RRSP Home Buyers’ Plan

General Konstantin Seroshtan 1 Feb

An RRSP (Registered Retirement Savings Plan) is a valuable tool for saving for retirement, offering tax-deferral on both contributions and on any interest your account receives. That means you can rack up some serious compound interest on your savings before paying tax. You’ll only pay tax on the funds you withdraw from the RRSP in retirement.

But did you know you can use your RRSP to increase your down payment on your first home?

Generally, the funds in your RRSP need to stay there until you retire for it to make financial sense, as there are penalties for early withdrawals. However, the RRSP Home Buyers’ Plan (HBP) is an exception to that rule, at least for first-time home buyers. With the HBP, you can withdraw up to $35,000 from your RRSP for a down payment on a home, which can make owning a home much more financially achievable.

If you’re thinking of using the RRSP Home Buyers’ Plan, there are a few things you should know – beyond the fact that it’s a tax-free loan to yourself. Before you inquire about making a withdrawal, here are 6 facts to consider about the RRSP HBP.

1. The maximum size of the withdrawal

The Home Buyers’ Plan allows you to withdraw up to $35,000 from your RRSP. This was increased from $25,000 in March 2019. If you’re buying your first home with your partner (or another first-time home buyer) then you can withdraw a maximum of $70,000.

Your withdrawal can come from multiple RRSPs that are in your name (see point 4) but the total withdrawal cannot exceed the maximum amount.

2. The RRSP 90-day withdrawal rule

Any money you withdraw has to have been in your RRSP for at least 90 days. This is true if you were to withdraw money from your RRSP for any reason (eg. the Lifelong Learning Plan), not just to use it as part of your down payment. If the money doesn’t sit in your RRSP for at least 90 days before being withdrawn, it may not be tax-deductible for that year.

If you think you’re going to come into some money soon, or if someone is going to gift you part of your down payment, don’t just invest it in your RRSP for the tax break. If you need to withdraw it in the next 90 days for the HBP, you may find that your deposit is on-hold. This would mean you wouldn’t be able to access it until after those 90 days are up. If you are expecting something like this, it might be a good idea to speak to a financial advisor or mortgage broker.

3. When you can make the withdrawal (and when you can’t)

You’re able to apply to make a withdrawal from your RRSP before you build or buy a home, on a few conditions. You must already have a written agreement to buy or build a home when you make the withdrawal. You’ll also need to be a Canadian resident at the time you make the withdrawal, all the way up to when the home is built or bought.

You can also make the withdrawal after you buy or build the home, but there’s a time limit. You must make the withdrawal within 30 days of taking ownership of the home. If you try to make the withdrawal more than 30 days after you take the title of the home, your withdrawal won’t be eligible for the HBP and you’ll be taxed on the amount you withdraw.

4. Withdrawing from multiple RRSPs

You can make withdrawals from several RRSPs, so long as you are the owner of each plan. The total amount withdrawn from all funds cannot exceed the maximum withdrawal amount. It’s generally not possible to withdraw from locked-in RRSPs or a group RRSP.

To make a withdrawal, you must complete a T1036 form for each RRSP you want to borrow money from, and submit each form to the issuer of your RRSP. For example, if you have RRSPs at both RBC and TD, you will need to submit two T1036 forms: one to each individual bank. As the second part of this rule suggests, it’s a good idea to submit all of your T1036 forms at the same time because you have to claim the full HBP amount you borrow in one calendar year on your taxes for that year.

The entire HBP amount needs to be withdrawn and claimed on your tax in the same calendar year, with one small exception. If you make a withdrawal in one calendar year and a second withdrawal in January of the following year, the CRA (Canada Revenue Agency) considers the second withdrawal to have been made in the same calendar year as the first.

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5. Repaying the withdrawal amount

Your first repayment isn’t due until 2 years after you make your withdrawal, and the full amount must be repaid within 15 years. You can start making repayments anytime, and you can repay the full amount early with no penalty, but these are your minimum repayment requirements. If you do pay more than the minimum, your remaining balance for future years will be reduced. The amount you have to repay each year is equal to 1/15th of the total amount you borrowed from your RRSP. You’ll be able to find your full repayment schedule in your CRA My Account. The CRA will also send you a yearly Home Buyers’ Plan statement of account.

6. Not making your minimum repayments

If you do not make your minimum repayment one year, you have to include the amount you did not pay as RRSP income on your taxes. To do this, subtract any amount you did repay from your minimum repayment amount and put the answer in-line 129 on your return. This amount will be taxed (which defeats the purpose of taking out this tax-free loan), and your HBP balance will be reduced accordingly.

The Bottom Line

As a first-time home buyer, it can be difficult to scrape together enough cash for a down payment on a home. However, if you’ve been diligent in your RRSP contributions, then the Home Buyer’s Plan is a great way to unlock the potential of your savings. However, you need to understand the program and its overall implications on your finances. For a full list of qualifying conditions for the RRSP HBP, as well as a list of important dates, visit the CRA website.

 

 

by Alyssa Furtado

Tips for Buying an Investment Property in Canada

General Konstantin Seroshtan 24 Jun

#1. Think About Financing Early

Canadian banks are very conservative when it comes to issuing mortgages for rental property investment. You’ll want to think about financing fairly early on to account for the likelihood that getting approved won’t be as easy as it was for your primary residence.

Prime lenders will typically want to see that you’re capable of making mortgage payments on both your primary residence and investment property without your debt-to-income ratio surpassing the 36% mark.

Crucially, they’ll want you to have this capability even without your investment property’s rental income. After all, your property may not be rented 100% of the time. Lenders will want to make sure the vacancy won’t leave you unable to make your payments.

You’ll also need a strong credit history in order to qualify for a mortgage on an investment property.

Truth be told, those new to real estate investment often don’t meet these stringent criteria, making it next to impossible to get a loan from one of Canada’s big five banks. But do not worry, I have access to many alternative lenders who specialize in investment property mortgages.

#2. Avoid a Fixer-Upper for Your First Investment Property

Buying an investment property will be stressful enough without the hassle of renovations. Unless you have a professional background in home renovation and can easily gauge the time and effort that will be involved in the project before you buy, avoid a fixer-upper for your first investment property.

If you ignore this advice, it’s very likely you’ll end up overpaying for a renovation that takes much longer than you expect. Avoid this by purchasing a property that’s in good condition. Save the fixer-uppers for once you’re more experienced.

#3. Account for Operating Expenses

Generally, a rental property’s operating expenses comprise 50% of its income. In other words, if you rent a property out for $1,500 per month, expect to spend roughly $750 of that on operating expenses.

That may sound like a lot, especially since you likely don’t spend anywhere near that amount of money maintaining your own home. However, operating expenses include not just maintenance, but also taxes and insurance unique to owning a rental property.

Remember to keep these figures in mind when shopping for a rental property.

#4. Expect the Unexpected

Your investment property costs won’t be limited to relatively predictable things like taxes and maintenance. You’ll also need to prepare financially for unexpected circumstances, such as your tenant losing their job and being unable to cover rent.

It’s generally recommended that you plan to set aside a certain portion of your rental income each month to account for potential unexpected expenses.

#5. Choose the Neighbourhood Wisely

When shopping for your primary residence, you probably chose the nicest neighbourhood you could afford. The problem with applying this logic to your search for a rental property is that a more expensive home will, of course, cost more to insure and maintain.

Instead, experts generally recommend looking for a cheaper property in a modest neighbourhood.

Additionally, when choosing a neighbourhood, look for one that:

  • has a high percentage of employment (anything below 50% is low)
  • is not governed by a homeowner’s association (fees and restrictions will absolutely decimate your profit margins)
  • has a relatively low crime rate
  • has very few vacant properties
  • is located near amenities such as highly-rated schools

#6. Figure Out Your Margins

While it’s safe to say that – barring any major mistakes – you’ll make money investing in a hot real estate market like Canada’s, it’s important to calculate your margins carefully to avoid any surprises. By doing this before you purchase a property, you’ll give yourself enough flexibility to change tactics if needed.

There are three very important metrics that can help you determine your margins:

  • cash flow: your monthly rental income, minus expenses
  • cap rate: (cash flow / property value) x 100
  • cash on cash return: (cash flow / your cash investment) x 100

#7. Research your legal obligations as a landlord

Most Canadian provinces have very strict tenant protection laws that can impact your profitability. For example, evicting a tenant in British Columbia involves a fairly long process, even if the renter in question isn’t paying.

You also need to be aware that the onus for property maintenance is on you as the landlord. If an appliance breaks down, for example, you’ll need to pay for repairs or a replacement. In many Canadian provinces (including BC, per its Residential Tenancies Act), this applies even if you state otherwise in your lease agreement.

#8. Consider Working with a Property Management Company

If your job or other obligations are demanding, you’d be wise to work with a management company that can offer guidance regarding how to buy an investment property. Property management companies handle a wide variety of things for you, including:

  • collecting rent
  • addressing maintenance concerns
  • marketing
  • maintaining records

Of course, this comes at an additional cost to you. Expect to pay between 5% and 10% of your rental income to a property management company.

 

#9. Think Long-Term

Real estate valuations rise over the long haul. Don’t discount the possibility of short-term turmoil, though. You can mitigate the impact of this turmoil by viewing your real estate investment as a long-term play. The longer you own the property, the more likely you are to benefit from positive trends in the Canadian real estate market (generally speaking, properties here won’t get any cheaper as the country’s population continues to grow).

 

#10. Take Care of Personal Debt Before You Buy

To increase your chances of getting a good mortgage with a reasonable interest rate, take care of your personal debt. Specifically, if your debt-to-income ratio is above the 36% mark (or dangerously close), you’ll need to address that.

There are many ways to approach this, including refinancing your primary residence to consolidate the debts or take out the equity for the down payment on a rental property.

Let’s chat about your options!

📲250.826.7626

📩 konstantins@dominionlending.ca

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit: Alpine Credits

A Pre-Approval Does Not Guarantee a Mortgage Approval

General Konstantin Seroshtan 28 Apr

by Ross Taylor

Many Canadians are under the assumption their mortgage is as good as done once they have a mortgage pre-approval.

But the truth is a buyer cannot expect a mortgage pre-approval will automatically translate into a mortgage. The lender now needs to consider the property itself, approve all the terms and review the documentation before you transition from pre-approved to approved.

Buyers often do not appreciate there is still some uncertainty when it comes to their mortgage. Unfortunately, once in a while this uncertainty bites back – with calamitous consequences.

Going in Without Conditions in a Hot Market

Not that long ago, when housing supply equalled or exceeded demand, the buyer would insert a clause requesting five business days (usually) to arrange mortgage financing – this is called a “condition of financing.” Even one or two days can make a world of difference.

These days across much of Canada, residential real estate is such a hot commodity it’s more likely offers to purchase will be firm and without a condition of financing.

The process is very skewed in favour of sellers at the moment, and it’s really not a comfortable or fair situation for the buyer. The fact of the matter is homebuyers, especially first-time buyers, are taking this risk every day. In many markets, it’s the only way you will win in a multiple-offer situation.

It is clearly in the buyers’ best interests to know in advance how much mortgage they might qualify for. This is achieved by providing complete information and documents to your bank or mortgage broker and allowing them a deep-dive into your personal finances and credit. They can then underwrite your application upfront.

Even when a thorough review has been conducted, and you are clutching a pre-approval certificate, there are many things that could happen to compromise your home purchase.

Insured Mortgage Approval

Suppose you are in line for an insured mortgage, which is always the case with less than a 20% down payment. Your mortgage approval is technically approved twice – first by the lender and then by the insurer. And please understand that no mortgage insurer has seen your pre-approval request.

The pre-approval considers your personal creditworthiness and borrowing capacity. The actual amount you qualify for also depends on the property itself: that plus the lender and insurer’s assessment of your application. Please remember, pre-approvals do not consider the specific properties.

Reasons Why the Property Can Hurt Your Mortgage Approval

To secure a mortgage, the borrowers and the property have to pass muster. No one knows the exact property you are going to buy when you are pre-approved. When it comes time for the lender to approve your mortgage, there are many ways the specific property can impede the approval.

There are several reasons why a specific property can cause concern. For more information, we defer to Dustan Woodhouse, whose passionate concern for this topic inspired this article and who lists many more here.

  1. Value of The Home: When multiple buyers are competing on the offer presentation day, there can only be one winner. In this market, the winner often has to bid much more than the market value. When this happens, the appraisal may come back with a value less than you paid. That will not necessarily kill your mortgage approval, as long as you have additional financial resources to cover the shortfall, if necessary. Note: This market does not favour buyers who go in subject-free (firm) with no wiggle room. If you are using all your financial resources to come up with the down payment and closing costs, what can you do if the value comes back lower?
  2. Property Condition: Have you ever seen an MLS listing that says “as-is” or “handyman special?” Those are red flags to a lender, and a mortgage may not be forthcoming at all. The appraisal may further report poor conditions, mold or even structural issues.
  3. Property Specifics: There are many reasons a property may prove challenging. Here are some examples of property types that will seem problematic to a lender:
    • Log homes
    • Homes on leased land, First Nations, government or private
    • Rural properties with a hint of hobby farming
    • Properties containing asbestos, underground oil tanks, aluminum wiring
    • The remaining economic life of the property
    • Suppose the property was a one-time grow-op or drug lab. Good luck with that – no matter the price you pay, even if the property has been remediated.
    • One property earlier this year had an MLS listing that proudly mentioned a 15-foot fish pond in the backyard – with a fish farm permit. That mortgage was VERY hard to place.
  1. Location: If a lender feels the property you picked is simply too far from your workplace, they may assume you need to keep a second home or place to stay, and in such cases they impute a “shelter cost” for you. This might also skewer your approval.
  2. Condos: Mortgage insurers keep lists of condo buildings they do not want to lend against. Maybe the maintenance fees seem extraordinarily high or the condo status certificate reveals significant assessments; for example, something like Kitec Plumbing.

    The smaller the condo is means fewer interested lenders
    . Many lenders simply do not like to lend against micro-condos. Condos under 500 square feet are often a cut-off, but in recent years that number has shrunk to 400 SF or less with some lenders. It might depend if the unit has a separate bedroom. In some of these suites, the bedroom is a wall bed/Murphy bed.

 

Reasons Why You Might Hurt Your Own Mortgage Approval

Your mortgage may not be approved because of something to do with you, the borrower. Either something material has changed in your circumstances or new information has come to light, which changes the lender’s view of you.

The golden rule is to be very wary of change during the home-purchasing process. A shiny new car in the driveway or a new job might completely cast things in a different light.

Earlier this year, one of our clients quit his job and became a freelance contractor after their firm offer was accepted. This was a problem because now he is considered self-employed. Such income is assessed differently during the mortgage underwriting process. Typically, you will need to show two years of operating success to qualify for your mortgage.

We managed to save the mortgage, but only because the employed partner’s income was so high. This change from salaried employee to self-employed could have been disastrous for this couple.

You want to be sure your personal taxes are up to date and in good standing with CRA. You must also pay all of your credit card bills on time and ensure you do not miss any payments.

It is definitely not a good time to defer loan payments of any kind. Even though mutually agreed payment deferrals do not adversely affect your credit score, mortgage lenders might think twice about lending a considerable amount to someone who needs relief from their financial obligations.

The Takeaway

When you and your real estate agent are honing in on a specific property, make sure to first circle back to your mortgage broker and ask them to input the property’s specs into your application.

Clarify and understand the strength of your mortgage pre-approval. What factors might result in a mortgage offer for a reduced loan amount, or worse, not being extended an offer at all?

Take stock of your personal finances. Understand from your mortgage broker where your debt service ratios are at, and if your credit history and employment situation are still acceptable. Ensure your income is well understood – especially if you earn overtime, bonuses, commissions or have irregular hours.

If you are buying a condo, ask your real estate lawyer to carefully review the condo status certificate in advance and report any and all items of interest to you.

If you are buying a rural property, make sure your Offer to Purchase addresses the septic system and water potability. And check the zoning!

Insist your realtor provide you with an up-to-date market analysis of the property’s value and assess your ability to weather a lower-than-expected appraisal value.

An experienced mortgage broker can often tell whether or not your mortgage approval would be at risk and can help you assess when it is a risk worth taking. They can tell you the potential concerns so you can make an educated, informed decision to proceed with your offer to purchase.

At the end of the day, this decision is all on you, the buyer. You need to make a fully informed decision if you choose to go firm with your offer.

Let’s chat about your options! 250-826-7626 konstantins@dominionlending.ca

How to tell if mortgage rates will go up or down

General Konstantin Seroshtan 9 Mar

If you have a mortgage, then interest rates are extremely important to you! When rates go up, mortgages become more expensive. When interest rates go down, keeping up with a mortgage becomes much easier. The problem is that you’re not just getting a mortgage based on today’s rate – your mortgage will be subject to rates that change over time, often over decades.

As a result, it’s important to know if mortgage rates are going up or down. This is a really hard question to answer, but there are a few things we can explain that might help you. We’re talking about mortgage rates in this article, but a lot of these rules apply to other types of interest rates, and we’ll use the terms interchangeably.

How to tell if interest rates are going up or down

It’s extremely hard to know for sure if rates will rise or fall, but there are ways to make educated guesses. Knowing whether mortgage rates will rise or fall comes down to understanding the state of the national economy, the world economy, and the current social and political circumstances you find yourself in.

That sounds complicated, we know, but don’t fret. Below we’ve explained some of the main factors that affect interest rates and what to look for in each one. Consider each of the factors below and you should get a pretty good idea of whether mortgage rates are rising or falling.

How banks set mortgage rates (the cost of lending)

At their core, mortgage providers are retailers. They offer a service that they sell for more than it costs. Instead of ”buying” a mortgage, you’ll pay a given interest rate for the service over time, which has to account for a lender’s costs, plus any profit it plans to make.

The main cost your bank needs to account for is the “funding cost”, which is the cost of borrowing the money that it will lend to you (yes, that’s generally how it works). Even if, hypothetically, the bank funded your mortgage with cash it had on hand, that money will be tied up in your mortgage instead of some other investment. In that case, the funding cost is an opportunity cost, the amount that it lost by investing in you and not elsewhere.

On top of the funding cost, mortgage providers need to earn enough to cover operating costs: staff, real estate, dividends to shareholders, etc. It also needs to make a certain amount of profit, which has to be enough to account for the risk that some borrowers will default on their mortgages (not you, of course).

Of course, these costs are variable, and change over time. To understand why that is, you’ll need to look at the wider economy.

Economic conditions (here and overseas)

Credit is like many other commodities in that it is also subject to supply and demand. When everyone wants to borrow money, the cost of credit is pushed up, increasing rates. When no one wants to borrow money, the cost of borrowing becomes cheaper. Most of the variation in demand for credit comes from commercial borrowers.

Generally speaking, when the economy is good, more businesses want to borrow money to expand their enterprises, so demand for finance increases and interest rates rise. Conversely, when the economy is performing poorly, demand for finance decreases, which sees interest rates drop.

The global economy also matters, especially that of the United States. The global economy is highly interconnected, and many Canadian banks borrow money from international sources, especially US Banks. This sort of relationship exists in most countries, although the details may change. Because of this, economic conditions overseas can directly affect the cost of borrowing at home, and vice versa.

The Bank of Canada’s impact on mortgage rates

One of the most important influences on mortgage rates is the Bank of Canada’s interest rate. A change to the Bank of Canada’s rate generally results in an equal adjustment to the prime rates of mortgage providers, although not always. This is because the Bank of Canada is a reserve bank, backed by the federal government.

Unlike the retail banks, the Bank of Canada tends to change rates proactively, rather than reactively. If there’s an economic downturn coming, the Bank of Canada will often cut rates early on. Cutting rates makes it cheaper to borrow money, which stimulates economic activity. Conversely, the Bank will increase interest rates if inflation is getting too high, for the opposite reason.

Variation between banks

Some rate variation between lenders is natural, as each bank is comfortable with different exposure to risk, have different overhead costs (especially digital-only lenders), as well as different marketing campaigns. 

Generally speaking, to remain competitive, most lenders will follow the general trends of the market. There are times though that will see the banks move in an unexpected direction. For example, the Bank of Canada cut its rate to 0.25% in the early days of the COVID-19 pandemic. While banks did drop their rates as well, they soon increased mortgage rates again. This was because the pandemic, alongside an economic downturn, also introduced extreme instability in the global economy, so many banks increased mortgage rates to account for the additional risk.

This is a good example of how an unexpected event can ruin even the best predictions of the future, which is explained by the Black Swan Theory…

The Black Swan Theory (the massive impact of rare events)

Created by Nassim Nicholas Taleb, a Lebanese-American mathematician and philosopher, the Black Swan Theory describes the extreme impact of unpredictable events. The original metaphor is about the long-term assumption that “all swans are white”, leading to the ancient Latin expression of a “Black Swan”, being something that didn’t exist. This was proven wrong by a single observation of the existence of black swans in Western Australia in the late 1600’s. In a single moment, an entire system of thought was turned upside down.

“Black Swan Events” like September 11, the Global Financial Crisis, and COVID-19 are similarly unprecedented, unpredictable, and cause massive social and financial disruption. You can read more about the theory on wikipedia, but the important takeaway is that these events happen, and there’s really no way that we can predict them. So, when making decisions based on whether mortgage rates will go up or down, be careful not to be too confident.

Your impact on mortgage rates

Of course, market rates are only one part of calculating the mortgage rate that you can personally receive from a lender. A much more significant impact comes from your personal circumstances. Factors including (but not limited to) your credit score, down payment, income, and existing debt repayments can all make a difference to the rate that you’ll eventually be offered.

So, will mortgage rates go up or down?

The only sure-fire way to know if rates will go up or down is to wait and see. Prediction is a fool’s game in many ways, even when we’re not exposed to the risk of Black Swan events (which we always are). However, whether rates are currently going up or down at a particular moment in time can sometimes be predicted based on a few indicators:

  • If the economy is improving, interest rates should go up
  • If the economy is failing, interest rates may go down
  • A large economic downturn can mean very low rates, as the Bank of Canada tries to stimulate the economy
  • Mortgage providers don’t always cut mortgage rates along with the Bank of Canada. Instability in the market can mean they need to decrease their risk exposure by increasing their margins
  • Your personal circumstances will affect your mortgage rates more than anything
  • Black Swan events can throw all of our predictions out the window

Speaking to an expert

A good understanding of how interest rates are set and what factors can increase or decrease them is a good start to understanding the current interest rate environment. However, whether mortgage rates will go up or down is still an extremely difficult question to answer.

If you’re trying to answer this question in preparation for getting a mortgage, it’s probably a good idea to speak to a mortgage broker. Mortgage broker’s are experts in mortgage rates and providers, and can advise you on the best course of action for your individual situation. Consultations with mortgage brokers are also typically free, which is a big plus.

Let’s chat

📲250.826.7626

📩 konstantins@dominionlending.ca

by Tim Bennett

BC Assessments Vs. What Your Home is Truly Worth

General Konstantin Seroshtan 11 Jan

The dollar figure on your provincial property assessment notice should not be taken as your home’s market value, here’s why:

BC Assessment notices have arrived in the mail, giving some homeowners a big smile and a bit more spring in their step (increased property taxes aside), while others wilt and lament at a modest gain or decrease in assessed value. For a full understanding of the 2021 BC Assessment Report results, read this.

But hold on a sec. Neither this assessment document, nor either parties’ emotions, are tied to a current true market value. In fact, provincial property assessments can be significantly too high or too low. Values are determined in July of the previous year, and properties are rarely visited in person by provincial appraisers.

For this reason, provincial property assessments should never be solely relied upon as any sort of relevant indicator of true market value for the purposes of purchase, sale or financing.

Think of the assessed value instead as something akin to a weather forecast, spanning far larger and more diverse areas than the unique ecosystem that is your neighbourhood, your specific street, or your specific property. A weather forecast made the previous July, not the previous week. As this is when assessed values are locked in, a full six months prior to the notices being mailed out.

The BC Assessment Authority does offer some useful tools for a high-level view of the market. Go to http://evaluebc.bcassessment.ca/ and start typing an address. You’ll get a drop-down window where you can click on the address you want.

Here’s what you can find out:

Details on single address: These come up on the first screen and include current and last year’s assessed value; size and rooms; legal description; sales history, and further details if the property is a manufactured home or multi-family building. There’s also an interactive map as well as links to information on neighbouring properties and sample comparative sold properties.

Neighbouring properties: Here you can compare the assessed value of houses in the immediate neighbourhood. Clicking on any property brings up further details.

Sample sold properties: Find comparable properties and see what they sold for and how their sold price compares to their assessed value. This is a great research tool for owners, sellers and buyers.

These tools can be a starting point, but if you’re looking to set a selling price on your own property, always enlist a professional. Valuing your property is not a do-it-yourself project. In a buying/selling transaction, it is best to order an appraisal, which is a much more accurate reflection of current market value. It is timely and reflects value for zoning, renovations and/or other features unique to the property. An appraiser is an educated, licensed, and heavily regulated third party offering an unbiased valuation of the property in question.

What’s My Home Really Worth?

Usually, market value is determined by what a buyer is willing to pay for a home, and what the seller is willing to accept.

A quick survey of recent sales and their relation to assessed values will often demonstrate no clear relationship between sale price and assessed value. It’s often all over the map. Some properties selling well below assessment, and others well above.

You also want an experienced and local Real Estate Agent to help you determine the selling price of your home. A (busy, local) agent will have a far better handle on what is happening in your area for prices than does a government document, and in many instances will save you from yourself.

In theory, a comprehensive current market review completed by a real estate agent should not differ radically from the value determined by a professional appraiser.

Professional appraisers spend all day every day appraising properties, and their reports are often seen as less biased. Imagine your reaction, as a buyer, to the following statements…

  1. The seller says their house is worth $500,000.
  2. The sellers’ listing agent says it’s worth $500,000.
  3. This house is listed at $500,000 based on a professional (marketing) appraisal.

Most buyers would consider #3 the most reliable of the above statements. And most buyers requiring financing will have the benefit of the lender ordering their own independent appraisal to confirm fair market value. Sellers rarely order an appraisal in advance, which can create some interesting situations.

In practice, agents are relied upon for listing price estimates. Most buyers don’t care much about what anybody else thinks the house is worth. Buyers care what they think it is worth. This is why we say that market value is ultimately determined by what a buyer is willing to pay for the home, aligned with what is acceptable to the seller.

The Two Kinds of Appraisals

It is important to note that there are two kinds of professional appraisals. There is the marketing appraisal, such as one ordered by a seller. And there is the financing appraisal, which is done so the bank is satisfied the house is worth what the buyer and seller have agreed it’s worth. The financing appraisal is a less in-depth review and more a matter of answering the question: Is this property worth the agreed-upon purchase/sale price?

A marketing appraisal goes deeper (and costs more), but a lender is not concerned with the actual market value over and above the purchase/sale price. A lender just wants the simple question answered. It is a rare day that the appraisal for financing has a value that differs significantly, if it all, from the sale price. Therefore one should not be surprised if, when buying a home, they find that the appraisal comes in bang on at the purchase price. As they do 99 per cent of the time. The one per cent of the time that the value is off, it is almost always a private transaction where the seller has had no professional guidance at all and has inadvertently set their price below market, by relying on something as inaccurate as their BC Assessment document.

In summary, rather than relying on your out-of-date BC Assessment for your home’s value, you should gather professional opinions from real estate agent(s) and an appraiser – these are the people with their feet on the ground and their heads in the game.

If you have any questions regarding this topic or would like me to put you in touch with the top real estate agents or appraisers in BC, please do not hesitate to contact me:

📲250.826.7626

📩 konstantins@dominionlending.ca

Does your payment frequency matter?

General Konstantin Seroshtan 21 Dec

It has been said that there are two certainties in life; death and taxes. Well, as it relates to your mortgage, the single certainty is that you will pay back what you borrowed, plus interest. However, how you make your mortgage payments, the payment frequency, is somewhat up to you! The following is a look at the different types of payment frequencies and how they will impact you and your bottom line.

Here are the six main payment frequency types:

  1. Monthly payments – 12 payments per year
  2. Semi-Monthly payments – 24 payments per year
  3. Bi-weekly payments – 26 payments per year
  4. Weekly payments – 52 payments per year
  5. Accelerated bi-weekly payments – 26 payments per year
  6. Accelerated weekly payments – 52 payments per year

Options one through four are designed to match your payment frequency with your employer. So if you get paid monthly, it makes sense to arrange your mortgage payments to come out a few days after payday. If you’re paid every second Friday, it might make sense to have your mortgage payments match your payday!

These are lifestyle choices, and will of course pay down your mortgage as agreed in your mortgage contract, and will run the full length of your amortization.

However, options five and six have that word accelerated attached… and they do just that, they accelerate how fast you are able to pay down your mortgage. Here’s how that works:

With the accelerated bi-weekly payment frequency, you make 26 payments in the year, but instead of making the total annual payment divided by 26 payments, you divide the total annual payment by 24 payments (as if the payments were being set as semi-monthly) and you make 26 payments at the higher amount.

So let’s say your monthly payment is $2,000.
Bi-weekly payment : $2,000 x 12 / 26 = $923.07
Accelerated bi-weekly payment $2,000 x 12 / 24 = $1,000

You see, by making the accelerated bi-weekly payments, it’s like you’re actually making two extra payments each year. It’s these extra payments that add up and reduce your mortgage principal, which then saves you interest on the total life of your mortgage.

The payments for accelerated weekly work the same way, it’s just that you’d be making 52 payments a year instead of 26.
Essentially by choosing an accelerated option for your payment frequency, you are lowering the overall cost of borrowing, and making small extra payments as part of your regular cash flow.

Now, It’s hard to nail down exactly how much interest you would save over the course of a 25 year amortization, because your total mortgage is broken up into terms with different interest rates along the way. However, given todays rates, an accelerated bi-weekly payment schedule could reduce your amortization by up to three and a half years.

If you’d like to have a look at some of the mortgage numbers as they relate to you, please don’t hesitate to contact means I  would love to work with you and help you find the mortgage (and the mortgage payment frequency) that best suits your needs.

📲250.826.7626

📩 konstantins@dominionlending.ca

PURCHASE PLUS IMPROVEMENTS EXPLAINED

General Konstantin Seroshtan 30 Nov

The purchase plus improvements mortgage is one of the best untapped opportunities when buying a home. Many homes for sale in the market are in great locations and the structure or ‘bones’ of the property is also excellent. But the property may not be totally up to date as far as to look or feel goes, or there may be a problem with the property that needs repair, or you might just have a different idea as far as how the interior could look.

Either way, if the home needs a bit of updating or renovations, this is where a purchase plus improvements mortgage could really help out.

This article will show you, not just how the purchase plus improvements mortgage works, but will also provide the best tips and strategies to get the most value out of the program, without any additional stress or cost on your part.

Specifically, this article will discuss:

  • How the purchase plus improvements program works in 7 steps
  • How to get the most out of a purchase plus improvement mortgage.
  • How to avoid issues, or potential loss from a purchase plus improvement mortgage

How the purchase plus improvements mortgage works in 7 steps:

  1. You can get a mortgage approved with as little as 5% down payment, and include some home improvement costs into the mortgage amount.
  2. When applying for purchase plus improvements mortgage, the contractor’s quote, for the work to be completed, should be provided up front with the offer to purchase the home. In other words, before you complete the purchase offer, we need to have a contractor quote outlining the work to be done, and what the cost will be.
  3. The contractor’s quote does not mean we need to specify exactly what materials will be used, but just more generally what will be improved along with the cost.
  4. There are some lenders I work with that will allow the homeowner to do the work themselves, but we will still need the costs to be outlined.
  5. After the purchase is completed, the borrower will need to come up with the funds to complete the improvements. Funds could come from a line of credit, gifted money, store ((ex. Home depot) credit or credit on their contractor themselves. The bottom line is that you need to figure out how to pay for the improvements, and then after the improvements are finished, the ledner will release the improvement funds.
  6. If you used credit cards, a contractor’s account, or gifted funds, these could be paid off once the work is complete and the purchase plus improvements funds are released by your lawyer.
  7. The work typically needs to be completed within 90 days, but exceptions can be made.

Here are some of the main guidelines for purchase plus improvement program in the Canadian market:

  • Available for small or large scale improvements and new home construction.
  • Improvement financing available for up to 95% of the ‘as improved’ value of the home.
  • ‘As is value’ is defined  as ‘the market value of the property after improvements’. Market value would be determined by an appraiser after the improvements are complete.
  • Available for homes under $1,000,000.
  • Typically, the improvements need to be less than $40,000 or 20% of the purchase price of the home. However in some cases the amounts can be higher if the lender allows for it.
  • Lending is based on either the purchase price, or the improved value of the property: whichever is less. PLUS ‘direct costs related to improvements’.
  • An appraisal may be required to confirm the improvements and the new property value.

How to get the most out of a purchase plus improvement mortgage

Although the purchase plus improvement mortgage can be used for many things, such as upgrading a furnace or a roof, these types of improvements may not add as much to the appraised or market value of the home.

An appraiser will not typically value a new roof, for example as higher than the cost to install the new roof. I have seen these kinds of ‘at par’ or even lower valuations in other areas too, such as the installation of new gas piping.

In some cases, you may want or need to use the purchase plus improvement mortgage program to make a repair to a property you are buying for safety or reasons of general upkeep.

However, where repairs are not the concern, the following short list is areas of improvement that not only equal the cost of the improvement but may potentially be valued higher by an appraiser than the cost of the work.

Kitchen: New cabinetry, countertops, sinks and faucets, flooring, paint and backsplash.

Bathrooms: New toilet, paint, flooring and vanity.

Basement: Finished or partially finished including flooring, drywall, mudding and paint, ceiling and lighting.

More specifically, when looking at these kinds of high value upgrades, there is a ‘diminishing rate of return’ for improvement costs in these areas.

For example, the first $5000 spent on a kitchen may generate $7,500 in improved market value, whereas the next $5,000 spent on a kitchen (to total $10,000) may result in an additional $5,000 in improved value (or break-even). In other words, in this example, you got more bang for your buck on the first $5000 spent on the kitchen than the next $5,000.

The diminishing rate of return is very important when upgrading a home or using the purchase plus improvements program and the key thing to understand if you want maximum improved value is:

(1) Spend the least amount of money, (2) for the best looking upgrade, (3) at a reasonable quality.

How to avoid issues or potential loss from a purchase plus improvement mortgage

Along the same lines as the information above, the other side of the coin is avoiding situations where the market value of the improvements may actually come in as less than the cost of improvements.

A $1000 lighting fixture will not likely get you any more market value than a $100 lighting fixture. A $3000 heated floor will not likely get you any more market value than a $300 non heated floor. The $500 faucet will not likely get you any more market value than the $100 faucet. The list goes on

The point is, using luxury items with purchase plus improvements program may be nice, and may still be worth it for you by far. But the higher-end upgrades will not likely result in the most market value realized from the completed work.

At the furthest end of the spectrum is a property that is ‘over improved’ for the neighborhood that it is in. This happens when a home is upgraded far beyond any other home in the neighborhood, and other sales in the area do not support the value of the home that has been upgraded.

There is of course nothing wrong with upgrading a home with more luxury items if this has meaning to you, however, if you are looking at maximizing the value of your purchase plus improvements mortgage (or for any renovation project) then installing lower-cost fixtures or upgrades, that look good and with reasonable quality, should help you realize a stronger return.

Whether you are a buyer or a realtor, it is important to know about the options that may be available to you or your clients.

I would love to tell you more about this program and many others. Contact me today!

Konstantin Seroshtan

📲250.826.7626

📩 konstantins@dominionlending.ca

Home Appraisals: What They Are and How the Process Works

General Konstantin Seroshtan 23 Nov

As a buyer, one of the key parts of getting a mortgage is having an appraisal performed to confirm the home value for the lender (bank).

Why Lenders Want an Appraisal

An appraisal is an unbiased, professional estimate of the value of a property for sale. Lenders always require a home appraisal before they’ll issue a mortgage because they want to protect their investment; if the actual market value of a property is lower than the sales price and if the buyer defaults on the mortgage, the lender won’t be able to sell the property for enough money to cover the loan.

How the Appraisal Process Works

The appraisal usually happens after an offer has been made and the home has been inspected. As the buyer, you’ll pay for the appraisal and most likely have to arrange for it to be done as well. This is the case even though an appraisal’s purpose is to protect the lender, not you.

Once it’s complete, the report is sent directly to the lender.

The average cost of a professional appraisal is from $350 to $450 as of 2020. The price can depend on your property type and location. More expensive homes or homes that have more than one unit will typically cost more. Expect the appraisal process to take a few days. The appraiser should be a qualified professional who is licensed or certified to do the work and has no direct or indirect interest in the transaction. Typically the banks will have a list of select appraisers approved by them and often the appraisal company is selected randomly.

Using Comps to Determine Market Value

The appraiser should know the area the home is in and will analyze the neighborhood as well as the details and condition of the house to provide an assessment of the fair market value.

The most important component involved in arriving at a property’s value is called comparable sales, or “comps.” These are similar properties, usually located within a mile or so of the home in question, which have sold in the last 90 days.

The appraiser compares several of the property’s features against the comps to arrive at the value. Factors include square footage, appearance, amenities, and condition.

For example, a large four-bedroom home in an area where mostly three-bedroom homes have recently sold will likely have a higher value than those comps. Likewise, a house with peeling paint and a patchy lawn in a well-manicured subdivision will typically appraise at a lower value than otherwise similar properties.

When the Property Appraises for Less Than the Sales Price

Sometimes the appraised value of a house comes in lower than expected. This can affect several aspects of the sale.

If the lender is deciding your loan amount as a percentage of the property price, it will choose either the sales price or the appraised value, whichever is less. Most lenders won’t loan more than between 80% to 95% of the home’s fair market value, so the appraisal value of the home is important when it comes to how much you’ll be able to borrow.

If the property appraises at the same as or at more than the sales price, you’ll probably get the loan amount you applied for. But if it appraises for less, the lender will most likely reduce the loan amount to match the value of the home according to the appraisal.

Dealing With a Low Appraisal

A low appraisal can delay or even cancel a sale; buyers and lenders don’t want to overpay for a house, and sellers may not want to drastically lower the price they were hoping to get.

You have a few options if the appraisal comes in low. If you wrote your offer contract to include a contingency that requires that the property be valued at the selling price or higher, you can walk away from the deal.

If you’re buying, another option is to try to negotiate with the seller to reduce the sales price. A third alternative might be to put more money down to cover the difference between the appraised value and the sales price.

And you can always dispute the appraisal. Find out what comparable sales were used and ask your agent if they’re appropriate. Your agent might be more familiar with the area than the appraiser was and might be able to locate additional comps to support a higher valuation.

Great news is that you do not need to deal with this alone – you have me by your side!

Let’s talk mortgages!

📲250.826.7626

📩 konstantins@dominionlending.ca

Renters insurance?

General Konstantin Seroshtan 16 Nov

Adding a small addendum to your lease agreements, mandating coverage for renters, is a shrewd move to benefit all parties. Whether you’re a new landlord or longtime one, it’s smart to require your tenants to have renters insurance.

Here’s how this simple clause can save you from headaches, stress and worry.

How renters insurance protects your investment

As a property owner, you don’t need insurance by law, but you get it to protect your building, contents and even yourself from potential risks. A typical home insurance policy covers the building and accessory dwellings, third-party liability, personal property, and additional living expenses. Renters insurance, as is often noted, covers the renters personal belongings, otherwise known as contents insurance. But, there’s much more to it, including:

Third-party property damage

If your renter has a visitor whose property is damaged, the renter’s policy can pay for the repair or replacement. Therefore, the visitor has no reason to pursue you for damages costing you time and money.

Third-party liability coverage

Let’s say the guest injures themselves in your tenant’s suite. Their renters insurance can pay for the ambulance and other medical costs outside of a provincial health plan (e.g. physiotherapy, dental). Similar to the property damage, renters liability coverage ensures you’re not on the hook for any liable compensation.

Additional living expenses

If your renter can’t stay in their apartment due to extreme damage from something like a flood or fire, their renters insurance is designed to cover the costs of alternative living expenses while you have their unit repaired.

How landlord’s benefit from tenants insurance

  1. It can pay your deductible. If your tenants are responsible for any damage to your building, while you’ll use your insurance to pay for the repairs, their insurance can pay your deductible. This can save you hundreds, or even thousands.
  2. Keep your tenants protected!. Feel good by educating tenants (especially those moving out on their own for the first time) about protecting the myriad of gadgets they possess – from smartphones to TVs and laptops. They’ll be happy to have the coverage in place if anything happens, even if something is stolen while they’re travelling.
  3. Avoid the courts. We outline this above, but it’s worth repeating. If a renter has access to funds through insurance benefits, there’s no incentive for them to go after you. Accidents happen, and insurance can quickly solve disputes.
  4. Get cheaper landlord insurance. By requiring renters insurance, you can often get a discount because there’s inherently less risk for your insurance company.
  5. It’s affordable peace of mind. If the potential renter pushes back, it may serve as a red flag they have credit issues or lack financial stability. You don’t have to rent to them if they don’t abide by your lease and avoid potential disaster.

Knowledge is power

Even though you, as the owner/landlord, don’t need a tenants insurance policy, understanding what is and isn’t covered will allow you to better prepare for any future risks.

What’s not covered in a tenant’s policy

Earthquakes or floods from a sewer backup or snowmelt seeping into the basement isn’t covered, unless you add the coverage to your policy (or your tenants add it to theirs).

Illegal activity isn’t covered, so be sure to also stipulate zero tolerance in your lease.

Limits and exclusions

It’s worth mentioning that there are limits to their contents coverage on certain items. So, if they own expensive jewellery or ride top end road bikes, let them know they should speak to their insurance broker about upping their limits.

If a partner or roommate moves in, they should get their own insurance to protect their valuables as it won’t be covered under the existing tenant’s insurance.

If they sublet their space, they need to inform you and their insurer. The insurer may revoke contents insurance during the sublet as the risk of theft increases, but their liability will remain. If they choose to homeshare their unit, and you agree to it, they should purchase additional coverage from on-demand insurance companies, like Duuo’s short term rental insurance.

 

Separating And Have A Mortgage? Start Here.

General Konstantin Seroshtan 9 Nov

With the latest stats claiming that about half of marriages end in divorce and with around three-quarters of Canadians being homeowners, it’s important to know how to handle your mortgage if you decide to separate. Here’s a quick list of things to consider.

You need to keep making your payments.

A mortgage is a legally binding contract between you and the lender. It doesn’t take marriage into account. If your name appears on the mortgage, you’re responsible for making sure the regular payments are made. A marital breakdown does not give you an excuse not to make your mortgage payments.

If during your marriage, you have relied on your spouse to make the mortgage payments and you aren’t certain payments are being made after separating, it is in your best interest to contact the lender directly to verify your mortgage is being paid. If payments aren’t being made, it could affect your credit score or worse, the lender could start foreclosure proceedings.

There is always a financial cost to break your mortgage.

If, in the course of figuring out how to split your finances, you decided to either refinance your mortgage, remove someone from the title, or sell the property, keep in mind that there will be legal costs incurred.

If you’re in the middle of a term, the penalty for breaking your mortgage might be significant, especially if you have a fixed-rate mortgage. It’s certainly worth contacting your mortgage lender directly to verify the cost to break your mortgage. Having that information accessible when writing out your separation agreement will provide increased clarity.

Listing your marital status as separated or divorced.

When completing a mortgage application for securing new mortgage financing, when you list your marital status as separated or divorced, you can expect that a lender will want to see your legal separation agreement or your divorce papers. This is because they will want to ensure you aren’t responsible for any support payments to your former spouse. This can create a sticky situation, especially if you haven’t finalized the paperwork and could delay getting new mortgage financing.

It could be harder to qualify for a new mortgage.

With the separation of assets also comes the separation of incomes. If both of you have been working and you’ve qualified for your existing mortgage on a double income, you might find it hard to maintain the same quality of lifestyle post-separation as you will be reduced to being a single income household.

This is where careful planning comes in. Working closely with your independent mortgage professional will make sure you understand exactly where you stand and if you can qualify to take over the mortgage on the matrimonial home or what other options you might have.

Purchasing the matrimonial home from your ex.

There are special considerations given to people going through a separation to buy out the matrimonial home. Instead of looking at the transaction like a refinance where you can only borrow up to 80% of the property’s value, lenders will consider one spouse buying out the other up to a 95% loan to value ratio. This comes in handy when dividing assets and liabilities.

If you’d like to discuss your mortgage options, please contact me anytime.

📲250.826.7626

📩 konstantins@dominionlending.ca