How to become a home owner in 2018: Everything you need to know
Buying a home in 2018 can feel a lot like an obstacle course especially if it’s your first time.
It’s not easy to become a homeowner in 2018. At least that’s what it seems like with everything that is going on in the housing market this year. Anyone who’s been following the news, has probably seen headlines with a combination of phrases like “market correction“, “biggest price drop in years“, “highly vulnerable“. On top of that, there is talk about strict financial requirements in order to get approved for a mortgage. What does it all mean and where do you even start?
At first glance this seems like a giant red flag, and you might not be completely convinced that you should be getting involved in real estate this year at all. This is why we have decided to summarize everything you need to know to survive the housing market chaos, use current circumstances in your favour, and come out a winner.
What happened in 2017
Let’s start with a quick recap of what happened in 2017. The housing market in Canada hit many lows and many highs during that year. The year started with significant price gains: overall house prices grew 30 per cent (compared to 2016). This is when the government decided that extra measures were needed to slow down the growth and resolve affordability issues. New foreign homebuyer tax hit the market last May, slamming the brakes on the housing prices. This was only a first step in a chain reaction. In the summer, stricter mortgage qualifying regulations were announced. Many Canadian homebuyers had to give up their potential dream homes because they could no longer qualify for the same mortgage. Despite this hit, the economy showed incredible resilience by staying strong and continuing to grow, albeit at a slower pace. In the fall of 2017, it was announced that qualifying for a mortgage in 2018 will become even more difficult. This economic rollercoaster resulted in a slowdown in sales and real estate prices. Experts were scratching their heads, wondering if there were any more shocking announcements in store for 2018.
What is happening in 2018
Toronto residents’ buying power has diminished because of the ever rising prices and newly introduced lending restrictions. A stress test came into effect, which is meant to determine if a borrower can still pay back the loan in case the interest rates increase. Thus, consumer interest in condominiums soared compared to other property types. For buyers who struggle with finding affordable properties, Toronto condo market is becoming very attractive. With detached houses still averaging over $1 million in many areas of Toronto, condominiums are the only affordable entry level homes for many residents. In 2017 condo sales were record high, powered by increased demand. Tightening mortgage rules in 2018 will likely force even more buyers to look into the condo market, keeping overall sales relatively high. As for detached homes and townhouses, the housing market is expected to gradually cool down over the course of the year.
Stress tests: What they are and why we need them
Previously only borrowers who put down less than 20 percent down payment on a mortgage were required to pass the stress test. It was used as a tool to assess the financial situation of the borrower. Stress tests ensured that borrowers would still be able to make their mortgage payments in a higher interest rate environment. Under the test, borrowers would have to qualify for a mortgage at a rate either 2 percentage points above the negotiated rate, or at a bank’s benchmark rate, whichever is greater. So, for example, if you are applying for a mortgage with a 3.3% interes rate, you would have to be financially fit to repay your mortgage at 5.3% interest rate or higher, depending on the bank’s benchmark rate.
As of January 2018 all borrowers are required to pass the stress test, not just those who saved less than 20 percent down payment. Of course, borrowers with extra financial capacity will easily pass the test and will not have to worry about it. However, many Canadian homebuyers stretch their financial capacity to the limit in order to get a mortgage, and they will be impacted the most by these new rules. Anyone who fails the test will not get approved for the loan they are applying for, and would have to increase their savings to pass the test, or settle for a cheaper home.
Are you a first time home buyer?
First and foremost, first time home buyers should find out what kind of mortgage they can qualify for and afford paying off. Since new mortgage rules make it more difficult for many buyers to afford a detached home, condominiums seem to be more affordable, yet prices for one bedroom units are still rapidly increasing. It is important to have a clear idea of what kind of property you can afford and make appropriate calculations ahead of time.
If you set your mind on a detached house or a townhouse and your financials allow you to do so, we have some good news. Even though prices are still high, in 2018 you can find better deals for this type of property compared to 2017. Additional income from renting out a basement or part of the house is an idea worth considering, as it can help to reduce monthly payments by a significant amount.
Lastly, knowing your long-term plan is important. Land transfer taxes, closing costs and other fees can become a big hit for your wallet.
Top 5 ways you can get started
Top 5 things to keep in mind when choosing to become a home owner in 2018.
1. Take a look at your overall financial situation and decide on a price range for a property that you can afford. Look at your savings, your income, rent, bill payments, expenses etc. and figure out what kind of mortgage payment you can afford each month. We’ve created a straight forward first time home buyer’s guide that goes into more detail about every step of the home buying process, and contains an easy to use financial worksheet to help you figure this part out.
2. Choose a professional to assist you. We can’t stress this enough. Look for an experienced real estate agent who works in the area where you are shopping for a home and who knows the market well. Also it’s a good idea to work with someone who has positive reviews, does this full time, and who is available during regular business hours. As far as the cost is concerned, in most instances these services come at no cost to the purchaser, because the buy-side real estate agent is typically paid a part of the listing agent’s commission. Professional help will make the home buying process smooth and will be well worth it in the end, especially if there is zero cost.
3. Don’t settle for the first mortgage deal that you encounter. Majority of first time buyers go straight to the bank for their mortgage approval. This is not the best strategy because there are usually other offers on the market that are simply not available through your local bank branch. A little shopping around can save you thousands of dollars in mortgage payments per year. We suggest working with a mortgage broker who has access to multiple competing lenders and can usually offer a better rate than a retail bank without any additional cost to you. You are typically looking for a professional full time mortgage broker with many years of experience and a proven track record with plenty of positive reviews. (check out our about page and our 5 star reviews on facebook and google)
4. Make sure your credit history is in order and there is no potentially suspicious activity in your bank accounts. When applying for a mortgage, make sure that you are not applying for other loans such as credit cards or lines of credit at the same time. Your mortgage application may be denied for these reasons. Same goes for moving large sums of money in and out of your accounts shortly before your mortgage application. This sort of activity can set off red flags with your lender and can be viewed as a suspicious sign. We realize that this might seem obvious, but in our experience, this still happens quite often, and can delay the application or cost the potential home buyer their mortgage deal.
5. Decide if your strategy is short term or long term. When purchasing a property, it’s good to have an idea of how long this property will remain yours. If, for example, you are planning to sell the property within the first 5 years, you should take into consideration the fact that you will most likely have to pay penalties for breaking the standard 5 year mortgage term. In cases like this, it sometimes makes sense to opt for a higher interest rate mortgage that will come with reduced penalties, and will result in overall savings, if you end up selling. Unfortunately, terms like these are well hidden in the fine print of your mortgage contract and can potentially cost you thousands of dollars. This is another good reason to consult a mortgage professional, who will make sure that you are getting the best deal based on your particular situation.
So what are your next steps?
There are many things to keep in mind – deciding on the type of property that suits your needs, figuring out the mortgage you’d be able to afford, and passing the stress test. But someone like you, who wants to be on top of their mortgage game, should also do their due diligence and invest their own time and energy into the process.
If you’re new to this and need more information before getting started, we’ve put together a straight to the point first time home buyer’s guide that covers every step of the process in more detail. We tried to keep it as easy to read and understand as possible, while making sure that all important information is explained in detail.
If you’ve already done your research and have a pretty good idea of what you are looking for, get started by contacting us and we will help you get your application approved right away.