How to Buy Property In A Pandemic: Financing Advice for First-Timers
Updated: Jun 5, 2020
Spring is when tulips bloom, mortgage lending season begins and buyers attend open houses in droves - except in 2020. It's now June and only the flowers are on schedule, with the rest of us playing catch up. Those who had no choice but to buy, sell, or move in the early days of COVID did so under duress, as new would-be buyers watched anxiously from the sidelines. With Phase I of reopening now underway, here's my advice for those wanting to jump into the real estate market for the first time - in a pandemic.
Qualifying under COVID
Arguably the most important part of any mortgage application is income, which proves to the lender you can make payments. Anything other than a guaranteed paycheque typically requires a two-year history verified by employment and CRA documents. For this reason, filing taxes on time, every year, is extremely important. Buyers should be ready to answer questions about how COVID has impacted their industry, clients and/or employer. Concerned about layoffs, lenders are now re-verifying income just before closing, so stability of income is paramount. If there is any cause for concern, a co-signer with steady income, good credit, and minimal liabilities can help to strengthen an application.
The minimum downpayment is 5% and can come from savings, investments in an RRSP or TFSA, or gifted funds. Regardless of the source, be prepared to provide financial documents because lenders require a paper trail to satisfy government regulations. Keep in mind that line items such as EI, CERB, or overdraft charges on statements are "red flags" and could hurt your ability to qualify. Those planning to buy should also be aware that the minimum downpayment amount could be increased to 10% in the future, as an equity buffer if prices decline due to COVID aftershocks. Having at least 20% downpayment will allow you to qualify for a higher amount with most lenders, and is required for properties over $1 million.
How much you qualify for is also determined by your credit score and the Bank of Canada benchmark rate, or qualifying rate. These two numbers serve to assess your ability to pay back a loan now and in the future. In April, major changes were made to the algorithm that determines your credit score and the way it's reported to lenders. As a consumer you cannot access this report, so consult a mortgage professional early-on to understand how it affects your application. Accepting loan or payment deferrals from creditors will likely be reported, could work against you, and should be avoided. Finally, the pandemic also brought some good news: the qualifying rate recently fell from 5.19% to 4.94%, so many borrowers will qualify for more under today's "stress test".
The lender may like your file but for the deal to work, they also have to like the property, because it acts as collateral for the loan. For this reason, it's recommended to work with an experienced realtor and include a financing clause with any offer to purchase. The lender will review an appraisal report to confirm that the property meets their standards and market value for the loan. If it's determined you overpaid, additional downpayment will be required. Other real estate sales, called comparables, are used to determine market value; so the absence of similar, recent sales (due to April's unprecedented low numbers) could be an issue.
Finally, you'll want to be aware of all costs and ensure you have the funds necessary to close. Mortgage default insurance of 3-4% may be added onto the mortgage, usually with less than 20% downpayment. Ontario land transfer tax of 0.5-2.5% (double in Toronto) is due on closing. 13% HST is charged on newly-built properties if not included in the purchase price. An appraisal, inspection, and legal fees shouldn't cost more than $3000 combined. If your money is invested in equities or mutual funds which fluctuate in value, consider selling to guarantee that the amount needed will be available on closing. Whatever your financial position, rest assured that you can afford expert advice, because mortgage brokers and real estate agents are paid on commission and typically do not charge buyers a fee.
What the data tells us
Even if a safe, effective vaccine were available tomorrow the road to recovery would not be fast or easy. A gradual "U" shaped economic course over the next 12-18 months is a likely scenario but not guaranteed. In such times of uncertainty, cash is king, and lenders are pricing mortgages accordingly. This is apparent with current fixed rates, which according to bond yields should be in the 2% range but are instead much higher - with a "COVID premium" built-in. Borrowers would be wise to consider a variable rate, historically an undeniably smart choice, and forecasted by major banks to stay low for years to come.
What about the housing market? Canada's top economists are predicting an interim price drop of up to 10-20% (in non-oil producing regions) with a return to pre-pandemic levels by, perhaps, the end of 2021. On the other hand, in some respects the market is on "pause" with housing's major drivers of supply and demand - new construction and population growth - equally weakened by the virus. Regardless of what plays out, the market will never be static, and timing an asset purchase is difficult for even the savviest investor in normal times. My advice is that the right time to buy is when you want to own the roof over your head and can afford to do so.
First-time buyers often need protection from themselves, being laser-focused only on buying a home and not on keeping it in the event they can't make payments. The reality is that most new homeowners today have very little or no savings after their home purchase is complete, often liquidating even RRSP assets for the downpayment. Consider how a layoff, health diagnosis, accident or injury could jeopardize years of work to achieve homeownership status and trigger expensive mortgage penalties. There are various insurance options to mitigate this risk, and young people pay the lowest premiums. The last few months have proven how life can obliterate even the best-laid plans, so getting professional financial planning advice for insurance, emergency and retirement savings should be a top priority for any new mortgagor.
The Canadian dream of homeownership is alive and well, so expect competition from other like-minded buyers and prepare all documents now. The best time to submit an application is before going house hunting because there may be steps you can take to strengthen your file. A good mortgage broker can help you prepare a solid action plan, take advantage of the best terms in the marketplace, and connect you with trusted industry professionals you'll need to close the deal.
Avoid stress and uncertainty by getting the expert advice you deserve: book a free strategic financing review at calendly.com/laurenpye/vinegroup. Follow me on social @laurenpye.ca to be in-the-know on financing strategies, news and updates that affect you.
Thanks for reading and be well.