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Down-payment blues

How much of your savings should go toward your down payment?

There is no definite right answer and sometimes it depends on where the investments or savings are. 

Does the buyer have a large amount invested in RRSPs, TFSAs or is it just in mutual funds or bank accounts?

There are few things that need to be considered: 

Job stability.

  • It does not make sense to use all of your money set aside for an emergency if there is a possibility that you could lose your job. 
  • Experts recommend having at least three months of expenses, which include bills, groceries and accommodations. 
  • If you are self-employed, it is recommended that you maintain six months of savings in an account to cover these expenses. 
  • Do not include theses emergency savings as part of your down payment or closing costs.

Can you save 20 per cent for the purchase?

  • If you have less than 20 per cent down payment on a home under $1 million the lender will require that the mortgage be insured for default by either the government insurer, Canada Mortgage and Housing Corp (CMHC) or one of the private insurers, Genworth or Canada Guaranty.  
  • The minimum down payment for any owner occupied property is five per cent of the purchase price. 
  • The default insurance premium is based on the loan to value and is more expensive with lower down payments.  If a purchaser only has five per cent down they will pay 3.6 per cent of the mortgage amount to one of the three insurers. 
  • So for a purchase of $400,000 with five per cent down ($20,000) the borrower would pay a premium of $13,680 based on the mortgage of $380,000. 
  • The premiums decrease as the borrower increases the percentage of the down payment. 
  • For 10 per cent down the premium is 2.40 per cent of the mortgage, 15 per cent down 1.80 per cent and of course no premium if there is 20 per cent down payment.
  • 3)Will you still have money to go out.

Purchasers need to look at the affordability of the home from their own budgeting perspective. 

There is nothing worse than being house poor and regretting buying. To figure out your budget look at your spending over the last 3, 6 of 12 months. 

Replace the rent you have paid with the estimated mortgage payments but don’t forget to include:

  • utilities
  • property taxes
  • home insurance
  • home repair fund

When you have taken these new costs into account does this exceed your income or does it leave you with a comfortable lifestyle? 

Can you make any cutbacks — the daily Starbucks, for example?

Will you be able to plan for retirement with increased living expenses?

  • Buying a home is a fabulous way to build up equity over your lifetime.  There should be other strategies to look fat to plan for your retirement. 
  • Make sure you have extra income to put away to build up a portfolio. Experts say 30-year-olds should aim to save 12-20 per cent of their gross income and minimum 10 per cent. 
  • Did you earn $60,000 per year, you should ideally save $8,000 per year or $670 per month. 
  • This amount will change as your income changes.
  • If you expect that your income will remain constant over the next five years or more, you should add the retirement savings to your budget to make sure you can continue to save.
  • If you decide to postpone buying or rent, make sure you put away more for retirement as you won’t have the equity building up in your home to help with retirement. 
  • Maybe putting down 20 per cent and when you have a bit extra, you can use it to build a nice nest egg.

Lifestyle

  • Home ownership involves a big lifestyle change as there is a lot of work involved in maintaining a property. 
  •  If you finances are in order, then it is just a matter of preference whether you buy or rent. Some people enjoy yard work and shopping at Rona.
  • Renting is not a bad idea if you there are ample rentals and you can make up for the lack of equity building by socking away money in a retirement savings plan. 
  • Buying is a good idea for some,  as long as you make sure to set aside money for emergence home repairs and the payments don’t you leave you too poor to put away funds for your retirement.

If you need further assistance determining if you should buy or rent please call 250 862 1806 or email





Musical mortgages

Stop! Before you transfer your mortgage…..

Too switch or not to switch, that is the half-a-million-dollar question. 

Mortgage lenders that is.

Many buyers purchasing homes already have a mortgage with their existing financial institution or another lender. 

Most assume that in order to save the penalty, they should stay with the existing lender. 

Is this a wise decision?

There are two questions you need to ask yourself.

  • Are you adding more mortgage money to your existing mortgage balance? 
  • And how long are you going to stay in this new home?

If you are adding money to your mortgage, some lenders will blend the new money at the posted interest rate, which is sometimes as much as 2% over the current discounted rate. 

It may make sense to take a look at the difference in cost  over the remaining term of paying the penalty and getting a new discounted rate on the entire mortgage. Also sometimes a discounted five-year rate is preferable as it may allow you to qualify for a larger mortgage.

If you are thinking that you may not stay in the home for the full five-year term, then, you will definitely not want to blend and increase your mortgage because this will leave you with a higher rate mortgage now over  a longer term and you may face a large penalty again when you go to pay it out. 

Most borrowers need to blend the mortgage out for five years for ease of qualification. The government requires that short term mortgages (less than five years or variable) be qualified at the posted five-year rate of 4.64%.

Speaking of penalties, have you ever wondered how those penalties are calculated? 

Most major financial institutions (banks and credit unions) take your existing mortgage mortgage rate, add on the discount they gave you when you took out the mortgage to determine the base rate.

They then find the posted rate that they are currently offering that matches your remaining term and calculate the difference in these two rates for the balance of the term remaining.  This is to reimburse them for the loss of a higher rate mortgage. 

If your mortgage is lower than the current rate then the penalty is three months of interest at the posted rate, not your contract rate.

I went to the various websites below and calculated the penalty on my own mortgage that I had.  Here are the results of my calculations:  (These results are subject to change based on the date and balance of the mortgage and the current mortgage rates).  The mortgage was $281, 901.65 with a 2.70% discounted rate, $132.0.54 monthly payments and a maturity date of November 1, 2018, held at the CIBC.

As you can see there is huge discrepancy in the penalty from a high of $9887.97 to a low of $2793.18.  This is the reason I challenge to question porting your existing mortgage and take a look at some of the other options available to you especially with the monoline lenders who generally work through mortgage brokers. 

Mortgage rates are only one aspect of a mortgage.  The prepayment options available and the penalty calculations can cost or save you thousands of dollars.

If you need help deciding whether to port your mortgage or how to calculate your penalty please call me at 250 862 1806 or email.



Buying in a hot market

As the summer approaches, it seems the Canadian real estate market has caught spring fever and things are not changing.

First-time homebuyers face many challenges when it comes to house-hunting during a peak home-buying season. Not only is there plenty of competition, but there is also deadline pressure.

But there’s a reason for that: buying and moving in spring/summer ensures better weather and provides breathing room for kids to settle in before starting at a new school. It also gives you all summer to decorate your new place, if you can beat out others vying for the same starter home.

 If you want to get an advantage over the competition, here are some top strategies for home buying during a seller's market.

Strategy No. 1: Hire a professional realtor

  • If you don’t already have a real-estate agent or realtor, I would be happy to make a recommendation.  A pro can help you narrow your search to the best neighbourhoods for your budget and lifestyle.
  • Local real-estate professionals know the finer points of different neighbourhoods, so you don’t waste time chasing bad leads such as a cute row-house on a street known for its crime, or hoping for a $400,000 house in a community where prices have started at $600,000 for the past five years.
  • Realtors and agents can fire up your search by emailing you pertinent listings right after they hit the market. A quick eye during spring house hunting can give you an advantage over other homebuyers who are surfing Realtor.ca or other real estate websites on their own.

Strategy No, 2: Use social media for PR and research

  • First-time homebuyers are twice as likely than other homebuyers to include social media in their home search. While it doesn’t replace the expertise of a realtor, social media is a valid tool.
  • Use social media networks for public relations: Serious about finding your first home? Launch your own PR blitz. Spread the word on Facebook that you’re looking, and in what neighbourhoods. You could get solid sales leads via family and friends (and friends of friends!).
  • For research: Twitter and YouTube provide valuable insights into a neighbourhood culture, helping you decide if it’s right for you. Wondering how family-friendly a particular street is? Google it, and you may find a bunch of tweets and YouTube videos of its legendary Halloween decorating and celebrations.

Strategy No, 3: Get mortgage pre-approval

  • It goes without saying that in any market, particularly a competitive one, you need to be pre-approved for a mortgage. Sellers won’t wait for a prospective bidder without mortgage pre-approval when there are plenty of other offers out there with their financing arranged.
  • Consider a mortgage broker and get your finances in order so that when you jump in with an offer, you’re doing so with both feet.

Strategy No. 4: Line up your real estate support team

  • In addition to your realtor and mortgage broker, it’s important to have other key, real-estate pros in your corner so you’re ready to move fast the moment you decide to put in an offer on a home, as well as provide you with sound financial advise.
  • Securing these pros ahead of time will ensure you’re not scrambling during peak home-buying season. Your team should include:
  • Accountant
  • Financial planner
  • Home inspector
  • Appraiser
  • Lawyer

Use word-of-mouth recommendations from trusted friends and family, or ask your realtor for their recommendations. 

We will be hosting a home-buyers information session with professionals on hand to answer questions on June 29  at 6:30 p.m. 

Please contact me to register 250 862 1806 or [email protected].
 





Grow-op nightmares

Buying a former Grow Op Property and Financing

I often get asked about the possibility of buying a home that was a marijuana grow operation or grow op for short. 

The price of these properties makes them attractive as they can be listed and sold far under market value. However, there are many things to consider in this kind of purchase. It's important to understand that once a property has been busted as a grow op, it will always need to be tagged as a former grow op even if it is 10 years later. This adds a negative stigma to the property.

Not only is it harder to get financing, but after a recent bust, there is always the danger of the property being mistaken by those involved in criminal activities.

The main danger with former grow ops is the presence; in 2014 CMHC and others had a conference to determine how to remediate the problem. The first thing is for a baseline condition to be determined by testing.

This is obtained by a home inspector who has qualifications to perform these special inspections. The inspector examines site conditions — exterior walls, foundation and roof, mechanical, electrical, plumping and interior structure. As well, air testing is conducted inside the residence to determine the presence of fungal growth/drug residue levels inside the residence compared to the outdoors. The drug levels must be less than the prescribed levels or the same as the exterior.

Once the condition has been determined then the remediation can begin. Again it is important that certified professionals are hired to do the work. After the renovations are completed, then there will be a post inspection with air-quality tests.

 The mortgages will need to be insured on these properties and this requires that the full renovation and decontamination be completed prior to funds being advanced. There is private financing available with a good down payment, if the property is in foreclosure and remediation cannot be performed prior to purchase. 

All mortgages for this type of property are approved on a case-by-case basis depending on the remediation and the strength of the borrower. Here are some of the additional documents that are required:

  •  Copy of occupancy permit
  •  Copy of post remediation home inspection
  •  Copy of Level 1 environmental assessment, including an air quality test
  •  Independent legal advise providing full disclosure of the risk associated with buying a former grow op
  •  Copy of RCMP/police report

In addition to this documentation, the client will have added fees and the interest rate may be higher to offset the risk. The purchasers must have good income, high credit score and a minimum of five per cent down payment.

The only way to remove the label of grow op from the property is to have the property completed rebuilt from the foundation. This means that each time the property changes hands the property disclosure statement must state that the property is a former marijuana grow operation and be provided to the subsequent purchaser.

For more information on former grow op financing please contact me at 250-862-1806 or email [email protected].



More The Mortgage Gal articles

About the Author

Laurie Baird is a Mortgage Broker with Verico Complete Mortgage Services. She has been in the mortgage business since 1991 and a broker since 1997. 

As a Mortgage Broker she is able to match her clients' needs with a lender who will provide them with competitive rates and products.

Laurie has a Bachelor of Education degree from UBC.

Contact Laurie at 250-862-1806 or visit:
http://www.okanaganmortgages.com

Visit Laurie's blog at: https://www.okanaganmortgages.com/blog



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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