Expert: Cinzia Dalgarno - 1/10/2010

Question
Hi Cinzia,

We bought a row townhouse and moved in 08/28/09. We are second from end of row-in middle. Our rate is 5.64% for 40 yrs and we are currently on monthly pymnet; we got in market with no down pymnt and were slapped with $8000 CHMC insurance fee. Our current balance is $235k
Now, we want to move to our final house, and we have porting ability according to the lender’s terms. We need to come up with 5% down pymnet and the closing cost amount. The down pymnt should be in account for 3 months, and we would get it for max 35 yrs, no more 40 as the conditions have changed.

At this point we are looking for information so that we make an informed decision, we have not started looking for a house yet neither have we talked to a selling agent. But going by the current listings in our area and the past sells we should sell our unit for a fair markt price of about $250k. The house we want is $300k.

We went to the lender and they say yes we can sell our house and pay them a penalty of $15,000 or we can escape this and port the mortgage as long as we buy and sell within 90 days. They said if we want 300k we have to be requalified unless we buy a house for $247 k which is the equivalent of the amnt we were originally qualified for-but we can’t get a house for this amount. We feel that the $300k should meet our needs and it is the final house as the kids are now going for college/uni. We will be ok with either end unit, semi or detached. We are in Ajax Ontario.

I know that lenders will not disclose the options, so I’m writing to see what other options we have that we can ask the lender to provide, like bridging loan? Could we use the proceeds from the sale of our current house as the down payment and does the rule of dwnpymnt being in acc for 3 months still apply? After the agent commission etc we should remain with abut $10k and we have about $5k but it is not in account for 3 months. We want to sell between now and May before market is flooded. Also given our scenario, should we sell first or buy first.  

We have been thinking of making use of our line of credits/cr cards facility and our savings to put aside about $10 k but again when the time comes for credit file pull up for assessment it will come up as having too high balance. We have diligently paid our accounts and our scores are quite impressive although we have not physically checked with Equifax etc.
If you need more details I can provide. Looking forward to your answers


Answer
Hello Sue. Below is a breakdown of the financial side of selling and buying a home. I would strongly recommend 3 things:
1. get a mortgage broker. They will be able to go over every detail of the various scenarios with you, and will be a great help in determining what your best course of action would be.
2. get a pre-approval - prior to selling or buying. The mortgage broker will be able to do that for you.
3. definitely, sell first. Your funds are limited, so you want to know exactly how much you have available to you for downpayment, etc.
Onto the figures. Given the scenario of:
$235k outstanding balance, 5.64% rate, new home price of $300k, existing home sale $250k;
Your lender will allow you to port your mortgage - this is great, but there will be conditions. Specifically, they will want to approve the property you wish to purchase, and they will want to re-qualify you, creditwise.
To give you an idea of what you might expect, on your purchase of $300k ("k" by the way, is short for "thousand"), here are the figures:
-your existing home will sell, let's say, for the full $250k that you are expecting. There are no standardized commission rates for realtors. You need to find out what you can expect to pay from the $15k that you will net, after you pay off your mortgage. In B.C., a typical realtor's fees are 7% of the first $100k plus 3% of the remainder of the purchase price. In Alberta, they typically charge 6% for the full purchase/sale price. Some charge more for strata properties, due to the increased amount of work. Depending on what your realtor charges, you may or may not have $10k left over after all is said and done.
Aside from your downpayment, you will need to prove that you have the equivalent of 1.5% of the purchase price - that's $4500 on a $300k purchase - for closing costs.
Let's assume for a moment that you do indeed net $10k from the sale of your unit. You also have $5k in savings; this gives you the $15k for the downpayment, but you don't have the closing costs. To answer your question regarding the "funds must be in your account for 3 months" rule, no, it does not apply if your downpayment comes from the sale of existing residence.

I would suggest you not borrow money for the downpayment and/or the closing costs. This would only increase your monthly debt load, and it sounds as if you are just managing at the moment.
If you do have the money necessary for the downpayment and closing costs, this is roughly what you should expect for the new mortgage:
the bank will port the existing mortgage to your new property. They will do a "top up" mortgage, and you will be charged a CMHC premium on the "new" portion of the mortgage - for example, you need to borrow an extra $50k ($300k purchase, $15k downpayment, difference is the total mortgage, $285k; total new mortgage is $285k, less the existing mortgage amount of $235k, new money is $50k).
The premium for the new money will be $2125, or 4.25% of $50k. This will be added to your mortgage, so your overall new mortgage amount will be $287,125. The payment amount will depend on the final rate - which will likely be a blended rate encompassing the 5.64% for the existing mortgage money, and the current rate for the new money. If the rate for the full mortgage stays at 5.64%, your payment would be $1556 per month, approximately.
This of course doesn't take into account monthly strata fees or property taxes.

I hope this was helpful to you,
Warm regards,
Cinzia