​​​​First Time Home Buyer in BC?

What is the mortgage ‘stress test’?
OSFI – The Office of the Superintendent of Financial Institutions has decided that borrowers should be forced to qualify at a rate 2% higher than their actual interest rate and at an amortization period of a maximum of 25 years rather than the actual amortization period on the borrowers contract.  The result is that almost all borrowers will qualify for at least 20% less, forcing many more Canadians to rent for many more years.  This unfortunate policy decision serves to make home ownership even more difficult for hard-working Canadians.  And as rents rise and more Canadians are forced to rent, this will make rental properties even more attractive for investors, further driving home prices out of reach.  If you feel this unfairly impacts you please contact OSFI here.

What is mortgage loan insurance?
Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC), a crown corporation, and GE Capital Mortgage Insurance Company, an approved private corporation. This insurance is required by law to insure lenders against default on mortgages with a High Ratio. The insurance premiums are paid by the borrower and can be added directly onto the mortgage amount. This is not the same as mortgage life insurance.

What is a conventional mortgage?
A conventional mortgage is one where the down payment is equal to 20% or more of the purchase price.  This results in a loan to value, or LTV, of less than 80%.  The purchaser does not normally require mortgage loan insurance unless there are specific lender policies that require it.

What is a fixed rate mortgage?
The interest rate on a fixed-rate mortgage is set for a pre-determined term – usually 5 Years. This offers the security of knowing what you will be paying for the term selected.  The 5 Year Fixed Mortgage is the most popular choice for Canadians.

What is a variable rate mortgage?
A mortgage in which the “discount” you receive from current benchmark rate is fixed.  If the benchmark rate moves up or down your payments can change accordingly, or your amortization period can change.  Variable rate mortgages can generally be locked-in at any time during your mortgage term without cost.  The important question is what fixed rate your lender will offer you at that time. It’s a question that can cost you tens of thousands of dollars if you get the wrong answer, and the wrong rate.

What is a home inspection and should I have one done?
A home inspection is an examination of the property to determine the overall condition of the home. In the process, the inspector should be checking all major components including but not limited to: roof, foundation, crawl space / basement, attic, retaining wall, etc and major systems such as electrical, heating, plumbing, drainage, exterior weather proofing, etc. The results of the inspection are generally provided to the to the purchaser in a written report within 24 hours of the inspection.  Many home inspectors will provide a short list of critical items immediately after the inspection, and also offer a walk-though on site.

How does bankruptcy affect qualification for a mortgage?
Depending on the circumstances surrounding your bankruptcy, generally some lenders will consider providing mortgage financing if you have been discharged for a minimum of 2 years and you have re-established solid credit.  You should have at least 2 established credit facilities that have a perfect payment history, post bankruptcy discharge.

How will child support affect mortgage qualification?
Where child support and alimony are paid by you to another person, generally the amount paid out is deducted from your total income before determining the size of mortgage you will qualify for. Where child support and alimony are received by you the amount received may be added to your total income, provided proof of regular receipt is available for a period of time determined by the lender.  You must have a formal separation agreement in place and provide that to the lender.

Can I get a mortgage to purchase and renovate a home?
The program is called “Purchase Plus Improvements”.  Purchasers with small or large down payments may qualify to buy a home and make improvements to it within 90 days of the purchase completion date. For high-ratio, (less than 20% down payment) financing, both Canada Mortgage and Housing Corporation (CMHC) and GE Capital, insured mortgages are available to cover the purchase price of a home as well as an amount to pay for immediate major renovations or improvements up to $40,000. This option can be a financially sound way to finance needed renovations as the ‘as-improved’ home value is reflected in the initial mortgage making the interest more affordable that credit card financing.

Can I use gift funds as a down payment?
Yes most lenders accept funds that are a gift from family as an acceptable down payment. A gift letter signed by the person providing the gift is required to confirm that the funds are a true gift and not a loan.  Lenders generally want to see that purchasers have saved some money on their own over time which can make the application stronger.

What is a pre-approved mortgage?
A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period of time and for a set amount of money. The pre-approval is calculated based on information provided by you and is generally subject to certain conditions being met before the mortgage is finalized. Conditions would usually be things like ‘written employment and income confirmation’ and ‘down payment from your own resources’, for example.

In summary, a pre-approved mortgage is one of the first steps a home buyer should take before beginning the buying process.

What is a down payment?
Very few home buyers have the cash available to buy a home outright. Most of us will turn to a financial institution for a mortgage the first step in a potentially long-standing relationship. But even with a mortgage, you will need to raise the money for a down payment.

The down payment is that portion of the purchase price you furnish yourself. The amount of the down payment (which represents your financial stake, or the equity in your new home) should be determined well before you start house hunting.

The larger the down payment, the less your home costs in the long run. With a smaller mortgage, interest costs will be lower and over time this will add up to significant savings.

How can you pay off your mortgage sooner?
There are ways to reduce the number of years to pay down your mortgage. You’ll enjoy significant savings by:

Selecting a non-monthly or accelerated payment schedule
Increasing your payment frequency schedule
Making principal prepayments
Making Double-Up Payments
Selecting a shorter amortization at renewal

Can I use my RRSP as all or part of my down payment?
Today, about 50% of first-time home buyers use their RRSP savings to help finance a down payment. If you are a first-time home buyer, the Home Buyers’ Plan (HBP) allows you to withdraw money from your Registered Retirement Savings Plan (RRSP) tax-free to make your down payment. The HBP is administered by the Canada Revenue Agency (CRA). There are certain conditions you must meet to be eligible for the HBP. For more information, contact CRA at www.cra.gc.ca.

What are the costs associated with buying a home?
First and foremost, you have to make sure you have enough money for a down payment – the portion of the purchase price that you furnish yourself.

Secondly, you will require money for closing costs. If you want to have the home inspected by a professional building inspector – which we highly recommend – you will need to pay an inspection fee. The inspection may bring to light areas where repairs or maintenance are required and will assure you that the house is structurally sound. Usually the inspector will provide you with a written report. If they don’t, then ask for one.

You will be responsible for paying the fees and disbursements for the lawyer or notary acting for you in the purchase of your home. We suggest you shop around before making your decision on who you are going to use, because fees for these services may vary significantly.

There are closing and adjustment costs, interest adjustment costs between buyer and seller and (depending on where you live) land transfer tax – a one-time tax based on a percentage of the purchase price of the property and/or mortgage amount.

Finally, you will be required to have property insurance in place by the closing date. And you will be responsible for the cost of moving.

Remember, there will be all kinds of things you’ll have to purchase early on – appliances, garden tools, cleaning materials etc. So factor these expenses into your initial costs.

What should the length of my mortgage term be?
The length of mortgage terms varies widely. As a rule of thumb, the shorter the term, the lower the interest rate the longer the term, the higher the rate.

While four or five year mortgages are what most home buyers typically choose, you may consider a short-term mortgage if you have a higher tolerance for risk, if you have time to watch rates or are not prepared to make a long-term commitment right now.

Before selecting your mortgage term, we suggest you answer the following questions:

1. Do you plan to sell your house in the short-term without buying another? If so, a short mortgage term may be the best option.

2. Do you believe that interest rates have bottomed out and are not likely to drop more? If that’s the case, a long mortgage term may be the right choice for you. Similarly, if you think rates are currently high, you may want to opt for a short to medium length mortgage term hoping that rates drop by the time your term expires.

3. Are you looking for security as a first-time home buyer? Then you may prefer a longer mortgage term, so that you can budget for and manage your monthly expenses.

4. Are you willing to follow interest rates closely and risk their being increased mortgage payments following a renewal? If that’s the case, a short mortgage term may best suit your needs.
What are the monthly costs of owning a home?

Needless to say, you’ll have financial responsibilities as a home owner.

Some of them, like taxes, may not be billed monthly, so do the calculations to break them down into monthly costs. Below you will find a list of these expenses.

The Mortgage Payment

For most home buyers, this is the largest monthly expense. The actual amount of the mortgage payment can vary widely since it is based on a number of variables, such as mortgage term or amortization.

Property Taxes

Property tax can be paid in two ways – remitted directly to the municipality by you, in which case you may be required to periodically show proof of payment to your financial institution; or paid as part of your monthly mortgage payment.

School Taxes

In some municipalities, these taxes are integrated into the property taxes. In others, they are collected separately and are payable in a single lump sum, usually due at the end of the current school year.

Utilities

As a home owner, you’ll be responsible for all utility bills including heating, gas, electricity, water, telephone and cable.

Maintenance and Upkeep

You will also have to cover the cost of painting, roof repairs, electrical and plumbing, walks and driveway, lawn care and snow removal. A well-maintained property helps to preserve your home’s market value, enhances the neighbourhood and, depending on the kind of renovations you make could add to the worth of your property.