An investment or rental property can be a great option for generating additional monthly income and growing your wealth over time, if planned properly.

This strategy has multiple options and outcomes that can benefit borrowers such as:

• Supplementing income now and boosting pension in the future, creating more financial freedom
• Allowing you to buy your dream retirement home now and rent it out until you’re ready to use it
• Increasing monthly cash flow for potential expenses beyond retirement savings
• Living in a multi-unit property (such as a duplex or tri-plex) and renting out one or two units

However, before you buy an investment property, there are a few things to know.

1. The minimum down payment required is 20% of the purchase price, and the funds must come from your own savings. Typically you can’t use a gift from someone else.  Another option is to utilize existing equity by refinancing your primary residence to fund the down payment of your rental or investment property. Closing costs and ongoing repairs and maintenance will need to be planned as well.
2. Only a portion of the rental income can be used to qualify for the purchase. Some lenders will only allow you to add 50% of the rental income to the application, while other lenders may allow up to 80% of the rental income minus expenses. Knowing which lenders recognize more income will allow you to qualify for the most possible.
3. Mortgage rates for a rental property can range from 0.10% to 0.20% higher than on mortgages for a principal residence or second home.

With the right purchase price and rental costs per month, a rental property can be a great way to supplement income and make the most out of your retirement. Not only does the income provide a greater monthly cashflow, but you also will have the ability to sell the property down the line if you so choose. However, bear in mind, the sale will be subject to capital gains tax. Your accountant will be able to help you with that aspect if you do decide to sell in the future.

Before getting started, it is important to calculate the cost of your investment (purchase price and closing costs), and maintenance amounts and compare those to rental potential to ensure profitability before purchasing.

If you’re looking to purchase an investment property, be sure to reach out to discuss your options and understand what is required.  I’m here to help.

Adapted from:
https://dominionlending.ca/life-style/could-an-investment-property-be-your-pension

When you buy an existing property, securing a mortgage approval before you commit to actually proceeding with the purchase takes a few steps. First, you would enter into a conditional purchase agreement with the current owner or builder at an agreed upon purchase price. The agreement would include a subject to financing, giving you time to confirm your mortgage before you pay your deposit to commit to buying the property.

Next, your mortgage application is typically reviewed within a week of entering into the conditional purchase agreement.   After the mortgage is approved, the subject to financing is removed and a deposit is usually due. Reaching this point means you and the owner have finalized the agreement, and the purchase will proceed in a few months or so. Finally, the property will be yours on what is referred to as the ’completion date’.  

A traditional mortgage approval is typically secured within approximately 30 – 120 days of the purchase completion date. 

Pre-construction, or pre-sale purchases, refer to condominiums, townhouses and other new builds, which have purchase agreements made much further in advance of the completion of the property. These purchases are sometimes referred to as pre-sales and can take up to 3 years to complete.

Some buyers will arrange pre-sale financing closer to the completion date of the purchase, and might wait until the property is about 4 – 6 months from completion.

However, as mortgages are subject to lender approval, an advance approval gives you the peace of mind the funds will be available to allow you to finalize on the purchase.

Like a traditional mortgage, the approval on a pre-sale mortgage is determined by your credit score, income-to-debt ratio, your employment history, the property’s value, and its characteristics.

Pre-sale mortgages including both a rate guarantee and an advance approval on the value of the property can in some cases be arranged as early as 18 months before the final purchase date.

Whether you’re seeking a pre-qualification to see how lenders may view your application, or you’re hoping to secure financing now for an existing property or future purchase, please reach out and discuss your options to ensure your plans can proceed smoothly.

Adapted From: https://dominionlending.ca/mortgage-tips/construction-and-pre-construction-mortgages

B.C. enhances consumer protection for homebuyers

A new homebuyer protection period will protect people in B.C. looking to buy a home from being pressured into high-risk sales.

The period is the first of its kind in Canada and marks the first key action the Province is taking based on the B.C. Financial Services Authority’s (BCFSA) report on ways to offer homebuyers better consumer protection in the real estate market. The mandatory three-day period will give homebuyers an opportunity to take important steps, such as securing financing or arranging home inspections, as they prepare to make one of their biggest financial decisions.

“Too many people have been faced with giving up an inspection in order to buy a home,” said Selina Robinson, Minister of Finance. “This is a major step toward providing homebuyers with the peace of mind they deserve while protecting the interests of people selling their homes – for today’s market and in the future.”

The homebuyer protection period will come into effect on Jan. 1, 2023. It includes a recission (cancellation) fee of 0.25% of the purchase price, or $250 for every $100,000, for those who choose to back out of a deal. For example, if the purchaser exercises the right of rescission on a $1-million home, they would be required to pay $2,500 to the seller.

Buyers still may make offers conditional on home inspections or financing at any time. The protection period will offer homebuyers the opportunity for due diligence at times when conditions are not in place.

The homebuyer protection period is informed by the results of consultations that the BCFSA completed this year with a wide range of real estate industry stakeholders, including home inspectors, appraisers, realtors and academics, as well as representatives from the legal and financial services sectors.

The Province will continue studying the BCFSA’s advice and its potential effects to further strengthen public confidence in the real estate market.

Quotes:

Blair Morrison, CEO, B.C. Financial Services Authority –

“Buying and selling a home are the most significant financial transactions in most people’s lives. The parameters to implement a homebuyer protection period, as well as other potential consumer protection enhancements, set forth in BCFSA’s advice to the government, are designed to give British Columbians appropriate time to exercise due diligence. Our advice is based on consultations with over 140 stakeholders, including industry experts and public-interest organizations. We want to promote confidence in real estate transactions and our advice is aligned with that outcome.”

Jonathan Sheppard, president, Home Inspectors Association BC –

“Home inspections help to eliminate some of the potential costly risks involved in purchasing while helping to make an informed decision. Home Inspectors Association BC members are proud that the B.C. government has recognized these risks and again leads the country in consumer protection.”

Andy Yan, urban planner and director of the city program, Simon Fraser University –

“The homebuyer protection period is something that is long coming and much needed as a modernization package for how homes are purchased in British Columbia and for the stability, accountability and transparency of the entire market.”

Tsur Somerville, senior fellow, UBC centre for urban economics and real estate –

“It is important to balance the interests of buyers and sellers. A key objective is to level the playing field and allow buyers to avoid having to make decisions under unreasonable time pressure. It addresses the very important goal that buyers feel trapped into buying a property without an inspection.”

Elaine Spilos, B.C. homebuyer –

“The homebuyer protection period guarantees time for the homebuyer to get the necessary information to make a wise decision.”

Quick Facts:

• BCFSA is responsible for the supervision and regulation of the financial service sector, including real estate professionals, mortgage brokers, insurance, pensions, trusts, credit unions and the Credit Union Deposit Insurance Corporation.
• B.C. will be the first province to implement a homebuyer protection period for resale property and newly constructed homes.
• Cooling-off periods for pre-construction sales of multi-unit development properties, like condominiums, are in place under the Real Estate Development and Marketing Act.

Learn More:

Read the report, Enhancing Consumer Protection in B.C.’s Real Estate Market, here: https://www.bcfsa.ca/media/2861/download

SOURCE: https://news.gov.bc.ca/releases/2022FIN0026-001134

Debt: To consolidate or not to consolidate? That is the question…

 If you are a Canadian living in debt, you are not alone. According to Statistics Canada:

• Household debt grew faster than income last year, with Canadians owing $1.83 for every dollar of household disposable income to debt(1)
• Canadian households use almost 13.48% of income for debt re-payment(2).
• The cost of living is projected to increase in 2022 (2)

And we are all aware inflation and interest rates have been rising rapidly of late. 

What is debt consolidation and how does it help?

Debt consolidation allows you to pay off smaller loans with a larger loan at a lower overall interest rate. This may be an avenue to explore to costs and repay debts faster.

Pros and Cons

Pros

• The lower the interest rate, the sooner you get out of debt. A lower monthly interest allows you to pay more towards your actual loan, getting you debt-free faster.
• You only have to make one monthly debt payment. This is more manageable than keeping track of multiple debt payments with different interest rates.
• Your credit score remains untarnished because your higher interest loans, such as a credit card, are paid off.

Cons

• A larger loan with a financial institution will require prompt payments. If you were struggling to pay your debts before, you may still be challenged with payments unless you qualify for a reverse mortgage.  Reverse mortgages are not always age-restricted, please contact me for more info.
• You may require a co-signer who will have to pay the loan if you’re unable to qualify on your own. Note that the CHIP Reverse Mortgage does not require a co-signer, as long as you qualify.

So how do you know if debt consolidation is the option for you? Contact me any time for assistance in weighing your options. 

SOURCES:

1 Debt-to-disposable-income ratio eases down from record 185% | CBC News

2 Key household debt-to-income ratio down in Q1 as income rises faster than debt | The Star

https://dominionlending.ca/sponsored/debt-to-consolidate-or-not-to-consolidate-that-is-the-question

Increasing Rates

With the rapid increases in interest rates this year, borrowers with static payment variable rate mortgages (VRM) won’t see increases to their regular payments, but those with adjustable rate mortgages (ARM) will.  Both still have the certainty they won’t have higher penalties as they may if they had fixed rate mortgages, but only a VRM has a payment that typically doesn’t change.

VRM Payments Staying the Same

With a static payment, the amounts going toward interest and principal within your regular payment adjusts as interest rates fluctuate, which can affect the amortization (amount of time it will take to the repay the loan) depending on the direction rates move.  Increasing rates can lengthen the amortization unless you make extra payments.  Decreasing rates will decrease the amortization again.

Trigger Rate

As rates rise, the VRM rate may reach a level at which the payment no longer covers 100% of the interest due within a given payment period. When that happens, none of the principal is paid down by the mortgage payment.  One of our VRM lenders calls this the Trigger Rate.  The full amount of the payment would be applied to interest, and the mortgage balance would begin to rise by the amount of the interest owing for the payment period that isn’t repaid.

Trigger Point

This lender will work with the borrower if the balance of the mortgage reaches a point where:

1. the mortgage balance exceeds 80% of the fair market value as determined by the lender for uninsured mortgages
   or
2. the mortgage balance exceeds 105% of the opening balance of the mortgage for insured mortgages.

This lender calls this the Trigger Point.  At this point, the lender will ask their VRM clients to make a lump sum payment, increase their payments, or lock in to a fixed rate mortgage.  Reaching the Trigger Point could take a long time in most cases with a VRM mortgage, but the possibility must be considered in determining the suitability of this mortgage type in your situation.

Creating A Buffer

On a 30 year amortization, paying bi-weekly will knock 4.5 years off the life of your mortgage and will create a buffer for lengthening amortizations, as would making lump sum payments as interest rates rise.  Setting your payment to the fixed rate payment you would have made, had you taken a fixed rate, is another way to build in a buffer.  If you get a raise or bonuses, you could make a few more lump sum payments along the way as well to help keep your principal balance heading in the right direction.

Renewal

When the renewal date arrives at the end of the term, the mortgage reverts back to the remaining original amortization period and the payment is reset based on rates available at that time. If you took a 30 year mortgage and five years passes, your new payment will be based on a 25 year amortization.  If your balance is higher due to interest rate increases, you would have a higher payment at renewal than you might expect.  The extent to which that payment will be higher will depend on your mortgage balance and renewal rates at that time.  Depending on whether you built in a buffer or not, that payment difference can be mitigated by the buffer you build in.

Moving to a static payment variable rate may come at a cost and not mortgages are created equal.  As always, this information is subject to change and lender approval, but let me know if you have questions on whether a static payment VRM would work for you. I am always happy to help.