Purchasing Another Home
Have you called your bank lately to renegotiate your mortgage, leverage your home equity to buy another property or discuss buying and selling in today’s marketplace? If you haven’t liked what you’ve been offered, perhaps it’s time to look beyond the bank.
After all, since you last purchased a home, mortgage lending has changed. There are more regulations, underwriting is different, the requirement for documents has multiplied and so has the stress.
It’s time to turn to the Wilson Team of Mortgage Experts for assistance. Whether you’re downsizing, upsizing, buying a second home, a vacation home or an investment property, we understand the mortgage landscape and are ready to help.
If you haven’t worked with a mortgage broker before, let us make something very clear: mortgage brokers always offer the best rates. With banks and lenders providing rate information online, they must be competitive, but traditional institutions aren’t necessarily the right option for your needs.
Sure, if you type “best mortgage rates” into your search engine, banks will appear along with a mortgage calculator. They wouldn’t be part of the industry if they couldn’t assist customers. However, they are only the starting point in the financing process.
When it comes to mortgages, profit margins for lenders are small and the competition is stiff, while the cost of facilitating and funding a mortgage has now increased by 58 per cent. Since banks are not in the business of losing money and their profits have never been so good, they must be compensating somehow.
That’s where we, the Wilson Team, enter the picture. As note earlier, mortgage brokers always have the best rates, because funding a mortgage through a broker costs less; it’s simply economics.
However, rates aren’t the only consideration. They are the big, shiny jewels that distract you from truly understanding mortgages, and choosing a mortgage on rate alone could cost you thousands of dollars down the road. If every mortgage and product were the same, you wouldn’t need competition.
There are various types of mortgages available in Canada:
- Open Mortgage: Offers maximum flexibility with the ability to pay off the mortgage before it is due.
- Closed Mortgage: A commitment with a pre-determined interest rate over a predetermined period of time, with a penalty for paying it off early.
- Convertible Mortgage: A mortgage agreement made at the beginning of a term that allows homeowners to change the type of mortgage they hold during its term.
- Hybrid Mortgage: More than one type of mortgage is contained in a single mortgage registration, e.g., a fixed-rate portion and variable-rate portion.
- Reverse Mortgage: A mortgage that allows homeowners 55 years and older to convert their home equity into either a lump sum payment or monthly cash payment.
Stop and think for a moment. Do you have a plan for your mortgage debt? Are you secure if there is any movement or change? Is your home being used as your current savings account? Do you want to scale your portfolio? If so, it’s time to pay attention, rather than taking the path of least resistance with your money.
A home is the largest asset you will have during your lifetime and a mortgage is the largest debt you’ll owe. You need to be responsible and educated about using such a large chunk of money. Remember, no one watches your money better than you do and the Wilson Team wants to ensure that you don’t make costly mistakes. You’ve worked hard for your equity, so it’s important to be sure that when you sign a contract, you fully understand the commitment you are making to that lender and you comprehend the terms of the contract in detail.
If you had a $350,000 mortgage today and you needed to break the mortgage within its five-year term, just like 78 per cent of your fellow Canadians, would you rather have a $15,000 penalty associated with it or an $2,400 cost? The banks bet on you making the choice that’s most advantageous to them. That’s how they make their huge annual profits. They understand consumer behaviour and craft their penalties accordingly. The BIG question you should consider is whether you will be in a position to negotiate with a bank.
Canadians break mortgages for all kinds of reasons, including:
- Interest rates have gone down
- Their financial situation has changed
- They want to buy a new home and move
If you are considering breaking your mortgage, there are many questions you should be asking before you do so, such as:
- Do you need that collateral charge they are going to register against your home? What does it do and how can you use it? Who offers it? Do they all work the same way?
- What happens to early renewal if you know rates are going up and you want to lock into a new rate early? What will the banks charge you for doing so?
- What happens when I port, i.e., repay my current mortgage and resume the mortgage at my new property? Almost all banks allow portability, but what does that look like? Will you now have two different mortgages or will it be a blend-and-increase mortgage?
- What is the IRD? Interest rate differential?
- How do I scale my portfolio?
- How do I create better cash flow?
- How can I recession proof myself?
- Do I understand mortgage insurance? How will each of the types being offered protect my asset and family, since they are all different?
- How do I access my equity? What does it cost to do so?
- How does my Secured Line of Credit work, given that every lender is different?
- How many products can I fit into the mortgage?
- Can I diversify the Mortgage products? Will that cost me down the road?
- How do co signors work?
When looking for a new mortgage, most shoppers also know to ask these questions:
- What is the best rate?
- Can I port the mortgage?
- Can I pay bi-weekly or weekly?
- Can I pre-pay my mortgage?
- Will you pay my penalty?
- Will you pay my appraisal?
- Can I get a lower rate before closing?
You need to understand your mortgage well, because it may be the largest item in your financial toolbox. There is a lot of misinformation about mortgages; just remember that they are products whose business model varies from lender to lender. Banks have fewer product offerings and diminished service options, so they can’t tailor the mortgage to your needs. Skeptical? Simply ask them how they differ from the other banks in town.
Canada’s six major banks, as well as credit unions, are what are termed “A” lenders. They deal with various financial products, not only mortgages, and their mortgage model is a retail one. Banks are subject to federal regulation, so all mortgage applicants must pass a stress test before being approved: they must prove they are able to pay interest at two percentage points than the offered or at the five-year average posted rate. Credit unions are provincially regulated, so no federal stress test is required,
Mortgage brokers, on the other hand, specialize in mortgages and have a variety of business models available to suit individual needs, understanding that everyone’s circumstances are different. The Mortgage Broker Regulators’ Council of Canada (MBRCC) oversees the work of brokers like the Wilson Team.
Remember: If it’s time for another mortgage and you’re heading to the bank, stop and think again.
The best time to think of buying a home is always NOW. One thing that seems to be certain about real estate prices: they continue to rise. Don’t look back five or 10 years from now and say, “If only I’d bought a home back then.”
Now, if you already own a home and are selling it to buy another property, there are other considerations. Here are some things for current homeowners to ponder:
- Mortgage portability. If the term isn’t up, you should be able to transfer your existing mortgage from your old home to your new one without breaking it and being subject to prepayment penalties. It’s a valuable feature to have in a mortgage, so see if your lender allows it. You may also be placed into a collateral charge when porting which would make any new funds you require put into a second mortgage. This would give you two different terms, amortizations, and rates. This is important to go through the mortgage products and options to ensure you are saving enough and not signing a new mortgage that removes your ability to save later.
- Mortgage penalties. If you plan to move before your mortgage term is up, you may face a prepayment penalty. This can be an Interest Rate Differential or 3 months interest. Lenders impose a fee for paying your mortgage early as an incentive for borrowers to pay back the principal slowly, allowing lenders to collect accrued interest. This is because you signed a contract and they need to pay back their funds. Every bank is different in terms of how the calculate their IRD AKA Interest Rate Differential so its not a cut and dry calculation. Banks are typically higher than monoline lenders. The penalty may not always be accurate if you are calling a few months before actually paying the current mortgage out.
- Downsizing. If you’ll be moving into a smaller residence, consider whether you need to store belongings or whether you’d like to disburse them among family members, donate them or sell them. The mortgage lender may be allow you to use your pre payment privileges when downsizing and requiring a smaller mortgage. This means if you need to reduce your mortgage amount when you move you can avoid penalty on amount you wish to decrease. Each lender is different when it comes to porting and generally you are not able to change the payments and amortization on the port.
- Upsizing. If you’re moving to a bigger home, you’ll probably need additional furniture, window coverings, etc. Don’t spend so much money on the house itself so you have none left over to furnish and decorate it. If you want to increase the mortgage amount because you need to borrow more, you may be able to port your CMHC / Genworth insurance to the new home and home have to pay a top up on the insurance. You will need to discuss with your mortgage broker the best way to move the funds over as well as review the product the bank or lender wants to place you in. It could be a blend and increase or multiple mortgages.
- Buying before selling. If you buy a new home before you sell your existing residence, you may be in trouble, unless you plan ahead. You may want a rent-back agreement, allowing you to remain in the home until you secure another domicile, or you may need a bridge loan that will allow you to pay for more than one mortgage during the period of overlap. You can also request an extended closing for your new home if you are confident your current home will sell quickly, giving you more flexibility. If you qualify for a HELOC, you might want to use it to make the down payment on your new home, then pay it back once your current home sells. You can also look at refinancing your home to take out the equity or even renting the home.
- Selling before buying. You may need a place to live until you can find a new property you like, so consider a rent-back agreement that allows you to stay in your current home for a monthly fee. You can also accept an offer with a settlement contingency, making the settlement of the new home contingent on closing on your existing home. Or, if you sell first, you may want to find a short-term rental so you can take your time seeking out your next dream home.
- Moving and storage costs. Unless you do the move yourself, don’t forget to factor in the cost of the movers and any temporary storage you’ll need for your belongings. You can rent a POD, a storage unit or move in with family while showing your home!
- Enjoy! You have new home! Get comfortable and relax.
We at the Wilson Team of Mortgage Professionals are here to guide you through the buying process. We can assist you in determining what you can afford and how best to structure your mortgage so, aren’t house poor. We can walk you through all the options for offers, settling and closing, too. Think about the joy a home could bring you, as well as the financial benefit. Don’t wait. Give us a call today!
- Your Personal Canvas. Your home is yours to renovate and decorate. It can be the expression of your dreams and your tastes. Even better, any improvements you make only increase the value of your humble abode.
- Raising a Family. Homes offer stability to families raising children. Everyone gets to know the neighbourhood, the school system and the nearby amenities and feels comfortable with them. In this case, familiarity usually breeds contentment.
- Looking After Aging Parents. If there’s one thing the pandemic has shown us, it’s that nursing homes may not be the ideal place to care for your elderly parents. If you’d like to keep a closer eye on them or make them more a part of your daily life, a home with a secondary suite is ideal for both closeness and privacy.
- Leisure. Your home is your castle. After work, it’s a place to relax and forget the pressures of the day. Who doesn’t enjoy the opportunity to chill out on a deck or a balcony?
- An Alternative to University Residences. Some parents find that it is cheaper to buy a home for their children to use as a residence during their university days. The child has one of the bedrooms, but the others can be rented out and the rents pay the mortgage. Meanwhile, your child has a stable, safe, comfortable place to live and study while away from home.
- Buying a home can also refer to a vacation property: the cottage you use to get away from it all and relax or the condo you visit when you want to pick up the pace. City dwellers can escape the hustle and bustle of everyday urban life in a more rural setting, while rural residents can indulge themselves with the top-notch restaurants and professional entertainment that cities offer. In addition, you can make some extra income by renting out your vacation property at times you aren’t using it.
- Rental income. In addition to vacation properties that you can rent to others occasionally, there is also the possibility of owning a home or condo that you rent out full time. Often, the rent payments cover the mortgage while you build up equity; after that, it’s yours to rent for extra income or to sell for some extra cash.
MEMORANDUM TO VENDORS OF RESIDENTIAL PROPERTIES
PLEASE NOTE: This memorandum has been prepared and is intended for your general information only. It is not held out and is not to be construed as advice with respect to your particular sale. Specific problems relating to your sale should be referred to your solicitor’s office. However, it is hoped that the information contained herein will be of benefit to you in understanding some of the more common aspects of a real estate transaction.
Agreement of Purchase and Sale
A lawyer should always be consulted before signing the agreement of purchase and sale. The lawyer will advise the client about the terms of the agreement and possibly become involved in the negotiation or even drafting of the agreement. Inasmuch as the agreement of purchase and sale is a binding contract, all rights flow from this important contract. Whether or not you are represented by a real estate agent we urge you to discuss the terms of the agreement before signing the document.
Nonstandard Additions to the Agreement
Nonstandard additions to the agreement should be discussed between the lawyer and client. For example, whether or not the purchase is conditional upon the purchaser’s sale of his own home or conditional upon the purchaser’s obtaining financing is important. When representing the vendor, it is important to continue to allow the vendor to offer the home for sale so as not to take the property off the market. What assets are included with the purchase (i.e. fridge, stove, etc.) and fixtures not included have to be identified. The purchaser may insist upon the right to have a building inspection done on the property and would make the purchase conditional upon receiving a satisfactory report.
One of the most important problems involved in the sale is whether or not a survey exists that is reasonably up-to-date. If there is no additional clause to the agreement the purchaser would be responsible for obtaining such a survey which currently costs approximately $1,000.00. If the clause was inserted it would be the vendor’s responsibility.
Several other considerations often arise outside the agreement but may be just as important to the vendor. The total cost of the transaction including fees and disbursements should be explained. Whether or not a “double deal” should take place on the same day for the sale and purchase of a new property or whether or not bridge financing should be obtained for a more leisurely move may be important to some vendors.
The Lawyer’s Role in Sale of a Property
We will explain what we expect of the client and what you can expect of us as your lawyers. You will have to provide us with all title documents, tax bills, and any other pertinent documents. The client will have to advise if there have been any additions to the property since the date of the original survey to determine whether the survey is reasonably up-to-date. We will inquire of the client as to what adjustments are to be made on closing such as municipal taxes, and whether or not an oil tank should be adjusted for. Lastly the typical procedure on closing day will be discussed as to how much money the client will receive after the payment of all fees, adjustments and commissions.
We will respond to any pertinent requisitions received from the purchaser’s lawyer. Any title problems revealed from the requisition letter must be solved before closing. Normally these problems are rectified between the lawyers without any difficulties. The client will be advised not to cancel insurance on the property until the day after the transaction has been completed and if necessary we will obtain a release from the mortgage company to allow the policy to be cancelled.
Mortgages on the Property
Any mortgages that are presently on the property will have to be discharged. A payout statement will be obtained from the mortgage company and a direction will be signed authorizing sufficient proceeds from the sale to go to the mortgage company to discharge the outstanding mortgage. Our undertaking will be given to the purchaser’s solicitor to register a discharge after closing.
If you are first-time buyer read more on the topic here.
Statement of Adjustment
A statement of adjustments will be prepared and reviewed by both the client and the purchaser’s solicitor prior to closing. The statement takes into account the deposit, the mortgages to be discharged, the tax adjustment, adjustments for oil tank (in any) and any other adjustments that may be necessary. A direction of proceeds will be signed by the client authorizing the payment of any outstanding mortgages, and the balance paid to this law firm in trust. In addition to the mortgage, any other items to be paid will customarily be paid by this firm including the real estate commission.
When to Sign the Documents?
Several days before closing an appointment will be made with the client to have all documents signed by the Vendor. These would include the Transfer (formerly the Deed), Declaration of Possession, and/or Closing Certificate, Undertaking, Bill of Sale if applicable. These documents will be reviewed by the lawyer with changes to be made, if applicable, before witnessing the vendor’s signature. It is customary that a key to the front door be provided to the lawyer at this time to be given to the purchaser on the actual closing. It is suggested that all other keys be left in the property and that under no circumstances should a key be given directly to the purchaser.
Statement of Adjustment
A Statement of Adjustment will be prepared and reviewed by both the client and the purchaser’s solicitor prior to closing. The statement takes into account the deposit, the mortgage(s) to be discharged, the tax adjustment, adjustments for the oil tank (in any) and any other adjustments that may be necessary. A Direction of Proceeds will be signed by the client authorizing the payment of any outstanding mortgages, and the balance paid to this law firm In Trust. In addition to the mortgage, any other items to be paid will customarily be paid by this firm, including the real estate commission.
Closing The Transaction
After the Transfer and other documents are signed, the key(s) and relevant documentation are sent to the purchaser’s lawyer in exchange for funds and relevant documentation. Each lawyer holds their material in trust until the transaction closes. In Ottawa real estate transactions are closed electronically from the lawyer’s office.
Registration can only take place when the local Land Registry Office is open, which for the purposes of closings is between 9:00 a.m. and 5:00 p.m. Since the Purchasers have to arrange for financing and other matters, the actual closing tends to take place later in the day. We cannot therefore guarantee when a cheque will be available to be picked up by the Vendor. In some cases, the funds are not available until the morning after closing.
Who Informs the Utility Companies?
It should be noted that it is the client’s responsibility to inform the various utilities that the meters should be read on closing and all final bills should be sent to the client’s future address for payment. We recommend that you jot down the meter numbers in the event there is any discrepancy.
After the Closing
Approximately four to eight weeks after closing a full report, Trust Statement and Statement of Account, together with copies of all documentation will be provided to you. We will ensure that any undertakings given on the closing are complied with; including the discharge of any outstanding mortgages.
We trust that this brief memorandum will be helpful and would ask you to keep in mind that the memorandum is not intended to be exhaustive nor does it cover every situation that occurs in real estate transactions.
Source: Nancie-Anne Heaphy, Edward G. Manthorp, Sean B. Kelly, Elisha M. E. Kelly