Mortgage refinancing in Canada is the latest domino to topple in the wake of the COVID-19 pandemic’s impact on our economy.
In fact, all forms of mortgage financing have been increasingly more challenging the past several weeks. Fortunately, most purchase transactions already committed to during these early transition stages are still going through.
Refinances are another matter though. They are uninsurable, so the lending risk sits squarely with the lenders; whereas purchase transactions facilitate changes of ownership, and the associated mortgages are a necessary and essential part of that process. Mortgage refinances are arguably a non-essential process.
When people refinance their mortgage, it is quite simply to get to a better place financially. For some, it is to reduce the mortgage interest rate, lower the monthly payment, and extend the term. For others, it is to extract equity from the home, often for one of the following reasons:
consolidating high-cost consumer debt
combining a second and first mortgage
financing home renovation projects
funding post-secondary education
assisting with a down payment for children buying their first home
paying off a consumer proposal early
funds to pay CRA tax arrears
tapping into home equity to help children with the down payment or closing costs on their first home
Market uncertainties have rendered most of these more difficult than a month ago, and in some cases impossible.
Three Reasons Why Mortgage Refinances Are Tougher For Canadians
The other day one major chartered bank announced:
“In view of the ongoing COVID-19 situation, the following changes are being made to lending policies affecting new applications submitted to us on or after Thursday, April 9, 2020. These changes are required due to declining employment, energy sector impacts, unstable property values, and restrictions on appraisers being able to access properties for appraisal reports.”
But as a result of COVID-19, there are three main reasons why mortgage refinances have become much tougher for Canadians…
More Stringent Scrutiny of Applicants’ Income and Employment
Lower Appraisal Valuations Than Expected
Lender Cutbacks in Maximum Loan-to-Value Ratio
1. Tougher Scrutiny on Applicants’ Income and Employment
Lenders are understandably skittish about income stability in the current market. They aren’t just worried about whether you have sufficient income today, but also whether your employment is safe and you will continue to have an income in the months ahead.
Canada lost a record one million jobs in March 2020 according to BBC News, and you can expect more layoffs and job losses as the full impact of COVID-19 becomes known. The Conference Board of Canada said on April 6th that a combined 2.8 million jobs could be lost during March and April, equal to nearly 15% of total employment.
Even though many of these job losses may prove to be temporary, no one knows.
And if you are in the business of lending money to people, you are going to be looking very carefully at all applicants’ employment income – both for what it is now, and what it might become when the current stay-at-home policy runs well past the month of April, as many experts feel it will.
Prime Minister Trudeau said recently [there will be] “No return to ‘normality’ until a coronavirus vaccine is available.” And that might not be till 2021!
What this means is that even if you had sufficient income to qualify for the desired mortgage amount two months ago, that might not be the case now, and as such, lenders have become more conservative and risk averse.
Mortgage Lenders Now Want to See All Income Documents Upfront.
If the borrower’s income and employment cannot stand up to scrutiny, there is no point going further. Here is what lenders are saying right now:
One Chartered Bank Says:
For any application using self-employed (BFS) income, in addition to standard income documents, the broker must provide us with a description of the business, when established, number of employees, and its current status (e.g., operating, shut down).
Note: we may request additional income documents or conduct additional due diligence at our discretion to verify current income/employment status.
Additional due diligence will be required to assess the viability of the business post COVID-19. To assist in the assessment, please consider asking your client for their most recent financial reporting, i.e., interim tax reporting.
One Monoline Lender Says:
If a borrower has been laid off, we will not use their income to service the file unless an exception is granted by us and the mortgage insurer (if required). Neither EI nor the Government of Canada Emergency Response Benefit are eligible for inclusion in qualifying income.
As you would expect, if your applicants do not work in one of these essential service sectors, we will require additional confirmation of their employer’s commitment for continued pay during the COVID lockdown.
We will not utilize any temporary Canada Emergency Response Benefits in qualifying calculations.
2. Appraisal Valuations Are Coming In Lower Than Expected
Appraisers rely on recent sales data to come up with comparable properties for their appraisal reports. But sales are down so much since mid March there are fewer to compare to. As reported in the Globe and Mail, Carolyn Ireland on March 31, 2020, wrote:
“Ontario remains under a state of emergency, and while the provincial government deemed most of the real estate industry “essential,” it did so in order to permit transactions to close – not to allow the industry to carry on with business as usual.”
And there is no incentive for appraisers to go high on their estimates – in the teeth of so much pessimism and conservatism. I think we will start to see more and more transactions fall off the rails because of low appraisal values.
Anecdotally, I’m seeing behavioural changes among appraisers that will lead to more values coming in lower than would have been expected a short while ago.
For example, some appraisal values are being submitted with a low, medium and high value. The other day a colleague had a mortgage amount cut back with a major chartered bank. The low was $1.5 million; the medium value was $1.6 million and the high value was $1.7 million. The bank had to take the medium value and the loan was cut back by 130k.
And, Actual Resale Values Are Starting to Drop
Rob McLister over at RateSpy notes, “If HouseSigma is in the ballpark, median GTA home prices are sliding hard in April. It estimates the median GTA home value is down to $740,000. That’s a 6% drop from the February peak of $789,000. Of course, these are just estimates and the data for April is volatile and incomplete.
“A couple of my sellers are nervous that things are going to get worse, so they’re taking what they can get.”
The fact is listings are down dramatically, and there are no open houses anymore. Buying a home for many is a luxury to be deferred till things settle down.
So the net is, it appears appraisers are being more cautious today, and there is nothing on the horizon that’s likely to change this. No one knows how fast buying activity will pick up when the dust settles from COVID-19, so cautious valuations are probably the new normal.
3. Lower Loan-to-Value Ratio Lending Maximums
Before COVID-19, only private mortgage lenders could refinance higher than 80% of the appraised value of a property. It’s against the rules for institutional lenders. Mind you, there are not many brave souls who want to lend over 80% these days.
One small bank has quietly announced they will only refinance to 75% of the appraised value. And many B-lenders, on their own volition, have already cut their maximum loan to value (LTV) to 75%, and that is in densely populated urban areas.
Their maximum LTV is less in rural areas and smaller cities. This percentage will face further downward pressure in the coming months.
And right now, private lenders are also exercising more caution than usual, pulling back on their maximum LTV. The individual retail lender has already gotten cold feet and isn’t at all happy over 50% LTV. Mortgage Investment Corporations (MICs) remain open for business at decent LTVs, but many are expecting higher overall returns on their capital.
These lower loan-to-value ratios, coupled with declining appraisal values, are shrinking the number of fundable mortgage refinance transactions.
Is There a Bright Spot for Refinances?
There’s an old adage that lenders like to give loans to people that don’t need it. That is probably more true today than ever, including for refinances.
In the United States, mortgage rates have already begun to fall quickly, especially for terms of 10 and 15 years, and there is rising interest among many to take advantage of a once-in-a-lifetime opportunity to refinance for a lower rate and radically reduce the remaining term of their mortgage. If you have sufficient equity that a light valuation doesn’t matter, and secure income, this could be a really great time to refinance.
This hasn’t happened yet in Canada, but could be the next phase for us as well. And, in general, if you have good enough income, have lived in your home for a while, and haven’t borrowed against your growth in equity, you may still be a good candidate for refinancing. (I’ll write more about this in a future article).
It’s a completely different world for mortgage refinancing than just a month ago.
Factoring together loss of income, lower real estate values, tougher appraisals, and lower loan-to-value ratios, it’s not hard to understand why the landscape for mortgage refinances has cooled considerably. Some refinances for specific types of borrowers will still be possible, but most of the typical cash-out deals we’ve seen for the last several years using home equity to solve debt problems, or large cash needs, are going to be fewer, and much harder to do.
Final word on this topic comes from respected industry veteran Ron Butler, who says, “Nothing will be the same for maybe the next two years. The old world of lending is gone.”
Sandy Silva, a 39-year-old sales director at Tulip Retail, a software platform for retail companies, with her seven-year-old son, Xavier.
In 1999, Sandy started dating her soon-to-be husband, Ryan, in Waterloo. She studied economics at Wilfrid Laurier University while he took political science at the University of Waterloo. In 2002, they got engaged, and Sandy’s father gave them an early wedding gift of $75,000. Sandy and Ryan used that money for a down payment on a $289,000 pre-construction two-bedroom condo in CityPlace. In 2005, they got married and moved into the unit.
Within a few years, they were thinking about having children, and being near family became a priority. At the time, they both worked in Toronto: she was a buyer for Sporting Life and he was a supervisor at an automotive manufacturing company. They used their combined savings, along with equity from refinancing their condo, to buy a $470,000 detached house in Brampton, where Sandy’s parents lived. Meanwhile, to make some extra cash, they rented out their CityPlace condo for $2,150 a month.
The value of their properties increased enough, after four years, that they decided to leverage their equity to scoop up more real estate. They knew, from having lived in the Waterloo Region during their college years, that demand exceeded supply in the area. Ryan also had family in Waterloo, which meant someone could take care of their investment properties. So they bought two detached houses in Waterloo for a combined $462,000 and rented them to university students for a total of $4,675 a month. The rental income was enough to pay their mortgage and turn a profit. In 2013, Xavier was born.
Three years later, Sandy and Ryan separated. Ryan sold the two Waterloo homes for a total of $540,000 and split the $78,000 profit with Sandy. He also kept the place in Brampton. Sandy held on to the CityPlace condo and took $250,000 in equity from the Brampton property, which she used to invest in Rent Frock Repeat, a designer dress rental company.
The bottom line
Sandy recently joined Tulip Retail as a sales director. She lives part time at her CityPlace condo, which is now worth $850,000, otherwise she stays at her parents’ place in Brampton with Xavier. And Sandy’s not done investing. She recently bought a one-bedroom condo in Vaughan—which she plans to use as a rental property—for $525,000. Her portfolio is now worth $1.375 million. Before the end of 2020, Sandy would like to buy a place in Brampton.
Source: Toronto Life – BY ALI AMAD | PHOTOGRAPHY BY GIORDANO CIAMPINI |
The Benefits and Risks of Co-Signing for a Mortgage
Thanks to tighter mortgage qualification rules and higher-priced real estate—particularly in the greater Vancouver and Toronto areas—it’s not always easy to qualify for a mortgage on your own merits.
You may very well have a great job, a decent income, a husky down payment and perfect credit, but that still may not be enough.
When a lender crunches the numbers, their calculations may indicate too much of your income is needed to service core homeownership expenses such as your mortgage payment, property taxes, heating and condo maintenance fees (if applicable).
In mortgage-speak, this means your debt service ratios are too high and you will need some extra help to qualify. But you do have options.
A co-signer can make all the difference
A mortgage co-signer can come in handy for many reasons, including when applicants have a soft or blemished credit history. But these days, it seems insufficient income supporting the mortgage application is the primary culprit.
We naturally tend to think of co-signers as parents. But there are also instances where children co-sign for their retired/unemployed parents. Siblings and spouses often help out too. It’s also possible for more than one person to co-sign a mortgage. A co-signer is likely to be approved when the lender is satisfied he/she will help lessen the risk associated with loan repayment.
Under the microscope
When you bring a co-signer into the picture, you are also taking their entire personal finances into consideration. It’s not just a simple matter of checking their credit.
Your mortgage lender is going to need a full application from them in order to grasp their financial picture, including information on all properties they own, any debts they are servicing and all of their own housing obligations. Your co-signer will go through the wringer much like you have.
What makes a strong co-signer?
The lender’s focus is mainly centred around a co-signer’s income coupled with a decent credit history. Some people think that if they have tons of equity in their home (high net worth) they will be great co-signers. But if they are primarily relying on CPP and OAS while living mortgage free, this is not going to help you qualify for a mortgage.
The best co-signer will offer strengths you currently lack when filling out a mortgage application on your own. For instance, if your income is preventing you from qualifying, find a co-signer with strong income. Or, if your issue is insufficient credit, bring a co-signer on board who has healthy credit.
There are typically two different ways a co-signer can take shape:
The co-signer becomes a co-borrower. This is like having a partner or spouse buy the home alongside a primary applicant. This involves adding the support of another person’s credit history and income to the application. The co-signer is placed on the title of the home and the lender considers this person equally responsible for the debtif the mortgage goes into default.
The co-signer becomes a guarantor. In this scenario, he/she is backing the loan and vouching you’ll pay it back on time. The guarantor is responsible for the loan if it goes into default. Not many lenders process applications with guarantors, as they prefer all parties to share in the ownership. But some people want to avoid co-ownership for tax or estate planning purposes (more on this later).
Nine things to keep in mind as a co-signee
It is a rare privilege to find someone who is willing to co-sign for you. Make sure you are deserving of their trust and support.
It is NOT your responsibility to co-sign for anyone. Carefully think about the character and stability of the people asking for your help, and if there is any chance you may need your own financial flexibility down the road, think twice before possibly shooting yourself in the foot.
Ask for copies of all paperwork and be sure you fully understand the terms before signing.
If you co-sign or act as a guarantor, you are entrusting your personal credit history to the primary borrowers. Late payments hurt both of you, so I recommend you have full access to all mortgage and tax account information to spot signs of trouble the instant they occur.
Understand your legal, tax and even your estate’s position when considering becoming a co-signer. You are taking on a potentially large obligation that could cripple you financially if the borrower(s) cannot pay.
A prudent co-signer may insist the primary applicants have disability insurance protecting the mortgage payments in the event of an income disruption due to poor health. Some will also insist on life insurance.
Try to understand upfront how many years the co-borrower agreement will be in place, and whether you can change things mid-term if the borrower becomes able to assume the original mortgage on their own.
There can be implications with respect to your personal income taxes. You may accumulate an obligation to pay capital gains taxes down the road. This should be discussed this with your tax accountant.
Co-signing impacts Land Transfer Tax Rebates for first-time homebuyers. The rebate amount is reduced based on the percentage of ownership attributed to the co-signer.
Tips from a real estate lawyer
We spoke with Gord Mohan, an Ontario real estate lawyer, for unique insights based on his 22 years of experience.
“The cleanest way to deal with these situations is for the third party (which is typically a parent) to guarantee the main applicant’s mortgage debt obligation,” Mohan says. “This does not require the guarantor to appear on the title to the property, and so it prevents most later complications.”
Following are five key suggestions from Mohan:
Co-signers should seek independent legal advice to ensure they fully understand their obligations and rights.
All parties should have updated wills to address their intentions upon death and give their executor clear direction with respect to their ownership.
Many co-signers try to minimize future tax impact by opting for 1% ownership and having a private agreement that the borrowers will indemnify them or make them full owners if there is a tax bite down the road.
Some co-signers try to avoid future tax consequences completely by having their real estate lawyer draw up a “bare trust agreement”, which spells out that the co-signer has zero beneficial interest in the property.
A bare trust agreement can come in handy for the Land Transfer Tax (LTT) rebate,enabling the co-signer to apply for a refund from the Ministry of Finance – LTT bulletin.
One thing that traditionally hasn’t been a strong suit in the Black family – and simultaneously, a detriment – is passing down healthy money habits to ensure financial stability for future generations.
In the technology age, however, that is beginning to change as more Black parents are building a foundation for their children to learn financial responsibility at an early age, hoping it’ll drive their decision making in adulthood.
“There is nothing righteous about struggling for your financial security,” Sabrina Lamb, a financial literacy educator, explained in the Pittsburg Post-Gazette. “It is actually a perfect storm of low self-esteem, lack of knowledge and generational conditioning.”
In order to break bad generational habits of spending money, parents must first take an introspective look to see how they’ve been holding up financially – only then can a parent truly impart wisdom on their child about good spending habits.
Here are some tips to start the conversation with your young ones.
Save, save, save!
It’s never too early to show your child the importance of saving money. On birthdays and holidays, for example, teach your child to put at least 30 percent of the cash they received into a piggy bank – or, an actual bank savings account. This will become routine so every time your little one gets some extra cash as a gift, they’ll immediately think to save it.
Teach the value of money.
So many children actually think money just appears into their parents’ pockets. Be direct in teaching your child that that’s not the case. Think about ways to make your child work for the money they’re seeking to purchase toys, video games or anything else they like – perhaps, a weekly payout for chores. This way your children will feel some type of way when spending the money that they actually worked their butts off for.
Discuss bills and budgets openly.
Now, it’s typical in many traditionally Black households that adults frequently tell children to stay out of “grown folks business.” Because of this, Black parents tend to never discuss any financial hurdles they may be facing – such as problems making mortgage payments – or even the growing costs of bills. It’s important to show your children how bills work. Like, for example, how leaving the lights on in every room translates into how much money the family owes on the monthly electricity bill.
Practice what you preach.
Children mimic everything they see their parents do. So, if you recklessly use your credit cards to buy clothes, jewelry and other non-necessities at the mall, your children will adopt that behavior without understanding the consequences of it. Be the financially responsible person that you want your children to be.
Whether you’re a first-time buyer or a seasoned investor, there are new rules in 2018 that you will want to understand if you plan to buy a condo in Toronto. In this blog post we are going to explain the new rules and give you some tips to navigate them.
The 2018 condo market at a glance:
What are the new rules and changes?
We spoke with James Harrison, President of Mortgages.ca, to give us a full understanding of what to expect this year.
The new rules are simple:
As of January 1st, 2018, the Bank of Canada’s “Universal Stress Test” is in effect.
The buyer must now qualify for their mortgage based on the 5yr posted rate (4.99% today) or their contracted rate plus 2.00%, whichever is greater.
What does it mean for buyers in 2018?
“In my opinion, this will negatively impact one’s buying power by approximately 15-20% on average,” says James Harrison.
This stress test is an expected addition to the federal government’s measures to limit over-leveraged buyers from entering the housing market. In February of 2016, the federal government raised the minimum down payment from 5% to 10% for properties between $500,000 to $1 million. As we discussed in a previous blog post about those down payment rules and changes, the aim was to “reduce taxpayer exposure and support long-term stability.”
The newest round of stress tests is also about creating a buffer zone, but it applies to uninsured mortgages (borrowers with 20% down payment). Effectively, everyone applying for a loan through a regulated lender will now be stress tested. In a previous post, we explained in plain words how your buying power may change under the new mortgage rules.
“This will have a huge impact on some buyers but not all,” says James Harrison. “I believe this will negatively affect first time buyers as they tend to have lower incomes and also carry some debt from school. With one’s buying power negatively affected by 15 to 20% you would think this will mean prices will come down. I would be surprised if prices came down more than 5% in 2018.”
“For the well qualified buyers (those with higher incomes and little to no debt) 2018 will most likely see less competition, which could mean more of a buyer’s market. We have not seen this in a very long time in the GTA.”
“If you purchased a property prior to January 1st, 2018, you can still qualify for a new mortgage based on the old mortgage rules (with some lenders). Some top Brokers may also have lenders that can still qualify clients under the old rules (or at least using the discounted 5 fixed rate of 3.29% for example) and a 25yr amortization. This can increase one’s buying power by about 10- 15%.”
“If a buyer bought a property (same for pre-construction) prior to October 2016 (they could also qualify for an insured mortgage based on the rules prior to the first stress test for insured buyers). This is a huge benefit for some buyers of pre-construction units.”
What to do if you’re not approved for a mortgage under the new rules?
“If a buyer no longer qualifies to purchase a property they want they may have to look for a strong co-borrower to sign on to the mortgage to help increase the income and bring the debt services ratios in line. Unfortunately, this may mean a lot more potential buyers will now be looking for a rental property, which in itself is already very challenging in Toronto.”
Alternatively, there are mortgage lenders that operate outside The Office of the Superintendent of Financial Institutions (OSFI). The ‘stress-tests’ apply only to lenders that are regulated under OSFI, such as the Big Five banks, while some second-tier banks and credit unions fall outside the new rules. These lenders have often been painted as “shadow lenders,” but they do fill a gap in the home buying process.
For buyers who don’t approve under the new mortgage stress tests, these non-regulated lenders can be a viable option and many of them offer rates competitive with top tier banks. One thing to keep in mind, however, is that non-regulated lenders are still hoping to limit risk, which means they tend to prefer borrowers with strong credit history. If your credit is weak, you may face higher rates on your mortgage. As always, it’s best to do some research.
“It is more important than ever for each and every buyer (or anyone looking for a mortgage) to connect with a very experienced Mortgage Broker. Going to your local bank branch is simply not a smart option anymore and has not been for years, but the new stress test will show this even more. A good Mortgage Broker will be able to help explain this fully and find you more options. Even if you are a well-qualified buyer you may not qualify with your bank but you may still qualify for excellent schedule A products with another lender. Do not give up until you speak with a good broker.”
Why is the government implementing these new mortgage rules?
“The reality of these most recent mortgage rules is that the federal government has serious concerns with the level of personal debt loads in Canada. So, they are continuously coming out with ways to help make sure everyone can truly afford the mortgage they are taking on. I personally feel this was too much, and I would not be surprised if the government is forced to pull this back within the next two to three years.”
“I am optimistic that 2018 will still be a strong year in real estate, but realistically a lot of buyers may be out of the market completely. I expect that 2018 will most likely be the year of mom and dad providing the down payment and co-signing for the mortgage as well.”
“I strongly encourage each and every buyer to contact a well-qualified and experienced mortgage broker for all of their mortgage needs, whether it is a purchase, refinance, or renewal.”
When Karen Somerville and her husband Alan Greenberg showed up for the pre-delivery inspection of their brand new luxury home in Ottawa they were horrified. Electricians, drywallers, plumbers and a variety of other tradespeople were still busy constructing their home and, despite assurances from the builder, the couple seriously doubted their $443,000 new build would be ready for possession in 14 days. Electrical wires hung from ceilings and stuck out from unfinished walls, appliances and cabinets were stacked in the kitchen, and only a portion of the hardwood floors had been installed. They immediately hired an independent contractor to examine the home. The result was a deficiency report citing 130 problems, including an undersized furnace and ductwork, poor ventilation and improper roof installation.
At first, Karen, then a university professor, and her husband Alan, an account manager with Sun Microsystems, tried to negotiate with the builder to resolve the problems. When this proved futile, the couple turned to Tarion—the private corporation that regulates Ontario builders and provides warranties on new houses and condos. Tarion sent its own inspector who confirmed that there were 85 defects in the home—but only 39 were considered to be under warranty.
Karen and Alan would be on the hook to fix the other defects themselves, which would cost the 40-something couple $4,000 or more. “This is the largest purchase we, as consumers, make,” says Karen, “and Tarion is supposed to be there to help.” Instead, she found herself having to document and defend an appeal against the provincial warranty program’s decision—despite paying a $650 fee for her new home warranty.
Buying a new home directly from the builder, whether a condo, townhouse or detached, is a popular choice. Almost one third of all homes sold in Canada each year are brand new. In Ontario alone, more than 52,500 buyers opted for a new build last year, and a forecast by the Canada Mortgage and Housing Corporation (CMHC) predicts that number will only climb. Despite the problems Karen and Alan encountered, it’s easy to see the appeal: Buying direct from the builder means you can customize your dream home to your exact tastes. It means higher energy efficiency ratings than older homes, and often higher quality building materials. New homes also have lower maintenance costs and are less likely to surprise you with a serious issues such as a cracking or tilting foundation, severe plumbing problems, asbestos or knob-and-tube wiring that needs replacing.
But as Karen and Alan discovered, there are some pitfalls specific to a new home purchase too—pitfalls that we don’t want you to run into. To help out, we’ve compiled the top 10 mistakes that new home buyers make, so you can be sure to avoid them. Read on to find out why you should be wary of the show home, what to do if your new place isn’t ready on time, how to save big money on upgrades, and most importantly, how to make sure that the dream home you’re expecting is the one you actually end up getting.
Mistake #1: They fall in love with the show home
When Jason Saxon and his wife Emily set out to find a builder in the quaint Edmonton suburb of Spruce Grove, they were surprised to find only two builders operating in the area. “Only one of them offered the separate dining room that we wanted,” says Jason, which made their choice easy. The deal was clinched when they toured the builder’s magnificent show home. “It had everything we needed,” gushed the systems analyst. The couple (whose names have been changed to protect their privacy) was so impressed by the show home they booked an appointment with a salesperson on the spot. Within days they had a signed purchase agreement and were busily designing their dream home.
That, of course, is the result every builder is aiming for, explains Stan Garrison, an industry insider with more than 20 years experience (we’ve changed his name to protect his privacy). “Most people fall in love with the show home, but you have to realize that everything you see in that model home is an upgrade,” he says. “And upgrades are a major portion of a builder’s 10% to 20% profit margin.”
Upgrades are so profitable for the builder because the industry standard is to charge double the sub-trade’s fee—a cost that is passed directly to the buyer, Garrison says. “That means the $8,000 granite countertops you ordered really cost your builder $4,000. Now multiply that by 25 buyers and you can see how builders make a profit.”
That doesn’t mean you should never order an upgrade, but you do need to be clear on what is an upgrade and what isn’t—and do a little bargaining so you don’t get taken for a ride. “With new builds there is no room for negotiation on the base sale price,” explains Max Wynter, a realtor with Re/Max Realtron Brokerage in Markham, Ont. “But there is room to negotiate the price of your upgrades.”
The rule of thumb is the more upgrades you spring for, the bigger the discount you should angle for. “If you purchase $5,000 in upgrades the builder may only give you a 10% discount,” says Garrison. “But purchase $50,000 in upgrades and you can start asking for $10,000 to $15,000 off the final price.”
Mistake #2: They trust the floor plan
Ken Grunber, who works at a video production house in Toronto, found out too late that the new condo unit he bought in 2007 wasn’t nearly as large as advertised. When he and his partner moved in and measured the area, they discovered it wasn’t 700 square feet after all. The condo was actually 560 square feet—if you don’t count the balcony and bathroom.
“That’s not unusual,” says Martin Rumack, a real estate lawyer with over three decades experience in new build construction. “Condo sales staff will often include balcony or terrace measurements as part of the total square footage. New home sales staff will provide square footage based on measurements of external walls. You can’t rely on their verbal assurances, on the floor models, or on the sale pitch or brochure.”
Unfortunately, many new home decisions are based solely on brochures or artist renditions. For instance, a sales brochure sold the Saxons on upgrading to French doors for the entrance to their walkout patio. “We’d originally seen the sliding doors in the show home, but a brochure highlighted the double French doors and we loved the look,” says Jason. They quickly paid the upgrade fee, but when they moved in they were surprised to find the doors didn’t have the little window panes with wooden slats between them that they had seen in the photo. Instead there was just one huge pane of glass in each door. “The price quoted by the builder’s sales rep didn’t include window slats, just clear glass. It would cost us more to get slats,” Jason says. “Now I know: get every detail in writing.”
In fact, the builder has the discretion to change an image, or floor plan, or layout and “you have no say,” says Rumack. He suggests asking for a breakdown of room sizes and plan details, and to “get it in writing.” Then, if there’s a substantial difference between what you’re sold and what you get you can either negotiate a price reduction or try and get out of the deal.
Mistake #3: They don’t get their contract lawyered
Whether you’re buying a new detached home or a condo, the purchase agreement is the legally binding document that spells out what you’re getting and the conditions of the sale. It’s full of fine print and legal-speak, and if you sign without legal representation, you risk being bound to terms you don’t understand or don’t want. More importantly, says Rumack, it destroys any chance of re-negotiating the terms of the sale.
“Skip legal advice and you could end up with an electrical utility box on your front lawn that you can’t do anything about, or no side door on your garage, regardless of what the plans looked like,” he says. “You could find yourself stuck with any manner of substitutions, exclusions or inclusions that could detract from your home’s future value.”
When you’re buying a condo, depending on the province you live in, you may have a cooling off period of up to 10 days. This gives you a chance to pay $800 to $1,600 and hire a lawyer to go through your contract after it’s signed. If you don’t like what they find, you can back out of the deal.
Unfortunately, there’s no such period for freehold homes, and many home builders demand that you sign a contract on the spot to secure your sale price or lot selection. Try to avoid this situation if possible, but if you must, at the very least insist on adding a clause that makes the deal conditional upon approval by your solicitor. “These days more and more builders are offering buyers a two-day period where they can seek legal advice before the contract becomes binding,” explains real estate lawyer Sheldon Silverman.
Mistake #4: They don’t bother with an inspection
During the home buying process there are two specific times when it’s important to have your house inspected. The first is the pre-delivery inspection, a mandatory walk-through for all new homes under warranty. This inspection takes place with your builder shortly before you officially take possession of your home. The second inspection should be scheduled for about one month before your home warranty expires. In Ontario the first and broadest portion of your warranty expires 12 months after your possession date, in B.C. it’s 24 months after possession.
During the pre-delivery inspection, you probably don’t need to pay for a professional inspector, but you might want to “take along a friend who’s wise about construction,” says Silverman, “because if you don’t write down the deficiency then the builder isn’t obligated to fix the problem.”
However, hiring a professional home inspector to do a second walkthrough before your warranty expires is a must. This will allow your home to go through all four seasons, which is enough time for major defects to start showing up, and you’ll still be able to get them fixed under the first stage of the standard provincial warranty, which covers against material and labour defects.
Mistake #5: They accept delays without a fight
Believe it or not, until quite recently, if your new house wasn’t ready on time, it was your problem. “Builders were not required to provide reasons or to limit their delays,” says Rumack. But that all changed when Toronto condo buyer Keith Markey challenged a Tarion decision five years ago.
In 2001, Markey bought a unit in a soon-to-be constructed condominium tower in downtown Toronto. His initial possession date was Nov. 30, 2002. But as the date approached, the builders kept sending letters announcing delays. Markey’s possession date was moved back six different times—he wasn’t able to move in until eight full months after the initial possession date.
He requested $5,000 from the builder to compensate him for the delays. The builder refused, the case went before a tribunal, and Markey won. Tarion appealed the case, but in 2006, Markey was vindicated: Not only did he receive almost $5,000 in compensation but close to $9,000 in damages. The case changed how Tarion and other provincial warranty programs handle builder delays.
“The law is now clear and critical dates are now included as part of the purchase agreement and contract,” says Silverman. “If a builder misses these critical dates and requires an extension, a buyer can either agree, and seek compensation, or simply get out of the deal.” Either way, Silverman suggests seeking legal advice whenever you’re presented with a request to delay a critical date.
Mistake #6: They forget they are moving into a construction zone
Anyone considering a new condo or home purchase should take into consideration the impact of ongoing developments. As one reader, who bought into the first phase of a three-phase condo development, recalls: “It’s noisy, everything is dusty and the air quality is just plain horrible—not even the best furnace filter could catch this dust. Combine that with the fact that the whole area is ugly for quite a long time and that access points can open and close, depending on the phase, and you have a recipe for long-term aggravation.”
Still, others, such as Jason Saxon, were mentally prepared for living in a construction site, and actually found it kind of fun—at times anyway. “You take the dust and dirt and noise with a grain of salt,” he says. “And it’s actually nice watching the homes go up.” In fact, there were only two days out of that first construction year when the Saxons and their neighbours felt truly inconvenienced. “When the builders put the final grading on our road no one could drive or park on our street,” Jason recalls. “For many of our neighbours that meant a hike through muddy and overgrown fields just to get home.”
Mistake #7: They think they have a warranty—but they don’t
Most buyers assume that all new-build lofts, condos and homes are covered by a provincial warranty, but this isn’t the case. Only three provinces—B.C., Quebec and Ontario—make warranty coverage mandatory. In fact, those are the only provinces that require new home builders to register with their respective provincial regulator at all.
“In Ontario, it’s illegal to build without being registered,” says Janice Mandel, vice president of corporate affairs at Tarion. But in other provinces, where the warranty program isn’t mandatory, builders can simply opt-out of coverage. Often they’ll try to convince home owners that they’re saving them the registration costs.
Buyers should be proactive and get their new home warranty in writing, says Mandel. They should also go online to determine if their builder is registered with a provincial regulator as a new home builder. This is particularly important for loft or condo conversions—residential units constructed inside an existing building shell. In such situations, new-build warranties often don’t apply.
Mistake #8: They’re not speedy with their warranty claims
When the Saxons first moved into their dream home near Edmonton, they were delighted. But they soon found themselves caught in a bureaucratic nightmare. During that first winter in their new home, they noticed a large crack in the cement-block floor of their garage. So they called the builder, who told them that when the ground thawed in the spring the problem would be fixed. A few months later, when the ground started to thaw, they noticed even more cracks stretching from their garage down their driveway. “We phoned, spoke to the site super, and even flagged down a builder’s representative, who promised us a new driveway.”
But weeks went by and nothing happened. “What was frustrating was coming home to see that our neighbour had a newly poured driveway and ours was still pock-marked and cracked.” That’s when Jason started sending emails. “You have to hound the builder, who seems willing to fix anything, but just needs a lot of motivation.” After weeks of sending emails and making calls the Saxons finally got a new driveway and garage floor.
The Saxons were able to get the problem fixed because they were proactive and understood that there are strict time limits on making claims. To ensure you understand how long you have, carefully read the package you get during the pre-inspection, as there are different deadlines for different types of warranty claims. “My advice: get a calendar and mark down those deadlines, and then make sure you get the claim in at least five days before the deadline,” says Peter Balasubramanian, vice president of claims for Tarion.
While you’re reading your new home package, you should also familiarize yourself with the maintenance you have to do to ensure your warranty remains valid. For instance, if you forget to change your furnace filters or fail to clean out your gutters you could find a claim regarding deficient heating or water penetration into your basement is deemed to be invalid.
Mistake #9: They’re ambushed by hidden closing costs
When you sign the purchase agreement for your new place, many of the closing costs are estimates. These costs often escalate as you approach your possession date, and both Rumack and Silverman have seen their fair share of “absurd” adjustments tacked on to a buyer’s purchase contract. For instance, you may find large charges that suddenly materialize for hooking up gas and electricity meters, plus mortgage discharge fees, development fees, deposit verification fees—Rumack has even seen a fee for “public art contributions” to cover the cost of a sculpture by a building’s entrance. “That’s why I pay close attention to the adjustments and try and get a cap on certain items and remove others,” Silverman says.
Mistake #10: They buy at the wrong time
If you’re buying a new condo or townhouse as an investment, the key is to get in as early as possible. In order to get the financing to start a new project, builders will often raise initial funding through pre-sales. These pre-sales often kick off with invitation-only VIP events, says Wynter. Usually, only high-volume realtors who specialize in the type of building on offer are invited. “If you see a line-up at a sales office, it’s often because a VIP event has been scheduled.” Once the VIP event is over, the builder will open sales up to all interested realtors, then finally they’ll open the project up to the public. “By the time a builder throws a grand opening for the general public, often 50% of the units have already been sold and the price has gone up three or four times,” explains Wynter.
It’s easy to get in on these VIP pre-sales, but you’ll need to work with a realtor who specializes in new developments and be ready to move quickly. For instance, the Paintbox development—the second phase of condos in the newly revitalized Regent Park area of Toronto—gave VIP realtors a week to register their clients for the pre-sale. Four days after registration closed clients were required to sign the paperwork.
Despite the potential savings on purchase price, this can be a risky way of buying real estate. When the Vancouver condo market turned in 2008 many pre-sale buyers found themselves with a contract price that was much higher than the current value of the unit. The builders refused to renegotiate the purchase contracts, and their banks refused to grant pre-arranged mortgages for the original purchase price. Many buyers were forced to either default—and lose their money—or find additional funding elsewhere, at significantly higher interest rates.
If you’re purchasing a freehold home, keep in mind that purchasing at the right time of year can also save you tens of thousands. For instance, in the Greater Toronto Area, the summer is the best time to shop for a new development, says Garrison. “People are on vacation in July and August and don’t have time to look for houses. When things slow down for a builder you have more bargaining power as a buyer.” Another good time to look is in December and January, but by mid-February activity starts to pick-up, says Garrison, and deals are taken off the table.
In Vancouver’s Lower Mainland the opposite is true: real estate and new home purchases are typically hot in the summer and slow down significantly over the rainy months of November and December. Each local market has its own cycle, so it’s best to talk to an experienced realtor.
Financial experts have some tips on how to handle the new mortgage “stress test” rules. The new mortgage rules mean buyers will be able to afford to borrow 20 per cent less than under the previous rules, according to some experts.
Starting Jan.1, home buyers faced a new challenge in addition to rising prices and a restricted supply of available homes — a mortgage stress test designed to cool the overheated housing markets.
The test, introduced by the Office of the Superintendent of Financial Institutions (OFSI), requires the qualifying rate for an uninsured mortgage to be the greater of the Bank of Canada’s five-year benchmark rate (currently sitting at 4.99 per cent) or the rate homebuyers negotiate with the bank plus two percentage points.
That means even a buyer who negotiates a mortgage at 3 per cent will have to show they can cope with payments rising to 5 per cent.
A report by Mortgage Professionals Canada estimates the new rules mean buyers will be able to afford to borrow 20 per cent less than under the previous rules.
The Star asked financial experts for advice on how best to handle the new regime.
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Clear those debts
One of the best ways to avoid the stress test derailing your home-buying plans is to first pay off any other debts you might have, said Paul Taylor, the CEO and president of Mortgage Professionals Canada.
“Any debt you are carrying will affect the mortgage you can qualify for, so you really should be doing the best to eliminate any credit card or outstanding loan debt before going to try to arrange a mortgage,” said Taylor.
Check the fine print
Some experts had urged clients who were going to hunt for a new home early in 2018 to lock down a pre-approval for a mortgage before Jan.1. Some lenders offered an exemption to the new stress test if you bought a home within 120 days of being pre-approved.
If you were pre-approved at that time with the 120-day window, you should talk to your mortgage broker to get a clear understanding of the deadline and what it will take to meet it.
According to Integrated Mortgage Planners president Dave Larock, “repeat or move-up” buyers, looking to take on bigger or pricier homes than what they currently own, will be hardest hit by the new rules. Many first-time buyers have already been putting down less than 20 per cent, forcing them to undergo another stress test that has been in place for the last year.
But James Laird, the co-founder of financial comparison platform Ratehub, said he thinks all levels of buyers will have to make some adjustments to their plans.
If you can’t delay buying in order to build up a bigger downpayment, you may have to just accept that you can afford “a little bit less house” than previously. In some cases, you might even need to resort to the Bank of Mom and Dad for help qualifying for the same mortgage that you could have secured on your own earlier.
You might be further ahead saving longer to make a larger downpayment later, perhaps in time for a long-rumoured drop in house prices, Laird said.
Timing is key
Laird suggests doing your research and consulting with a mortgage broker, because there are some exceptions and a few groups of people using traditional lenders who will also not be subject to the new regulations.
For example, if you signed a contract to buy a pre-construction condo before Jan. 1 that you have yet to move into, you’ll still fall under the old rules.
And, says Larock, “If you bought prior to Jan. 1, even if you close after Jan. 1, you will be grandfathered (into the old mortgage policy), but you need a firm offer to purchase prior to Jan. 1.”
You’ll also be able to sidestep the test, says Taylor, if you nab a mortgage from an alternative lender, like a credit union that doesn’t have to apply the test because it falls outside the regulations covering banks and other traditional lenders.
But not everyone will be able to get off the hook.
If you scrambled to buy a home before the new regulations kicked in or even long before that, when your mortgage comes up for renewal, if you chose to switch lenders, you will have to qualify under the new policy, warns Taylor.
“I suspect that means a number of people’s mortgage renewals will probably be issued at slightly higher rates than they previously would have been because the bank is going to know you won’t have the ability to take your mortgage anywhere else,” he says. “That’s not going to be good news for everyone.”
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Source: TheStar.com – By Tara Deschamps Special to the Star Mon., Jan. 22, 2018