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Leveraging The Equity in Your Home To Buy A Cottage Now


Buying A Cottage

Thinking of Buying a Cottage? Here’s How to Leverage The Equity in Your Home to Make That Happen

Cottages have always been a hot commodity, but even more so this year as vacation destinations are limited and time away from the city can provide a much needed mental break and escape for many families.

 

But how do you get your hands on one of your own? Buying a cottage is probably much more realistic than you realized. Here’s how:

 

Leveraging Equity in an Existing Property

One of the most common ways that buyers are able to come up with a down-payment to buy their cottage is by using the equity that already exists in their home. This can fund the down payment, or you can finance the entire cottage this way.

 

For example, in Toronto, you can refinance your home up to a maximum of 80% market value.

  • –  Your home is currently worth $1.2 million
  • –  Remaining mortgage: $600,000
  • –  You can refinance up to 80%, so up to a total of $960,000 mortgage
  • –  $960,000 – 600,000 existing mortgage ≈ $360,000 cash

You can take that $360,000 in cash to buy a new property or as a secured line of credit.

 

 

What are the Down Payment Requirements for a Cottage?

Owner-occupied second homes/cottages:

  • –  You can buy a cottage (second home) with as little as 5% down on the first $500,000 and then 10% thereafter to $999,999.
  • –  If the property is > $1 million, you’ll need a 20% down-payment.
  • –  The down-payment will depend on whether the property is 4 season cottage (Type A) or summer only (Type B) – see below for more detail about that:
    •   >  Type A cottages – minimum 5% down
    •   >  Type B cottages – minimum 10% down *some lenders may require more

 

 

Cottage Mortgage Qualifications change depending on the type of property.
What does this mean?

Type A Properties mean “All-Season Secondary Homes”:

  • –  Owner-occupied or occupied by an immediate family member
  • –  Single-family dwelling
  • –  Property particulars:
    •   >  Must be a readily marketable residential dwelling
    •   >  Must be winterized with seasonal access
    •   >  Must have an estimated remaining life of > 25 years

 

Type B Properties mean “Seasonal Cottages”:

  • –  Same property characteristics as Type A homes except:
    •   >  Seasonal access permitted (road not accessible in winter)
    •   >  The property does not need to be winterized

 

 

*Important Note: These are general guidelines only, for insured purchases less than $1 million. If the value of the property is over $ 1 million, lenders have their own separate requirements.

 

 

There are also some special financing considerations to keep in mind!

Most lenders will want to know upfront if there is safe drinking water or UV filters, to ensure that what comes out of your tap isn’t toxic. As a result, water potability tests may be required if the cottage is on the water. They may also do a risk assessment for flood in certain areas.

 

 

 

*Important Note: You should always have a financing condition in your offer on a cottage or second vacation home – usually for at least 10 business days. This allows for the appropriate water tests to be completed and for an appraisal to be scheduled (appraisals usually take longer to schedule in smaller communities).

 

 

 

The Biggest Takeaway?

Buying a cottage is probably more affordable than you think. Either way, the key to securing cottage living — and making that staycation a peaceful escape — is to speak to a mortgage broker first.

 

 

 

 

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The New Normal: Home Appraisals During COVID-19

Few things have remained unchanged during the novel coronavirus pandemic.

Home appraisals are no exception.

Home Appraisals During COVID-19

They’re as routine as the sun rising every morning.

But even home appraisals have had to adjust to the COVID-19 pandemic that stresses physical distancing for the sake of public health.

Just a few short months ago, appraisers would walk through a home to assess its value when someone applied for a mortgage on a new property or hoped to refinance their existing home.

Now, with flattening the curve being top of mind, appraisers are relying more than ever on technology to do their job.

What to expect when getting an appraisal.

“There’s a lot that can be done on computers,” says Scott Nazareth, mortgage professional with Mortgages.ca.

Appraisers are turning to MLS in search of comparable sales to help determine a home’s worth. Then they’re making adjustments. Does your home have a marble floor? That will be considered in an assessment if an appraiser could only find similar homes with hardwood and carpet online.

The marketability of a home is also factored into appraisals. Is it next to a railroad or cemetery? What are the trends in the neighbourhood?

Appraisers did this kind of virtual legwork previously but more emphasis is put on it now.

Extraordinary assumptions in extraordinary times.

For as much as an appraiser can glean online, there’s nothing like seeing a home in person.

Appraisers typically go into a home to look at any renovations and upgrades. These days, they’re looking through windows, noting this in assessments as an extraordinary assumption. 

Extraordinary assumptions were frowned upon by lenders previously, but that’s changing, Nazareth says.

“Before, it would be considered a drive-by appraisal and not normally accepted,” he says. “Now lenders have accepted this new form of appraisal and it’s called a modified appraisal.”

Securing financing with a modified appraisal.

A-lenders quickly adjusted to accept extraordinary assumptions, Nazareth notes.

But private and B-lenders, which might be the only option for some borrowers, realize they’re taking on extra risk by granting financing based on these modified appraisals. B-lenders that may have offered up to 85 percent of a mortgage’s value before the pandemic has scaled back to 70 or 75 percent, Nazareth explains.

“They’ve really had to change their underwriting criteria and have had to change the amount they lend,” he says. “It’s definitely impacting the ability of clients to take money out in the alternative and private space.”

Home Ownership, Mortgage Education

The Reverse Mortgage: Why It May or May Not Work For You

Popular opinion says reverse mortgages are bad for borrowers, but that’s one of many misconceptions about these loans.

What is a Reverse Mortgage

A 71-year-old with limited income came up with a plan to better her financial fortunes.

She decided to convert her basement into a rental suite. The money she’d make each month from taking on a tenant would supplement her CPP and Old Age Security payments.

Knowing that a bank loan wasn’t an option at her age and with her income, she decided to take out a reverse mortgage for 25 per cent of her home’s value. The renovation got done, a tenant moved in, and now she’s earning an income that boosts her financial security. The best part is she gets to stay in her home.

What is a reverse mortgage?

A reverse mortgage is a loan secured against the value of a home. Unlike a regular mortgage, borrowers aren’t required to make regular payments. In fact, they don’t have to pay it back at all until they sell their home. 

The money is tax-free and can be used however homeowners want. Anyone over 55 can apply for a reverse mortgage, with the eligible amount calculated by age and other factors.

Reverse mortgages really come in handy in situations like that of the 71-year-old who put the money back into her home, says James Harrison, president of Mortgages.ca

“She still owns her home and her home’s still going to appreciate in value, so it’s great,” he says. 

A reverse mortgage is also an ideal option for older pensioners who want to continue living independently as they age, Harrison adds. 

“If they can set this up, they can have full-time care and be able to stay in their home, and that’s a big thing.”

Why do reverse mortgages get a bad rap?

Depending on the reverse mortgage, there can be high or hidden fees. But Harrison says the benefits of a reverse mortgage outweigh any disadvantages, especially if borrowers consider a private loan as an alternative.

For starters, the entire value of a reverse mortgage can be taken in one lump sum, or in monthly or quarterly installments. 

Interest rates are also reasonable compared to private loans, Harrison notes. The 71-year-old who converted her basement to a rental suite secured a variable rate of prime plus 1.75 percent, or 4.20 per cent as of May 2020. Private loans can clock 10-12 percent interest plus high fees just to get set up.

“There’s a lot of flexibility in a reverse mortgage,” Harrison says. “You can do a three-year variable, five-year variable or fixed and when you want to sell and move, you pay it back and keep the rest.”

blog, Home Ownership, Mortgage Education

Should I Set Up a Home Equity Line of Credit?

Home equity lines of credit can be a financial lifeline when emergencies happen.

But waiting until retirement to set one up can throw homeowners a real curve-ball.

An older adult couple living in a million-dollar home called it quits on their careers after their mortgage was paid off.

They considered applying for a $600,000 home equity line of credit before retiring but decided against it in the end. They figured if they ever needed to access a large amount of cash, they could easily get it because of the equity they had in their home. A year later, they decided they wanted to spend less time in the city and more time enjoying the peace and quiet of lake life. They wanted to buy a cottage. 

Bad news came when they applied for a mortgage: their retirement income wasn’t enough to qualify. Had they secured that home equity line of credit before retiring, however, they could have used that to pay for their slice of heaven by the water.

Whether retirement is on the horizon or you have dreams of giving up corporate life for self-employment, it’s important to have the conversation with a professional about shoring up financial safety nets, including a home equity line of credit, before making the leap.

How does a home equity line of credit work?

A home equity line of credit is secured against the value of your home but approval is based on your income at the time you apply for it. 

You may never need to tap into it, but if you do, the interest rate with a home equity line of credit is better than with any credit card or unsecured line of credit. It really is the cheapest line of credit on the planet.

Paying off a home equity line of credit also comes with greater flexibility. The balance can be paid in full, unlike a mortgage, or you can choose to pay the interest only.

Home equity lines of credit also remain in place as long as you own your home.

When should you get a home equity line of credit?

Most people are never offered a home equity line of credit by their bank, but they should speak to a mortgage professional about applying for one as soon as they’ve built up equity in their home — and while they’re still earning a secure and stable salary.

The key is to be prepared for whatever life might throw your way, and that includes getting a home equity line of credit in place sooner than later regardless of career ambitions or retirement plans.

blog, Mortgage News

Getting a Mortgage During a Pandemic

Home buyers getting into the market and home owners looking to refinance wonder whether a new mortgage is possible right now.

It is, but with some caveats.

A recent first-time home buyer decided honesty was the best policy when he lost his job during the current COVID-19 crisis.

With just two weeks before the deal closed on his new home, he told his bank what happened. His parents co-signed on the mortgage and the deal moved forward, but the home buyer could have landed in serious financial trouble without that safety net.

He was at risk of losing his deposit and being sued by the sellers for money they would have lost had the deal fallen through.

Can I get a mortgage right now?

All this to say Canada’s large banks are still financing home purchases, even with an economy that’s all but halted. But they are being more conservative with their lending, says James Harrison, president and mortgage broker with mortgages.ca.

For starters, they’re no longer making exceptions on debt-service ratios and they’re eliminating discounts on prime and variable mortgages. Self-employed applicants will also have a harder time getting a mortgage with banks more thoroughly scrutinizing the industries in which they work.

Updated letters of employment are now essential for approval. Banks have started asking mortgage applicants for pay stubs up to two weeks before deals close, too, and they’re calling employers to confirm clients still have a job.

“Get your files in order,” Harrison advises. “Get your conditions met as soon as possible so there are no problems later and deals can close.”

Be prepared to wait.

Still, it will take longer for deals to be funded because banks are swamped right now. Mortgage applications were up 400 per cent when the pandemic started taking its toll economically, Harrison says.

Home buyers were taking advantage of low fixed rates at the time. Homeowners looking to refinance also jumped at lower interest offered after the Bank of Canada dropped rates.

Approval on financing can now take up to 10 days with clients waiting up to four weeks to get that cash in hand.

The key is to work with an experienced mortgage broker who can help navigate financing during these unprecedented times and get the best rates for homebuyers and homeowners in the process.

“It’s not the time to drag your feet and rate shop,” Harrison says. “Have the conversation with an experienced mortgage broker, know what’s out there and get your approval in place. Don’t be left in the dark because everything is changing so fast.”

 

Home Ownership, Mortgage Education

Understanding Mortgage Deferrals during COVID-19

Heres what you need to know about pausing your mortgage payments

Getting through to a bank can be a test of patience right now.

Those trying to connect to a bank employee have two options: endure the long wait time by testing your music trivia knowledge against the on-hold soundtrack or hang up.

If you choose to hang up, its important to try again at another time, particularly if youre calling to defer mortgage payments during the COVID-19 pandemic.

What is a  mortgage  deferral?

Canadas six largest banks offered to pause mortgage payments for those who lost work or faced financial hardship after COVID-19 slowed our economy to a grind.

Large banks are allowing customers to postpone their mortgage payments for six months, and so far, more than 210,000 Canadians have requested the relief.

Some smaller non-bank lenders are offering mortgage payment deferral programs, too, but they may only suspend payments for a shorter time.

The strategy is to get everyone to just stay home,says James Harrison, president and mortgage broker with mortgages.ca. The thought is in six months well be back up and running and can make payments. But in the meantime, people can use that money to buy groceries and keep the lights on.

Whatever the case, its important to speak to someone directly about halting payments to ensure you and your lender are on the same page. Dont let the frustration of being on hold cause you skip payments without permission, assuming your bank will understand why.

What are the long-term effects of deferring mortgage payments?

Your credit score will nose dive if you dont make it official with your bank that you need a break from your mortgage payments. So stay on the line or try again, no matter how long it takes. Approval is typically automatic once you do speak to a bank employee.

However, keep in mind you will have to start paying your mortgage again. Payments will be higher when you do, Harrison warns, because interest is still accumulating on your principal and on the interest you were already paying. Do the math to ensure your mortgage will be manageable when payments resume.

A lot of people think its interest-free for six months and the government is covering it,he says. Theyre not.

The good news is deferring your mortgage officially — shouldnt affect your credit score. But it is up to banks to let credit monitoring agencies know whats happening on your behalf. Given the average bank employees workload right now, its best to get that guarantee in writing or ask for the name and employee number of the person helping you in case you need that information later.

Otherwise, this short-term gain could lead to long-term credit pain.