So you're keen to buy a new condo instead of paying
rent, but you're not sure you can afford it.
Perhaps you're a first-time buyer and nervous about
taking the leap and eager to know more about the financial complexities of buying
a new home.
Daryl Simpson, sales and marketing executive at
Bosa Ventures, one of B.C.'s biggest new homebuilders, knows plenty about condo
financing.
"First-time buyers have a lot of important questions
they need to get answered," he says. "They want to know exactly how
much mortgage they qualify for, what happens to the money they put down as a down
payment, and they want to make sure they are aware of any hidden costs."
Developers have different down payment requirements,
says Simpson. Some ask for five per cent of the total purchase price when you
buy and then a further series of five per cent payments to make a total 25 per
cent by the time the new home is complete.
This is good in one respect because it means buyers
have a sizeable equity by the time they move in, but it also tends to keep some
first-time buyers from getting into the market.
Other developers require a $1,000 deposit at the time
of purchase and then another payment to bring the total to five per cent of the
purchase price when all subjects are removed and the contract becomes firm and
binding. In most cases, this takes less than a week.
"The down-payment money doesn't go into the developer's
pocket. That's a popular misconception," says Simpson. "The deposit
is designed to shift some of the risk to the purchaser. What the developer is
looking for is a show of commitment from buyers that they are going to see the
project through."
Other provinces allow developers to post a bond and
insure deposited funds so they can withdraw them and put them to use. "But
in B.C. you can't touch these funds. Provided the necessary safeguards were in
place for consumers, I don't think it would be a bad things, but most developers
don't find it necessary anyway."
Deposited down payments do allow a developer to get
financing, so in a sense they are used to advance a project, he says.
"For instance, a lending institution will look
at the trust account and see all the people who have purchased. This translates
into confidence in the project. It is an indication that there is sufficient equity."
Another misconception is that if you take out a mortgage
on a condo that hasn't been built yet, you start making mortgage payments
before you move in.
"This scares a lot of people off. But the fact
is that when you get pre-approved for a mortgage, you don't start making your
monthly mortgage payments until the building is complete and you actually move
in to your new home."
As for how much mortgage a person qualifies for, Simpson
says the formula for calculating
the amount is straightforward. "What a mortgage
broker will do is take a person's gross annual income and multiply it by.32
(the gross debt service ratio) and divide the result by 12 to get the monthly
payments. That gives the lender an idea of how much mortgage a buyer can afford."
Simpson recommends that all buyers should visit their
bank or credit union before going condo shopping. This is simply to avoid disappointment,
but many developers have representatives of a lending institution at their presentation
centre to provide immediate assistance and advice.
Some developers offer a mortgage buy-down or a
mortgage cap. This means the developer and the lending institutions have got together
and worked out a financial package where the developer either agrees to pay the
difference to "buy down" mortgage payments to a more affordable monthly
payment or the financial institution agrees to freeze a certain interest rate
for a number of years in exchange for the opportunity to represent buyers.
This arrangement gives buyers confidence that once
they get into their new home, they will be able to afford the payments for the
next two or three years. With a buy-down, mortgage interest rates can be cut as
low as 2.9 or 3.9 per cent.
One of the most creative ideas in condo financing at
the moment is a product called Equity Edge; says Simpson.
"'this is sold by London Guarantee, the leading
warranty insurance provider in B.C. It allows a buyer to purchase a bond to the
value of the down
payment instead of coming up with cash."
The price is 2.5 per cent of the value of the bond
plus $100 application. Which for $10,000 would be $350.
Not all developers will accept the bond as part of
a down payment, but it is worth asking about, Simpson says.
As for closing costs, there is GST, which is reduced
from seven per cent to 4.8 per cent on a new home priced through a government
rebate and the property transfer tax (PTT) which is one per cent of the price
of homes under $250,000.
"Lawyers fees are usually about $600 but a lot
of banks and credit unions will take care of these if you take a mortgage out
with them," Simpson says.
Simpson says buyers have 72 hours to change their mind
from the moment all subjects are removed and the contract is signed and becomes
firm and binding.
Finally, buyers could be responsible for a share of
property taxes and water levy. "If the seller has prepaid the property taxes,
the statement of adjustments will make you assume the balance of the property
taxes for the year."
When do realtors get paid? Not a big concern for buyers,
but commissions are something paid in full at the time of purchase and sometimes
half is paid at time of purchase and the rest when the buyer takes occupancy.
Regardless, the fee for a realtor's services is
always paid by the seller, never by the buyer, Simpson points out.
