Upgrading to your next home
Moving up. Moving on.
Buying a home is much easier the "second time around" because you know the basics and understand the process, but there are some steps you don't want to forget. And some new ones you may need to think about.
There are many reasons to buy a new home: you need more space – or a different kind of space, you're moving to a new area, you name it. Sit down with everyone in your family to assess your current house – what works, what doesn't and what features the new house should have. Think about how long you'll be in your next home and anticipate future requirements. After defining your needs, you can begin to look at the market for homes that fit. If it seems that only houses over a certain price have a games room, you can decide whether that price range is appropriate or if you're prepared to compromise (just a little). Here are some other things to consider:
Determine your down payment.
You'll have paid some of the principal on your existing mortgage and, more than likely (particularly in the Lower Mainland and many other areas of BC), your property will have appreciated, putting you in the enviable position of selling at a profit. If so, you'll be able to put a generous down payment on your next home, which will definitely help if you're taking on quite a bit more of a mortgage.
If things haven't worked out as planned, you can still apply for a high-ratio mortgage (down payment of 20% or less) even if you had a high-ratio mortgage on your first house. If you're concerned about the down payment, talk to your financial advisor about your different options.
Pre-approval is still a good idea.
Just as important as the first time around, pre-approval lets you know what you can afford and what your payments will be. It also indicates to the potential vendor that you're serious.
Be aware of potential penalties.
Pre-payment penalties may apply if you're buying before your mortgage term is up, technically "breaking" your existing mortgage contract. If you're taking out a new mortgage with the same institution, your lender will often reduce or eliminate the penalties but if you're changing lenders, allow for a penalty in your closing cost calculations.
If your current mortgage is portable, you can take the rate, terms and conditions and balance to your new home, which works out well when your existing rate is lower than current rates. If your new mortgage is larger, your lender may offer "top-up" options.
Another way you may be able to avoid pre-payment penalties is if your existing mortgage is assumable. If your rate is lower than current rates, your buyer may be interested in assuming your mortgage and its terms - an additional selling feature for your home.
Review your mortgage strategy.
Armed with your past experience and current knowledge, now is a good time to review your options and consider a different type of mortgage. When rates are down you may want to try a variable rate mortgage. Or perhaps you have a specific strategy in mind and want the security of a fixed rate. Learn more about mortgage strategies and discuss their merits as well as the features and benefits of different mortgages with your financial advisor.
Tight timing? Bridge financing may be an option.
You find the home of your dreams, but the owner has to close the deal within the month and you can't sell your current home that quickly. How can you come up with the money to buy the new place while carrying the old one?
Bridge financing could be your best option and it may make the difference in getting the home you really want. It's a large, short-term loan that bridges the overlap period when you own (and are paying for) two homes before the sale of your current home closes. When you sell your old home, the proceeds of that sale are used to pay off the bridge loan, plus interest and costs.
There are a couple of loan options:
- A lump-sum personal loan with a fixed interest rate and a lump-sum repayment at maturity.
- A personal demand loan with interest-only payments.
There are no minimum or maximum loan amounts for bridge financing. The amounts depend on the confirmed source of repayment, that is, the sale of your current home. You can make full or partial repayment at any time without penalty, and interest rates are comparable to conventional mortgage rates.
You should only consider a bridge loan if you can afford the interest charges and can pay it off in full as soon as possible. Why? Because every extra day can cost you money. Also, don't count on bridge financing before going ahead with any plans. Consult your financial advisor to ensure it's a viable option for you.
Understand the paperwork.
The offer process is pretty much the same this time around except for the fact that you'll likely have a better understanding of what everything means. You'll also be more aware of how to manage closing and possession dates.
Accepted offer in hand and pre-approved mortgage in place, your mortgage application will move along easily. Closing details may be different this time because you may be handling the sale of one home and the purchase of another at the same time. All other transactional details and costs should be similar.