Buying a house doesn’t have to be stressful

Buying a house should be an exciting time but it can get pretty stressful, not only for first time home buyers, but for move-up buyers as well.

The number one worry is finding problems after moving in. The next worry is that prices will drop and the house won’t be worth the original purchase price.

You can reduce some of that stress and worry by putting together a team of experts who will guide you through the entire process. 

It starts with a mortgage professional who will take a look at your finances, including your credit score, to qualify you for a mortgage. A lot of information about you and your credit management abilities come up during this process. For example, derogatory items may be on your report, but that doesn’t necessarily deny your ability to qualify for a mortgage. Everyone’s situation is different and a mortgage agent is familiar with most situations, and can offer options.

Once you know the amount of house you qualify for, you can confidently work with a Realtor to find the right home for you. On average, home buyers spend five months house-hunting and visit 10 locations before deciding to buy. It’s certainly a good idea to take your time to make sure to get the house that’s right for you. 

Interestingly, a 2013 BMO Psychology of House Hunting report found that 33% of home buyers felt rushed into making a purchase – that increased to 39% for first timers. Sixty-eight per cent were prepared to settle for a home that was less than perfect. Four-fifths of prospective buyers said they know a home is right for them as soon as they step inside. So, you may not be alone.

Once you’ve put together the Offer to Purchase with a Realtor, working with a trusted lawyer is the best way to make sure there are no surprises at closing. The bottom line is to take your time, work with professionals and do some research. 

Here are the suggested steps to make sure you get on the right track and into your new home:

• Determine the location and the type of home to suit your  needs. Most people will have an idea of where they want to purchase their new home based largely on familiarity and convenience. For example, living close to work or schools might be a priority, or selecting a certain area of town with parks and amenities, and/or walkability scores. This is also a good time to think about how much you want to spend and what you can afford.
•  Get your finances in order. During the pre-approval process is a good time to make sure you have the finances to cover your down payment and disbursements on your anticipated purchase.
•  Start your home search. How you find the perfect property is entirely up to you. Many home buyers enlist the services of a Realtor. It’s important to only look at homes within your budget.
• Hire professional services. You will need a lawyer to complete a real estate transaction. A real estate lawyer ensures your paperwork is correct and that the transaction is complete. They will review the contract and mortgage documents, conduct a title search, purchase title insurance on your behalf, register the property in your name, get signatures, prepare a Statement of Adjustments that shows the amount you will pay in closing costs, and collect and disburse fees.
•  Hire a  home inspector. Home inspections have become part of the homebuying process for both new home purchases or resales. It might seem like a waste of money to pay for a home inspection for a newly-constructed home, but you might consider getting an inspection a few months before the expiration of the New Home Warranty.  Better safe than sorry.
• Insurance Agent. Lenders also require you to have fire insurance so an insurance agent will help you find the best coverage and the best price.
• Make an offer. This is done by presenting the seller with an Offer to Purchase. Sellers have the right to accept, reject or put in a counter offer. Remember to include all necessary details in your purchase offer. The deposit will be paid, in trust, to the Realtor.

If you’re planning on purchasing a first home or a new home, then get started with a mortgage professional.

By Bud Jorgenson, VP.TMG  Prairies

Mentor of the Year, 2017, Mortgage Professionals Canada

What’s best for consumers?

We need to clear the air. We’ve recently come across marketing materials that some Bank mortgage specialists have been sending aimed at “educating” members of the public on the impact of the mortgage rule changes and the limitations of dealing with mortgage brokers. Some bank specialists are referring to mortgage brokers as sub-prime brokers and that the recent changes to the mortgage rules will negatively impact us. As mortgage brokers we would like to respond.

We agree that it is vital for Canadians to be educated on the ways in which the most recent mortgage rule changes coming into effect, and all recent regulatory and legislative changes will impact mortgage consumers and markets as a whole.  We applaud all efforts to bring awareness at this very important juncture in our industry.

The Office of the Superintendent of Financial Institutions (OSFI) is an independent government agency whose mandate is to supervise federally regulated financial institutions.  OSFI is the agency who is updating their B-20 underwriting guidelines that came into effect on January 1, 2018.

In addition to having access (directly or indirectly) to most of the major Tier 1 banks in Canada, mortgage brokers also have access to many other provincially-regulated and private mortgage lenders. Those lenders include Credit Unions, Monoline mortgage lenders who have funded hundreds of billions of dollars in aggregate (including First National, MCAP, Merix, Street Capital, etc) alternative lenders (Canadian Western Bank, Equitable Bank, Home Trust, etc.) and private lenders. 

This allows brokers to ensure that the features of the mortgage are aligned to the client’s needs. Brokers will look at prepayments options, how penalties are calculated, how the mortgage is registered and how the client credit fits against the available products.

Perhaps it is only semantics but when a customer deals with a broker they do not have to ‘negotiate’ a rate with the lender directly – the broker shops the market to secure the best overall cost of borrowing for the unique needs of the consumer.  This competition maximizes the opportunity for a consumer to get the best overall deal.

The recent OSFI changes are actually targeting all consumers (including the federally regulated banks) rather than only the subprime market. In fact, it may create market share opportunities for subprime lenders. 

We certainly agree on the need for consumers to get the best advice. A mortgage broker is licensed with their corresponding provincial regulator. They have to meet initial education and licensing requirements and then have to maintain educational requirements going forward. Given the breadth of lender and mortgage products available to brokers, they have to constantly do research on the options available to their clients.

Brokers also get to deal with large regulated banks. Sometimes that represents the best option for the client to consider. Other times specialty lenders, mono-line lenders and unregulated lenders represent the best interests of consumers. 

Broker market share has actually increased steadily since the onset of the Global Financial Crisis and with each additional mortgage rule and regulation changes. This is because brokers are best suited to assess a mortgage client’s needs and then access a number of market options to fit those needs.

Debunking the myths

Myth: With the broker channel, the goal is to move the mortgage on each renewal

Reality: The goal of the broker channel, in general, is to present multiple options to consumers so they get the optimal mortgage for their unique needs. That includes looking at prepayment options, type of mortgage charges, costs of borrowing, portability, etc.  Brokers often advise their clients to stay with their current lender at renewal. The  goal at renewal is exactly the same. The result of providing clients with the best ongoing advice at the time of origination and at renewal, a broker is able to grow their referral networks.

Myth: If the client remains with the same lender at renewal a small trailer fee is paid to the broker. 

Reality: This is true in some cases and creates accountability between the lender, broker and customer in those cases.

Myth: If they (brokers) move the mortgage to a new lender then the full mortgage commission is paid as it represents a new deal to that new lender. This becomes a “residual or passive income” source for the broker.

Reality: If a client chooses to move their mortgage at renewal after being given the options then it is considered a new deal. As such it has all the corresponding work associated with any new file at that time.  That is not residual income – it is earned income and in most cases paid by the financial institution receiving the mortgage, NOT the client.

Clients save money when they work with a mortgage broker at renewal

The Bank of Canada released a report a few years ago titled “Competition in the Mortgage Market” and found the following:

“Banks also offer larger discounts to new clients than to existing clients. Consumers willing to switch financial institutions when shopping for their mortgage will see, on average, an additional discount of 7 basis points from the posted rate. The results also indicate that borrowers who use a mortgage broker pay less, on average, than borrowers who negotiate with lenders directly. This average discount is about an additional 19 basis points.”

Most mortgage brokers offer ongoing advice and information to their clients. Because they deal with a wide variety of lenders for unique circumstances they are often very well versed in issues affecting mortgage borrowers.

For example, as of January 1^st, a bank rep may tell you all uninsured mortgages have to be qualified at the benchmark rate or 200 basis points (whichever is higher). What they mean to say is all their mortgages are qualified in that manner.

It may be that a bank may be the best option for many clients but other lenders, credit unions for example, can still qualify the borrower at the contract rate.

By working with a licensed mortgage professional, you have a trusted advisor and problem solver, who is best positioned to navigate these changes.

Brokers take the time to first understand a client’s needs, both short term and long term, then recommend the right mortgage and present options. As the lending environment changes, brokers keep up-to-date with all these changes and have access to a variety of lenders including banks, credit unions, trust companies, monoline lenders and private lenders. No one is more knowledgeable and more informed than we are.

Housing slow down heralding a more balanced economy

For the past four years economists have been warning us of a slowdown in housing activity, of lowered house prices and of interest rate increases. None of which have come to pass, until now, with the exception of interest rate increases and clearly, no one really knows what will happen with rates.

“Real estate, it has nine lives,” said Benjamin Tal, deputy chief economist at CIBC in an interview with the Globe and Mail. “Every time it’s supposed to slow down because of interest rates, something bad happens elsewhere that keeps interest rates low…”

Here are the most recent predictions from the Canada Mortgage and Housing Agency (CMHC).

New-home construction will slow over the next two years as low oil prices continue to take their toll on the economy despite rock-bottom interest rates.  Prices of resale homes will rise 3.4% this year before slowing to 1.5%.

Oil-dependent provinces such as Alberta and Saskatchewan will be hit hardest.  Home prices will likely decrease below the national average in Alberta.

In the rest of Canada the slowdown will be due to the shifting preferences among buyers. Where once buyers set their sights on higher-priced, newly built detached homes, they will start looking at buying older entry-level resale homes and more affordable new builds, such as townhouses and condos.  A healthy supply of condos and townies has kept those prices more affordable.

In Canada’s two high-priced markets – Vancouver and Toronto, demand for detached homes may fall because they are just not as affordable. However, just outside of these two hubs, prices are affordable.

CMHC also predicts that mortgage rates will rise slightly over the next two years, with five-year posted rates set to range from 4% to 5.5% this year, rising to 4.2% to 6.2% next year – caveat: We’ll see.

Many economists also say that our housing market is overvalued. Some say upwards of 60% compared to rent, some say about 30%, but the consensus seems to be between 10% and 20%.  But we may be looking at the wrong comparison.  What’s really important is a mortgage holder’s ability to pay.  And that means people need to stay working. 

So far, job numbers are good. The unemployment rate is holding steady at 6.8 %. Compared to a year earlier, Canada has added 161,000 jobs (a gain of 0.9 per cent) and the total number of hours worked has grown by 1.2%. Full-time jobs have risen by 1.8% over the past year. 

However Canadians are carrying large debt loads. At last count in March the debt ratio was 163.6% -- a record high. However, in June the debt ratio declined. It appears that in a low interest rate environment, consumers pay down debt.   Benjamin Tal said in an interview, “We have seen in the past that Canadians use low interest rates to actually pay down debt faster, as opposed to add to their debt…”

It looks as if consumers don’t have a problem paying their debts…unless interest rates shoot up past “historical norms”.  Yet, how many years have to pass before something becomes history?  We’ve been living with low interest rates since 2008 – that’s seven years. It could be that low interest rates are now the “norm”.

We are living in times that are defying textbook scenarios on the economy. Clearly world economies have changed. It’s not likely that interest rates will skyrocket in the next few years, given what’s happening in the world; it is more likely they may start to increase… slightly. 

What we’re seeing today is the correction that economists predicted would happen two years ago. With it will come a more balanced, stable economy where people are happily working, who are able to pay their debts, where interest rates are “low normal” and  where house prices are affordable. 

In the end, economists will look back and say that everything unfolded as it should.