We don’t qualify to purchase as much as we did a year ago. Should we look at a private mortgage? – LOOKING FOR OPTIONS
DEAR OPTIONS: There are a number of mortgage alternatives, including A-type lenders (major banks), B-type lenders (major Canadian institutions, which may be less stringent in their rules) and private mortgages. While the majority of Canadian mortgages come from A lenders, sub-prime and private lending still represents a significant portion of the market. These options may work for Canadians who don’t meet the challenges of the current “stress test”, which requires buyers to qualify for a mortgage at two percent over the current rate (either the Bank of Canada 5-year benchmark or the rate offered by their lender, whichever is higher).
Triggered by bill B20, the “stress test” is meant to ensure that borrowers can handle higher interest rates, should they happen to rise. Bank of Canada analysts were predicting rate increases when the bill took effect in 2018. Fifteen months later, the U.S. Federal Reserve and Bank of Canada have held off on rate increases. This may indicate that rates have stabilized. If I had a crystal ball, I might predict that the economy has levelled off a bit. Ideally, it would be great to see some longer amortizations and a re-evaluation of the stress test coming down the pike.
If you don’t qualify for A-type lending, sub-prime or B lending may be a good short-term solution to help you get you into the market. Should you consider these, be sure to vet them thoroughly. You might alternately want to look to the Bank of Mom and Dad (and not for money, necessarily).
Pro Tip: as was common in previous generations, a parent or relative with solid credit may be able to co-sign for a year or two, to help you get you into the property you want.
We have a lot of equity in our townhouse. Now we want to buy another house to live in, so we can rent it out. Any advice? – EAGER TO INVEST
DEAR EAGER: I get this question a lot. The first thing I tell my clients to do is read the Residential Tenancies Act, so they can fully grasp what it means to be a landlord. Many people dream of owning rental properties. With the tax implications, I feel they’re a great investment once you’re in your “forever home” (a.k.a. the house you’ll live in until you’re ready to downsize). The appreciation on your principal residence is tax free, so if you were to downsize from an $850,000 home to a $400,000 one, you’d be left with a nice, tax-free nest egg. In contrast, any gains you make on a rental property will be taxed.
Pro Tip: Plan thoroughly before you invest. With the acquisition cost and only 20 percent down (the minimum required to buy a rental property), cash flow can be elusive. You need to focus on building equity.