The Bank of Canada seems to be sticking to their plan of keeping interest rates low until June 2010. Which is a good indication that the variable mortgage rates will remain low. While this sounds promising to homeowners who are buying and/or selling within the next seven months, many of us are wondering what’s going to happen with interest rates after this date? And as we’re trying to predict what the rates will be like, Ontario and B.C. are conveniently going to be paying extra taxes when the Harmonized Sales Tax (HST) comes into effect July 1, 2010.

So potentially higher interest rates and additional taxes are on the horizon – sounds like a double whammy right? You see, the additional tax is going to affect everything we currently don’t pay PST on: groceries, haircuts, clothes, etc. This also includes most of the home purchasing closing costs such as lawyer fees, home inspections and real estate commissions. To top it off, the current 5% GST we pay on new homes will now increase by 7 – 8%. Homeownership is going to get a little more expensive come July 2010.

So what exactly is the HST and how will it affect the provinces of Ontario and BC?

The HST is a sales tax that combines both the PST with the GST. In Ontario, this tax will be 8% PST + 5% GST equalling a new 13% HST. In BC, this will mean adding up the existing 7% PST + 5% GST resulting in 12% HST. When the new tax becomes effective, GST/PST will be completely eliminated and everything will instead require HST, minus certain exempt items that can be found on the Revenue Canada website.

While the HST will take effect in BC and Ontario on the same day, key differences exist between how the tax was introduced and the rebates each province will receive.

In Ontario, Dalton McGuinty introduced the HST in January 2009. Despite negative reactions, it was announced in March 2009 that the HST would take effect in July 2010. When this tax was introduced, the public was also promised a family rebate to “offset” some of the tax burden. Rebates introduced to counter balance the effect of the sales tax totals $1,000 for families with an income below $160,000 and $30 for singles with an income below $80,000.

While Ontario has been preparing for the July 2010 transition to HST since March, BC didn’t make this announcement until this past July. The announcement came as a complete shock to businesses and residents. There was no warning or consultation and no family or individual rebate offered.

How will the HST affect real estate

Regardless of when it was announced, both provinces will face increased taxes. Resale homes will be exempt but new home sales will be affected. However, in both cases, the services required to run a home and sell a home such as utilities, real estate commissions, home inspections and legal fees will increase by 8% or 7% (depending on the province you live in).

For new home sales, according to the Ontario Real Estate Association, the HST will add $1,747 to $2,297 to a home costing less than $400,000. Here is a breakdown of the typical increases we’ll see in both Ontario and BC:

$470 for mortgage insurance/life insurance;

$80 for legal costs;

$32 for home inspection;

$1,150 to $1,700 for real estate commission.

To help ease the burden, both the Ontario and the BC governments have promised rebates for all home buyers purchasing new homes regardless of the price of the house (resale homes don’t qualify).

Rebates up to $24,000 are promised on the first $400,000 of the purchase price. This rebate is also extended to new residential rental properties.

Yes, all new homes, regardless of their price, are going to be seeing a maximum rebate of $24,000. However, the price for a new home will increase by 8% in Ontario and 7% in BC. Meaning, a $400,000 house will still increase by approximately $8,000 after the rebate, plus you’ll have to pay the additional taxes on top of the closing costs.

Other areas being affected by HST

Residential landlords will see an increase in the costs to house tenants. Items required to operate a building such as maintenance, electricity, plumbing, etc., will now be subject to the additional tax. Landlords may be forced to increase rent as a result.

The home construction industry is also expected to suffer. All new homes are subject to the combined tax and builders are worried this will cause the market to collapse when it was just getting back up to speed, even with the promised rebate. The past few months have been seeing extremely high rates of housing starts, rising to the highest levels in March. Starts were up to 55,700 in October (up 14.8% from September) in BC and up 13% in Toronto reaching 34,200 in October.

While builders have seen a promising recovery in their industry over the past few months, they’re now worried consumers will once again crawl back into hiding after July. Therefore, many are working overtime to get projects done before the deadline.

The HST is arriving at a time when we’ll still be recovering from the hard-hit recession. Yes consumer confidence in the real estate market has increased but this has been a result of lower prices and record-low interest rates. Now with the new tax coming at a time when interest rates are predicted to go up, new home sales and starts may once again stagnate.

The real estate market experienced a depressing winter last year, with real estate agents and lawyers losing out on a lot of money. While this winter looks more promising, lawyers, agents and builders will have to work to maintain consumer confidence into the summer; whether this is through discounts, packaged deals or attractive home prices. If you’re thinking about purchasing a new home, you may want to look into it now so you’re not caught in the potential crossfire between hiked interest rates and added tax.

Caroline
PR@RateSupermarket.ca

Related posts:

1. Scotiabank Believes Fixed Rates Will be Higher by July 2010
2. July 2010 Update – Mortgage Rate Outlook
3. Canadian Home Sales Slow in February 2010
4. RateSupermarket.ca’s Expert Mortgage Panel Divided but Consensus Expects Rates to Remain Low in Early 2010
5. Are Mortgage Rates Heading Lower in February 2010?

Tags: bank of canada, Housing Market, HST, Interest rates, mortgage, mortgage rates, taxes