Given the softening housing market in Brampton, Toronto and the GTA, I’ve been asked when is the best time to buy – now or wait? History has proven that it is almost impossible to perfectly time the market. Since home ownership has proven to be a very solid investment over the long term, focus on buying a home when you are financially ready and when it fits your lifestyle.
When you start thinking of buying, an important first consideration is the mortgage stress test because it can affect how much mortgage you can qualify for and therefore how much house you can buy. Lenders are required to ensure that your financial situation passes a stress test hurdle before approving your mortgage. You’ll be stress tested at a rate that is based on whichever is higher – the benchmark rate of 5.25% or the rate offered by your lender plus 2%. If you review current rates, it’s clear that you will have to qualify at your contract rate plus 2%, a situation many will find frustrating. The minimum you’ll be stress tested is now around 5.8% for an insured variable rate mortgage, while fixed rates are testing at over 6.5%.
The government put in this rule to ensure borrowers can handle their mortgage payments should rates rise. But rest assured that your actual payments will be based on the lower mortgage contract rate that I negotiate for you.
If you’re looking to buy in the next twelve months, the best thing to do now is to get yourself mortgage ready well in advance. Here are some tips to get you started:
- Look to solutions when the stress test is an issue. We can look at ways to improve your ability to qualify under the stress test and/or increase your qualifying amount. One option is to go for a variable-rate mortgage. I also have access to credit unions that are provincially regulated and don’t need to follow the stress test but instead qualify at the contract rate or contract rate plus 1%. Private lending is another available solution we can consider.
You can also add a cosigner to your application, which involves including the support of another person’s credit history and income to your application. The co-signer will be put on the home’s title and your lender will consider this person just as responsible as you are for the mortgage - Cash is king. Plan to go into homeownership with the maximum downpayment possible but first understand how much downpayment is needed. You need 5% on the first $500,000 which will be $25,000 and 10% for any amount over this threshold. If your purchase price is $1 million or more, a minimum 20% downpayment is needed. With less than a 20% down payment, you must have mortgage default insurance, which is added to your mortgage amount, and you are restricted to a 25-year amortization mortgage. If you have 20% down or more, you don’t need mortgage default insurance and can choose a 30-year amortization mortgage, giving you the option of lower mortgage payments should that meet your needs.
- Get a downpayment boost from family. Parents and grandparents have enjoyed the personal and financial benefits of home ownership themselves and see how hard it is today to make that important first step into the market. Increasingly and if they can financially, they are gifting some or all of the downpayment, or by helping with other debts. This may be an ideal way to achieve a 20% downpayment so you aren’t required to pay mortgage default insurance premiums, although slightly higher rates will likely apply. Things to think about:
- Parents and grandparents have a responsibility to their own financial security first.
- Consider property law. It may be best to consult a lawyer. If you are buying as a couple and you later split up after receiving a downpayment gift from your parents, you may find that 50% of that money goes to your partner as part of your settlement.
- If it’s a gift, your lender will require a gift letter be signed that stipulates the money does not have to be paid back at any time.
- Obtain a pre-approval before house shopping. Its a great idea to get a pre-approval so you know the amount of mortgage you qualify for and can shop within your budget. You’ll also know what your monthly payments will be and have security that your interest rate will be held for a specified period i.e., 120 days. Be realistic though and make sure you can afford that pre-approved amount. While it does offer some security, keep in mind that a pre-approval is not a mortgage approval. Your lender will need to assess the property you are purchasing. And finally, be sure to not make significant changes after getting the pre-approval i.e., changing jobs, adding debt or missing payments, co-signing another loan, or using your down payment money.
- Get your credit report. Getting a copy of your credit report will let you know how you will be viewed by lenders. You can order yours for free through the mail or for a small fee online at Equifax or Transunion. If you spot a problem, contact the credit agency to resolve the issue.
- Polish your credit. You can quickly boost your score by several points with continual good credit habits. Most importantly, pay your bills on time, every time. Don’t let your credit accounts exceed 33% of the credit available. Before you cancel any credit cards, get advice. And don’t apply for a store card just to save on your purchase that day. Make a habit of checking your credit score regularly so you can watch how those good credit habits push your score higher.
- Factor in closing costs. There are added costs that come with the purchase of a home. Generally, you can expect to pay between 2 – 4% of the home’s selling price in total closing costs. One of the biggest lessons learned by many home homebuyers was that they should have been more thorough when budgeting and accounting for all the costs of homeownership. You also need to consider the ongoing costs that will become part of your monthly homeownership expenses, like home insurance, property taxes, utilities and maintenance.
- Take advantage of incentives. There are government programs available to help first-time buyers get into their home and tax credits/rebates that can help with closing costs and other home-related expenses. Some may not fit your circumstances, but others are a must to take advantage of like the Land Transfer Tax Rebate and the First-Time Home Buyer Tax Credit.
- Conditions are important when you make an offer to purchase. You will definitely want a financing condition in your offer that gives you time to get your mortgage commitment from your lender. Remember that a preapproval is not a commitment since the lender must evaluate the property.
You may also want to include home inspection and appraisal conditions. Making sure the home is properly inspected is an important safety net and allows you to get out of the deal or negotiate a lower price if the inspector finds an issue with the home. And if the appraiser decides the property has a lower value, that could affect your financing and require you to increase your downpayment, particularly if you are right at 5 or 20% down. An appraisal condition in your offer can make sure that this doesn’t happen.
Start a dialogue early. I can help you be fully prepared to get you where you want to go, and to make sure you can take advantage of any opportunities in Brampton, Toronto or the GTA that come your way. Contact me today and answer any questions you may have!
