This is not a new subject – if you have been speaking with me, you can hear the frustration in my voice. As a mortgage broker but also a tax-paying citizen, I am frustrated, because the government is impacting my ability to live comfortably and afford the lifestyle I and you pay for, through our taxes. Home ownership has become a privilege rather than a right in this country and that is a huge shame!
October 2016, we saw a shake-up to the industry when the government first started playing with the rules. Through the guise of controlling foreign buyers, it did nothing to impact them, however it definitely impacted us in our buying power and in some cases by 20%. Now looking forward, that will be further impacted again in January, 2018. Regardless if we put 20% down or not, we now have to qualify at the qualifying rate (currently 4.89% + 2%), which is the new stress test. This will impact your ability to qualify!
Every year thousands of new immigrants arrive in Canada and more than half of those end up immigrating to Toronto. With property prices where they are, many people cannot afford to buy resale and therefore end up looking at the pre-construction opportunities, of which there are many in this growing city.
My current clients are Canadians but were living in Kuwait for the last 17 years. There two oldest have since come back for University and their youngest will be going to high school next year. They arrived in Toronto 6 months ago and the wife recently found work but the husband is still looking for work in a highly competitive marketplace.
Every once in a while as investors, we come across an amazing deal and usually that deal is a deal because it needs a lot of work – otherwise known as a “handyman special”.
Then the question becomes what is the best way to financing this opportunity and which lenders will consider the “after repair” value and not the “as is” value. Currently there are very few options that exist to renovate properties using the “after repair” value.
Options using the “as is” value literally suck! You can do a purchase plus mortgage, where the lender will give up to 10% or $40,000 max. of the “as is” value for renovations and after all is said and done, you get to include that cost into the mortgage. However the caveat is that you must have those funds in your pocket to begin with. Another way might be to take it out of your existing HELOC or unsecured LOC, but then you are worried about timelines, paying it back, over-extending your lines of credit and worse if another opportunity comes along you have now tied up that money into the current property, waiting to flip it!
Furthermore, how far is 10% of the value going to get you? Not very far in most cases! The rest comes from your own pocket and if you are like me there are typically other uses for that money.
I got a call today from an investor client, who is tired of losing out on bidding wars for existing homes and is considering putting an offer on a pre-construction stacked townhouse. Last year she had purchased a pre-construction condo as an investment but this year she was purchasing a stacked townhome as a second home for her son, who had just graduated school and did not have a job yet, which meant he could not qualify for a mortgage on his own. She had a pre-approval in place for 5% down on a purchase.
She was concerned that even with the 5% down she planned to put down. the builder was insisting on a 20% down payment and all of it was due in 90 days, with no firm closing date. She asked if there was a work-around. I suggested she show the pre-approval to the builder and see if she could reduce it.
She was taken by surprise by the demand for a 20% downpayment and so I thought this would be a timely article as many people are unaware of all the costs and demands that come with pre-construction. Here are some things to consider.