Hi Guys, This is Thomas!
Your Trusted Advisor here!
Previously in Connect with Thomas,
I invited Andrew Chang from City Wide Mortgage Services
to give us tips on how to get your first mortgage approved in Canada.
This week, we will continue on 3 more things
1. What are other hidden cost when getting a mortgage
2. what are some incentives as a first home buyer
3. should we go for variable or fixed interested rate with this low interest environment
Let’s get started!
From what I know, Andrew,
sometimes the cost of having a property is not just a list of price,
because I know there will be legal fees, there will be taxes,
and there's some other like inspection fee, etc.
Can you walk us through a little bit?
Is it just a list of price on MLS websites?
Yeah, that's a very good point, Thomas.
So a lot of buyers assume that…
let's give you an example.
They'll say, Hey, I'm looking for a $500,000 property,
I have $100,000 saved down which is equivalent,
which equates essentially to 20% down and they're going to say,
Okay, I have enough saved up.
I'm going to use the whole $100,000.
That should be sufficient to close this property
and close this transaction.
But unfortunately, a lot of them don't take into account
that there's other costs associated with closing and buying them.
you'll always have to get an appraisal depending on the type of transaction.
So appraisal fees can be anywhere between $300, $400 or $500,
depending on the type of property it is.
There's legal fees that you have to pay your lawyer
or notary to register the transaction for you.
That can be anywhere between $1,200 to $1,500 to maybe up to $2,000,
depending how complicated your transaction is.
There's Home Inspection fees
if you want to make sure that the property
that you're buying doesn't have any issues.
And a big one that a lot of people don't realize is something called
Property transfer tax,
which is the fee that we have to pay to the government
whenever we pay whenever we purchase a property,
and the property transfers title to somebody else.
So property transfer tax is usually
a big expense that a lot of people don't take into consideration.
And that can be quite expensive.
So if you guys have any questions about that,
feel free to let me know.
Those are substantial fees,
so I always tell the client whenever you're budgeting
and whenever you're trying to figure out
how much money you need to purchase a property,
you always have to leave a little bit of wiggle room on the side
to make sure that you have enough money
to not only pay the down payment,
but to pay the closing costs,
as well as making sure
you have a little bit of money on the side for a rainy day as well.
Speaking of first home buyers,
what are some incentives out there?
Because I know that, for example, RRSP,
you can actually take out $35,000 tax free for your first home buyer,
and there's some incentive on the taxes as well, too.
Yeah, so first time homebuyers.
There's a lot of incentives out there
that can help them for the first time when they're buying a property.
Some of those include the RRSPs,
which you can draw up to $35,000 maximum per borrower.
So for example, there's all you can borrow for up to $35,000.
However, there's caveats that come with that which include,
you guys must occupy that residence as a principal residence.
For example,
if your first time buying is going to be for investment or rental property,
you're not allowed to use this RRSP program.
The funds from RRSP also must be deposited within the RRSP account
for over 90 days prior to you withdrawing it.
So, for example, let's say you just put the RRSP in two weeks ago
and suddenly you want to buy a property,
you're not allowed to pull that out as well.
And depending on the purchase price for first time buyer,
you could get a rebate or credit back on the property transfer tax.
So depending on what your final purchase price is,
you may not need to pay the full amount of property transfer tax,
and you may get a percentage rebated back to you depending on the price.
Another thing that a lot of people may not be aware of is that
gifted down payments are allowed from immediate family
for purchases for owner occupied property.
So, if a client may be a little bit short
or may not have exactly enough money
to be comfortable to purchase a property,
if they have family that's willing to give them money
to help them purchase a property that is allowed as well.
So a lot of people aren't aware of that.
So if you guys do have family that's willing to help you guys out,
it's definitely a big plus.
And if you're worried that it might be a big hassle
or a big ordeal to do that,
it's actually very simple.
Basically, the money just needs to be deposited in the client’s account
and the family member signing over the money
just has to sign something called the gift letter,
which basically states
I'm gifting this money to so-and-so
to help them purchases properties,
and they don't have to repay that money back to me.
Awesome! And I do have one final question,
I'm sure people are interested is about the interest rates.
I know that for interest rates,
there's something called
the variable interest rate and the fixed interest rate
And what the current low interest environment.
Do you have any suggestion?
Which one will be better for the people in Canada?
So obviously, with everything that's going on right now
with COVID, and the markets and the interest rates being at historic lows
we've never really seen before.
There's not really a right or wrong answer
to its fixed the right product.
For me, it's variable the right product for me,
it really depends on the borrower situation.
It really depends on their risk tolerance and their scenario
and how risky can they be?
what is their cash flow situation like on a month to month basis?
Just to give clients a little bit of information on the main benefits
and pros and cons for each product, a fixed rate, essentially,
the pro of it is that the interest rate won't fluctuate
throughout the term of the mortgage.
So whatever your rate is that we get for you at the time of closing,
that's going to be your rate for the entire term.
So you don't have to worry about it going up,
you don't have to worry about it going down.
However, the downside for that for fixed rate mortgages,
generally their penalties if you break the mortgage,
and breaking the mortgage refers to whether
you could sell the property that's breaking your mortgage.
If you want to refinance your mortgage,
to pull out the equity
that's breaking your mortgage,
anything that changes the terms of your mortgage
is considered breaking your mortgage.
The fixed rate penalty is quite substantially
higher than a variable rate mortgage.
So that's one big downside as well.
For example, the variable rate mortgage
the pros of that is, generally speaking, in a normal environment,
a variable rate more,
which is lower (or should be) than a fixed rate mortgage.
So you should be saving a little bit of interest
on a month to month basis for that.
However, the big risks are variable rate mortgages.
If the interest rates and the prime rate changes up or down,
your monthly payments will generally change with that.
It will cause fluctuations in your monthly payment,
which a lot of borrowers may not always be comfortable with.
if they only have set aside X amount of money on the budget every month,
they don't have to worry about one of these things
going up or down by quite a bit.
So that's kind of one downside for the variable rate mortgage.
However, if you have someone that's willing to take the risk
and is not too risk adverse,
they're usually willing to take a variable rate mortgage
and ride out the fact that they're going to be saving money
in the meantime,
and they can take the risk of it fluctuating up and down.
And another big pro for variable rate mortgage compared to fixed rates
is that if you do break your mortgage anytime,
the penalty calculation for variable mortgage
is quite a bit lower than a fixed rate mortgage.
So generally,
you're going to be saving a lot of money in that instance as well.
And last main benefit of a variable rate mortgages that
It at any time during the term of your mortgage,
you can generally lock it into a fixed rate mortgage anytime,
with no fees and no penalty.
So if you're worried about a fluctuating up or down,
you can just lock it into the best fixed rate at that time.
So it gives you that flexibility.
Whereas if you're on a fixed rate mortgage,
and you notice that the variable rate mortgages are very, very low,
you're not allowed to just switch it to a variable rate mortgage at any time.
Because that would be technically breaking your mortgage,
which would trigger the penalty,
which would be quite substantial.
So right now, there's not really you should do this
or you should pick this product.
It's really based on each individual's situation,
each individual's financial situation,
and I try to help plan around that to let the client know,
Hey, if you're a little bit risk adverse,
maybe you should go for this product.
Hey, if you're willing to take the risk,
you should take this product.
If this might not be a long term home for you,
and you're thinking of maybe moving or breaking a mortgage
within a few years, maybe this is the part for you.
So it really just varies on a case by case situation.
And our job is to help plan, and help the client figure out
what is the best part for them?
Because, at the end of the day,
clients always worry about what's the rate?
What's the rate? what's the rate?
And that's not always the most important thing for the client.
It's about figuring out which product is
the best for their situation now and for the situation in the future.
Wow. That's really good information.
Because, I know a lot of you know,
especially the millennials or
young families and the individuals
What they do is they will actually just go shop around on the internet
the internet as they handle to find the lowest interest rate
and I know that that's not the only thing
to consider when getting approval,
especially if maybe you have debts,
how to get a bigger approval rates,
and, what are the factors that can affect the mortgage
Afterwards, I think that's all essential as well, too.
Yeah, and I think that's a big misconception with a lot of people
because they think,
Oh, I found something on Google,
it showed the lowest rate.
Let's just go for that without seeing knowing the fine print
and without knowing the product details,
because unfortunately, a lot of these lenders will always
obviously post their “lowest rate product”,
which unfortunately, usually 95% of the time,
doesn't apply to that buyer situation.
So they don't even qualify for that product.
Or they do qualify for that product.
That product might be a no frills product,
which basically means it's a very, very restrictive product
with very, very high penalties compared
to a regular standard mortgage.
So there's a lot of things that they need to consider
rather than just, Hey, the number looks really low,
let's just go for that.
But there's a lot of fine print and a lot of detail within each
mortgage product that the clients have to consider.
So I always tell the clients:
if you guys ever have any questions, please reach out.
And, you know, don't be fooled just by the advertised rate
because those aren't always the best products for the client.
All right! So I just want to say thank you so much! Andrew!
there's a lot of information,
That's definitely a good review for all of us, as well.
And I know this is just only the tip of all the things
that we need to know, too.
I hope I can invite you back for more details about mortgage because,
I'm sure besides me,
a lot of people are looking for their first property
or they get their mortgage renewed, too.
Alright! Thanks so much and of course,
for those of you who have questions about anything about mortgage,
I will put all the details in the description box below as well
You can just put your comments in there,
and I promise both me and Andrew
will be here to answer your questions.
And again, thanks so much, Andrew!
I look forward to see you in the next episode.
Thank you, Thomas.
Have a good day. Talk to you soon.