Finance: Mortgage must-knows

LENDING A HAND

Experts share their strategies on choosing mortgage features when financing a new home, and your new B.C. small-town lifestyle.

By Tracey Rayson

While British Columbia eases out of the pandemic, Canadian mortgage rates remain at near-record lows. To date, an elevated sellers’ market, low inventory and bidding wars have some B.C. residents overextending their budgets, eager to get a right-sized home, and the right mortgage, right now.

“Don’t base your purchase decision on what you qualify for,” cautions Charmaine White, a certified financial planner at Prospera Credit Union in Vernon. “Think about how much you want to pay and what makes sense for your budget. Budgeting isn’t sexy, but it’s the foundation,” she says. “Make a list of expenses and [calculate] your debt-to-income ratio. If your expenses exceed what you have coming in, it’s not going to work long-term.” New so-called mortgage “stress test” qualification rules in Canada help ensure your payments are sustainable, even in the case of future inflation.

If you buy more home than you can afford, you risk being “house poor,” by leaving too little for discretionary spending or meeting other financial obligations and expenditures, including savings and long-term investments like education. White says, “I advise clients to commit no more than 20 per cent of their income towards mortgage payments. If they choose to slow down—not work so hard and live on less—it gives them that flexibility.”

Hello, HELOC

White speaks from experience: she left Coquitlam for Vernon in 2013 with her husband and two young kids. “The lure to right size to a bigger home in the Okanagan for less money was irresistible,” she says. “We got a better lifestyle, we upsized [our home] and paid off our mortgage, and we set up a line of credit secured by our home, to allow for future investment opportunities or for anytime we needed to borrow money.” A home equity line of credit (HELOC) is a financial product, offered by many lenders and institutions, that helps you leverage the value of your home in the same way.

It’s Closing Time

Homebuyers often forget about closing costs, which can typically be one to four per cent of the purchase price. Ed Pednaud from Dominion Lending Centres in Sechelt highlights four fees to watch for, and suggests Dominion Lending Centres’ My Mortgage Toolbox app (dlcapp.ca) for more tools and information.

Property transfer tax (PTT)

• 1% on the first $200,000 of purchase price, 2% on the remainder up to and including $2 million, 3% on amounts greater than $2 million, further 2% on the portion of residential property over $3 million.

Legal or notary public

• Budget $1,500 for these services and required documents.

Property appraisal

• Budget $750 to $1,200 for a professional appraiser to visit your property. • Depending on geographic location (such as boat-in access only property), add up to $1,000 to that estimate.

Inspection

• Budget $1,500 for this highly recommended service before finalizing a deal. • Inspection is not mandatory and might be tempting to skip in a hot market where “no conditions” offers often win out, but it’s a safety net for buyers who take a big risk without one.

Ultimately, your financial standing will shape your borrowing decisions and homebuying experience. Secure work is essential, but you also need sufficient savings and a strong credit score (680 for less than a 20 per cent down payment). White suggests working with a lender to consolidate your debt (such as credit cards, vehicle loans and lines of credit) into one payment at a new, lower interest rate, but also advises, “watch the amortization on that! If you’re trying to reduce your debt but you’re spreading it over a longer period, you may end up paying just as much interest.”

Rating the mortgage rates

“Prior to the pandemic, if you were in a variable rate mortgage you were at an advantage,” says Ed Pednaud, mortgage professional with Dominion Lending Centres in Sechelt. “You paid less interest over your mortgage over the last 30 years than if you were in a fixed rate.”

Variable rate mortgages commonly permit borrowers to lock into a fixed rate at any time, but timing is crucial. On predicting rate direction, Pednaud laughs: “If I could time the market from an investment point of view, I’d be rich! It’s almost impossible,” he says, although he projects that “rates are expected to rise mid- to late-2022, and who knows what those increases will look like.”

Variable mortgages don’t suit the risk averse, either: that includes retirees without large cash reserves or people with static incomes with no flux in their earning potential. “I think a lot of the clients don’t plan for any adversity,” says Pednaud. “If you’re nervous about rates or can’t afford any swings, fixed is a much better option.” In other words, if you’re planning to bet your entire nest egg on your nest, you might want to reconsider.

A home equity line of credit (HELOC) is a financial product, offered by many lenders and institutions, that helps you leverage the value of your home in the same way.

YES!