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March 22nd, 2018 | Buyers

The Buying Process: Financing – Buyers Spring Training Seminar

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A Few Key Terms & Definitions

To get an idea of what we are talking about, let’s define a few key terms in the financing process.

Down Payment vs. Deposit.

After placing an offer on your dream home, you’ll have to provide a deposit (certified cheque or bank draft) within 24 hours after the acceptance of your offer, otherwise, no deal!

While the money that you put down towards your mortgage (typically 5-20% of the purchase price) is called a downpayment. The deposit becomes part of the downpayment once the sale closes. However, if the sale does not close due to buyer neglect, the deposit may be lost. 

A+A tip: Bringing a certified cheque or bank draft (the deposit) during an offer deadline, will increase your chances of winning.

Federal Government Home Buyers Plan (RRSPs).

To help first time buyers, the government put in place the HBP, a program that allows prospective buyers to withdraw up to $ 25,000 from their RRSPs to use towards their downpayment. Buying as a first time buyer couple? You can use $50,000 ($25,000 each), but don’t forget, you have 15 years to pay it back!

Mortgage Pre-Approval.

A mortgage pre-approval is fundamental in the process of buying a home. To be pre-approved a bank or lender will look at the prospective buyer’s credit history, debt and income to ensure their credit worthiness and give the buyers a shopping budget.

Stress Test & Interest Rates.

Another aspect to take into consideration when being pre-approved is the interest rate. The stress test was implemented for everyone looking to buy, irrespective of their downpayment amount. The Bank of Canada requires banks/lenders to pre approve buyers on the Qualifying Rate (currently 5.14%, was 4.99% in 2017) to ensure they can withstand an interest rate hike. This obviously decreased the affordability for many.

The Mortgage Interest Rate is the actual rate of your mortgage once you purchase a property.

A Lenders, B Lenders, Brokers and Private Lending.

A Lenders are the big Banks, they offer traditional, more favourable rates/terms & conditions.

B Lenders are Trust Companies and Credit Unions, consider more “medium-to-high-risk” buyers, with less favourable rates/terms & conditions.

Private Lenders are Private companies, people, friends & family, they consider “high-risk” buyers, with the least favourable rates/terms & conditions.

Brokers are the ones who work with the above institutions to Broker loans.

But what are the Key lending facts?

If you are buying a first home, you can purchase with 5% downpayment up to first 500K, with 10%, on all amounts over 500K, and with 20% if the property’s value is over 1M.

CMHC (Canada Mortgage and Housing Corporation) is a government corporation that assists all Canadians providing mortgage liquidity and affordable housing development. If the buyer has less then 20% downpayment, the CMHC insurance fee will be blended into the buyer’s mortgage. In the case the buyer has 20% or more, they will not have to pay the insurance fee.

Although the stress test reduced affordability by 10-20% for some buyers, the market will be protected from overextension and pollution, thereby ensuring that speculators will not dictate the future market.

To conclude:

  • Many major lenders already used approval rates higher than posted rates (2-4%)
  • For those people that are self-employed and contract workers, not much has changed and therefore, that Buyer pool stayed the same
  • Credit Unions are still underwriting deals under old rules
  • Important to remember that 2017 saw interest rates hike by 0.5% and another hike of 0.25%  was seen walking into 2018, with more looming in the near future

Other Seminar Notes:

2018 Market Update & Analysis

The Buying Process: Showings

The Buying Process: The Offer

The Buying Process: Post-Purchase

 

Have a question on what you read? Ready to start the buying process?

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