Tuesday, December 18, 2012

Mortgage on Million Dollar Homes

I have had quite a few inquiries lately on people having trouble financing large purchases so I figured a post was needed.

First and foremost I will explain how default mortgage insurance comes into play.  If you are purchasing a home that cost $999,999 you can get away with putting down as little as 5%.  If the purchase price of the home is $1,000,000 you have no choice but to put down 20%.  This may not seem fair; which I do agree, but the governments angle is to protect the Canadian housing market.  If something does go wrong, high end homes are the first to crash and crash harder.

Houses in this bracket only make up about 0.1% of homes sold in Canada so it is a very small bracket of consumers.  For the people that do fall in this bracket keep reading and I will explain the financing options.

ALL LENDERS ARE DIFFERENT.  I made this statement bold and capitalized because one of the biggest misunderstandings in the mortgage world is all banks are the same.  In reality, if your current lender says no you do not qualify, it does not mean another lender will not do the deal.  Obviously your lender is not going to tell you to go the bank next door.

Generally at some point each lender has a maximum loan to value they will lend on.  For example, X lender says we will finance up to 80% of the first million then 60% of the rest.  So if you are purchasing a home at 1.5 million they will finance 80% of $1,000,000 which is $800,000 and 60% of $500,000 which is $300,000 for a total of a $1,100,000 mortgage.  You would need to come up with a $400,000 down payment.

Some lenders will use 80% of the entire amount up to 2 million or even higher.  So in the 1.5 million purchase the down payment required would only be $300,000.  Down payment requirements also vary on the type of property; if it is a farm or a rental, is it in the city or rural area?

Rates can vary quite a bit at this level, often times consumers may be a little perplexed when they are not receiving the best rates advertised.  Some lenders will offer best rates on these mortgages and others consider them high risk even if you have 800 credit score and provable income.

At this level of purchase you really want to make sure you read the fine print, beware of collateral mortgages unless you understand them and this is what you want, and make sure you understand the pre-payment privileges and penalties.  Not knowing and signing something unfavourable could literally cost you tens of thousands of dollars.   

One thing that also helps a lot if you are working with a broker, do not be shy about admitting net worth, this is a huge part making your application favourable.  Would you lend a million dollars to someone who barely has enough money to cover closing costs?  Disclose any assets you have it will only help.

If you are using self declared income don't sweat it, there are still ways to get this done.

One last thing to keep in mind, financing at this level requires a broker who really knows what they are doing.  There can be massive savings in payments from lender to lender, you want to make sure you are using a very large volume brokerage that does business with many lenders.

If you have any questions don't hesitate to contact me which ever way works best for you,

Till next time, have a great day.

Ron Miller

YouTube Hamilton Broker

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