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“Let Me Be Your Guide”
Becoming a homebuyer is a big deal – but it doesn’t have to be stressful or complicated. It’s so important to be confident and well-informed through the process. We can’t help you choose your home, but we can help you be happy with your choice by providing you with helpful hints and tips along the way. After your preapproval with a mortgage specialist, refer to this guide to know what to look for and what to expect in a property; and each player in the process that will help you along the way.
When buying a home or other property, you will have to rely on a range of professionals to guide you through the process. For first time home buyers in particular, it helps to be acquainted with these specialists and their roles.
Mortgage Broker – a mortgage expert who introduces buyers to a full range of mortgage products, interest rate options, and strategies to pay off a mortgage more quickly. This professional works only on his or her client’s behalf, and may also be known as a mortgage agent or mortgage consultant.
Lender – financial institutions, such as banks, credit unions, trust companies, pension funds, and life insurance companies which lend money to home buyers.
Realtor – a real estate representative who can find properties in your price range and to your specifications. A realtor is familiar with what’s on the market and pricing, and will arranges the purchase transaction on your behalf.
Appraiser – this property specialist determines a property’s market value, based on its condition and the selling price of comparable properties recently sold in the area. The market value enables the lender to determine the loan to value ratio of the mortgage (the amount of the mortgage versus the value of the home), and in many cases the mortgage broker will assist you in this process.
Property Inspector – examines the home you intend to buy to evaluate its roof and structural stability, electrical work, plumbing, appliances, fireplaces and furnace. This inspection is usually arranged by the buyer, and allows him or her to address any issues with the seller prior to closing, as well as anticipate any repairs that may be required.
Lawyer / Notary Public – your lawyer or notary will review the Agreement of Purchase and Sale, ensure that all closing documents have been completed correctly (including the title search and title insurance), as well as file documents with the provincial land title office. Your lawyer or notary will also ensure your property is clear of all existing mortgages, judgments and builder's liens.
Default Mortgage Insurer – mortgage insurers protect lenders from a borrower defaulting on a mortgage at any time during the amortization period. Home buyers with down payments of less than 20% must purchase mortgage insurance from the Canada Mortgage and Housing Corporation (CMHC) or GE Mortgage Insurance Canada.
New Home or Resale Home?
While some homebuyers are very clear on their preference for a brand-new home or an older home, for most of those house hunting, it is worthwhile to weigh the benefits of new vs. resale, and consider how any home fits within your lifestyle. An important starting point is to consult your real estate agent, who knows the local market, has the expertise to guide you through the buying process, and can assist you in assessing your needs. As you look for a home, here are some points to consider:
Costs – A new home may involve a range of extra costs such as landscaping, appliances, window coverings, a security system, and GST. For older homes, their individual charm often goes hand in hand with increased maintenance, especially if previous owners were not diligent in upkeep – it is prudent to create a budget and timeline for anticipated and unanticipated repairs.
Location –Typically, older neighbourhoods are nearer the city centre, while new subdivisions tend to be on the outskirts, which may often necessitate a longer commute into work.
Living space – You're likely to get more space for your money in an older home, since lower building costs of the past usually meant larger homes. On the other hand, new-construction homes often employ more efficient and innovative uses of square footage and property.
Landscaping – Older homes tend to have well-established trees, gardens, and lawns. Most new homes may have smaller trees and sparser vegetation, but may also have irrigation systems.
Energy efficiency – New homes feature more advanced materials such as triple glazed windows, thicker insulation and more efficient appliances to lower energy costs. Older homes, unless they have undergone a retrofit, usually cost more per square foot to heat or cool, which should be added to your monthly expenses.
Customization – In a new house, you can often have input into the flooring, blinds, cabinets, appliances, paint colours, etc. In a used home, you rely largely on the previous owner’s preferences, unless you plan some remodelling projects – build any improvements into the overall cost of your home.
Neighbourhood – Many new subdivisions offer centrally located playgrounds, clubhouses, as well as jogging paths for residents. More established districts typically have better access to urban shopping venues and city restaurants.
Buying Income Property
Although results vary, rental-property prices are at historic highs in many major Canadian markets. For example, "plex" buildings (those with between two and five rental units) in Montreal increased an average of 68.1 percent in the past five years according to the Greater Montreal Real Estate Board.
But despite the allure of quick money, experts caution that there is a big difference between buying a house or condo for yourself and buying property as an investment.
"When you buy rental property, you are getting into business for yourself. It's not like buying residential real estate," says Vince Brescia, president of the Ontario Federation of Rental Housing Providers. "Your decisions should be made on a cold dollars-and-cents basis."
To help, we've compiled a list of things to do for those who are thinking about becoming landlords:
Learn the business
One ironclad rule for potential buyers is that you should work in the industry for at least two years first. There are more potential pitfalls in the rental-property business than you can learn about by simply reading.
Working part-time for a friend or relative who owns a building before investing in your own will dramatically increase your chance of succeeding. If that isn't an option, talking to other building owners in the neighbourhood where you are thinking of buying would be a good start.
Don't put all your eggs in one basket. Start by buying a one- or two-unit property, so you can make your mistakes when there isn't too much at stake. There's a lot to learn about negotiating with tenants and contractors, doing minor repairs and handling the tax and regulatory paperwork.
Check the valuation metrics used in different markets
Buying rental property is similar to buying residential property in many ways, except the stakes can be much higher. For smaller units, particularly in the plex market, the asking price tends to be arrived at by comparing the unit to be sold with the selling price of similar units in the area that have changed hands recently. Larger properties, on the other hand, tend to be priced according to gross rental revenues.
Don't pay too much
A big part of making money in real estate lies in getting in at the right price. So make sure that you don't pay too much. The trick, of course, is knowing what "too much" is. But shopping around and avoiding areas that have seen big run-ups in recent years are good ideas.
It's also best to talk to several real estate agents that specialize in the market you want to invest in to make sure the property that you want to buy has been correctly priced. And don't forget to get your property inspected.
Get a good lawyer and accountant
The rental industry is highly regulated. The paperwork aspects of being a property owner are just as important as the business aspects. A good lawyer and accountant may be pricey, but they are usually worth it. Ask other property owners to recommend professionals who have real estate experience.
Contact a property owners' association
Most Canadian provinces and territories have an association geared to lobbying for and providing support to rental-property owners. Rental laws differ from region to region across the country, especially in the area of rent control. Quebec's rental laws, for example, are based on civil law as opposed to common law, as in the rest of Canada.
These associations, such as the Ontario Federation of Rental Housing Providers, often have good information on their Web sites that will give potential buyers a good idea of some of the challenges they will face and how to deal with them.
Familiarize yourself with the tax implications
If you buy a rental property, you'll have to produce a set of financial statements for tax purposes outlining your revenues and expenses. It pays to do some research beforehand, so be sure to read Bankrate Canada's story, The tax implications of owning property.
Arrange financing first
According to Danielle Turbide, a mortgage broker with Multi-Prêts Hypothèques, the Canadian banking industry regards buildings with between one and six rental units as residential real estate. They are thus eligible to be financed at the promotional posted mortgage rates.
Buildings with more than seven rental units are considered to be commercial properties and are evaluated using much tougher criteria. Interest is charged based on the bank's assessment of the risk that is inherent in the deal.
Check out the tenants
For most small-rental-property owners, choosing tenants will be the most important decision that they make. Industry professionals say that rental laws are stacked in favour of tenants, and it can be hard -- and sometimes impossible -- to expel bad ones.
According to Brescia, it is far better to take a good tenant who pays you a little less in rent than take your chances with a suspect tenant, just because he is a little looser with his cash.
While their realtor wasn't able to find any suitable lots for sale, she did find the perfect lot on a vacant parcel that wasn't on the market. A quick title search revealed the lot was owned by two couples. When the realtor asked if they'd consider selling, she discovered they'd recently had a major falling out and wanted out pronto.
Fast forward 15 years, and Gray is now the owner of a luxury, custom-built chalet with a gorgeous view of the mountains on a piece of land that originally cost him $132,500. The same lot would sell for over $2 million today. "This illustrates how the right realtor can change your life," says Gray, a former practicing lawyer and now and author and real estate consultant.
While having a good realtor goes a long way in finding your own piece of paradise, buying raw (or unimproved) land isn't as straightforward as buying an existing house.
Read on to find out what you need to do to find a piece of land that suits your dreams and your needs.
Dream a little dream
The easiest part about buying land is the dreaming stage. It's also the place you should begin.
"The first step is to do a needs/wants list, and if you have a partner in your life, have them do one as well," says Gray. "Do them separately, then compare notes to see if you're on the same planet."
A needs/wants list covers all the attributes of the property -- treed, flat, on the waterfront, close to town and so on.
Show me the money
Before you start researching properties (whether it be on Realtor.ca, through newspaper ads or word of mouth), it's important to figure out what you can afford and how you're going to finance your purchase. Raw land is often classed as a speculative investment because the loan's collateral (the property) isn't currently in use, so theoretically, it's easier for borrowers to walk away from it. In other words, don't assume it'll be easy to get a mortgage.
"Vacant land is tough -- not impossible, but tough," says Bob Switzer, a mortgage broker with Invis Inc. in Owen Sound, Ont. "Most lending institutions don't want to finance vacant land because it may sit forever and nothing happens. If you never develop, will it change in value? That's what most lenders are afraid of."
If you have a high net worth and a healthy income, you're most likely to be approved for a conventional mortgage, albeit at a higher interest rate and possibly with a larger deposit than for a home.
If your means are more modest, and you don't have the cash to buy a piece of property outright, a mortgage broker can shop around at different lending institutions and tap into other non-traditional sources of funding such as private mortgages, in which a private individual or company backs your loan.
Alternatively, banks may offer a secured line of credit, a second mortgage on an existing property or a construction loan if you're looking to build right away (whereby funds are advanced in draws, depending on your stage of construction). Another option may be a loan negotiated with the vendor of the property.
The law of the land
Many first-time land buyers think you just find a lot, buy it, then start building whenever you're ready. It's not that easy. One of the worst things that can happen is that you buy the lot of your dreams only to find that you can't build what you want.
"If you're buying a property to build something on, you have to make sure that the bylaws that regulate the property allow the use," says Stanley Makuch, a lawyer with Cassels Brock & Blackwell, LLP, in Toronto.
Bylaws regulate everything from the percentage of the lot that can be covered by buildings to where you can place your septic system. And just because a neighbour has built a certain style or size of house, that doesn't mean you can, too.
While your realtor and your lawyer can help you with the specific conditions you should include if you decide to submit an offer (such as pending a building permit and well and septic approval), here are a few questions that you need to consider:
While many people buy land for future building, there are risks to shelving your dream as planning and environmental rules may change. Consider landowners outside Toronto that had their property permanently protected from development under Ontario's Greenbelt legislation.
Financing Home Inprovements
Whether you intend to purchase and spruce up a “fixer upper” or wish to make changes to your current home, deciding how best to finance home improvements is the starting point to a successful project. The key questions to ask are: how much will all this cost and how will it affect the value of the property?
The main ways to finance home improvements are cash, credit cards, a line of credit, a mortgage which includes the costs of renovations, or refinancing one’s current mortgage.
Smaller projects – say under five thousand – it may make sense to simply use cash, or perhaps a credit card. Keep in mind, however, that credit cards and payback plans offered by retailers often involve high interest rates.
Medium-sized projects – costing from five to twenty thousand -- a personal line of credit allows you to withdraw funds to purchase materials as you wish for a set period. The real benefit is that you can put a line of credit in place for a one-time cost and charge up then pay it down many times over, never needing to re-qualify. Lines of credit secured by cash or a mortgage usually have an interest rate much lower than with credit cards.
Large projects – mortgage financing is an option here, as it allows you to access more favourable rates. For home buyers, you may qualify for a mortgage which allows you to incorporate the cost of immediate home improvements into your mortgage. For current homeowners, it could pay to refinance your existing mortgage – up to 80% of your home’s value with a conventional mortgage, or up to 90% with an insured mortgage. You may also wish to consider consolidating a range of higher interest borrowings (credit cards and car payments, for example) at the time of your mortgage refinancing, thus reducing your interest rate and monthly payments.
Financing Your Move
For homeowners eager to move, a common question is whether to buy another home first and then sell their current home, or sell first and then buy. Here are some things to keep in mind:
Buy first, then sell. With this strategy you can search for the home you want before having to first sell your current home. However, you won’t know the final selling price of your home, and if it is slow to sell, you could end up making payments on two residences. Many turn to bridge financing, a short-term loan to finance the purchase of the new home that is repaid (with interest and costs) when the sale of the original home is completed. When buying a home, you can make an offer to purchase conditional on the sale of your current home. Yet in a hot market, sellers may not be overly keen to consider such a proposal. In any case, it is wise to request a late closing date on the purchase of your new home to maximize your selling window.
Sell first, then buy. With this strategy you’ll know exactly how much money you have before beginning your house hunt, and will be free to make an offer on your next home that is not subject to the sale of your original home. This makes sense if you're in a rising market where you're likely to encounter a bidding war over prime real estate. Yet, if you take longer than expected to find a suitable new home – which can happen in a strong market – you may have to rent in the interim. And if you’ve sold your current house and have agreed to vacate on a set date, you might be under pressure to settle for a house that falls short of your ideal. If you sell first, you can try negotiating a longer period until closing or see if the buyers would consider you as a renter for another month or two after closing, until you find your perfect home.
Paying Off Your Mortgage Quickly
If you put a little thought and planning into your "mortgage strategy" you could save tens of thousands during the course of your loan. Here are three ways to help you get mortgage free faster.
Payment frequency simply refers to how often you will make mortgage payments or the frequency with which you make installments. There are several options when it comes to payment frequency, but one in particular, accelerated bi-weekly payments, will help you pay down your mortgage much faster.
You may have heard of bi-weekly payments, you may even be making bi-weekly payments, but do you have the right kind of bi-weekly payments? Here is an explanation of the right kind of bi-weekly payments and some key differences to be aware of...
Bi-Weekly Payments: (The wrong kind)
This option does not make a huge difference to the life of your mortgage. Assume you have a payment of $1,000. The $1,000 a month payment is multiplied by 12, the number of months in the year, and then divided by 26. This equates to a bi-weekly payment of $461.54 which means that at the end of the year you will have paid exactly $12,000! No different than if you had made 12 equal monthly payments of $1000.
A very small amount of savings are gained due to half of your payment being made early each month. The main reason for choosing this option would be the convenience of matching your payment to your pay days.
Bi-Weekly Accelerated Payments: (The right kind!)
This option does make a huge difference to the life of your mortgage. With the accelerated payments option, payments are exactly half of a monthly payment amount and are collected every two weeks. This means exactly every 14 days, not the 15th and 30th of the month. For example if the monthly payment is $1,000, the bi-weekly accelerated payments will be $500. This will mean that over the course of the year you will pay 26 payments of $500 or $13,000 in total.
How does this make such a big difference?
Payments are made on the same day every 2nd week. For example at the time of writing this article, March of 2008, the payments would come out on say every Friday. This would mean payments on March 2nd , 16th and 30th. That would mean during the month of March you would actually have 3 bi-weekly payments made. This would happen only during 2 months of the year, but does equate to one extra full monthly payment per year.
Stated another way:
If you pay $1,000 per month X 12 months = $12,000 in payments for the year, but if you pay accelerated bi-weekly then it is $500 X 26 = $13,000.
The amount of interest is the same, therefore, the additional payment of $1,000 (or the amount equal to one full monthly payment) will be deducted directly from the balance owing on your mortgage each year. This coupled with the fact that you are making more frequent payments will quickly lower your principle balance and thus the amount of money you are paying interest on.
Most lending institutions will allow you to make additional payments. This can mean a one time lump sum payment, or several lump sum payments throughout the year. Often this can be done in conjunction with your regular mortgage payments. You may have heard of "Double up" payments. This simply means doubling the amount of your payment for as long as you wish. ($2,000 per month instead of the usual $1,000). The total amount you can pay additionally in a year will vary, but can not exceed the pre-payment privilege for that year. The pre-payment amount is always pre-set and ranges typically from 10% to 25% per year.
At the end of each mortgage term, you have a renewal date. If interest rates at this time are about the same as they were when you first got your mortgage, or even lower, then you should consider decreasing your existing amortization period. A reduction in your amortization means a shortening of the total length of time it takes to pay off your loan.
All the amortization really does is determine your monthly payments. The larger you choose to make your payment amount, effectively the smaller the length of time (amortization) it will take to pay off your total debt. Renewal time is always the best time to consider switching your mortgage to another lending institution. A mortgage broker will be able to obtain a better interest rate than you can negotiate by your self, so it is often best to consult a broker. This should be done approximately 4 months before your renewal date to guarantee the lowest rate at the time of renewal.
Protecting Your Mortgage
The purchase of a home is a major financial commitment, and how best to safeguard your investment is something you have to consider. There are a range of insurance products available to make sure that your home and your family’s lifestyle are protected. But before you can make an informed choice, it is important to take the time to look at all the possibilities. Here’s a quick sketch of various forms of insurance you will want to consider.
“Mortgage Insurance” is required by law to insure lenders against default on mortgages with a loan to value ratio greater than 75%.
Homeowner’s Insurance provides coverage against losses on the physical home and its contents, along with personal liability coverage.
Mortgage Life Insurance pays off your outstanding mortgage balance in the event of your death.
Mortgage Critical Illness Insurance also pays off your outstanding mortgage balance in the event you are diagnosed with severe illnesses such as heart attack, stroke or life threatening cancer.
Mortgage Disability Insurance pays your mortgage payments should you become disabled and are prevented from performing the normal duties of your job.
In the case of life, critical illness, or disability insurance, in deciding which products are appropriate for you, it is helpful to ask questions, such as:
Your financial picture changes significantly when you get a new mortgage. This creates a need for insurance coverage to protect your new investment and your family’s future.
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