5 MISTAKES FIRST TIME HOME BUYERS MAKE

Buying a home might just be the biggest purchase of your life—it’s important to do your homework before jumping in! We have outlined the 5 mistakes First Time Home Buyers commonly make, and how you can avoid them and look like a Home Buying Champ.

1. Shopping Outside Your Budget
It’s always an excellent idea to get pre-approved prior to starting your house hunting. This can give you a clear idea of exactly what your finances are and what you can comfortably afford. Your Mortgage Broker will give you the maximum amount that you can spend on a house but that does not mean that you should spend that full amount. There are additional costs that you need to consider (Property Transfer Tax, Strata Fees, Legal Fees, Moving Costs) and leave room for in your budget. Stretching yourself too thin can lead to you being “House Rich and Cash Poor” something you will want to avoid. Instead, buying a home within your home-buying limit will allow you to be ready for any potential curve balls and to keep your savings on track.

2. Forgetting to Budget for Closing Costs
Most first-time buyers know about the down payment, but fail to realize that there are a number of costs associated with closing on a home. These can be substantial and should not be overlooked. They include:

• Legal and Notary Fees
• Property Transfer Tax (though, as a First Time Home Buyer, you might be exempt from this cost).
• Home Inspection fees

There can also be other costs included depending on the type of mortgage and lender you work with (ex. Insurance premiums, broker/lender fees). Check with your broker and get an estimate of what the cost will be once you have your pre-approval completed.

3. Buying a Home on Looks Alone
It can be easy to fall in love with a home the minute you walk into it. Updated kitchen + bathrooms, beautifully redone flooring, new appliances…what’s not to like? But before putting in an offer on the home, be sure to look past the cosmetic upgrades. Ask questions such as:

1. When was the roof last done?
2. How old is the furnace?
3. How old is the water heater?
4. How old is the house itself? And what upgrades have been done to electrical, plumbing, etc.
5. When were the windows last updated?

All of these things are necessary pieces to a home and are quite expensive to finance, especially as a first- time buyer. Look for a home that has solid, good bones. Cosmetic upgrades can be made later and are far less of a headache than these bigger upgrades.

4. Skipping the Home Inspection
In a red-hot housing market a new trend is for homebuyers to skip the home inspection. This is one thing we recommend you do not skip! A home inspection can turn up so many unforeseen problems such as water damage, foundational cracks and other potential problems that would be expensive to have to repair down the road. The inspection report will provide you a handy checklist of all the things you should do to make sure your home is in great shape.

5. Not Using a Broker
We compare prices for everything: Cars, TV’s, Clothing… even groceries. So, it makes sense to shop around for your mortgage too! If you are relying solely on your bank to provide you with the best rate you may be missing out on great opportunities that a Dominion Lending Centres mortgage broker can offer you. They can work with you to and multiple lenders to find the sharpest rate and the best product for your lifestyle.

–GEOFF LEE

PAYMENT FREQUENCY

One of the decisions you will need to make before your new mortgage is set up, is what kind of payment frequency you would like to have. For many, sticking to a monthly payment is the default, however, different frequencies may end up saving you less interest over time.

Monthly Payments

Monthly payments are exactly as they sound, one payment every month until the maturity date of you mortgage at the end of your term. Took a 3-year term? You will make 36 payments (12 payments a year) and then you will need to renegotiate your interest rate. 5-year term? You will make 60 payments.

$500,000 mortgage

3% interest rate

5-year term

$2,366.23 monthly payment

$427,372.90 remaining over 20 years

$69,346.70 paid to interest

$72,627.01 paid to principal

Semi Monthly

Semi-monthly is not bi-weekly. Semi monthly is your monthly payment divided by two. That means, you are making 24 payments every year, but each payment is slightly less than half of what the monthly payment would of been.

$500,000 mortgage

3% interest rate

5-year term

$1,182.38 semi monthly payment

$427,372.99 remaining over 20 years

$69,258.59 paid to interest

$72,627.01 paid to principal

Bi-Weekly

Bi-weekly, you are not making 2 payments every month. With 52 weeks in a year, you are actually making 26 payments, 2 more than semi-monthly (2 months a year you make 3 bi-weekly payments). The interest paid and balance owing are slightly less than the others, but mere cents. You will still need to make payments for another 20 years.

$500,000 mortgage

3% interest rate

5-year term

$1,091.38 bi-weekly payment

$427,372.36 remaining over 20 years

$69,251.76 paid to interest

$72,627.64 paid to principal

Accelerated Bi-Weekly

Just like regular bi-weekly, you are not making 2 payments every month. With 52 weeks in a year, you are actually making 26 payments, 2 more than semi-monthly. However because this is accelerated, the payment amount is higher.

$500,000 mortgage

3% interest rate

5-year term

$1,183.11 accelerated bi-weekly payment

$414,521.40 remaining over 17 years 4 months

$68,325.70 paid to interest

$85,478.60 paid to principal

You have increased your yearly payment amount by $2,384.98, $11,924.90 over 5-years. That extra $11,924.90 has decreased your outstanding balance at the end of your mortgage term by $12,850.96 because more of your payments went to principal and less went to interest. Also, you will now have your mortgage paid off more than 2.5 years earlier.

The same option is available for accelerated weekly payments which will shave another month off of time required to pay back the whole loan as well. If you can afford to go accelerated, your best option is to do so! Especially in the early years where a larger portion of your payments are going towards interest, not paying down your principal.

If you have any more questions, please do not hesitate to reach out to a Dominion Lending Centres mortgage professional near you.

–RYAN OAKE

5 REASONS YOU MAY WANT TO CONSIDER A RENT TO OWN PROPERTY

With the real estate market continuing to hold steady, many young families are looking for other options to afford a home. Many millennial families still are holding onto the dream of owning a detached home or their own townhouse/condo one day…but the task of moving on from a rental can seem daunting and impossible. This is where a Rent To Own (RTO) property can offer a solution. Here are 5 reasons you may decide to look for an RTO property.

1. RTO allows you to have a set savings plan to put towards one day owning the property you are currently living in. How this works is by setting up a contract with your Landlord (seller) and agreeing to pay an amount each month that is above what your rent is currently for a set amount of time. For example, if the property you are currently renting rents for $1.000 you would agree to pay the landlord $1400. The additional $400 would go into an account the landlord has set up for you and towards your future down-payment.

2. RTO will allow you to make lump-sum payments during the course of the RTO contract. It’s common with most RTO contracts to have the option to pay a lump sum payment to the down payment by giving the landlord a larger rent cheque. Keep in mind that the down payment is non-refundable which is why it is crucial to involve a mortgage professional and lawyer in the process.

3. RTO’s will require you to be pre-approved prior to the contract going through. This is an ideal situation as being pre-approved allows you to fully understand the other factors that contribute to you getting a mortgage. For example:
• Your current income level
• Your current credit score
• Your current debt owing
• How much you are pre-qualified for

Knowing these numbers can highlight other areas that you may need to work on or improve during the time you are saving up for the down payment and set you on the right course for when you are ready to purchase.

4. You can pre-establish a great team of professionals working with you. As with any mortgage product, a RTO will require you to work with a team of professionals including a mortgage broker. Building this relationship early can help you alleviate any further speed bumps you might have down the road. They can work with you for the entire process and make it run smoother and help you stay on track.

5. The setup is simple and offers a unique solution. Setting up a Rent to Own starts with a contract. The lawyer or solicitor will write this for you and should work closely with your mortgage professional to accommodate lender policies and guidelines. Here are some of the important elements that need to be included in the RTO contract are:
• The Purchase Price
• Purchase Price negotiations formulated based on the market trends of the area in which you are buying
• The term and length of the RTO agreement
• Exit and/or assignment clauses

The RTO must be registered on the title of the subject property and RTO down payments collected thru the contract must have a clear and full banking history that is supported with bank statements. These down payments must not be spent by the seller at any time.

Once you agree on the RTO you can agree on the future purchase price and timelines as well. This will give a target and allows one to know that once they’ve hit x amount of years over RTO payments, they will have enough of a down payment to purchase the property at the originally agreed upon purchase price.

Now, what happens if things change and a party wants out of the contract? For the Landlord, they are required to honour it until the term is over. For the tenants, they are able to “sell” their contract to another buyer who will assume the contract to recoup your down payment. The price is usually the down payment amount that you’ve already paid to the Landlord.

The contract can also include the fact that the tenant (buyer) can purchase in certain intervals at a certain price but does not have the right to recoup your down payment.

One final thought on Rent To Own properties; There are many RTO companies and solicitors out there. Choose wisely who you opt to work with. Many do not fully understand the setup of an RTO contract and the contracts that need to be followed by Lender guidelines. It is always best to have the solicitor work hand in hand with your Dominion Lending Centres Mortgage Broker to ensure that the contract lines up and nothing is missed during the set-up process.

This unique solution could be the answer for someone who is renting currently but is having a hard time getting their down payment together. RTO’s are becoming more and more popular due to the high housing prices.

–GEOFF LEE

PRINCIPAL & INTEREST

Principal and interest are the two components that make up a mortgage payment. Principal is the portion of your payment that goes towards paying down the outstanding balance of your mortgage. Interest is the other portion of your payment which goes directly into the pockets of your lender and does not contribute to paying down your mortgage balance.

What some people may not realize is that a compounding interest rate (what the majority of all mortgages are) is weighted differently depending on how many years you have left on your mortgage.

If a young couple were to purchase their very first home, lets say $500,000 for example, and they had a $100,000 down payment, their mortgage would be $400,000. If they had today’s interest rates, their mortgage would be around 3%, compounded semi-annually, over 25 years with their interest rate re-negotiable every 5-years if they keep the same term. Assuming they were able to get 3% for the entire 25-years, their monthly payments would be $1,892.98 a month for the life of their mortgage.

Their first payment however is not $1,892.98, with 97% of it going to paying down the $400,000 balance and 3% going towards interest. The very first payment would actually be broken down as $993.81 of interest and $899.17 going towards paying down the principal balance of $400,000.

Now, it wont stay like this forever, the very last payment before the first 5-year term is up would be broken down as $854.62 going towards interest and $1,038.36 of the $1,892.98 going towards paying down the principal. It wouldn’t be until year 10 where the interest portion dips below $500.

If you can, any pre-payments you make each month will directly pay down the principal balance outstanding. This will also in turn, allow for less interest to be charged as interest is always calculated based on the current balance outstanding. In the later years, it may not be as advantageous, but in the first 5-10 years, it can be extremely beneficial.

If you want to see the break down of principal and interest portions inside your own mortgage, feel free to reach out to a Dominion Lending Centres mortgage professional near you.

–RYAN OAKE

Housing Market Recovery Continued in October

The national housing market continued its recovery in October, according to the Canadian Real Estate Association’s (CREA) recently released report.

While sales remain 7% below levels reached during 2016 and 2017, they are 20% above the six-year low reached in February. Transactions are up 12.9% year-over-year and higher in the vast majority of cities.

The benchmark price is up 1.8% year-over-year to $633,600 in the 19 markets CREA tracks.

Yet, CREA continues to blame tighter lending rules for softer-than-peak market conditions.

“Steady national activity in October hides how the mortgage stress test remains a drag on many local housing markets where the balance between supply and demand favours homebuyers in purchase negotiations,” said Jason Stephen, president of CREA. “That said, all real estate is local, so market balance varies depending on location, housing type and price segment.”

Borrowers must now qualify for a mortgage at least 2% higher than their contract rate, which is pushing them into less expensive housing types, or out of the market altogether. The move by the federal bank regulator is designed to protect the economy at large. Should interest rates rise, homeowners may be so strapped to pay their larger monthly mortgage payment that they will stop spending on other goods and services, and thus drag the economy at large into a recession.

Since Canadian household debt levels are currently higher than the national GDP, at about $1.6 trillion, and almost entirely due to mortgages, this is a very real fear. Borrowers can still get around the stress test by seeking out mortgages from credit unions or private lenders.

British Columbia, however, is likely experiencing a slump because of the new mortgage rules, plus a small tax on foreign buyers. Greater Vancouver prices are down 6.44% year-over-year, the Lower Mainland down 5.68% and Fraser Valley down 4.16%. The decline in benchmark prices is likely short-term.

Meanwhile, the Prairies have endured several years of declining prices and CREA says the region is on the cusp of a “full-blown buyer’s market.” They overbuilt during oil boom times and sellers are suffering the consequences. Regina’s benchmark price is down 7.12% year-over-year, Saskatoon is down 1.54% and Calgary prices are down 2.37%.

Ontario continues to do well, especially in the smaller cities in the southwest. Guelph’s benchmark price is up 6.45% year-over-year, Hamilton is up 7.11% and Toronto is 5.55% higher.

Prices are likely to continue to rise into 2020 because supply is tightening across the country. There were only 4.4 months of inventory at the end of October 2019—the lowest level recorded since April 2017. Furthermore, the national sales-to-new listings ratio is now at 63.7%, far above its long-term average of 53.6%.

“Based on a comparison of the sales-to-new listings ratio with the long-term average, just over two-thirds of all local markets were in balanced market territory in October 2019, including the GTA and Lower Mainland of British Columbia,” CREA reports. “Nonetheless, sales negotiations remain tilted in favour of buyers in housing markets located in Alberta, Saskatchewan and Newfoundland & Labrador.”

For more information on the national housing market this October, check out the infographic below:

–Danielle Kubes

These Homeowners Need a Private Mortgage

Most of us don’t give much thought to private mortgages. We are vaguely aware they exist, but perhaps have the impression they are mortgage solutions for financial derelicts.

But that is totally not true. More often than not, they are needed when bad things happen to good people.

And private mortgages and B-lender mortgages are the fastest-growing segment of the Canadian mortgage industry.

One reason is because it’s much harder to qualify for an A-lender mortgage now than at any time in recent memory. High home prices, in major cities particularly, result in large mortgage requirements, and the mortgage stress test can put qualification out of reach for homeowners who previously had no such concerns.

In addition, there are several situations people find themselves in which are not attractive to regular mortgage lenders. These problems require solutions, but a different type of lender needs to step forward and help the homeowner get on track. Let’s look at three such situations.

#1) This homeowner has too many debts, and his credit score is low. Notwithstanding lots of equity in his home, the banks have said no.

#2) These homeowners are in the middle of a consumer proposal. The doors to the banks are firmly closed, yet they need to finance a car purchase, and they would like to improve their monthly cashflow.

#3) This homeowner has large CRA debt. Banks and other A-lenders do not like refinancing to pay off CRA debt.

#1) Too Much Debt And Credit Score Too Low

This fellow has been living proud and mortgage-free for several years, but meanwhile has racked up credit card debt that just won’t go away. At first, people believe they can manage it down, but the crippling high interest rates of 19.99% or more make it really hard.

And when the cycle starts, they next tap into other available credit to pay off the credit cards that are giving them a problem.

When he approached us, he had a nice town home in the west end of Toronto, $115,000 of unsecured debt, and a credit score of 557. And he had no mortgage.

The minimum monthly payment on the credit card debt was not much less than his take home pay from his job!

The Solution

We could see his credit score would zoom upwards once all the debts were cleared and no remaining balances. So, we found a private lender who was happy to lend a new first mortgage on very favourable terms. An annual mortgage interest rate of 5.99%, and a mortgage fully open after three months. This means as soon as he is ready, he can refinance to an A-lender without penalty.

And when that happens, all the ugly credit card debt will be scrunched up into a mortgage at roughly 3% interest, with a monthly payment of around $500. This is a game-changer compared to the $3,000 per month or so he was paying before.

#2) In A Consumer Proposal

These homeowners both have decent jobs and more than $200,000 equity in their detached B.C. home. Three years ago they both had to file a consumer proposal after a new business venture failed and left them with lots of consumer debt.

They reached out to us for three reasons:

1) Their bank, which holds their first mortgage, has told them they will not offer a renewal in late 2020.

2) Their car lease is expiring in January 2020, and they want to exercise the buy-out option. They are being quoted crazy high interest rates on a car loan.

3) They are finding it tough, paying $1,300 each month towards the proposals, on top of their car payment, and also their mortgage, taxes and utilities.

The Solution

The solution here is a one-year, private second mortgage for around $60,000. Interest-only payments at a rate of 12%, and the monthly payment is only $600, which is half of what they are paying now on their consumer proposal.

This small new mortgage will pay off their proposal completely, and also allow them to buy the car when it comes off lease.

And after their proposal is paid off, we will coach them on rebuilding their personal credit histories. And we will send an investigation package to Equifax Canada requesting they clean up all the reporting errors. (Sadly, there are ALWAYS reporting errors in the credit report after filing a consumer proposal.)

And in late 2020, when their first mortgage matures, they won’t have to worry about the renewal. We will refinance both mortgages into one new mortgage with a different lender. They will be ready.

#3) CRA Debt Problem

Several months ago, we met a Mississauga homeowner who only owed $70,000 on his first mortgage, but he had neglected filing corporate taxes for a few years, and owed CRA significant money. There was a judgment against him for $49,000, which had been registered as a lien against the family home. And another one looming for $133,000. And he had also accumulated a large amount of unsecured debt.

If you are self-employed and owe a lot of money to CRA, your borrowing options are very slim in the world of conventional mortgage lenders. We talked about this in a previous article. Occasionally we encounter homeowners whose tax debt is so large it cannot be readily paid. The end result is a debt that can’t be negotiated away, with a creditor you can’t afford to ignore.

The Solution

The solution for our clients was either going to be a very large, disproportionate private second mortgage at a high interest rate (close to 12%) or to refinance the small first mortgage to a new private first mortgage at only 6.99%.

For a lengthier discussion about the costs associated with a private mortgage, you can read this article.

We took the first mortgage approach; paid off the CRA liens and all other personal debts. As a bonus, the lender allowed us to partially prepay the mortgage payments in advance, so that the monthly payment for the new mortgage would be roughly what it will be when they refinance down the road – avoiding payment shock!

Then we contacted Equifax Canada to confirm the tax liens had been cleared and waited for the client’s credit score to rocket upwards, unencumbered by a high debt load.

Sure enough, it all came to pass, and now we are refinancing the private mortgage into an A-lender, only six months later.

The Wrap

In our first two cases, we also gave consideration to B lender solutions. They were a legitimate option, but here the private mortgage made more “dollars and sense.”

There are many other reasons why you might one day need a private mortgage. This article told the story of three fairly common situations.

You can find a more in-depth look at why you might need a private mortgage here. If a private mortgage is in your future, you should tread carefully and satisfy yourself you are dealing with reputable people who will treat you fairly.

–Ross Taylor

Mortgage Growth Slows in First Half of 2019

Residential mortgage growth was down more than 7% in the first half of 2019 compared to a year earlier, likely caused in part by the federal government’s mortgage stress test, according to new data from the Canada Mortgage and Housing Corporation (CMHC).

The quarterly Residential Mortgage Industry Dashboard shows new originations by the country’s chartered banks totalled $60.26 billion in the first half of the year, down from $64.93 billion in 2018. Similarly, growth of same-lender refinances were down 14.5% to $30 billion and same-lender renewals fell 9% to $86 billion.

“(The) residential mortgage market continues to show slowing growth, with activity mainly focusing on renewals with the same lender,” CMHC noted.

It also suggested the slower growth in the residential mortgage market is “likely attributed to the stress test.”

The mortgage stress test on uninsured mortgages took effect on January 1, 2018. After coming into effect, it is estimated that 18% of buyers who could previously afford their preferred purchase would fail the test, according to data from Mortgage Professionals Canada.

Additionally, the Bank of Canada raised interest rates three times in 2018. Two of the quarter-point rate increases came in July and October, the effects of which would have extended into early 2019.

CMHC did say that slow growth of the residential mortgage market, along with low mortgage default rates, has helped to improve Canada’s financial stability.

Banks Are the Market Leaders

CMHC’s report also delved into the current market share of outstanding mortgage balances, finding that 75% are held by banks.

Credit unions and caisses populaires have a 14% share, followed by Mortgage Finance Companies (MFCs) at 6%, and Mortgage Investment Corporations (MICs) and private lenders at just 1%.

MICs, which aren’t regulated in the same way that banks are and aren’t subject to the mortgage stress test, had an estimated market size of $13 billion in 2018, CMHC said. That’s up 10% from the year before, and up from an estimated $8-10 billion market size in 2016.

Delinquency rates were found to be lowest among credit unions and caisses populaires, at just 0.16%, and higher among MICs and private lenders, at 1.92%.

–Steve Huebl