Over the past few weeks I’ve been getting a lot of questions about the new mortgage rules announced earlier this month. I thought it would be helpful to provide some clarification.
1. Expanded stress test to include all new insured mortgages.
Before the new legislation, applications for insured high-ratio mortgages (less than 20 per cent down payment) were stress tested to ensure the borrower could handle an interest rate increase.
Now applications for ALL insured mortgages will be subject to a stress test. As well as qualifying at the negotiated mortgage rate, borrowers will have to qualify at the Bank of Canada five-year fixed posted mortgage rate, which is generally a couple of percentage points higher.
Additionally, the borrower’s total Gross Debt Service Ratio (percentage of gross annual income spent on housing expenses such as taxes, hydro and mortgage payments) must not exceed 39% and their Total Debt Service Ratio (same as above but including all other debts such as car loans, student loans or credit cards.) must not exceed 44%.
The impact of all of this will mean a reduction in the amount borrowers will qualify for. First time home buyers, who are already struggling to buy into a seller’s market, will be hardest hit by this change.
2. New criteria for insurance on conventional mortgages
Before the new legislation, conventional insured mortgages were exempt from some of the restrictions placed on high-ratio insured mortgages,
Now there are a number of criteria restricting the insurance for even low ratio mortgages such as:
- amortization period of less than 25 years,
- purchase price of less than $1 million,
- borrower credit score of 600 or higher, and
- property must be owner-occupied.
These changes are intended to limit the government's risk exposure in overheated, high-priced markets like Toronto and Vancouver.
3. Reporting sale of primary residence to the CRA.
Before the new legislation the sale of a primary residence was exempt from capital gains tax and therefore not reported to Revenue Canada .
Now the sale of a primary residence must be reported to Revenue Canada, however the sale is still exempt from capital gains tax.
This change is intended to expose non-resident speculators who might be claiming a primary resident tax exemption.
4. “Lender risk sharing” on the horizon?
Currently the Canadian government shoulders 100 per cent of the risk in the event of default on an insured mortgage. This is not the norm internationally.
The government is proposing that Canadian mortgage lenders should share some of the risk.
If, in future, mortgage lenders do assume a greater risk, the added cost to them will be passed on to borrowers either by interest rate hikes or other fees.
Finding the right home is a bit like falling in love. Of course, there is the practical side of choosing a home. It should meet your needs in terms of price, number and size of rooms, location, parking, etc. But there is also an intangible element to it, an emotional quotient, so to speak. Here are a few signs to watch for to help you figure out which property is the right one for you.
Is there chemistry? When you walk into a property for sale, sometimes it just feels right. There’s an immediate sense of ‘yes, this could be the one’. Maybe it has a special feature you like. Or the space has a good vibe. Or the light is just right. Or it reminds you of something.
You can see the future together. It is usually a good sign if you can mentally see yourself living in the space or you can picture your stuff in it.
You try to convince others that it is the right property. Often when we’re not sure if something is good for us, we ask the advice of those around us. Sometimes, we don’t like what they have to say. You can tell that you’re really into a particular property when you try to convince those around you that it is right for you even when they raise objections.
Nothing else measures up. If a property you have visited becomes the benchmark against which all others are compared and none of them match up, that could be a sign.
Finally, if you can’t get the property out of your mind and it becomes a subject of daydreams, it is probably the right property for you.
If you need a hand finding the home of your dreams, please give a call. I’d be happy to help.
With the Spring market about to heat up, and prognosticators saying this year will be every bit as hot as 2015, it might be a good idea to pre-plan how to make your real estate offer stand out in the unfortunate case that you find yourself in a competition for the property of your dreams.
Pre-Approval. I’ve written about this before. It’s essential to include proof that you have been pre-approved for a mortgage and not just pre-qualified. Pre-qualified is far less guaranteed of a loan than pre-approved. This assumes, since most of us don’t have heaps of money lying around, that you need financing. If you can pay cash that would be your absolute best chance of securing the winning bid.
Good deposit. The deposit, sometimes known as ‘earnest money’ helps to show the sellers how serious you are. If you can pull together a decent deposit, it will make a favourable impression compared to those who offer to put down the minimum.
Flexible closing. If you are able to cater to the sellers’ wishes when it comes to closing date, offer to do so. Most sellers are unable to buy before they sell, so they face incredible pressure to find a suitable home in a short period of time. Extending closing to 90 or 120 days will alleviate a bit of the pressure for them to find a new home and get their belongings packed up and moved.
Clean offer. Omit as many conditions as possible. The sellers will want to accept an offer with the greatest chances of a successful outcome. They don’t want to have to put the property back on the market. If you’re in a competition, the fewer conditions the better. My only caveat to this is that you should always include a home inspection. Make it quick though - no two-week long timeframe for the home inspection condition.
Make it personal. For some sellers, moving is an emotional experience and visualizing the ‘right’ people living in their house helps to ease the transition. What is the ‘right’ people you ask? Who knows? Everyone is different. Once I heard of an offer being rejected because the young couple buying wasn’t married and the elderly couple selling had a strong opinion about being married. They are entitled to their opinion.
To avoid potentially revealing that you are not the 'right' people, don't talk about yourself, I suggest you write a letter focusing on what you love about the house and the neighbourhood and why you want to live there.
Your REALTOR should have already called the listing agent to try to find out if the sellers have any hot buttons that you can use to your advantage. If not, ask your REALTOR® to make that phone call so you can put together the most attractive offer from the standpoint of the sellers.
Here in the GTA there are literally hundreds of different neighbourhoods each with its own pluses and minuses. So how do you narrow down where to start looking when it comes time to look for a new home? Here are some thoughts.
First, think about what matters to you. It may not the same thing that matters to your friend or your co-worker. That’s okay because they won’t be living there. You will. Examine your lifestyle for clues. Here are some questions to get you started.
So you’ve decided to buy your first home. That’s great! Even with the help offered to first-time home buyers through CMHC, you will still need to pull together a down payment. Here are 10 ways to help you save the down payment in record time.
Move back home. Save on rent payments by moving back in with mom and dad (if they’ll have you) temporarily.
Get a second income. Look for something you can do in the evenings, on the weekend or possibly seasonally.
Move to a less expensive rental. Think about whether you can reduce costs by moving to a different location or getting a smaller rental space.
Hi Roomie. As another option to reduce rental costs, consider looking for a roommate to share your space.
Take public transit and sell the wheels. In most cases, traveling by public transit is much more cost effective than owning a car. Save on parking, gas, insurance and maintenance by exchanging in your car for a transit pass.
Lose the landline and cut the cable. Many people no longer have land phone lines or cable TV, but if you do, consider disconnecting and save the monthly fees.
Brown bag it. Paying for lunch out every day can really add up compared to buying food at the grocery store and preparing your own lunch.
Eat at home. As above, eating dinner out at restaurants frequently is an extravagance that few first time home buyers can afford. This is not to say you can’t enjoy a night out, but make sure it is the exception and not the norm.
Skip a trip. The cost of vacationing can really add up. Think of the airfare, hotel cost and restaurant bills. Foregoing one or two vacations can make a fast impact on your down payment if you put the money towards it instead.
Put a cap on extravagant purchases. This doesn’t just apply to your own clothes-shopping addiction, but also to gifts that you give. Set a budget and stick to it and achieve your dream of home ownership that much sooner.
With the cost of owning property skyrocketing in cities like Toronto and Vancouver, more and more first time homebuyers are turning to income suites to help get them into the market. Shows like HGTV’s Income Property make it look easy enough to do. Before you take the plunge let’s take a reality check and look at some of the pros and cons.
The Extra Money. Whether used to get into a place you otherwise couldn’t afford, reduce living expenses or to try and pay down the mortgage faster, the extra money is the obvious benefit to having an income suite.
Property Values. An income suite can add to the value of the property. Adding an income suite provides the highest ROI of any home renovation project.
Lack of privacy. You will be sharing space with a tenant whom you may or may not feel comfortable around.
Landlord responsibilities. Being a landlord means being ‘on call’ to fix problems the tenants are having with the property. Living in the same house with your tenant means being on call 24/7.
Residential Tenancies Act. Even though you’ve spelled out the lease terms, including rules, notices and penalties for non-payment, it can be very difficult to remove a difficult tenant and/or get paid for rent in arrears. Be sure to do a thorough background check before renting to anyone you don’t know! We don’t want to read your story of a nightmare tenant in the newspaper.
Hidden costs. Besides the cost of upkeep of the income unit there may be other expenses as well. Insurance premiums could increase. But it’s best to inform your insurance company as they might be able to deny a claim if they discover an income suite they didn’t know about. Rental income is taxable income that must be reported on income tax returns and could increase what you owe. Lastly, an income suite is considered an investment and could be subject to capital gains tax when you sell.
Before you make the decision to buy a property with an income suite, be sure to consider the pros and cons and ask yourself if the benefits are worth it to you.
One day, when I worked on RBC's ad campaigns, I was waiting with our RBC clients for a new copywriter to join our briefing session for a mortgages project. The 20-something writer joined us and the session began. In a short while the writer asked for a pause in the meeting so he could ask a question. “What is a mortgage exactly?” he asked. Most of us were stunned by the question but, upon reflection, it made perfect sense. Until you consider buying your first property, learning the ins and outs of mortgages isn’t a priority.
For those of you considering buying a home, here’s a primer on mortgage lingo.
Principal vs. Interest. The principal is the amount of money you are borrowing to buy the property. The interest is what the lender is being paid to lend you the money.
Fixed vs. Variable Rate. A variable rate mortgage has an interest rate that fluctuates with any changes in overall interest rates. If interest rates go down, more of your payment goes towards the principal. If they go up, less of your payment goes toward the principal and more toward the interest portion. If interest rates are expected to go down, a variable rate might be best.
A fixed rate means that the interest rate will remain the same for the term of the mortgage. If interest rates are expected to rise, a fixed rate might be best.
Open vs. Closed Mortgage. An open mortgage means that it can be partially or fully repaid at any time without penalty saving the homebuyer a lot of money in interest.
A closed mortgage means the opposite – that there would be a penalty if you chose to prepay, renegotiate or move the mortgage before the end of the term.
Amortization vs. Term. Amortization is the total length of time it will take to repay the mortgage, generally 15 or 25 years. The term is the length of the contract you undertake with the lender usually 2, 3 or 5 years after which time you will need to renegotiate a further term.
The thing to keep in mind when considering a mortgage is that rate is not everything. Look for payment alternatives such as bi-monthly or every two weeks payments that will greatly reduce amortization time. Also look for annual pre-payment or skip-a-payment options that many lenders offer even on their closed mortgages.
If in doubt your REALTOR® can introduce you to a mortgage specialist who will take you through your various options.
Lots of pundits have weighed in on each side of the rent vs. buy debate but I’m adding my voice to this question as I believe firmly in the concept of owning if you can.
Those on the side of renting cite the flexibility of not being tied down financially and not having the maintenance or cost of upkeep associated with owning. Some of the hidden costs of home ownership are things like home insurance and property tax which you will continue to pay long after your mortgage is paid off.
The obvious answer as to why it pays to buy is that you build up equity in a home over time rather than building up equity for your landlord. And a little (or a lot) of equity does a number of things for you: It provides a safety net you can fall back on if necessary. Used as security against a loan, it provides a less expensive way to borrow. And you can use it as a downpayment to step up in the market should your housing needs change. Even if your home never appreciates in value, the equity you build is a useful thing.
In a growing housing market, the value of your home increases while your payments do not. In Toronto home prices have increased by about 6% year-over-year for the past ten years. And, with interest rates continuing at all-time lows, it is a great time to buy. The big caveat here is that interest rates will go up at some point, perhaps substantially. Those who are on the fringe of home affordability now, may no longer be able to afford their payments at a higher interest rate.
But my favourite reason for believing in buying a home is that it becomes a kind of “forced” savings plan. Some people, myself included, have a difficult time committing to retirement savings plans. A home can be a sort of retirement savings plan. After years of paying down equity along with some increase in property value, you can downsize your home in your golden years and use the proceeds towards living expenses.
If you’re convinced and ready to take the home buying plunge, a @REALTOR is ready to help.
We’ve all heard them: stories about people who’ve had really bad experiences with home insurance because they thought they were covered for something when, in fact, they were not. So a word to the wise: know what your home insurance policy covers.
At its most basic, home insurance will cover the cost of replacing your freehold home (just the interior of your condo unit), the contents in your home and protect you from personal liability should there be an accident involving someone while at your home.
Insurance policies will generally not pay out in cases where damage is predictable (i.e home built in a flood plain and subsequently flooded) or preventable (frozen pipes inside a home that burst due to homeowner negligence). Some forms of disaster are not automatically covered, such as damage due to sewer backup, mudslide or earthquake although extra coverage can be added with an additional premium.
It is generally recommended that you purchase enough insurance to re-build your home – keep in mind that this is the replacement cost of the home and doesn’t include the property or reflect market value.
Generally, furniture, appliances and clothing are covered by home insurance. There may be limits to how much you can claim on certain items, notably computer equipment, stamp or coin collections and jewelry. It is best to specify items of value in a special rider in order to ensure they will be covered in the event of loss or theft.
As with most things, there are different types of policy available for all budgets:
Comprehensive Insurance guards against the widest range of claims
Basic (or “named perils”) offers coverage on perils set out in the policy
Broad offers comprehensive coverage of your house but limited coverage of contents.
No frills very low coverage for a property that doesn’t meet the criteria necessary for other types.
Another way to manage the ongoing cost of insurance premiums is to negotiate a higher deductible. A deductible is the amount of money you pay out of pocket against a claim before the insurance payments kick in. Even agreeing to up the deductible by a couple of hundreds of dollars can make a difference in premiums.
Home insurance is not a legal requirement of home ownership, however most mortgage lenders require it. Likewise, most landlords require tenants to have tenants insurance to cover damage to the rental unit caused by the tenants or their guests and to cover the tenant’s belongings.
This month let’s take a look at two programs aimed at helping first time home buyers achieve their home ownership goals.
The Home Buyers Plan (HBP) is a federal program that allows first time home buyers to withdraw up to $25,000 from their RRSPs to use as a down payment. Normally if you withdraw money from an RRSP you are taxed at source. This means that if you wanted $20,000 in hand you would have to withdraw a higher amount to reflect the tax repayable to Revenue Canada. The lender would remit that extra amount to Revenue Canada as part of the transaction. With the HBP there is no tax penalty but there are repayment requirements. Generally you are required to pay this amount back into your RRSP within 15 years in annual increments.
Typically mortgage lenders look for a down payment of more than 20% of the purchase price of the home. For most first time home buyers this would put their dreams of home ownership out of reach. To aid those with low down payments, the federal government has created a program where high ratio mortgages (those with less than 20% down) are acceptable as long as they are insured. The insurance premiums are added to your loan repayment amount.
To be clear here, the insurance directly benefits the lender in case you default on your obligation. It benefits you by making the lender less risk averse and more likely to approve you. The Canadian Mortgage and Housing Authority, as well as a few private insurers, provides insurance for high-ratio mortgages. Your lender can help you to find the best mortgage insurance for your situation.
If in doubt, speak to a REALTOR® before you start your home search and they can walk you through the down payment requirements.
Caveat emptor. Let the buyer beware. That truth has given rise to the industry of home inspection. Sometimes even the most attractive homes are hiding expensive problems behind freshly painted walls. If money were no object, it wouldn’t be a problem. But for most of us, we budget a certain amount for accommodation based on our income. Costly repairs could set us up for years of unanticipated debt repayment.
Enter the home inspector. He or she will inspect the major systems and components of the house such as the heating, cooling, plumbing, electrical, roof and foundation. Usually they provide a written report outlining the condition of the elements they’ve inspected with an indication of how much longer they expect the element to continue to perform without needing to be repaired or replaced.
The buyer’s REALTOR® will write the agreement of purchase and sale to be conditional on having a home inspection. Once the home inspection report is provided, the buyer can make an informed decision about how to proceed. The options are to:
a. walk away from the purchase if the report suggests a lot of work is required.
b. ask the seller to either make repairs, or reduce the cost accordingly (which the seller is under no obligation to do).
c. waive the condition and finalize the deal.
Always be sure to choose a home inspector wisely. In Ontario there are currently no minimum qualifications or requirements for becoming a home inspector. The Ontario Ministry of Consumer Services recently commissioned a study on the issue. One of the recommendations is to regulate and license the home inspection industry to better protect the public.
Your REALTOR® will be able to refer you to a home inspector whom they’ve used and trust.
For those considering buying a home, one question is usually should I buy a condo or a freehold? While everyone has their own reasons for ultimately choosing one over the other, here are a few points to consider.
In Toronto we often tend to think of a condo as being a loft or apartment. While that may be true, a condo is actually a type of ownership where owners own their individual units and share the expense of the common elements such as driveways, garages, pools and fitness rooms. Condos come in all shapes and sizes from townhouses to detached to common element only (country club model). The monthly maintenance fee pays your fair share of upkeep of property and common elements.
For those who lack the time to mow the lawn and shovel snow, a condo can be a great idea and they are generally less expensive to purchase than freehold.
The downside is that the condo rules dictate some things, i.e., exterior window coverings must be off-white, and forbid others, i.e., no pets. Inside one’s own unit, an owner usually has the freedom to make upgrades and design decisions.
Some argue that the monthly condo fee is money lost as opposed to it going straight toward the mortgage (as with a freehold) and ultimately building equity faster.
Another key downside in this shared ownership model is that each owner shares in the financial liabilities of the condo as well. While the reserve fund is intended to cover the cost of major repairs, there could conceivably be some circumstances where an unexpected cost could impact on an owner’s pocketbook.
With a freehold home an owner has, as the name suggests, more freedom. Along with that freedom comes the need to maintain the home and look after any major repairs such as replacing the roof.
Freehold homes tend to offer better resale potential than condos and generally have more space.
There was an interesting article in the June 2014 issue of Toronto Life about “condo kids” that is, children born to parents living in condos. Parents cited issues including lack of space for kids’ stuff and for kids to play as well as lack of nearby resources for kids, i.e., parks, daycares or schools . If you’re considering starting a family, I’d suggest you read this article before deciding to buy a condo.
Early in the home buying process, prospective buyers need to decide whether or not they will use a mortgage broker to secure a lender or if they will contact lenders directly themselves.
Over the past decade the percentage of borrowers using mortgage brokers has increased by over 10 percentage points to 40% and is slightly higher again for first time buyers at 45%. And no wonder. Mortgage brokers understand the mortgage market and will do the legwork involved in preparing paperwork, pulling a credit report and negotiating multiple quotes. For borrowers unsure of or unable to do their own comparison-shopping, working with a mortgage broker is a good decision. And since the lender pays the broker, there is usually no cost to the borrower.
That said, the mortgage market is extremely competitive with lenders all striving for market share. If a borrower falls within the lending criteria of a bank or has a history of multiple products with a bank, chances are quite good that they will be offered a very competitive mortgage package, as good as the broker would be able to secure.
If you are “outside of the box” of the Banks’ risk tolerance model, for example with poor or no credit history or buying something outside of a principle residence, consulting a mortgage broker is a good idea. Mortgage brokers source lending from multiple sources including trust companies, insurance companies and private lenders so they will likely have a product for every borrower scenario.
Either way you decide to go, mortgage broker or bank; make sure that you take the time to find an individual you’re comfortable with. Brokers and loan officers are both paid by the lender, not the borrower so be sure that whomever you work with is looking out for your needs first and foremost.
Did you know: Of Canada’s big five banks, only TD, CIBC and Scotia sell mortgages through the broker network. RBC and BMO do not.
Buying a home for the first time can be a bit bewildering with potentially more than a few unforeseen expenses. Rather than find yourself in this position when the time comes to make an offer, take a look at this primer on closing costs.
Legal fees – Your lawyer’s role in the transaction will be to review the offer, register the mortgage documents, complete the title search, register the deed with Land Titles and work with the Seller's lawyer on the statement of adjustments. Generally legal fees average about $1200.
Property Tax and Utility Adjustment – You, the Buyer, are responsible for property taxes and utilities on the date of adjustment (generally the day of closing). Anything pre-paid by the Seller for beyond the date of adjustment is credited to the Seller in the Statement of Adjustments.
Land Transfer Tax – In Ontario, property sales (subject to some exceptions) are subject to LTT. For illustration purposes the LTT on a $400,000.00 single-family home purchase in Mississauga would be $4,475.00. The same home in Toronto would be subject to Municipal Land Transfer Tax (MLTT) of $3,725.00 in addition to the LTT for a total of $8,200.00.
Some of the other costs you may encounter are: Home Inspection, Property Survey, Title Insurance, Mortgage Insurance, Homeowners Insurance, HST/GST (depending on type of property), Interest Adjustments and moving expenses.
One piece of good news. Your realtor’s commission (2.5-3% of the purchase price) is paid by the Seller, not by you.