Mortgages for Expensive Homes – Not as Easy as it Sounds!

Kelly Hudson • Oct 31, 2019

Large home purchases that require a mortgage present unique challenges in the Canadian Mortgage market. Sliding scales, director approval, multiple reviews, it all adds up to difficultly getting larger mortgages approved, unless you’re working with an experienced mortgage broker.


In 2012 the government of Canada removed the mortgage insurers ability to approve mortgages of $1 million (or more) with less than 20% down payment. As a result of this change, the minimum down payment for homes over $1 million starts at 20% of your purchase price and increases.

Since any home purchase over $1 million cannot be insured against default, the lender applies a  sliding scale  to reduce their potential for loss if the borrower defaults.  Consequently, large mortgages present a unique challenge, especially in the Vancouver/Toronto market. 

Depending where you live, most lenders consider home purchases over $500-750K to be large enough for them to want to mitigate their risk.  In larger urban centres like Vancouver & Toronto, lenders will consider purchases up to $1 million before increasing the down payment with sliding scale.

Sample sliding scales for Vancouver/Toronto

  • 20% down payment on the first $1,000,000, plus 40% down payment on the balance over $1,000,000
  • 20% down payment on $1,250,000, plus 50% down payment on the balance over $1,250,000
  • 20% down payment on $1,500,000 plus 40% down payment on the balance over $1,500,000

Every lender has their own risk level for expensive home purchases.

As you can see, the typical lender sliding scale for jumbo mortgages is very punitive and can result in a much higher down payment when purchasing a home over $1 million.

Lenders want to alleviate the higher risk on purchases of expensive homes, because there is a smaller pool of potential buyers compared to lower home prices. This makes expensive homes more vulnerable to market corrections.  If there is a price correction, it can be more difficult for lenders to get their money back, should they need to foreclose. 

Lenders are risk adverse!  When they perceive a risk, they are either going to charge higher interest rates OR lessen their risk with a sliding scale, requiring home buyers to put a larger down payment on properties over their threshold.

Example:

  • Base line with no sliding scale home purchase $1,500,000
    • Minimum 20% down payment = $300,000
  • Down payment required for a home purchase with Sliding Scale 20% down payment on the first $1,000,000, plus 40% down payment on the balance over $1,000,000
    • 20% down payment on $1,000,000 = $200,000
    • 40% down payment on $500,000 (amount over $1M) = $200,000
      • Down payment required $400,000

20% down payment = $300K versus sliding scale $400K down payment required – Yes sliding scale can make a big difference in your required down payment!

Sliding scale is designed so that as a property’s price increases, you need a larger down payment. 

  • Therefore, the maximum loan/mortgage amount available decreases on a proportionate basis.

To minimize the size of your down payment, you need an experienced mortgage broker who works with a multitude of lenders, giving you the most flexibility with sliding-scale.

Other points to keep in mind with a large mortgage:

  • Pay attention to the terms and conditions of your mortgage, especially your prepayment penalties.
    • Larger loan amounts amplify the differences in the penalties charged by different lenders.
  • Most large mortgage loans must be escalated up the ranks for management approval. This means it can take lenders an extra day (or two) to get your approval back so your subject removal date may need to be longer.
    • Typically, I recommend 10 business days for subject removal on large mortgages.

  Another important point to keep in mind, when real estate prices flatten or drop, lenders can become much more conservative when underwriting higher-end real estate. As such, there can be wide disparity in the value different lenders will assign to a property.

Partnering with an independent mortgage broker will help ensure that you and your property are matched with the lender who is offering the best fit for your situation.

If you know anyone looking for a high-end home, who needs a mortgage, I can help them arrange the financing.   We’ll work together to figure out a budget and down payment (based on sliding scale).  Then, we will work with a lender for a pre-approval, so we have a clear picture for affordability.  BLOG Pre-Approved for Your Mortgage…  What Does that Really Mean???

Mortgages are complicated, especially over $1 million… you need to engage an expert!!!   Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson

Mortgage Expert

Mortgage Architects

Mobile 604-312-5009  

Kelly@KellyHudsonMortgages.com

www.KellyHudsonMortgages.com

 

Kelly Hudson
MORTGAGE ARCHITECTS
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First Home Savings Account (FHSA) - 5 Things You Need to Know

By Kelly Hudson • 09 Apr, 2024
Canadian homebuyers face a significant challenge when it comes to accumulating the hefty down payments required to purchase homes in our increasingly expensive housing markets. According to the National Bank of Canada's housing affordability index from February 2024, the down payments needed for the median homes in cities like Toronto and Vancouver surpass $200,000. In response to this growing concern, the federal government introduced the First Home Savings Account (FHSA) on April 1, 2023, aiming to help improve the financial down payment burden on prospective homebuyers. However, while the FHSA offers promising opportunities, it's crucial for would-be buyers to understand its workings and potential risks. Here are five essential things prospective homebuyers should know before opening their own FHSA: 1. How does the FHSA work? The FHSA allows account owners to put as much as $8,000 in savings away annually, and up to $40,000 over five years. Contribution room starts growing the first year the FHSA is opened. If you don’t have the whole $8000 now – consider starting your FHSA account this year with $100. Then if/when the rest of the cash comes available you can top up the account to a maximum of $8000/year (maximum contribution $40K) That money is tax-free on the way in and on the way out, meaning any contributions can count as deductions on income tax and are not taxed when withdrawn for a down payment on a qualifying home. The FHSA is “the best of both worlds,” with funds behaving like a registered retirement savings plan (RRSP) on the way in and a tax-free savings account (TFSA) on the way out. Moreover, funds in the FHSA can grow tax-free for up to 15 years, after which they must be withdrawn or transferred to an RRSP. It's important to note that withdrawing funds for purposes other than a home purchase results in the amount being added to your taxable income for that year. 2. You don’t have to be a first-time buyer Contrary to popular belief, the FHSA is not exclusively reserved for first-time homebuyers. Eligibility extends to Canadian residents aged 18 (or 19 in some provinces) to under 71. You also must not have lived in a home owned by you OR your spouse in the year that you open the account or any of the preceding four years. This means Canadians who owned their home but sold more than five years ago, or currently own the property but don’t live there as their principal residence, are qualified to open an FHSA. That opens the account up to anyone who owns and rents out a property but also rents themselves. 3. What do you do with the money once it’s in the FHSA? Funds within the FHSA can be held in various investment vehicles, including high-interest savings accounts or securities. The choice of investments depends on individual risk tolerance and time horizon. While long-term savers might opt for stock market investments to capitalize on potential gains, those nearing their purchasing goals might prefer more conservative options like guaranteed investment certificates (GICs) or fixed-rate savings accounts. 4. Multiple accounts can work together Individuals can open multiple FHSAs across different financial institutions without exceeding annual or lifetime contribution limits. Although joint accounts aren't permitted, funds from multiple FHSAs can be pooled towards the purchase of a single home. Additionally, the FHSA can be used alongside other savings vehicles such as TFSAs and the Home Buyers' Plan (HBP), further enhancing purchasing power. Home Buyers Plan (HBP): Qualifying home buyers can withdraw up to $35,000/each from their RRSPs to assist with the purchase of an owner-occupied home . The funds are not required to be used only for the down payment, but for other purposes to assist in the purchase of a home. These funds are withdrawn, with the condition that the funds are paid back into the account over the course of 15 years (or you are taxed on the portion not being repaid into your RRSP). Please note that RRSP funds MUST be in account for 90 days BEFORE removing for down payment. A down payment is not the only thing buyers need to prepare to be financially ready for a home. Canadians should consider their “credit-worthiness,” as well, and make sure they’re paying down debt so that when they’re ready to buy and cash out their FHSA, that they will qualify for the mortgage amount they need. BLOG 8 Credit Rules You Need to Know, Before You Buy a Home BLOG 5 C’s of Credit to get a Mortgage 5. Don’t forget about the tax implications Opening an FHSA entails tax obligations, including reporting contributions and transactions in the annual tax return. A T4FHSA slip provided by the lender details these transactions, with individuals required to fill out Schedule 15 for deductible contributions. Notably, contributions to the FHSA are tax-deductible, but transfers to an RRSP are not. Individuals have the flexibility to carry forward deductions to future tax years if desired.

Understanding Debt and Its Impact on Mortgage Approval

By Kelly Hudson • 13 Mar, 2024
Securing a mortgage significantly depends on your credit score and debt load. Understanding how different types of debt affect mortgage affordability is crucial. Debt falls into two categories: secured and unsecured. Secured debt, backed by collateral like a house or car, provides lenders security in case of default. Unsecured debt, such as credit cards, lines of credit, and student loans, poses higher risk for lenders and typically carries higher interest rates. Here's how different types of debt influence your credit score and mortgage approval: Credit Cards are unsecured debt, offering revolving credit lines with interest rates based on creditworthiness. Responsible credit card usage can positively affect credit scores, but defaults or late payments can lead to higher interest rates and decreased creditworthiness. Line of Credit : Like credit cards, lines of credit are unsecured and provide borrowers access to a predetermined credit limit. Responsible use can improve credit scores, while defaults can have negative credit repercussions. Student Loans: Despite being unsecured, they can enhance credit scores if paid on time. They contribute to the debt-to-income ratio. Auto Loans: Auto loans are secured debt, with the vehicle serving as collateral. They can diversify debt portfolios and improve credit scores. Existing Mortgage Loans: Secured by the property, timely payments enhance credit scores. Missed mortgage payments raise red flags for new lenders. Maintaining a balanced mix of debt types strengthens credit scores and mortgage eligibility. However, over-borrowing can be harmful.
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