Many prospective first-time homebuyers have likely been waiting patiently on the sidelines for a chance to get into the Canadian housing market.
As 2023 approaches, a window may be opening for some of them to get that first piece of real estate, whether it’s a condo, a townhouse or a detached home.
Home sales and prices have fallen in 2022 as the Bank of Canada raised its policy interest rate in a bid to cool searing-hot inflation. As a result, the extremely-hot Canadian housing market is cooling for the first time in years, albeit as prospective buyers face higher borrowing costs.
Many forecasts have been projecting a further cooling going into 2023, so if you’re a prospective first-time homebuyer thinking the new year will be your time to jump into the market, what do you need to do to make your dream a reality?
Here’s what you need to know.
How will I know if I can afford to buy a home?
According to Victor Tran, RATESDOTCA mortgage and real estate expert, the first step prospective first-time homebuyers must take is to talk to a mortgage professional to figure out what they can afford.
Be it a mortgage broker or a mortgage specialist at a financial institution, these professionals will help you figure out how much you can spend on a home, which is a combination of your down payment and what a lender will provide you, said John Pasalis, president of Realosophy Realty.
After you’ve found your mortgage professional, you’re going to want to assemble a “solid team” to work with you on your homebuying quest, Tran said.
“Team as in not just a mortgage broker, but also an experienced realtor in the area that you’re looking to purchase and a real estate lawyer. That’s the person who is going to wrap everything up and ultimately close the deal,” he said.
When it comes to choosing a realtor, it’s important first-time homebuyers take the time to interview multiple to find the right one, Pasalis said.
“From my perspective, a big part of their job is really educating buyers throughout the process. If you have someone who wants to educate you, warn you about certain things and prepare you, that’s generally better than someone who says, ‘How much do you want to spend? Let’s go look at houses,’” he said.
“In terms of working with them, a big part of it is their agent educating them early in the process and throughout the process because it’s a difficult market right now to navigate. There aren’t a lot of homes and when we’re looking at sale prices, some of them are very confusing. It’s very challenging to come up with a good value for a home, so you want to be careful when deciding who to work with.”
I’ve found a home and want to put in an offer. What’s next?
When you’ve found a home you want to put an offer to purchase on, one of the first steps you should take is to send the listing to your mortgage professional, Tran said.
If you are pre-approved for a mortgage, generally that reflects a rough estimate of how much a lender would provide you based on your down payment and other financial information. By sending the listing to your mortgage professional, they can give you a more accurate reflection on what your maximum mortgage amount can be on that home.
“Every property has different annual property taxes, and that can skew the numbers. It can impact the amount you can borrow depending on what the taxes are. If you’re looking for a condo, every condo has different monthly maintenance fees; that can also impact the amount you can qualify for as well,” Tran said.
“It’s important to keep your mortgage specialist or mortgage broker in the loop.”
Then, you must work with your realtor to figure out what the property is worth, Pasalis said. Your realtor should give you an idea of a reasonable range that the value of the home is in, and they do that by sending you similar homes nearby that have previously sold.
“In today’s market, agents are pricing things very differently. You have some agents still pricing homes below what they’re worth to create a bidding war,” he said.
“On the flip side, you have some agents and sellers listing homes for prices that are well above what they are worth, so you need to know exactly what the home’s worth, or at least get a good idea of it. Where you bid on it in that range is up to you, but that’s your starting point before making an offer.”
Once you’ve nailed down your offer price, consider putting conditions on your bid, including one on financing and home inspection, Tran said. If you’re buying a condo, you should also put a condition upon review of the status certificate, which is a document that could identify any financial or legal issues with the condo corporation, he added.
Prospective first-time homebuyers should also consider the closing date of the home they’re putting an offer on, Pasalis said.
“If you’re renting right now, you want at least a 60-day closing date because you’re going to have to give your current landlord a two-month notice. You don’t want to be owning and renting two places for too long,” he said.
“If a seller wants a very quick closing and you’re able to accommodate that, then certainly you may want to make that part of your negotiation strategy, to maybe try to get the seller to give you a slightly better price if you’re giving them a closing date that they want.”
How do I navigate the mortgage market?
While the Canadian housing market has cooled in 2022, many lenders in response to the Bank of Canada’s rate hikes have increased their lending rates, making it more difficult to qualify for a mortgage.
Prime lending rates at major Canadian banks currently sit at 6.45 per cent. Their 50-basis point increase from 5.95 per cent mirrored that of the Bank of Canada, which raised its key lending rate to 4.25 per cent on Dec. 7. That marked the central bank’s seventh rate hike of the year since March after sitting at 0.25 per cent for two years following the onset of the COVID-19 pandemic in 2020.
The Bank of Canada will make its next interest rate announcement on Jan. 25. It has signalled that a pause in rate hikes could be coming, with some economists predicting interest rates will peak in 2023.
In certain Canadian markets, it may be difficult for first-time homebuyers, especially Canadians on a single income, to buy real estate. If Canadians are seeking a mortgage from a major lender, they will be met with the banking regulator’s stress test. Canadians will have to either qualify at 5.25 per cent or the mortgage contract rate plus two percentage points, whichever is higher.
Canadians can increase their chances of getting a mortgage by increasing their down payment, Tran said, whether it’s from additional savings or a monetary gift from family or friends.
They can also look to a cosigner or guarantor on their mortgage, but that might not always help, he added.
“If they (your cosigner or guarantor) have a full-time job and free and clear property, then that’s great. You’re essentially adding additional income, but no additional liabilities,” Tran said.
“But if that cosigner or guarantor has debts of their own, they have a mortgage on a property or they have outstanding liability like credit cards or car payments, they may actually bring down your chances of qualifying.”
If Canadians run into trouble getting a mortgage from a traditional lender, there are alternative providers out there, like credit unions. But they do come with risks, Pasalis said. Alternative lenders typically require a larger down payment and their loans come with a higher interest rate, he added.
“It’s not necessarily easier to get a mortgage from an alternative lender,” Pasalis said.
“It has its own risks if one wants to go down that path.”
The question about whether to go with a fixed-term mortgage, a traditional option for Canadians as mortgage payments are set for a specific period, or a variable mortgage, which is prone to change with Bank of Canada rate decisions, comes down to whether you’re comfortable with risk, Tran added.
“Personally, I’m comfortable with a little bit of risk. I believe the prime rate will eventually come back down, maybe in a year or two. It’s a lot higher now than the fixed rate, but I may start seeing some savings in year three, four and five of the five-year variable term,” he said.
Also, “you might be walking down the street and you might see a house for sale, and suddenly now you’re in the market again looking to buy. You just never know, so that’s why I like variable. Just a little bit more flexibility.”
What other costs should I prepare for?
While there has been much focus over the years on saving for a down payment, there are other costs prospective first-time homebuyers need to budget for.
Pasalis, who is based in Toronto, recommends clients budget two to three per cent of the purchase price for closing costs, but lawyer fees and land transfer tax may vary from province to province. First-time homebuyers may also be eligible for a series of federal government incentives, including the First-Time Home Buyer Incentive — a program that sees Ottawa give some first-time homebuyers an interest-free loan of between five and 10 per cent of the cost of a home.
Furthermore, if first-time homebuyers put forth a down payment that is less than 20 per cent of the purchase price, they’ll need to get mortgage insurance, Tran said.
“I’ve seen people who buy homes maxed out and they can’t afford furniture when they move in,” Pasalis said.
“You don’t want to put yourself in that position where you’re just stretching so much that you’re sleeping on the floor because you can’t afford a bed.”
When’s the best time to buy? How can I maintain a positive mindset?
Both Pasalis and Tran say it’s extremely tough to time the market. However, recent industry reports offer some insight on where the market could be heading in 2023.
In a Dec. 13 report, Royal LePage said it’s anticipating Canadian home prices to drop just one per cent in 2023, and Re/Max told Global News on Nov. 29 that the new year could see “balance” return to the market. The Canada Mortgage and Housing Corp. (CMHC) said in an October report that home prices will resume their “upward trend” in the second half of the year.
Tran advises prospective first-time homebuyers to watch the market, and when they see a listing they really like, to “go for it.”
“That opportunity may not come by again. It’s a good time for buyers to get in right now because it’s a less stressful environment, and you can really take the time to make this big decision in your life,” he said.
However, shopping for your first home can be stressful, and Pasalis recommends prospective first-time homebuyers be realistic about what they want.
“The one thing that makes it a little bit depressing sometimes is when you look at what you can afford, and you’re like, ‘This is not my dream home.’ … If I’m a first-time buyer, I would personally try to look for value,” he said.
“If you’re looking at a home that needs some work over time, that has good bones … that’s a better bet because you end up getting that one probably for less than what, in theory, market value is today because those homes aren’t getting as many offers today.… If you want everything from day one, it’s going to be hard.”
At the end of the day, Tran said it’s important to plan for the process.
“Making the offer and getting the financing, I think that’s fairly easy,” he said.
“Planning is almost 80 per cent of the whole process. As long as you stay in touch with your individuals who are helping you … and you understand what’s happening in the market, it will be a lot easier on you and it will be a lot less stressful.”
— with files from Global News’ Craig Lord
Source link
Related
