Thinking of Buying?
While every financially significant investment poses risks, the 2015 Canadian real estate market offers more opportunities than ever before. Whether you are an experienced real estate investor with a sophisticated and diverse portfolio, or a first-time homebuyer contemplating the purchase of your first home, it’s important to educate yourself on the latest economic and real estate market trends, the basics of the home buying process and to understand the unique local market trends impacting your neighbourhoods of interest. It’s also essential that you select a skilled an experienced real estate advisor to help you navigate the process.
Sotheby’s International Realty Canada provides homebuyers with expert advice, accurate market and property information, prompt access to coveted properties and the highest level of service and discretion. We offer skilled and authoritative assessment of real estate opportunities, as well as exclusive access to some of the best properties on the market —many of which may never be available to the public on MLS.
The Home Buying Process: A Basic Overview
Step 1: Secure Financing
Before starting your home search, it’s important to evaluate your financial situation, confirm your budget, familiarize yourself with mortgage options and secure pre-approval from your lender. This will help you conduct your search with confidence and negotiate your desired home successfully.
Establish Your Budget
As a general guideline, total monthly housing costs for your primary home, including mortgage payments, taxes, maintenance fees, insurance, interest charges and utilities, should not exceed 32 per cent of your gross monthly household income.
Many financial advisors also suggest that total monthly debt, including mortgage payments, credit card and car payments, should not exceed 40 per cent of your gross monthly income.
Those purchasing a real estate investment property should consult their real estate and financial advisor to understand tax and financial implications of their purchase.
If your downpayment amount is less than 20 per cent of the total purchase price, you will need to purchase mortgage loan insurance that guarantees the debt against default. In most cases this will be added to the mortgage loan.
Check Your Credit Rating
Your credit report plays an important role in your mortgage approval process and in determining the interest rate and other loan terms that a lender offers you. Before meeting with a potential lender, you may wish to confirm your credit rating so you have time to resolve any issues. Contact Trans Union of Canada: 1-800-663-9980 or Equifax Credit Information Services Canada: 1-800-465-7166 for more information.
Understand Mortgage Basics
Mortgage interest rates are fixed, variable or adjustable.
- Fixed: A fixed mortgage interest rate is a locked-in rate that will not change for the term of the mortgage.
- Variable: A variable rate fluctuates pending market conditions while the mortgage payment itself remains unchanged.
- Adjustable Mortgage Interest Rate: With an adjustable rate, both the interest rate and the mortgage payment change based on market conditions.
OPEN OR CLOSED MORTGAGE
- Closed Mortgage: A closed mortgage cannot be paid off, in whole or in part, before the end of its term. A closed mortgage is a good option if you’d prefer a fixed monthly payment and wish to predict your monthly expenses. However, because there are often penalties or restrictive conditions if you pay an additional amount, a closed mortgage may be a poor choice if you decide to move before the end of the term or if a decrease in interest rates is anticipated.
- Open Mortgage: An open mortgage is flexible. You can typically pay off part of it or the entire amount at any time without penalty. This may be a good option if you plan to sell your home in the near future or if you intend to off a large sum of your mortgage loan. Most lenders allow open mortgages to be converted to closed mortgages at any time, though often for a small fee.
- Amortization is the length of time the entire mortgage debt will be repaid. Many mortgages are amortized over 25 years, but longer periods are available. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run.
CONVENTIONAL VS. HIGH RATIO MORTGAGES
- Conventional Mortgage: A conventional mortgage is a mortgage loan that is equal to, or less than, 80% of the lending value of the property. The lending value is the property’s purchase price or market value — whichever is less. For a conventional mortgage, the down payment is at least 20% of the purchase price or market value.
- High-ratio Mortgage: If your down payment is less than 20% of the home price, you will typically need a high-ratio mortgage. A high-ratio mortgage usually requires mortgage loan insurance. CMHC is a major provider of mortgage loan insurance. Your lender may add the mortgage loan insurance premium to your mortgage or ask you to pay it in full upon closing.
- The term is the length of time that the mortgage contract conditions, including interest rate, are fixed. The term can be from six months up to ten years.
- There are generally several term options for a mortgage and it’s important to weigh the benefits and costs of each. A longer term (five years, for example) may allow you to plan ahead and protect you from interest rate increases, but may not offer you flexibility, should interest rates fall.
Optimizing Your Mortgage
Work with your lender to optimize your mortgage payment schedule for your unique situation. Many primary homeowners aim to pay off their mortgages as quickly as possible, which can be achieved with more frequent installments. Your mortgage may also be structured to allow an increase in payments as cash flow permits, and there may be anniversary lump sum payment opportunities each year to be applied directly to the principal.
If you are purchasing real estate solely for investment purposes, other considerations such as tax implications come into play. Consult your real estate and financial advisor for assistance.
Get Written Pre-Approval
In markets where there is high demand and a low volume of the type of home you wish to purchase, written pre-approval is essential and will give you the competitive edge in securing your desired home. For example, in a scenario where a seller receives two similar offers, one accompanied by a letter that confirms financing pre-approval, and another other without supporting documents, the former offer is frequently considered first.
Step 2: Define Your Goals, Needs and Budget
Prior to meeting with your real estate advisor, it’s important to clarify your budget, personal property preferences, and any anticipated life stage and lifestyle requirements that may impact the purchase of your home.
LIFESTYLE AND LIFE STAGE
Most people aim to find a home and neighbourhood that will meet their needs for the next five to 10 years. Your real estate advisor can help you assess how your lifestyle and life stage needs may impact the property or neighbourhood that is right for you.
Step 3: Conduct Your Home Search
Once your Sotheby’s International Realty Canada associate has an understanding of your budget and property preferences, you can expect them to provide you with:
Automatic Property Updates
As soon as a property that meets your desirable home criteria is posted on MLS, your real estate associate will send you an email alert to direct you to that listing.
Advance Access to Exclusive Properties
In some neighbourhoods, homes are sold within days, or even within hours, of being listed on MLS. Others are marketed and sold within a real estate company’s network without ever being made available to the public. In some cases, your REALTOR® may be able to arrange for advance access to properties that are represented within their professional and company network.
Your real estate agent will schedule walk-throughs of properties matching your preferences and needs. You may also review properties on realtor.ca, on sothebysrealty.ca or by visiting open houses, then contact your REALTOR® to schedule a private tour, should there be one that matches your needs.
Evaluation of Options
It can be challenging to determine the fair market value of a home and to assess whether it is "good value" for its listed price or for your budget. Variables that impact the value of a home or property include its location, neighbourhood, community plan, proximity to amenities, lot attributes, views, property size, interior and structural condition, construction type, age, unique features, and the state of the local real estate market.
Step 4: Submit Your Offer
It’s important that you sit down with your agent or lawyer to prepare your offer. Real estate laws vary widely from region to region, and it’s essential that you protect your legal interests and account for any specific contractual contingencies that are unique to your area and desired property. Some general considerations include:
Legal and Contractual Obligations
In Canada, an offer commits you to legal and contractual obligations as soon as the other party has accepted it. Prior to submitting an offer, ensure you are clear on the legal obligations you are undertaking, should the offer be accepted.
Prior to writing your offer, your Sotheby’s International Realty Canada associate can provide you with information on recent area sales, local market information and background on whether there are competitive bids, which will help you determine your initial offer as well as your target price for this specific home.
With some investigation, your associate may also be able to assess your seller’s background and objectives for selling, which may assist you in crafting a competitive offer.
The details of an offer typically include: your legal name and that of the vendor, the legal civic address of the property, the price you are offering to pay, inclusions (items in or around the home that you think are included in the sale should be specifically stated in your offer, such as appliances, lighting fixtures or window coverings), amount of your deposit, dates you take legal and physical possession of the home, legal "subjects" or "conditions" upon which the contract becomes final (such as satisfactory home inspection report or financing approval), and the date the offer expires.
Your offer is a legally binding document and should be prepared by a real estate professional or lawyer.
Your REALTOR® can advise you as to whether a professional inspection should be conducted prior to or after submitting your offer. This will depend on the property age and type, and whether competitive bids are anticipated.
Ensure that any time frames indicated in your contract are realistic, particularly if your offer is still subject to securing a mortgage loan, a situation we advise against by ensuring you secure pre-approval in advance. Increases in market activity as well as increased vigilance by lenders may mean that mortgage approval requires more time.
Step 5: Negotiate Successfully
After submitting an offer, you should be prepared to negotiate, not just on the initial price, but on all key factors impacting the sale of the home including deposit, inclusions, dates for completion and possession, and deadlines for subject removals. Ensure you know your budget and requirements prior to submitting your offer so you don’t commit to additional costs in the heat of the process.
In high-demand, low-inventory areas, you may find yourself bidding against other buyers. Some sellers in high-demand niche markets may also intentionally list their home at a low price hoping to stimulate multiple offers. This doesn’t necessarily mean that the price will be bid up significantly over the asking price, but it does mean that due diligence is required on your part and the part of your REALTOR® to ensure the offer you submit is strategic, competitive and reflective of what are ultimately willing to pay for the property.
Whether you are anticipating competition or not, you should be preapproved for your mortgage prior to your home search and well in advance of writing an offer. In a multiple offer situation, this will impact your ability to negotiate successfully, particularly if others making an offer are already preapproved. It also lets you know the maximum you can afford in what may be a stressful situation.
You can expect one of three responses to your offer:
Accepted as is: the deal is complete and once signed by the seller, the offer becomes a binding legal contract.
Counter offer: the seller may make changes to your offer, such as adjustments to the price, closing date or conditions. You may accept the counter offer and close the deal by signing the document. Or, you may make another counter offer back to the seller.
Rejection of the offer: the seller may choose to reject the offer and the sale will not go through.
Once both parties come to an agreement, negotiations conclude and you move on to the next steps in the buying process. You will have a set period of time in which to satisfy the legal conditions ("subjects") agreed to in your contract, such as completing a satisfactory home inspection report or securing financing. Only after your subjects/ conditions are removed do you have a legally binding document.
Step 6: Close the Deal
The closing or completion day is the day you take legal possession or your new property.
As this day nears, your REALTOR® and lender will monitor the progress of your transaction to ensure there are no last minute issues that need to be dealt with.
Completion (Closing) Day
On completion day itself, legal property ownership is transferred to your name. The mortgage amount is provided to your lawyer or notary by your lender and you will receive a Statement of Adjustments with costs payable, including: balance owing, legal fees, property transfer taxes and other completion costs. Your lawyer or notary will pay the seller, complete necessary documents and register your home at the Land Titles Office in your name.
On your closing day, your lender provides the mortgage money to your lawyer/notary, you provide the down payment (minus your deposit) to your lawyer/notary as well as remaining closing costs. Your lawyer/notary pays the vendor, registers the home in your name and provides you the deed to your new home.