Kimberley Marr, CAAP, ABR, is a RE/MAX real estate broker with over 23 years' experience. Throughout her career she has assisted many buyers and sellers in fulfilling their real estate goals and dreams. Marr has developed and taught real estate buyers' programs for the last 17 years with a focus on first-time home buyers. She has made television appearances and has been a speaker at national and international real estate, mortgage financing, and industry related conferences. Your First Home: A Buyer's Kit is her first book. Visit her online at www.kimegerton.com.
Julie Wilson: In your experience, what would say is the #1 misconception about buying your first home?
Kimberley Marr: There is a misconception that a large down payment (i.e. 20-30 percent of the purchase price) is required, which may not be the case for buyers that qualify for a high-ratio type of mortgage. Mortgages usually fall into one of two categories—conventional or high-ratio financing. Sometimes a buyer, based on lender underwriting criteria qualifies for a mortgage, may not have a large enough down payment to be considered a conventional type of mortgage (i.e., 20 per cent or more of the purchase or appraised price whichever is lower, for a down payment). However, the buyer may still be able to purchase a home with a smaller down payment. If the buyer meets the lenders high-ratio underwriting criteria, he or she may qualify with a down payment of 5 per cent of the purchase or appraised price of the property whichever is lower. The lender usually requires that the borrower pay for mortgage default insurance to protect the lender against the buyer defaulting on their mortgage payment. It is important to check with your lender as there are rules and requirements for the buyer to qualify and to participate.
Generally speaking, the mortgage default insurance premium is calculated as a percentage of the loan amount and the premium is based on your down payment and amortization amongst other factors. The default insurance premium usually can be included in the amount that you owe on the mortgage and paid with your mortgage payment, or it can be paid when the mortgage is advanced. In some provinces, the premium is considered an insurance premium and is subject to provincial sales tax, which is payable in full on closing and cannot be added to the mortgage amount. Rules can change—check with your lender on the required qualifications, exact premium amount as well as detailed information about the high-ratio mortgage program.
JW: Recently, I was talking to a friend who prefers to rent because of the particular quality of life she's looking for, namely that she doesn't want to be responsible for the upkeep of property and any maintenance that comes along. What quality of life is gained by owning your own home?
KM: The quality of life gained by owning a home comes from the satisfaction of the feeling that it is something you call your own—being able to contribute towards building an asset over the long term, and knowing that improvements made to the home are for your benefit and enjoyment. Most people pay a monthly shelter payment (i.e. paying rent or a mortgage payment) which can increase over time. However, a homeowner can work towards paying off the mortgage, thereby eventually eliminating a monthly shelter or mortgage payment and at some point in the future have an asset which they own without a mortgage.
JW: Certainly in Toronto, more first time home owners believe that the only way they can afford a larger home is if they purchase a house with a separate rental unit? a) Is this true? If so, what should they know going in? b) What personality types lend themselves to this responsibility?
KM: In some expensive cities, buyers may consider purchasing a home with a separate rental unit to help offset the costs. There are a factors that a buyer needs to investigate. Although some lenders may recognize and allow a portion of the rental income to be included in their underwriting criteria to qualify a borrower for a mortgage loan, buyers need to also check and confirm the local city, town and/or municipal laws where they wish to purchase a home to ensure separate rental units are legal and allowed and that they are complying with retrofit, fire, insurance, tax laws, Landlord & Tenant rules and regulations and any other appropriate laws or regulations. It is prudent to obtain professional legal and tax advice.
Based on my experience, buyers that tend to lend themselves to this are generally entrepreneurial types, who might feel that the potential to purchase in a certain location is offset against the responsibilities and potential risks of being a landlord and utilizing this strategy.
JW: Do you see any trends emerging in real estate over the next five years?
KM: I don’t have a crystal ball, but based on industry economic feedback and reports, it is possible that interest rates in Canada may remain affordable for the next year or two and, if this is the case, first time buyers may continue to enter the marketplace. Due to the price of homes in some cities, especially if home prices rise, a first time buyer may opt to purchase in more affordable suburban cities and/or towns that are still accessible by highways and/or public transportation to employment and other amenities. Compared to other major cities, such as Hong Kong, London, Paris or New York, generally speaking, the price of real estate in some of the major Canadian cities and is more affordable and, barring any global crisis, certain Canadian cities and home types are in demand.
JW: I've heard that whether you buy a car new or used, it inevitably ends up costing the same, you just spend the money up front or over time. Can the same be said for homes?
KM: There is a saying in real estate: “location, location, location”. Pricing is often a result of demand versus availability of product. Building a home yourself, for instance, is a different process than purchasing a resale already built home that you may consider renovating. In a dream locale, and/or big city, land may be scarce, therefore prices of vacant or potential “tear-down” homes on desirable lots are usually expensive. Yet suburban and/or rural lots may involve other considerations such as water, sewage, and other services and considerations to name a few. Deciding to build your own home or renovate an existing home becomes a personal and financial decision, which, depending on your needs, wants and finances, there are pros and cons for both situations.
Check with your lender and make sure that you understand mortgage underwriting criteria and requirements, as building your own home might require different financing underwriting criteria that you may need to qualify for versus buying a resale already built home and renovating it. Consider your long and short term personal and financial goals, along with what type of home you desire including but not limited to the size of home, lot size, location, facilities and amenities of the area, as well as how quickly do you require a home as building a home may take longer than renovating a home. There are many factors to consider.
JW: Simple question. What do you personally like most about real estate?
KM: Many homeowners consider real estate an investment—as well as a potential “forced savings”, meaning that over time you can eventually pay off the mortgage loan. People have to live somewhere, and most people pay a monthly shelter payment. Why not have this monthly payment goes towards something that you can own with no mortgage at some point in the future? Some mortgages products have terms and conditions that allows a homeowner/borrower to make partial pre-payments of principle, in some cases without a penalty, up to a predetermined maximum percentage of the mortgage (in addition to the regular mortgage payment) that helps to accelerate the homeowner/borrower through the mortgage, paying off the mortgage loan more quickly, which means you own the home sooner. I cannot predict what the market or sales price of the home will be worth in the future, although history has shown that over time the price of real estate has appreciated. Consider the concept of owning a home rather than making a monthly shelter or rental payment to pay off the landlords mortgage—you decide.
CONTEST: Win one of five copies of Kimberly's book, Your First Home: A Buyer's Kit.
How to Enter: Just follow @cdnbookshelf on Twitter and RT our contest tweet. Simple as that! (Contest closes Friday, February 10, 2012 at 6 p.m. EST. Winners announced the following Monday. Shipping inside Canada only.)
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