New Mortgage Rules and your Muskoka Home

Modern Family E.jpgYou may or may not know that the federal government recently announced some big changes concerning the guidelines for borrowers of high-ratio mortgages – a borrower who has a deposit of less than 20 per cent of the purchase price of a home. These guidelines must be adhered to by banks but not private mortgage lenders.

If you plan to borrow from a bank and need mortgage default insurance you must now meet the mortgage “stress test.” This means that as a borrower, you must be able to carry a mortgage based on current Bank of Canada rate for a five-year term which is currently 4.64%. This could be much higher than the rate for the term that your bank may be willing to offer you. Current 5 year posted fixed rates at many major banks are under 3%. While your payment will be based on the actual rate charged by your bank for the mortgage you agree upon, you must qualify based on the higher rate.  This means if you are “tight” on your debt service ratio calculation you may be qualify for less than you did prior to this change. Taking the time to get pre-approved is even more important now than before.

If you already have a home these new requirements and guidelines do not affect you, or if your pre-approved mortgage commitment was already in existence prior to Oct. 17, 2016, however there may have a deadline for you to use that commitment. These changes are only for high ratio mortgages and will not affect you if you have more than 20% down payment.

If you are considering an investment property in Muskoka you will be glad to know these new provisions do not affect you. However, that is because most lenders have restricted the amount they will lend on investment properties to 80 per cent of the appraised value or purchase price, whichever is the lower amount.

These changes will likely affect the ability of some first-time home buyers to qualify for a mortgage.  If you are a first-time buyer it may mean a longer wait before your purchase while you accumulate a bigger deposit or it may mean making the decision that your first home will be a little less glamorous than you may have hoped for.

This may all sound a bit gloomy but let’s be positive about it. By using this stress test, you should be less stressed about your ability to make your payments each month and when your mortgage comes up for maturity, IF the interest rates are higher, you should be able to afford the increased payment.

Ultimately this is a consumer protection bid by our government designed to help people keep their homes and not lose them if interest rates increase significantly.

November was Financial Literacy Month, and CREA (Canadian Real Estate Association)  the national association to which I belong, has developed some resources you can use all year long to help understand some of the trickier financial concepts you might encounter during the home buying process.

There is a series of eight videos which cover topics from amortization to mortgage pre-payment to the Home Buyers’ Plan (HBP) and beyond. Each video is under two minutes and done in a fun, animated style, the videos break down some of the financial terms and implications you might come across.

The videos can be found here 

You may also enjoy looking at the Homebuyers’ Road Map, a publication developed in collaboration with the Financial Consumer Agency of Canada, to help Canadians navigate the home buying journey.

Ultimately knowledge is power so I hope you will use these resources and will not hesitate to call me if you have any questions about buying your first or next home in Muskoka or if you have questions about your present home and the implications of these new mortgage rules.

 

 

Understanding the Financing Clause when Buying Muskoka Home

What is a Mortgage - Karen Acton Royal LePage Lakes of MuskokaOur market in Muskoka has been very active this last few years and sometimes the temptation to make offers unconditional can be very strong.

As a buyer, you may have been pre-approved and feel that it is safe to buy unconditionally only to be caught up by a lender’s requirement that you cannot meet.  At the last minute, you may even have to come up with a larger down payment.  If you are unable to do so, this could leave you not only losing your dream home but potentially subject to the consequences of a breach of contract.

As a seller, an unconditional offer is always very appealing but if that buyer cannot produce funds on closing the results cannot only be heart breaking, but you may be faced with losing the home you hoped to buy and possibly being in breach of your contract with the seller of your future home.

As a Realtor® I always strive to guide my clients with good advice and protect them from making a mistake. I know that when a buyer finds the perfect home or cottage they want it and don’t want to be outbid.  My job is to be the voice of reason. Unless you have the resources to buy with cash or a very large down payment that well exceeds most lenders’ requirements, a financing clause is simply the best option.

In a recent article Mark Weisleder a Partner, author and speaker at the law firm Real Estate Lawyers.ca LLP covered the following important points.

1. Pre-approvals are no guarantee you will obtain your financing

Too many buyers are cavalier about submitting offers without a financing condition, especially during the pressure of a bidding war. You must understand that even with a pre-approval, the lender must be satisfied with its own appraisal. The foundation for most appraisals is what would a willing buyer pay a willing seller, WITHOUT pressure? In a bidding war, there is almost always pressure on the buyer. This is why the appraisal will likely be lower than what the buyer offered and the lender will offer you less money than you hoped for. The answer is always to have an extra 5-10% of the down payment in reserve to protect you. In a condominium purchase, if it is conditional upon review of a status certificate, use that time to also make sure your financing is in order.

 2. Lenders can change their mind right up until the day of closing

Even if you are approved after you sign your agreement, the lender can still change their minds based on anything which they may learn before they advance funds. There are usually many conditions attached to any loan approval, such as verification of income, down payment, employment. Make sure you work with your mortgage broker to satisfy all of these conditions and requirements as soon as possible in the process. The worst words a lawyer can hear from a lender on the day of closing is “The file is in underwriting”. This typically means that someone else is reviewing the entire file because issues have arisen. In some cases this can result in the entire loan being cancelled, right on the day of closing. In our firm, since we receive and send funds via wire transfer, we are fortunately able to complete deals even when lenders are late transferring funds to our trust account.

 3. Always know the net amount you will receive from your lender

Every mortgage commitment is different. Some may contain up-front fees for arranging the loan, appraisals, CMHC fees and HST, interest to the interest adjustment date. All of these fees are deducted right off the top, before the balance is sent to your lawyer on the day of closing. The bottom line is you must know the exact amount that will be sent to your lawyer on closing, to make sure you have enough to make up the rest of the down payment, land transfer tax and legal fees. At our firm we remind clients to send us their mortgage instructions early in the process so that we can get them the net amount they will need to complete the transaction in a timely manner.

In Muskoka lenders sometimes have requirements for additional documentation. Things like water potability certificates, septic use permits, proof of properly installed water treatment (disinfection) systems, road access agreements to prove year round access, final occupancy permits and zoning even an inspector’s statement regarding the type of wiring and insulation. A mortgage can’t be advanced without insurance on the property, so a W.E.T.T. inspection may be necessary for wood burning devices. Ultimately the underwriter at the lending institution is responsible for making sure that the lender’s investment is protected.  Sadly, they are not concerned with how much a buyer loves a property or how much the seller needs the transaction to close.

I hope that after reading this you will be cautious when buying or selling a Muskoka home or cottage. A good Realtor® will always put the interests of the client ahead of their own and encourage you to use a financing clause if there is any possibility you may need one.

Buying Bracebridge Real Estate – Deposit Required!

Real Estate Deposit - Bracebridge Realtor Karen ActonAs a Muskoka Realtor I deal with many buyers who have come here from different locations and often, they have very different expectations regarding the deposit required when making an offer on a Muskoka property.

In the Ontario Real Estate Associations education materials Deposit is defined as

“a payment of money or other valuable consideration, given as a promise that the obligations in the contract will be carried out. The deposit will usually be forfeited if the contract is not completed. If the transaction is completed, the deposit is credited towards the purchase price”.

In reality it is always money but in theory it could be anything of value that the buyer is willing to take as surety. Remember it has to be taken care of by the listing brokerage so putting a “goat” or a “gold bar” into a trust account is going to be difficult. While the deposit is required throughout the province to make a legally binding agreement it varies from region to region in its size and manner of collection.

Below are some common questions and answers about deposits that I have been asked.

  1. When is the deposit due?

In Ontario, the standard real estate contract gives the buyer two choices; you can pay the deposit immediately when you present your offer to the seller, or you can agree to pay it within twenty four hours after the seller accepts the offer. Most buyers prefer the second option. If you are in a bidding war, you will be encouraged to come up with the deposit immediately, to show additional good faith to the seller.  While it is not common there is also an option to pay it at a different date by simply making it a clause in the agreement of purchase and sale. In Muskoka It is quite common to make a small deposit within 24 hours of acceptance and then a larger 2nd deposit after all conditions are removed. This is because we sometimes have long closing dates (especially on cottages) and it is a way for a buyer to give confidence to the seller that they are very serious about owning the property but perhaps they want to wait until spring to close the deal.

  1. How much should a deposit be in Muskoka?

Deposits in Muskoka are typically less than in large urban area like Toronto. However they should reflect your commitment to the transaction and a larger deposit will definitely give the seller more confidence in your ability to purchase and your sincerity in wanting to do so. It is normal to make bigger deposit on more expensive properties. A typical deposit on a $1,000,000 property would be $50,000 whereas a deposit on a $250,000 one may only be $5,000. Remember that it is credited toward the purchase price so you have nothing to lose by putting a good size deposit with your offer if you can. If the offer is conditional on financing, inspection or any other specific due diligence item and that condition is not met you will get your entire deposit back.

  1. Can the buyer just cancel the deal by refusing to pay the deposit after the deal is accepted?

The simple answer is no. Once the deal is accepted, neither the buyer nor the seller can change their mind. If they do, the contract is in default. This is different from a particular condition in the offer not being met. In the event the buyer fails to make the deposit and the contract goes into default the seller can sell the property again and if they obtain less money than you were going to pay them, the seller can sue the buyer for the difference, plus legal fees.

     4. Can the seller refuse to release the deposit if the buyer is unhappy with their home inspection?

Occasionally an inspection will reveal something that a buyer is unwilling to accept. A deposit cannot be released unless both the buyer and seller agree. If a seller believes the buyer did not act in good faith in trying to satisfy their condition, whether it is a home inspection, financing or a condominium status certificate review, they can refuse to release the deposit. This means it stays in the broker’s trust account until a judge decides who gets it, which can take years. This is another reason why we sometimes see the provision to make two deposits in their offer, a small one when the offer is accepted, and a second larger deposit once the conditions is satisfied.

  1. What happens if the deposit is paid late?

If you are late with the deposit you are in default. If you have a problem getting the deposit on time let your realtor know and we can usually amend the agreement to give you more time. However, the seller has the right to cancel the deal. All time limits matter in real estate contracts and if you are late, even by a few minutes, the seller can try to cancel. This can happen especially when the market is “hot” and perhaps another offer is waiting to be presented that could be for more money.

  1. Why does the deposit go to the listing broker in trust?

This provision is for the protection of the buyer. It is not to protect the brokerage commission as is sometimes believed. If the seller goes bankrupt or disappears with the deposit, the buyer would not be protected. When the deposit is held by the real estate brokerage, it is in trust and is also protected by insurance so even if the brokerage goes bankrupt, the buyer can get their money back.

 

I hope you find this informative. If you have any questions I am always happy to help.

 

The Basics About Mortgages for Home Buyers

What is a Mortgage - Karen Acton Royal LePage Lakes of MuskokaAre you planning to purchase a new Bracebridge home and will you need a mortgage? If so it is important that you understand what a mortgage is.  Very often your banker, lawyer and even your Realtor will assume you fully understand what a mortgage is by the time you come to signing the documents for the purchase of your new home. However, many buyers, when asked will admit to having only a limited understanding. They certainly know that a mortgage is a loan and that it is a necessary part of the home buying process but do not really understand its structure.

This is not surprising, after all, the home buying process only happens a few times in a life time for most of us, so it is understandable that very few of people invest a lot of time in understanding all the “jargon” that is part of a mortgage document.

So here are some helpful notes:

  • A mortgage loan is a loan secured by real estate. A document called a mortgage charge is signed by the lender and the borrower and is the proof that the loan was made.  This is then registered on the title of the property and becomes an encumbrance on the title. This means, the property cannot be sold without satisfying the amount still outstanding on the loan.
  • The word mortgage is a French law term which means “death pledge”, meaning that the pledge ends or dies when either the obligation is fulfilled or if the loan is in default the property is taken back by the lender through foreclosure or power of sale.
  • Most buyers will secure their mortgage through the bank where they do regular business. However, it is good practice to shop around for the best deal you can get when “buying” a mortgage.  You may think that to say “buying a mortgage” is wrong, but in actual fact, you will be buying it. There are fees that you must pay upfront or that will be built into the total amount you borrow to cover the cost of preparing the mortgage and registering it. In addition you will be paying back to the lender, interest on the amount borrowed. You can obtain a mortgage from a bank or go to a mortgage broker who will “shop around” on your behalf to find the best product for your needs, very similar to insurance brokerages.
  • There are many clauses or terms in a mortgage document that few people will read until they have an issue. Breaching one of these clauses or terms causes a default and puts the lender in a position of being able to take back the property to protect their investment.  Some of these clauses can include the requirement to pay annual property taxes and keeping the property insured against fire and damage. This means if you get into property tax arrears the lender may choose to start proceedings to either require you to catch up or to take back the property. When purchasing, your lawyer will not be able to complete the closing until you have provided proof that you have secured insurance on the property. The terms in your mortgage provide the “rules” you must abide by in order to be lent the money for 20+ years, so it is wise to read them.

 

It is not easy to say “I do not understand” especially when you are excited about the new home you are buying. But a mortgage is a big deal. The very best thing you can do for yourself is find a great mortgage specialist. It may be through your local bank and the people you have an established relationship with or it may be through a mortgage broker, but whoever you select make sure you trust and feel comfortable with them. This is important because you will be disclosing your personal financial information to them so they can get you the very best mortgage product. You also need to be able to ask them to explain the mortgage document to you before you sign it. So, I recommend that you shop for the very best person to handle this very important financial step in your life.

As a Realtor I encourage my clients to get pre-approved for a mortgage before we start to look for a home. This helps to prevent disappointment later in the process. It also begins the process of building a great relationship with a mortgage specialist, so when the mortgage document is prepared and ready to sign clients are comfortable asking any questions.