Thinking about buying a house with friends? Here’s what to consider

Down Payment & Buying DAZADA DIAMOND 21 Aug

Thinking about buying a house with friends? Here’s what to consider

On July 1, the Canada Mortgage and Housing Corp (CMHC) changed the rules around mortgage insurance, making it more difficult for some would-be buyers to qualify for a CMHC-backed loan. And despite the early impact of COVID-19 on housing values, prices bounced back in May and June and remain relatively high. According to a recent Canadian Real Estate Association report, homes in Canada sold for an average of almost $539,000 in June, and of course much more in cities like Toronto and Vancouver.

It’s no wonder some Canadians are considering co-ownership to get into the market or move into a more desirable property or location. But if living with family can be complicated, co-buying with an unrelated party (a friend, for example) is even more complex and could benefit from expert guidance.

We reached out to Dalia Barsoum, president of Woodbridge, Ont.-based Streetwise Mortgages, and Richard Bell, partner at Bell Alliance LLP in Vancouver, to find out how a co-ownership arrangement might differ from a typical purchase. If you’re interested in the idea, here’s what to consider before buying property with a friend or two.

Choose a co-ownership type 

You can co-own a home as joint tenants (similar to a married couple buying a home together) or tenants-in-common. (Usually, the term tenant describes a person who rents or leases property. For an estate owned by more than one person, however, a tenant is a co-owner.) With joint tenancy, each person has an interest in the investment, and if one owner dies their share of the home goes to the other owner(s). In a tenants-in-common arrangement, each tenant owns a portion of the property, which becomes part of their estate when they die. Whether registering as joint tenants or tenants-in-common, all owners on the title will need to sign any mortgage, and there can only be one lender, notes Bell. Barsoum points out that from a lender’s standpoint, every co-owner is 100 per cent liable for the mortgage. So if one buyer defaults or forgets to make a payment, everyone’s credit scores will be negatively impacted.

Agree on the fine print

What if someone wants to rent out their place? What happens when one person wants to sell? These are the types of questions you should review with potential co-owners and attempt to answer in any co-ownership agreement. “When you’re doing contracts, you’re always trying to ask what scenarios can arise and what do you do if things go wrong?” says Bell. “What is the contractual arrangement between the parties?”

Any agreement should also specify the percentage each person has, which — if you aren’t splitting ownership equally — Bell suggests could be calculated based on factors such as square footage and livability differences between each unit, assuming there are separate spaces. If one unit will use more municipal services, for example, a different ratio might make sense.

Beware you may face lending challenges

When working with co-buyers, Barsoum will typically look at each person’s finances before recommending how any deal should be structured. “Sometimes having everyone on title complicates the deal from a financing standpoint and may result in suboptimal financing for the group,” she says. “When two or three people come together [to buy a property], they may be all making money and bringing more income to the table to improve their qualification, but they are maybe also bringing their own debts into the equation.” Buyers’ credit stores will be blended, she explains. If one individual’s score is very low it might affect approval or the type of financing the group gets.

In those situations, it might make more sense to exclude one buyer from the property title. Their interest in the co-ownership can be protected through a separate legal agreement. However, Barsoum notes that some lenders don’t care how the title of a property is split up, whereas others may want everyone to have equal ownership depending on who’s on the application.

Whether or not the parties are related, there are two situations where it may be harder to get approval: when investors want to buy a rental property together and when it’s a larger group of people making the purchase. “Whenever multiple people are going on an application, lenders generally want to know the story,” says Barsoum. “Why are [these] people coming together to buy? And the story has to make sense.” Bell notes that, in his experience, financing can also be a challenge for a tenants-in-common arrangement.

Look for a mortgage with flexibility 

Co-buyers might expect to spend several years living together, but individual circumstances may change sooner than that. “Life happens … someone gets married or has a new job or needs to change location [and] they want out,” says Barsoum. “If they have taken a fixed-rate mortgage, then there is going to be a [larger] penalty.” Barsoum recommends variable-rate mortgages for clients who are getting into co-ownership arrangements because they offer more flexibility and generally have smaller penalties if you need to break your mortgage early.

Don’t forget about government programs for homebuyers

Programs such as the First-Time Home Buyer Incentive can be invaluable. Barsoum notes first-time buyers — whether purchasing with friends, family or a spouse — would be able to benefit from the incentive on their share of the property, even if co-buyers do not qualify.

  • (Credit: iStock/Getty Images)

Economists: CERB might galvanize younger home buyers

Down Payment & Buying DAZADA DIAMOND 4 Aug

Economists: CERB might galvanize younger home buyers

Economists: CERB might galvanize younger home buyersThe Canada Emergency Response Benefit might be a potent stimulant of activity involving the next generation of home buyers, if the results of a new market study are any indication.

According to Fraser Institute economists Jason Clemens, Milagros Palacios, and Nathaniel Li, around 400,000 Canadians in the 18-24 age range are eligible for CERB. The study estimated that this cohort earned between $5,000 and $12,000 per month in 2019.

“These [young] Canadians represent a total potential cost to CERB of $4.8 billion (before taxes on CERB),” the economists said in an analysis published by The Financial Post. “It’s also worth noting that for this group of CERB-eligible Canadians, CERB benefits are on average higher than their monthly earnings in 2019, meaning they’re actually better off receiving CERB than they were working.”

Moving the age range to Canadians younger than 18 years old who had monthly household incomes of $5,000-$24,000 will push the number of CERB recipients to 855,500, with a total potential cost of $10.3 billion.

And the widest range in the economists’ estimates – the 15-24 age cohort with household incomes of $5,000-$24,000 last year – yielded around 985,200 CERB recipients with a total potential cost of $11.8 billion.

This wellspring of future market strength will likely offset the significant economic impact of the COVID-19 pandemic on younger Canadians, as reported recently by TD Bank.

The TD Bank study found that around 66% of Canadians in the 18-34 age range are bracing for – or have already experienced – job losses or reduced hours due to the coronavirus. To compare, the unemployment/underemployment rate among those older than 55 years old was 38%.


Mortgage Deferrals ‘Buying Time’ For Canadians, Bank Of Canada Says

Down Payment & Buying DAZADA DIAMOND 22 Jul

Mortgage Deferrals ‘Buying Time’ For Canadians, Bank Of Canada Says

The pause in mortgage payments are giving people a chance to get back to work.

Andrew Chin/Getty Images
A view of Metro Vancouver is seen here at twilight on July 18, 2020, from Burnaby, B.C. Softening population growth from immigration could start to weaken house prices in the future.

TORONTO — A Bank of Canada economist says the current economic recovery could be different than the recovery from the financial crisis of 2008.

Mikael Khan, the Bank of Canada’s director of financial stability, said that while the employment rate has fallen due to the pandemic, house prices are recovering and keeping homeowners from filing for insolvency.

Khan said breaks from mortgage payments have bought homeowners some time to get back to work amid the COVID-19 pandemic and economic downturn.

“The fact that these deferrals have been available is really, really important,” said Khan. “Ultimately, what matters most when it comes to defaults is people having a job, having their incomes. What the deferrals are doing is they’re essentially buying time for that process to unfold.”

Khan, who spoke at the Move Smartly Toronto Real Estate Summit on Monday, has been studying mortgage defaults. He compared the COVID-19 pandemic to a natural disaster, such as the 2016 wildfires in Fort McMurray, Alta., which also involved a mortgage deferral recovery plan.

Bank of Canada research found that while the wildfires caused a bigger spike in employment insurance filings than the 2008 recession, the EI trend reversed much faster after the fires than in 2008.

The 2008 conditions set off a lengthy recession due to “an underlying fragility in the global financial system,” the research suggested. But the wildfires, like the COVID-19 pandemic, were a sudden shock.

“One thing that’s always very important when you’re facing a large negative shock is the initial conditions,” said Khan.

“In Fort McMurray, when the wildfires hit, that’s an area that had already been struggling for some time with the decline in oil prices that had occurred about a year or so prior, so financial stress was quite high,” Khan said.

“Now, at the national level, what we’ve been concerned about for many, many years is the high level of household debt. That’s the No. 1 pre-existing condition that was there when the pandemic struck.”

While there are some parallels, the rebuilding process from a pandemic remains more uncertain compared to a wildfire, the research said. Khan cited increased savings rates as an example of a fundamental shift with potential to affect how quickly the economy recovers from COVID-19.

Over the past few months, some have warned that it could lead to a deferral cliff once benefits —such as Canada Emergency Response Benefit and mortgage deferrals — run out.

“When it comes to bumpiness in the recovery … this question that has been in the background of most of our discussions is, ‘To what extent will we see defaults or insolvencies?’” said Khan. “I think it’s reasonable to expect some sort of increase. What we’d be concerned about, there, is a very large-scale increase.”

Khan said that when a mortgage is in default, it can be caused by a “dual trigger” of both unemployment and large decline in house prices. Home prices in many areas have recovered since the start of the pandemic, Khan said. The job market’s recovery will be key to determining the impact of mortgage deferrals, said Bank of Canada research cited by Khan.

Softening population growth from immigration could start to weaken house prices in the future. But for now, Khan said, it wouldn’t make sense for homeowners with healthy home equity to file for insolvency.

“Even in cases where a homeowner simply can’t make their mortgage payments anymore — as long as they have equity in their homes and the housing market is relatively stable — there’s always the option to simply sell without kind of resorting to those sorts of measures,” said Khan.


How much should you put down when you buy a house?

Down Payment & Buying DAZADA DIAMOND 13 May

How much should you put down when you buy a house?

A small down payment can be costly in the long run. But a big one can be risky.


One of those big, fat decisions when you buy a house is: How much money should you put down?

A decent-sized down payment will reduce your monthly mortgage payment and will protect you from additional costs. But hey, maybe you just don’t have the cash.

Here’s the lowdown on down payments.

Low down payment, higher costs

Paying the mortgage for the primary residence A lower down payment will mean higher mortgage payments.In Canada, if you buy a home for less than $500,000, you’ll have to pay a minimum of 5% up front. That percentage increases if the home costs more.

Whatever the minimum, if you make a low down payment, you’ll face higher monthly mortgage payments.

How come? Several reasons. The first is just simple math: If you put up less money now toward the price of the house, you’ll need to borrow more and will have more of the cost to pay off.

Next, loans with lower down payments usually come with higher interest rates.

Finally, a big reason is something that’s often dreaded called mortgage insurance.

Benefits of a 20% down payment

Serious couple studying contract agreement, reading terms and conditions attentively before signing Determine whether you can afford to make a larger down payment.Lenders love it when you can make a 20% down payment, because that makes the mortgage a manageable risk. The lender believes it would have little trouble recouping the other 80% if you were ever to default on the loan and fall into foreclosure.

If you can’t or don’t want to put that much money down, the lender is required to take out mortgage default insurance for your loan, usually through the Canada Mortgage and Housing Corporation. It’s insurance that helps pay off the loan if you ever stop paying. Mortgage insurance can be expensive, and lenders will dump the cost of the premiums on to you.

You get to choose between adding the premiums to your mortgage payments or disposing of them as an upfront lump sum. If you add the premiums to your regular payments, you’ll have to pay interest on it. And in Manitoba, Quebec, Ontario and Saskatchewan, you’ll also have to pay sales tax up front.

If you’re buying a home for $1 million or more, you can’t get mortgage insurance and have to pay at least 20% up front.

Risks of a higher down payment

hundred dollar banknotes with golden rope band, isolated on white background

A higher down payment will tie up a lot of money in your house.But making a larger down payment isn’t always the smartest choice.

A big chunk of money will be tied up in your home. You won’t have an easy way of getting at that money if you’re suddenly slapped in the face with a major unexpected expense and don’t have an emergency fund to deal with it.

And when you make a hefty down payment, there’s also a chance you could lose that money completely. If you’re ever foreclosed on, the down payment will never be returned.

What should you do?

Isolated portrait of stylish young mixed race woman with dark shaggy hair touching her chin and looking sideways Weigh the pluses and minuses before making your decision.Personal finance is just that: personal. There is no right or wrong answer to how much of a down payment should be made.

You have to weigh all the pros and cons and decide what would work best for you. A trusted financial adviser might help you make your choice.


Aging population means advance planning for homebuyers

Down Payment & Buying DAZADA DIAMOND 28 Apr

Aging population means advance planning for homebuyers

Aging population means advance planning for homebuyersCanada’s population is aging and the country is set to have a significant increase in seniors in the coming years but is the housing market ready?

A new report from Sotheby’s International Realty Canada and the Mustel Group, reveals that aging homeowners are concerned about their living arrangements in their senior years.

With an estimated 1 in 5 Canadians of 65 years and older by 2024, the challenges for the real estate industry is being able to meet the demands of a cohort of seniors that wants to age in their own homes.

In one of the first studies into the housing aspirations of aging Canadians, the survey of 1,764 homeowners of ages 54 years or older in Metro Vancouver, Greater Calgary, Greater Toronto and Greater Montreal, found that 46% considered their needs in older years when they bought their current home.

Factors that are important to these buyers include safety, transit links, and grocery stores.

Within the home, a main level bathroom, and either single-level living or potential for a bedroom on the main level are important. For condos, elevators, fitness and wellbeing facilities, and security were top considerations.

No desire to move
The survey confirms the trend for aging Canadians to want to remain in their own home – and their current home – as long as possible.

Little more than a third of respondents said they expect to sell their home in their lifetime and just 14% expect to move to a new city, with a similar share expecting to move to a different neighbourhood in their current city.

Of those that do expect to sell, downsizing (54%) and freeing cash for lifestyle expenses (25%) are among the top reasons.

Condos are the top choice of those who plan to sell. This is particularly apparent in Montreal, Vancouver, and Toronto.


Canadian reverse mortgage debt tops $4BN for first time

Down Payment & Buying DAZADA DIAMOND 27 Apr

Canadian reverse mortgage debt tops $4BN for first time

Reverse mortgage debt increased 13 per cent over one year, as more seniors choose to stay in their homes

Reverse mortgage debt in Canada has topped $4 billion for the first time, according to Office of the Superintendent of Financial Institutions (OSFI) filings analyzed by housing blog Better Dwelling.

A reverse mortgage is a mechanism for those who have paid off their mortgages to tap into their home’s equity, receiving a monthly or lump-sum payment. It is popular among retirees as it allows them to stay in their home while giving them an income. It is usually only payable upon sale of the home, or death, which means that it is paid off before the rest of the estate is passed to the beneficiaries.

This is a 13 per cent increase from one year previously and the first time in Canadian history that reverse mortgage debt has topped $4 billion.

Better Dwelling reverse mortgage debt
Source: OSFI regulatory filings; Better Dwelling

However, the blog pointed out that the rate of growth for reverse mortgage debt is slowing, as the 13 per cent year-over-year increase for December was the lowest growth rate in many years (see graph below). It added that residential mortgage credit is growing at 5.1 per cent as of January 2020.

Better Dwelling reverse mortgage debt growth change
Source: OSFI regulatory filings; Better Dwelling

The report came at the same time as a Sotheby’s International Realty Canada survey found that the vast majority of older Canadians want to stay in their current homes, in preference to downsizing or moving, for as long as possible.


Canadians are struggling to save, according to new poll

Latest News & Economy DAZADA DIAMOND 26 Mar

Canadians are struggling to save, according to new poll

Canadians are struggling to save, according to new pollThree out of four Canadians are finding it hard to balance spending on what they need now with saving for later.

A new poll by RBC found that more than half of Canadians are taking a “whenever I can” approach to saving, as opposed to regularly setting aside money. That’s the highest level in five years.

In addition, 56% of respondents say their highest financial priority is to save for retirement, while 53% have a top goal of adding to their rainy day fund. While Canadians have good intentions of saving, actually putting it into practice is proving more difficult.

“Less than half of poll respondents who identified these two priorities actually put any savings toward them over the past year, with only 46% contributing to a rainy day fund and 43% putting money aside for retirement,” the report stated.

Baby boomers are the most worried about their retirement savings. Four in ten Canadians over 55 don’t think they have squirrelled away enough money for their retirement years. 40% are also worried about the impact of inflation and 36% are concerned about what the weakening of markets could mean for the value of their savings and investments.

Even with these looming concerns however, less than half of Canadian seniors have a financial plan in place.

“It’s easy to connect the dots: many who aren’t saving enough don’t yet have a financial plan,” said Stuart Gray, director of the financial planning centre of expertise at RBC. The most important step is for people to understand what their current finances will allow them to achieve and find a financial advisor to help develop a plan to close any gaps, he added.

Those with a financial plan were a bit more optimistic about their financial future, according to the survey. They reported feeling more organized, confident and reassured about their money.

For the second consecutive year, the poll found that more Canadians own TFSAs (60%) than RRSPs (49%). If forced to choose between contributing to their RRSP or contributing to their TFSA, the tax free savings account was the more popular choice by double.

The RBC poll stated that Canadians who want to grow their savings, the big advantage of both TFSAs and RRSPs are the impact of compounding when financial contributions to TFSAs and RRSPs are invested.

“We explain this as gaining interest not only on your original investment, but also interest on your interest, which helps your earnings generate even more earnings,” adds Gray. “That’s a win for anyone who invests inside their TFSAs and RRSPs.”

For this survey, RBC conducted an online poll for a week in December last year with 2000 Canadian adults.


Canadians have become much less interested in buying homes

Down Payment & Buying DAZADA DIAMOND 23 Mar

Canadians have become much less interested in buying homes

Canadians have become much less interested in buying homesCOVID-19 has reverberated across all segments of Canadian society and has become particularly acute in the housing sector.

Open houses and inauguration events have fallen out of favour, amid the imposition of policies like social distancing and isolation.

Interest in buying homes across Canada has also substantially plummeted over the past few weeks, if new data from residential information portal Point2 Homes is any indication.

“The outbreak has shattered seasonality, transforming the spring months, which was normally the time when the housing market was starting to pick up speed, into a period of anxious down time,” Point2 Homes stated in its analysis. “Much of the activity associated with homebuying and home selling is simply on hold, as people and institutions alike are trying to see where the pandemic is headed.”

The decline in home searches made through the portal reached as much as 32% by March 16. The downward trend has been clear, with an 8% drop registered on March 11, a 20% decrease on March 12, and a 24% plunge on March 13.

And the impact upon Canadian housing does not stop there, as the societal effects of the disease are likely to change some aspects of the homebuying and selling business permanently.

“There certainly could be long-lasting impacts in terms of shifts in preferences for location and even features of homes,” according to Jim Clayton, director of the Brookfield Centre in Real Estate & Infrastructure at York University’s Schulich School of Business.

“Some people may be more hesitant about being part of a crowd and hence avoid mass/public transit. The work, and learn, from home revolution that many have been calling for over the past decade could become much more of a reality and may change how and where people want to live,” Clayton explained in an interview with Point2 Homes.


Immigration continues to supercharge the engines of Canadian housing

Banks & Bank of Canada DAZADA DIAMOND 10 Mar

Immigration continues to supercharge the engines of Canadian housing

Immigration continues to supercharge the engines of Canadian housingThe pace of inbound immigration to Canada – cited as the fastest among the G7 nations – is driving an unprecedented housing boom, according to Dominion Lending Centres chief economist Sherry Cooper.

In a recent analysis published at DLC’s online portal, Cooper stated that this demand for more housing is also feeding into a greater need for professionals like construction workers and electricians – industries that are seeing an increasing proportion of immigrants.

Nearly half of all newcomers in the year ending September 30, 2019 went to Ontario, data from Statistics Canada showed. This amounted to approximately 209,200 immigrants, compared to the 89,400 that went to Quebec and the 65,000 that chose British Columbia.

“The Bank of Canada highlights this factor in suggesting that the economy will continue to grow in 2020 and 2021. Certainly, it is a strong positive for the housing markets in these provinces,” Cooper stated.

Late last year, a markets observer argued that population growth will be the cornerstone of Canada’s long-term economic health and prestige in the global arena.

“If you look at Canada’s demographics today, we will grow – on current trend – to about 50 million people from 37 million today by about 2050, and then we stop growing,” Mark Wiseman told BNN Bloomberg in an interview back in October.

“This is a trend that we have to get on top of now. If we stop growing we will have a smaller economy. If we stop growing, we’ll be less important in the world, as the rest of the world grows around us.”

Immigration will be an important component of this strategy, the Century Initiative co-founder added.

“All we have to do if we start acting today is increase by about 20% to 30% from what we are doing today and then we get what’s known in investing as the compounding effect… Those immigrants will have children, those children will have children, et cetera,” Wiseman explained. “The longer we wait, the bigger the problem becomes.”


As gig economy grows, borrowers shut out of mortgage market

Down Payment & Buying DAZADA DIAMOND 4 Mar

As gig economy grows, borrowers shut out of mortgage market

As gig economy grows, borrowers shut out of mortgage marketIt seems as if everyone’s got a side hustle these days. More than 40% of Canada’s millennials have worked in the gig economy over the past five years, according to a study from the Angus Reid Institute, and although they’re bringing in extra cash, their side hustle can be a hurdle to qualifying for a mortgage.

Taylor Little is the CEO of Neighbourhood Holdings and noted that more than one-third of their borrowers now identify as gig economy workers, all of whom have turned to alternative sources after being denied traditional mortgage financing. More traditional mortgage lenders look specifically for stable income streams, making qualifying for a mortgage near impossible for non-salaried employees.

Increasing unaffordability in major urban markets (and even that’s expanding beyond the long-time hotspots of Toronto and Vancouver to areas like Montreal) is coinciding with a decreasing ability for a growing demographic to get a conventional loan. At the same time, people aren’t seeing their incomes grow at the same rate as their housing costs.

There are also more opportunities now for entrepreneurship. People are not only looking for additional income, but for ways to capitalize on preferred skill sets or to engage in more flexible work arrangements. The lending challenge is dealing with multiple income streams that can be based on contract, project, season, or a combination of factors.

Some lenders are changing how they approach self-employed borrowers, but many lenders, particularly banks, are still looking at the challenge of reconciling the non-standard income stream with the framework they have to make lending decisions.

“There’s no doubt a lot of work is being done to change things, but for now, the gold standard for bank lending is to have a T4 showing steady income or six months’ worth of bank statements so you can show regular deposits,” Little said. “If you don’t conform to that, the banks have a really hard time wrapping their heads around making you a big loan.”

Little noted the irony of thinking about concentration risk in a loan portfolio versus borrower income; for a borrower with a steady salaried income, there is 100% concentration risk to their job. If that person loses that job, it goes from 100 to 0, whereas for the gig economy worker, it might go from 100 to 80, with a likelihood that they will quickly fill that gap. Borrowers are looking to diversify their income sources for any number of reasons in the same way that lenders attempt to diversify their funding sources.

“From our end, it’s definitely an area where we can help on the alternative side,” Little said. “We are not originating tens if not hundreds of billions of dollars of mortgage per year. We’re in the hundreds of millions, and because of that, we can build our own systems and look at a borrower’s application more holistically. That’s given us that flexibility to serve this part of the market.”

Around 40% of Neighbourhood Holdings’ borrowers are self-employed, Little said. He sees their role as helping borrowers buy time; they get a short-term mortgage but as they pay off their interest-only loan, they’re working with a mortgage broker to help reframe their situation and income to fit into a bank’s box.

Brokers might even want to make the extra effort to market to self-employed individuals because in many cases, these people are unable to walk into a bank and walk out with a mortgage because they’re often shut out by the banks at first glance. Changing expectations and figuring out a plan to get to their ultimate goal takes time. There’s work that borrowers can do, Little said, but it doesn’t happen overnight.

In actuality, Little said, the credit quality of their borrowers is pretty high, and they’re often some of the best types of borrowers that a lender could ask for.

“It’s not criminals and deadbeats . . . these are some of the scrappiest people that you probably want to lend to. They have three different income sources, or four, and these are people that if, if one contract goes away, they’re good at finding another,” Little said.