MORTGAGE: Think hard about easy money

What a difference a year makes when it comes to real estate in B.C. where declining housing prices and historically low interest rates turned a seller's market into one favouring the buyer.

In an effort to jumpstart the economy after the worldwide credit crisis, the Bank of Canada cut interest rates making the cost of a mortgage the most affordable in years. Five-year mortgage rates with interest rates under four per cent are available from most financial institutions.

It certainly helped Reed Harris to buy a second home. And it helped Holly McCallum to start looking for her first owned home. But it's not "easy" money; it demands, especially of first-time buyers, close attention to loan details.

Reed Harris is a Vancouver mortgage broker who bought a two-bedroom apartment in Kitsilano recently for $323,000. (That price was $35,000 less than the list price, illustrating the contribution of price cuts by sellers and lower interest rates to the recent increase in the number of real estate transactions locally.)

Harris financed the purchase with a convertible mortgage with a one-year term and with a rate of 3.95 per cent rate.

The 29-year-old isn't new to the housing market. He already owns a Vancouver residence which he rents out, but until the Kitsilano purchase never resided in a home he owned. He financed the earlier purchase with a mortgage with a five-year term and a fixed rate of 51/4 per cent.

"I own a rental property downtown, but with these rates it's silly to rent," the owner of Verico Mortgage Manifest said in an interview. "The cost of money has come down and with some properties the monthly mortgage payments are less than rent."

This spring he was offered 2.9-per-cent money, but he found features of the more expensive mortgage useful.

"It's a one year-term; at any time I can switch it to a variable," he says.

"I don't intend to sell. The equity I've created with the place I'm living in means I could use the equity in one year from now as a down payment [on a third property]."

Prospective home buyer Holly McCallum, 48, has been looking to buy her first place for the past year. The reason she didn't buy earlier was the fact her current suite - a two bedroom condo in a Burnaby high-rise - is such a reasonable rent. In fact, the landlord has never raised the rent in the 10 years she has lived there.

She recently made some money in stock options and decided given the strong buyers' market it would be foolish to not invest in her own property.

"This is the right time," she says. "The only reason I'm waffling now is deciding whether to go to the banks myself [to negotiate an interest rate] or use a mortgage broker."

McCallum says she was pre-approved for a mortgage and is looking for a condo no more than $350,000.

"It really comes down to price and what's available," she says.

Mortgage broker Alyson Thiessen, owner of Geterdone Girls of Mortgage Intelligence in Nanoose Bay says buyers like McCallum are right to fully understand what they are buying before leaping into the market but she strongly believes its best to go with an experienced mortgage broker and understand the different mortgage options.

"There's a lot of great rates but you need to know what you are buying. Read your mortgage commitment," she says.

Review the terms of the mortgage, such as what are the payout penalties if you were able to pay it off early? What are the prepayment privileges?

Another tip is to ensure you are pre-approved before going shopping.

"Ninety per cent of clients are pre-approved properly. You are only pre-approved when all your documents are in and verified. An offer can be made and it will go through. Most banks just run the numbers and say you're good for that amount but that's not pre-approval."

Of the 90 per cent of clients who come to her initially with a rough idea of what they can afford about 10 per cent will later learn the estimate was wrong, she says.

"I see them every day. The result is they don't get the property they want, some get discouraged and won't even buy," she says.

"It's worthwhile for everyone to get as much information as possible. Everyone's situation is incredibly different but it helps to have someone (like a mortgage broker) to hold your hand and point things out."

According to a recent survey by the Canada Mortgage and Housing Corporation Survey during the past twelve months about one-quarter of all mortgage transactions were arranged through the mortgage broker channel. Most notably, broker share among first-time buyers had increased to 44 per cent, up from 35 per cent in 2007.

Demographically, brokers tend to do better among younger purchasers aged 25 to 34 years (42 per cent share), and female purchasers (43 per cent share).

Harris says a mortgage broker will understand all the rates on the market, whereas a bank lender will only show you what the one bank is offering.

Harris says his top tip is geared towards the first-time buyer who he advises not to get a car loan.

"A $500 car loan per month payment reduces your mortgage purchasing power by $100,000. It's a dramatic difference in terms of quality of (housing) product."

He also suggests being properly pre-approved and becoming an expert in the area you want to buy.

"Start the search soon so you become an expert and be willing to take action quickly.

"There's a large number of people looking for good deals so you have to be pro-active."

With his own place he made an offer the day after it was listed, and made sure his offer had all the necessary protections like subject to inspection, subject to financing and confirmation of strata documents, in the case of an apartment or townhouse.

(prepared by Kim Pemberton/Vancouver Sun)