Debt Service Ratios – GDS and TDS

General Konstantin Seroshtan 25 May

While it’s easy to use my mortgage affordability calculator to figure out how much you can afford to borrow for a new home purchase, it’s a good idea to understand how lenders calculate the maximum amount they will loan you. The two calculations a lender does are: your gross debt service ratio (GDS) and your total debt service ratio (TDS).

Note that while the guidelines state your GDS should be no more than 32% and your TDS should be no more than 40%, most borrowers with good credit and a reliable income will be allowed to exceed these guidelines. The maximum GDS is 39% and the maximum TDS is 44%.

Gross Debt Service Ratio (GDS)

To calculate your GDS, lenders try to figure out the proportion of your income you would be paying each month to own a particular property. First, the lender will estimate your annual mortgage payments, property taxes, heating costs and 50% of your condo fees (if applicable). The lender will then add that up and divide it by your gross annual income. If the answer equals less than 32 per cent (industry standard), the lender can feel confident in your ability to pay your monthly housing costs.


Total Debt Service Ratio (TDS)

To calculate your TDS, the lender will take the same GDS calculation but add in any other monthly payments you might have to make, including loans or the minimum payments on any credit card debt. So, the lender adds together your mortgage payments, property taxes, heating costs, 50% of your condo fees and debts, and divides the total by your gross annual income. If the answer equals less than 40 per cent (industry standard), the lender will know you have the money to make all of your monthly payments and you will be on track with getting approved for a mortgage.


What happens if I’m over the industry standard?

If either of your answers go over than the industry standards, you may want to save more for your down payment and/or pay off some existing debt before buying. However, the 32% GDS and 40% TDS standards are guidelines, not rules. If you have a high credit score or some valuable assets, you may still qualify for a mortgage, even if your GDS and TDS are slightly higher than the industry standards. The maximum GDS and TDS allowed is 39% and 44%, respectively.

RRSP Home Buyers’ Plan

General Konstantin Seroshtan 21 May

One great source of funding for your mortgage down payment is a Registered Retirement Savings Plan (RRSP). The Canadian government’s Home Buyers’ Plan (HBP) allows first time home buyers to borrow up to $25,000 from your RRSP for a down payment, tax-free. If you’re purchasing with someone who is also a first time homebuyer, you can both access $25,000 from your RRSP for a combined total of $50,000. However, since the HBP is considered a loan, it must be repaid within 15 years.

First-time home buyer eligibility

In order to be eligible as a first-time homebuyer, you must meet the following criteria1:

  • RRSP funds you borrow must be in your account for at least 90 days prior to withdrawal
  • You cannot have owned a home within the previous four years
  • If you’re buying with a spouse (or common law partner) who is not a first time homebuyer, you cannot have lived in a house they owned for 4 years
  • You have entered into a written agreement to buy or build a qualifying home
  • You mush intend to live in the home within one year of purchase as your primary residence
  • If you have used the Home Buyers’ Plan before, you cannot have any outstanding balance due
  • You must make the withdrawal from your RRSP within 30 days of taking title of the home
  • You must be a Canadian resident

If you make a withdrawal from your RRSP, but do not meet the first-time homebuyer eligibility requirements, this withdrawal will be taxed and you must include it in your income tax statement as taxable income.

Buying with a partner

If both you and your spouse (or common-law partner) meet the first-time homebuyer eligibility requirements, each of you can withdraw up to $25,000 from your RRSPs for a total of $50,000.

If only you qualify as a first-time homebuyer, you will still be able to withdraw the $25,000, provided you have not lived in, as your primary residence, a house owned by your spouse or common-law partner.

How the HBP process works

It’s important to note that any funds you withdraw for the homebuyers’ plan must be in your account for 90 days prior to your withdrawal.

In order to participate in the Home Buyers’ Plan, you must print off a copy of Form T1036 . This form is available from Canada Revenue Agency’s website (www.cra-arc.gc.ca). You must fill out Section 1 then give the form to the financial institution that holds your RRSP so they can fill out Section 2. Your financial institution will send you a T4RSP form, which will confirm how much you withdrew from your RRSP as a part of the Home Buyers’ Plan. You must reference this form in your income tax return for the year you made the withdrawal.

Don’t forget you must make the withdrawal within 30 days of taking title of the home. If you try to make the withdrawal more than 30 days after you take title of the home, your withdrawal will no longer be eligible for the HBP and you will be taxed on the amount you withdraw.

Finally, beginning 2 years from your purchase you must make annual payments over 15 years to pay back the loan to your RRSP. Canada Revenue Agency will send you a Notice of Assessment, which will indicate the amount of the loan you have repaid, the balance left to be repaid, and the amount of your next payment. To start repaying the loan, you must make a contribution to your RRSP in the year the repayment is due or in the first 60 days of the following year.

Repaying the loan

Since the Home Buyers’ Plan is considered a loan, you must repay the amount you withdrew from your RRSP within 15 years, with the first payment due two years after you first withdrew the money. Canada Revenue Agency will send you a Notice of Assessment, which will indicate the amount of the loan you have repaid, the balance left to be repaid, and the amount of your next payment. To start repaying the loan, you must make a contribution to your RRSP in the year the repayment is due or in the first 60 days of the following year.

Let’s look at an example where you buy a home in 2013, and withdraw $19,500 from your RRSP to put towards your down payment. Your first payment is due two years late, in 2015.

Step 1 : Calculate the minimum annual RRSP repayment

$19,500 total RRSP withdrawal÷15years to repay=

$1,300 minimum annual repayment

If you decide to contribute more than your minimum annual payment in a given year, your go forward minimum monthly payment will adjust accordingly. Continuing with our example above, let’s assume you contributed the minimum payment in 2015 of $1,300. In 2016, you decide to make a large contribution of $8,075. We now must calculate the minimum annual contribution for 2017 and all subsequent years.

Step 2 : Calculate the adjusted annual RRSP repayment after lump sum payment

$19,500 total RRSP withdrawal – $1,300 2015 RRSP repayment = $18,200

$18,200 – $8,075 2016 RRSP repayment = $10,125 remaining RRSP loan balance

$10,125 remaining RRSP loan balance÷13remaining repayment years = $778.85 annual repayment

Missing payments

If you do not make your minimum repayment one year, you have to include the amount you did not pay as RRSP income on your taxes. To do this, subtract any amount you did repay from your minimum repayment amount and put the answer in line 129 on your return. This amount will be taxed (which defeats the purpose of taking out this tax-free loan), and your HBP balance will be reduced accordingly.

Step 1 : Calculate your taxable income due to RRSP underpayment

$1,300 minimum annual RRSP repayment amount – $1,000 actual annual payment made $300 taxable income

 

First-Time Home Buyer Programs

General Konstantin Seroshtan 18 May

Every homeowner was once a first-time home buyer. Unfortunately, with housing markets heating up across Canada, it’s never been tougher to get onto the proerty ladder for the first time. Luckily, there are a range of first-time home buyer programs in Canada that aim to make it easier to buy your first home.

As a first-time homebuyer, it’s a good idea to be familiar with any programs that apply to your situation, be they rebates, tax benefits, ways to fund your down payment, or the minimum you must put down for your home purchase. Read on for information on these programs, as well as some more general information about the home buying process.

Programs for first-time home buyers in Canada

Here are some of the main first-time home buyer incentives and rebates you should be aware of.

RRSP Home Buyer’s Plan

If you haven’t purchased a home within the last four years (or lived in a spouse’s home in the same timeframe), you may qualify for the RRSP Home Buyer’s Plan. With this plan, you may borrow up to $25,000 tax-free from your RRSP to fund your down payment. Just keep in mind that the money must be in your RRSP at least 90 days before the purchase of your house.

The First Time Home Buyer’s Plan is advantageous for Canadians because generally speaking, early withdrawals from RRSPs are considered taxable income. In this case, they’re exempt but you must start repaying the amount borrowed from the RRSP two years after you buy over a 15-year period.

Land Transfer Tax Rebate

Some Canadian provinces charge a land transfer tax when you buy a house. This is generally between 0.5% and 2.0% of the purchase price of the property, and represents the largest closing cost you’ll have to pay. In an effort to help first-time home buyers, several provinces rebate some or all of this tax if you’re eligible.

You can receive a rebate on some of the land transfer tax you pay if you live in British Columbia, Ontario, or Prince Edward Island. Homebuyers in the City of Toronto are also eligible to receive a rebate on the city’s land transfer tax, in addition to the provincial rebate.

First-Time Home Buyer’s Tax Credit

The First-Time Home Buyer’s Tax Credit, introduced in the 2009 federal budget, allows first-time buyers in Canada the opportunity to recover some of the costs associated with their purchase. It helps offset legal fees, inspections, and other similar closing costs. The First-time Home Buyer’s Tax Credit is a non-refundable credit and is valued at $750.

GST/HST New Housing Rebate

The GST/HST New Housing Rebate offers money back to Canadians who buy a newly built home, substantially renovate an existing home, or rebuild a home that was destroyed due to fire. In all three cases, an individual will incur GST/HST on their purchase. The GST portion of a new home purchase or renovation can be rebated to all Canadians who qualify.

Provincial first-time home buyer programs

Most first-time home buyer programs are found at the federal level, but there are several provinces that have their own programs as well (along with the land transfer tax rebates we mentioned earlier). Quebec, for example, offers an additional tax credit (max $750) to first-time home buyers.

To properly understand what you’ll be eligible for in your province, contact me for a free consultation.

More information for first-time home buyers

Here are some other general tips on how to buy a house as a first-time homebuyer in Canada. Check the links for more information on any of these topics.

Down payment

For first-time home buyers, the down payment is probably the main thing you’ll need to think about for your first purchase. In Canada, you must put down a minimum of 5% as a down payment for homes less than $500,000. If the purchase price is between $500,000 and $1 million, you’ll need 10% on the amount between $500,000 and $1 million. For houses over $1 million, the minimum down payment is 20%.

CMHC Insurance (mortgage default insurance)

Mortgage default insurance, also known as CMHC Insurance, may seem like a strange concept, but it’s relatively straightforward. If you have a down payment of less than 20% of the home’s value, you must purchase mortgage default insurance. But this doesn’t act as insurance for you. Rather, it protects your lender in case you don’t make your mortgage payments. It’s designed to make financial institutions comfortable with lending to individuals who don’t have a large down payment.

Mortgage insurance is calculated as a percentage of the value of the mortgage amount. If your down payment is between 5% to 9.99%, the mortgage insurance will represent 3.6% of the mortgage amount. For down payments of 10% to 14.99%, the mortgage insurance will cost 2.40%. And for down payments of 15% to 19.99%, mortgage insurance costs 1.80%.

CMHC insurance isn’t available for homes with a purchase price of more than $1 million. As a result, anyone buying a house in excess of this amount must have at least 20% as a down payment on their purchase.

First-Time Home Buyers’ Tax Credit

General Konstantin Seroshtan 18 May

The First-time Home Buyers’ Tax Credit was introduced as part of ‘Canada’s Economic Action Plan’ to assist Canadians in purchasing their first home. It is designed to help recover closing costs such as legal expenses, inspections, and land transfer taxes.

The Home Buyers’ Tax Credit, at current taxation rates, works out to a rebate of $750 for all first-time buyers. After you buy your first home, the credit must be claimed within the year of purchase and it is non-refundable. In addition, the home you purchase must be a ‘qualified’ home, described in more detail below. If you are purchasing a home with a spouse, partner or friend, the combined claim cannot exceed $750.

To receive your $750 claim, you must include it with your personal tax return under line 369.

How do you qualify for the First-time Home Buyers’ Tax Credit?

In order to be eligible for the First-time Home Buyers’ Tax Credit, your home must meet the following requirements:

  • Be within Canada
  • Be an existing or new home
  • Be a single, semi, townhouse, mobile home, condo, or apartment
  • Can include a share in a co-operative housing corporation that gives you possession of the home
  • You must intend to occupy the home within one year of purchase

In order to be eligible for the First-time Home Buyers’ Tax Credit, your home must meet the following requirements:

  • You or your spouse must purchase a qualifying home
  • The home must be registered in either your name or your spouse’s name
  • You cannot have owned a home in the previous four years
  • You cannot have lived in a home owned by your spouse in the previous four years
  • You must present documents supporting the purchase of the home

Home Buyers’ Tax Credit for people with disabilities

If you have a disability and are purchasing a home, you do not need to be a first-time home buyer to claim the Home Buyers’ Tax Cedit, where a person with a disability is defined as a person who can claim a disability amount on their tax return in the year the home is purchased. The Home Buyers’ Tax Credit can be claimed if the home purchased is suitable for the disabled person’s needs, and the disabled person occupies the home within one year from the date of purchase.


Land Transfer Tax Rebate for First Time Homebuyers

Another tax credit available to first time homebuyers in Ontario, British Columbia, and Prince Edward Island is the land transfer tax rebate. Each province has its own rules about who is eligible to claim the land transfer tax rebate. The amount of the rebate depends on which province you live in, the value of the home, and whether one or both buyers has owned a home before. Contact me to find out more!


GST/HST New Housing Rebate

If you buy your home before it’s built, or if you substantially renovate an existing home, you could qualify for a rebate a portion of the sales tax. The amount of the GST/HST new housing rebate depends on the purchase price of the home, and can only be claimed if the net purchase price is $450,000 or less. While this rebate is often taken advantage of by first-time buyers, this rebate is available to all Canadians who qualify regardless of whether they’ve owned a home before.

HOW TO VERIFY YOUR DOWN PAYMENT WHEN BUYING A HOME

General Konstantin Seroshtan 11 May

Saving for a down payment is one of the biggest challenges facing people wanting to buy their first home.
To fulfill the conditions of your mortgage approval, it’s all about what you can prove (hard to believe – but some people have lied in the past – horrors!).
Documentation of down payment is required by all lenders to protect against fraud and to prove that you are not borrowing your down payment, which changes your lending ratios and potential your mortgage approval.

DOCUMENTATION REQUIRED BY THE LENDER TO VERIFY YOUR DOWN PAYMENT

This is a government anti-money laundering requirement and protects the lender against fraud.

1. Personal Savings/Investments: Your lender needs to see a minimum of 3 months’ history of where the money for your down payment is coming from including your: savings, Tax Free Savings Account (TFSA) or investment money.

  • Regularly deposit all your cash in the bank, don’t squirrel your money away at home. Lenders don’t like to hear that you’ve just deposited $10,000 cash that has been sitting under your mattress. Your bank statements will need to clearly show your name and your account number.
  • Any large deposits outside of “normal” will need to be explained (i.e. tax return, bonus from work, sale of a large ticket item). If you have transferred money from once account to another you will need to show a record of the money leaving one account and arriving in the other. Lenders want to see a paper trail of where your down payment is coming from and how it got into your account.

2. Gifted Down Payment: In some expensive real estate markets like Metro Vancouver & Toronto, the bank of Mom & Dad help 20% of first time home buyers. You can use these gifted funds for your down payment if you have a signed gift letter from your family member that states the down payment is a true gift and no repayment is required.

  • Gifted down payments are only acceptable from immediate family members: parents, grandparents & siblings.
  • Be prepared to show the gifted funds have been deposited in your account 15 days prior to closing. The lender may want to see a transaction record. i.e. $30,000 from Bank of Mom & Dad’s account transferred to yours and a record of the $30,000 landing in your account. Bank documents will need to show the account number and names for the giver and receiver of the funds. Contact me for a sample gift letter.

3. Using your RRSP: If you’re a First Time Home Buyer, you may qualify to use up to $35,000 from your Registered Retirement Savings Plan (RRSP) for your down payment.

  • Home Buyers Plan (HBP): Qualifying home buyers can withdraw up to $35,000 from their RRSPs to assist with the purchase of a home. The funds are not required to be used only for the down payment, but for other purposes to assist in the purchase of a home.
  • If you buy a qualifying home together with your spouse or other individuals, each of you can withdraw up to $35,000.
  • You must repay all withdrawals to your RRSP’s 15 years. Generally, you will have to repay an amount to your RRSP each year until you have repaid the entire amount you withdrew. If you do not repay the amount due for a year (i.e. $35,000/15 years = $2,333.33 per year), it will be added to your income for that year.
  • Verifying your down payment from your RRSP, you will need to prove the funds show a 3-month RRSP history via your account statements which need to include your name and account number. Funds must be sitting in your account for 90 days to use them for HBP.

4. Proceeds from Selling Your Existing Home: If your down payment is coming from the proceeds of selling your currently home, then you will need to show your lender an accepted offer of Purchase and Sale (with all subjects removed) between you and the buyer of your current home.

  • If you have an existing mortgage on your current home, you will need to provide an up-to-date mortgage statement.

5. Money from Outside Canada: Using funds from outside of Canada is acceptable, but you need to have the money on deposit in a Canadian financial institution at least 30 days before your closing date.  Most lenders will also want to see that you have enough funds to cover Property Transfer Tax (in BC) PLUS 1.5% of the purchase price available in your account to cover your closing costs (i.e. legal, appraisal, home inspection, taxes, etc.).

  • Property Transfer Tax (PTT) All buyers pay Property Transfer Tax (except first-time buyers purchasing under $500,000 and New Builds under $750,000). This is a cash expense, in addition to your down payment.
    Property Transfer Tax (PTT) cannot be financed into the mortgage

Buying a home for the first time can be stressful, therefore being prepared with the right documentation for your down payment and closing costs can make the process much easier.
Mortgages are complicated, but they don’t have to be. Contact me today and I will help you throughout every step of the process!

5 MISTAKES FIRST TIME HOME BUYERS MAKE

Mortgage Tips Konstantin Seroshtan 4 May

Buying a home might just be the biggest purchase of your life—it’s important to do your homework before jumping in! I have outlined the 5 mistakes First Time Home Buyers commonly make, and how you can avoid them and look like a Home Buying Champ.

1. Shopping Outside Your Budget
It’s always an excellent idea to get pre-approved prior to starting your house hunting. This can give you a clear idea of exactly what your finances are and what you can comfortably afford. Your Mortgage Broker will give you the maximum amount that you can spend on a house but that does not mean that you should spend that full amount. There are additional costs that you need to consider (Property Transfer Tax, Strata Fees, Legal Fees, Moving Costs) and leave room for in your budget. Stretching yourself too thin can lead to you being “House Rich and Cash Poor” something you will want to avoid. Instead, buying a home within your home-buying limit will allow you to be ready for any potential curve balls and to keep your savings on track.

2. Forgetting to Budget for Closing Costs
Most first-time buyers know about the down payment, but fail to realize that there are a number of costs associated with closing on a home. These can be substantial and should not be overlooked. They include:

  • Legal and Notary Fees
  • Property Transfer Tax (though, as a First Time Home Buyer, you might be exempt from this cost).
  • Home Inspection fees

There can also be other costs included depending on the type of mortgage and lender you work with (ex. Insurance premiums, broker/lender fees). Check with your broker and get an estimate of what the cost will be once you have your pre-approval completed.

3. Buying a Home on Looks Alone
It can be easy to fall in love with a home the minute you walk into it. Updated kitchen + bathrooms, beautifully redone flooring, new appliances…what’s not to like? But before putting in an offer on the home, be sure to look past the cosmetic upgrades. Ask questions such as:

  1. When was the roof last done?
  2. How old is the furnace?
  3. How old is the water heater?
  4. How old is the house itself? And what upgrades have been done to electrical, plumbing, etc.
  5. When were the windows last updated?

All of these things are necessary pieces to a home and are quite expensive to finance, especially as a first- time buyer. Look for a home that has solid, good bones. Cosmetic upgrades can be made later and are far less of a headache than these bigger upgrades.

4. Skipping the Home Inspection
In a red-hot housing market a new trend is for homebuyers to skip the home inspection. This is one thing we recommend you do not skip! A home inspection can turn up so many unforeseen problems such as water damage, foundational cracks and other potential problems that would be expensive to have to repair down the road. The inspection report will provide you a handy checklist of all the things you should do to make sure your home is in great shape.

5. Not Using a Broker
We compare prices for everything: Cars, TV’s, Clothing… even groceries. So, it makes sense to shop around for your mortgage too! If you are relying solely on your bank to provide you with the best rate you may be missing out on great opportunities that a Dominion Lending Centres mortgage broker can offer you. I will work with you and multiple lenders to find the sharpest rate and the best product for your lifestyle.