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Canada’s New Mortgage Rules
December 19, 2024
The Canadian government aims to make home ownership easier for first-time buyers with new mortgage rules effective December 15th 2024.
New price cap targets improved affordability.
Canadian home buyers offering a down payment of less than 20 per cent of the home purchase price less than $1 million must buy mortgage default insurance and have to put at least 20% for a property priced $1 million or more.
Starting December 15, the federal government has raised the price cap for insured mortgages to $1.5 million from $1 million. Canada’s minimum down payment structure will remain unchanged, allowing buyers to put down $75,000 on a million-dollar home instead of the current $200,000 requirement.
For example:
- Property purchase price - $1 million
Minimum required down payment - $200,000
Starting 15th December:
- Property purchase price - $1 million
Minimum required down payment - $75,000
Expanded access to 30-year mortgages
Another change allows first-time home buyers with insured mortgages, and those purchasing newly built homes, to extend their loan term to 30 years instead of 25. This reduces monthly payments but increases total interest costs over the mortgage’s lifespan.
Mortgage amortization is the process of gradually paying off a home loan through regular payments over a set period, typically in monthly installments. Each payment covers both interest and a portion of the principal (the original loan amount). Over time, as the principal decreases, a larger share of each payment goes toward reducing the loan balance.
Mortgages are typically repaid over 25 years, but a 30-year option reduces monthly payments. Previously, buyers with less than 20% down were limited to 25-year terms.
Who qualify as a first time home buyer in Canada?
- You've never purchased a home before
- You haven't lived in a home that you or your current spouse or common-law partner owned in the last four years
- You've recently experienced the breakdown of a marriage or common-law partnership
Canadians choosing a 30-year amortization will pay more in interest over time compared to a 25-year mortgage.
Mortgage stress test changes for renewals
Since 2018, Canadian homebuyers must pass a mortgage stress test proving they can afford higher rates. Under new rules now, switching to a new lender with the same loan and amortization won’t require a new stress test, known as a straight switch.
What is a Mortgage Renewal?
When you take out a mortgage, you agree to a term—the length of time you’ll commit to the lender under specific conditions, like the interest rate. Once that term ends, if you still owe money on your home loan, you’ll need to renew the mortgage. This process is known as a mortgage renewal. It allows you to:
- Continue with your current lender, or
- Shop around for better terms with a new lender.
Renewing your mortgage is a chance to reassess your financial situation and possibly save money by securing a better interest rate or adjusting your payment terms. A straight switch is when a homeowner renews their mortgage with a new lender, keeping the same loan amount and amortization schedule.
The mortgage stress test requires buyers to qualify at 5.25% or 2% above their mortgage rate, whichever is higher, to protect against payment difficulties if interest rates rise.
https://www.canada.ca/en/financial-consumer-agency/services/mortgages/renew-mortgage.html
What do the experts say?
Experts believe these changes will create more opportunities for buyers. The 30-year mortgage option, in particular, could improve affordability for those previously limited by the 25-year term. However, they cautioned that longer amortizations could result in higher interest payments unless borrowers adopt strategies like bi-weekly payments or extra contributions.
However, not all are convinced the changes will improve housing affordability. John Pasalis, president of Realosophy, warned that the reforms could lead to short term home price inflation.
CIBC economist Benjamin Tal suggested additional measures could be announced soon, as housing affordability remains a politically sensitive issue.
In conclusion, while the new mortgage rules offer greater flexibility and potential affordability for buyers, it's important for home buyers to carefully consider the long-term impact of extended amortization periods. By weighing the benefits of lower monthly payments against the higher interest costs over time, buyers can make more informed decisions to suit their financial goals. With these changes, the Canadian housing market may become more accessible, but thoughtful planning remains key.
komalvijmortgage@gmail.com I (780) 233-8500
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Unlocking Your Dream Home: Purchase Plus Improvement Mortgage
December 09, 2024
The journey to home ownership is both exciting and daunting. For many Canadians, finding a home that checks all the boxes—location, style, and functionality—can feel like an uphill battle. Enter the Purchase Plus Improvement Mortgage Program, a game-changing financing tool that allows you to buy a home and finance its renovations under one mortgage. Whether you’re a first-time buyer or upgrading, this program can turn a fixer-upper into your dream home.
If you’re in Edmonton or anywhere across Canada, understanding how to leverage this program could save you money and unlock opportunities in the competitive housing market. Here’s everything you need to know—plus some pro tips to maximize its benefits.
What Is a Purchase Plus Improvement Mortgage?
A Purchase Plus Improvement Mortgage is a specialized mortgage product that combines the cost of buying a home with funds for renovations. Essentially, it allows you to:
- Purchase a home that may need updates or repairs.
- Borrow extra money (up to a specified limit) for those improvements.
- Roll the cost into a single mortgage with one monthly payment.
- Purchase with lower down payment.
This type of mortgage is ideal for buyers who find homes that are almost perfect but require modifications, such as a kitchen upgrade, bathroom renovation, or a finished basement, that too with a low down payment.
Why Use the Purchase Plus Improvement Program?
Expand Your Options In Edmonton’s diverse housing market, the perfect home might not be in perfect condition. By using this program, you can consider properties that need a little TLC, widening your range of choices.
Save Money Renovating a home through this program is more cost-effective than using a high-interest credit card or personal loan to finance renovations after the purchase.
Convenience Consolidating your home purchase and renovation financing simplifies your budgeting with one payment schedule.
Boost Your Home’s Value Strategic renovations can significantly increase your home’s resale value, offering a strong return on investment.
Create a Personalized Space Transform your new house into a home that fits your taste and lifestyle.
How Does it work?
Step 1: Mortgage Pre-Approval
Before you begin house hunting, start by getting pre-approved for a mortgage, which will give you an idea of how much you can afford.
A mortgage pre-approval is a lender's conditional commitment to provide financing for both the property purchase and planned renovations. During pre-approval, the lender evaluates your financial situation, including income, credit score, debts, and down payment, to determine the maximum amount you can borrow.
The pre-approved amount includes both the purchase price and the renovation budget, typically capped around 10-20% of the home's "as-improved" value.
The lender can lock in an interest rate for 90-120 days, and provides confidence as you search for a home that needs upgrades.
Avoid any major changes to your financial situation before closing on the mortgage. This includes taking on new debt, such as applying for a new credit card, financing a car, or making large purchases on existing credit.
Step 2: House Hunting
Once pre-approved, look for a property that needs upgrades or repairs while including renovation costs in your mortgage. This approach allows you to consider homes that might not be move-in ready but have potential to become your dream home.
Begin by identifying neighborhoods and properties within your pre-approved budget, which includes the estimated renovation funds. Look for homes with solid structures and good locations, focusing on properties that can be enhanced with upgrades like kitchen remodels, new flooring, or energy-efficient improvements.
Avoid properties requiring extensive structural repairs unless you're prepared for a more complex approval process.
As you view homes, think about the renovations you’d like to make and gather rough cost estimates. Sellers may be more willing to negotiate on homes needing updates, giving you an opportunity to maximize value. Collaborate with your real estate agent to identify homes that meet the program's criteria, such as allowing for an increase in appraised value post-renovation.
Once you find a suitable property, submit an offer.
Step 3: Possession and Renovation
Once your mortgage closes and ownership transfers, you take possession of the property. At this stage, the purchase funds are released to the seller, and your lender holds the approved renovation funds in trust. The renovation funds are not immediately accessible; they are disbursed only after the completion of the approved work.
You can start the renovations, which must align with the scope and budget approved during the mortgage process. Typically, you are required to complete the renovations within a specified time frame, often 90-120 days after possession.
Be prepared to finance the initial renovation costs upfront, as lenders release funds only after an inspection confirms the work is done.
Step 4: Final Inspection
Once the renovations are complete, you notify your lender and the lender may ask for an appraiser or inspector to visit the property. The purpose is to:
- Confirm that the renovations match the agreed-upon plans and quotes submitted during the mortgage process.
- Verify that the work has been completed to a satisfactory standard.
Some lenders may not require an inspection and / or may ask to provide detailed invoices.
After the inspection or verification, the lender releases the renovation funds held in trust. Funds may be sent directly to you or to the contractor, depending on the arrangement. The release happens in a single payment, covering the agreed renovation costs.
Once renovations are complete, your mortgage transitions to a regular repayment schedule.
Renovations must be completed within the lender's specified time frame, and any changes to the plan require prior lender approval to avoid delays.
Enjoy Your Upgraded Home!
Pro Tips for Success
- Work With an Experienced Mortgage Broker Navigating the Purchase Plus Improvement Program can be complex. A seasoned mortgage broker will guide you through the process, ensuring you meet all lender requirements and timelines.
- Plan Renovations Wisely Focus on upgrades that add the most value, such as kitchen remodels, bathroom updates, or energy-efficient improvements. Avoid overly personalized changes that might not appeal to future buyers.
- Budget for Unexpected Costs Renovations often come with surprises. Set aside a contingency fund to cover unforeseen expenses beyond the approved amount.
- Choose Reliable Contractors Select licensed and insured contractors with solid reputations. Lenders may require proof of credentials, and quality work ensures the investment pays off.
- Meet Deadlines Most lenders require renovations to be completed within a set timeframe, typically 90-120 days. Stay organized to avoid delays in fund disbursement.
Case Study:
Sarah and Ahmed are newcomers to Canada, and are looking to buy their first home and have been approved for a $500,000 mortgage. They found a house priced at $450,000 but realized it needed $50,000 in upgrades to modernize the kitchen and bathroom.
Challenge: Sarah and Ahmed would need to finance renovations, either through personal savings or a high-interest loan, adding financial stress.
Solution:
Sarah and Ahmed opted for purchase plus improvements:
- Purchase the Home: Include the renovation costs as part of their mortgage approval.
- Borrow for Improvements: Add $50,000 to their $450,000 mortgage, totaling $500,000.
- Streamlined Financing: Use one loan with the same competitive mortgage interest rate for both the purchase and renovations, avoiding the higher rates of personal loans or credit cards.
Renovation Impact: After spending $50,000 on upgrades, the home’s market value increased by $60,000.
Is the Purchase Plus Improvement Program Right for You?
This program isn’t for everyone. If you’re looking for a turnkey home or lack the upfront cash to start renovations, it might not be the best fit. However, if you’re willing to invest time and effort into creating a home that matches your vision, the Purchase Plus Improvement Mortgage Program is a powerful tool.
The Purchase Plus Improvement Mortgage Program is an excellent way to turn a house into your dream home while staying financially savvy. With the right guidance, it’s a seamless process that can deliver significant rewards.
Your Dream Home Is Just A Mortgage Away! 
How to Save for Your First Home: A Comprehensive Plan
November 11, 2024
Becoming a homeowner is exciting, but not for everyone. Before buying, consider all costs. CMHC advises that monthly housing expenses shouldn't exceed 39% of your gross income, covering mortgage, taxes, and heating. Your total debt, including other loans, should stay under 44% of your gross income.
Let's outline a detailed, step-by-step guide to help you save for your first home in Canada.
Step 1: Define Your Homebuying Goals
The first step in saving for your first home is to clearly define your homebuying goals. Ask yourself these important questions:
1. Where do you want to live?
Housing prices vary widely depending on the location. Research your desired city or neighborhood to understand the average home prices. For example, homes in Toronto and Vancouver are significantly more expensive than those in smaller cities like Halifax or Winnipeg.
2. What type of home do you want?
Are you looking for a detached home, a townhouse, or a condo? Different types of homes come with varying price points and associated costs.
3. When do you want to buy?
Set a realistic timeline for when you’d like to purchase a home. Having a target date will help you create a focused savings plan.
4. What is your budget?
Consider what you can afford in terms of monthly mortgage payments, property taxes, and other homeownership costs. Mortgage lenders typically recommend that your housing costs not exceed 32% of your gross monthly income.
Step 2: Calculate Your Down Payment
- For homes priced up to $500,000, the minimum down payment is 5%.
- For homes priced between $500,000 and $999,999, you’ll need 5% for the first $500,000 and 10% for the portion above that.
- For homes priced at $1 million or more, the minimum down payment is 20%.
For example, if you plan to buy a $600,000 home, your down payment would be:
- 5% of $500,000 = $25,000
- 10% of $100,000 (the portion above $500,000) = $10,000
- Total down payment = $35,000
You’ll need to save this amount before purchasing your home. Keep in mind that the larger your down payment, the less you’ll need to borrow, which can reduce your mortgage payments and the amount of interest you’ll pay over the life of the loan.
Set up automatic savings transfers on payday to build your down payment consistently.
Step 3: Set Up a Dedicated Savings Account
Once you’ve calculated your down payment, it’s time to start saving. Opening a dedicated savings account for your home purchase is a smart strategy. This will help you keep your home savings separate from your day-to-day finances, ensuring you don’t dip into it for other expenses.
Here are a few account options to consider:
1. Tax-Free Savings Account (TFSA):
A TFSA is one of the best ways to save for your down payment. Contributions to your TFSA are not tax-deductible, but any growth (interest, dividends, or capital gains) is tax-free. You can withdraw funds from your TFSA at any time without paying taxes, making it ideal for saving for a home.
2. First Home Savings Account (FHSA):
The FHSA is a newer account specifically designed to help Canadians save for their first home. It combines the benefits of both a TFSA and an RRSP. Contributions to an FHSA are tax-deductible, and withdrawals (including investment income) are tax-free if used for purchasing a home. You can contribute up to $8,000 annually, with a lifetime limit of $40,000.
3. High-Interest Savings Account (HISA):
A HISA offers a higher interest rate than a traditional savings account, allowing your savings to grow faster. Look for an account with competitive rates, no fees, and easy access to your money.
Maximize your FHSA and RRSP contributions for tax-free growth and withdrawals.
Step 4: Create a Budget and Savings Plan
Now that you’ve set up your savings account, the next step is to create a detailed budget and savings plan. Here’s how to get started:
1. Track your income and expenses:
List all your sources of income and track your monthly expenses. Identify areas where you can reduce spending to free up more money for your down payment savings. Consider cutting back on non-essential expenses like dining out, entertainment, and subscription services.
2. Set a monthly savings goal:
Based on your budget and target down payment, set a monthly savings goal that will help you reach your target within your desired timeframe. For example, if you need to save $35,000 in five years, you’ll need to save $583 per month.
3. Automate your savings:
Set up automatic transfers from your checking account to your dedicated home savings account. Automating your savings ensures that you stay on track without the temptation to spend the money elsewhere.
4. Track your progress:
Regularly review your savings plan and adjust as necessary. If you receive a bonus or tax refund, consider putting that money directly toward your down payment savings.
Open a high-interest savings account specifically for your home fund.
Step 5: Take Advantage of Government Programs
The Canadian government offers several programs to help first-time homebuyers. Make sure you’re aware of these programs, as they can significantly reduce your financial burden. The programs and incentives include the following:
The Home buyers’ amount
You may be eligible to receive a non-refundable tax credit of up to $1,500.
GST/HST new housing rebates
You may be eligible for a rebate for some of the tax you pay when buying your home.
The Home Buyers’ Plan (HBP)
You may withdraw up to $35,000 from your registered retirement savings plan (RRSP) tax-free to buy your first home.
Budget 2024 increased the HBP withdrawal limit from $35,000 to $60,000. This limit applies to withdrawals made after April 16, 2024.
Step 6: Reduce Your Debt
Lenders consider your debt-to-income ratio when determining how much mortgage you can afford. To improve your chances of qualifying for a mortgage and securing a better interest rate, focus on reducing your debt before applying for a loan.
Here are a few strategies to lower your debt:
1. Pay down credit card balances:
Credit card debt often comes with high interest rates. Focus on paying off your balances or transferring them to a lower-interest card to reduce the amount of interest you’re paying.
2. Consolidate high-interest debt:
If you have multiple high-interest debts, consider consolidating them into a single loan with a lower interest rate. This can simplify your payments and reduce your overall interest costs.
3. Avoid taking on new debt:
Refrain from making large purchases or taking on new loans while you’re saving for your down payment. Lenders may view increased debt as a red flag, which could affect your mortgage approval.
Reduce high-interest debt first to free up cash for your home savings.
Step 7: Build an Emergency Fund
Before you purchase a home, it’s essential to have an emergency fund in place. Homeownership comes with unexpected costs, such as repairs and maintenance, and having a financial safety net will help you avoid taking on additional debt when these expenses arise.
Aim to save three to six months’ worth of living expenses in your emergency fund. Keep this money in a separate account from your home savings, such as a high-interest savings account, so it’s easily accessible when needed.
8: Consider Additional Income Streams
If you’re finding it difficult to save enough for your down payment, consider boosting your income with a side job or freelance work. Even a small amount of extra income can help accelerate your savings.
Some options include:
- Freelancing in your area of expertise (writing, graphic design, web development)
- Taking on part-time work (such as delivering food, tutoring, or offering childcare)
- Renting out a room in your current home (if possible)
Every bit of additional income can bring you closer to your goal of homeownership.
Step 9: Monitor the Housing Market
While you’re saving, keep a close eye on the housing market. Interest rates, home prices, and market conditions can change, impacting your purchasing power. If you’re close to your savings goal, it might be worth speeding up your timeline if you notice that home prices in your desired area are rising quickly.
Alternatively, if the market cools, you might want to wait to get a better deal. Staying informed will help you make a strategic decision about when to buy.
Saving for your first home in Canada requires careful planning, discipline, and patience. By setting clear goals, creating a detailed budget, and taking advantage of government programs, you can make homeownership a reality. Start by defining your down payment target, set up a dedicated savings account, and automate your contributions to stay on track. With a solid savings plan, you’ll be well on your way to unlocking the door to your dream home.
Happy saving!
komalvijmortgage@gmail.com I (780) 233-8500
Understanding Mortgage Default Insurance: Do You Need It?
November 04, 2024
Mortgage Default Insurance, often called CMHC insurance in Canada, is mandatory for homebuyers who make a down payment of less than 20% of the property's value. It protects lenders in case the borrower defaults on their mortgage. This insurance allows buyers to qualify for a mortgage with a lower down payment, but it adds an extra cost, typically ranging from 2.8% to 4% of the mortgage amount. The premium can be paid upfront or added to the mortgage balance. While it facilitates homeownership for many, it increases the overall borrowing cost, so understanding its impact on long-term affordability is essential.
Mortgage default insurance is provided by three insurers in Canada:
1. CMHC (Canada Mortgage and Housing Corporation)
2. Genworth Canada
3. Canada Guaranty
It allows homebuyers to qualify for mortgages with as little as a 5% down payment, making homeownership more accessible.
If possible, aim to save for at least a 20% down payment to avoid the added cost of mortgage insurance and reduce your overall borrowing expenses.
Pros of Mortgage Default Insurance For Homebuyers
1. Lower Down Payment Requirement
- Without default insurance, you'd need at least a 20% down payment. With it, you can purchase a home with just 5%, making homeownership possible for many first-time buyers.
- Example: If you want to purchase a $400,000 home but only have $20,000 saved, mortgage insurance lets you proceed with your purchase without needing to wait and save $80,000 (20% down payment).
2. Lower Interest Rates
- Insured mortgages are often considered less risky by lenders because of the insurance, meaning they can offer you lower interest rates. This can lead to significant savings over the life of the mortgage.
- Example: The interest rate might be 4.29% with mortgage default insurance, versus 4.65% for an uninsured mortgage, saving thousands over time.
3. Opportunity to Enter the Housing Market Sooner
- Saving for a 20% down payment can take years, especially with rising real estate prices. Mortgage default insurance allows you to buy a home sooner with a smaller down payment, enabling you to start building home equity faster.
- Example: Imagine home prices in your area are increasing by 2% annually. If you wait three more years to save a 20% down payment, the cost of your desired home could rise significantly, making it harder to afford.
4. Spreading Out Costs Over Time
- Instead of paying the insurance premium upfront, you can add it to your mortgage and pay it off over the life of your loan.
- Example: If the insurance premium is $12,000, adding it to a 25-year mortgage spreads the cost, making it more manageable. This way, you’re paying a small amount each month instead of a large upfront fee.
5. Building Equity Faster
- Purchasing a home sooner allows you to take advantage of potential property value increases.
- Example: If you buy a $400,000 home now and the market appreciates 2% over the next year, your home’s value increases to $408,000. This $8,000 equity gain can be beneficial, especially if you wouldn’t have been able to buy without mortgage default insurance.
These examples illustrate how mortgage default insurance can be a strategic tool to help homebuyers access the market sooner, manage costs, and potentially benefit from favorable financial conditions.
Budget for this cost carefully. Remember, the premium can be paid upfront or added to your mortgage, which will increase your monthly payments and the interest paid over time.
Cons of Mortgage Default Insurance For Homebuyers
1. Increased Cost of Homeownership
- Additional Expense: Mortgage default insurance adds a significant cost to your overall mortgage, ranging from 2.8% to 4% of the total loan amount.
- Example: For a $400,000 mortgage with a 4% insurance premium, you would pay an extra $16,000. If this premium is added to the mortgage and amortized over 25 years, you’ll also pay interest on the premium, increasing your overall cost.
2. No Benefit for the Buyer
- Lender Protection: The insurance protects the lender, not the buyer. It does not cover you if you run into financial difficulties or cannot make your mortgage payments.
- Example: If you default on your loan, the insurance ensures the lender is compensated, but you still face foreclosure and the loss of your home. The insurance does not provide any financial safety net for you.
3. Long-Term Financial Impact
- Interest on the Premium: If the insurance premium is rolled into your mortgage, you pay interest on that amount for the duration of your mortgage term.
- Example: Using the previous $16,000 insurance premium example, if added to a 25-year mortgage at a 5% interest rate, the actual cost of the premium could end up being around $28,000 over time due to interest.
4. Requirement Despite Financial Stability
- Inflexibility: Even if you have a stable income and excellent credit, you still have to pay for mortgage insurance if your down payment is less than 20%.
- Example: A young professional couple with a high income and stellar credit score but only 10% saved for a down payment must still pay for mortgage insurance, even though they pose minimal risk of default.
5. Impact on Monthly Payments
- Higher Monthly Costs: The added insurance premium increases your monthly mortgage payments, reducing your monthly cash flow for other expenses.
- Example: If the insurance premium increases your mortgage balance from $400,000 to $416,000, your monthly payments will be higher than if you had a mortgage without insurance. This could strain your budget, especially if other unexpected expenses arise.
These examples show that while mortgage default insurance can make homeownership more accessible, it also adds a financial burden and increases the cost of borrowing over time. It's essential to weigh these drawbacks against the benefits to determine if it's the right choice for your situation.
If you are a first-time buyer with a limited down payment, view this insurance as a pathway to get into the market sooner, especially if property values are rising.
💡Pro Tips for Homebuyers
1. While mortgage default insurance allows you to buy with a 5% down payment, aiming for at least 10% can significantly reduce your insurance premium.
- Example: On a $500,000 home with a 5% down payment, the premium is 4% ($19,000). If you increase your down payment to 10%, the premium drops to 3.1%, saving you around $4,500.
2. Even though the insurance is mandatory, you can still shop around for the best mortgage rates. Some lenders might offer better rates on insured mortgages, helping you save over the long term.
3. If you have an insured mortgage, making accelerated payments (bi-weekly instead of monthly) or lump sum payments can help you pay off your mortgage faster and reduce interest costs.
4. When deciding whether to buy a home with less than 20% down, factor in all the costs, including the mortgage insurance premium, monthly payments, property taxes, maintenance, and utilities. This will help you avoid financial strain.
Mortgage Default Insurance (CMHC Insurance) can be a valuable tool for first-time buyers to enter the market sooner, but it’s important to consider the long-term cost. Weigh your ability to save a larger down payment against the benefits of homeownership and market conditions.
Talk to a mortgage broker to understand the total cost of the insurance over time and how it affects your monthly payments. This can help you decide if waiting to save more is a better financial move.
Happy house hunting!
komalvijmortgage@gmail.com I (780) 233-8500
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