What To Do If Canada Enters A Recession

Recessions can feel scary. But, before a recession hits, most Canadians can feel it coming.

Here’s what to look for and how to react should a recession hit Canada in 2023.

What is a Recession?

A recession occurs after six months of negative gross domestic product (GDP). GDP refers to a situation where a country’s economy is contracting or shrinking, rather than growing. A negative GDP can be a sign of economic recession or depression. This may result in people losing their jobs, businesses closing, and consumers buckling up and spending less money.

Why do Recessions Happen?

Recessions are naturally a part of the economic cycles and happen to regulate monetary policy, but that doesn’t help consumers who can’t make ends meet.

Some common reasons recessions occur include the following:

• Out-of-control inflation – If the government has to step in to handle inflation, it can raise interest rates considerably, which deflates most businesses’ capabilities
• Negative economic events – The pandemic is a good example of a negative economic event no one saw coming, and it swept the entire world
• Debt bubbles – When businesses have excessive debt, and interest rates increase to the point they can’t afford their loans, it hurts the economy.

What Happens to Canadians during a Recession?

Now that you know why a recession might occur, how does it affect consumers? 

If the economy goes into recession, it means companies create fewer products. Production slowdown usually results in layoffs and businesses closing. This can also affect the stock market and, eventually, consumer spending because consumers become too afraid to spend the money they have.

This creates a vicious cycle. Consumers don’t spend, so businesses stop producing, which means more layoffs and a hiring freeze. Consumer confidence falls, and the entire country goes into what feels like a depression.

Fortunately, a recession isn’t a depression. Recessions are temporary, usually less than one year, while depressions last multiple years. 

How the Government Steps In

Just as the government will step in when the economy suffers from high inflation, they also step in during a recession.

Instead of increasing interest rates, they typically lower them. This makes it easier for businesses and consumers to borrow and recycle money throughout the economy. As a result, businesses can get back to producing more and eventually hire more help and consumers’ confidence will increase in the economy, allowing them to spend again.

Preparing for a Recession

If you’re worried about a recession occurring, here’s how to prepare:

• Spend only on necessities
• Don’t go into debt
• Increase your emergency fund
• Consider additional income streams
• Review your budget and investment plan
• Remain calm, and don’t bail out of your investments

Final Thoughts

Recessions don’t last forever, so don’t make drastic changes to account for them. When the recession passes, you’ll be back to your ‘old ways’ and can spend with more confidence. But, for the time being, prepare yourself for the worst so you don’t suffer financially if the economy hits rock bottom.

Building a home from the ground up can be both an exciting and a daunting experience. On one hand, it is exciting to be able to choose your land, your home plan, and the finishes. On the other, a build requires extensive planning with not only the build itself, but also regarding landscaping, services, and the financing of it all. This is why it is important to surround yourself with professionals from the very beginning so you can have a clear plan moving forward.

As a Mortgage Broker, I always strive to ensure that my clients are aware of all options and have assistance throughout the financing process. With a new build, there are two options regarding your mortgage: you can have either a Completion Mortgage or a Draw Mortgage. A completion mortgage is where you enter into a purchase agreement with the builder, but they carry all costs until completion – including the land and services. Your builder will require a deposit, which will be held in trust with a Solicitor and will form part (or all) of your down payment. Once the property is ready for possession, your mortgage will be funded and the builder will be paid.

A draw mortgage will allow the Builder access to funds during the build in stages. This process is more involved than the completion mortgage, but has it’s advantages as well. Here are some important points to consider:

• Land Purchase:
  • You will need to have purchased the land you’re going to build on before starting the build and will require a minimum 25% down payment on the land itself
  • This mortgage will then get paid out as part of the mortgage draws for the build (typically this is paid out on the first draw of your mortgage)
  • If your land is not serviced, you will need to pay for these with cash unless the builder adds these into the construction quote and manages the installation.
• Down Payment:
  • You’ll need a minimum of 5% down payment on the total (completed) value of the property if this will be owner-occupied. An investment property will require a greater down payment (20% or more). Your builder will also require a deposit to begin the build – this will form part of your down payment and will be held in trust with a Solicitor.
  • The value of the land, services (if already in place), and completed build will be determined via an appraisal. This appraisal will break down the value of the land and the home separately, as well as give value to the total package as if your build were 100% complete
  • As long as your equity in the land and services is equal to or greater than 5% of the total appraised value for the as-complete property, this can be used for 100% of your down payment. For example, if your land is valued at $120,000, you would need a $30,000 down payment. If your as-complete value is $650,000; you can use the $30,000 land equity towards your total down payment on the build –  the minimum down payment required for a $650,000 purchase is $40,000 and so you would only need an additional $10,000 for down payment.
  • If you would like to add cash to have a greater down payment, you can definitely do this as well
• Builder Requirements
  • The builder will need to be a new home warranty certified builder
  • They’ll provide you with a purchase contract, detailed list of finishing options (often accompanied by a list of cost allowances) and a copy of the plans. The appraiser will use these to determine the value of the home at completion
• Mortgage Payments
  • During the build you will only pay interest on the portion of funds that have been advanced to the builder.
  • Funds are released in ‘draws’ – payments – based on specific completion stages, as outlined by the lender. The final draw will be released for the builder once the home is 100% complete and ready for occupancy.

It is important to ensure that you have had a pre-approval completed prior to entering into a contract with your builder. This will not only ensure that you are qualified based on lender guidelines for the total cost of the build, but is also a great time to discuss your contingency plan in the event of cost overruns and the cost of adding services to your land, if needed.

If you would like to learn more about your mortgage options for a future build, do not hesitate to reach out!

Email: jenni.jackson@dlcme.ca
Cell: 780-897-0166

VARIABLE vs FIXED

When it comes to mortgages, the age-old question remains: “Should I go with a variable or a fixed-rate?”. To make an informed decision, it is important to look at not only the historical trends, but to also be aware of your own comfort level. There is no advice that can be a blanket solution for all borrowers and for every situation.

When it comes to variable versus fixed-rate, it is important to understand what these mortgages are based off of:

Fixed Rates

Fixed mortgages are so named as they are based on a fixed interest rate that is set for the duration of the term with fixed payments. These rates are based primarily on the Canadian bond yields – as yields rise, you can expect an increase in the fixed interest rates being offered to Borrowers. Once you accept your mortgage commitment with a lender, that rate is guaranteed for the duration of your term.

Variable Rates

On the other hand, variable-rate mortgages fluctuate with the Prime Rate. This can either mean fluctuations in your payment or – if you choose to have set payments – the interest portion of the payment will flucuate. The Prime Rate is directly affected by the Bank of Canada’s overnight lending rate – as this rate fluctuates, so does the Prime Rate.

In the last 10 years, the prime lending rate has gone from 2.50% to 3.95% and now sits at 2.45% as of January 2022. Due to recent events, these rates have seen a downturn – providing huge benefits to new borrowers looking to pay as little as possible.

While a variable-rate mortgage could cause fluctuations in interest being paid, historically, the choice of a variable rate mortgage over a fixed rate has allowed borrowers to save in interest costs. Particularly because variable rate mortgages are often offered at a much lower rate than their counterpart, the fixed rate.

The uncertainty of a variable rate; however, means that this is not a product for everyone and it comes down to the borrowers comfort. Some individuals have no wiggle room in their budget for potential changes in mortgage payments, or they do not like the uncertainty of not knowing exactly what their mortgage payment will be each month. For these clients, a fixed-rate would be the best choice.

If clients are comfortable with a variable-rate mortgage, they have a unique opportunity to take advantage of lower interest rates. One option is to set your mortgage to a fixed-payment so that if the interest rate drops, it means you are paying more on your principal amount each month. On average, every 10% increase in payment can save three years off the amortization of a five-year term and so having fixed payments can provide extra benefits with falling interest rates. Or, if your payments are set to flucuate, you may see your monthly payments drop in accordance to decreases in the Prime Rate.

But what if the Prime Rate increases?

If your payments are set to flucuate with each change, then no action is needed on your part. If you have set your payments to a fixed amount, you will want to consult with your Mortgage Broker to ensure that your payment is set at an acceptable level to ensure that not only the interest is being paid, but that an appropriate amount of the principal is being paid as well. This is where accessing the skills of a knowledgeable Mortgage Broker are a huge advantage. If you choose a variable rate, know that it would take several increases in Prime Rate to catch up to where fixed rates are currently at. I inform all of my variable rate clients any time there is a change to the Prime Rate so that you are kept up-to-date!

Most lenders will allow you to convert your variable rate to a fixed rate if you begin to feel uncomfortable with the flucuations. Your lender will convert your mortgage to the rate that closest matches your remaining term. As an example, if you are in a 5 year term and have 3 years remaining, the lender will convert your current variable rate into a 3-year term fixed rate.

Differences in Penalty

A big benefit to variable-rate mortgages is that if you choose to sell before the mortgage term is up, the penalty is typically only three months interest as opposed to the much heavier interest rate differential (IRD) calculation used to determine fixed-rate mortgage penalties. This can provide you with more flexibility if you find yourself needing to make a change to your mortgage mid-term.

There are a few statistics out there that state that over 60% of homeowners break their mortgage term within the first 3 years. The difference between three months of interest as a penalty or an IRD calculation can be several thousand dollars.

If your mortgage is maturing in the next 60-180 days and you’re not quite sure what to do, give me a call! Not only can I provide tips for your existing mortgage to help save you money, but I can also help you assess whether there is a better product available and if you should make the switch to a new lender.

AFTER A SEPARATION – What is next for your home?

Separating, whether through divorce or ending a common law relationship, is never an easy step. If you find yourself in this situation, you are certainly not alone – latest statistics show that 38% of all marriages in Canada end in divorce. Losing your relationship does not mean that you need to lose your home as well. Most individuals who are going through a separation feel as though they are forced to sell their home and split the equity – but there is a solution.

A Spousal Buy-Out Program allows one partner to purchase the home from another. This is particularly beneficial when there are children involved and you want to provide as much stability as possible. 

Backed by all three of Canada’s default mortgage insurance providers (Canada Mortgage and Housing Corporation, Sagen™ and Canada Guaranty), this program is designed to allow one party to refinance the shared home up to 95% of its appraised value. In order to qualify, both you and your ex-partner must currently be on the title to the property. The Spousal Buy-Out Program can also be used to pay off any joint debts held and to pay out your partner’s share of the equity.

The person who is purchasing the home, of course, must be able to qualify for the mortgage – this is where I come in!  Fortunately, The Spousal Buy-Out Program was designed to help you and, if needed, it allows individuals to bring on a cosigner, such an existing family member or even a new partner, to assist with qualification.

If you are separating from your spouse or partner and want to hold onto your shared home, there are a few things to keep in mind:

1. A SIGNED SEPARATION AGREEMENT

To qualify, the lender must be provided a signed copy of the separation agreement. The details of asset allocation (including current equity in the home) must be clearly outlined, as well as how joint debts are to be divided.

2. AN AGREEMENT OF PURCHASE AND SALE

A standard purchase agreement will need to be signed indicating the party that is to purchase the home. Your Lawyer can assist you with this.

3. INCOME DOCUMENTATION

Standard income documentation will be required so that I can verify that you qualify for the mortgage amount required. If you need to bring on a co-signer, that person will also need to provide their documentation. Depending on the source of your income, the list will vary. 

4. CONFIRMATION OF DEBTS TO BE PAID

This is an optional one-time option for paying off any jointly held debts. The proceeds can only be used to buy out the other owner’s share of equity and/or to pay off joint debt as explicitly noted in the signed separation agreement.

5. AN APPRAISAL

An appraisal report will likely need to be obtained to determine available equity in the home. During the approval process, the lender will request that we order an appraisal (usually through a third party). You will be responsible for this cost but the report will only be made available to the lender. We can ask the Appraiser for a letter of transmittal; however, this is not always granted. 

5. CLOSING COSTS

Aside from the cost of the appraisal above, you will also incur costs associated with purchasing a home, such as lawyer fees and title insurance. These costs can vary on a case-by-case basis (and depending on location). You can estimate closing costs by taking a look at my mortgage app here: https://dlcapp.ca/app/jenni-jackson

Moving on in life can often be difficult, but this program allows you to maintain some of your routine and security by ensuring you – and your children – can remain in the home you love.  

Have you found a home in the perfect location but the finishings are less than ideal? Maybe the house needs new shingles or updated doors. Great news – we have a mortgage product for that! A Purchase Plus improvements mortgage allows you to add the costs of renovations to your mortgage.

Sounds perfect, doesn’t it? It is a very helpful product for homeowners but there are some important details to keep in mind:

• QUOTES. All quotes must be received up front. There are no exceptions to this. You will need to work with your Realtor to obtain quotes for the renovations to be completed as these quotes will need to be sent to the lender with your offer to purchase. In most cases, the lender will request an appraisal to determine the value with the renovations completed.
• DOWN PAYMENT. Your down payment will be based on the purchase price + the total cost of the improvements. Depending on the value of the improvements, this can add up to a significant sum and so you will need to have access to additional funds to cover the increase.
• MAXIMUM IMPROVEMENT VALUE. This is very lender specific and can also be dependent on the type of home you are planning to purchase as well as its location. Most lenders will cap the total value of the improvements to 20% of the purchase price and have a maximum improvement value of $40,000. There are lenders who will go beyond the $40,000 cap but, as mentioned above, it is dependent upon location and the type of property.
• WHAT CAN BE INCLUDED? Most renovations can be included such as flooring, shingles, cabinets, windows…the list goes on! You can also add a garage if the property does not currently have one. Appliances, furniture, landscaping, or other forms of moveable property cannot be included in the quotes.
• TIMELINE. 90-120 days is the typical time frame that lenders will allow for completion of the work. With the current delays in the supply chain, it is important to discuss this timeline with your contractor to ensure that the supplies will be ready and that the work will be completed on time. Some items, such as a fence, are seasonal and may be able to receive an exception to this. We have access to limited lenders with a 1 year time frame – these are beneficial when dealing with a large-scale renovation. Keeping track of timelines is very important – if the work is delayed past the maximum allotted time, the lender may decline the improvement value…leaving you on the hook for those costs.
• NO CHANGES. The value of the property was approved based on the quotes provided. You will be unable to change the work being done after you gain possession and also cannot complete just part of the quote. Work must always be completed as per the quote provided.
• VERIFYING COMPLETION. If the total of the renovations is less than $15,000, we can usually supply lenders with confirmation of paid invoices. Once reviewed, they will release the funds (see below). With larger renovations, lenders will require that an Appraiser inspect the property to verify that the work has been completed as per the quotes that were initially provided. It can take about a week to process the release of the funds and so it is important to make sure that all of this happens within the lenders’ allowed timeframe.
• PAYMENT. When the renovations are complete and verified, the lender will release the funds. Your lawyer will handle the disbursement of these funds to the contractor(s) used.

There are many variables to factor in when determining the options available to you for a Purchase Plus Improvement mortgage. I am happy to assist you throughout the process and help you make your house a home!

Interested in a Rural Property?

Buying a home in the country is a dream for many, but there are a few important points to keep in mind before you dive right in!

Here are a few things you should know:

1. Check The Zoning: When it comes to buying rural property, it is important to check how the property is zoned. This is vital as zoning will determine how you are able to use the land, as well as what types of buildings are allowed and where they can be located. Is the property zoned as “residential,” “agricultural” or perhaps “country residential”? Depending on the zoning, it could affect the lenders available to you and what you qualify for.

2. Property Boundaries: Once you have determined how a property is zoned, it is important to look at the land. You may want to acquire a survey early in the process if the boundaries are not clear. Knowing the exact boundaries of your potential property will help to avoid future disputes and help you make an informed decision as to whether the land meets your needs or not.

3. Considering the Land and Your Mortgage: What many people don’t realize is that land has an effect on qualifying for a mortgage and what you can borrow. In fact, most lenders will mortgage: (1) house, (1) outbuilding and up to (10) acres of land. If you have several outbuildings or extra land that is being purchased, you may need to consider additional funding on top of your typical 5% down payment. This doesn’t mean that you cannot obtain a mortgage for a property with more than 10 acres, we absolutely have access to lenders that will allow this! It is always a good idea to send the property information to your Mortgage Agent in order to verify that the property will work within your approval limit.

4. Water and Sewage: When it comes to rural living, many people draw water from private wells and utilize septic tanks
   for sewage. To ensure everything is safe and in working order, it is a good idea to have an inspection done on the septic tank and water quality as a condition on the purchase offer. Due to the nature of these properties, be advised that inspections may cost more than it would in the city, but it is important as lenders may request potability and flow tests.

5. Coverage Matters! When it comes to rural properties, you will want to obtain Title Insurance in addition to your home insurance policy. In fact, most lenders now require Title Insurance. Title insurance protects the title of your new property from fraud and possible deficiencies, such as unregistered utility easements. 

If your dream is to purchase a home in the country, I would be happy to help you determine your options! My goal is to ensure that you understand any differences in the mortgage process and overall qualifying that come with rural purchases.

I also know several realtors who specialize in rural properties…let us help you purchase your country home!

RENT-TO-OWN: Ensuring your Success

Rent to Own’s can be tricky to complete in the lending space, however; if set up properly this type of contract can lead you down the path towards home ownership.

A rent-to-own contract is essentially a purchase contract with an extended period of time between the acceptance of the contract and the closing date. It is important that the Buyer and Seller each have their own representation…lenders will not allow a Solicitor to represent both the Buyer and the Seller.

As a first step, I would advise contacting a Mortgage Professional prior to entering into a rent-to-own contract. Even though you may not qualify for a mortgage right now (thus the reason for the rent-to-own), you can be given valuable advice and a road map to ensure your success and the completion of the contract at the end of the term.

There are several very important aspects to consider in a Rent-to-Own scenario:

Setting the Purchase Price and Completing the Contract (Offer to Purchase)

In order to determine the purchase price, there must be an appraisal completed up front and kept on file. This appraisal will also need to include market rents for that property. The market rents will determine what you will pay as rent for the property and any amount over and above that will be put in trust towards the purchase (we will discuss this further below).

The contract will need to have an end date agreed upon by both the Seller and the Buyer (1-3 years is typical). For contracts longer than 3 years, it would be advisable to register the rent-to-own as a lease on the title of the property. This can be discussed with your Solicitor in greater detail.

It is very important that the contract states clearly that if the buyer is unable to complete the transaction (i.e., cannot get approved for a mortgage at the end of the contract), then the deposit and funds received over and above market rent are to be refunded (or partially refunded, at the very least). Often, this is left out of many contracts and is one of the reasons that Buyers will see a decline from their lender when it comes time to obtain the mortgage. Any equity built in the property during the Rent to Own period will belong to the Buyers, and it is a good idea to stipulate that point in the contract as well. If an adjustment to the purchase price is agreed upon at the end of the contract, then the Solicitors representing the Buyer and Seller will execute an amendment to the original contract.

The contract must state the rental amount PLUS the amount being paid in addition to that (if any). This needs to be clearly stated and broken out as rent and equity being built – which will ultimately add to the Buyer’s down payment. There also must be a deposit given on the property and the amount of that deposit stated in the contract. Depending upon the size of the initial deposit given, it may be enough to cover the full down payment of the property (minimum of 5% of the purchase price). In this case, the buyer may be only paying market rent until they are able to complete the purchase. In other cases, a smaller deposit was given OR the buyer would like to pay additional funds monthly to build up equity in the home. This built-up equity will be viewed as the down payment, in addition to the initial deposit, at the end of the contract term.

The Deposit

Upon acceptance of the rent-to-own contract, the deposit must be given to the seller and is to be held in trust with their Solicitor. This deposit amount can vary and as mentioned above, can form part or all of the down payment. Much like a traditional purchase contract, any funds that will form the down payment must be held in trust until the completion of the contract. If the rent-to-own has a 3-year term, then all those funds will be held in trust with a Solicitor for the full 3 years.

Managing the Funds

Another common reason for a decline at the end of the rent-to-own term relates to how the funds have been managed. The deposit and any funds received over and above the market rent (as set out in the contract) must be held in trust with a Solicitor. They cannot go directly to the Seller. When the time comes to complete the purchase and obtain a mortgage, the Buyer will be requested to provide a statement of the account from the Solicitor in order for the lender to verify the initial deposit and any other funds that will form the down payment.

Already Have a Rent-to-Own Contract in Place?

Does your rent-to-own contract not fall in line with the guidelines above? First, don’t panic! We do have lending options for you outside of traditional institutions. Most likely, you will need to be placed with a private lender for a short term (1 year, ideally) and then move to a traditional lender after that. Keep in mind that going with a private lender will mean that you will need a minimum of 20-25% of equity in the property. Depending on the type of property and the location, you may be required to have even more. The more rural a property, the more equity will be required. Private lenders are willing to take on more risk and therefore will also have a higher interest rate and initial fees.

Each mortgage file, whether a rent-to-own or a traditional contract is unique. It is best to consult with a mortgage professional who can help you navigate the lending options.

CLOSING COSTS! In addition to your down payment, there are a few other costs to consider when purchasing a home:

DEPOSIT ON PURCHASE
Once your offer to purchase is accepted, you will be required to submit a deposit on your purchase. The amount can vary, and so you should discuss with your Realtor what is appropriate based on the value of the property. This deposit will form part of your down payment.

HOME INSPECTION FEE
Buying a home will, for most people, be the single largest investment of your life. As a buyer, you will want to ensure you are aware of any serious issues prior to finalizing the sale. You can expect an inspection to cost between $300-$500, depending on the size and location of the property.

APPRAISAL FEE
Your lender may require an appraisal of the property that you are purchasing. This appraisal will not only confirm the value of the property, but also confirm that its condition meets the expectations of the lender. Appraisal costs can vary greatly depending on location and size of the property; you should plan for a cost of $325-$550…keeping in mind that the more rural a property is, the higher the cost of an appraisal.

LEGAL FEES
In a purchase, you will need to enlist the services of a Solicitor. Your Solicitor will finalize the purchase of your property and prepare your final mortgage documents from the lender. You may obtain a quote from your Solicitor’s office prior to your appointment.

TITLE INSURANCE
Your lender may require title insurance in order to protect the title of your new property from fraud and possible deficiencies such as unregistered utility easements. The cost of title insurance in Alberta can vary; however, you can expect the cost to be between $250-$300.

PROPERTY TAX ADJUSTMENT
If the Seller of the property pre-paid the property taxes for the current year, then you will be required to pay back the tax amount for the time that you occupied the home. Ex: If you moved into your home on November 01 and the Seller paid the property tax until Dec 31, you would need to reimburse the seller for the 60 days that you occupied the property for that year.

INTEREST ADJUSTMENT
Most likely, your first mortgage payment will not be on the day that you gain possession of your new home. You will accrue interest from the date of possession until your first payment and will need to cover that cost.

**LAND TRANSFER TAX**
If you do not live in Alberta or Manitoba, you may have to pay a Land Transfer Tax. This handy calculator will show you how much you may owe depending on the province that you are buying in and the value of the property.
https://www.ratehub.ca/land-transfer-tax

The best way to approach home ownership is to be prepared! I strive to ensure that my clients are educated on the process and that the journey to home ownership is as seamless as possible.

Contact me if you are planning on making a move!

Contact Me Today!