Month: October 2020

Download My Mortgage Toolbox!

The first-time home buyer incentive (an overview)

General Konstantin Seroshtan 19 Oct

If you’re an aspiring first-time home buyer in Canada, you’ve may have heard about the first-time home buyer incentive program. It’s the latest first-time home buyer program in Canada that aims to help new buyers more easily afford a home.

While the incentive is an interesting program that offers a lot to people in the right situation, it has qualification conditions that limit how useful it can be. This page has everything you need to know to understand whether you can benefit from the incentive.

What is the first-time home buyer incentive?

The first-time home buyer incentive is a kind of interest-free loan for qualified first-time home buyers to help decrease their regular mortgage payments. The incentive contributes up to 10% of the total cost of the home, which you’ll need to pay back within 25 years. By delaying the repayment of this interest-free amount, first-time home buyers can save a significant amount of money over the course of their mortgage. Launched in September 2019, the first-time home buyer incentive is offered by the Canada Mortgage and Housing Corporation (CMHC).

More specifically, the first-time home buyer incentive is a shared equity mortgage. That means the CHMC will technically be a part-owner of your home, although you’ll have exclusive access to it. There’s more detail on the technicalities of shared equity mortgages below.

How does the incentive work?

The first-time home buyer incentive sees the CMHC pay for up to 10% of the cost of your first home, as part of a shared equity mortgage. The incentive provides 5% of the purchase price for an existing home or 10% for a newly built home. The additional contribution will lower the cost of your regular mortgage payments.

Example: With a $400,000 mortgage, a 2.5% fixed rate, and a 25-year amortization, your monthly payment would be around $1,792. With the CMHC covering 10%, your new mortgage would be $360,000, with a new monthly payment of $1,613. That’s a saving of $179 per month.

A shared equity mortgage means that a second party – in this case, the CMHC, a branch of the federal government – shares ownership of the home, based on how much they invest. With the full 10% of the first-time home buyer incentive, that would mean the CMHC owns 10% of your home. However, the incentive provides you exclusive access to the home – you won’t need to share 10% of it with the government!

You’ll need to pay back the CMHC contribution within 25 years or when you sell the home, whichever comes first. While the incentive amount is interest-free, the amount of money you’ll need to pay back will fluctuate alongside the value of your home.

Example: If you bought a home worth $500,000 today, a 10% CMHC contribution would be $50,000. However, if you pay back the CMHC contribution when the house has grown in value to $750,000, that 10% figure would be $75,000. That’s how much you’d need to pay back.

Basically, you’ll have to pay back the percentage borrowed (5% or 10%) of the value of the home at the time you sell or pay back the incentive. You’ll pay more than you initially borrowed if the home increases in value, less if the home depreciated.

Sounding pretty good so far? Unfortunately, the first-time home buyer inventive is not without its flaws.

Qualifying for the first-time home buyer incentive

One of the weaknesses of the first-time home buyer inventive is the range of restrictions put in place on who can use it, and on what kind of homes it can be used. Here are the four main requirements for qualifying for the first-time home buyer incentive.

First-time home buyer: You need to be a first-time home buyer to be eligible. This is a pretty obvious rule, considering the name of the program! For this program, a first-time home buyer is defined as never having owned a home anywhere in the world, and to not have lived in a home owned by their spouse or common-law partner in the last 4 years.

Household income: Your household income must be less than $120,000 to qualify. That means you and your partner’s income (if you have a partner) must be less than $120,000 combined. The current average income in Canada is around $52,000, so while most people will still be eligible with this rule, it doesn’t leave a lot of wiggle room.

 

Minimum down payment: You must have the minimum required down payment saved in cash. For properties worth less than $500,000, that’s 5% of the overall property price. For homes worth between $500,000 and $1 million, the minimum down payment is 5% of the first $500,000 plus 10% of the rest. The incentive amount is not counted as part of the down payment.

Four times your income: The maximum amount you’re able to borrow is four times your qualifying income. That means the maximum amount you can borrow and still be eligible for the incentive is $480,000, and that’s only if you earn exactly $120,000 a year. This is the most restrictive requirement, as it significantly limits the number of mortgages that will be eligible for the incentive, especially in Canada’s more expensive cities, like Toronto, Vancouver, and Calgary.

Taken together, these restrictions seriously limit the number of Canadian first-time home buyers that are actually eligible for the incentive. Not only will they have to earn close to an average income, but they will need to buy a very modestly priced home compared to their earnings.

Conclusion

So, is the first-time home buyer incentive right for you? Well, maybe. Firstly, you’ll need to decide whether you are eligible for the incentive. Then, crunch some numbers to determine your mortgage affordability with and without the incentive. If you want to buy a home that’s more expensive than the maximum allowed under the incentive, then it might not be for you. On the other hand, understanding the different options available to you might influence your purchasing decision.

Of course, it’s impossible to accurately predict future home prices and, therefore, how much the incentive will actually cost you. There are also other options to consider – like a joint mortgage – that can help reduce the financial burden of your first mortgage. It’s best to speak to a mortgage broker to determine whether or not the first-time home buyer incentive is right for you.

Let’s chat!

📲250.826.7626

📩konstantins@dominionlending.ca

 

 

 

 

 

 

by  Tim Bennett

7 TIPS TO GET APPROVED FOR A MORTGAGE

General Konstantin Seroshtan 16 Oct

If you’re looking to dive into homeownership, it’s important to be prepared at every step. Besides tracking interest rates and hunting for the perfect home, applying for a mortgage is the biggest step in the process. While it might seem stressful, it can be made much easier if you get your financial affairs in order ahead of time. Here are 7 ways to help get your mortgage application approved.

  1. Check your credit score

In Canada, credit scores run from 300 to 900 across five categories: Poor, Fair, Good, Very Good, and Excellent. The exact categories vary based on which credit bureau is being used, but the process is essentially the same. Your credit score is a snapshot of your overall financial health, so it’s important that you know what yours is.

Mortgage lenders will use your credit score to gauge your financial trustworthiness and ability to repay your debts. The higher your credit score, the more likely you’ll be offered the lowest mortgage rates in Canada. Ideally, you want your score to be at least 680, but higher is always better. In addition to your overall numerical score, your credit report will also contain information about late payments, the number of accounts you have open, your overall debt levels, and the length of your credit history. Making loan and bill repayments on time and not using too much of your available credit will generally leave you with a higher score.

You can check your credit score for free with several online companies. Online credit checks will pull your score from one of Canada’s two credit bureaus, Equifax or TransUnion. It’s a good idea to check your score each quarter, and do everything you can to increase your credit score.

  1. Save a larger down payment

Buying a home will always require some amount of cash upfront, also known as a down payment. The bigger your down payment is the better, for a few reasons. The main reason is simply that the larger your down payment, the less you’ll need to borrow, and the less interest you’ll pay. However, just getting approved for a mortgage relies on the down payment as well.

What’s the minimum down payment for mortgage approval? In Canada, there are minimum down payment requirements based on the home’s price:

  • Less than $500,000: The minimum down payment is 5% of the purchase price.
  • $500,000 to $999,999: You’ll need 5% of the first $500,000, and 10% for the portion of the purchase price above $500,000.
  • $1 million+: 20%(minimum) of the total purchase price.

In Canada, a down payment of less than 20% of the home’s purchase price requires the buyer to buy mortgage loan insurance. Paying these insurance premiums will increase your monthly mortgage payment.

Overall, you’ll want to save up as much as you can for your down payment. Of course, that’s easier said than done when homes in cities like Kelowna and Vancouver can run north of a million dollars! However, the more cash you put down upfront, the more likely you are to get approved by a mortgage lender.

  1. Keep your income stable

While you’re applying for a mortgage, it’s important to keep your day job. Mortgage providers won’t approve your mortgage without proof you can make your payments. A full-time job is the best way to prove that, as it guarantees your income long-term. Having been with an employer for a long time will also help your application, though it’s not the only thing that matters. If you’re applying for a mortgage with your partner, both of you having full-time jobs is ideal.

Note that as long as the coronavirus pandemic continues, the stability of your income is even more important than normal. The last thing you want is to take out a mortgage just before you lose a major source of income!

If you’re employed on a casual basis, it might be worth looking for a permanent role for the duration of your mortgage application, even if it’s just part-time. Getting a great mortgage with a low rate can save you tens of thousands of dollars, so it could be worth finding some more stable employment while you finish your application.

If you’re self-employed, things can get a little more tricky. You’ll be required to provide details on your business and income for several years, proving that you’ll be able to stay profitable long term, in order to meet your mortgage payments. The best thing you can do to get approved for a mortgage if you’re self-employed is to get in touch with a licensed mortgage broker like me. I have the background knowledge you’ll need the prepare the best possible application.

  1. Pay down existing debt

Taking on a mortgage means taking on some long-term debt, so you’ll want to minimize your existing debt. Once you get your mortgage, paying it will be much easier if you don’t have other debts to service. Existing debt will also make it more difficult to be approved for a mortgage, as lenders will look at your debt-to-income ratio when considering whether or not to lend to you.

Your balances across your credit cards, lines of credit, or student loans don’t necessarily need to be at $0. However, your existing debt will impact how much you’ll be able to borrow and at what rate. Keeping debt levels low is also good for your credit score in general.

  1. Get a mortgage pre-approval

A mortgage pre-approval is when a lender evaluates your financial situation and pre-approves you for a set mortgage amount, interest rate, and term. Mortgage pre-approvals are valid for 90 to 120 days, giving you time to find a home without losing a great mortgage deal.

Besides your credit score and the size of your down payment, mortgage lenders will also consider your income and employment status, debt-to-income ratio, and your assets and liabilities. A mortgage pre-approval is a good thing to have because it allows you to house hunt within your price range, and also means you can move quickly to submit an offer when you find your dream home.

  1. Get a great rate

Getting a great rate is generally seen as the outcome of a mortgage application, but it goes both ways. By using a mortgage broker, you’ll often find lenders offering not only lower rates but also better contract terms!

  1. Know what you can afford (and what you can’t)

How much of a mortgage you can afford is affected by several things, including your expected mortgage payments, living costs, debt repayments, and other financial obligations. While mortgage lenders will consider all of these, it’s important to be honest with yourself about what you can afford.

Only you can fully understand your financial and lifestyle needs. Things like how much you spend on childcare, groceries, or supporting your parents can be missed in the mortgage application process. On top of that, your future plans could change your financial situation. While you don’t need to tell your bank if you plan to quit your job or have a child, they would seriously affect your ability to afford your mortgage. You should also factor in other purchasing costs, like home inspections and closing costs (usually about 3-4% of the purchase price). Remember you’ll have to pay for utilities, upkeep, property taxes, and repairs too.

Decide what you can realistically afford now and in the future, then stick to it. If your finances are good, you might get approved for a higher mortgage than expected. Resist the temptation to spend every dollar you’re approved for and consider what you can actually afford.

The bottom line

Getting a mortgage approval is about getting your financial life in order. Keeping your credit score high, paying down debt, and saving money are all worth doing, whether you’re applying for a mortgage or not. Even if you’re not looking to buy a home now, look after your finances today and you’ll be in a stronger financial position tomorrow, whatever you decide to do.

 

 

 

 

 

 

 

by Alyssa Furtado

 

Your mortgage payment deferral is over. Now what?

General Konstantin Seroshtan 5 Oct