RESIDENTIAL REAL ESTATE. It’s not just the terraces that warm up in the spring. So is the real estate market. Faced with the prospect of a lease coming to an end, it is at this season that the first buyers take action. They will acquire the homes of first sellers, who will become second buyers. They will look at the homes of more experienced owners who, in turn, will go to nest elsewhere.
So turns the wheel of residential real estate.
In March and April, the most sales were in Quebec, with an average of 8,500 for each of these two months over the past five years, according to the Federation of Real Estate Boards of Quebec (FCIQ). This is reflected downstream, 16,000 transactions involving a single-family home were, for example, notarized in Quebec in June 2017, compared to only 2,700 in January of that year, JLR compiled. “Friday and Monday of the last weekend of May are the busier for notaries,” says Joanie Fontaine, an economist at the real estate research firm.
When real estate comes alive, mortgage applications abound. In all this spring excitement, the risk of letting a detail pass increases, and this can be as unfortunate as it is costly. “This is more common among first-time buyers who don’t know the rules and have no experience in finding a mortgage,” says Hugo Leroux, president of Hypotheca, a mortgage agency. Second-time buyers are also not immune to a blunder, and recent changes in qualification rules can give them some nasty surprises.
To avoid being caught off guard, we’ve prepared this list of homework and things to know before you go hunting at the perfect house and sign a mortgage.
1. Make sure your credit report does not contain any anomalies
Don’t confuse it with your credit score that you have to pay for and which will not help you in your steps (or in general). Ask only for your file, which you can get for free from Equifax and TransUnion. It contains your personal information, including your social insurance number, as well as data on your credit use (cards, margin, personal loan, mortgage) and your payment habits of telecommunications service providers. You may find problems that may delay getting a loan and miss out on a purchase opportunity.
“One of my clients confiscated his daughter’s phone and turned it off for three months. He did not realize that during all this time the service had not been paid, the many reminder notifications were sent on the device that was sleeping in a drawer. These delays ended up on his credit file since the bill was in his name,” says Yves Ferragu, a mortgage broker at Multi-Loans.
His client had to pay for wireless services, of course, but also convince the operator to remove the stain on his credit report, which hindered his efforts to obtain a mortgage.
2. Don’t visit homes without doing this…
Moving to the most exciting stage of the purchasing process without having budgeted or qualified for financing is a classic mistake that exposes its authors to disappointment and time-wasting. What could be more frustrating than succumbing to property and realizing at the time of financing that no lender is willing to give you the mortgage necessary to purchase it? Worse, you could get the loan and realize months later, stifled by monthly payments, that the house is beyond your means.
It’s important to budget. Unlike the qualification calculation method used by lenders, based on gross income without taking into account the customer’s habits, the budget allows the cost of the property to be recorded in “real life”. “Housing should be around 30% of your net pay,” says Mario Lambert, a financial planner for the Canadian Armed Forces. He advises military, ex-military, and family members. The budget portion allocated to housing does not only include the repayment of the mortgage. It includes property taxes, condominium fees when applicable and maintenance fees.
The cost of housing generally increases when you change your address. Pascal Berger, the mortgage advisor at RBC Royal Bank, suggests testing your ability to cash in on this increase in spending. “If your home costs you $1,000 a month, exercise for a few months with $2,000. If it hurts, you can’t afford it. »
3. … and this.
Some will say that pre-approval mortgage push buyer to homes that exceed their financial capacity. Many couples have, in the past, been surprised by the amount (high!) that the bank was willing to lend them. The phenomenon has not disappeared, but it has been mitigated by the tighter qualification rules, which have been in place for almost two years.
Like the budget, credit pre-approval allows you to narrow your searches into market segments that match your means. Most importantly, it will prevent you from missing out on buying opportunities, as sellers and their brokers are more attentive to offers from buyers who have received prior support from their bankers.
4. Know the rules of mortgage qualification
In recent years, qualification rules have been gradually tightened by the Office of the Superintendent of Financial Institutions (OSFI) to contain household debt and ease pressure on Canada’s financial system. . Knowing these rules could save you from bad decisions that could reduce your ability to borrow.
Since the end of 2016, more and more borrowers are undergoing what is called a “stress test.” Today, there is no way for a person applying for a mortgage to opt-out. What is this test?
To qualify for a mortgage, you must comply with more demanding debt ratios. Your financial obligations, which include mortgage repayment, property taxes, heating and electricity costs and all of its debts, must not exceed 44% of your income. However, lenders must consider this ratio a higher mortgage rate than that actually granted. This is the novelty, especially for five-year fixed-rate mortgages.
A buyer with a good credit record can get a rate of around 3.6% for a fixed five-year mortgage these days. If the loan is not insured by CMHC, 2% must be added for the purposes of calculating the ratio (i.e. 5.6%). For an insured loan, the rate used is 5.34%. This ensures that you are able to cash in on an interest rate increase, but these measures reduce the amount you can borrow.
The test applies to first and experienced buyers. “Buying a new car financed on credit will affect borrowing capacity. Ideally, you should clean up your balance sheet before you shop for a mortgage, not the other way around,” says broker Yves Ferragu.
Homeowners whose incomes have declined before their mortgage is renewed, for example as a result of job loss, may no longer qualify. In this case, they will have no choice but to do business with their current lender, which may reduce their bargaining power.
5. Don’t be obsessed with the 20% down payment
The minimum down payment on the purchase of a home is 5%. To avoid having to insure the mortgage with CMHC, you must make a down payment of 20% of the house price. Below this threshold, CMHC’s insurance premium ranges from 2.8% to 4.5% of the loan amount, depending on your financial contribution. With a minimum down payment and a $200,000 mortgage, the premium will be $9,000, an amount that will be added to the mortgage. If the down payment is 15%, the premium is reduced to 2.8% of the mortgage.
It’s worth taking out his calculator. Many lenders pay lower mortgage rates for an insured mortgage. What for? An insured loan carries less risk to the institution. These receivables can also be securitized more easily in order to be resold on the financial markets.
According to Hugo Leroux of Hypotheca, a rate of 3.25% can be obtained for a fixed five-year insured loan, compared to 3.6% for a conventional loan. The rate discount partially offsets the insurance premium. Note that you can have your loan insured even with a down payment of more than 20%, the premium will be even lower (between 0.6% and 1.7%). Who says it’s easy to shop for a mortgage?
6. Think about other fees
Buyers may be tempted to put all their cash into the down payment while forgetting the other costs that await them: notary fees and moving, real estate transfer tax (welcome tax), as well as curtains and Mower. Reflection on the down payment must take this parameter into account.
If you use the RAP, the money withdrawn from the RRSP can be used for both the down payment and to pay these bills. You can reinvest them in a TFSA and even in your RRSP to take advantage of the tax deduction, as the Canada Revenue Agency does not track the money withdrawn from the RRSP with the RAP.
Keep in mind that a 9% tax on the CMHC insurance premium is payable when the transaction is formalized with the notary. In addition, CMHC may refuse to insure your loan if you do not hold the equivalent of 1.5% of the value of the home in the bank to cover all these costs.
7. Think about renovations before, after it will be too late
Many homeowners pay for their renovations through the refinancing of their home or a mortgage line of credit. However, these tools are inaccessible if the mortgage exceeds 80% of the value of the home, thus to the majority of first-time buyers.
“If the coveted home needs renovations, a first-time buyer won’t be able to do it for several years, unless you pay cash for the work or use a renovation loan at the time of purchase,” says Denis Doucet, spokesman for Multi-Prêts.
The terms of such a loan vary from institution to institution, but the principle is the same. At the time of granting the mortgage, the lender makes available to the purchaser additional funds available only upon the presentation of invoices proving the completion of the work. In the meantime, they are paid through a margin or a credit card. When the renovations are completed, the temporary loans are transferred to the mortgage.
8. Will you stay in your new home for a long time? Think about it!
Most people show up at Denis Doucet’s office obsessed with rates. “They don’t know all the characteristics of a mortgage agreement,” says the Multi-Loans spokesperson.
Interest rates are an important aspect, but there are others. That’s why the mortgage broker will inquire about your plans. Do you plan to have children? Do you think you will be called upon to work in another city or country? Is your job stable? The answers to these questions could affect the lender’s choice, the term of the loan, and the type of rate chosen, fixed or variable.
If you were to sell your home before the end of the term, usually five years, you will face hefty penalties for prepayment. The formula for determining the amount is particularly disadvantageous to the client of a fixed-rate mortgage. The penalty can sometimes be equivalent to the down payment. For a variable rate mortgage, it is more reasonable. It represents three months of interest.
If the purpose of selling the house is to acquire another, often it is not a problem, the lender will agree to transfer your mortgage to the new property under the same conditions unless you move to another country.
The mortgage advisor won’t ask you that kind of question, but ask yourself in your heart if your relationship is strong. Couples who break up are most often the victims of these large penalties. They come out impoverished from separation, without being able to buy a new home, with a bill of several thousand dollars for prepayment.
9. What is your risk aversion?
This question refers to another, the eternal: fixed or variable? When taking out a mortgage, the variable rate is always lower than the fixed rate. But unlike the latter, which is guaranteed until the end of the term, the variable rate fluctuates according to the bank’s prime rate, which itself moves according to the Bank of Canada’s key interest rate. Current mortgage holders know something about it, the cost of their loan has increased three times in the last 18 months.
It is not the prospect of a rate hike or fall that should guide you, but your ability to withstand such fluctuations serenely. If you are nervous, the fixed rate is preferable.
If you are not afraid of the variations, the variable rate is generally advantageous. “If the gap between the fixed rate and the variable rate is less than 75 basis points (0.75 basis points), the former can be a winner. Beyond that, it would take a rapid and significant rise in rates for fixed-rate mortgages to be more advantageous,” explains Hugo Leroux.
At the time of writing, the best variable rate for an uninsured mortgage is 2.75%. The fixed rate is 3.6%.
Tip: You could opt for the variable rate and ask that your monthly payments be equivalent to what you should have paid at a fixed rate. You won’t feel the changes in interest rates and you’ll pay off your principal faster.
10. Shop and negotiate
When it’s time to redo the roof of your house, you don’t hesitate to ask for several submissions. Why don’t you do the same with a mortgage? “I advise knocking on the door of at least three lenders,” says Armed Forces planner Mario Lambert.
Also, ask a mortgage broker what they can offer you. There are multiple specialized lenders whose products are only offered through brokerage firms.
Above all, never sign a mortgage at the rate posted by your financial institution. It’s artificially inflated.