Whether you are thinking about buying your first home or considering your second or third property investment, it’s important to know your options and unfortunately there is a lot of misinformation and confusing language around the ins and outs of buying that can make the process more confusing than it needs to be. As a result, many potential investors struggle to grow their portfolio or miss out on profitable opportunities, losing both time and money. Below are 8 simple ways you can start speeding up the purchase of your next home!
1. The Bank
Let's consider how banks evaluate and determine your mortgage amount
In Canada, the primary ratio is debt to income, this is your total monthly income divided by your debt including the mortgage amount and related costs of the property to be purchased. The ratio indicates your ability to pay the mortgage and your current state of leverage. Most banks in Canada are comfortable lending up to an amount that leaves the ratio at 42% at most. It should be noted if you have an existing property that will be leased, most banks will only consider 50% of the rental income for the ratio and 100% of the related expenses, this is a very conservative approach and limits your approval amount. There are some banks and alternative lenders that will consider 100% of the rental income, which significantly increases your mortgage approval amount. Of course, higher income and lower debt will result in a larger approval amount as well!
2. Pre-approval amount
Let's start estimating your pre-approval amount
The simplest method in to use five or six times your income, this is the maximum amount you will be approved for, however a more accurate method is to calculate your current debt to income ratio and determine the variance from the lending limit of 42%
3. Mortgage insurance concerns
CMHC insurance on 5% down for your first property
CMHC usually insures only one property with less than 20% down, however there are other insurers with comparable rates that can be leveraged. Some of these insurers will insure more than one property.[Text Wrapping Break]Putting the minimum down is 5% of purchase price up to $500,000 and 10% thereafter up to $1Million. Insurance brokers do not usually insure mortgages greater than $1Million.
Keep in mind that you only need mortgage insurance if you are putting less than 20% down.
4. Less than 20% down payment
Securing a mortgage with less than a 20% down payment
A common question we get is, “can I get a second property for less than 20% down?”. Short answer, yes. With an alternative insurer and a healthy ratio and plan, multiple properties can be purchased for less than 20% down.
5. Existing properties
Retaining or selling existing properties when purchasing again
The question to ask yourself is; “Should I sell my property, or keep it long-term?”. While many people sell their existing property to purchase their next, this prevents long term diversified wealth generation. It is best to weigh your options and do your best to retain your current property and add a second property to your portfolio, whether it becomes a rental or otherwise. In the long run, this will build significant equity and you have the opportunity to generate rental income. If cash is required, a home equity line of credit (HELOC) or refinancing your mortgage will allow you to translate the equity built in your home into cash for the down payment, which alleviates the need to sell existing property.
6. Home equity line of credit
HELOC down payment on your next property
A HELOC is one of the best options and facilities out there which acts as a revolving debt facility based on the equity built in your existing home. The loan value is calculated by banks at 80% of fair market value (FMV) less your current mortgage amount. If your first property was purchased recently and has not significantly appreciated, then it is unlikely you will get approved for a material HELOC, in this case, refinancing your mortgage is a good back up option with comparable results. If it has been a few years since your initial property purchase, it is more likely that your property has increased in value which can then lead to an approval of a significant HELOC facility. Keep in mind, you do not need to obtain the HELOC at the same bank in which you have your mortgage, be sure to shop around for the best rates, terms and appraisals. It is in your best interest to request a secondary appraiser if the first one is too low or unreasonable.
7. When to use a HELOC
Down payment amounts on a second property
Putting down 20% will provide you with a healthier ratio for a higher pre-approval amount, even considering the incremental debt utilized from your HELOC. You may qualify for a unique type of HELOC that provides you a steady increase in your available credit as you pay down the mortgage. This is a great safety net should you face hard times as you can then choose to make interest only payments on your mortgage. If you do not need a larger pre-approval amount, then putting the minimum down will leave you with the ability to use your HELOC for another property or various other investments.
8. Thinking outside the box
If you’re really struggling to get approved to purchase property on your own
Property prices have consistently gone up and will likely continue to do so, consider partnering with a trusted person. You can also purchase in another locale that has lower property prices so you are at least in the market and can start growing your portfolio from there.
These are just a handful of considerations when purchasing your next property, there are many challenges and hurdles that can come up along the way, and working with a professional advisor can help you overcome any roadblocks and problem solve efficiently in order to make well-informed financial decisions that make the most sense for you. If you are interested in getting personalized advice, sign up with Fisherman Financial today for a free consultation service to start understanding how you can begin or continue to build upon your own property portfolio!