If you’re thinking of buying your first home, rest assured that owning a little piece of British Columbia is as sound an investment as ever, even with the new rules and taxes 

As Tanya and Russ Leigh can attest, hunting for your first home in the popular price range of $300,000 to $400,000 can be a trying experience. The newlyweds, who are looking for a multi-bedroom Lower Mainland house or condo (preferably with “grass, a garden or a backyard,” for their 12-year-old pug, Max) have made four offers in the past month — only to strike out four times. In each case, they lost out to a higher bidder.

“You feel this amazing high when you start letting yourself think, ‘This could be the one,’ and start falling in love with the place, seeing yourself living in it, imagining where you’re going to put the furniture,” says Tanya, 30, who teaches high school math. “But, when it doesn’t come through, you realize, ‘Oh no, now we have to go through this whole process all over again.’ It’s incredibly frustrating, incredibly emotional.”

Her husband agrees. “I never thought it would be easy buying our first place, but I definitely did not expect it to be this hard,” says the 32-year-old marketing specialist. “We have our financing in place, we’re serious, we thought we were good to go. But, as it turns out, so is everyone else, and we seem to be in the middle of this race to buy a home as quickly as you possibly can.”

The mass of homebuyers that the Leighs and other first-timers have been competing with may be due to the push to purchase property before the new federal mortgage rules backed by the Canada Mortgage and Housing Corporation are in effect, April 19, 2010.

“The changes don’t affect buyers in any way more than a prudent measure to make sure that the consumer can still afford their mortgage five years from now.” 

“For some buyers, the new rules could have some impact, but for most it’s not a bad thing and will actually level the playing field and help protect those looking for a shorter-term loan,” explains Sharon Lutz, mortgage broker and owner of Delta-based Pinnacle Mortgage. “Basically, there may be a bit more red tape to cut through before you’ll be able to borrow money for a house, but the impact will be minimal.”

In mid-February, in an effort to prevent the same kind of problems that caused the collapse of the U.S. housing market (an event that triggered a global financial crisis), Canadian Finance Minister Jim Flaherty announced three revisions to the rules for government-backed insured mortgages.

Three revisions

First, new qualifying standards will mean borrowers must be able to handle a five-year, fixed-rate mortgage, even though they may opt for a shorter term and lower rate. (Previously, borrowers are income-tested for a three-year fixed rate at major banks.) The government says this test will help homebuyers prepare for higher interest rates.

Craig Alexander, TD Bank’s deputy chief economist, explained in a research note that this change could influence about 25 per cent of all new mortgages. “That does not mean those buyers wouldn’t still buy, but they may have to lower their expectations as to the size of the homes they want,” he notes. “Based on a five per cent down payment and a national average home price of $337,000, a buyer would need about $9,200 more in annual income to qualify under the changes. At $200,000 and five per cent down, that would fall to $5,500.”

Second, the refinancing of homes will now be limited to 90 per cent of the value of a property, down from 95 per cent, meaning that property owners won’t be able to draw equity back down to the five per cent down payment level.

According to the government, this will help make owning a home a more effective way to save. “The impact of this change should be quite limited,” says Alexander. “Less than one-third of refinancing is done by individuals with mortgage loans in the range of 90 to 95 per cent of the value of the property. On the margin, it will act as a small negative for consumer purchases (largely on durable goods) that are financed through mortgage refinancing — but the amount will be small.”

It’s not just first-time buyers who are impacted by the new rules. Investors and buyers looking for a second property will now have to come up with a minimum down payment of 20 per cent for government-backed insurance on properties they don’t live in, up from five per cent. “This measure is likely aimed at tempering speculative buying of real estate by reducing the leverage available to buyers,” Alexander explains. “It will, however, also impact individuals buying real estate for investment purposes more generally, including those looking for rental properties. In rough ballpark terms, the change might impact about five to 15 per cent of new mortgage originations.”

“Anyone buying property, whether they’re first-time buyers or not, will have to get to know the new regulations, of course, but beyond that the changes don’t affect buyers in any way more than a prudent measure to make sure that the consumer can still afford their mortgage five years from now,” Lutz says.

Get ready: The HST is set for July 1, 2010, but sales of new homes where both ownership and possession of the home are transferred after June 2010 are also subject to the HST. 

More Changes
But the evolution of buying real estate in B.C. doesn’t end here. With the province prepping to implement a new form of taxation — the 12 per cent harmonized sales tax (HST) — on July 1, 2010, homebuyers looking at brand-new properties are trying to beat this second looming deadline.

The HST, which is applicable to most goods and services, including new homes and condominiums in B.C. (tax owed on resale properties is not directly affected by the new tax), is the combination of the federal goods and services tax (five per cent GST) and provincial sales tax (seven per cent PST). Currently, new B.C. homes are subject to five per cent GST, in which first-time homebuyers can receive GST rebates (for properties priced between $350,000 and $450,000). On July 1, this five per cent GST will be replaced with the 12 per cent HST — a seven per cent increase in taxes on the total purchase price of a new home or property (albeit two per cent is already embedded in the cost of materials)

It may sound like bad news, but the provincial HST program will give partial rebates for new B.C. homes priced up to $525,000. “Essentially, the government will give these homebuyers a partial five per cent B.C. HST rebate on the provincial tax side, which makes a new B.C. home $525,000 or less no more expensive than it is today,” Lutz explains. “It’s when you go over that ceiling or are looking to buy in more expensive areas that you’ll feel the impact.”

For those who anticipate buying a new home before summer, there will be transitional guidelines surrounding purchases made before July 1, much like when the GST was first introduced. The precise rules will vary depending on several factors but, in general, sales of new homes where both ownership and possession of the home are transferred after June 2010 would be subject to the HST.

Additionally, even for older homes, the HST will apply to real estate closing costs and fees, which could lead to a boost in inventory this spring, as people try to sell their homes before the HST comes in.

The Leighs, who hope to visit more open houses that fit their preferences and budget, say that’s music to their ears. BCHM

For more information on HST on new homes and transition rules, see www.chbabc.org.