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.

Transform your vacation rental into a welcoming oasis, on a budget.

Are you dreaming of buying a vacation rental property, have just bought one, or are strongly considering it? If so, your mind is probably abuzz with design ideas and thoughtful touches you could add to the home.

In order to make a rental property into a viable business, you need to set a reasonable budget and stick to it. And everything in the home should be geared towards rental guests. Some elements may not align with how you would design and furnish your own home, but what matters is that it appeals to guests. Keep in mind that as a rental, it has to be able withstand wear and tear, and items should be reparable or replaceable.

Consider learning about who stays in the area, what they value, and how you can tie that in with the character of the home to create a great experience. For example, if guests are typically groups of women between the ages of 25-40 who come to tour wineries and enjoy Instagram-worthy décor, keep that in mind when highlighting and enhancing the natural charm of your property in a way that might suit such a group.

To furnish your vacation rental without sacrificing comfort or experience, there are many different tactics you can employ.

First and foremost, ensure that everything you bring into the home can reasonably be maintained. That means, don’t plant rose bushes if you can’t trim them, don’t bring in a white shag carpet if you won’t be there to vacuum it every day. As a guest, you want to arrive at a home that’s clean and well taken care of.

Re-use, re-purpose, and be thrifty. Everything you bring into the space doesn’t have to be shiny and new. Thrift stores, grandparents’ basements and garage sales can be full of treasures like antique books, frames, artwork, lamps or other accents. Clean them up and paint them, if needed. Placing out a few selectively chosen antiques can add uniqueness and visual interest to the room. For simple items like frames that can easily be painted, it can save you a bundle on decor.

Remove any personal items from the home, such as family photos, paperwork, storage bins, clothing, etc. Leaving these items around will make guests feel like they are intruding on someone else’s personal space; it doesn’t feel like a getaway. That’s not to say that you can’t add personal touches. Keep in mind that personal touches tell a story and are different than personal items.

You can also add homey touches before guests arrive, like a bottle of wine (is there a brand or product that your area is known for?), a hand-written card, a bag of coffee, some toiletries, etc. These thoughtful extra-somethings make the guests feel welcome and valued.

Consider guests’ comfort as they use the house. Ensure the linens are plentiful. That includes towels, hand towels, sheets, blankets, pillows, etc. They don’t have to be pricey linens, IKEA or Costco works just fine. Everyone has their own way of getting comfy on the couch or in bed. Some guests may only want one pillow, while others may want three. Have extras available in a linen closet or shelving area so that they can freely use what they need.

Spills and messes happen, kids may wet the bed, or someone might want to take a nap on the couch, so a few extra blankets, towels, sheets, and pillows will be greatly appreciated. Aim to make the experience as smooth and comfortable as possible.

In addition to comfort, make it as easy as possible too. Provide a house manual detailing everything they need to know about check-in, check-out, info about the home and the area, if certain things are not allowed, how to contact the host, etc. Put helpful labels or markers on closets or storage areas that house extra bedding, kitchen supplies, recycling bins, etc. The goal should be to provide your guests with all the handrails they need to have a fantastic and streamlined experience, without having to call you to ask anything.

Finally, create a statement somewhere in your home that stands out and is memorable. It could be artwork, a wall decal, or mural that your guests want to take pictures of. It could be a really fabulous gallery wall (showcasing all those thrift store frames) that displays your interests and tells a story. Or maybe it’s a stylish and comfy room with plush couches, lots of pillows, blankets, and interesting books.

If you were staying at a vacation rental, imagine what details you would appreciate or want to take a picture of. What type of spaces would you be drawn to relax and unwind in? In my home, I created a room for ultimate relaxation and comfort; it has large, plush couches, tons of pillows, movable coffee tables, and a curtain that runs along the length of the doorway so that you can block out the action happening in the rest of the house. Guests are always drawn to this area because it’s a cozy place to read, hang out or watch a movie.

No matter what your budget is, you can turn your vacation rental into a welcoming oasis that will make guests feel comfortable and valued, and give them a fabulous experience.

How Bridge Financing Works.

In life, things don’t always go as planned. This is especially true when it comes to real estate! When it comes to buying a new home, in a perfect world, most of us would like to take possession of their new residence before having to move out of the old one. This makes moving a lot easier and allows you time for painting or renovations prior to moving into your new home. Unfortunately, this is where things get complicated.

Most people need the money from the sale of their existing property to come up with the down payment for their new one. This is where bridge financing comes in. Essentially, bridge financing allows you to ‘bridge’ the financial gap between the firm sale of your current home and the firm commitment to purchasing your new home.

WHAT ARE BRIDGE LOANS?

Bridge loans are short-term solutions that range from 90 days to 12 months. This type of financing allows you to access some of the equity in your existing property to put towards the down payment of your new home. To be eligible for a bridge loan from a typical bank or mortgage lender, a firm sale agreement must be in place on your existing home, meaning all subjects have been removed. You will also require a purchase agreement for the new home to verify the amount required.  Without a firm sale agreement, there are borrowing solutions available but at a higher cost through private lenders. 

If you are currently looking to sell one property and buy another, it is important to consider whether you can qualify and pay for two mortgages at once if necessary.  There are a number of reasons for this including:

• Property values are constantly changing. You won’t know how much money you have until you sell your home as a home is only worth what someone is willing to pay for it. Past sales and future guesses are not reliable means of arriving at a current property value.
• If the proceeds from your existing home are required to help pay for the down payment on your new home, as well as renovations and moving costs bridge financing is not always straightforward and does not address every situation equally

Securing bridge financing

If you have sold your existing home but the closing date comes after the closing date of the new property you just purchased, then bridge financing can sometimes address the issue. 

If you have firm sale and purchase agreements and want to move forward with bridge financing, you will need to ensure your lender can accommodate this type of transaction.

COSTS OF BRIDGE FINANCING

Bridge financing typically costs more than a traditional mortgage and can cost between Prime plus 2 to 5 percent, and can also come with an administration fee.

In some cases, if you require a loan over $200,000 or a loan for more than 120 days, your lender may register a lien on the property until the loan is repaid. To remove this lien, you will need to consider the added costs of paying for a real estate lawyer.

PRIVATE FINANCING

If you are moving ahead on the purchase of your new property without selling your existing one first, and the proceeds of the sale of your current home are required for your down payment, you would have to proceed with a higher cost private loan vs. being able to work with a bank or regular mortgage lender.

Private financing is expensive, but it is generally a more affordable option than lowering the sale price of your current home and greatly reducing it in price just to sell it quickly.

COSTS OF PRIVATE FINANCING

Private loans have a much higher interest rate than traditional mortgages and come with lender fees in addition to brokerage fees. These amounts will vary based on your specific situation considering the timing and duration of the loan, the loan amount, the amount of the loan relative to the value of the new property and the equity in the current one, your credit, property details, and other potential factors and terms.

When it comes to bridge financing and selling and buying of your home, there can be a number of hoops and not all lenders will address the situation equally.  All financing is always ultimately subject to lender approval and I’m always here to help determine your best options. 

The Governing Council of the Bank of Canada raised its target for the overnight policy rate by a full percentage point to 2-1/2%. The Bank is also continuing its policy of quantitative tightening (QT), reducing its holdings of Government of Canada bonds, which puts additional upward pressure on longer-term interest rates. In its press release this morning, the Bank said that “inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around 8% in the next few months… While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent. More than half of the components that make up the CPI are now rising by more than 5%.” The Bank is particularly concerned that inflation pressures will become entrenched. Consumer and business surveys have recently suggested that inflation expectations are rising and are expected to be higher for longer. Wage inflation has accelerated to 5.2% in the June Labour Force Survey. The unemployment rate has fallen to a record-low 4.9%, with job vacancy rates hitting a record high in Ontario and Alberta. Central banks worldwide are aggressively hiking interest rates, and growth is slowing. “In the United States, high inflation and rising interest rates contribute to a slowdown in domestic demand. China’s economy is being held back by waves of restrictive measures to contain COVID-19 outbreaks. Oil prices remain high and volatile. The Bank expects global economic growth to slow to about 3½% this year and 2% in 2023 before strengthening to 3% in 2024.” Further excess demand is evident in the Canadian economy. “With strong demand, businesses are passing on higher input and labour costs by raising prices. Consumption is robust, led by a rebound in spending on hard-to-distance services. Business investment is solid, and exports are being boosted by elevated commodity prices. The Bank estimates that GDP grew by about 4% in the second quarter. Growth is expected to slow to about 2% in the third quarter as consumption growth moderates and housing market activity pulls back following unsustainable strength during the pandemic.” In the July Monetary Policy Report, released today, the Bank published its forecasts for Canada’s economy to grow by 3.5% in 2022–in line with consensus expectations–1.75% in 2023 and 2.5% in 2024. Some economists are already forecasting weaker growth next year, in line with a moderate recession. The Bank has not gone that far yet. According to the Bank of Canada, “economic activity will slow as global growth moderates, and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures. Global energy prices are also projected to decline. The July outlook has inflation starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024.”

Bank of Canada Overnight Rate   Bottom Line Today’s Bank of Canada reports confirmed that the Governing Council continues to judge that interest rates will need to rise further, and “the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation.” Once again, the Bank asserted it is “resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.” At 2.5%, the policy rate is at the midpoint of its ‘neutral’ range. This is the level at which monetary policy is deemed to be neither expansionary nor restrictive. Governor Macklem said he expects the Bank to hike the target to 3% or slightly higher. Before today’s actions, markets had expected the yearend overnight rate at 3.5%.

Article courtesy of Dr. Sherry Cooper

Calculating Income.  Part Two

In our last post, part one of our two part article on calculating income, we looked at full- and part-time employment income requirements when applying for a mortgage.  In part two, we’re reviewing what self-employment income verification may entail as lenders calculate your income in their review of your mortgage application.

self-employed

If you are self-employed, the requirements for income documentation are quite different than verifying income as an employee. Self-employed applicants will likely need to provide:

1. Last Two or Three Years’ T1 Generals: This is your income tax return. The full document is typically 25 pages or more, and you’ll need to include all its schedules.  One of the schedules is the Statement of Business Activities, which is used to illustrate business income versus expenses for some self-employed individuals, but not all.
2. Notices of Assessment (NOA) from Canada Revenue Agency: You will also need to provide the previous two or three years’ NOAs as a self-employed mortgage applicant. CRA sends this as your verification taxes have been filed.  They show whether you have a balance owing, and if so you’ll need to verify outstanding balances have been paid.
3. If Incorporated: Articles of Incorporation and your last two year’s financial statements
4. Sole Proprietor: a business license is sometimes a requirement.
5. More recently lenders have begun to request recent contracts, bank statements, or GST returns to verify ongoing business activities.

As mentioned in part one, not all mortgage applicants look the same.  Lenders may ask for more or less than what we’ve covered here.  If you don’t meet some of the criteria we’ve covered, there are often exceptions to the rule.  Connect with your trusted Mortgage Consultant to review your options and to ensure you take advantage of opportunities you might not otherwise have realized may apply to you.