BuyersAGENCY RELATIONSHIPThe Code of Ethics of the Canadian Real Estate Association requires its members to explain the nature of their relationship with the parties whom they contact.
Before you enter into a contract with a real estate broker regarding a real estate transaction, you should understand what type of relationship you will have with the real estate company. The Toronto Real Estate Board (TREE) brochure, Agency Relationship Explained, describes your options. If you choose to have a real estate Sales Representative represent you as a Buyer broker, you will need to:
- read the brochure Agency Relationship Explained and sign the acknowledgement contained in it;
- enter into a Buyer Representation Agreement or a Customer Service Agreement, which clearly establishes the obligations of both parties.
WHAT CAN YOU AFFORD?Homes come in every size, style and price range. Knowing what you can afford at the beginning of your search saves you time and disappointment later on. The following calculations outline the process financial institutions use to determine what you can afford.
First Affordability RuleLenders such as banks and trust companies allow you to spend approximately 32%* of your gross monthly income on housing costs (including property taxes, heating and, if applicable, 50% of condominium fees). The ratio of debt to income is referred to as the Gross Debt Service ratio or GDS.
Second Affordability RuleThe second affordability rule is that your entire monthly debt load shouldn't be more than 40% of your gross monthly income. This includes housing costs and other debts, such as car loans and credit card payments. Lenders add up these debts to determine what percentage they are of your gross household monthly income. This is your Total Debt Service (TDS) ratio.
In addition to GDS and TDS ratios, financial institutions base their lending decision on your credit history, job stability and the amount of your down payment. Interest rates also affect the amount of financing you will be able to obtain.
*Please note that many lenders are prepared to exceed these guidelines.
UNDERSTANDING FINANCINGPre-ApprovalIt is important to be qualified or pre-approved for financing before you start looking for a home. This lets you and your realtor know what you can afford as well as providing a written confirmation or certificate for a fixed interest rate good for a specific period of time. To obtain pre-approval, contact your realtor or mortgage broker. The benefit of a mortgage broker is that he or she operates independently of the lender and therefore can assist you in finding the best financial product at the best rate from a variety of sources and usually at no expense to you.
Conventional MortgagesThe maximum amount of a conventional mortgage is 80% of the purchase price. The amortization or length of time in which to repay the loan is usually 25 years. The term of the mortgage is the number of months or years, usually six months to five years, for which the rate of interest is set.
High Ratio MortgagesFor most people the hardest part of buying a home- especially I? the first one - is saving the necessary down payment. With mortgage loan insurance, you can put as little as 5% down. Mortgage loan insurance protects the Lender and, by law most Canadian lending institutions require it. The cost of high ratio mortgage loan insurance is in the form of a premium. The premium is calculated as a percentage of the principal and can be paid in a single lump sum or be added to your mortgage and included in your monthly payments.
The 5% Down PaymentThe down payment is usually derived from a Buyer's accumulated savings or a gift from an immediate relative. The Buyer may also be eligible either, one to receive a "cash back" from the lender, which can be used as the down payment, or two to borrow the required funds.
Using your RRSP to Purchase a HomeThis program allows each RRSP plan holder to borrow up to $25,000 from the plan to use toward the down payment of a home. Couples with separate plans can borrow up to 125,000 each to a total of $50,000. Home Buyers using this program have up to fifteen years to return the monies, interest free, to their RRSP. Using these funds towards the purchase of a home does not deregister the plan unless the monies are not returned as agreed, thereby allowing participants to retain the tax advantages the RRSP offers.
HOME OPERATING COSTSThe following is an estimate of the costs involved in the normal operation of a home in the Toronto area. Costs vary from one area of the city to another so these figures should be used only as a guide.
Realty TaxesProperty owners have the option of paying their property taxes in eight installments over the course of the calendar year. Mortgage companies may insist that they pay the property tax and collect it with your monthly mortgage payment. Realty taxes range from $1,000 to $5,000 a year and up depending on the size and location of the property. Taxes are reassessed on an ongoing basis.
HeatingHome heating will usually be provided by natural gas, oil or electricity. Costs vary depending on the type of fuel, size of home, amount of insulation, exposure and usage.
ElectricityCosts vary greatly depending on usage, e.g. how many people you have in the home, the size of your home, how many energy efficient cost measures you have undertaken such as Energy Saver appliances. Usually billing is every second month or you can go on equal billing and pay monthly.
InsuranceInsurance is essential for all homeowners and is required by your mortgage company before it will release the funds to close the deal. Premiums are based on the replacement cost of the building and start at around $350 to $700 per year.
Water & Solid Waste ManagementMost properties in Toronto are now on water meters and are billed according to usage. As of November 1st 2008, your water bill will also include a fee for Solid Waste Management. Your Solid Waste Management fee will pay for garbage, recycling, green bin, litter prevention, landfill management and other diversion programs. These utility bills will be sent about three times a year.
ADDITIONAL COSTS OF BUYINGHome InspectionA home inspection is strongly recommended for most residential properties and will usually be a condition of the offer. Your Sales Representative can assist you in choosing a home inspector. The cost will vary depending on the value, age and use of the property but will usually range from $350 to $500.
Termite Inspection
You may wish to hire a termite inspector as well as a home inspector if you are buying in an area of the city where termites are known to be a problem. This could add another $200 to $300 to the cost of your inspection.
Appraisal FeesWhen you apply for a mortgage, the lender will want to see an appraisal on the property to ensure that the price you are paying falls within the accepted range of value for that type of property and that area of the city. The fee for this is usually between $250 and $350.
Land SurveyWhen you make an offer on a freehold property you will usually ask the Seller to provide a copy of the survey for the property. The purpose of this survey is to show the boundaries as well as the footprint of the building on the site. If there is no survey available, you may wish to hire a surveyor to prepare one at a cost of approximately $1,000 to $2,000.
Title InsuranceTitle insurance provides insurance against the future costs of remedying most problems with the title on your property. Ask your Sales Representative to explain the benefits and the cost of this service.
Land Transfer TaxClick on our Land Transfer Tax Calculator (at left).
Applicable TaxesThe Seller is required to pay the GST on the real estate commission. Buyers are responsible for paying applicable taxes on appraisal services, land survey, home inspection, termite inspection, lawyer's fees and on the premium charged on CMHC loans or Genworth Financial Canada.
