Buying a Home in Canada in 2018

The bottom line is this, despite the new mortgage stress testing, which took effect on January 1st this year, you can still buy a home!

What’s this stress test?
Stress testing is a best practice risk management tool. Stress tests are used by financial institutions to gauge how their business would fare under extremely difficult conditions. Basically if the Bank of Canada raised the interest rates by say 2% over a short period of time, how would this affect people’s ability to pay off their mortgages? Can they still pay it? or will they default, causing a economic crisis?

Who is dictating this?
The Office of the Superintendent of Financial Institutions Canada (OSFI) is an independent agency of the Government of Canada, established in 1987 to protect depositors, policyholders, financial institution creditors and pension plan members, while allowing financial institutions to compete and take reasonable risks.
On October 17, 2017 OSFI released new guidelines for the mortgage industry in Canada. Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.
“These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said Superintendent Jeremy Rudin.

Why is this happening?
Of course this make it harder to be qualified for a larger mortgage (debt), but for good and logical reasons. According to Statistics Canada, household credit market debt as a proportion of household disposable income is 170.4. This means there is a $1.70 in credit market debt for every dollar of household disposable income. So with the Canadians debt to income ratio being historically high, especially in Greater Vancouver Area and Greater Toronto Area, any fluctuations in bank interest rates will shoot up the mortgages and many mortgage owners may not be able to keep their homes. Kind of what happened in 2008 in the US – an economic disaster. So to avoid this, when a bank tries to qualify you for a mortgage, they will offer you a mortgage rate but add 2% to that. Of course this makes your home purchase power less, but it makes your more robust to interest hikes.

So now what?
You can still buy a home. You just have to change your game plan. For one you need to get your finances in order. This means work and save your money, watch your spending. You simply need to make some lifestyle changes to allow you to save more. Don’t buy too much on credit, aka money you don’t have. Do you really need that latest phone or car? Do you really need 10 pairs of jeans? Do you need multiple expensive vacations? In a perfect world, everyone wants everything. But you have to ask yourself, what is more important to you? If having a home is the answer than that is your goal and reason to sacrifice other things to be able to save a larger down payment.
Second, you may not be able to get the newest, biggest, nicest house in the best area in the city. You may have to consider condos and townhouses, instead of fully detached home which tend to run higher in price. You may have to expand your search, which mean checking out suburbs. Sure that extra 10-15 minutes drive from work when you’re already so tired is a major pain but you can get more land and bigger house. So in the end it’s about sacrifice and what’s more important to you.

Lastly, no mater if you’re buying a home or selling a home, you definitely should hire a real estate agent. A trusted professional that will be able to guide your thought the whole process. Buying or selling a home is a serious thing and trying to do it all yourself is highly not recommended. If you’re in the Burlington real estate market, be sure to contact Team VanDinther – Lori and Kim. They provide exceptional service with integrity, experience, knowledge and skilled negotiating.

Major Changes to Mortgage Insurance for Second Home Buyers

Canada Mortgage and Housing Corp. has declared that they will be tightening up the types of mortgage insurance it will offer. The Crown corporation said Friday that it is going to stop offering mortgage insurance on second homes. It will also stop offering mortgage insurance to self-employed people whose income cannot be validated through traditional means.

These changes affecting those who buy second homes also means that if they currently have an insured mortgage; they will not be eligible to act as a co-borrower on another insured mortgage.The CMHC says that its second home program and its self-employed-without-third-party-income-validation programs account for less than 3 per cent of its insurance business volumes in terms of the numbers of mortgages insured. A recent press release stated:

“Given the limited use of these products, their discontinuation is not expected to have a material impact on the housing market.”

The Crown Corporation has been offering insurance on second homes since 2005. This has enabled people to buy more than one home with a smaller down payment than they would otherwise need. It has been offering insurance to self-employed people without strong income validation since 2007. CMHC will cease offering both products as of May 30.The CMHC also noted that

“self-employed Canadians can still qualify for CMHC insured financing through CMHC homeowner products with a validation of their income using traditional methods.”

Those might include a notice of assessment, audited financial statements, or unaudited financial statements prepared by an independent third party.

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Tips for Getting Pre-Approved for a Mortgage

Mortgage Pre-AppovalUnless you have a wad of cash just sitting around, chances are you’re going to need to borrow money from a lender to buy a house in Burlington. Getting a mortgage pre-approval is usually the first step and is very beneficial because it shines light on how much you can afford, ensuring that you’re not getting into a financial nightmare that you’re not prepared for. Mortgage is a huge and financial responsibility and you want to take out as much uncertainty as you can. Most real estate agents and sellers want you to have mortgage pre-approval letter before they start working with you. essential

With that being said, here is the essential list of things to know about the mortgage pre-approval.

1. Shop around for mortgage.
When starting the mortgage pre-approval process you want to talk to a few different mortgage lenders first. Even tough the deals might be relatively the same you can always fine tune. This allows you to know how much money you have to work with, helps a lot when looking for the house.

2. Get your financial state in order.
You can request and obtain a free credit report from TransUnion or Equifax credit agency which will show your credit standing and for a fee you can get a rating too. This is what lenders will see before you apply for mortgage pre-approval. You want to take care of your outstanding debts and loans and make sure you are looking good. Close down any unused debt and make sure the information is all in order and the best it can be. This will give you better rates and larger amount.

3. You don’t have to settle for one lender.
Just because you get your mortgage pre-approval done with one lender doesn’t mean that you should at the end go with them because the rate used when calculating the mortgage amount is not necessarily going to stay. At the actual time when you find the house and sign purchase contract that’s when the loan type and rate will be determined. If not satisfying look elsewhere.

4. Prepare your financial documents.
Your lender will tell you exactly what you need to bring with you when going for a mortgage pre-approval but to be prepared include: T4 slips for last 2 years, Tax returns for last 2 years, Bank statements for last few months, Recent pay stubs or other proof of income and Proof of investment income, if any.

5. Stay on top of it.
You usually have 90 days to house hunt after you get your mortgage pre-approval letter showing the amount. Sellers want to be sure the buyers financial situation is still in order and hasn’t changed drastically. If it did, notify your lender so your pre-approval is adjusted too.

When you’re ready to look for a house in Burlington, remember to call Lori VanDinther, Burlington realtor. Being a long time resident of Burlington and working in the real estate industry for over 20 year, Lori has all the necessary skills and experience to representing your best interests and help you make all the right moves!