Making the switch from renting to owning is exciting, but for some prospective buyers, the process of purchasing a pre-sale home may appear trickier to navigate than they expect. First off, a pre-sale is a contract between a buyer and developer to purchase a property that hasn’t been built yet.
There are many reasons why buying a pre-sale is so appealing – it’s brand new, you can pick your finishes, equity can build by the time construction is complete, and you receive 2-5-10 warranties, to name only a few advantages.
But before you sign on the dotted line, the first course of action is knowing how much of a mortgage you qualify for. Jayen Properties shares tips to help you get your financial house in order to improve your chances of being approved for a mortgage.
Mortgage Affordability:
If you are new to the pre-sale market, here’s what you need to know about qualifying for a pre-sale mortgage. Before a mortgage broker can negotiate the best interest rate, they need a clear picture of your financial situation.
Whether you are a first time homebuyer or an investor, homebuyers have to budget for their day-to day-expenses. One of the biggest mistakes buyers make is not preparing for life’s inevitable “surprises.”
“Some clients forget to include the day-to-day expenses,” says Jamie Dhaliwal, senior mortgage broker and partner, Home Ease Mortgages. “Beyond just a mortgage, there are also “hidden” closing costs that prospective buyers forget to factor in.”
A very important part of the mortgage strategy is your financial planning. From calculating monthly mortgage payments to avoiding financial surprises or pitfalls, Home Ease Mortgages’ comprehensive list of mortgage calculators will help you accurately determine how much of a mortgage you can afford before you go house hunting. These tools are crucial to empower you to make an informed decision.
What you need to know about Debt Ratios:
Lenders take into account 2 ratios – Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS) to assess your ability to afford a home: (The CMHC Debt Service Calculator will help you calculate your total debt, which includes car, student and personal loans, and credit card debt).
To qualify in British Columbia you need to factor in the following: proof of stable income, proof of a good credit history, and you must have an adequate down payment. For first-time homebuyers, it is 5% down payment for homes priced at $500,000 or less and for over $500,000, it is 5% on the first $500,000 and 10% on the remaining balance.
Benefits of mortgage pre-approval:
The advantages to getting pre-approved for a mortgage is knowing how much you can afford to borrow, to estimating your mortgage payments and locking in an interest rate.
“We see some clients who wait closer to the closing date to get approved for a mortgage, only to find out they can’t afford the pre-sale,” says Dhaliwal. “ As soon as you put a deposit down on your pre-sale, get your mortgage pre-approved.”
The beauty of working with professional mortgage brokers is that you pay nothing for their services. A mortgage broker/associate is paid by the lender and only when the mortgage completes.
When it comes to mortgages, there are many forms in Canada. Typically, we think of fixed rate and variable rate. However, you may not be aware that there are several other mortgage types.
The Most Common Mortgage Types:
- Fixed Rate: The interest rate doesn’t change during the term of your mortgage
- Variable Rate: this interest rate fluctuates over time as it is tied to the lender’s prime rate. If you can handle the risk, this might be right for you. Speak to your mortgage expert first.
- Closed versus Open mortgages: although an open mortgage might have a higher interest rate than a closed one, it gives you the flexibility to repay your mortgage faster without penalty. A closed mortgage is great if you aren’t planning on paying off your mortgage before the term of your mortgage comes up. The interest rate is typically better than an open mortgage.
- Convertible mortgages: In simple terms, a convertible mortgage is on average a short-term mortgage with a fixed rate with the flexibility to convert it to a long-term mortgage at any time without penalty
Advantages of locking in a mortgage rate:
You now know the advantages of buying a pre-sale – you plan ahead, allowing you the time to budget, plan your move and save money. But are there benefits to locking in a rate months in advance?
Yes, says Unjali Gill, office manager, Home Ease Mortgages.
“The benefits of locking in a mortgage rate is that if rates go up, you are secure from fluctuating rates,” says Gill. “However, if the rates drop, we can renegotiate and secure the lower rate without any penalty. On average, a bank will secure your rate for nine months but some banks will honour your rate until your home is completed.”
For more information about mortgages, the Government of Canada is a great resource.