We always like to get our clients thinking about home equity and how it helps grow their wealth. So, a big question for many of our clients is, which type of home generates equity faster: New Homes or Resale? Here we help shed some light on which home provides faster returns.
New Homes vs Resale Prices
Let’s start with pricing. Generally speaking, the price of new houses for sale in Toronto will be lower than a resale home. This is because most new builder houses are located much further out from the downtown core. Although you can find opportunities in Toronto, they tend to be customized “executive” homes built on existing properties. These homes run higher, as they are in more desirable locations. At the time this blog was written, resale homes for sale in Toronto in the 416 area were about $185,000 more than homes in 905 areas. When it comes to new homes however, the difference can be much higher depending on the location.
Additional Costs of New Homes
Resale homes tend to be a what you see is what you get situation. However, with new homes you pay a base price and then face common additions that push that price up such as fencing and landscaping, appliances, or air conditioning. Although most builders offer bonuses, such as free appliances, it’s important to understand exactly what is and isn’t included when buying new. Otherwise, it can cost tens of thousands more once all is said and done.
GST/HST for New Homes
Unlike resale homes, the government charges 13% GST/HST on newly built homes. You pay 8% to the province and 5% to the federal government. Both governments offer a rebate. However, the GST portion only applies to homes under $450,000. In Ontario you can claim 75% of the HST but it’s capped at $24,000. The GST/HST on a new home costing $1,000,000 would break down as follows:
- GST/HST: $130,000
- Total cost: $1,130,000
- Rebate for GST: $0
- Rebate for HST: $24,000
- Final cost: $1,106,000
In theory, if you found a resale home for the same price, you’d save $106,000.
Both new homes and resale homes at current Toronto prices will require a 20% down payment. However, your builder will expect down payment installments up front. This can be 5% to 10% of the sale price due at 30-, 60- and 90-day marks, or in some cases based on milestones like the completion of the house frame, windows, roof, etc. With a resale you don’t contend with more than a 5% deposit at the time of the sale, with the down payment not due until closing.
If you pre-qualify for a resale mortgage, your interest rate is guaranteed for up to 120 days. However, with new homes, you’re looking at whatever interest rates exist 30 days before you take possession which can be years away. This can pose a serious financial challenge.
It used to be you could sell a new home once it was built for an impressive profit. Buyers loved buying a practically brand-new home without the wait. However, builders caught on to this scheme, and now hike up their prices to reflect the projected average home price at the time the home is scheduled for completion. This eats into your profits. As well, if you want to benefit from your GST/HST rebate, you have to wait 12 months from your closing date before selling. For resale homes, since you don’t pay GST/HST this isn’t an issue. In the current market, it is possible to see excellent equity in just a few months depending on your down payment and location.
The Bottom Line
Although you might pay less for a new home, a resale home still builds equity faster. You always pay current market value and can sell whenever you want. With a new home you have to wait 12 months from closing to see the benefits of your GST/HST rebate, and pay a price based on what your builder figures your home will be worth once the home is finished. This reduces your equity building potential.
If you’re looking for a team of Toronto realtors to help build your wealth, the Christine Cowern Team’s got you covered. Give us a call at 416.291.7372 or email us at firstname.lastname@example.org. We’d love to work with you!