Atrina Kouroshnia offers her essential guide to help you navigate the basics of lending requirements, down payments, loans and qualification in our new mortgage landscape
Atrina Kouroshnia
REW
I was at my office the other day when a current home owner walked in off the street in a panic. A developer had proposed to buy out the building in order to redevelop, but she was worried; if they didn’t get market value, it would be difficult for her to get into another home. With no mortgage on her current property, she was terrified at the thought of having to move out and start all over under the new mortgage regulations. Would she even qualify, she wondered? And if not, where would she go?
This was one of many clients who have contacted me recently with similar questions. While there has been a lot of media coverage on the changes, every situation is unique and raises different possibilities.
This FAQ sheet is meant to give you some straightforward, honest advice about what the recent changes are, how to deal with them, and what to expect in the upcoming months.
Q: What is the minimum down payment on a home in BC?
A: A minimum down payment for someone who is fully income qualified is five per cent. However, if the purchase price of a property is over $500K, a minimum down payment of five per cent on the first $500K is required. After that, you will be required to come up with 10 per cent on the remaining amount. For example: The down payment for a property valued at $600K would be five per cent of $500K ($25K) plus 10 per cent of the additional $100K ($10K). Total minimum down payment required: $35K. But remember that this amount can change at any time, and has the potential to increase to a 10% down payment if the rules change.
If you’re looking for further clarification, I put together a “Cliff’s Notes” for down payments last month you might find helpful.
Those who are self-employed with stated income are looking at a minimum of 10 per cent down payment no matter what the sale price. Anyone with poor credit or non-verifiable source of income will be looking at alternative lending sources and around 25 per cent at minimum for a down payment.
Q: Where can my down payment come from?
A: In addition to your own savings or other funding sources such as inheritance, if you are employed, you are allowed to have 100 per cent of the down payment gifted from family.
Another option for first-time homebuyers is the Home Buyer’s Plan, through which they can use some of their RRSP towards a down payment. Remember, too, that first-time buyers have a property transfer tax (PTT) exemption up to a home value of $475K, and a PTT discount up to $500K, so you will not have that capital expense at the outset. For all buyers, a new property up to a purchase price of $750K would be exempt from PTT as long as it is owner-occupied, plus there are a number of rebates available to new homeowners.
If you are self-employed and you choose to state your income, at least half of the 10 per cent down will need to come from your own source. You will need to have been in business for at least two years, or beyond that, be able to show a two-year average of NOA income and two years of taxes filed as a business for ‘self’ for any “A” type of mortgage.
However, if you have been in business for less than two years, there may still be the possibility to obtain a mortgage from a B lender. If you take this route, you will need one year of bank statements and related documentation. This will include the length of operation, and retained earnings or savings. Your income must also be reasonable for the property you wish to purchase.
Q: What about the new BC government down payment loan program for first-time buyers?
A: The new BC Home Partnership program was introduced on December 15, 2016, to help first time home buyers get into the market. Essentially, it is an interest-free loan from the BC government for first five years. This loan gets registered as a second mortgage on the property and would be due if the property is sold.
Because this is an unconventional form of down payment, the insurance premiums will be higher. A few of the lenders so far have expressed that they will be partaking in this program. The consensus so far is that the insurance premium through one of Canada’s mortgage insurance providers will be bonused by 0.25 per cent.
It is important to note that because this is a loan, the lender will calculate a repayment amount and include it in your liabilities. So far the lenders that have updated us will be using the higher of the benchmark rate, which is currently 4.64 per cent or the contract rate amortized over 20 years.
To give you an idea of what this number looks like, depending on the total down payment and the insurance premium, the lender would consider $65-67 per every $10,000 that you are borrowing on this program, even though you are not actually making any payments. If you max out the loan, and borrow the full $37,500 offered by the program, your lender would calculate a repayment amount of approximately $250 per month. In effect, this could reduce the actual mortgage you can borrow by over $50,000.
When you work out the numbers, not everyone would benefit from this program. An ideal candidate for this program would be someone with a good income, very little debt if any, and someone who is purchasing well below their approved limit. When we calculate the repayment of the loan, the total mortgage amount and hence purchase price gets reduced.
If you are interested in participating in this program, allow yourself ample as with any new program, the kinks would take a while to get worked out. Make sure you are pre-approved and you have discussed your options with your mortgage broker to see if you would benefit. Lastly, avoid making subject-free offers based on the assumption that your application would get approved.
Q: What is the maximum amortization on a mortgage?
A: The maximum amortization on an insured or insurable mortgage is 25 years, while on a non-insured or non-insurable mortgage it is 30 years.
Q: Can I get a mortgage if I’m here on a work visa?
A: If you are living in BC on a work visa, you will pay 10 per cent down on an insured mortgage. On a non-insured mortgage you will pay 35 per cent down. And you will still be required to pay the new foreign buyer’s tax of 15 per cent additional PTT.
Q: How much of the rental income can I use to qualify for a mortgage on a home with a suite?
A: Generally speaking, you can expect 50 per cent of your rental property investment back. By this I mean that you will take 100 per cent of the income minus expenses, and add 50 per cent of that to your total income for qualification purposes. It is possible to use a rental worksheet, which can make the numbers more attractive, but this is usually the case with most lenders. However, some will use an 80 per cent “rental offset” system that will help you qualify for more on the basis of your rental income, so shop around and ask questions.
Q: What is the difference with a monoline lender?
A: Even monoline lenders do not bulk insure everything. Now that November has come and gone and the new changes are underway, we are clearer on the look of things to come but there will be some suits yet to press.
Though monoline lenders usually bulk-insure their files, it now depends on where the lender is obtaining their funding from. While they may not need to bulk-insure, most have confirmed that they will continue to offer 30 years’ amortization and qualifying on the contract rate if the client has a five-year fixed rate. However, because these files are no longer seen as highly insurable clients, the rates will likely increase about 10-15 basis points for a longer amortization and/or will use the contract rate to qualify.
A good example is TD bank, which – although a major national lender that does not bulk-insure as much as a monoline lender – has added a premium for its longer amortization. RBC has also joined the game and is now charging higher rates for any amortization over 25 years.
Q: Why is it important to speak with a mortgage broker?
A: In light of the recent changes to the mortgage requirements in BC, speaking with a mortgage broker is really in your best interest. Unlike in the past, many lenders are no longer lending for rentals nor refinancing. Not only that, they are no longer allowing a refinance as capital towards paying down a debt.
If you want a longer amortization or if your mortgage is not insurable, simply speaking, you need to be willing to pay for it. In the end, those hurt the most by these changes will probably be first time homebuyers more than anyone else.
For an overview of the five essential documents you will need to secure a mortgage, complete with examples, feel free to visit my latest web post here.
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