When to Buy A Home = When You Can Afford A Home
2020-08-17 | 08:04:47
Good Morning everyone!!
Hope you all had an enjoyable weekend with your friends and loved ones.
It has been another busy week with qualifying new clients as they embark on purchasing their first home.
They have been renting for years.
They have also, smartly, been saving for years.
As we all know, the crazy world of real estate prices, especially in the Greater Toronto Area and Greater Golden Horseshoe continues to go up and up, and up.
Many still on the fence since COVID-19 forced the shutdown of our economy have seen interest rates dropping to historic lows. As of last week, we have also seen the lowering of the qualifying rate (better known as the stress test) from 4.94% to 4.79%.
Though the lowering of the stress test is positive, its net effect on purchasing a home – especially in or around the Toronto area – is less than the rate of price increases in said area.
Also, July 1st had CMHC backed insured mortgages implement even more strict guidelines for would be homebuyers. Nearly two months after CMHC’s decision, important to note, not followed by Canada’s other two mortgage insurers – Genworth and Canada Guaranty – the sky has not fallen on Canadian homeowners and real estate prices. At least not yet. And, at least not to the tune of 8% to 18% that Evan Siddall, the President & CEO CMHC, is predicting over the coming months.
So where is the problem?
Where is the disconnect?
The purpose of CMHC – Canada Housing and Mortgage Corporation – is to help people, like my clients, purchase a home.
The main problem is decades old now. The Canadian government needs a national housing initiative that will increase the stagnant supply of homes of all types being fought for by a continuing high demand. All this, despite the economic downturn caused by COVID-19.
The result is a real estate market that is, thus far, not showing negative results anywhere near what Evan Siddall is projecting is on the horizon.
But, the effect on the consumer, bombarded by negative predictions on home prices, has resulted on some would be buyers not wanting to buy and, some would be sellers not wanting to sell.
Where does this leave you who is working hard and saving diligently to buy your first home?
For realtors, how can you better serve your first time homebuyers?
The answer will be made by educating yourself and/or your clients on what is required of them when purchasing a home, despite and in light of how difficult it is to get a mortgage in the first place.
Here are some tips:
* Once you have spoken to a lender or mortgage agent such as myself, we will not tell you when you should buy a home. We will reveal if you can afford to buy a home within your desired price point.
Having a full time job, good or great credit, personal savings and not borrowed money towards a down payment of at least 5% are initial steps in the process.
Debt service ratios: GDS and TDS, are calculated to determine what price point you are able to afford. Coupled with the stress test that is used to create a “what if” scenario of interest rates rising, a mortgage amount limit is determined for your financial position.
* Look for a home and partner with a professional Realtor once you have been pre-approved or pre-qualified.
I’ll be honest, I hate both of these terms used above. Pre-approvals or being pre-qualified assumes that one receives some kind of guarantee that the lender will lend on a specified amount and all that is missing is the home you choose.
Far from it.
Many conditions are set and, until the final day of closing, the lender has every freedom to renege on the deal if they feel the risk factor is too high, one’s credit score has taken a significant downturn or, the borrower’s financial position has changed from the period of being pre-approved. Please consider there are other factors as well in addition to those mentioned.
* Use savings for a down payment rather than borrowed funds. If the down payment is coming by way of a direct family gift not needing to be repaid, a letter is required stating that the funds are a gift.
Also, if you or your client is putting a down payment less than 20%, a mortgage default insurance is required. If only placing a 5 to 9.99% down payment, a 4% mortgage default insurance charge is added to your mortgage amount. Therefore, your 5% down payment on a $400,000 mortgage will result in an additional $16,000 payable or amortized charge over the life of your mortgage.
Between 10 – 14.99% down payment, a 3.10% mortgage default insurance is charged.
Between 15 – 19.99% down payment, a 2.80% mortgage default insurance is charged.
From 20% and above, no default insurance is required.
Please also note that for insured mortgages, the maximum amortization period is 25 years in contrast to the 30 years you can amortize a mortgage with a down payment amount of 20% or more.
Please also note that the mortgage default insurance protects only the lender in the event the borrower can no longer pay. In 2019, the rate of mortgage delinquencies was at .29% for all of Canada. Translation: Canadians pay their mortgages!! Lending criteria is strict!! High-risk mortgages do not exist in Canada.
* You need to have saved between 2 and 5% above and beyond your purchase price for closing costs and other miscellaneous expenses.
These costs include land transfer taxes (charged twice if buying in the Metro Toronto area!!), house insurance, moving costs, legal fees, utility set up fees and more.
I always tell my clients, don’t become too focused on purchasing a more expensive home. Lenders do not and most will not allow you to use all of your savings towards the down payment.
Nor should you.
It is always more prudent to afford a lesser priced home that still allows you to carry on with your lifestyle after you buy your home and pay for all the extras attached to your home’s purchase. Going to bed at night knowing you need every penny you earn to go to the mortgage is not the best strategy towards homeownership – despite your willingness to assume that sacrifice.
Also, in the excitement and euphoria of the home’s purchase, many do not consider repairs, upkeep, minor renovations and a myriad of other expenses that either quickly - but eventually – appear. Knowing you have extra funds, preferably your own rather than borrowed funds, will be a further peace of mind to yourself, your family and, your pocket book.
Keep your focus on your debts, your credit score, your savings and how close you want to be to your maximum level of purchasing power.
Your economy at home will more often than not, ever neatly correspond to the economy at large, reports, data and forecasts that we receive daily – whether they be good or negative.
Also, trying to time the real estate market is a frustrating practice that has kept many from making the decision to purchase when they were able to instead of focusing on prognosticators assertions that “the bubble” will soon burst.
This is not to guarantee that things will not get worse in the real estate market. They might…they might not. There have been drastic hits in the past but, over the long term, real estate remains one of the safest investment vehicles we are privy to.
But 75% of Canadians surveyed purchase a house because they want a home they can call their own – and not because it is an investment vehicle.
Since World War Two, the annual appreciation in the Toronto region and its periphery is near 5%. This of course includes all the negative periods within that time.
Once the economy improves, even if it takes a couple of years to get back to where we were pre COVID-19, the challenge again for home prices will continue to be the commitment the Canadian government pledges towards increasing the housing supply to supplement the (until now) never decreasing demand.
As always, if you, your client or someone you know can use my services to position themselves towards a mortgage product best suited to their needs and lifestyle, please contact me.
It’s my pleasure to be of any assistance and I look forward to your calls and questions.
Wishing you all a great week ahead,
Marco
