The Purchase Process – What are My Closing Costs?

General Victor Anasimiv 24 Oct

When it comes time to get serious about purchasing a home, it’s important to do your homework and make sure you have a team of knowledgeable professionals working with you:  a realtor familiar with the area in which you’re shopping around, a notary or lawyer who can work around your schedule, and a mortgage broker who understands your needs and has helped you with the pre-qualification process.

Perhaps you’ve saved up enough of your own money for a down payment.  Or maybe you’re being gifted the funds by a generous family member.  Regardless, in addition to down payment funds, you must also have money set aside for closing costs.  Total costs will vary according to the transaction, but your mortgage lender will want to know that you have additional money on the sidelines to cover these costs.  Some lenders will require proof that you have 1.5% of the purchase price available for closing costs, especially if it’s a high-ratio purchase (less than 20% down).  So an important part of the homework leading up to purchase time is gathering estimates of any fees & costs that may be applicable to you.  The following is a list of potential, but not exhaustive, closing costs you may encounter upon completion of your purchase.

Mortgage default insurance

You may be more familiar with the terms CMHC or Genworth insurance, as they are the largest mortgage insurers in Canada, with Canada Guaranty being the third.  Mortgage default insurance provides protection to your lender if you happen to default on your mortgage.  If you are putting less than 20% down, your mortgage is known as a high-ratio mortgage and subject to a mortgage default insurance premium.  The premium is calculated as a percentage of the mortgaged amount and the percentage will vary based on the total down payment.  For example, if you put between 5 and 9.99% as down payment, your insurance premium is calculated at 4% of the loan amount.  If you can manage a down payment of 10 to 14.99%, the premium drops to 3.1%.  You can opt to pay the insurance as a lump sum, but the majority of borrowers simply have the premium added to the mortgage amount and amortized with the rest of the loan.

Property transfer tax

In B.C., when you purchase or gain an interest in a property, you’re responsible for paying property transfer tax.  The tax is based on the fair market value of the property at the date of registration, unless you qualify for an exemption, which can be granted under certain conditions to first-time home buyers or buyers purchasing a newly built home.   In B.C., the tax is charged at a rate of:

  • 1% on the first $200,000;
  • 2% on anything over $200,000 up to and including $2 million; and
  • 3% on anything over $2 million.

For example, if the fair market value of a property is $600,000, the tax owed will be $10,000.

GST

Newly built homes are subject to GST at purchase. There are rebates and exemptions available and your solicitor should calculate the amount payable for you.  The GST is added to the purchase price, less any rebates.  Your down payment will be calculated based on this total purchase price.

Home insurance

This insurance must take effect from the moment you are the owner of your home. Certain types of properties can be more challenging to insure and it’s always a good idea to research the property you’re interested in purchasing to see how much insurance will cost.  Some lenders, such as local credit unions, will require additional earthquake insurance.  Home insurance typically costs around $1,200 per year, but costs will vary depending on the type, location and any unusual characteristics of the property, such as outdated construction materials.

Home inspection fee

The purpose of a home inspection is to ensure you are making a sound investment. A good home inspection should cover nearly every element in and around a home and other structures on the property. Roofing, full exteriors, structural elements, full interiors, plumbing, electrical, heating and air conditioning, and all of the components of these are subject to inspection. It is a good idea to do your research before hiring a home inspector. Your realtor may be able to recommend someone, or you can check with friends or family to see who they have used. A good home inspector will spend three to four hours going over your home, then spend time with you explaining his/her findings. Inspectors provide a written report documenting any concerns that need to be addressed. You can expect to pay $400-$500 for an inspection.

Appraisal fee

An appraisal is not the same as a home inspection.  While a home inspection is more for your own peace of mind, your lender may require an appraisal to confirm fair market value. Most lenders will pass the cost of an appraisal on to you. Depending on the location and complexity of the property, an appraisal can cost anywhere from $300 to $1,500. Some lenders have an internal valuation system they use with the intention of bypassing the appraisal requirement.  If the property passes this test, there is usually a much smaller fee associated with it.

Title insurance

Title insurance is mandatory with most lenders.  The price can vary based on property value, but is typically about $250.  In addition to protecting against title fraud, this insurance will protect the lender from various issues with the property, such as violations of municipal by-laws or encroachments onto an adjoining property.  It’s important to note that this insurance is for the benefit of the lender. Homebuyers can purchase an additional personal policy if the choose.  It is relatively inexpensive if the two policies are purchased together.

Legal fees and disbursements

On a straightforward transaction, legal fees typically run about $1,200-$1,400. Your solicitor will also calculate any money that is owed to the seller for your portion of items that have been paid in advance, such as municipal property taxes or utility bills.

As your mortgage broker, I will do my best to make sure you’re aware of any potential fees or additional costs that might be encountered.  But with a bit of preliminary research and discussions with your realtor, you can be sure that you’ve put enough money aside so there are no last-minute surprises during the purchase process.  Prior planning prevents poor performance!  Let me help take the stress out of the process.  Call me today!

An “Engineered Slowdown” of the Canadian Housing Market

General Victor Anasimiv 17 Oct

Think back to the beginning of July.  Vacations were just getting started.  Summer weather was in full swing, at least here in BC.  Seems pleasant, but mortgage brokers across Canada were quietly dealing a new round of frustration.  On July 8th, the Office of the Superintendent of Financial Institutions (OSFI), the big banks’ supervisor & regulator, published draft revisions to the guidelines for residential mortgage qualification, specially for uninsured mortgages.  You may recall that in the fall of 2016, sweeping changes were made that included a new stress test for insured borrowers.  After that change, a borrower with less than 20% down-payment would now have to qualify at the Bank of Canada benchmark rate (currently 4.89%).  Prior to the stress test, the same borrower could qualify at contract rate if they chose a 5yr fixed rate (currently about 3.09%).  This “stress test” effectively decreased one’s purchasing power by about 20%.

Fast forward to now.  As of today, OSFI has made their summer draft revisions a reality.  There are a couple changes being made, but directly from their website, here is the change that will be most felt by the general publicare the changes:

OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages. Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.

OK, so what does this mean exactly?  If you had 20% available for a down-payment, you could avoid the “stress test” and still qualify at the contract rate.  As of January 1, 2018, this will no longer be the case.  As of that date, the minimum qualifying rate for uninsured mortgages will be “the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%”.

Perhaps this is best explained with an example. Let’s assume the purchaser (or purchasers) has a total qualifiable annual income of $75,000, no other debts and a decent credit history, and has access to the required 20% down payment (own resources or gifted).  Under the current rules as they are, if you chose a 5-yr fixed rate term (currently about 3.39%), this income would likely qualify for a purchase of about $565,000.

After January 1, 2018, the qualifying rate for this mortgage will now be 5.39% (the greater of the benchmark rate 4.89%; or the contract rate +2% = 5.39%).  At this higher rate, and all other variables being equal, the maximum purchase price drops to about $450,000.   Purchasing power has dropped by about 20%.

So why is this happening?  OSFI’s official explanation is that “these revisions reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada”.   These changes are part of an “engineered slowdown” of the Canadian housing market.  The general consensus from mortgage brokers and real estate agents across the country is that this approach is a bit too heavy-handed.  Perhaps it would be more prudent to leave sufficient time to gauge the previous changes before making new ones.  As with the fall 2016 changes, there are a lot of unanswered questions, and as brokers, we fully expect further clarifications and explanations in the coming days and we will do our best to keep you, our clients as informed as possible.

However, regardless of the motives behind these changes and any consequences, anticipated or not, they are happening.  If you’ve been toying with the idea of purchasing or refinancing, now is a very good time to thoroughly examine all options as your goal will be pushed a little further out of reach in the new year.  I’m more than happy to discuss these new changes with you and to help figure out your best course of action moving forward.  Contact me today!

 

So You Want to Buy an Investment Property…

General Victor Anasimiv 16 Oct

Rental vacancy rates are at historic lows on Vancouver Island.  If you’ve been looking for productive ways to invest your money, perhaps you’ve been thinking about purchasing an investment property as it seems like a pretty safe bet.   The purchase of any new property is an important decision – one that should be planned for and executed carefully.  It’s one thing to purchase a new home to live in yourself.  It’s another thing entirely to purchase a rental property.  While the purchase process – viewing the property, making an offer, signing contracts, etc – unfolds the same way, getting a mortgage can be quite different.  The government has imposed regulations that have altered the qualification criteria and lenders have created different mortgage products crafted with investment properties in mind.

The first step in the purchase of any property should be organizing your financing. Here are a few important, but often overlooked points to be aware of:

  • Have you saved up a sufficient down-payment?  The minimum down-payment on an investment property is 20%, unlike the required minimum of 5% on an owner-occupied property.
  • Recent regulatory changes by the government have forced lenders to price mortgages differently. Best rates are no longer available on rentals. Expect a rate 10-25 basis points higher than the rate offered for an owner-occupied home.
  • Are your income taxes up-to-date?  A lender will want to know that you’ve filed your most recent year’s taxes.
  • Have you explored your options for property management?  Do you know how much it will cost?  Are you better off handling property management yourself?  Do you consider yourself handy?
  • How large is your real estate investment portfolio already?  Some lenders impose limits on the number of rentals a borrower can own.

With this in mind, it’s important to determine just how much you qualify for, which is my job.  You will need a sufficient annual income to cover the anticipated mortgage, property tax & insurance costs, in addition to all of your other debts, which includes mortgages currently in place on your primary residence or existing investment properties.   To help keep debt servicing in check, rental income from your existing properties & the new rental can be used to help boost your total annual income.  Exactly how much can be included can depend on certain factors, such as:

  • the lender, as each has its own guidelines regarding rental income.  Some allow 50% of the rent to be used while others allow 80%.  Some treat it as an addback, simply adding the allowable rental income to overall income, while others treat it as an offset, deducting the rent from overall housing expenses.
  • the location of the property. Rental income from a rural property may be looked at differently than rent from a condo in the city.
  • the type of property.  Is it a standalone single family dwelling?  Is it a 4-unit townhouse?  Or is it a rental suite attached to your primary residence.   These differences will matter.

Before jumping into the purchase, you’ll want to make sure that this property will actually turn a profit for you.  Is the property currently tenanted?  If so, a current lease will let you know how much rent to expect.  On the purchase of a rental property, an appraisal is almost always required.  If the property is currently sitting vacant (which probably isn’t likely these days), an addendum can be added to an appraisal whereby the appraiser determines a value for fair market rent, and we can use that figure in your application for financing.

Becoming a landlord carries a lot of responsibility.  It is important that you are aware of what is expected of you legally, and equally as important, what rights you have as a landlord.  The government of BC provides a lot of info to help both individuals maintain a working relationship.  Here’s a link to their page. Rules and regulations might be different in other provinces, so be sure to do your homework on the subject.

As you can see, there are a lot of variables and key points to be aware of when purchasing an investment property.  It’s my job to take care of the financing part of the purchase.  I’m with you every step of the way to make sure nothing is forgotten and that we’re getting you the best rate and mortgage possible.  I can also help you plan for the future, helping you determine the best property to purchase to achieve your goals, and figure out what the next steps will be.  If you’re thinking about an rental property to diversify your investment portfolio, give me a call today

250-338-3740

Is it Time to Lock in a Variable Rate Mortgage?

General Victor Anasimiv 10 Oct

Approximately 32% of Canadians are in a variable rate mortgage.   Up until very recently, rates have been declining steadily for the better part of the last ten years, so this has worked well.

Recent increases in mortgage interest rates understandably trigger questions and concerns, which are best handled by a discussion with me, an independent mortgage expert, not the lender. There are details & conditions you might not be aware of, and there is no guarantee that a lender will cover all the bases.

Over the last several years, there have been headlines warning us of impending doom with both house price implosion, and interest rate explosion.  Other than a couple very localized & brief instances, very little of this doom & gloom has come to pass.

Before accepting what a lender may offer as a lock-in rate, I highly recommend having a quick discussion with me to review all of your options. Especially if you are considering freeing up cash in the future for such things as renovations or travel or investing towards your children’s education.  Even if you just want to lock in the outstanding balance, having a conversation about pre-payment penalties is crucial because they will change when you switch from a variable to a fixed rate.

In the vast majority of variable rate mortgages, the usual pre-payment penalty is 3 months interest.  There are exceptions to every rule – if you opted for a low-rate no-frills type of mortgage, it may come with a larger penalty.  But 3 months interest is usually the standard.  On the other hand, the pre-payment penalty for fixed rate mortgages can be quite substantial, even if you’re early on in the term of the mortgage.  It’s known as the interest rate differential (IRD) and is based on factors such as your current rate, the posted rate for a comparable mortgage and the amount of time left in your term.  It’s a fairly complex calculation and is typically many times higher than the standard 3 months interest penalty.

These massive penalties are designed for banks to recuperate any losses incurred by clients (you) breaking and renegotiating the mortgage at a lower rate. And so locking into a fixed rate product without careful planning can translate into a significant financial downside for the client.

Another common misconception involves the lock-in rate.  “Locking in” your mortgage doesn’t freeze the current rate on your mortgage.  Rather, you will lock into a rate offered by your lender, which could be based on the length of time left in your term.  Or you could be forced to start a new 5-yr term, and there is no guarantee that the rates offered will be current best rates.

On the other hand, there is something to be said for the peace of mind that comes with having a fixed rate mortgage.  You know what your payments will be for the full term and never have to worry about them increasing.  If it helps you sleep at night and alleviate any concerns, maybe locking in is the better option.  Generally speaking, there is no ‘correct’ answer that applies to everyone because everyone’s situation is unique.  There is only a ‘specific-to-you’ answer, and the best way to come up with that answer is having a conversation with me, your mortgage broker.

Life is variable, perhaps your mortgage should be too.

As always, if you have questions about locking in your variable mortgage, breaking your mortgage to secure a lower rate, or any general mortgage questions at all, I’m here to help!  Contact me today at 250-338-3740

(with info taken from the monthly DLC newsletter)