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Tag: First-time home buyer

  • Buying pre-construction: What if your home is worth less than you paid? – MoneySense

    Buying pre-construction: What if your home is worth less than you paid? – MoneySense

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    What are your options if you find yourself in this situation? Let’s look at the intricacies of buying a pre-construction home in Canada, why some buyers are having difficulty closing on their purchases, and steps you can take to avoid losing a large deposit.

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    How does buying a pre-construction home work in Canada? 

    Generally, pre-construction homes offer several key benefits. For one, the property is brand new. Unlike with a resale home, you can customize a new home right down to the finishes and countertops. And because the home is new, you can expect to spend a lot less on repairs and maintenance.

    New homes also give you more time to save. With resale homes, you typically must pay the deposit and down payment within a 30-to-90-day timespan. With new homes, the deposit can often be spread over several months or years.

    In case you’re new to buying pre-construction homes in Canada or you’d like a refresher, here are some important details to be aware of.

    Payment schedule for pre-construction homes

    Unlike a resale home when you usually pay the deposit within 24 hours of your offer being accepted, with a pre-construction home there’s typically a deposit payment schedule.

    With a pre-construction home, you’re usually expected to have a down payment of between 20% and 25%. This may sound like a lot at first, but the amounts are spread over several months and years. For example, you may be asked to make a deposit of $3,000 at the time of making an offer, followed by 5% within 30 days of the offer, 5% within 90 days, 5% within 180 days and a final 5% at the time of occupancy.

    Oftentimes, the deposit structure is up for negotiation. If the builder’s payment schedule doesn’t work for you, you should try to negotiate one that does.

    Mortgage rules for pre-construction homes

    In Canada, mortgage rules are the same for a new home as a resale home. For example, you’re required to pass the mortgage stress test in both cases. However, a key difference is timing. With a new home, you don’t know what mortgage rates will be when the property closes. Mortgage rates could be the same, or they could be higher or lower. This adds uncertainty. Without knowing what mortgage rates will be, you actually don’t know if you’ll be able to afford the property in the future.

    There’s also the issue of the property value for mortgage lending purposes. Lenders don’t sign off on the mortgage for a pre-construction home until the time of closing. You make an offer without financing, then hope to get financing at the time of closing.

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    Sean Cooper

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  • Fixed or variable mortgage rate: Which should you choose in 2024? – MoneySense

    Fixed or variable mortgage rate: Which should you choose in 2024? – MoneySense

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    It’s been a tough time for home owners (and first-time home buyers), but the Bank of Canada (BoC) has held interest rates steady since July 2023, and the latest economic data is leading experts to suggest that interest rate cuts may be on the horizon. So, what can Canadians expect from interest rates in the months and years ahead, and what does that mean for fixed mortgage rates and variable mortgage rates? We spoke to an economist and a mortgage broker to get a better sense of what’s ahead, and whether a fixed or variable rate is your best option in 2024.

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    What happened with interest rates in 2022 and 2023?

    Rates went up significantly over the past two years, and a lot of it had to do with post-pandemic inflation.

    “Central banks had to react very aggressively to the spike in inflation, and they jacked up interest rates significantly—475 basis points since March 2022,” says Robert Hogue, assistant chief economist at RBC Economics. (One basis point is equal to one hundredth of a percentage point. And 475 BPS means 4.75%.) “This is easily the most aggressive monetary policy we’ve seen in at least a generation.”

    John-Andrew Newman, a mortgage broker in Oakville, Ont., notes that this aggression was essentially a side-effect of the economic impacts of the COVID-19 pandemic. “The COVID environment brought all rates down because the government influenced the interest rate marketplace in a way that was intended to help Canadians manage the effects of various lockdowns,” Newman explains. “They went extreme in one way, which led to inflationary factors peaking after [COVID], and then interest rates started to go up.” 

    Rates climbed quickly to help tame decades-high inflation. “There was almost a whiplash effect [after COVID] as rates went up to the other extreme—and that’s where we are today,” Newman says.

    Many mortgage holders with fixed-rate mortgages secured before the pandemic now face steep payment increases at renewal. Canadian mortgage holders with variable rates are also dealing with higher costs, though the impact has not been the same for everyone—some have seen their payments increase with every hike in the prime rate, while others haven’t. 

    With a variable mortgage with adjustable payments (sometimes referred to as an adjustable-rate mortgage), the mortgage payments fluctuate in response to changes in the lender’s prime rate. Borrowers with this type of mortgage watched their payments increase as interest rates began to rise. 

    However, many variable-rate holders have a mortgage with fixed payments. As interest rates rose, their mortgage payment stayed the same, but the amount of principal paid each month decreased as the amount of interest paid went up. Some of these borrowers have seen their amortizations stretched to point that their payments are almost interest only, Newman says. Some have reached their trigger rate—the point at which the mortgage payment no longer covers the mortgage interest costs.

    This is one of the reasons it’s important to know what type of variable mortgage you have—the former can have a far bigger impact on your budget and cash flow in the short term, and the latter can result in a sudden spike when renewing your mortgage. That increase may be challenging for many mortgage holders to navigate, particularly if they’ve gone into negative amortization (when the monthly mortgage payments aren’t high enough to cover the interest owed on the loan). 

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    Erin Pepler

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  • Why actor Isabel Kanaan says overnight success and wealth are similar – MoneySense

    Why actor Isabel Kanaan says overnight success and wealth are similar – MoneySense

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    What’s the worst money advice you’ve ever received?

    “What’s the point in saving, you could die tomorrow.” 

    Although this is the worst advice I’ve received, it still taught me that I can let go and not keep thinking about the future but live in the present as well.

    Would you rather receive a large sum of money all at once or a smaller amount of money regularly?

    I’d rather receive a smaller amount of money every week or month for life.

    What do you think is the most underrated financial tip?

    Financial literacy is your friend. We live in a day and age where the internet has all the answers. Use that to your advantage. How to spend and save is going to differ from person to person, so it’s best to learn what strategies work for you.

    What is the biggest misconception people have about growing money?

    Believing in overnight wealth or success. There’s this misconception that as soon as you start investing, or as soon as you get a job with a big paycheque, or even if you win the lottery, all your money problems will go away. No, not at all. It takes time and effort. You need to keep working to sustain that lifestyle.

    Can you share a money regret?

    Not investing sooner.

    What does the word “value” mean to you?

    Value to me is usage, plus time, plus experience. For example, someone might rather save money by opting for cheaper winter boots. I would rather buy a sturdy quality pair. The lower-quality boots would have lower usage since they would break faster, use up my time more because then I’d have to buy new ones, and limit me from experiencing winter by being cautious of breaking the cheap boots. The higher-quality winter boots would have more usage and save me time, and I can maximize my experience with it with no hesitations.

    What’s the first major purchase you made as an adult? 

    I’ve been saving for most of my life and have refrained from making any luxurious purchases, and that put me in a position where I was able to buy my first house.

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    Lisa Hannam

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  • Hoping to build an ADU? New grants can help low-income Californians get started

    Hoping to build an ADU? New grants can help low-income Californians get started

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    State officials have revived a popular grant program to help lower-income California homeowners build accessory dwelling units by covering some of the upfront costs. But funding is limited, so demand for aid may soon outstrip the supply of dollars.

    The California Housing Finance Agency’s ADU Grant Program offers up to $40,000 to qualified homeowners to cover pre-construction costs of an ADU, including planning and permit fees for the structure. The program exhausted its initial $100 million months ago, causing the agency to stop taking applications; now, $25 million more is available for homeowners seeking help.

    Obtaining a grant is not as simple as filling out a form online, however. For starters, applicants have to meet the program’s new income limits. Household income must be less than 80% of the area median income, which translates in Los Angeles County to $84,160. That’s down from 150% of the area median income in the initial round of grants.

    Applicants also need to work through a state-approved lender or “special financing participant” because the grants aren’t paid to homeowners — they’re paid to lenders. The CalHFA website lists 18 participating lenders as well as 10 governmental or nonprofit agencies, including Neighborhood Housing Services of Los Angeles County, which specializes in affordable housing.

    Typically, homeowners must obtain a construction loan for an ADU from a participating lender before seeking an ADU grant. The loan will cover the costs that the grants will reimburse, including architectural designs, permits, soil tests, impact fees, property surveys, energy reports and utility hookups, the agency says. These expenses can make up a sizable portion of the cost of a new ADU, especially one built by converting a garage or other existing structure.

    If you haven’t started work on an ADU yet, let alone obtained a loan, you can still get in line for a state grant. Neighborhood Housing Services, which provides construction loans for ADUs, says it will try to reserve a potential grant for anyone who emails it two pieces of information: a current mortgage statement and one month’s worth of pay stubs or other proof of income. The information, which should be sent to admin@nhslacounty.org, should also include the person’s legal name, address and Social Security number.

    A homeowner who meets the income limits but can build an ADU without a loan can still apply for a grant through NHSLA. But the agency’s construction team would have to manage the project and the grant funds, said Iris Cruz of Neighborhood Housing Services.

    Grant applicants will have to sign and submit an affidavit to CalHFA attesting to several things about themselves and their plans, including that they are a U.S. citizen or legal resident; they own and have their primary residence on the property where the ADU is being built; they will use the ADU for permanent housing or long-term rentals; and the ADU will conform to local building and zoning codes. If any of those statements prove to be false, the applicant could face a prison term and a fine of up to $10,000.

    The lender, meanwhile, will have to attest that the grant applicant meets the program’s income limits.

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    Jon Healey

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