South Okanagan Real Estate and Community News

March 1, 2022

What does rising interest rates mean to home buyers?

What does an interest rate hike mean if you’re planning to engage in the housing market next year, if you already have a mortgage, or any other debt? Let’s take a step back to better understand what causes movement in interest rates.

What Causes Interest Rates to Rise or Fall?

The Bank of Canada is our central bank, and along with its Governor (currently Tiff Macklem holds the position), it is responsible for setting monetary policies, printing money, and the Bank’s interest rate. Per the Bank, its principal role is “to promote the economic and financial welfare of Canada,” as defined in the Bank of Canada Act. “At the heart of the Bank’s monetary policy is a commitment to maintain low and relatively stable inflation—in particular, to keep the rate of inflation close to the two-per-cent midpoint of the one- to three-per-cent target range,” according to the Bank’s website.

A good example of this is March 2020, when the Bank implemented a trio of interest rate cuts in an effort to protect the Canadian economy from the fallout of COVID-19. How do interest rates affect the economy? The Bank’s key interest rate has remained unchanged for just shy of two years, currently sitting at 0.25%. A low rate aims to boost the economy when a slow-down is anticipated, and it serves as a guideline for other big banks and lenders when they set their own interest rates­­, including mortgage rates. The hope is that reducing the cost of borrowing will encourage consumers to keep spending and thus, the economy keeps humming along.

Indeed, low mortgage interest rates were a factor in the active Canadian housing market, and according to a recent survey conducted by Leger on behalf of RE/MAX Canada, 26 per cent of Canadians want to/plan to buy a home while interest rates remain low.

How Will Higher Interest Rates Affect Me?

What happens when interest rates rise? As the economy recovers, interest rates will typically rise (or as we saw in the wake of COVID-19 in a down economy, they will fall). When the Bank makes changes to the policy interest rate, similar changes can occur in short-term interest rates, including the Bank’s prime rate, which can be a reference point for big banks and other lenders when they determine their own interest rates.

A higher interest rate means borrowing money is more expensive. This applies to everything, from car loans and student loans, to lines of credit, outstanding credit card balances and yes, mortgages. On the flip-side, if you have investments or money parked in a high-interest savings account, you may see higher returns.

If you already own a home and are locked into a fixed mortgage rate, a higher interest rate won’t affect your mortgage payments for the term of your mortgage. When it’s time to renew, you may be doing so at a higher rate, which means less of your hard-earned money is going toward paying down your principal loan.

If you have a variable-rate mortgage, an interest-rate hike would mean a larger portion of your regular mortgage payment will be allocated to interest, versus principal.

Meanwhile, those who are in the market to buy a home will feel a more-immediate pinch, in the form of a higher mortgage interest rate. And if you’re hoping to buy a home in a pricey market, such as Toronto or Vancouver, that pinch could feel more like a punch. Depending on the amount borrowed, even an increase of one percent can mean thousands more paid in interest over the life of a mortgage.

Those who are also carrying other forms of debt, such as credit card balances, will also get hit with a higher cost of borrowing.

How Could This Change Impact Canadian Real Estate?

Might a higher lending rate cool the Canadian housing market? Potentially. One reason for the high demand and flurry of market activity that took place in 2020 and 2021 was the rock-bottom interest rate. This prompted many prospective homebuyers to get off the fence, so to speak, and expedite their purchase to take advantage of the attractive rate. (That is, if they could find a home to buy in this tight market.)

On the other hand, could a higher interest rate heat up the market? This scenario is unlikely once the higher rate is in effect. However, it’s not unheard of for home-buying activity to pick up before an expected increase. This, however, would be based on a “best guess” as to when the Bank will actually make its move, and whether or not mortgage lenders will follow suit. According to the Bank’s latest interest rate announcement, an increase in the key interest rate could happen as early as April 2022.

How To Prepare for Higher Rates Ahead

It’s safe to say interest rates will rise, eventually. Now that you have a better idea of how higher interest rates may affect you, what can you do to prepare for the inevitable pinch to your pocketbook?

  • Pay down your loans as much as possible, while interest rates are still low. Remember, whether it’s a mortgage or another type of loan, a lower interest rate means more of your payment goes toward paying down principal.
  • If you’re carrying multiple debts, consider paying down the higher-interest ones first, since those debts are more expensive to carry.
  • If you’ll be shopping for a home in 2022, get pre-approved for a mortgage. Not only does this give you a good idea of how much you can spend, doing this also locks in the current (lower) rate for a period, often 90 or 120 days. And getting pre-approved costs you nothing.
  • If you have a variable-rate mortgage, discuss your options with your lender or financial adviser, and consider locking it in for a fixed term, at the current lower rate.

Of course, it’s always wise to discuss the details of your financial situation and goals with an accredited financial adviser. And speaking of professional help, work with an experienced Realtor to navigate the Canadian real estate market and find your dream home.

Jan. 28, 2022

10 Tips for Getting the Best Mortgage Rate in Canada

When you purchase a home, a down payment is typically applied to the purchase price, and the balance is to be paid off over your term of the mortgage. The loan you receive from a lender in order to pay for the house is called a mortgage.

Simply put, a mortgage is a legal and binding agreement between a lender and a borrower for a specific amount of money that must be paid back within a predefined amount of time. The mortgage is a secured loan in that the house you are buying is collateral for the loan. This means that, should you not meet your mortgage repayment obligations, the lender has the right to take the property.

Purchasing a home and taking on a mortgage is a big commitment. In addition to the amount borrowed, the interest rate you receive is also a factor in assessing affordability. Shopping for a better interest rate could save you tens of thousands of dollars over time.

 

10 tips to help you get the best mortgage rate in Canada

1. Research Mortgage Interest Rates

There is no one-size-fits-all approach to getting a mortgage. There are a few different types of mortgages, each of which will impact the interest rate you receive, based on a few of the factors we will be touching on later.

The first, and also the best option, is a prime mortgage. These are offered to borrowers who are considered less risky by lenders. These borrowers typically have a credit score of at least 670, have contributed a down payment of between 10 and 20 percent, and have a low debt-to-income ratio. The most significant perk of a prime mortgage is a lower interest rate, which will help the borrower save thousands of dollars over the loan’s lifetime.

The other is a subprime mortgage. These are offered to borrowers with a lower credit score, typically between 580 and 669. Subprime mortgages carry higher interest rates because borrowers are seen as “riskier.”

By knowing your credit score before speaking with a professional, you can be sure to get the appropriate interest rate.

 

2. Decrease Your Debt-to-Income Ratio

A simple way to get the best mortgage rate in Canada is to decrease your debt-service ratio. This represents the percentage of your gross monthly income used to pay off your debts. Lenders use this value to assess the risk you carry when borrowing money. Canada Mortgage and Housing Corporation recommends keeping your Gross Debt Service (GDS) ratio (your monthly household income that covers your housing costs) below 39 percent, and your Total Debt Service (TDS) ratio below 44 percent.

To decrease this ratio, make larger payments on your debts, reduce debt by purchasing only what you can afford in cash, or increase your income. By decreasing your debt-to-income ratio, you signal to lenders that you are less of a risk.

 

3. Improve Your Credit Score

Improving your credit score takes time, but it can be done. Some easy ways to accomplish this are to make larger payments on your outstanding credit card bills, pay off any collections that may be on your credit report, get caught up on all your bills, and keep outstanding balances on credit cards low.

 

4. Increase Your Income Stability

Income stability signals to a lender that you’re less likely to default on your mortgage. First, sit down and run an honest assessment on how much money you bring in every month versus how much you spend, to improve your income stability. Then, look for ways to spend less and earn more. This can be accomplished by cutting out frivolous expenses, asking for more hours at work or taking on a side hustle.

 

5. Gather Your Employment History

Before meeting with a mortgage lender, gathering your employment history is key. Mortgages are large loans, and lenders want to know that you are serious about paying them back and are a low risk for default on your payments. Compiling your employment history shows the lender that you have a track record of gainful employment and are unlikely to be unemployed in the foreseeable future.

 

6. Save More and Increase Your Down Payment

By contributing a larger down payment, you can reduce the size of your mortgage and attract a more favourable interest rate. Typically, if your down payment is greater than 20 percent, you will receive a better interest rate than if you put down only five percent.

 

7. Use Cash Reserves

Lenders will look at your savings account to ensure you have enough cash in reserve to cover your mortgage in case of job loss. They like to see a few months worth of mortgage payments tucked away in your bank account. This also shows lenders that you are suitable and fiscally responsible. Consider saving up three or four months worth of mortgage payments to get a more favourable mortgage rate.

 

8. Consider Interest Rates

Currently, interest rates are exceptionally low. Consider timing the purchase of your home during a time when interests rates are lower, to reduce your monthly payments and the interest paid over the lifetime of your loan.

 

9. Low- Versus High-Ratio Mortgages

If you have less than 20 per cent as a down payment on the home you plan to purchase, you’ll need mortgage loan insurance. This serves as an added layer of security for lenders, should you default on your loan. This fee can be paid up-front or added to your monthly payments. To avoid this expense, save up at least 20 per cent for your down payment.

 

10. Shop Around

Finally, once you have completed all the steps above to get the best mortgage rate, it is essential to shop around. Some lenders can give you a better borrowing rate than others, and it is vital to know all the options available to you before you commit to one of the most significant investments you’ll make in your lifetime. While you’re at it, research lenders, too, as they may offer different mortgage terms that can affect your bottom line.

Finally, consider working with a mortgage broker. This is a third-party intermediary between the lender and the borrower. A mortgage broker will collect your financial information and “shop around” for you, to find the best mortgage rate and terms from their pool of lenders. And the best part? A mortgage broker’s services don’t cost the borrower a thing.

 

Courtesy of Remax.ca

Sources:

Canada.ca

https://www.canada.ca/en/financial-consumer-agency/services/credit-reports-score/improve-credit-score.html

https://www.canada.ca/en/financial-consumer-agency/services/mortgages/interest-on-mortgages.html

Forbes

https://www.forbes.com/sites/robertberger/2015/05/07/6-tricks-to-getting-a-great-mortgage-rate/?sh=3aab6ed93f0f

 

Posted in Buying a Home
Jan. 28, 2022

Big, Small Space: Could you see yourself in a tiny home?

Experts weigh in on the pros and cons of micro-size living in a tiny home.

 

Are you willing to climb a ladder to get to your bedroom?

While many homeowners dream of upsizing for space, others instead dream of downsizing for a myriad of reasons like cost, care, and comfort. But with the phenomenon of tiny home living prominent in the real estate realm, some are ready to shrink their living space to new levels – even condensing into less than 400 square feet.

Rising in popularity over the past decade, the tiny home movement has been perpetuated by an impending desire for wanderlust. In the wake of the COVID-19 pandemic, more and more people are looking to redefine their reality.

When it comes to tiny homes, the definition of “tiny” will vary depending on who is asked. While 400 square feet and under has become industry standard, some real estate agents will consider a freestanding structure under 600 square feet a tiny home, too.

An often affordable option, tiny homes tend to be desirable due to their lower cost of living, minimalistic nature, off-grid living capabilities, and appeal to buyers with a persistent sense of adventure. Depending on local zoning laws, tiny homes are also being seen as opportunity for a guest house, backyard office, or income property.

“People typically downsize for three different reasons,” says Steve Weissman, CEO of the Tumbleweed Tiny House Company, a renowned green-certified tiny home builder, based in Colorado Springs, Colorado. “One is a minimalist lifestyle choice where you want to get away from attachment to possessions. The second is the environmental component and the third would be that it financially makes sense for many to achieve homeownership.”

Are you considering going tiny? Weissman and RE/MAX agent Richard Rolfingsmeyer unpack the pros and cons of buying a tiny home.

 

The Pros: Affordability, Sustainability, and Freedom

“When downsizing this small, your overall cost is less, so it allows more freedom to upgrade the things that are really important to you. Each tiny house is a work of art and a form of personal expression,” Weissman says.

Tumbleweed’s largest model is just 260 square feet. According to Home advisor, the average cost of a tiny home is $45K, but the more customizations, homey details, and space-saving solutions are added, the higher the price. Tumbleweed’s intricate tiny homes sell for an average of $100K.

For many, the low cost of a tiny home in comparison to a traditional house could present an opportunity to become a homeowner sooner than planned or own a home outright without a mortgage. Plus, monthly bills – like electricity and gas – are significantly lower when operating within a micro-sized footprint. Speaking of which, a traditional layout for a tiny house includes a ground-level room with a kitchen, living area and bathroom, and a sleeping loft atop.

“The house itself is consuming a lot less propane and using less power,” Weissman says. “And when you’re living there, your consumption is less, too. You're not filling your house with furniture and other random things. It really is a lifestyle change.”

Aside from the occasional ambitious DIY-projects, most tiny homes begin with a builder, like Tumbleweed, which sells direct to consumer. A real estate agent steps in when it’s time for resale.

Richard Rolfingsmeyer, better known as “Richard-REALTOR®," an agent with RE/MAX Real Estate Results in Bentonville, Arkansas, kickstarted his experience with tiny homes when he appeared on an episode of the HGTV show Tiny House Hunters. His on-air client was pursuing micro-living primarily for its sustainable benefits, like using less energy and natural resources on a daily basis.

The client also wanted the freedom to roam. Depending on how they’re situated, tiny homes provide homeowners the flexibility to get up and move with their house in tow.

“Your tiny house can be mobile if you have an easy way to load it on a flatbed or trailer. On the other hand, if you have it on a concrete block foundation, moving is difficult and the location is more permanent. My client specifically wanted a situation where she could connect her home to a vehicle and be able to go,” Rolfingsmeyer says.

“[My client] also didn't want to be tied down to a mortgage or a plot of land. Her whole idea was to be able to travel the country and meet new people all while working a job and having a reliable home-base,” he adds.

In addition to serving as a primary dwelling, tiny homes are an unconventional – yet more affordable – option for second-home ownership. For vacation purposes, they are widely treated like a cabin and can be seen in mountainside or woodsy settings to get away and immerse with nature.

 

The Cons: Storage, Privacy and Land Logistics

The ideals of tiny home living must be met with reality, and a sizable consideration is storage – or lack thereof.

“Many people like their stuff – and like to accumulate even more stuff. If you're having to get two or three storage units to store your possessions just because you want to live in a tiny house, then that's maybe not the most cost-effective way to go tiny,” Rolfingsmeyer says.

A minimalist lifestyle is what draws many to tiny home living in the first place. But an ongoing commitment to minimalism is a must to maintain livable conditions. For those who are able to pare their possessions down to few, most tiny homes will suffice with elaborate storage solutions and dual-purpose features like drawers nestled in stairs and furniture that folds to nearly nothing.

“Something I've learned about people who live small is that they are more interested in investing in experiences rather than things,” says Weissman, a minimalist himself.

Sharing such small space can also be a point of contention, so those interested in going tiny must really enjoy spending quality – and quantity – time with their roommates.

“In smaller spaces, even little noises and sounds can start to get on your nerves,” Rolfingsmeyer warns.

Regardless of whether a whole family or just one person and a dog is living inside a tiny home, condensation can become an issue. Weissman recommends ensuring the tiny home you buy – whether it’s new or being resold – has a proper ventilation system for optimal air quality.

“Especially in colder climates, you start getting condensation. And as a result, mold is a relatively common problem in tiny homes,” he explains. “However, we created a heat recovery ventilation system and over the years it was adopted by other tiny home builders, too. [The system] circulates air through the tiny house and makes for a much healthier environment.”

According to Weissman, only 5% of tiny homeowners move their home around regularly and 20% move it once every five years. Most buyers must arrange or purchase a permanent space for the structure to live in because, unlike buying a traditional house, a tiny home more than likely won’t come with land.

“The majority of our homes are going into a backyard, and then some are going into a tiny house community,”  Weissman says. “But for those that aren’t, the owners have to consider buying a plot of land.”

So, if you’re up for adventure – or are looking for a way to potentially save money while reaping the benefits of homeownership – consider taking on a big year ahead in a tiny home. Rolfingsmeyer suggests getting in contact with your local RE/MAX agent to discuss new versus resale options, land, local tiny home communities, and more.

 

Courtesy of Remax.com

Posted in Home Buying Trends
July 31, 2017

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Posted in Market Updates