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The-Mortgage-Gal

First-time buyer incentive

More details about the FirstTime Home Buyer Incentive program were rolled out last week.

The intent of the plan is to help make mortgages more affordable for qualified first-time home buyers.

Who qualifies to use the First-Time Home Buyer Incentive program?

  • At least one purchaser must be a first-time home buyer
  • Must not have owned a home during the last four years
  • People who have gone through a marital breakdown or separation (even if they have owned a home within the last four years)
  • Household income can not exceed $120,000 a year
  • Canadian citizens, permanent residents, or non-permanent residents who are legally authorized to work in Canada

The maximum mortgage amount can be up to four times the amount of your annual income.

If your income is $100,000 the maximum mortgage amount will be $400,000 so your purchase price will be $400,000 plus your down payment.

If you have $20,000 saved and the program kicks in $20,000 your purchase price would be $440,000.

As the maximum allowable income under the program is capped at $120,000 this means the maximum mortgage amount will be $480,000 (plus the related CMHC premium) plus your down payment.

This puts the maximum purchase price under the program at $530,000 (slightly higher for a brand new home).

The federal government’s new plan is slated to roll out Sept. 2. Mortgages approved under the program can close Nov. 1 or later. The program’s information page contains a qualifier stating that these dates may change due to unforeseen circumstances.

In a nutshell, the Government of Canada is offering either five or 10% per cent toward your down payment in exchange for an equity share in your home.

You must have a minimum of five per cent down from your own resources.

For existing homes, the maximum contribution from the program is five per cent; for new construction you may be eligible for ten per cent towards your down payment.

The government’s contribution is non-interest bearing and must be repaid when you sell your home or after 25 years.

Instead of charging interest, the government has structured this as an equity share in your home.

This means when you sell your home, you will repay the government the same percentage of the sale value of your home (or current value of the home if you still own it at the 25-year mark) as their original contribution.

As an example, you buy a home priced at $300,000. The government kicks in $15,000. Ten years later you sell your home for $400,000. Your repayment to the program is $20,000 (five per cent of $400,000).

If the market crashed and your home sold for $200,000 your repayment would be five per cent of $200,000 so in this case $10,000.

Using the example of the $300,000 purchase price, having the additional $15,000 toward your down payment would reduce your monthly payment by about $75. You would pay about $4,500 less over the first five-year term.

If you sold at the end of five years for $400,000 your repayment of the equity share would be $20,000 – five per cent of the sale price of your home.

You paid $4,500 less, but it cost you $5,000.

Say you sell your home at the 10-year mark. For years six to 10 of your mortgage, assuming a similar interest rate and no extra principal payments, with the reducing balance your payments are about $60 less per month less. So you pay $8100 less over the 10 years ($4,500 + $3,600).

At the end of the 10 years, you sell your home for $500,000. Your repayment to the program would be $25,000. This equity share has now cost you $16,900.

The information released so far indicates that the government’s contribution to your down payment will be registered as a second mortgage against your home.

Guessing on my part as I haven’t seen the specifics yet, I expect that this will be registered not as the original amount but in a way that protects the government’s interest in the home over time.

This means that you will likely have to repay the equity share if you are looking to refinance your home.

The promotional material I’ve seen states that the intent of the program is to make home ownership more affordable.

In some instances this may be the case, but I am hard pressed to see how the program will benefit the majority of home owners over the longer term.

I anticipate that we will start to hear from lenders over the coming weeks as to how they will be handling applications for clients wishing to use this program.

I also expect we will hear more from the government over the coming months as they address the multitude of questions that have already been raised.

This is one aspect of the program for you to think about. As I said, for some people this may be the assistance that means they qualify to buy a home as opposed to having to wait longer.

For more information about the specifics of the program, check out the link to the government site on the Resources Section of our webpage.

For most people, my feeling is we have to carefully consider the longer-term impact of this incentive on your bottom line.

My expectation is that it will be wiser to make slightly higher payments than to roll the dice and lose a significant chunk of the equity in your home.



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Mortgage homework

Most first-time home buyers I work with are better prepared then they think.

There is a wealth of information available at their fingertips, so by the time they call for a mortgage pre-approval they’ve already started researching the home buying process.

There is so much information available that for some it becomes overwhelming.

As a mortgage broker, I want my clients to understand the process and be confident with the decisions they make. I want them to feel comfortable asking me any questions that come up.

I also want to be confident that I am providing the best advice based on their situation, so I pre-screen my clients and ask for certain information upfront

I get calls daily that start with “What’s your best rate?”

Three years ago, that was an easy question to answer. We had one rate sheet and (with a few exceptions) providing a rate quote was pretty simple.

After the mortgage rule changes in October 2016 and January 2018, providing the best rate is a more involved conversation. I have six pages of rates to go through and want to make sure I have the right fit.

Rate is only one piece of the mortgage puzzle, and I don’t want to misquote a rate that I can’t get for a client when they have an accepted offer on a home.

It is as important for your mortgage professional to do their homework as it is for you (as the client) to do yours.

For instance, if you are considering buying a home and using a Purchase Plus Improvements product, there are certain lenders who have low rates but don’t offer this program.

If you are writing an offer on a home on leasehold property in West Kelowna, there are a select few lenders that will provide mortgages.

If you are needing to use your Child Tax Benefits to qualify for the mortgage, there are only a few lenders that will use that income.

If you have student loans outstanding, lenders factor payments differently which can make or break an application.

If you are self-employed and have done some creative accounting, we are likely looking at a different mortgage product.

Buying a home is the largest investment and financial commitment many people make. It is easy to get caught up in the excitement and make a rushed decision based solely on interest rate.

Sometimes, the best rate or advertised specials may cost you dearly in the long run.

Many lenders offer two similar rates. As a generalization, the ones I see are .05 per cent apart. On a $400,000 mortgage, the interest savings is $943.22 over the five-year term.

If the lower rate mortgage comes with restrictive clauses such as a higher pre-payment penalty or the requirement to sell their home to get out of the mortgage I make sure clients understand the consequences of choosing that lower rate.

Statistics show that two out of three mortgages are broken before the five-year mark. By broken, I mean that the clients have either sold or refinanced, so have had to pay out the original mortgage.

If they have chosen one of the low rate mortgage products this can mean a significant penalty.

Last summer, I worked with a young couple who had chosen the lower rate as they were convinced they would be in their home for the long term.

They found themselves in financial distress when her position was eliminated and it took almost six months for her to find a similar job at the same rate of pay.

Their lender did refinance their mortgage to consolidate their credit cards and loan, but because they had chosen the low rate mortgage, they had to pay a penalty of $3,400.

Had they chosen the rate that was .05 per cent higher, there would have been no penalty involved.

With rates dropping over the last two months, another consideration for people purchasing a home is what the lender’s policy is for dropping your rate after your initial approval but before your mortgage closes.

A physician friend groans about patients who use Dr. Google to self-diagnose before they book an appointment.

The internet is a great tool for research, but it is also important that you work with a professional who takes their time to get to know you and does their homework to find the right mortgage for you.



Courage to choose

Choose courage over comfort.

This phrase has been running through my head since I heard it. And this story does circle back to mortgages, I promise.

On Saturday morning, I attended Habitat for Humanity’s Key Ceremony in Peachland. A deserving  family received the keys to their new home.

Over the years, I had heard of Habitat for Humanity but had only a vague idea of what they do as an organization. I heard of projects overseas where people go to volunteer their time to help build homes for people in impoverished countries.

I knew about ReStore, as I frequented the store in Prince George before I moved to the Okanagan.

I started volunteering with Habitat for Humanity last fall. I was looking for an opportunity to give back as I feel I have been tremendously blessed and wanted to find a way to help others in our community.

What I have seen over the last few months is what a dramatic impact Habitat has on the lives of so many people in our area.

At the ceremony on Saturday, there were tears of happiness and whoops of joy. This family’s journey to home ownership was shared. For them, it was a 12-year plan to have a home to call their own.

When it came time for the new homeowner (a single mom) to say a few words, there were not too many dry eyes in the crowd.

She shared a little more about her journey, including how she had to put her dreams of pursuing her art as a career on the back burner, in order to take the steps necessary to qualify for a Habitat home.

She talked about having to make some tough decisions. She talked about prioritizing having a safe, stable home for her son over her desire to focus on her passion.

She talked about choosing courage over comfort.

Then, she snipped the ribbon and opened the door to her new home.

There are many of us who can learn from this amazing lady, me included. Sometimes, making the tough decisions and sacrifices now will pay off in amazing ways down the road.

One couple I worked with about four years ago shared a strategy with me. They desperately wanted to buy a home, but were having a tough time saving for their down payment.

They had done some reading and started by tracking where their money was going.

They diligently wrote down every penny they spent for a month. At the end of the month, they totalled up a few different categories, and were a bit stunned to realize what they were spending on coffees and meals out.

They went into the bank and opened what they called their Impulse Account. From then on, every time they were out and about and had the urge to spend $11.50 on coffee, they would transfer the $11.50 to their Impulse Account and skip the coffee.

At the end of the first month, they had just shy of $400 in their account. Once they realized they could save money, they knuckled down and made a few other changes.

Over the 1 1/2 years, they saved what they needed for their down payment.

The following year, I worked with another young couple looking to buy their first home. This couple took things to the extreme and made some dramatic life changes as they were determined to buy a home.

For them, this meant selling one of their vehicles and their travel trailer. The young lady walked to work for almost a year to help save for their down payment.

They moved to a cheaper rental and shared the space with a roommate. They cut back on all frills, including meals out and cable.

As she put it, they ate a lot of Mac and cheese.

I couldn’t have done this, and I doubt I will see anyone else work so hard to accomplish what they did.

We all have different priorities. Home ownership is not for everyone. Home ownership may seem like a pretty big goal.

It may not happen today, tomorrow, or even over the next few months, but with a clear goal, a plan, and a strong desire to succeed there may be options out there for you that you haven’t considered.

Having the right people in your corner can make all the difference.

Congratulations to this family on their new home – you’ve worked so hard to get there and are truly an inspiration.



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Honesty best policy

Finding the right mortgage broker is important.

Whether you choose to work with a mortgage broker, a branch employee, or a mortgage specialist tied to one  bank, working with someone who helps you to feel comfortable with the process and knows what they’re doing is key.

Being honest and upfront with your mortgage person is equally as important.

Last week, I had a series of back and forth emails with a couple.

They wanted very specific answers, but would only provide the barest of information for me to work with. They told me they are looking to purchase a home in the $900,000 range.

I replied several times, always qualifying my answers that I needed to understand the whole picture before I was comfortable going into more detail.

Inside voice: I was fully aware that the clients were either shopping or researching before committing to working with me.

We set up a time to chat that confirmed they were having similar conversations with other mortgage providers.

Essentially, they were looking for someone who would tell them what they wanted to hear.

Taking their application over the phone and running quick calculations showed that they did not qualify to borrow anywhere near what they needed to buy the home.

They had apparently been talking to various people over the course of a few months, but never sitting down to provide all of their information. Their branch had pre-approved them to buy the $900,000 home.

When the rubber hit the road and they had an offer on a home, the bank declined their application.

When I dug a little deeper, it turned out that they hadn’t disclosed a child-support payment she had to make to her ex-husband, or a vehicle loan he had co-signed for his daughter.

The loan payment showed up on his credit report, and the child-support payment came to light the same way (arrears where Family Maintenance Enforcement Program has put a comment on her report).

The clients had been adamant that they didn’t want anyone to touch their credit report until they had an offer in play because they were confident it was squeaky clean.

Their bank offers a free app that shows them their credit score all the time. Their scores were 734 and 756 respectively.

When their bank person pulled their credit reports and the additional debts came to light, it was game over for their approval.

So now the clients have an accepted offer on a home, and the people they are buying from have written an offer on another home.

There are a minimum of four realtors, three families, two home inspectors, and multiple other professionals who are investing time into making these purchases come together.

The clients are madly scrambling to find financing as they have fallen in love with this home and have given their landlord notice that they are moving (that’s for another conversation).

I am very particular about getting a complete picture before I give clients the all-clear to go write an offer.

If clients prefer, I wait to pull their credit history. I understand as it can sometimes take over a month to find a suitable property. When we submit applications for approval the credit bureaus need to be less than thirty days old.

I clearly and carefully explain that any mortgage pre-approval I do (if I don’t review their credit) is subject to a satisfactory credit bureau.

I will ask the clients to pull their credit reports and send me a copy so I can have a quick look. Over the years I’ve had several unpleasant surprises and don’t like having to navigate issues after the fact.

I’d rather know what we are working with up front so we plan accordingly.

I am hoping we will be able to find a solution for these clients but can not say with certainty that we can.

Buying a home can be an interesting ride. Regardless of how much homework you’ve done and how prepared you are, there will be moments of stress and anxiety along the way.

Knowing what you can afford, and working with a professional who does their due diligence from the beginning , can help make the process smoother – and most importantly successful.

Hope you enjoyed the gorgeous weekend. Perfect weather for house hunting!



More The Mortgage Gal articles

About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

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

Visit their 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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