First Time Home Buyer
Being on the path to purchasing your first home is one of the most exciting and most rewarding moments in life! While people don’t always dream of the perfect mortgage, we do grow up dreaming of a white picket fence and our dream home. Even if you imagined your dream home as a 6-bedroom mansion, we all have to start somewhere!
This first-time home buyer section will take you through the important steps and considerations for your first home, including:
● Determining whether you are ready for home ownership
● Costs of home ownership
● The process of buying your first home
● Securing your down payment
● Mortgage pre-qualification and pre-approval
● Financial Approval
● Closing day
Let’s get started.
Before you jump on in, there are some things you should ask yourself. As amazing as it is to be a first-time home buyer, it is important to remember that this is likely the largest financial decision you will ever make. There are a few questions you can ask yourself to make sure you’re ready to take this incredible leap!
1. Are you financially stable?
2. Do you have the financial management skills and discipline to handle this large of a purchase?
3. Are you ready to devote the time to regular home maintenance?
4. Are you aware of all the costs and responsibilities that come with being a homeowner? Let’s find out!
Regardless of whether you choose a mortgage professional or traditional bank, the first step begins with your down payment.
The minimum down payment on any mortgage in Canada is 5% however, putting down more is beneficial when possible as it lowers the amount being borrowed. Nonetheless, if you can only afford the minimum that is perfectly okay! Just remember, if you are putting down less than 20% to purchase your home, default insurance will be mandatory to protect the investment.
Ideally, individuals looking to purchase their first home will have built up a nest egg of savings that they can apply towards a down payment. However, we know this is not possible for everyone so if you don’t have it all saved, don’t worry! Besides being a vital savings plan for retirement, RRSPs can be a great resource for first-time home buyers and can be cashed in for up to $35,000 individually towards a down payment. In fact, most mortgage professionals will tell you nearly half of all first-time buyers use their RRSPs to help with the payment. Those first-time buyers who choose this option will have 15 years to pay the tax back and can defer these payments for up to two years if necessary. Always remember, deferring a payment can increase the time to pay off the loan and you will still owe the full amount!
Another option for securing your down payment is a gift from an immediate family member, typically a parent. All that is required for this is a signed Gift Letter from the parent (or family member providing the funds) which states that the money does not have to be repaid and a snapshot showing that the gifted funds have been transferred.
Once you have your down payment and are ready to realize the dream of owning your first home, you must get pre-qualified!
This process provides you with an estimate of how much you can afford based on your own report of your financial situation. The benefit of this is that it sets the baseline for a realistic price range and allows you to start looking for that perfect home within your means! Now this process is not a mortgage approval, or even a pre-approval, but it helps to establish your budget. You must supply an overview of your financial history (income, assets, debt and credit score) but the real requirements come with the pre-approval process where you submit your actual documentation.
You’re almost there! Financial approval is the last step to getting your mortgage and buying your first home! You will need to keep in mind that just because you are pre-approved, it does not guarantee that the final mortgage application is approved. Being entirely candid with your home-buying team throughout the process will be vital as hidden debt or buying a big-ticket item during your 90-120 day pre-approval can change the amount you are able to borrow. It is best to refrain from any major purchases (such as a new car) or life changes (such as changing jobs) until after closing and you have the keys to your new home!
Phew, you made it! Closing day is one of the most exciting moments where all the house hunting and paperwork really pays off. It is on this day that you will want to make use of your lawyer or a notary.
To complete the process of closing the sale, your lender gives your lawyer the mortgage money. You would then pay out the down payment (minus the deposit) and the closing costs (usually 1-4% of the purchase price). Typically, this payment is done through a bank draft, which will require a bank run ideally 10 days before closing, which is then brought to the lawyer on your closing date. From there, the lawyer or notary then pays the seller, registers the home in your name and gives you the deed and the keys!
Congratulations, you are now a home owner!
New to Canada
Canada has seen a surge of international migration over the last few years. With all these new faces in town wanting to plant roots in this great country, we want to touch base on some of the details surrounding mortgages and how new immigrants can qualify to be homeowners!
Buying a house is an exciting step for anyone, but it is especially so for individuals who are new to the country. As daunting as it may seem, purchasing a home is completely possible with a little knowledge and preparation.
If you are new to Canada and are looking to get a mortgage, connect with a Right Team Mortgage Professional today for expert advice and options that best suit you!
If you are already a Permanent Resident or have received confirmation of Permanent Resident Status, you are eligible for a typical mortgage with a 5% down payment – assuming you have good credit.
Some additional criteria for qualifying includes:
● Must have immigrated or relocated to Canada within the last 60 months
● Must have a valid work permit or obtained permanent residency
● All debts held outside of the country must be included in the Total Debt Servicing Ratio (GDS/TDS)
○ Rental income earned outside of Canada is excluded from the GDS/TDS calculation
● Guarantors are not permitted
● Must be an owner-occupied property if putting less than 20% down payment
For Permanent Residents with limited credit, or individuals who have not yet qualified for Permanent Residency, there are still options! In fact, there are several ‘New to Canada ’
mortgage programs through CMHC, Sagen™ and Canada Guaranty Mortgage Insurance, which cater to this group of homebuyers.
New to Canada Programs
To qualify for these New to Canada programs, you must have immigrated or relocated to Canada within the last 60 months and have had 3 months minimum of full-time employment in Canada.
For individuals looking for 90% credit, a letter of reference from a recognized financial institution OR 6 months of bank statements from a primary account will be required.
If you are seeking credit of 90.01% to 95%, you will need to produce an international credit report (Equifax or Transunion) demonstrating a strong credit profile OR 2 alternative sources of credit demonstrating timely payments (no arrears) for the past 12 months. The alternate sources must include rental payment history and another alternative, such as hydro/utilities, telephone, cable, cell phone or auto insurance.
Another option for New to Canada residents, depending on your residency status and credit history, are alternative lenders such as B-Lenders and MICs (Mortgage Investment Corporation). It is important to note that alternative lenders will require a down payment of 20%.
Alternative lenders cater to individuals who lack a strong credit history or a guaranteed income (recent immigrants, or the self-employed, for instance). As a result, these lenders generally have lower entry qualifications, which are offset by higher interest rates.
Why is Alternative Lending Necessary?
● CRA arrears
● Income issues such as non-traditional income as with self-employed borrowers
● Credit issues such as low credit score, credit arrears, current mortgage or even bankruptcies
● Unexpected liens on title
● Foreclosure situations
● Unique financing needs/opportunities
If you do not qualify for the New to Canada programs, or a standard mortgage, reach out to a Right Team Mortgage Professional and they will help you navigate the alternative options!
Using a mortgage professional will help to ensure you understand your options and they can help you determine the best program and mortgage choice for you. Before you talk with a mortgage professional, there are a few things you need to know when it comes to submitting an application – and getting approved – for your first mortgage in Canada:
Supporting Documents
If you are new to the country and have weak credit, supporting documents will come in handy. These may include: proof of income, proof of 12 month’s worth of rental payments or a letter from a landlord, documented savings, bank statements and/or letter of reference from a recognized financial institution. These documents all paint the picture of whether or not you are a safe investment for a lender.
Build your Credit Rating
This is one of the most important aspects to getting a mortgage, as credit rating determines your reliability as a borrower and will determine your down payment rate. One of the best ways to build your credit is by getting a credit card that you use and pay off each month. Paying other bills such as utilities, cell phones and rent can also contribute to your credit score and reliability.
Start Saving!
One of the most expensive aspects of home ownership is the down payment, which is an upfront cost and one that is vital to securing your future. As mentioned, the down payment can be as little as 5% to 10% depending on your status. However, if you are paying $500,000 or more for your home, the minimum down payment will be 5% for the first $500,000 and 10% of any amount over $500,000.
Choose a Mortgage Provider
Once you are ready to get your mortgage, it is best to contact a Right Team Mortgage Professional who can help you determine the best mortgage solution to suit your needs. They may even be able to find you some extra savings!
Second Property
Are you looking to purchase a second property? That is an incredible opportunity and we are here to help provide you with the keys to success to expand your financial portfolio and ensure stability for the future!
Before you launch into this purchase there are a few things you should know, such as how to purchase a second property by tapping into existing home equity, the differences in requirements for vacation vs. rental or investment properties, and who can qualify.
In the case of purchasing a secondary property, most lenders will allow you to borrow money against the equity you have in your current home and use it as a down payment for a second home. Before jumping in, it is important to understand the different financing options to determine which route best suits your circumstances and property goals.
Refinancing
One option for tapping into your home equity for the purpose of purchasing a secondary property, is to refinance your mortgage. Essentially, mortgage refinancing means getting a reevaluation on your home and then redoing your mortgage based on the current value. This will allow you to tap into the equity your home has built over the years, and pull out the extra funds for a down payment on your secondary property. Keep in mind, when using some of your current equity, it will increase the principal amount and the interest payments on your mortgage as the mortgage is now refinanced at a higher amount.
Home Equity Line of Credit (HELOC)
There is a second option to unlock your home equity, which is through a Home Equity Line of Credit (HELOC). This option allows you to borrow money using the equity in your property, with the property as collateral.
A HELOC serves as a revolving line of credit to allow the borrower to access funds as needed, letting you utilize as much or as little equity. HELOC payments are unique as they are interest only payments unlike regular mortgages, which include principal interest and tax. Another benefit of HELOC is that you are required to only pay interest on the amount you actually use! This can provide financial breathing room, especially during tight months. That said, if you do choose to pay the interest as well as a portion towards the principal, it can help you pay off the loan much faster.
You can utilize a HELOC by tying it to your existing mortgage or applying for it separately.
In Canada, you are able to borrow up to 65% of your home’s value using this method. However, keep in mind, your HELOC balance AND current outstanding mortgage cannot exceed 80% of your home’s value when added together.
Buying a vacation property is essentially like purchasing a second home. The minimum down payment is still 5% of the purchase price and will require the same process as your first mortgage. However, if you are purchasing a non-winterized vacation home, or will not have year-round access, then you will be required to put down 10%.
It is also important to disclose if you plan to use your vacation home to provide rental income, as this will change the requirements.
If you are purchasing a secondary property – whether a vacation home or an investment property – there are a few differences if the intention is to rent it out. Before you look at purchasing a rental property, consider the following points:
1. The minimum down payment required is 20% of the purchase price, and the funds must come from your own savings. You cannot use a gift from someone else.
2. Only a portion of the rental income can be used to qualify for and to determine how much of a mortgage you can afford to borrow. Some lenders will only allow you to use 50% of the added income, while others may allow up to 80% of the rental income while subtracting your expenses. This can have a much higher impact on how much you can afford.
3. Interest rates will usually have an added premium on them when the mortgage is for a rental property vs. a mortgage for a home someone intends to live in. The premium can be anywhere from 0.10% to 0.20% on a regular 5-year fixed rate.
Rental income from the property can be used to debt service the mortgage application, but do bear in mind that some lenders will have a minimum liquid net worth requirement outside of the property.
Along with the added monthly cash flow, rental properties have a further benefit of being able to write-off interest on ANY money used for the rental, even if it is pulled from your primary home’s equity. Also, if you do eventually want to sell this property, note that it will be subject to capital gains tax. It is best to ask your accountant about these tax write offs.
You might be surprised to learn that you do not need to be one of the uber rich or make six figures to have a second property. You just need to have the right knowledge, determination and a financial plan!
Before taking on a secondary property, you will need to have your down payment in order (whether from savings or home equity) based on the minimum requirements. It is also important to have a sufficient credit score to qualify (680 or higher) for a conventional mortgage. However, if your credit score has not reached 680, there are still options. Alternative or B Lenders can be great solutions for individuals with credit challenges, while still helping you purchase your dream home!
You will also need to pass the stress-test to prove that you can financially carry both mortgages. Also keep in mind, there may be potential barriers with lenders as most will limit the number of mortgages within a portfolio. If this is only property number two or three, you should not have any concerns. However, as you expand your portfolio, you may run into a limit at five properties (at which point you would be considered a commercial file).
Moving
Life is constantly changing. As a result, your current home may no longer be suitable for you.
If you are feeling cramped in your tiny apartment or have a little one on the way, it may be time to consider moving on up! For those of you who feel that your current home is too big, or requires too much maintenance, then now might be a good time to downsize!
If the answer to moving is yes, there are some things to consider, such as your current mortgage and potential costs of moving.
If you are wanting to up or down-size your home, and are doing so during your current mortgage cycle, there are a few things to keep in mind. The first is that making any change to your mortgage during your mortgage term is considered “breaking” the mortgage.
Portability
If your mortgage is portable, moving up and scaling down will be much simpler. If you are unsure of the term “porting” your mortgage, it refers to taking your existing mortgage (including your rates and terms) and transferring it from the original property to another. This can only be done if you purchase a new property while simultaneously selling an old one. However, unlike mortgage refinancing, porting does not require you to break your mortgage or pay penalties.
Consider The Penalties
Whenever you break your mortgage, you must face the associated penalties. Depending on the type of mortgage you have (variable vs. fixed-rate) and how much time is left (1-year, 2-years, etc.), it will determine the level of penalty. Typically, these are calculated in one of two ways:
1. Interest Rate Differential:
In Canada, there is no one-size-fits-all rule for how the Interest Rate Differential (IRD) is calculated and it can vary greatly from lender to lender. This is due to the various comparison rates that are used. However, typically the IRD is based on the following:
● The amount remaining on the loan
● The difference between the original mortgage interest rate you signed at and the current interest rate a lender can charge today
Ideally, you will want to be aware of what your IRD penalty would be before you decide to break your mortgage as it is not always the most viable option.
2. Three Months Interest:
In some cases, the penalty for breaking your mortgage is simply equivalent to three months of interest. A variable-rate mortgage is typically accompanied by this penalty.
Re-Qualifying
If you are unable to port your mortgage, you would need to re-qualify for a new mortgage at the current rates offered by lenders and would be subject to government changes – including recent “stress test” rules.
What to expect? The stress test and its most recent rules.
The Stress Test was originally introduced in October 2016 for insured mortgages (down payments of less than 20%), but as of January 1, 2018 this now includes all mortgages, regardless of down payment percentage. This test determines whether a home buyer can afford their principal and interest payments, should interest rates increase. It is based on the 5-year benchmark rate from Bank of Canada or the customer’s mortgage interest rate plus 2% – whichever is higher.
When it comes to moving on up, it can be exciting and rewarding, as long as you consider all of the costs. When up-sizing, some of the costs to consider include;
● Costs to sell your current home
● Purchase price on the new home
● Property Transfer Taxes
● Realtor fees (typically 2.5-5% of the homes selling price)
● Home ownership costs
If you are moving up from a condo or apartment to a single-family home, you will save on strata fees; but it is important to realize that you will now be responsible for all of the maintenance of your home. To ensure financial success, it is a good rule of thumb to save 1% of your new home’s purchase price per year, for maintenance. For instance, if you purchase a $600,000 home then you would want to try to save $6,000 per year.
Making the move to a larger home is both an exciting and daunting process – but it is doable with the right preparation.
Regardless of your current situation there are some costs that go with selling your existing home and moving to something smaller or more affordable. These costs include:
● Realtor commission fees, which range from 2.5-5% of the home selling price
● Closing costs and legal fees, which are 1-4% of the purchase price on the new home
● Miscellaneous costs such as moving expenses, upgrading appliances and/or buying new furniture
● If you are moving into a condominium or townhouse, there are potential strata fees to consider – even if you are mortgage free
Most individuals looking to scale down are looking to do so for retirement or because they are now empty-nesters. However, if you are looking to downsize simply due to being unable to manage your mortgage or maintenance costs, there is an option called “Reverse Mortgage”. A Reverse Mortgage is a loan secured against the value of your home. It is exclusively for homeowners aged 55 years and older and enables the homeowners to convert up to 55% of the home’s value into tax-free cash. With a reverse mortgage, you maintain ownership of your home and can use the loan to cover costs or pay out debts. The loan would need to be repaid in the event that you choose to move and sell the current home.