Finance & Taxation
When financing a home in Squamish or anywhere in Canada, there are two criteria:
First, housing costs including the mortgage payment, taxes, utilities, and strata fees cannot exceed 32% of your gross income. If you have no other debt an exception can be made up to 35%. Total debt servicing, including all other loans and credit payments, cannot exceed 40% of your gross income.
Secondly, in a conventional mortgage a down payment of 20% is required. The exceptions to this are insured mortgages that are available for your primary residence with a minimum of 5% down payment. The insurance cost increases as the percentage of financing requested increases. For more information on a down payment see How much you need for a down payment.
With higher valued properties lending values decrease as the value of the property increases. For non-residents the required down payments are slightly different. Since everyone’s mortgage needs are different, we recommend that you speak to your mortgage specialist, financial adviser, or Royal LePage Black Tusk Real Estate agent for more information and in order to find the financing solution that fits your unique needs.
TaxationThe GST (Goods and Services Tax) is a 5% federal tax. It is a value added tax and, in the case of real estate, it applies to the purchase of new construction and on the resale of accommodations that have been rented out for short term / nightly rentals. It also applies to most of the services provided in completing a real estate transaction.
The payment of GST can be deferred if the new purchaser is going to continue to offer the property for short term or nightly rental for 90% of the time and becomes a GST registrant. Becoming a GST registrant is a straightforward procedure of completing four forms. Once you are a GST registrant, you are entitled to claim credits for the GST that you pay on legal fees, property management fees, and utilities such as electricity, gas, cable and telephone, for example. You are then required to charge, collect and remit GST on the nightly rentals, which in some cases may be done through your property manager. You will be required to file an annual GST return as well.
GST rebate is available under certain conditions where the house is to be a principal residence.
GST ON NEW HOMESWhen you buy a newly constructed home, condominium or townhouse, the entire purchase price including land is taxable. If the home is going to be your primary place of residence it may qualify for a partial GST rebate, depending upon the sale price. If the property is to be rented to tenants the full 5% GST is charged on the purchase price. In addition, some rebates could apply for long term rental properties.
GST ON RESALE HOMESThere is no GST on the purchase price of a used residential property that has been occupied as a residence before you bought it. Used residential property includes an owner occupied house, condominium, apartment, summer cottage, vacation property or non-commercial hobby farm.
Your Royal LePage Black Tusk Real Estate Agent has more details and can be contacted regarding this or any other question you may have about your Squamish real estate.
Mortgage Information for Dominion Lending Centres
TYPES OF MORTGAGES
In Canada, there are two major categories that mortgages fall into, either closed or open. Most mortgages are closed, meaning that you can’t pay out the mortgage in full without paying a penalty to the lender. You can, however, often make lump sum or extra payments each year.An open mortgage allows you to pay out the mortgage anytime without penalty. But you typically pay a higher rate than when opting for the same closed version. Open mortgages may have an administration fee that is higher than a closed mortgage if you do decide to fully pay off the mortgage. This is partly why it is so important to read the fine print and ask about these charges. In most cases, it’s better to take the closed product if you do not intend to fully pay out the mortgage in a short period of time.
Closed mortgages are offered in terms starting at six months. The interest rate is fixed during that term. (The term should not be confused with the amortization. Amortization is the time period it would take to fully pay off the mortgage by making regular payments.) Variable-rate mortgages, on the other hand, have a rate that floats with the prime rate and are often closed mortgages.
The number one question a home buyers often have is “What does the mortgage process entail?” In very simple terms, the following is an outline of the process.
THE MORTGAGE FINANCING PROCESS
1. Get pre-approved: Avoid any hiccups or obstacles before you begin the home shopping process. Being pre-approved helps in the following ways:
- Determines price range – it will help you understand what your monthly costs will be and determine your price range.
- Guarantees the rate – from 90-120 days. We will automatically adjust your rate down with any market reductions.
- Allows you to put in a competitive offer and become a successful bidder with a short subject to financing requirement.
3. Offer document is accepted:
- Provide your mortgage broker with a copy
- An appraisal is ordered (if necessary)
- Send in any remaining documents required for financing (income confirmation, down payment confirmation, etc)
- Send an inspector in (if applicable)
- Receive the lender’s approval on property and final approval letter
5. Lawyers’ Office: You will be asked to provide any money that is to be used as your down payment, which is not already on deposit with your real estate agent. Typically, you will go in 1-2 days prior to the completion date.
Income and Job Stability – Your income determines how much you may borrow. In most cases, 32% of your gross income for salaried, non-self-employed or commissioned people is used to determine how much you can borrow to cover the cost of the mortgage payments, taxes and any applicable maintenance. All other debts (eg. car loans, credit cards and lines of credit, etc.) must not exceed an additional 8% of your gross income.
WHAT DOES A LENDER CONSIDER WHEN LOOKING AT YOUR MOTGAGE APPLICATION?
Credit History – Your credit score must show that you pay your bills on time. If not, you may still be approved, but the interest rate may be higher than expected.
WHAT YOU NEED TO SUPPLY TO THE LENDER:
- Income Confirmation – For salaried individuals: letter of employment and your most recent pay stub.
- Down Payment Confirmation – The lender will require that you prove the source of your down payment. You will have to send in bank statements, statements showing RRSPs, stocks etc. You must show a three-month history of your accounts. If there are any large lump-sum deposits, you are likely to be asked to show where the deposit originated. For mortgages where your down payment is less than 20% of the purchase price, you will also be asked to demonstrate that you have access to 1.5% of the purchase price in your bank account. You must be able to show this through a credit card, line of credit, gift from family or savings in case closing costs run higher than expected.
- Contract of Purchase and Sale – This is a copy of the accepted offer of the home you intend to purchase and a copy of the MLS listing sheet.
Whenever possible, it is advisable to try to put a 20% down payment into the new home. Most individuals are unable to do this, so their mortgage needs to be insured by either Canada Mortgage and Housing Corporation (CMHC), Genworth Financial or Canada Guaranty because the Bank Act will only allow financial institutions to lend up to 80% of the price without mortgage default insurance.
CONVENTIONAL VERSUS HIGH-RATIO MORTGAGE
The mortgage is insured so that if you default on your payments, the lender is paid out in full and the insurer is left to deal with the borrower. The insuring companies charge an insurance premium. The premiums are based on the loan to value (LTV), which is the amount of the loan versus the value of your home.
You may borrow up to 95% of any price for an owner-occupied purchase, in most urban areas. If you are buying a property for investment purposes, the maximum loan amount is 80% and the insurance premium is higher than shown above.
The main reason many renters feel they can’t afford to purchase a home has to do with saving for a down payment. But there are many solutions available today that can help first-time buyers with their down payments.
DOWN PAYMENT OPTIONS
Many lenders will allow for a gifted or borrowed down payment. And of those lenders that will not provide this alternative, many offer cash-back options that can be used as a down payment.
Better yet, there are programs available from some financial institutions where they will offer a “free down payment” or a “flex down”. Of course, you will end up paying about 1% more in your interest rate, but the program will help you get in the home ownership door and start accumulating equity earlier. You must, however, stay with the original lender for the full initial five-year term or else you will have to pay the down payment back.
In 2009, a $5,000 increase was made to the RRSP Home Buyers’ Plan, meaning first-time homebuyers can now withdraw up to $25,000 from their RRSPs for a down payment – tax and interest-free. And if you’re part of a couple making a home purchase together, you can each withdraw up to $25,000 from your RRSPs.
The following is a list that will help you in calculate your true costs in purchasing your new home:
- Property Transfer Tax – This is a tax that is charged whenever a property is purchased. The tax will vary from jurisdiction to jurisdiction.
- GST – Tax is only charged on new homes and does not affect homes priced at less than $400,000. Even homes that exceed the price threshold are only taxed on the portion that exceeds $400,000. Certain conditions may apply. Please contact you lawyer/notary for more detailed information.
- Legal Fees – Your lawyer or notary will charge you a fee for drawing up the mortgage and conveyance of title. The amount of the fee will depend on the individual that you use. The typical cost is $800-$1,000.
- Survey – If you are purchasing a single-family home, you will need to give your lender a survey certificate showing where the property sits within the property lines. Some exceptions are made on low loan-to-value deals and acreage properties. A survey will cost approximately $300-$350, but the lender will often accept a copy of an existing survey.
There are several programs in place to assist home buyers. We have highlighted a few popular programs below.
SPECIAL FINANCING PROGRAMS
Business-for-Self (BFS) Financing
Several programs are available to assist people who are self-employed. Lenders recognize the fact that what is shown on a BFS tax return may not truly reflect the actual income earned for that party. There are several programs where qualification is based on stated income instead of taxable income. You will be required to have clean credit and supply the last three years’ tax assessments from Revenue Canada confirming that you have filed as self-employed and that you are up-to-date with your taxes.
There are essentially two types of self-employed or BFS borrowers – those who can prove their income and those who cannot, and must instead use a stated-income mortgage product. But, if you have been self-employed for more than three years, you can’t use a stated-income product.
By providing the required documentation, you’re much more likely to be approved for a mortgage if you qualify based on your income. The trouble is that if you cannot prove your income, you pose a higher risk in the eyes of lenders.
If you have been self-employed less than three years, you can use a stated-income mortgage product up to 90% loan to value (LTV) – meaning the down payment can be as low as 10% of the purchase price. And if a BFS individual wishes to refinance an existing mortgage, the maximum loan amount is 80% of your home’s value.
If you do not qualify for traditional financing all is not lost, since you may be eligible for alternative – or private – funding. Although you will pay a higher interest rate – on average about 12% – this route may enable you to acquire funds to purchase a home.
It is also important to note that there are added fees involved with private funding because the deals involve a higher degree of risk and take longer to get approved. The combined lender/brokerage fee will depend on the specific deal and the risk it poses, but the figure will be disclosed upfront so you know exactly what you will be expected to pay for these services.
Another key point to consider is that private financing is equity based, meaning that the lender’s decision will be based on a specific piece of real estate (as opposed to conventional deals that focus on the personal credit of the borrower). Private lenders want to know that the property is marketable and that they will be able to easily sell it should the mortgage go into foreclosure.
New to Canada
Many of the available ‘New to Canada’ mortgage products apply to new immigrants who have been in the country for up to 36 months. In most cases, Canadian mortgage lenders and insurers want to see employment letters that prove your offer of employment and salary in Canada. You must also have at least a 5% down payment for the home from your own resources – which means it has to be your own money, not borrowed or gifted. So, for instance, if you’re selling your home in another country and using some of the proceeds as a down payment on a home in Canada, you must be able to prove this.
Lenders and insurers also want to see that you have a solid credit history. Requirements for this proof varies based on which insurer and lender your mortgage is funded through. Often, an international credit bureau is sufficient to prove your credit history. If this is not available, you can also provide 12 months’ worth of bank statements, mortgage or rental payment receipts, utility or telephone bills and so on.
You must also apply for landed immigrant status to get the ball rolling on securing your social insurance number (SIN), which is required before you begin working in Canada.
Purchase with Improvements
This program allows you to add into your mortgage the costs for renovating your new property. It is offered for mortgages where the down payment is less than 20%. For situations where your down payment exceeds 20%, you would simply set aside a portion of money that was meant for the down payment to be used for the renovations.
The lender will require that you supply a list of work to be done and a quotation from a contractor. Once the work is complete, the lender will send the appraiser back into the property to verify that the work has been completed and then your lawyer or notary will release these funds to you. This is important to note, as you will essentially have to pay for the renovations in advance and then be reimbursed.
For a full Buyer’s Package please contact a member of our sales team.