Did you know that two out of three Canadian families own a house? That is one of the highest rates of home ownership in the world. And for good reason; Real estate is a great investment.
And with increasing housing prices, it's all the more important for first-time buyers to get a foot on the first rung of the property ladder. If you want to make it big, about 80 per cent of millionaires made their first million in real estate!
So what are some of the advantages of becoming a homeowner today?
Home ownership is the single largest source of savings for Canadian households.
Your payments build equity (as opposed to renting, where your money goes to the building owner).
Unlike other investments that can be volatile, when you buy a home the increase in its value is relatively steady. The average price of a house for sale on the Canadian real estate market has increased every year since 1998.
The return on investment for a house can be substantial. In Canada, there has not been a recorded 10-year period where average house prices have not increased.
Homeowners can use the equity in their homes as security for other loans.
Buying a home and building equity is the first step on the property ladder. It gets you into the housing market, keeps you in touch with increasing house prices, and puts you in a good position to trade up to bigger and better homes as your circumstances allow.
GETTING STARTED Before you begin searching for a home, it is important not to waste your or your realtor's time searching for homes you can't afford. Never mind the heartbreak of falling in love with a home that is unfortunately out of reach at the time.
The first step in buying a new home should be to take a look at what you can afford and how you are going to pay for it. If you're like the majority of home buyers, you will have to finance your purchase with a mortgage loan. So what exactly is a mortgage?
A mortgage is a loan that uses the home you buy as security. This loan is registered as a legal document against the title of your property. Below is a quick overview of some of the most common terms and aspects of a mortgage that you should understand.
The principal is the amount of the loan that is actually borrowed.
The interest is the amount the lender charges for the use of funds borrowed. Interest rates vary according to a number of factors including terms and conditions of the mortgage and the borrower's credit history. Payments are usually comprised of both principal and interest.
The amortization period is the number of years that it will take to repay the entire mortgage loan in full. A longer amortization period will result in lower payments but will take longer to pay off the loan which means you will pay more in interest. Amortizations typically range from 15-30 years.
The term is the length of time for which a mortgage agreement exists between you and your lender. A longer term means you will keep the interest rate agreed upon for a longer length of time. Rates and therefore payments vary with the length of the term. Terms usually range from 1-10 years with a five-year term being the most common. Generally a longer term, because of the added security, will be at a higher rate than a shorter term.
The maturity date marks the end of the term, when you can repay the balance of the principal or renegotiate the mortgage at interest rates in effect at that time. If you choose to repay or renegotiate the mortgage before this time, penalties may be charged. Once your mortgage matures you are free to renew with your current lender or shop around to other lenders for the best rate.
The payment schedule is the frequency at which you will make your mortgage payments. These can occur monthly, semi-monthly (twice a month), bi-weekly (every other week) or weekly. Generally, more frequent payments result in lower interest costs over the life of your mortgage as more principal will be paid down per year.
WHY SHOULD YOU USE A MORTGAGE BROKER? When you are ready to start looking at buying a home, you will need to first determine who you will want to work with to get financed. Traditionally most people will use either a mortgage broker or a bank. Your parents probably dealt with a bank to buy their first home, but times are changing. Over 25 per cent of Canadians used a mortgage broker for their last transaction, and about 47 per cent of all first-time home buyers used a mortgage broker. Why has there been such a shift?
First, mortgage brokering used to be primarily for "subprime" mortgages (individuals with poor credit or other unique circumstances). Since the 1990s, many major lenders including major banks and trust companies began to use mortgage brokers as an additional channel to fund their "prime" mortgages. Almost all Canadian banks have ties to the broker channel in some way, by either directly or indirectly funding mortgages.
The other big shift that has occurred over the past five years is centralization. Gone are the days of relationship banking, where a bank will help you based on your relationship and length of time you have been with them.
Now many banks base their lending criteria on quantifiable data, like income to debt ratios, credit ratings, etc.
Fitting into your bank's box is more difficult than ever before due to the credit crisis that began in 2008, and banks' boxes have shrunk considerably. Even if you do fit in their box, is their box appropriate for you?
WHAT IS A PRE-APPROVAL? A mortgage pre-approval is when your lender has reviewed your basic financial information (income, credit score, current debts, etc.) and has determined the maximum amount of money they will lend to you.
PRE-APPROVAL PROCESS The pre-approval process consists of three quick and easy steps.
Once this is done, your file will be sent for a pre-approval to the lenders that offer the best rate and product to suit your needs.
Our policy is not to send in a preapproval until rates start to move up, ensuring that you get the longest rate hold period possible.
To determine how much you qualify for banks use a set of ratios that determine how much of your income will be used to pay down your current debt.
The two ratios used are Gross Debt Servicing (GDS) and Total Debt Servicing (TDS).
GDS is the percentage of your gross income that is required to cover housing costs. These costs include the following items:
Property tax payment
Strata fees (if applicable)
MORTGAGE INSURANCE This is a protection plan for the bank. If you default, the bank forecloses and they lose money, but the insurer will cover the bank's losses.
DOWN PAYMENT There are various sources available for your down payment:
RRSP withdrawal: You can withdraw up to $25,000 per borrower to be used toward your down payment. The funds have to be repaid within 15-years and you cannot take out RRSPs that haven't been in the account for at least 90 days.
Gift: A most common way for first-time homebuyers is to receive a gift from family to help with the down payment.
Borrowed funds: This is most common with individuals who have good incomes and have money available on a line of credit.
Sweat equity: Sweat equity is when you have assisted a builder in building the home you are buying.
CLOSING COSTS To complete the transfer of title into your name you will need to talk to a notary or lawyer which costs $1,000 to $1,200. If you are not a first-time homebuyer you may not qualify for a property transfer tax exemption. In B.C., property transfer tax is one per cent of the first $200,000 of your purchase and two per cent of the balance. However, in B.C., if your purchase is less than $425,000 you will not have to pay PTT. If you purchase between $425,000 and $450,000, you will pay a percentage of the tax, and if you purchase a home over $450,000 the full amount is required.
NARROW THE SEARCH The process of finding the right home can take anywhere from one day to more than a year. Take your time and know when to bite.
WRITING THE OFFER Writing an offer can seem scary, but if your realtor includes good "subjects" in the offer (requirements that must be met in order for you to proceed with the purchase), it doesn't have to be. Removing subjects should only take place once you are absolutely sure you want to purchase the property. Make sure to take your Realtors advice into consideration when writing your offer price. It is uncommon for the first offer to be accepted, so be prepared to face a counter offer. Sometimes multiple counter offers may go back and forth before you and the sellers have agreed to a price.
You should always at least have subject to financing in your offer. A pre-approval does not ensure that when it comes time to purchase, you are guaranteed to be approved. The lender may have issues with a property, a strata, or something else unforeseen during the pre-approval process.
BEGIN FINANCING You should inform your Broker as soon as you have an accepted offer so that they can get working on the financing right away. Your Broker may need to update some of your documentation and will also need documents related to the property (for more information about normal documentation requirements, see Appendix B).
It is at this stage that you want to firm up which term, amortization, down payment amount etc., which you will want to proceed with. Your Broker should be able to advise you what your options are regarding; pre-payment privileges, rates, and expected turnaround times.
ARRANGE INSPECTION Usually it is a good idea to make sure that your financing has been approved or that there is a strong chance of it happening before paying for an inspection, which usually costs $450+. However, you will still need to give the inspector ample time to arrange a time to inspect the property so make sure you discuss with your Realtor to figure a proper time frame.
It is highly recommended that either you or your Realtor is present during or after the inspection so that you have a good idea of what problems the property may have and also what is in very good shape. Some issues may arise when the inspector goes through a property so be prepared to either walk away or renegotiate your price if there are major issues like mould, evidence of a previous illegal substance operation or other dangerous items contained in the report. Not only do these issues affect your health and safety, they can make the property more difficult for finance both for you and for a potential future buyer once you sell. Once you have the report you should discuss how to move forward with your realtor.
REMOVE SUBJECTS AND PROVIDE DEPOSIT Removing subjects happens when you decide you are 100-per-cent committed to purchasing the property. You then remove all of the subjects that protect the buyer (subject to financing, inspection, etc.). At this point, your financing should be 100 per cent settled, inspection was sufficient, appraisal was sufficient (if necessary), and strata documentation was sufficient (if applicable), as well as any other conditions you had in your purchase contract. As mentioned earlier, it is not writing the offer that you should be concerned with, it is removing subjects - there is no turning back. Upon removing subjects you will typically have 24 hours to provide a deposit cheque and you are "firm" on the deal.
THE NEXT STAGE Now that you are firm on the deal, you need to get prepared for the closing date that you specified on your contract. This will typically be two to four weeks after you have removed subjects, but can be longer depending on the preferences of both buyer and seller. During this time there are a few items you will need to arrange.
INSURANCE We know how important it is to be properly insured, so we always offer two options when discussing insurance. One product is a No Questions Asked mortgage insurance product that provides life, disability and critical illness insurance for up to $500,000.
The other option is to speak with one of our affiliated insurance advisers who can give you one on one advice to help you make your decision.
CLOSING By now you should know how much money you need to bring in to your notary or lawyer to complete the transaction, and will be instructed to bring them a bank draft or certified cheque to cover the balance of the funds to close, along with proper ID.
During this meeting you will be going through a fair bit of paperwork with the lawyer or notary to complete the transfer.
Depending on which lender you use, it may be necessary for you to visit the branch to go over important mortgage details like preferred payment dates, etc. before closing.
MOVING IN Usually on the day of closing you will get your keys. Make sure your realtor tells you when you are able to move in, as the sellers may still be moving out the morning of the possession date. The sellers should have already cleaned the house, but another clean won't hurt!
CHANGE THE LOCKS Make sure you change your locks after closing. You don't want extra keys floating around, jeopardizing your security.