4 SIGNS YOU’RE READY FOR HOMEOWNERSHIP

While most people know the main things they need to buy a home, such as stable employment and enough money for a down payment, there are a few other factors that may help you realize you’re ready, perhaps even earlier than you thought!

As a mortgage broker, it is my job to ensure that each one of my clients is getting the best service I can provide. Part of this means educating as much as possible when it comes to buying a home, which is why I’ve put together a list of 4 signs that may tell you that you are ready to become a homeowner.

You should have more funds available than the minimum of a down payment
This one may seem obvious, but it’s something that people may not realize until they actually think about it. It’s very difficult to afford a home if you only have enough money for a down payment and then find yourself scrambling for day-to-day living after that.

If you have enough money saved up (more than the minimum needed for a down payment), you may be ready to start house-hunting.

Your credit score is good
This might seem obvious at first glance, however, if you don’t have a good credit score, chances increase that you could be declined altogether or stuck with a higher interest rate and thus end up paying higher mortgage payments. If you have a less-than-optimal credit score, working with a mortgage professional can help you get on the right track in the shortest time possible. Sometimes a few subtle changes can bump a credit score from “meh” to “yahoo” in a few short months.

Breaking the bank isn’t in your future plans
Do you plan on buying two new vehicles in the next two years? Are you thinking of starting a family? Are you considering going back to school?

Although you may think you can afford to purchase a home right now, it’s extremely important to think about one, two, and five years down the road. If you know that you aren’t planning on incurring big expenses that you need to factor into your budget anytime soon, then that’s something that may help you decide to buy a home.

You are disciplined
It’s easy to say, “it’s a home, I’m going to have it for a long time so I may as well go all-in!”. While that would be nice, that’s rarely the case!

You must have a limit that you’re willing to spend. Sitting down with a mortgage broker or real estate agent and analyzing your finances is crucial. It’s important that you know costs associated with buying a home and what the maximum amount is that you can afford without experiencing financial struggles. IMPORTANT: This is not the amount that you are told is your max!

This is the amount that you calculate as your max based on your current monthly budget and savings plan. It’s quite frequent where I have clients tell me that their max budget is, say, $1200 and then when I run the numbers they could actually be approved for much more. Low and behold suddenly these guys are looking at homes that are hundreds of dollars a month higher than their initial perceived budget. It is up to you (with my help or pleading, when necessary) to reel things back in and make sure that you aren’t getting into something that affects the long-term livelihood of a well thought out budget or savings plan.

Conclusion

These are just four signs that you may be ready to purchase a home. If you’re seriously considering buying or selling, talking with a Dominion Lending Centres mortgage broker, such as myself, can help put you on the right path to a successful real estate transaction.

RRSP – USE HOME BUYERS’ PLAN (HBP) MORE THAN ONCE

Under the home buyers’ plan, a participant and his or her spouse or common- law partner is allowed to withdraw up to $25,000 from his or her RRSP to buy a home. Before 1999, only the first- time home buyers are permitted to buy a home under this plan. Now a person can take an advantage of HBP plan more than one, two, three, four or more times as long as the participant in this plan fulfills all other conditions. The house can be existing or can be built.

Are you a first – time home buyer?
You are considered a first-time home buyer if, in the four year period, you did not occupy a home that you or your current spouse or common-law partner owned. The four-year period begins on January 1st of the fourth year before the year you withdraw funds and ends 31 days before the date you withdraw the funds.
For example, if you withdraw funds on March 31, 2018, the four-year period begins on January 1, 2014 and ends on February 28, 2018.
If you have previously participated in the HBP, you may be able to do so again if your repayable HBP balance on January 1st of the year of the withdrawal is zero and you meet all the other HBP eligibility conditions.
Qualifying home – a qualifying home is a housing unit located in Canada. This includes existing homes and those being constructed. Single-family homes, semi-detached homes, townhouses, mobile homes, condominium units, and apartments in duplexes, triplexes, fourplexes, or apartment buildings all qualify. A share in a co-operative housing corporation that entitles you to possess, and gives you an equity interest in a housing unit located in Canada, also qualifies.

Repayment of withdrawal amount into RRSP
Generally, you have up to 15 years to repay to your RRSP, the amounts you withdrew from your RRSP(s) under the HBP. However, you can repay the full amount into your RRSP(s)
Each year, the Canada Revenue Agency (CRA) will send you a Home Buyers’ Plan (HBP) statement of account, with your notice of assessment or notice of reassessment.
The statement will include:
• the amount you have repaid so far (including any additional payments and amounts you included on your income tax and benefit return because they were not repaid);
• your remaining HBP balance; and
• the amount you have to contribute to your RRSP and designate as a repayment for the following year.

If you have any questions contact a Dominion Lending Centres Mortgage Professional near you.

Why, why, why it is so challenging for entrepreneurs to obtain a mortgage in Canada?
If you’re among the 2.7 million Canadians who are self-employed, regrettably your income is not as easy to document as someone who’s traditionally employed.

Since 2008, mortgage regulations in Canada have made it more challenging for those who work for themselves to qualify for a mortgage due to tighter restrictions on “stated income” loans. In 2012, Canada’s Office of the Superintendent of Financial Institutions (OSFI) introduced Guideline B-20, which requires federally regulated banks to evaluate applications for residential mortgages and home equity lines of credit with more scrutiny. These rulings made it more challenging for the self-employed to prove income.

Here’s what Self-Employed home buyers need to know:

1. Most self-employed are motivated to decrease their earnings to avoid paying tax through legitimate expenses and personal deductions.
-Therefore, much of one’s self-employed income does not show up on paper.

2. I’m sorry… but you can’t have your cake and eat it too! If you choose to write off as much of your income as legally possible to avoid paying taxes, claiming low take-home pay, you will end up paying a higher interest rate on your mortgage.
– i.e. home buyer is a tradesperson, they earn $70,000/year and legitimately write off their business expenses to $40,000/year on Line 150 of their tax return. Lenders use income from Line 150… not gross income to determine affordability.
– Some lenders allow you to “gross up” your declared taxable income (as opposed to stated income) by adding up to 15%.
– i.e. if your declared income on your Notice of Assessment (NOA) is $40,000, the lender could add 15% for a total of $46,000. In most cases this doesn’t really help the business owner, as their income is still too low to qualify for the mortgage they want.

3. The new mortgage rules mean the assessment of a self-employed applicant’s income has become far more rigorous. Lenders now analyze the average income for the industry a self-employed candidate works in, and study the person’s employment history and earnings in the field. Their stated income should be reasonable, based on:
– industry sector
– type of business
– length of time the operation has been in business

4. Work with professionals. You need to hire a qualified book keeper and a Chartered Professional Accountant (CPA). Their job is to know the ins and outs of taxes so that you can put your focus on growing your business.
– You need to keep all your financial affairs up to date. That means getting the accountant prepared financials, filing your annual tax returns and most importantly paying your taxes. Government always gets first dibs on any money. Lenders won’t be interested in you haven’t paid your taxes.
– I recommend having a discussion with your CPA. Let them know that you want to buy a home. Come up with a budget of what income you need to be able to prove on your tax returns.

Suggestion: you could choose to pay more personal income tax this year, to push your line 150 income up and help you qualify for any mortgage transactions you hope to make. Please note: most lenders will want to see 2 years history, to prove consistency in earnings.

5. For self-employed borrowers, being able to document income for the past 2-3 years gives you more lending options. Some of the documents your lender may request include:
– Credit bureau (within 30 days of purchase)
– Personal tax Notice of Assessment (NOA) for the previous two to three years.
– Proof that you have paid HST and/or GST in full.
– Financial statements for your business prepared by a Chartered Professional Accountant (CPA).
– Contracts showing your expected revenue for the coming years (if applicable).
– Copies of your Article of Incorporation (if applicable).
– Proof that you are a principal owner in the business.
– Business or GST license or Article of Incorporation

6. If you have less than 20% down payment, Genworth is the only option of the 3 mortgage default insurers that still has a stated income program.

Self-employed home buyers, who can document proof of income, can generally access the same mortgage products and rates as traditional borrowers.

Tips for self-employed applying for a mortgage to ensure the process goes smoothly:

1. Get your finances in order. Pay down your debt!!
– Every $400/month in loan payments lowers your mortgage eligibility by $100,000
– Every $12,000 in credit card debt lowers your mortgage eligibility by $100,000
– Do you see a theme here? Pay down your debt! Resist buying/leasing a new vehicle or taking on any additional debt prior to buying your home

2. 3 “Rules of Lending” what Banks look at when you apply for a Mortgage in Canada
– Debt-service ratios are a major factor in a loan-approval assessment based on your provable income (Line 150 – what you paid taxes on)
– Maintain good credit. Solving the Puzzle – 5 factors used in determining your Credit Score
– Consider a larger down-payment.
– If you run into difficulty qualifying on your own, consider having someone co-sign for your mortgage. Would a Co-Signer Enable You to Qualify for a Mortgage?

3. Have two to three years’ worth of your self-employed supporting documentation available so your mortgage broker can work with you to set up your Mortgage Preapproval.

4. Be consistent and show stability. Lenders prefer self-employed borrowers who work in a business that’s established and have expertise in that field.

What happens if the banks still don’t want you for a conventional mortgage?

Many high net worth business owners with low stated incomes turn to private mortgage lenders for financing, since they can’t prove their income.
It is difficult to navigate which lenders specialize in self-employed mortgages. Using a mortgage broker has obvious advantages, since mortgage brokers have access to multiple lenders and have a broad knowledge of the mortgage market.

If you have any questions, contact a Dominion Lending Centres mortgage specialist for help.

Ask people this question and you will get a variety of answers. Most home owners will say 10% is what you should put down. However, if you speak with your grandparents, they are likely to suggest that 20% is what you need for a down payment.

The truth is 5% is the minimum down payment that you can make on a home in Canada. If you are planning on buying a $200,000 home then you need $10,000.

It all can be explained by the creation of the Canadian Mortgage and Housing corporation (CMHC) by the Canadian government on January 1st, 1946. Before this time, you needed to have 20% down payment to purchase a home . This made home ownership difficult for many Canadians. CMHC was created to ease home ownership. This was done by offering mortgage default insurance. Basically what CMHC does is it guarantees that you will not default on your mortgage payments. If you do, they will reimburse the lender who gave you the mortgage up to 100% of what the homeowner borrowed. In return lenders allow you to purchase a home with a smaller down payment and a lower interest rate.

CMHC charges an insurance premium for this service to cover any losses that may occur from defaulted mortgages. This program was so successful that CMHC lowered the minimum down payment to 5% in the 1980’s.

However, if you have little credit history or some late payments in the past they may ask you to provide 10% instead of the tradition 5% if they feel there is a risk that you may default at some time.

You should also be aware that the more money you put down, the lower your monthly mortgage payments will be. You also can save thousands in mortgage default insurance premiums by putting 20% down. At this time, home buyers who put 5% down have to pay a fee of 4% to CMHC or one of the other mortgage default insurers to obtain home financing. On a $400,000 home this is close to $16,000.

If you can provide a 10% down payment the insurance premium falls to 3.10% and if you can provide 20% it drops to zero. While 20% can seem like an impossible amount to save, you can use a combination of savings, a gift from family and/or a portion of your RRSP savings to achieve this figure. The best recommendation that I can make is to speak with your Dominion Lending Centres mortgage professional to discuss your options and where to start on your home buying adventure.

Are you in a Variable Rate Mortgage? Me too.

If you’re in a fixed rate mortgage, this news does not impact you. Mind you ‘impact’ is too strong a word to use for the subtle shift that occurred Jan 17, 2018.

Short Version

The math is as follows:

A payment increase of ~$13.10 per $100,000.00 of mortgage balance. (unless you are with TD or a specific Credit Union, in which case payments are fixed and change only at your specific request)

i.e. – A mortgage balance of $400,000.00 will see a payment increase of ~$54.40 per month

Personally, we are staying variable, for a variety of reasons…

Long Version

Qualification for variable rate mortgages has been at 4.64% or higher for some time. This required a household income of greater than $70,000.00 for said $400,000.00 mortgage .

Can 99% of said households handle a payment increase of $54.40 per month? Yes.

Will 99% of households be frustrated with this added expense? Yes.

Ability and annoyance are not the same thing.

Have these households enjoyed monthly payments up to $216.80 lower than those that chose a fixed rate mortgage originally? Yes.

Are 99% still saving money over having locked into a long term fixed from day one? Yes.

Should I lock in?

A more important question is ‘why did we choose variable to start with’? And this may lead to a critical question ‘Is there any chance I will break my mortgage before renewal’?

The penalty to prepay a variable mortgage is ~0.50% of the mortgage balance.

The penalty to prepay a 5-year fixed mortgage can increase by ~900% to ~4.5% of the mortgage balance. A massive increase in risk.

There are many considerations before locking in, many of which your lender is unlikely to discuss with you. It’s to the lenders advantage to have you locked into a fixed rate, rarely is it to your own benefit.

At the moment decisions are being made primarily out of fear. Fear of $13.10 per month per $100,000.00

What about locking into a shorter term?

Not a bad idea, although this depends on two things:

Which lender you are with as policies vary.
2. How many years into the mortgage term you are.

If your net rate is now 2.95%, and have the option of a 2-year or 3-year fixed ~3.00% – this may be a better move than full 5-year commitment.

Do not forget the difference in prepayment penalties, this is significant.

Bottom line – Know your numbers, know your product, stay cool, and ask your Dominion Lending Centres Broker.

These are small and manageable increases.

P.S.

It was a bit disappointing to see logic and fairness fail to enter the picture, after the last two Federal cuts to Prime in 2015 of 0.25% each the public received cuts of only 0.15% each time.

Every single lender moved in unison, not one dropped the full 0.25%.

Amazingly, not a single lender saw fit to increase rates by the exact same 0.15% on the way back up. Every lender has instead increased by 0.25% – a full 100% of the increase passed on to you, the borrower.

Not cool man, not cool at all.

We share all the pain of increases, and get only part of the pleasure of decreases.

I am disappointed by this, not surprised, but disappointed.

With 47 per cent of homeowners scheduled to renew their mortgages this year, 2018 is a year of change for lots of Canadians.
Here are the top 8 things you can do to get the best renewal:

1. Pull out your mortgage renewal now, and start early. When you are proactive instead of reactive you can see if there is anything on your credit score or lifestyle that we can modify to ensure you are positioned for the best renewal. You are only in a position to do this when you start early- in the last year of your mortgage you will have the most amount of options available. For example, there can be an inaccuracy in your credit report or you may be considering an income/job change that would impact your options. We can look at timing accordingly for you.

2. Do not just sign the renewal offered. Lenders can change the terms of your mortgage, and the renewal you are signing can cost you up to four per cent of your equity if you are with the wrong lender for your current life stage.

3. Most people think the best rate is the best renewal – WRONG. The terms are most important and with all terms moving or selling is the only reason most people think they would ever break a mortgage- THIS is simply not the case, a change in the interest rate market, divorce, health, job change, investment opportunity and many other reasons would contribute to a future modification being beneficial for a consumer.

4. Take into consideration lender history. The lender can have a higher prime then anyone because they know the cost to leave outweighs staying the course. The lenders are very smart with their calculated risks- and this is not something they have an obligation to disclose.

5. Remember your lender has a bias – their job is to handcuff you so they can make as much profit off you as possible- don’t be a victim.

6. Do not shop each lender on your own, it takes points off of your credit score. All lenders have different rates based on your score and you want to position yourself to get the best. By using a mortgage professional, they can shop multiple lenders protecting your credit using only one application, while the rate variation can be on average a half a percent!

7. Don’t get sucked into the online rate shopping- any monkey can post a rate online and you can drive yourself crazy looking at something that does not exists. In today’s complex mortgage market there are significantly different rates based on – insured mortgage vs uninsured mortgage, switch vs refinance, purchase or renewal, principal residence vs rental, salary or self-employed, 600 credit score or 700 credit score, amortization of 20 years to 30 years, type of property condo vs house, and leased land or freehold. The variations can mean a difference in thousands of dollars. Like diagnosing a medical condition, you can’t go online, you do have to put in the appropriate application and supporting documents to verify which options are available to you that will result in the lowest cost in borrowing.

8. Remember your mortgage is the largest debt and investment most of us have, when you contact an independent mortgage professional, we are going to invest all the work and expertise and advise you in your best interest regardless if we get your business. We may after our review advise you to stick with your existing lender, or make another recommendation for you. We are only here to enhance your finances and save you money, and there is no cost for our service.

Mortgage brokers have become an integral part of Canada’s financial landscape. Rather than deal directly with banks, about 30 per cent of Canadians turn to independent brokers to help them secure the best terms for their loan.

But as residential real estate markets continue to power ahead at a time of economic uncertainty, government regulators have started to tap the brakes. And it’s understandable that many mortgage brokers are getting edgy about what lies ahead.

Consider.
Lending rules for homes worth more than $500,000 have been toughened, lowering the amortization period to 25 years for high-ratio insured mortgages and tightening processes for mortgage approvals based on income.
New mortgage “stress tests” from the Office of the Superintendent of Financial Institutions (OSFI) take effect on January 1. They’re designed to ensure that if interest rates begin to rise from historically low levels, Canadian homeowners will be able to withstand the resulting pressure. It’s not an altogether unreasonable move given the context: Canada has the highest level of private debt of all G-7 countries.

It’s all the more relevant because the Bank of Canada has raised its key interest rate target by a quarter of a percentage point twice this year. In turn, those increases have pushed up the big bank prime lending rates which are used to determine rates for variable-rate mortgages and lines of credit.

The new rules are expected to reduce the number of first-time homebuyers entering the market. Now, even with a top-up from the Bank of Mum and Dad that bumps them over the 20 per cent insurance threshold, borrowers still have to pass that stress test for higher rates.

Many mortgage brokers are rightly concerned about an immediate hit to the overall volume of their business.

After all, many Canadians will now need more income for the same amount of mortgage. Early estimates suggest that a potential buyer of a $1-million home putting down 20 per cent, would see about a 15 per cent reduction in purchasing power.

There’s another downside to the coming change as well: The rules will not apply to mortgage renewals with an existing lender which has the effect of entrenching existing relationships and reducing the incentive to shop around for a better deal – and new lender.

For the overwhelming majority of brokers, however, any short-term impact is offset by the promise of a more sustainably healthy residential real estate market.

Mortgage brokers with high standards, who have a practice rooted in robust verification, due diligence and KYC rules, will be nominally affected. That’s also true for those who already adhere to the industry “best practice” of thoroughly reviewing the sources of a down payment.

As it is in any sector, disruption of the status quo causes anxiety. But in the case of mortgage brokers, the changes that lie ahead will lead to a stronger business in turbulent times.

You might think you would be rewarded for toiling away to save a down payment of 20% or greater. Well, forget it. Your only prize for all that self-sacrifice is paying a higher interest rate than people who didn’t bother.

Once upon a time we had high ratio vs conventional mortgages, now it’s changed to; insured, insurable and uninsurable.

High ratio mortgage – down payment less than 20%, insurance paid by the borrower.

Conventional mortgage – down payment of 20% or more, the lender had a choice whether to insure the mortgage or not.

vs

Insured –a mortgage transaction where the insurance premium is or has been paid by the client. Generally, 19.99% equity or less to apply towards a mortgage.

Insurable –a mortgage transaction that is portfolio-insured at the lender’s expense for a property valued at less than $1MM that fits insurer rules (qualified at the Bank of Canada benchmark rate over 25 years with a down payment of at least 20%).

Uninsurable – is defined as a mortgage transaction that is ineligible for insurance. Examples of uninsurable re-finance, purchase, transfers, 1-4 unit rentals (single unit Rentals—Rentals Between 2-4 units are insurable), properties greater than $1MM, (re-finances are not insurable) equity take-out greater than $200,000, amortization greater than 25 years.

The biggest difference where the mortgage consumers are feeling the effect is simply the interest rate. The INSURED mortgage products are seeing a lower interest rate than the INSURABLE and UNINSURABLE products, with the difference ranging from 20 to 40 basis points (0.20-0.40%). This is due in large part to the insurance premium increase that took effect March 17, 2017. As well, the rule changes on October 17, 2017 prevented lenders from purchasing insurance on conventional funded mortgages. By the Federal Government limiting the way lenders could insure their book-of-business meant the lenders need to increase the cost. We as consumers pay for that increase.

The insurance premiums are in place for few reasons; to protect the lenders against foreclosure, fraudulent activity and subject property value loss. The INSURED borrower’s mortgages have the insurance built in. With INSURABLE and UNINSURABLE it’s the borrower that pays a higher interest rate, this enables the lender to essential build in their own insurance premium. Lenders are in the business of lending money and minimize their exposure to risk. The insurance insulates them from potential future loss.

By the way, the 90-day arrears rate in Canada is extremely low. With a traditional lender’s in Canada it is 0.28% and non-traditional lenders it is 0.14%. So, somewhere between 99.72% and 99.86% of all Canadians pay their monthly mortgage every month.

In today’s lending landscape is there any reason to save the necessary down payment or do you buy now? Saving may avoid the premium, but is it worth it? You may end up with a higher interest rate.

By having to wait for as little as one year as you accumulate 20% down, are you then having to pay more for the same home? Are you missing out on the market?

When is the right time to buy? NOW.

Here’s a scenario is based on 2.59% interest with 19.99% or less down and 2.89% interest for a mortgage with 20% or greater down, 25-year amortization. In this scenario, it takes one year to save the funds required for the 20% down payment.

• First-time homebuyer
• Starting small, buying a condo
• 18.9% price increase this year over last

Purchase Price $300,000
5% Down Payment $15,000
Mtg Insurance Premium $11,400 (4% as of March 17, 2017)
Starting Mtg Balance $296,400
Mortgage Payment $1,341.09

Purchase Price $356,700 (1 year later)

20% Down Payment $71,340
Mtg Insurance Premium $0
Starting Mtg Balance $285,360
Mortgage Payment $1,334.40

The difference in the starting mortgage balance is $11,040, which is $360 less than the total insurance premium. As well, the overall monthly payment is only $6.69 higher by only having to save 5% and buying one year sooner. Note I have not even built in the equity that one has also accumulated in the year. The time to buy is NOW. Contact your local Dominion Lending Centres mortgage professional so we can help!

SHORT VERSION:

Do not rely on your provincial assessment for a fair market value of your property.

The value printed on that document was arrived at during a time in the previous year, the market may have changed a bit since then, and not in the direction you might think.

Do not rely entirely on the buyer’s opinion or the seller’s opinion in an unlisted private transaction for a fair market value.

Do not rely entirely on your neighbours, friends, or family members opinions for a fair market value of a property.

Do consider ordering a marketing appraisal, but do not rely on it 100%… maybe 98% though.

Do consider an evaluation by an experienced, active, local Realtor or two. This in combination with a marketing appraisal is the best indicator of current fair market value.

Gather professional opinions from Realtor(s) and an Appraiser – these are the people with their feet on the ground and their heads in the game.

Thank you.

LONG VERSION:

Provincial Property Assessment notices have arrived in the mail for BC residents (and other provinces), giving some homeowners a big smile and a bit more spring in their step (increased property taxes aside), while others wilt and lament at a modest gain or decrease in assessed value.

Hold on a sec, neither this assessment document nor either parties’ emotions, are tied to a current true market value. In fact provincial property assessments can be significantly too high or too low. In BC, values are determined in July of the previous year, and properties are rarely visited in person by provincial appraisers.

For this reason provincial property assessments should never be solely relied upon as any sort of relevant indicator of true market value for the purposes of purchase, sale, or financing.

Think of the assessed value instead as something akin to a weather forecast, spanning far larger and more diverse areas than the unique ecosystem that is your neighbourhood, your specific street, or your specific property. A weather forecast made the previous July, not the previous week. As this is when assessed values are locked in, a full six months prior to the notices being mailed out.

The BC Assessment Authority does offer some useful tools for a high-level view of the market. Go to http://evaluebc.bcassessment.ca/ and start typing an address. You’ll get a drop-down window where you can click on the address you want. Here’s what you can find out:

DETAILS ON ONE ADDRESS

These come up on the first screen and include: current and last year’s assessed value; size and rooms; legal description; sales history, and further details if property is a manufactured home or multifamily building. There’s also an interactive map as well as links to information on neighbouring properties and sample comparative sold properties.

NEIGHBOURING PROPERTIES

Here you can compare the assessed value of houses in the immediate neighbourhood. Clicking on any property brings up further details.

SAMPLE SOLD PROPERTIES

Find comparable properties and see what they sold for and how their sold price compares to their assessed value. This is a great research tool for owners, sellers and buyers.

These tools can be a starting point, but if you’re looking to set a selling price on your own property, always enlist a professional. Valuing your own property is not a do-it-yourself project. In a buying/selling transaction your are best to order an appraisal, which is a much more accurate reflection of current market value. It is timely and reflects value for zoning, renovations and/or other features unique to the property. An appraiser is an educated, licensed, and heavily regulated third party offering an unbiased valuation of the property in question.

WHAT’S MY HOME REALLY WORTH?

Usually, market value is determined by what a buyer is willing to pay for a home, and what the seller is willing to accept.

A quick survey of recent sales and their relation to assessed values will often demonstrate no clear relationship between sale price and assessed value. It’s often all over the map. Some properties selling well below assessment, and others well above.

You also want an experienced and local Realtor to help you determine the selling price of your home. A (busy &  local) Realtor will have a far better handle on what is happening in your area for prices than does a government document, and in many instances will save you from yourself.

In theory a comprehensive current market review completed by a Realtor should not differ radically from the value determined by a professional appraiser.

Professional appraisers spend all day every day appraising properties, and their reports are often seen as less biased. Imagine your reaction, as a buyer, to the following statements…

1. The seller says their house is worth $500,000.
2. The sellers’ Realtor says it’s worth $500,000.
3. This house is listed at $500,000 based on a professional (marketing) appraisal.

Most buyers would consider #3 the most reliable of the above statements. And most buyers requiring financing will have the benefit of the lender ordering their own independent appraisal to confirm fair market value. Sellers rarely order an appraisal in advance, which can create some interesting situations.

In practice, Realtors are relied upon for listing price estimates. Most buyers don’t care much about what anybody else thinks the house is worth. Buyers care what they think it is worth. This is why we say that market value is ultimately determined by what a buyer is willing to pay for the home, aligned with what is acceptable to the seller.

It is important to note that there are two kinds of professional appraisals. There is the marketing appraisal, such as one ordered by a seller. And there is the financing appraisal, which is done so the bank is satisfied the house is worth what the buyer and seller have agreed it’s worth. The financing appraisal is a less in depth review and is essentially answering the question; is this property worth the agreed upon purchase/sale price.

A marketing appraisal goes deeper (and costs more) but a lender is not concerned with the actual market value over and above the purchase/sale price. A lender just wants the simple question answered. It is a rare day that the appraisal for financing has a value that differs significantly, if it all, from the sale price. Therefore one should not be surprised if, when buying a home, they find that the appraisal comes in bang on at the purchase price. As they do 99% of the time.

The 1% of the time that the value is off it is almost always a private transaction where the seller has had no professional guidance at all and has inadvertently set their price below market by relying on something as inaccurate as their BC Assessment document.

IN SUMMATION

Do not rely on your property assessment for a fair market value of your property.

The value printed on that document was arrived at during a point of time during the previous year, the market may have changed a bit since then, and not in the direction you might think.

Do not rely entirely on the buyer’s opinion or the seller’s opinion in an unlisted private transaction for a fair market value.

Do not rely entirely on your neighbours, friends, or family members opinions for a fair market value of a property.

Do consider ordering a marketing appraisal, but do not rely on it 100%… maybe 98% though.

Do consider an evaluation by an experienced, active, local Realtor or two. This in combination with a marketing appraisal is the best indicator of current fair market value.

Gather professional opinions from Realtor(s) and an Appraiser – these are the people with their feet on the ground and their heads in the game.

…and of course, when it comes time for your mortgage, visit a mortgage professional at Dominion Lending Centres!

1. Not consolidating high interest debt into low interest mortgage.
2. Paying “fees” to get the lower rate
3. Not looking at their long term forecast
4. Taking a 5 year rate when 3-4 years can be cheaper
5. Having their mortgage with a lender that has high penalties and restrictive clauses.

Not consolidating high interest credit or vehicle loans in their mortgage. I hear this often “I don’t want to use the equity in my home” or “I can pay it off”. Many times when people end up with debts is due to inefficient budgeting and understanding what your income is and your debt payments are. There are many folks where monthly payment is the driving factor in their monthly budget. Making minimum payments can take you YEARS to pay off. Soon after people get mortgages, they are buying that new car at 0% interest and $600 month payments, then the roof or hot water tank goes and they put another $15,000 on credit, then someone gets laid off and boom…can’t make all the payments on all those debts that it took a 2 income family to make. It’s a true reality. Let’s look at an example:

Paying Fees to get the lower rate.
Dear rate chasers…they catch up with you somewhere. Nothing comes for free. Let’s face it, you go to the bank and their goal is to make money! A lender that offers you a 4.49% with a $2500 vs a 4.64% with no fee and you think “yes, score what a great rate!” Hold your coins… as you could be walking away poorer as the banker didn’t run the bottom line numbers for you. Chasing rates can cost you more money in the long run.

Your $500,000 mortgage was offered with two rates for the business for self guy who needed a mortgage where they didn’t look at the income so much: 4.49% and $2500 fee and $4.64% no fee. Lets see what it really looks like for a 2 year mortgage.

$502,500 (built in th $2500 feel) 4.49% – payments $2778 per month – $479563 owing in 2 years
Total payments: $66672
$500,000 (no fee) 4.64% – payments $2806 per month – $477634 owing in 2 years
Total payments: $67344.

Wait? So by taking the lower rate with the fee means I owe $1929 MORE in 2 years and only saved $672 in overall payments?

The long term financial planning side.
I counsel many of my clients to take 2-3 year year terms for a variety of reasons. Better rates, lower payments, capitalizing on the equity in your home to pay off a car loan or upcoming wedding. Did you know the average homeowner refinances every 3 years of a 5 year term and pays a penalty?

Taking a 5 year when 3 and 4 year rates might be a better option. Many times the 2-4 year rates can be significantly lower than the 5 year rates. Remember, the bank wants money and the longer you take the term, the more they make. True, many folks prefer or fit the 5 year terms, but many don’t. Worrying about where rates will be in 3-5 years from now should be a question, but not always the guiding factor in you “today” budget.
Here is an example of a $450,000 mortgage and what the difference in what you will owe on a 3 year term.

2.34% – payments are $990 every two weeks = $402,578 owing in 3 years
2.59% – payments are $1018 ever two weeks = $403,604 owing in 3 years.
Your paying $28 MORE every two weeks ($2184 total) and owe $1026 MORE in 3 years. Total LOSS $3210! Planning is key. Stop giving away your hard earned money!

Mortgage monster is in the penalties you pay when you fail to plan.
Since many families today are getting in with 5-10% as their downpayment.
If you got your mortgage with many of the traditional banks you know and your current mortgage is $403,750 and you need to break your mortgage (ie refinance to pay off debts) 3 years into the contract you potential penalty could be $12,672! Ouch. vs going with a mortgage broker who can put you with a lender that has similar rate you penalty would be significantly different – almost $10,000 dollars different!

Get a plan today! If you have any questions, please contact your local Dominion Lending Centres mortgage specialist.