Home Buying Guide for Young Canadians
Jeff Schwartz, Executive Director and Ben Allen, Community Outreach Manager are joined by Dorothy Lazzari from the Premiere Mortgage Centre to discuss some of the important things young Canadians should consider when buying their first home
Ben: Hello and welcome to another Consolidated Credit Webinar! We’re here again with Jeff, our Executive Director, and we’re joined by Dorothy Lazzari, from Premiere Mortgage Centre. Today we’re going to be talking about buying a home; a how-to guide for young Canadians, or really any potential home buyer, so thanks for being here!
Dorothy: Thank you for having us.
Ben: Okay, so today we’re gonna be talking about a pretty important topic, buying a home. So, things we’re going to look at today are: where do I start, of course, what can I afford, and then I’m sure most of you have probably heard about the stress test. We’ll take a little bit of a look at what is that, what’s involved with that, and what does that really mean when it comes down to purchasing power. Chances are, you’re probably gonna have to take some sort of a loan, or a mortgage, to purchase a home. So, we’re gonna look at kind of the ratios and the values that the lenders want to see. And finally, we’re gonna look at who can help you; all the different financial professionals that are gonna help guide you through this process. So big question is: “Where do I start?” So, as a financial counselor, I feel it’s my obligation to let everyone know that they need to start with their budget, or in this case budgets. When you’re buying a home, you’ll probably have two budgets. One of them should be your household monthly plan, that guides your spending, your saving, and helps you achieve your financial goals. The other budget is going to be the one that you’re gonna need for your home purchase, which is something we’ll talk about a little bit later. It’s going to have to include, not only the sticker price of the home, but also the money you’re gonna need for closing costs, taxes, home inspections, and especially emergencies. Now, Jeff happens to be a huge fan of emergency savings. So, I’m hoping maybe he can enlighten us on, one, you know just the general importance of emergency savings, and two, how a new homeowner should approach emergency savings, what are they gonna have to look out for, and what might be new for them.
Jeff: Thanks Ben. Yeah, yeah, I’m a big proponent, a big fan of emergency savings plans. And why? Because savings are critical! The people we see at consolidated aren’t necessarily frivolous spenders, they’ve just had life happen, and putting them further into debt when that life happens. It’s those expenses that you don’t expect, and aren’t prepared for that can really send you, in from an otherwise solid financial plan, into a bit of a tailspin. So, that’s why having an emergency savings fund is one of the most important things you can do to actually avoid debt. And from our perspective, it’s usually recommended that we save, save about three to six months’ worth of expenses, so that if that unexpected expense occurs, or you have some sort of interruption in your income, you don’t have to take on additional debt to work through it. Now, as you’re probably thinking this really applies to homeownership, and truthfully it becomes even more important when you are a homeowner. It always seems that the furnace goes a pipe let’s go or the roof starts leaking at the most inopportune times. Now, as a homeowner this financial goal is critical to survival, so these emergency savings funds are what are going to keep you afloat, and keep you from taking on more debt, and potentially even keep you from losing your home because you’ve had one of these unexpected expenses come up. So, my idea here is with a lot of things around savings, to start small. Start so you don’t even notice it, and the important part of that is start today! Don’t put it off until next month when you feel you’re in a better position. Even if it’s five, ten, twenty dollars, start today, put it into a savings account, and then you’ll get better at it as time goes along.
Ben: For sure, and hopefully you gain some compounding interest with that. And it’s a little bit of a confidence booster too, seeing those emergency savings kind of build every week or every month. So that’s great and that leads us right into our next point, which is your credit. Having a higher credit score and a clean credit report is going to get you a better interest rate on your mortgage period. So, it might be worthwhile to get both copies of your credit reports, TransUnion, and Equifax, and then start doing a little bit of cleaning, before you actually start the house-hunting. There might be mistakes on there. There could be some negative information, a late payment, debt in collections, and that might come off of your credit report in a month or two, or six months. So, you know you can also identify signs of identity theft, but you really don’t know until you check. These credit bureaus aren’t in the business of calling consumers and saying, “Hey Ben there’s a discrepancy in your credit report.” That responsibility falls to you; you have to check your credit report, look for any mistakes, and find out how long that negative information, if it’s there, is going to be there. Now Dorothy, obviously a hard credit check is going to be part of the process of getting approved for a mortgage. But I’ve heard you can have up to five mortgage lenders do a hard inquiry on your credit file, and the credit bureaus will count it as one credit check for the purposes of your score calculation. So, is that true or is that just another one of the many credit myths that are floating around out there?
Dorothy: Thanks Ben, that’s actually true. The credit bureau agencies have updated their software over the years, and the programs have become sophisticated enough to know that inquiries within a 30-day period typically do not affect the credit score after that first one. What you’ll need to be careful of is when that 30-day period begins. Working with a licensed mortgage professional will alleviate any of those confusions as they know really when and how to use that. Having said that your broker will pull a bureau and can send that with every application so there’s no real need for any other lenders to pull another one. This is important, because if you’re on the border with an acceptable score and it drops due to another inquiry, it could mean the difference between an approval or a decline on your mortgage request.
Ben: Okay thanks, I thought that was still the case, so I’m glad that they’re you know updating their software and they’re recognizing that. So that’s why researching is so important. This is probably the biggest purchase of your life, so you’re gonna want to take your time, learn the lingo, speak to the right financial professionals, and we’re lucky enough today we happen to have one of them with us. So, Dorothy can you just briefly kind of cover, you know, these different professionals, who’s gonna help you, who’s gonna be part of the process, that sort of thing.
Dorothy: Sure, sure I can. The home-buying process, it’s an extensive one, but with the right team it can certainly be a simpler process than you might think. Your team of experts is going to include a licensed realtor, who’s going to work with you to look for the right home that fits both your needs and your lifestyle. Of course, it’s important to know that a realtor can also represent you even buying both a resale home and a new home construction, from a builder site. They’re gonna know the ins and outs of those conditions on that, on those offers. So, it’s important to work with a licensed realtor. A home inspector is another licensed professional that you’ll want on your team. An inspector will look for structural concerns with the house that might be a problem for you in the future. This is going to help you and your realtor negotiate and finalize the price of that home. Now, a licensed merchant mortgage professional, of course, is also an important team member for sure. Without the financing, you can’t purchase your home. A mortgage broker is governed by FSCO, it’s Financial Services Commission of Ontario, who have access to many lenders with various different mortgage programs. So, they may even be able to help you with alternative financing, which may fit a certain budget and a certain household cash flow. Lastly, but equally important, is to have a lawyer on your team. A lawyer will not only work on closing the deal when it’s time, but will also offer legal opinions on the contract, including documents like status certificate, when buying a condo. In some cases, opinions on co-signing and home ownership title splits, including the interest in the property value, are important to the new homeowner. All these professionals will walk you through the entire process and educate you along the way.
Ben: All right that’s great, so I mean, if home ownership is a near goal or a near future goal for you, then maybe you also want to speak to your financial adviser or the person who’s helping you with your investments or your money. And of course we don’t want to forget family and friends and yes I know your in-laws will always share their opinions but your friends and family might also have some useful pieces of information so don’t disregard everything that your friends and family are telling you. Your old man just might be right, he might know a little bit about home ownership so take them to account as well. When it comes to your budget you know, what can I afford? That’s really going to come down to the old adage you know location, location, location. So here we see two of Canada’s hottest markets, Toronto and Vancouver and when we compare them to other major Canadian cities, we see that the cost for a monthly payment mortgage payment is more than double. So, it really does depend on where you’re gonna live so that leads me into my next question which would be for you Dorothy. What is it about Toronto and Vancouver housing markets that’s making them so hot? Is it the jobs and the employment found there, the higher wages? Is it now foreign buyers? What’s with that?
Dorothy: Well there are definitely hot spots for sure. This is a combination of factors. Ben, the cost of living in places like Toronto Vancouver is definitely higher and that includes housing. The housing demand is high in these cities and cities like Toronto maintain of course or hotspots because immigration is important to Canada and this is where a lot of immigrants will settle. We’ve also seen our fair share of foreign buyers. This has had a lot of impact by pushing up demand on housing. These cities are also places of convenience and what I mean by that is they’re young homeowners which settle in places where they don’t necessarily need a vehicle for example and are able to rely on public transit systems to go about their daily lives. It’s a lifestyle convenience. Employment, yes is also a major factor for sure. Big cities can offer great deal more of employment opportunities, so all these factors put pressure on the housing market. When the demand is high and the supply is low, not enough to meet the demand then the prices will increase.
Ben: That makes a bit of sense then. So now we’ll quickly try to break down what this mortgage stress test is. Whether you’ll need to insure your mortgage. Then after that, we’re just going to take a quick look at what the lenders want these good ratios. So Dorothy, I’ll just kind of explain what these ratios mean to your lender when you’re looking for a mortgage. It’s definitely worth it to understand them because they’re all gonna have a direct effect on your purchasing power when it’s time to go house-hunting. So,what is the stress test? Dorothy can you just quickly try and explain the mortgage stress test and the difference between an insured and an uninsured mortgage before we start getting into the nitty-gritty details of home buying.
Dorothy: Sure, just to keep it quite simple as possible, the stress test is a new regulation that’s mandated by the government. It was introduced in January of 2018. It’s not really a test but rather a new strict rule of calculations that the lenders will use in order to determine whether you’ll qualify for a mortgage or not. This is across the board with any down payment of 20% or higher. The difference between an insured and non-insured mortgage typically has to do with the down payment. Typically, any purchase with less than 20% down payment is required to be insured for the lender and purchases with 20% down and more is not insured for the lender.
Ben: So basically, you just have to qualify for a little bit more than what you’re looking for, so you know what does that actually mean? Well we’re going to take a quick example here. We’re going to look at a $400,000 mortgage at you know 3 1/2 percent and these are just kind of rounded numbers to make it a little bit easier but now we know what the stress test is but what does it mean in terms of being able to afford your home. So, Jeff, if you could just take us through this quick example of someone who’s looking to get approved for this $400,000 mortgage and what the stress test is going to mean to them.
Jeff: I mean really the stress test idea or the stress rule idea is very similar to emergency savings. If you are prepared for the worst the outcome really is never that bad and here because your house is on the line, the stress test is an excellent buffer against the rise in interest rates. So, let’s take you through it. Let’s say you have a four hundred thousand dollar mortgage at about three and a half percent. Your payment is going to be approximately two thousand a month. Now with the stress test applied you add an additional two percent to that interest rate which has the effect of increasing your monthly payment and that would go to approximately two thousand four hundred and forty dollars per month. Well this is not what you will pay each month, the government just wants to make sure that if you had to pay that amount because of an increase in interest rates, if you’re on a variable mortgage or even at renewal, you could afford that payment. So, it’s just a safeguard to make sure homeownership doesn’t turn into a disaster for you or for your finances.
Ben: That’s great way to put it. So it’s reducing a little bit the capacity about eighteen and a half percent. So what do the lenders want. Now I’ll send this back to Dorothy because I’ll admit it, when I was putting this slide together it was a little bit intimidating. As a financial counsellor, I’m used to tell you know basic math addition subtraction multiplication that sort of thing. So, if you can just take a second, just to try and demystify these debt service ratios, GDS tedious what’s a P.I.T.H, and you know what are the numbers. What percentages do the lenders want to see. So, let’s start with the GDS.
Dorothy: Sure, no problem Ben.That’s a lot of acronyms to learn that’s for sure. GDS stands for gross debt service and TDS stands for the total debt service. To keep it simple, the lenders will want these percentages to be within a certain limit. So for GDS, it will refer to just the mortgage payment, property taxes and heat and for TDS, it will refer to mortgage payment property taxes heat and all other monthly debt payments you might have such as a car and credit card payments for balances that you might still have outstanding at the time you buy a home. So, the P.I.T.H stands for principal, interest, taxes and heat. These are used in the GDS calculations. Now the percentages that the lenders will look for will vary depending on the lending programs and of course your credit sometimes. Thirty five percent GDS and 40 percent TDS is quite common however they will vary and sometimes grants are made up to 39 and 44 percent. Alternative lending programs are different they calculate a little bit further and go beyond those so sometimes they can go up to 48 and 60 percent for GDS and TDS
Ben: Then of course we have the DTI, the debt-to-income and you know I’m pretty familiar with that. That’s just your monthly debt payments to your income, your gross income, so you know lower is certainly better. But just like it says, you know that’s your debt to income. Jeff, you see people every day with high debt service ratios and big debt balances so you can you just explain the importance of maintaining a good DTI or debt to income ratio and would you say that looking for a home with a high DTI is a good idea. Should paying down debt outweigh the sense of urgency that some people feel when they’re looking for a home.
Jeff: Your ability to service your debt or look because a lot of people don’t understand what service here that means or make sure you can make your full payments on time, that is critical. So this this is this measurement this ratio really kind of helps you determine where you’re at so without your debt to income ratio is something that you want to pay attention to so that you have a good idea of where you stand on a regular basis to see how much of your actual budget is going towards paying you’re making your debt payments. So truthfully having a high debt to income ratio prior to buying a home would really not be a good idea. That means the amount of money required to service your debt in comparison to your income is also high, so you have to ask yourself. If I’m actually ready to stretch my current debts payments each month and do I really want to take on the extra burden of a mortgage payment. Now not to mention the potential for large unexpected expenses of owning a home so if it were me, I want to make sure my financial house is in order before I consider buying a physical house. In other words, sometimes we may have to put that urgency towards paying down our current debt rather than taking on more debt
Ben: okay that’s a good way to put it. So now we’ll move on to the LVR or LTV, the loan-to-value ratio and this one was a little less intimidating for me to understand it’s your loan minus the mortgage balance divided by the value of the home. So Dorothy, can you just let us know a little bit about LTV ratios and when they might be used.
Dorothy: So. the loan to value is exactly that. It’s the loan value compared to the value of the property is the way the lender will look at it. So you can purchase a home up to 95 percent but at an 80 percent loan to value you’ll save a lot of money because it’s not insured. So this could save you thousands and upfront costs because as an insured mortgage there’s a premium to pay on that. Even though it’s added to the mortgage and paid off over 25 years there is an upfront cost to putting less than 20% down. So loan to values also become important when dealing with exceptions. I find or specific type of properties while uninsured mortgages go to 80% and insured mortgages go to 95% sometimes when exceptions are given on income and/or credit loan to values will be cut back oftentimes to 65 say, 75 percent loan to value for example even some specialty lending programs will only offer 50 percent loan to value so this really means to you as a homeowner your down payment will have to be higher so it’s more money down upfront on your part.
Ben: We talked a little bit there about you know, damaged credit or bruised credit or how important credit is so if you have less than stellar credit you know don’t let that dissuade you for buying a home. A mortgage is probably one of the best reasons to take on debt unlike a car which rapidly depreciates in value chances our homes value will appreciate the longer you own the home, provided we don’t see another housing market crash like we saw in 2008 but I mean that’s part of the reason we have the stress test in the first place I suppose. So always start by making a plan that’s gonna help you try and rebuild your credit. So the first thing to do would be get your credit report like I said take a look at it if there’s any mistakes get some fixed and you start finding out how long things are gonna be there and what you need to do to help build your credit back up. So I’ll turn this slide over to Jeff now if you could just take some time to explain some of the options that a potential home buyer with bruised credit might want to look at before starting the house hunt what kind of plan would they come up with what might they want to do in regards to building their credit and how can I go about paying down their debt.
Jeff: A lot of this is kind of encapsulating what we’ve already talked about whether you have good credit or whether you don’t have good credit. So, in dealing with the people that have bad credit, this probably is even more important but I think as a cautionary tale. Don’t worry all is not lost just because you have bad credit doesn’t mean that you can’t get into the housing market. I mean, if you have a good job and your finances are in order now and the houses that you’re looking at all represent good value all is not lost. I mean for starters, as we’ve been talking about, do a homeownership budget. Once that’s complete, take a look at your credit reports. You say it’s bruised but is there anything in the short-term you can do to help improve that credit score and credit profile. Maybe that means paying down some debt on a couple of cards because you’re coming up to the limit and if you can pay down some of those debts on those credit cards and get down to say 35 to 40 percent of what your limit is, that’s really going to help you. I think you alluded to this earlier, making sure there’s no reporting errors. Some of the reporting errors that show up on a credit report would be okay. Let’s say you have a balance outstanding of a thousand dollars and your true limit on that card is five thousand dollars but for whatever reason the credit card company is showing that your credit card only has a limit of a thousand dollars that’s going to have a negative impact on your credit score so you might want to report that to the creditor to make sure that they correct that error on your credit report. In addition, and you might even want to consider taking on new credit so maybe it’s an installment loan or a secured loan that reports to the bureau which has the impact of building positive credit. So you’ve got some things that are dragging your score down but maybe there’s an opportunity to take on additional credit and it’s small in nature that will have the impact of improving your credit score and your credit profile and the idea here is you really just want to showcase you as being someone who is worthy of getting a mortgage. Now once you’ve done all you can in this rehabilitation area, it’s time to get creative and quite frankly this is where a strong real estate agent and a strong mortgage broker can really earn their wages. There are many different options out there to help you get that mortgage in the short term and as you improve your credit and as you improve your track record of making sure that you’re making payments in full and on time you can transfer you can transfer your mortgage or renew your or get another mortgage at much more favorable terms. So as your credit and your profile improves, it’s going to become these options will become available to you at a much lower cost. So the idea here is what do you need to do to get into the market initially and be able to secure financing given the fact that you’ve got bad credit and I know Dorothy has probably dealt with clients like this and I know there are options that involve some vendor take-back financing and other opportunities on the real estate brokerage side that may help you get into the market. You just have to be a little bit creative and think creative and think outside the box to take advantage of those opportunities.
Ben: What your credit report say about you. That’s kind of what I always say in my workshops. Is it something you know you’re proud of. You want to show a mortgage lender. If it’s not, maybe you want to spend some time just trying to fix that up a bit or like you said, get creative. You know see what else is available out there so you know if the stress test is stressing you out if these numbers and these values are making you worried a little bit? Well the thing is just to stay positive. The stress test can be a hurdle but it’s also there for a reason. Its protection so you know as we’ve seen interest rates are rising and I would suspect that they’re going to continue to rise at least for a little while so that might mean you need to save longer but that’s a good thing too right you’ll have a bigger down payment over the course of the loan it’ll be less interest charged as well. Definitely stick to a budget, if you don’t have one then start one if you need help starting one then one of our credit counsellors would be more than happy to speak to you. This is a huge decision so make sure you speak to the right people you have the best debt service ratios, debt to income ratios that sort of stuff so like I said do the research learn the lingo, speak with someone that you trust and you know help get the right team together to help you on this home buying path. So Jeff, is there any parting words of wisdom before we get to the Q&A
Jeff: I think we’ve covered it quite a bit but I think the one thing that I would like to stress here is to be prepared and most importantly don’t jump in until you’re ready and once you are, don’t worry. There’s going to be options that are designed specifically for you and your particular situation.
Ben: Dorothy, anything you’d like to mention before we move on to questions.
Dorothy: I agree, we’ve touched on a lot of different points and Jeff brought up some very good points as well and I think we’re in a time where you have to get creative and I don’t think there’s ever been a better time to deal with licensed professionals for sure. You know for our part, a mortgage broker is certainly a financial partner if you will. Even in times of distress your mortgage broker can help you restructure your current debts and can use the strategy to help you buy your home. You know some of us even have access to certain credit card and loan programs which may help you. Even if you’re already a homeowner preparing to sell and buy again and you just or you just need to restructure things, a mortgage broker can certainly refinance the mortgage to eliminate the debt and combine it in order to increase the household cash flow and get you ready for your home purchase. The point here is always reach out for options because there are so many out there for sure.
Ben: So that brings our home buying workshop to a close. We have some time left to take some questions but if you want, you’re more than welcome to contact either myself or Dorothy at the email addresses found here and it looks like our first question would be directed towards Dorothy. I’ve heard that adding one of my parents as a cosigner to my mortgage will help me. I’ve saved 5% for a down payment and I have a credit score of 725 which I believe is pretty good and my dad is willing to co-sign if it will help. Is that gonna help?
Dorothy: So, they’re starting off in a very good position. Yes, the credit score of 725 is good. You’ve done a great job at maintaining your credit so that’s great. Cosigner option is possible even on an insured mortgage for 5% down. The insurer through the lender will certainly look at that option we would look at your dad’s application details and one factor in his income index as well and see how that would service all together to have both of you on there. If that works we would propose that to the insurer through the lender but just some advice on cosigner option would be consult with your real estate lawyer on how to minimize the impact on future land transfer tax costs when that eventually comes off title. So if you want to add on as a cosigner he’s gonna serve the immediate purpose of buying that particular home and maybe be a cosigner until you get to a point where you can actually afford that home on your own. So eventually you’ll look at the option of taking dad off title and that’s where your real estate lawyer is gonna come in handy so that he knows how to register and how to record the interest in that property value between you and your father and help you save some money that way but the simple answer here is cosigner option it’s definitely available for you and certainly worth taking a look at. you can certainly email me for the specifics and then any other questions you might have on that one
Ben: great I wish my dad was that nice. Anyways the next question we’ll shoot over to Jeff. Does credit counseling affect Mike I have some credit-card debt I want to clear up but I don’t want to hurt my credit before looking for mortgages
Jeff: So this is an interesting question and I’m going to start off by saying, I mean just talking to a credit a credit counsellor is gonna do nothing to your credit and in fact it may open your eyes to different solutions as well as having a better and deeper understanding of your current financial situation. There are options which may report to your credit bureau if you are really struggling with debt and need help to pay back debt because you’re behind and/or you sense you’re going to become behind and truthfully at that point looking at homeownership is probably not a good idea but you also want to put your yourself in the shoes of the lender. I mean if you’re going to go out and ask for a mortgage you probably want to look at saying okay if going on some sort of restructured payment plan or a debt management program is going to show up on my credit report put your put yourself in the lender shoes. Are they going to feel secure around giving you additional debt once you’ve had trouble? So you may want to consider that when before you start shopping for a mortgage and as I said earlier in the webinar, is to make sure your financial house is in order before you go down the road of buying a physical house.
Ben: Looks like the last question could be for both of you I’m sure you can both help with this. So, we’ll start with mortgage or with Dorothy and then if Jeff has anything to chime in we’ll end off with that. So, what is a good mortgage rate in Canada for someone with excellent credit
Dorothy: So, this is always an interesting question. The best rate question is a little different now. It used to be you know you’d get a phone call and ask well what’s the best rate and there would be a rock-bottom rate for a five year fixed closed for example but it is very different now because the lenders have adopted all new pricing and it’ll be different based on credit, down payment and sometimes even amortization. So whether you take a 25 or 30 year mortgage, sometimes can have an effect on that interest rate so there’s a whole set of factors in goal before we can actually quote and but it’s best to know that there is an overall downward trend right now so that the range is low. Again right now we’re seeing anywhere specifically between 2.6 for up to 3.0 for and that’s for a 5-year fixed but it’s best to speak to a licensed broker for to help negotiate the best terms that’s certainly part of what we do and the most important factor attached to the rate are the actual terms and conditions. You know if you’re looking for a rock-bottom rate you have to look to see what the penalties are in future because that might have a big impact if you’re looking to restructure your mortgage at the three-year mark or selling and buying yet again. You know what good is the lowest rate if you’re going to end up paying exuberant penalty fees down the road. You’d have to look at those options and compare them and see what’s best for your scenario
Ben: Okay, some good things there. Jeff anything you wanted to chime in with good mortgage rates?
Jeff: Yeah and I’ll think with what Dorothy said at the very end I think you’ve hit the nail on the head. I mean it’s good should be a relative term it should be relative to you and what you want because each of these different mortgage options are going to have different pros and cons and if they end up being a real con for you and I think you use the example that if you really push hard on the rate and then you decide to get out of your mortgage early that penalty is going to be based on the difference between prime rate probably and what you’re paying and that’s going to have a dramatic impact on the penalty and truthfully that might not be good for you but if it’s your last mortgage I mean like and you want to hold it through I mean there’s all sorts of different things that are going to impact the individual consumer and what’s relevant for them. So a good rate is the best rate for them and the only other advice is shop around because definitely lenders want this type of business on their books especially in Canada and if you can pit one against another to kind of reduce your apples-to-apples comparison then you’re going to be the winner at the end of it.
Ben: All right so some solid professional advice. There if you do need some KOFE or some knowledge of financial education you know perhaps you’d like to step into our credit dojo we have a mortgage mastery course in there that you can take. It’s online so if you’re interested in learning more about how the KOFE platform can help you or your organization, please feel free to reach out with me directly. And Jeff, Dorothy, this will conclude our webinar so I’d like to thank both of you again for taking the time to speak with me today and I hope you have a great week.