Whenever the Canadian real estate market topic comes up in conversation, it typically surrounds how first-time homebuyers are struggling to get their feet in the door. Whether the challenges of putting together a down payment or qualifying for a mortgage, aspiring homeowners have many hurdles to overcome.
But while these labours of Hercules are undoubtedly real, move-up buyers also have an uphill battle to overcome as they are contending with comparable issues, from higher borrowing costs to more expensive residential properties in their communities or a faraway distance.
Wait a minute. What is a move-up buyer anyway? This person currently owns a home and intends to sell this property to acquire a new one that is typically larger. The reasons for this decision will vary, but some common factors of moving up include needing more space for a growing family, upgrading to a better neighbourhood, taking advantage of favourable market conditions, and searching for a differently designed home.
At a time of tightening lending standards and above-trend mortgage costs, move-up buyers will need to determine how to finance this transition, which could happen at a snail’s pace or the speed of light. Let’s dig a bit deeper to consider your financing or borrowing options.
What Every Move-Up Home Buyer Should Know About Financing Options
Here are four financing options that every move-up homebuyer should know:
Using Your Home Equity Wisely
Did you buy your home before the coronavirus pandemic? Did you acquire one in the early days of COVID when rock-bottom interest rates fueled a buying frenzy? Whatever the case may be, you might have accumulated a tremendous amount of tax-free equity over the years. It might be enough to fund your next home purchase or the down payment on your next single-family house in Victoria, townhome in Halifax, or two-bedroom plus den condo in downtown Toronto.
Of course, the question becomes: Should you touch your home equity? The reality of the situation is that you can employ the gains from the sale of your home, but you should do so wisely or conservatively. Rather than use up 100 percent of your home equity, perhaps you can dedicate a certain percentage of the proceeds to your move-up acquisition.
Like buying a home will be the most significant financial decision of your lifetime, so is the decision to sell your home, since you might access hundreds of thousands of dollars in equity.
Line of Credit or Bridge Loan
Because you own your home, tapping into credit is a little easier. It will vary on a case-by-case basis, but generally, homeowners will be given favourable terms for a larger amount of capital.
As a result, you could be tempted to fund your move-up purchase with a line of credit. Or, if you need time between selling your current property and buying your next one, you may consider using a bridge loan. While it is imperative to speak with a mortgage broker about your financing options, making the necessary calculations, from interest rates to extra charges, is vital.
Both credit instruments can be useful and affordable mechanisms at your disposal. A line of credit can be an easier way to fund your purchase if it is only a small mortgage or purchase. A bridge loan can be a helpful tool in this transition period of listing your property and buying a new one without enduring immense financial pressure.
Are Second Mortgages Reasonable Options?
Typically, homeowners will use second mortgages to help consolidate debt when they have lost a job, suffer from a health ailment, or endure credit challenges. Private lenders usually offer them, and they come with higher interest rates (in this climate, it can be in the double digits!).
That said, conventional mortgage lenders might be willing to offer second mortgages with customizable terms and conditions. Many families use these financial products to help their kids buy a house or pay for their children’s post-secondary tuition.
At the same time, financial institutions will often push through a home equity line of credit (HELOC), as borrowers can receive up to 65 percent of the value of their home.
Ultimately, it is about weighing your financing options and determining what is best for you, your family, and your wallet. Communicating with both your real estate agent and the bank is crucial.
Cash-Out Refinance
A cash-out refinancing option consists of obtaining a new mortgage for your home, whether from a current lender or a new source. You will then pay the first loan in its entirety by using the second one, which will help you lock in a new interest rate and loan term.
This might seem enticing, but there are a few things you need to know:
- Users will pay fees and penalties to ensure the long-term savings exceed the upfront costs.
- Borrowers must meet requirements (length of homeownership, credit score, home equity, etc.).
- Clients must have a lower debt-to-income ratio.
- The minimum equity requirement is usually as much as 20 percent in equity.
Other Money-Related Tidbits of Information
In addition to your financing options, it is essential to think about other factors related to your move-up homebuying experience:
Refrain from going overboard and over budget on your next purchase.
Sit down and calculate your finances, from what you earn to your liabilities to your retirement savings.
Determine whether to buy or sell first (there is no right or wrong answer to this quandary).
Take your time and do your research on what is available in the real estate market.
Work with the right people to make the best decision possible.
Takin’ Your Time
The last few years have been a chaotic time in Canada’s housing market. The roller coaster ride of mortgage rates, the buying frenzy, the dramatic rise in home valuations, the modest correction, and everything else that occurred in the Canadian economy. As we learned, being impatient can often burn buyers and sellers. Therefore, you do not need to put the pedal to the metal. Instead, be patient and precise so you can be confident you made the right choices throughout the move-up homebuying process.
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