according to market research firm Urbanation.
 

And thousands more are just in the excavation phase and also likely to be impacted. That’s because development charges in Toronto only kick in after the foundation has been poured and the “superstructure” building permit is issued.
 

“Builders have two choices here — they can pass the added costs on to buyers or they can absorb them. But these proposed increases are so great, they can’t be absorbed in most cases,” says Bryan Tuckey, president of the Building Industry and Land Development Association (BILD), the umbrella group for the development industry.

“It has been brought to the City of Toronto’s attention that there are a number of buyers who will be impacted.”
 

A city official declined to comment on the issue, other than to say that any increases would likely be phased in over a year, to July, 2014, and are need to cover the costs of city services, from transit to sewers and water mains, that are impacted by every condo project that’s built.

The increases would still leave Toronto development charges below what’s charged in 905 municipalities.
 

Developers have asked the city for more time to assess the impact and have cautioned that the sudden jump (increases in 2008 were phased in over four years) could further threaten the condo industry, which has already been impacted by softening sales and tougher mortgage lending rules imposed by Ottawa that have knocked many first-time buyers out of the market.
 

This could knock out more, notes Tuckey.

Banks Raise 'Special Discounted' Fixed Mortgage Rates

Toronto Star

Business / Personal Finance

Excerpted from Toronto Star

Banks raise ‘special discounted’ fixed mortgage rates

Canada’s largest banks are moving to increase some of their mortgage rates. BLOOMBERG

By:The Canadian Press, Published on Thu Jun 20, 2013

 

A number of Canada’s largest banks are moving to increase some of their mortgage rates.

Scotiabank and the Royal Bank of Canada on Thursday became the latest to announce a round of increases covering various terms of what they call special discounted rates.
 

Those increases came a day after TD Canada Trust, the retail arm of TD Bank , boosted its “special” five-year closed rate a tenth of a percentage point to 3.39 per cent. The rate is a discount off the posted rate.
 

Scotiabank said its special discounted rates on two-year, four-year, seven-year and 10-year fixed-term residential mortgages were all going up a tenth of a percentage point effective June 22.

Its special four-year, fixed-term special rate, for example, rose to 3.09 per cent.

Royal Bank said is special discounted four-, five- and seven-year rates were going up June 24 by two-tenths of a percentage point to 3.29, 3.39 and 3.79 per cent respectively.
 

Royal also said its posted three-year closed rate would go up a tenth of a percentage point to 3.75 per cent.

MORE ON THESTAR.COM:

 

 

Pre-approved Financing May Not be Enough for Home Purchase

Toronto Star

Business / Personal Finance

Pre-approved financing may not be enough for home purchase

Excerpted from The Toronto Star

If you waive financing condition in your offer to purchase house or condo, you are in trouble if lender says you bid too high

DAVID COOPER / TORONTO STAR

Whether you're looking for a condo or house, just make sure the value of the property you're bidding on will be accepted by your lender - even if you have a pre-approved mortgage.

By:Mark WeislederReal Estate, Published on Fri Jun 14 2013

 

Many buyers get pre-qualified for financing before they start looking for a home. This means that they find out in advance the maximum amount that a lender will provide to them based on their income. The mistake is thinking that no matter what home you buy, the lender will just give you the money you need, provided that it is within your approval limit.
 

Buyers need to realize that just because a lender pre-approves you does not mean they will lend you all the money. The property you buy must, in the lender’s opinion, be worth what you paid for it.
 

Most real estate agreements are conditional for a few days on the buyer arranging satisfactory financing. In many cases, however, the buyer waives the condition before the lender conducts an appraisal of the home itself. Even worse, in most bidding wars, buyers do not even include a condition on financing, hoping that their pre-approval will be enough.
 

In the last two months, I have seen two situations where lenders requested an appraisal of the property just days before closing, and when the appraisal stated that the house was not worth what the buyers paid, the lender just cancelled the loan. The buyers had already paid the deposits and were preparing to close. Now they faced the possibility of losing their deposits and getting sued.
 

In both cases, we were initially able to arrange for an extension of the closing date to give the buyers time to solve their problem. In one case, the mortgage broker got creative and was able to find the buyer a new mortgage, albeit at a higher interest rate and for a shorter term than the original mortgage. Still, the deal got done.
 

In the second situation, the buyer had purchased a brand new condominium from an original investor, who flipped it just before closing. The original price was $200,000 when the development started four years ago, but the buyer today paid $240,000. The problem was that when the bank asked for the appraisal, the appraiser said that since other investors closed at the original price of $200,000, he would not agree that the unit had in fact appreciated to $240,000 today. The buyer was fortunate to have relatives who lent him the shortfall to close the deal.
 

Buyers, when you are looking at potential lenders to assist with your home purchase, ask in advance how long it takes them to do their appraisals. Many lenders can get this done within 3-4 days, so that you can have assurance that you will get all your money before you have to waive any financing condition.
 

Be very careful about bidding on a home without a financing condition, unless you budget an additional 10 per cent down payment in reserve, just in case the lender surprises you just before closing with a reduced loan. Being prepared will assist you in closing on time, and with the right amount of money.

Mark Weisleder is a Toronto real estate lawyer. Contact him at mark@markweisleder.com  

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