When your mortgage application goes through the approval process, they are not only looking at you, but also the property in question. In fact, sometimes when an application is denied it has nothing to do with you, and everything to do with the property.

To improve your chances of success when it comes to financing, there are three main things to consider:

1. The type of property
2. The location of the property
3. The usage of the property

Let’s take a look at some of the specifics for each of these considerations.

type of property

There are various types of properties when it comes to home ownership – detached houses, semi-detached, condos, townhouse, duplex, carriage or heritage home. Depending on the type of property you have chosen, there may be specific considerations.

CONDOMINIUMS

When it comes to condo properties, the lender (and potentially the insurer) will consider the age of the building. In addition, they will look at maintenance history (or lack thereof), as well as the location for marketability. Some lenders may have stipulations that limit themselves to buildings with a certain number of units, or past a certain age.

If the condo you wish to buy is lacking a depreciation report, has a low contingency fund or large special levies pending, these will be red flags for the lender. Any of these situations will require a more thorough review. These items should also serve as strong considerations for you as it indicates the management (or lack of) for that condo building.

ADDITIONAL UNITS

If you are looking at a property with additional units, it is important to consider that buildings with over four units, are considered a ‘commercial’ property and would be evaluated on that basis.

HERITAGE HOMES

Whether registered or designated, heritage homes require a more detailed review and often come with special considerations for financing.

LEASEHOLD OR CO-OP PROPERTIES

These properties also have specific requirements, particularly when it comes to the maximum loan-to-value which means they will require a larger down payment. These types of properties also typically call for additional documentation, and may have varying interest rates.

If you shift from a standard condo to a lease-hold property, your down payment amount will likely change. If you want to move to a small rural town or a small island, there will be fewer options. In addition, you may have to pay a higher rate as well as provide more documentation on the property.

location considerations

You’ve heard it before – location, location, location! Location matters just as much to the potential homeowner as it does the lender. Some things to keep in mind when it comes to location include:

POTENTIAL RESALE VALUE

If the location limits the potential resale value for the building, lenders may not provide financial approval on that property. This is due to the increased risk if the borrower defaults. In that case, the lender may not be able to foreclose the property and get enough funds back due to the low resale. That said, some lenders may allow these properties but they might reduce the loan amount if the building is located outside of a major market area, or they may add a premium to the interest rate.

RURAL CONSIDERATIONS

For properties with water access only, or with no access to municipal utilities (heat, water, electricity, sewage), there will be additional requirements to assess lender risk. These requirements might include: Insurance coverage, water testing, septic tank inspection, seasonal access and condition of the property.

TRANSFER TO ANOTHER PROVINCE

It is also important to note that if you purchase a home in one Province and are transferred or move to a different province, some lenders won’t be able to port the mortgage due to being provincially based.

usage considerations

The use of the property can include things such as personal, investment, recreational, agricultural and also consider previous activities. A few things to keep in mind are:

CONDOMINIUMS

If you are looking at purchasing a condo on a property that has either a commercial component in the building (such as shops on the first floor), or allowable space in the unit for businesses (live/work designation), you may have limited lender options. In some cases, lenders will avoid these types of properties at all costs, while others may require approval from the insurer (i.e. CMHC).

RENOVATION REQUIRED

If the property requires renovations, the extent of the upgrades, as well as the property value will be taken into consideration.

PREVIOUS GROW-OPS

Homes that previously existed as grow-ops, have special lending options. These typically come with higher interest rates and costs due to decreased value.

RENTAL SUITES

For owner-occupied homes that contain rental suites, it is important to consider potential rental income. If the house is purchased for investment, rental income is automatically considered. This can result in a different interest rate than simply an owner-occupied dwelling. In these cases, the rental income can also increase the resale value of the property. However, an appraisal of the property must be conducted and reviewed to ensure the condition. This will also uncover whether any renovations were completed to add value.

SECOND PROPERTIES

Purchasing a second home for recreational use will require a review to determine if it is seasonal or year-round access.

Before you begin your home search, it is best to discuss your future plans with a Dominion Lending Centres Mortgage Professional. This will ensure you receive accurate information to understand the specific requirements your potential property might require. Seeking expert advice early on will also give you ample time to find the right fit! This will also ensure you can submit a full financing review before subject removal on a purchase.

There are 9 million Millennials in Canada, representing more than 25 percent of the population. Born between 1980 and 1999, the eldest are in the early stages of their careers, forming households and buying their first homes. Buying a home is a daunting process for anyone, but especially so for the first-time home buyer. This is the largest and most important financial decision you will ever make and it should be done with the appropriate investment in time and energy. Making the effort to be financially literate will save you thousands of dollars and assure you make the right decisions for your longer-term financial security.

1. Don’t rush into the housing market–do your homework: learn the basics of savings, credit and budgeting.

Lifelong savings is a crucial ingredient to financial prosperity. You must spend less than you earn, ideally saving at least 10 percent of your gross income. Put your savings on automatic pilot, having at least 10 percent of every paycheck automatically deducted. Money you don’t see you won’t spend. Contributing to an RRSP, at least enough to gain any matching funds your employer will provide, is essential. The Tax Free Savings Account (TFSA) is an ideal vehicle for saving for a down payment and now you can contribute as much as $10,000 a year.

You also need to establish a good credit record. Lenders want to see a record of your ability to pay your bills. As early as possible, get a credit card and put your name on cable, phone or other utility bills. Pay your bills and your rent in full and on time. Do not run up credit card lines of credit. The interest rates are exorbitant and the only one who benefits is your bank. Keep your credit card balances well below their credit limit.

Do a free credit check with Equifax every six months to learn your credit score and to see if there are any problems. Equifax tracks all of your credit history, which includes school loans, car loans, credit cards and computer loans.  Equifax grades you based on your responsible usage and payments.

Budgeting is also essential and it is easier than ever with online apps. You need to know how you spend your money to discover where there is waste and opportunity for savings. The CMHC Household Budget Calculator helps you take a realistic look at your current monthly expenses.

2. Make a realistic projectory of your future household income and lifestyle and understand its implications for choosing the right property for you.

Millennials are likely relatively new to the working world. Lenders want to see stability in employment and you generally need to show at least two years of steady income before you can be considered for a mortgage.  This also applies if you have been working for a few years in one career and then decide to change careers to something completely different. Lenders want to see continuous employment in the same field. If you are self-employed, it is more challenging, and you need professional advice on taking the proper steps to qualify for a mortgage.

Assess the stability of your job and the likely trajectory of your income. Millennials will not follow in the footsteps of their parents, working for one employer for forty years. In today’s world, no one has guaranteed job security. Take a realistic view of your future. Will your household income be rising? Will there be one income or two? Are there children in your future? Will you remain in the same city? The answers to these questions help to determine how much space you need, the appropriate type of residence, its location and the best mortgage for you.

Financial planning is key and it is dependent on your goals and expectations.

3. This is not a Do-It-Yourself project: build a team of trusted professionals to guide you along.

You need expert advice. The first person you should talk to is an accredited mortgage professional. There is no out-of-pocket cost for their services. Indeed, they will save you money.

These people are trained financial planners and understand the ever-changing mortgage market. Take some time with them to understand the process before you jump in and find your head spinning with all the decisions you will ultimately have to make. They will give you a realistic idea of your borrowing potential. Before you fall in love with a house or condo, make sure you understand where you stand on the mortgage front. Mortgages are complex and one size does not fit all. You need an expert who will shop for the right mortgage for you. There are more than 200 mortgage lenders in Canada and they will compete for your business.

It is a very good idea to get a pre-approved mortgage amount before you start shopping. This is a more detailed process than just a rate hold (where a particular mortgage rate is guaranteed for a specified period of time). For a pre-approval, the lender will review all of your documentation except for the actual property.

There is far more to the correct mortgage decision than the interest rate you will pay. While getting the lowest rate is usually the first thing on every buyer’s mind, it shouldn’t be the most important. Six out of ten buyers break a five-year term mortgage by the third year, paying enormous penalties. These penalties vary between lenders. The fine print of your mortgage is key and that’s where an expert can save you money. How the penalty for breaking a mortgage is calculated is key and many monoline lenders have significantly more consumer-friendly calculations than the major banks.[2] A mortgage broker will help you find a mortgage with good prepayment privileges.

The next step is to engage a real estate agent. The seller pays the fee and a qualified realtor with good references will understand the housing market in your location. Make sure the property has lasting value. Once you find the right home, you will need a real estate lawyer, a home inspector, an insurance agent and possibly an appraiser. Make any offer contingent on a home inspection and remediation of significant deficiencies.

4. Down payments, closing costs, moving expenses and basic upgrades need to be understood to avoid nasty surprises.

The size of your down payment is key and, obviously, the bigger the better. You need a minimum of 5 percent of the purchase price and anything less than 20 percent will require you to pay a hefty CMHC mortgage loan insurance premium, which is frequently added to the mortgage principal and amortized over the life of the mortgage as part of the regular monthly payment.

Your lender will want to know the source of your down payment. Many Millennials will depend on the largesse of their parents to top up their down payment.

The down payment, however, is only part of the upfront cost. You can expect to pay from 1.5-to-4 percent of the purchase price of your home in closing costs. These costs include legal fees, appraisals, property transfer tax, HST (where applicable) on new properties, home and title insurance, mortgage life insurance and prepaid property tax and utility adjustments. These amount to thousands of dollars.

Don’t forget moving costs and essential upgrades to the property such as draperies or blinds in the bedroom.

5. Test drive your monthly housing payments to learn how much you can truly afford.

Affordability is not about how much credit you can qualify for, but how much you can reasonably tolerate given your current and future income, stability, lifestyle and budget. Most Millennials underestimate what it costs to run a home, be it a condo or single-family residence.

The formal qualification guidelines used by lenders are two-fold: 1) your housing costs must be no more than 32 percent of your gross (pre-tax) household income; and, 2) your housing costs plus all other debt servicing must be no more than 40 percent of your gross income.

Lenders define housing costs as mortgage payments, property taxes, condo fees (if any) and heating costs.[3] But homes cost more than that. In your planning, you should also other utilities (such as cable, water and air conditioning), ongoing maintenance, home insurance and unexpected repairs. Taking all of these costs into consideration, the 32 percent and 40 percent guidelines might well put an unacceptable crimp in your lifestyle, keeping in mind that future children also add meaningfully to household expenses and two incomes can unexpectedly turn into one.

The best way to know what you can afford is to try it out. Say, for example, you qualify for a mortgage payment of $1400 a month and adding property taxes and condo fees might take your monthly housing expense to $1650.  A far cry from the $500 you pay now to split a place with 3 roommates. Start making the full payment before you buy to your savings account and see how it feels. Do you have enough money left over to maintain a tolerable lifestyle without going further into debt?

Keep in mind that this is not a normal interest rate environment. Don’t over-extend because there is a good chance interest rates will be higher when your term is up. Do the math (or better yet have your broker do it for you) on what a doubling of interest rates five years from now would do to your monthly payment.  A doubling of rates may be unlikely, but it makes sense to know the implication.

Do Your Calculations Look Discouraging?

If so, here are some things you can do to improve your situation:

• Pay off some loans before you buy real estate.
• Save for a larger down payment.
• Take another look at your current household budget to see where you can spend less. The money you save can go towards a larger down payment.
• Lower your home price — remember that your first home is not necessarily your dream home.

Footnotes:

[1] I would like to acknowledge and thank the many mortgage professionals of Dominion Lending Centres who made contributions to this report.

[2] People break mortgages because of job change, decision to upsize, change neighbourhoods, change in family status or refinancing. The last thing you want to discover is that discharging a $400,000 mortgage 3.5 years into a 5-year term is going to cost you $15,000.

[3] Lenders now also assess your qualification compliance if interest rates were to rise meaningfully, a likely scenario in this low interest rate environment.

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

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According to a study by Finder.com, 67.7% of Canadian parents assist their adult children financially. This may include helping them with rent (29.3%), handing out cash (38%), or contributing to larger purchases such as a down payment on a house (21%). Another reason why you may be helping out family members right now is the financial strain brought on by the COVID-19 pandemic.

The pandemic has disproportionately affected millennials, with 76% feeling the squeeze due to a reduction in working hours or job losses. Despite the fact that you may be in a better financial situation than other family members, it’s important to consider your options when looking to financially help your family – so you won’t jeopardize your retirement in the process.

HOW CAN I FREE UP FUNDS WITHOUT PAYING A PRICE?

There are many avenues you may explore in order to access the cash you need to help out adult children or other family members.

Withdrawing from savings:

The easiest and most straight-forward option may be to withdraw from retirement savings. However, be aware that reducing your savings may have a negative impact on your future retirement income. There’s also the possibility that it’ll trigger capital gains and withdrawal tax, as well as OAS clawback.

Sell off assets:

Another option is to cash in on investments, although considering the economic upheaval of the pandemic, now may not be the best time to liquidate assets. Meanwhile, cashing in will eliminate investments from your portfolio unnecessarily, as well as triggering taxes and OAS clawback.

Draw on lines of credit:

An alternative is to turn to existing lines of credit such as home equity lines of credit (HELOCs) or credit cards in order to help out family members. If you’re able to get approval for a HELOC, it can be a strong option as the interest rate is lower than for most other loans. However, banks are currently approving far fewer than before in an attempt to protect themselves from the economic effects of the pandemic – retirees without a steady income are particularly susceptible to having their HELOCs denied. Something else to consider with most lines of credit is the need to make monthly loan repayments, which can put additional pressure on your retirement income. Credit cards are another loan option; however, these have among the highest interest rates of all and can quickly lead borrowers into a cycle of debt.

Explore a different option:

If none of these options are for you, there’s another option that’s often overlooked. The CHIP Reverse Mortgage from HomeEquity Bank allows you to borrow up to 55% of the value of your home while continuing to live there. The CHIP Reverse Mortgage is made specifically for Canadians 55+, with an approval process that doesn’t penalize you for being retired or approaching retirement.

Furthermore, you don’t have to pay what you owe until you no longer live in your home, meaning no stressful monthly repayments affecting your cashflow. And depending on what you need the money for, you can opt to have it in monthly payments or as a lump sum. Finally, some clients are concerned that they may end up owing more than their house is worth, however, with HomeEquity Bank’s No Negative Equity Guarantee, you’ll never owe more than your home is worth.

Financially assisting family members is something that generous Canadians have been doing for a long time. However, COVID-19 means that many people need to help out their loved ones more than ever. By carefully thinking through your options and deciding what’s right for you, you can give your family financial support without jeopardizing your retirement.

Contact your DLC Mortgage Professional today to find out more about how the CHIP Reverse Mortgage can help you support your family during this time.

Throne Speech: Canada’s Response to COVID-19

Prorogation on August 18, following the resignation of Finance Minister Morneau, a new session of Parliament, and a new speech from the throne was meant to allow the government to hit the reset button. And for Prime Minister Justin Trudeau, to try and move past the summer of controversy involving WE Charity and the Canada Student Service Grant.

THE FISCAL PICTURE

There was little opposition earlier this year when the federal government backstopped nearly every economic sector through emergency benefits, wage subsidies, and other programs. But with the federal deficit approaching $400 billion, there are growing calls to temper new spending.

The new Finance Minister, Christia Freeland, has consulted with former prime minister Paul Martin, who erased deficits as finance minister more than 20 years ago. And she claimed this week to be “well aware” of concerns about federal spending and the fiscal balance but said getting more people back to work was a top priority, along with managing a second wave of COVID-19 infections.

“The single most important economic policy of our government and the best thing we can do for our economy is to keep coronavirus under control,” Freeland said. “I can’t emphasize that too much. Some people sometimes like to talk about a trade-off between good health policy and good economic policy. I could not disagree more strongly.”

Today’s throne speech is one of the most highly-anticipated throne speeches in recent memory–amid a slowing economic recovery and rising COVID case counts. Though not an economic blueprint, it lays out Ottawa’s vision for what policy supports it believes are needed to carry the country through the next phase of recovery.

Measures already floated include improved permanent support for the unemployed–building on exceptional levels of policy support delivered over the spring and summer. Estimates for how much all of that will cost will await a fall fiscal update and subsequent budget.

COVID-19 CASE COUNTS TICK HIGHER AS THE ECONOMIC RECOVERY SLOWS

A barrage of reports issued in the past week reinforced what will probably be a historically large, and yet still only partial, bounce-back in economic activity over the summer in Canada. Home resales surged again in August. Reports on retail, wholesale, and manufacturing trade for July left GDP still on track to rebound 40% (at an annualized rate) in the third quarter. But that would only retrace only about 57% of the decline over the first half of the year. And early data – including Royal Bank’s tracking of credit card purchases–continue to flag a slowing pace of recovery.

Meantime, virus case counts are being watched more closely again in Canada, given a faster uptick in recent weeks, particularly in Ontario, Quebec, British Columbia, and Alberta. This latest wave of infections has been more concentrated among less vulnerable age cohorts, meaning fewer hospitalizations. Still, easing in containment measures has already been paused, and in some spots, reversed. At a minimum, the increased spread is another reminder that there are limits to how much the economy will recover while the virus threat remains.

In today’s speech from the throne, the Governor General was expected to lay out the government’s vision for the pandemic recovery. It won’t be easy, with COVID-19 cases on the rise and investor confidence wobbling. While the economy has improved since April lows, the recovery continues to be fragile–especially in the face of a possible second wave. Where should the government focus its investments? And if it survives the confidence vote, what could we expect in its next budget?

Trudeau insisted that he does not want a campaign soon — but would be ready if necessary. “I think it’s irresponsible to say that an election would be irresponsible,” Trudeau told reporters. “Our country and our institutions are stronger than that, and if there has to be an election, we’ll figure it out.”

“I don’t think that’s what Canadians want. I don’t think that’s what opposition parties want, and it’s certainly not what the government wants.”

A MATTER OF CONFIDENCE

Regardless of how many specifics or dollar figures are in the speech from the throne, it will be a confidence test for the Trudeau government, 15 seats shy of a majority in the House of Commons.

Without support from one major opposition party, an election is likely. But it’s not clear if that’s the kind of reset button opposition leaders are ready to press.

NDP Leader Jagmeet Singh wants a pledge to extend the Canada Emergency Response Benefit while the Employment Insurance system is reformed. And he wants a clear pledge to extend access to paid sick leave.

Singh told CPAC he heard no specific commitments from Prime Minister Justin Trudeau when the two spoke last week. But he will be watching for signals from the government, not just in the speech itself, but in the debate and legislation that follows.

From new Conservative leader Erin O’Toole, recently given a positive COVID-19 diagnosis: “Let’s see the plan, and if it’s for the betterment of the country, we’ll support parts of that plan. If we don’t see it, we’ll put forward our own vision”.

The Bloc Quebecois, meanwhile, has threatened to try and force an election over the WE affair unless Trudeau steps down. And the party wants increased health care transfers to the provinces, more support for seniors, respect for Quebec jurisdictions, and support for supply-managed farmers.

But their leader will not be on Parliament Hill as the House of Commons resumes; Yves-François Blanchet has tested positive for COVID-19 and tweeted Tuesday that he and O’Toole would wait to give their formal replies to the speech until after their isolation periods had ended.

ACTUAL MEASURES IN THE THRONE SPEECH

Overcoming pandemic is the key theme of the speech. COVID-19 has been incredibly hard for parents, especially women, young people, older adults, and Black and racialized Canadians. Low wage earners have been hardest hit.

Fight the pandemic and save lives

Faster testing, short-term closure orders in high-case areas
Help businesses in those areas
Additional PPE funding
More funding to keep schools safe
Vaccine strategy
Immunity task force led by scientists
Supporting Canadians Through this Crisis

Emergency Wage Subsidy extended
Job loss supports
Government creates jobs, assists training, youth employment strategy,
CERB recipients now supported by EI system–broadened to include self-employed and gig workers
Action Plan for women–child care services, create a Canada-wide early childhood education system, after school programs, support for women entrepreneurs.
Aid to small businesses
Improve business credit, assistance to sectors hardest hit
Build back better to create a more resilient Canada

Stimulus for recovery that is done prudently
Reduce income inequality by raising taxes stock options and wealth
Increase taxes on the digital giants that do business in Canada
Defend the strength of the middle class
Fighting climate change and commitment to sustainable growth
Long-term care homes assistance, new standards for care
Increase Old Age Security at age 75
Primary care physicians for every region
Mental Health resources increased
National Universal Pharmacare
Telemedicine
Limiting firearms
National Action Plan on gender-based violence
Affordable housing growth
All Canadians have access to highspeed internet
Affordable regional air services
Eliminate chronic homelessness
Enhance First-time homebuyer incentive
Address food insecurity and enhance local food supply chains, protect food workers
Support farmers
Introduce the most extensive training and education and accreditation programs in Canadian history
Create good jobs in climate action sectors
Exceed Canada’s 2030 climate goals
More transit options, zero-emissions vehicles and batteries, electric charging stations
Cut corporate tax rate in half for clean technology companies
Support natural resource and oil companies as they move towards zero-emission and clean-energy goals
Ban single-use plastics next year
Clean water and irrigation plans
Stand up for who we are as Canadians–welcoming and fights discrimination

We take care of each other, welcome newcomers, embrace two official languages
Address systemic racism
Help Indigenous, First Nations, and Mate peoples
Take action on online hate, support employment of Blacks and racialized people
Reform criminal justice system and law enforcement
Encourage immigration and family unification
Invest more in developing economies
Support human rights, bring detained Canadians home
BOTTOM LINE

This is an ambitious agenda. Many of these proposals are sweeping commitments. Spending details will come later, likely in a fiscal update in November or December.

The speech did not extend the CERB, which the NDP said was a condition of support. Also, the NDP asked for paid sick leave, which was not mentioned.

Quickly following the speech, the Conservatives’ initial response was that they could not support this proposal. Among other things, they berated that there was no fiscal framework or anchor to prevent further downgrades of Canadian credit ratings. According to deputy leader Candice Bergen, Conservatives will not support a speech from the throne filled with “buzzwords” and “grand gestures” that ignores the ailing energy sector, farmers, the unemployed, and struggling small business owners.

The political posturing will continue.

In the next week, the speech will be debated, during which time, the government can make changes.

Prime Minister Justin Trudeau and other party leaders will address the nation at 6:30 pm ET/3:30 pm PT tonight.

Dr. Sherry Cooper
DR. SHERRY COOPER
Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.