October 13, 2010

To Buy or Not to Buy: Is The Harmonized Sales Tax Affecting Your Decision On A New Home?

Does the recently implemented Harmonized Sales Tax (HST) have you in a conundrum with your plans to build or buy a new home? You're not alone. Many Canadians are thinking about the same thing and trying to determine whether to buy now or wait until the upcoming vote to see if HST will be abandoned.  In our blog this week we thought we would explore the pros and cons of HST and the implications it has on buying a new home in the greater Vancouver, BC metropolitan area.

TRUE OR FALSE?
The Harmonized Sales Tax will add to the overall cost of your home.

Answer: TRUE. Bottom line is that the HST that is in place today does add to the total cost of your new home whether you buy from available inventory or build a custom home.

TRUE OR FALSE? If you wait to buy or build, you will save money.

Answer: FALSE. Are you surprised by that answer?  Most people are when we tell them.  Facts and figures support the thought that even if Harmonized Sales Tax is abandoned after the vote, you may end up paying even more for a new home. How can this be? The answer is simple. Interest rates. We ran some numbers to illustrate for you the potential difference in cost to you if you buy today or wait a year or two with the popular assumption that the HST will be voted out.

This example is based on a $1,000,000 purchase and a mortgage of $500,000.

Purchase Price of Home = $1,000,000
Total Tax on the Home = 12% HST
-         5% GST = $50,000 (Before HST was implemented this is the only tax owed. If HST is removed, this will again be the case)

-         7% PST - $70,000 (This is the additional amount that now needs to be paid because of the HST implementation)

-         Rebate offered by government in the amount of $26,250 in lieu of tax increase

-         Total amount of tax now owing = ($50,000 GST + ($70,000 PST - $26,250 rebate (= $43,250)) = Total tax of $93,250

The underlined $43,250 is the extra tax amount owed at present because of HST. When you look at this number, it is easy to see how prospective home buyers would find this number to be daunting.

However, if you take into consideration that interest rates are projected to rise significantly over the next couple of years you can see how those same figures can change dramatically, resulting in higher cost to you.

Buying Today vs. One Year from Now
-         Today’s Interest rate = 3.65% five year fixed
-         One year from today, 1% hike to 4.65 five year fixed

Results:
o Paying $3,348 more per year in mortgage payments

o Paying $16,740 more over the five years of the mortgage

o Paying $24,310.10 more in interest to the bank over the five years

Buying Today vs. Two Years from Now
-         Today’s Interest rate = 3.65% five year fixed
-         Two years from today, 2% hike to 5.65 five year fixed

Results:
o Paying $6,876.84 more per year in mortgage payments

o Paying $34,384.20 more over the five years of the mortgage

o Paying $48,904.91 more in interest to the bank over the five years

Do You Think You Can Afford To Wait?

Assuming the interest rates will rise as projected, you can see how playing the waiting game will likely cost significantly more one or two years from now as opposed to buying a home now and not waiting on the fate of the Harmonized Sales Tax. One of the biggest misconceptions we run into on a daily basis is the notion that buying now with the HST in place, is not a good idea. The reality is that if you are looking to buy, now is a great time simply because interest rates are at an all time low and even if you pay the HST on your home, it will probably result in major savings to you as you'll lock in those low rates.

An interesting side item to note is the increase in buyer interest on land/lot reservations and purchase. Buyers who understand the true impact of HST combined with today's low interest rates are reserving lots and planning their move now. At Wallmark Homes, we felt it was important to talk about HST and how it can affect you in ways you may not have expected. Simply put, from a pocketbook and a lifestyle perspective, it's likely not worth it to wait. Buyers who want to potentially save more money and live in their ideal location should act now, not later.

If you have questions about how the Harmonized Sales Tax will affect you and want to know more about owning a home now and affordability, Wallmark Homes has a team of experienced and qualified new home specialists to help take the confusion out of the process whether you are buying new or building a custom home.