Valuable tax tips for first-time buyers

Question:

We have been saving for a down payment on a condo. We have about five per cent and $3,000 for closing costs. Is this a good time to buy?

- Mo and Neeta, Toronto

Answer:

A home used as your primary residence is a great investment. The sale of a family’s principal resident is tax exempt, meaning you’ll pay no tax on the next 40 years of appreciative value on your home. No tax! That alone says it all. And paying your mortgage is a way of forced savings. Owning your home, if nothing else, builds equity. We all have to live somewhere. It makes far more economic sense to make monthly payments that fatten your pockets, rather than a landlord’s.

First-time buyers should consider the following:

• Determine what you can afford and stick to that price.

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• Negotiate with several financial institutions for the best interest rate, terms and conditions. You may be surprised how competitive banks are for your business. Shopping for a mortgage can be as easy as a few clicks on your mouse.

• Create a formal plan to achieve your goals, using three easy steps: discipline, discipline and more discipline.

• Check your credit rating, and improve and maintain it. A one-day late payment is still considered late, and it could affect your mortgage negotiating power.

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• Manage your monthly mortgage payments. First-time buyers should make sure monthly payments are manageable and will continue to be even if interest rates rise.

• Put down as large of a down payment as possible to avoid taking out a high-ratio mortgage that incurs additional costs and interest. A five-per-cent down payment on a home leaves little equity. Consider waiting a few more months or buy with closing dates in several months.

• Set aside an additional two to three per cent of the purchase price for closing costs, such as land transfer taxes, legal fees and disbursements, moving costs and other incidentals. With only $3,000, you may be left short on closing. Speak to a real estate lawyer to get an idea of what to expect.

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• If buying a new condo, check if Harmonized Sales Tax (HST) is included in price. What is included and who gets the HST rebate? Remember, all new homes must charge 13 per cent HST. There is no HST on resale homes.

• Under the Home Buyers’ Plan (HBP), you can use your RRSP as part of the down payment. An individual and their spouse, provided they qualify, may withdraw up to $25,000 each, tax-free, from their RRSP. You will have 15 years to repay the amounts to your RRSP, starting after the second year of your withdrawal.