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Buying A Home, The 30,000 Foot View

Diane Buchanan • Mar 14, 2018

Did you know that the average Canadian will spend roughly 11 months actively engaged in the house buying process? However, most of the dreaming (and preparation) happens before then. Buying a home is a big deal, and it’s a decision that shouldn’t be taken lightly. With all the recent changes by the Canadian government tightening mortgage qualification, you can never be too prepared! 

Even if you don’t plan to buy for a couple years, there is only so far general information can take you. Each person is different, as are their financial situations. So if you’d like to discuss your personal financial situation, feel free to contact me anytime. I would love to work with you!

With that said, here is a 30,000 foot view of what you need to know about buying a home, as it relates to mortgage financing. 

Are You Credit Worthy?

First things first, do you have a good credit? Having good credit is of paramount importance when applying for a mortgage. Establishing a good credit score takes some time, most lenders want to see that you have managed your credit well over a minimum of a 2 year period. 

Even if you have a huge downpayment and manage your money perfectly, and the idea of debt disgusts you, having an established history of borrowing and repaying money is crucial. It’s really hard to get mortgage financing without a credit history. 

How Will You Repay Your Mortgage?

If a lender is going to lend you money to buy a property, they are going to want to know you have the means to pay them back. They want to know that you have a steady job, and will make you prove it through documentation. Depending on how you get paid, lenders will want to see an employment letter, pay stubs, your T1Generals, Notice of Assessments, and really anything else they feel gives them an accurate picture of how much money you make!

Do You Have A Downpayment?

In order to borrow money from a financial institution, you’re going to have to bring some money to the table. Of course the best downpayment comes from an accumulation of your own resources, but there are other sources of downpayment that are available to you. A 5% downpayment will be the bare minimum required, and depending on the purchase price, it might be more. 

It’s important to know that you will have to prove the source of all downpayment funds. This can typically be done through 90 days of bank statements. The lenders (and government) want to ensure that you aren’t purchasing the property with the proceeds of crime, and laundering money. Just know that there will be heavy scrutiny on where you got your downpayment. 

As houses become more expensive, a lot of parents have decided to help their kids with the purchase of a property by gifting downpayment funds for a downpayment.

How Much Can you Afford?

What you can afford on paper and what you can afford in real life are often very different. The amount you qualify to borrow is based on way too many things to include in a single article. And the rules keep changing. Most recently, the government has introduced a financial “stress test” that forces buyers to qualify at a mortgage rate that is at least 2% higher than the rate they will pay. 

So once you are ready to actually start shopping, or even months before then, it’s a good idea to sit down with an independent mortgage professional who can work through your unique financial situation and will let you know exactly what you can afford to spend on a property. 

Regardless of where you are in the home buying process, it’s never too early to give me a call! My goal is to walk you through the process from start to finish, even if that is a matter of years, instead of months. Contact me anytime, I’d love to work with you!

DIANE BUCHANAN
 Mortgage Broker

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Fixed-Rate or Variable-Rate Mortgage?

By Diane Buchanan • 24 Apr, 2024
If you're looking to buy a new property, refinance, or renew an existing mortgage, chances are, you're considering either a fixed or variable rate mortgage. Figuring out which one is the best is entirely up to you! So here's some information to help you along the way. Firstly, let's talk about the fixed-rate mortgage as this is most common and most heavily endorsed by the banks. With a fixed-rate mortgage, your interest rate is "fixed" for a certain term, anywhere from 6 months to 10 years, with the typical term being five years. If market rates fluctuate anytime after you sign on the dotted line, your mortgage rate won't change. You're a rock; your rate is set in stone. Typically a fixed-rate mortgage has a higher rate than a variable. Alternatively, a variable rate is not set in stone; instead, it fluctuates with the market. The variable rate is a component (either plus or minus) to the prime rate. So if the prime rate (set by the government and banks) is 2.45% and the current variable rate is Prime minus .45%, your effective rate would be 2%. If three months after you sign your mortgage documents, the prime rate goes up by .25%, your rate would then move to 2.25%. Typically, variable rates come with a five-year term, although some lenders allow you to go with a shorter term. At first glance, the fixed-rate mortgage seems to be the safe bet, while the variable-rate mortgage appears to be the wild card. However, this might not be the case. Here's the problem, what this doesn't account for is the fact that a fixed-rate mortgage and a variable-rate mortgage have two very different ways of calculating the penalty should you need to break your mortgage. If you decide to break your variable rate mortgage, regardless of how much you have left on your term, you will end up owing three months interest, which works out to roughly two to two and a half payments. Easy to calculate and not that bad. With a fixed-rate mortgage, you will pay the greater of either three months interest or what is called an interest rate differential (IRD) penalty. As every lender calculates their IRD penalty differently, and that calculation is based on market fluctuations, the contract rate at the time you signed your mortgage, the discount they provided you at that time, and the remaining time left on your term, there is no way to guess what that penalty will be. However, with that said, if you end up paying an IRD, it won't be pleasant. If you've ever heard horror stories of banks charging outrageous penalties to break a mortgage, this is an interest rate differential. It's not uncommon to see penalties of 10x the amount for a fixed-rate mortgage compared to a variable-rate mortgage or up to 4.5% of the outstanding mortgage balance. So here's a simple comparison. A fixed-rate mortgage has a higher initial payment than a variable-rate mortgage but remains stable throughout your term. The penalty for breaking a fixed-rate mortgage is unpredictable and can be upwards of 4.5% of the outstanding mortgage balance. A variable-rate mortgage has a lower initial payment than a fixed-rate mortgage but fluctuates with prime throughout your term. The penalty for breaking a variable-rate mortgage is predictable at 3 months interest which equals roughly two and a half payments. The goal of any mortgage should be to pay the least amount of money back to the lender. This is called lowering your overall cost of borrowing. While a fixed-rate mortgage provides you with a more stable payment, the variable rate does a better job of accommodating when "life happens." If you’ve got questions, connect anytime. It would be a pleasure to work through the options together.

Understanding the Recent Housing Affordability Measures in Canada

By Diane Buchanan • 18 Apr, 2024
In recent years, housing affordability has become a significant concern for many Canadians, particularly for first-time homebuyers facing soaring prices and strict mortgage qualification criteria. To address these challenges, the Canadian government has introduced several housing affordability measures. In this blog post, we'll examine these measures and their potential implications for homebuyers. Increased Home Buyer's Plan (HBP) Withdrawal Limit Effective April 16, the Home Buyer's Plan (HBP) withdrawal limit will be raised from $35,000 to $60,000. The HBP allows first-time homebuyers to withdraw funds from their Registered Retirement Savings Plan (RRSP) to use towards a down payment on a home. By increasing the withdrawal limit, the government aims to provide young Canadians with more flexibility in saving for their down payments, recognizing the growing challenges of entering the housing market. Extended Repayment Period for HBP Withdrawals In addition to increasing the withdrawal limit, the government has extended the repayment period for HBP withdrawals. Individuals who made withdrawals between January 1, 2022, and December 31, 2025, will now have five years instead of two to begin repayment. This extension provides borrowers with more time to manage their finances and repay the withdrawn amounts, alleviating some of the immediate financial pressures associated with using RRSP funds for a down payment. 30-Year Mortgage Amortizations for Newly Built Homes Starting August 1, 2024, first-time homebuyers purchasing newly built homes will be eligible for 30-year mortgage amortizations. This change extends the maximum mortgage repayment period from 25 years to 30 years, resulting in lower monthly mortgage payments. By offering longer amortization periods, the government aims to increase affordability and assist homebuyers in managing their housing expenses more effectively. Changes to the Canadian Mortgage Charter The government has also introduced changes to the Canadian Mortgage Charter to provide relief to homeowners facing financial challenges. These changes include early mortgage renewal notifications and permanent amortization relief for eligible homeowners. By implementing these measures, the government seeks to support homeowners in maintaining affordable mortgage payments and mitigating the risk of default during times of financial hardship. The recent housing affordability measures announced by the Canadian government are aimed at addressing the challenges faced by homebuyers in today's market. These measures include increasing withdrawal limits, extending repayment periods, and offering longer mortgage amortizations. The goal is to make homeownership more accessible and affordable for Canadians across the country. As these measures come into effect, it's crucial for homebuyers to stay informed about the changes and their implications. Consulting with a mortgage professional can help individuals explore their options and make informed decisions about their housing finances. If you're interested in learning more about these changes and how they may affect you, please don't hesitate to connect with us. We're here to walk you through the process and help you consider all your options and find the one that makes the most sense for you.
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