The first thing you need to do when you buy real estate is to secure financing for your purchase through a mortgage.
Most customers are aware that it is in the bank’s best interest to provide a mortgage for them to be able to purchase a house. The loan is secured: the guarantee of the return of the bank’s money is your property. Nevertheless, before granting the loan, the bank needs to check your credit history and evaluate your financial situation to make sure you are able to make monthly payments. A rough estimate for the allowed amount of credit by the bank is 30% of the total household income for the year. For example, if your annual earnings are about $60,000 then your mortgage payments should not be above $20,000 a year (or about 1666$ a month). With that income you can expect to obtain a $360,000 to $390,000 mortgage.
You may wish to contact a bank specialist, either by phone or by email, for a Prequalification and a Pre-approval Mortgage. All you need to do is provide your first and last name(s), the total income for the household for the year and the estimated down-payment. Upon the banks positive response, you should obtain confirmation that, according to the given information and after having checked your credit history, the bank will provide you with a mortgage of a certain amount and with a certain interest rate. This rate will be fixed for you for about 3-4 months. The application and approval process is free, nor does is obligate you to purchase. The main benefit, however, is that you are guaranteed that interest rate for your mortgage remains the same even if it increases while you continue to shop houses. This also helps you know what property you can afford.
One-time payments when buying real estate
Nowadays it is possible to make a purchase of real estate with 5 % down-payment. However, in order to be able to do that, you would need to purchase an additional insurance, which is referred to as “High Ratio Financing.” The cost of this insurance is between 1 and 4.15% of the total credit amount and depends on the loan term. The insurance then is added to your total credit sum, which only slightly increases your monthly payments. These additional costs can be avoided if you are able to make a down payment of about 20-25% of the total purchase price.
Property Transfer Tax
According to the law, when buying real estate one needs to pay the government an additional tax – the “Property Transfer Tax”. It is calculated as a sum of 1% of the first $200,000 and 2% of the remaining purchase price. For example, when you buy a house for $500,000, your tax will be $8,000: the first
$2,000 derived from 1% of 200,000 and the additional $6,000 from 2% of the remaining $300,000.
It is important to know that for the first-time property buyers it is possible to be exempt from the above-mentioned tax through the “First Home Buyers Exemption”. To obtain this exemption you will need to satisfy a set of conditions as well as to complete a special application form when signing the contract for purchase with your lawyer or notary.
The main conditions in addition to being a first-time property buyer are:
– the total purchase price should not exceed $425,000 (although, one may be partially exempt from the tax if the purchase price is below $450,000)
-the buyer has to be a Canadian Citizen or a Permanent Resident;
-the buyer should have lived in BC for at least 12 months to the day of purchase;
-the mortgage should not be below 70% of total purchase price (in other words, you should not have paid over 30% of purchase price as a down-payment);
-the buyer(s) should reside in the purchased property for at least a year after the purchase day
As a first time buyer you can obtain complete information about this exemption, pertinent to your individual situation, from your lawyer or notary.
Paying the GST (Goods and Services Tax) when buying a new home
As soon as you buy real estate directly from the developer and become the first official owner of a unit, this tax is added to the purchase price. As of April 1, 2013 this tax is back from HST and is 5% now. If your estate costs less than $500,000 and if you are going to live in the place that you are purchasing (as opposed to renting it out), then you are entitled to receive a “New Housing Rebate” on the tax that you have paid. For example, if your estate costs below $350,000 the rebate will be at a maximum discount rate and it will return You 36% of the money paid for GST. A special formula is used to calculate GST for purchases between $350,000 and $450,000 where the amount of the rebate proportionally decreases as the purchase price grows.
Usually your lawyer or notary will provide you with the exact amount of your GST on the day of completion of sale. Moreover, you have the right to file an application for a rebate within two years of the completion of sale.
Paying for lawyer or notary services
The buyer has to choose their own notary or lawyer to complete the purchase and register the property to their name in the Land Title Registry. The cost of these services varies slightly and can be around $750 – $850. It is recommend that you find out ahead of time the cost of services as well as the details on what exactly is included in those services. Very often the initial price quoted does not include additional expenses so it will take some research and diligence to determine the total cost.
Paying the real estate agent
This service is free for prospective buyers. The agent gets their commission from the seller for finding a client, filling out all necessary documents and registering the property under the name of the buyer.
Annual expenses for real estate maintenance -Annual Property Tax.
As soon as you buy a property, you start paying the annual property tax. In the middle of the year you will receive a letter from the municipality with the Property Tax Notice stating the exact amount of the tax. Usually the deadline to pay your tax is July 1st. Generally this tax is about $1000 to $2500. Keep in mind that the British Columbia government offers a “Home Owner Grant” for those who use their property to live in it. This Grant is either $570 or $845 (if one of the owners is over 65 years old). Thus, you need to pay this tax according to one of the following options:
Column A – No Grant, if you are renting out your property and do not reside in the premises
Column B – Basic Grant: tax is decreased by $570, if you live in the property
Column C – Additional Grant: tax is decreased by $845 if one of the owners is over 65 years of age.
Please be aware of the fact that if in the first year you do not own the property for the full 12 months but only for a part of the time, the size of the tax will be calculated accordingly. For example, if you bought a house on the 1st of July, you will only have to pay a half of the tax. The other half will be collected from the previous owner.
Annual Utility Fee
At the very beginning of the year you will receive another letter from the municipality – Utility Statement (cost for water or sewer use). The deadline to pay this bill is usually in the middle of March. On average, this bill is between $200 and $500.
In certain municipalities the “Annual Utility Fee” is calculated at the same time as the “Annual Property Tax” which means they will have to be paid at the same time. Please do not hesitate to call me if you have any questions.
Fire Insurance for the house.
Your lender likely will require you to obtain fire insurance to protect the investment if you are buying detached house. On average it will cost you close to $100 a month or 1200-1500$ a year for the house insurance. If you are buying strata property- condo, apartment, townhouse- the fire insurance is included into the strata monthly maintenance fee.
Best regards, Antonina