Read on to learn why a private mortgage is more than a last resort for a first-time home buyer – and down payment assistance programs you may not be aware of
On top of stricter mortgage rules in recent years (including the introduction of the stress test in 2018), the economic climate amid the COVID-19 pandemic is making it harder for hopeful homebuyers to get approved for the mortgages they need. With many Canadians still yearning for home ownership, mortgage brokers need to prepare for the reality that there are many people who don’t fit into the prime lending box.
First-time homebuyers who are struggling to qualify for a traditional mortgage may be great candidates for a private mortgage. Private lenders can offer structured mortgages, but generally have more relaxed lending guidelines than banks or other prime lenders. They often lend at a lower loan-to-value ratio (e.g. maximum 85%), however, so mortgage brokers should be ready to offer their first-time homebuyer clients advice and options for coming up with their downpayment. There are several government incentives that you want to be sure to recommend, and other creative ways to come up with this cash.
Lend the money to yourself with the Home Buyer’s Plan
The Home Buyer’s Plan essentially allows a purchaser to provide themselves an interest-free loan towards buying a home. This federal government program allows first-time homebuyers to withdraw up to $35,000 tax-free from a registered retirement savings plan (RRSP). This is a great option for a client who needs a lump sum of capital toward their first home. Under this plan, the homebuyer will need to pay the money back in installments over 15 years.
Bank of Mom and Dad
The Bank of Mom and Dad is playing an increasingly important role in today’s mortgage market. More than a quarter of first-time homebuyers in Canada used a gift from family members for part or all of their downpayment, while 15% used a loan from a family member. As home prices have increased significantly over recent years, parents have been able to access their own home equity and refinance to help their children come up with a downpayment. Mortgage brokers can talk to first-time homebuyer clients about this option and even offer to have a conversation with their parents on whether refinancing is a possibility.
Support From Your City
Many municipalities across Canada offer down payment assistance to support current constituents and attract new ones. For example, Simcoe County provides a 10% down payment assistance in the form of a forgivable loan for eligible borrowers. The City of Toronto also offers eligible first-time buyers of newly constructed or resale residential property a rebate of over $4000. Helping your clients find these valuable resources is an easy value-add that mortgage brokers can offer.
There are also several tax credits and rebates that your client may be eligible for. For example, the federal government offers first-time home buyers a $5,000 non-refundable tax credit, which can translate to about $750 in tax savings once you claim it on your annual tax return. Depending on the province, some buyers may also be able to access an HST tax rebate.
Gain a Competitive Edge
Private lenders are generally much faster than banks and prime lenders when it comes to the approval process, which gives your client a competitive edge when putting in an offer in a hot market. Helping your client take advantage of all that’s available to them positions you as their go-to home buying expert, and can help them achieve their home ownership dreams.
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