August 3, 2020

Good Advice for First-time Homebuyers

Making an Informed Investment

If you’re in the market for a new home, take a moment to ask yourself a few key questions about what you should be looking for, how much you can comfortably afford to spend, and whether homeownership is right for you.

How much home can you afford?

  • Before you begin shopping for a home, prepare a simple budget, so you can figure out where most of your money is going on a monthly basis. If you aren’t sure how much you’re spending each month, use CMHC’s Household Budget Calculator to take a realistic look at your current expenses.
  • When preparing your budget, don’t forget that there are many up-front costs that come with buying a home. This can include a deposit, appraisal fees, legal fees, home inspection fee, survey or certificate of location cost, title insurance, land registration fees, water or septic tests, Estoppel Certificate fees, condo or strata fees, property taxes, utility bills, property insurance, moving costs and other expenses. Use CMHC’s Home Purchase Cost Estimate Worksheet to calculate your up-front costs.
  • Always keep in mind how much you can afford to spend. As a general rule, your total monthly housing costs (including mortgage payments, property taxes and heating expenses) should be no more than 32% of your gross household monthly income.
  • In addition, your total monthly debt load (meaning your housing costs plus any car loans, credit card payments, personal loans, line of credit payments or other debts) shouldn’t exceed 40% of your monthly income.
  • The amount of house you can afford will also depend on the size of your down payment. Once you’ve decided how large a down payment you’re prepared to make, use CMHC’s Mortgage Affordability Calculator to figure out the maximum home price you can afford, how large a mortgage you can borrow, and what your monthly payments will be.
  • If your down payment is less than 20% of the value of the home you want to buy, you will also need to budget for Mortgage Loan Insurance. Mortgage loan insurance helps Canadians buy a home with a minimum of 5% down. Talk to your broker or lender to find out more.
  • After all these calculations, if the numbers don’t look encouraging, you may want to pay off some other loans, save for a larger down payment, lower your target home price, or take a look at your budget to see where you can spend less.

Which mortgage is right for you?

  • When choosing a mortgage, you will have to select between a wide variety of different options. This includes: the amortization period (the length of time to pay off your mortgage); the term (the length of time the interest rate and other options you negotiate will remain in effect); the payment schedule (monthly, bi-weekly, weekly, etc.); open or closed mortgages; and whether you want a fixed or variable rate of interest.
  • Your lender or broker can help you decide which options are right for you. You can also use CMHC’s Mortgage Payment Calculator to compare a few options, and find out how much your payments would be.
  • To give your family greater financial stability and peace of mind, you may want to consider getting a smaller mortgage than the maximum amount you can afford, or reducing your amortization period to pay off your mortgage sooner.
  • When choosing a mortgage, always take into account the impact an increase in interest rates could have on your ability to make your monthly payments.

What is your credit score, and how can you improve it?

  • Your credit score is a number that illustrates your financial health at a specific point in time. It is also an indicator of how consistently you pay off your bills and debts.
  • Your credit score is one of the factors lenders consider when qualifying you for a mortgage. A good credit score, for example, can help improve your chances of being approved.
  • To find out your credit score, contact Canada’s two credit-reporting agencies: Equifax Canada and TransUnion Canada. These agencies can provide you with an online copy of your credit score as well as a credit report — a detailed summary of your credit history, employment history and personal financial information.
  • If you find any errors in your report, notify the credit-reporting agency and the organization responsible for the inaccuracy immediately.
  • If you want to improve your credit score, always pay your bills in full and on time; pay off your debts as quickly as possible; never go over the limit on your credit cards; and try to reduce the number of credit card or loan applications you make.
  • Once your credit score has improved, work with your mortgage professional to obtain a mortgage that works for you.

What is mortgage fraud, and how can you avoid becoming a victim?

  • Mortgage fraud occurs when someone deliberately misrepresents information on a loan application, to obtain mortgage financing that likely would not have been approved if the truth had been known.
  • To protect yourself from becoming the victim of, or an accomplice to, mortgage fraud, never accept money, guarantee a loan or add your name to a mortgage unless you fully intend to purchase the property.
  • Never give out your personal information, banking information, credit card details, passwords, or other personal or sensitive information, unless you know who you are dealing with and how your information will be used.
  • If you are buying or selling a home, use only licensed Real Estate Agents and other professionals.
  • Determine the sales history of any property you are thinking about buying, and have it inspected and appraised.
  • Find out if anyone other than the seller has a financial interest in the home.
  • Get independent legal advice from your own lawyer or notary.
  • Never sign anything until you know exactly what you are signing.
  • Be wary of anyone who approaches you with an offer to make “easy money” in real estate. If a deal sounds too good to be true, it probably is

Brokers pursue mortgage break for first-time home buyers

The Globe and Mail
Mortgage brokers are pressing the federal government to make it easier for young people to buy their first homes, just as the spring sales season descends and Ottawa prepares its next budget.

Jim Murphy, the head of the Canadian Association of Accredited Mortgage Professionals, recently met with finance department officials in a bid to convince them that their efforts to cool the housing market have gone too far, especially when it comes to the impact on first-time buyers.

“March, April and May are the most important months for both new sales and re-sales,” said Mr. Murphy. “And the market is slowing.”

The government has deliberately taken measures to cool the growth of house prices and mortgage debt levels four times since the financial crisis, amid fears that it was heating up too quickly.

The most recent measures, which took effect in July, included chopping the maximum length of insured mortgages to 25 years from 30. All other things being equal, a shorter mortgage means higher monthly payments for the borrower.

Mr. Murphy and a number of other industry players say this rule change, coupled with stiffer lending guidelines that regulators have imposed on the banks, have made it too difficult for young people to enter the housing market at a time when prices remain high. While sales have dropped significantly in the wake of the July rule changes, prices have yet to follow suit.

Now Mr. Murphy is asking the government to resume its backing for insurance on 30-year mortgages, as long as the buyer can prove they could qualify for a 25-year mortgage. He is also pushing for an increase to the $750 tax break that first-time buyers receive.

The Finance Department declined to comment, but it is unlikely that Ottawa will take any such steps right now. Finance Minister Jim Flaherty signaled this year that he was pleased with the impact his changes have had so far, and wouldn’t mind seeing house prices come down.

And he took Bank of Montreal to task last week for its decision to cut the advertised price of its five-year fixed-rate mortgages from 3.09 per cent to 2.99 per cent (lower rates are available in the market, but that was the lowest posted five-year fixed rate among the largest banks), indicating that he continues to be worried about consumers racking up too much mortgage debt and inflating house prices.

Indeed, he went so far Friday as to pat other banks on the back for not following suit by dropping their posted five-year rates to such levels (customers can negotiate with banks and obtain discounts from the posted or advertised rates).

Some economists, such as Canadian Imperial Bank of Commerce’s Benjamin Tal, are cautioning that the housing market could rebound more quickly and to a greater degree than expected this spring after months of slumping sales. And the point at which consumer debt levels are likely to become a real issue for the economy is when interest rates finally begin to rise.

Phil Soper, the chief executive of real estate agency Royal LePage, supported Mr. Flaherty’s three earlier interventions in the market, agreeing it had become overheated, but thought the changes in July went too far and made it unnecessarily difficult for first-time buyers.

However, he suggested that, eight months on, the damage has been done, and so he is not pressing Mr. Flaherty to create new incentives for first-time buyers right now. The government might as well save those for when interest rates rise, he suggested.

“There is not an overwhelming cause from a public policy standpoint to provide further assistance to young people who want to own their own homes,” Mr. Soper said. “I think that might come, and we might be talking about that in a couple of years as it becomes more difficult for them.”

Dear first-time homebuyer: Ottawa wants you to tread carefully

Garry Marr | Dec 27, 2012

Your government is increasingly worried about you getting into the housing market, if you haven’t figured it out by now.

Ottawa has made it harder for you to get credit and is trying to limit how much debt you can take on. Has the message sunk in yet? The real estate industry says yes, and points to a dramatic drop in sales over the past few months as proof new mortgage regulations have stifled the market.

The lesson for consumers is to tread slowly.

It’s a reality check for a lot of buyers in the market for what they could realistically afford
Gregory Klump, chief economist at the Canadian Real Estate Association, agrees there is little doubt the government has cast its eye at the first-time buyer. “They are the ones that generally take out high-ratio mortgages,” he says.

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Anyone with less than 20% saved for a down payment is considered high ratio, because under federal law they must buy mortgage default insurance if they are borrowing from a bank. Those loans are ultimately backstopped by Ottawa.

“Based on recent discussions with mortgage brokers and lenders, the way they characterize it, is that it’s a reality check for a lot of buyers in the market for what they could realistically afford,” Mr. Klump said. “Don’t buy a home with granite counter tops.”

Finance Minister Jim Flaherty was all smiles near the end of the year as sales in the sector dropped, happy with what many say has been a government-induced soft landing after he moved in July to tighten mortgage lending rules for a fourth time in three years.

“Less demand, lower prices, modestly, in the housing market are much better for Canadians than a boom followed by a bust,” he said. “The housing market has softened somewhat in part because of steps that I’ve taken and I’m happy about that.”

Among the key changes was the limit on amortization lengths, dropping them to 25 years from 30 years. Lengths were as long as 40 years during this cycle. Longer lengths lower monthly payments, allowing consumers to qualify for a larger loan but ultimately pay more interest.

Mr. Klump said the government is not telling people they shouldn’t buy but rather to tamp down their expectation. “Don’t get in over your head,” he says. “We’ve had an unprecedented period of low interest rates and, to prevent a housing market bubble, he has tightened mortgage regulations.”

He says it’s one thing to hear Mr. Flaherty, or even Bank of Governor Mark Carney, talk about debt but it’s another thing when the restrictions smack you right in the head and stop you from borrowing as much as you could have previously.

Farhaneh Haque, director of mortgage advice at TD Canada Trust, says consumers have gotten the message and have a new attitude when it comes to home buying.

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“I think they are doing a ton more research and educating themselves more on their affordability than they have in the past. You hear the horror stories of not getting approved after you’ve committed to a purchase,” said Ms. Haque. “They are not just leaving everything until the last minute. Some are even delaying their purchase to get a down payment.”

The government kept the minimum down payment required to buy a home to 5%, for anyone purchasing with mortgage default insurance. A rise in that percentage was one of the industry’s biggest worries.

Phil Soper, chief executive of Royal LePage Residential Real Estate Services, said the federal government has a very limited toolbox when it comes to affecting the housing industry — and the indebtedness of Canadians.

“They didn’t set out to target one buyer group. They simply wanted to avoid setting up a scenario where they were an accessory to a crime, if you will, by enticing the unsophisticated or younger home buyer into a large asset purchase where if interest rates rose they could not meet their obligations,” said Mr. Soper. “Their motives were noble but we’ve set the bar higher and put a larger hurdle in front of first-time buyers. But it is not insurmountable.”