November is Financial Literacy Month and we have the tips to ensure your financial game is on point this Fall as we head into the New Year!

Nail Down Your Budget
Understanding the basics of budgeting and tracking your income versus spending is a fundamental part of financial literacy and control. Building a budget can help you define your spending habits, and determine where there is room for adjustments, and this gives you a chance to review your cash flow situation to ensure it aligns with your financial goals.

Ideally, your budget will fall close to the range of the following:

• 32% of your income for housing, including property taxes, maintenance, utilities, etc.
• 26% of your income for life, including groceries, medical, childcare, vacations, fun, etc.
• 16% of your income for transit, including car payments, bus passes, gas, etc.
• 16% of your income for debt, including credit cards, lines of credit, loans, etc.
• 10% of your income for savings, including long-term planning, retirement, etc.

DOWNLOAD OUR FIRST HOME BUDGET TEMPLATE!

Dedicate Your Savings

Many individuals will have a savings account that is connected to their chequing account. This can be a bad habit, as it becomes too easy to use your savings account as a second account versus as a dedicated account for emergencies, vacation planning, or more. Ideally, you are putting 10% of your monthly income into savings whenever possible.

Live Within Your Means

This one seems simple, but it is surprisingly difficult to do – especially if you don’t have a proper budget! By putting together a budget as mentioned above, you can see where you are spending your income and how it compares to what you are bringing in. Ideally, you are adjusting your spending to ensure that you are not going over the cash flow available to you with priority expenses first, followed by leisure.

Understand Your Banking Options and Interest Rates

Having a loan with a 16% interest rate, a credit card that you’re barely making payments on, or a savings account that doesn’t give much back are all areas for consideration when it comes to truly understanding your options. Sometimes a different bank, account type, or loan type can make a big difference to your financial position. There are plenty of options, especially at mortgage renewal time, for consolidating your debt, changing your mortgage, getting a better interest rate, and more!

LEARN MORE ABOUT CONSOLIDATING DEBT!

TIPS TO PAY OFF YOUR MORTGAGE FASTER!

Check Your Credit

An annual review of your credit score and credit report is a huge part of financial literacy as this plays a key role in your overall financial status. Your credit score affects your loans, credit cards, mortgages and the interest rate you can qualify for so be sure to understand where you fall on the scale.

GET HELP UNDERSTANDING YOUR CREDIT SCORE!

Plan for Big Expenses

Are you looking to replace your car? Planning a family vacation? Need to renovate your kitchen or replace some furniture? These are all typically larger expenses that should be planned for in advance. While sometimes an appliance will break and need to be replaced, the goal is to have funds in your budget (or savings) for when things come up unexpectedly but also to plan out spending before large purchases or bookings. This ensures that when you get on that plane or drive off that car lot, you know you’re already paid!

Review Your Financial Progress

A lot of people set up a budget but then they don’t update it! Ideally, if any of your expenses change, such as an increase to your streaming services bill or utilities go up, you are updating your budget in real-time to ensure that you are keenly aware of what is coming into your account and going out. Generally, an annual review is a good idea for an overall clean-up of your budget but keeping it maintained all year long will help you get the best picture of your financial situation.

Stay Informed

When it comes to financial literacy, knowledge is power. With so many resources by your side from your mortgage broker to our Enriched Tips, Economic Insights and more it is easy to keep your finger on the pulse and be mindful of current economic changes, as well as new products or opportunities such as 40-year amortization mortgages!

Whether you’re new to financial literacy and budgeting, or simply want a refresh, taking control of your finances and better understanding your spending, cash flow and options will help you get the most out of your income!

written by DLC Chief Economist Dr. Sherry Cooper.

If you have a basement suite or rental property and you are currently looking for a tenant, there are some things to know! Whether this is your first tenant or you have other rental properties, it is a good idea to familiarize yourself with the specifics to ensure a harmonious tenancy.

As always, your responsibility as the landlord is to keep your rental properties in good condition and ensure they meet health, safety, and housing standards. However, as a landlord, you also have additional responsibilities around the rental agreement and tenant regulations.

Tenancy Agreement

Landlords are required to prepare a written agreement for every tenancy. Bear in mind, if this agreement is not prepared the standard terms for your province will still apply, especially if a security deposit is paid. This agreement should clearly outline the following:

• Who the agreement is between
• The length of the tenancy
• Rent amount and due date
• Required deposits (if any)
• Pet restrictions (if any)
• Additional terms (smoking or non-smoking, etc)

The tenancy agreement should also outline if there is the ability to add a roommate, and whether or not utilities, parking, storage, laundry, etc. are included.

Deposits

Typically, a security or damage deposit is requested by the landlord to establish tenancy and cover any unexpected issues that may arise. The deposit can be no more than half of the first month’s rent.

If you are charging a pet deposit fee, note that guide or service pets are exempt from any damage deposits. In addition, you cannot charge fees beyond the pet damage deposit.

Move In

To ensure the move-in goes smoothly, tenants and landlords should schedule a move-in time that works for everyone. At the beginning of the tenancy, you may also consider an inspection before the new tenant has moved in to ensure everyone is on the same page and the condition of the unit is clear in regard to any potential damages or fixes needed.

As a landlord, you are also responsible for changing the locks (at your cost) should the new tenant request it.

Additional Considerations

As a landlord, you will want to assess the suitability of any new tenant before signing the agreement. There are a few things you can do to ensure a smooth process and the right choice of tenant:

• Ask for proof of identity
• Thoroughly check all references
• Contact previous landlords to ask about rental and payment history
• Conduct a credit check to confirm income and financial suitability
• Get the names of all persons to be living in the rental unit

Once you have reviewed the above, you will be in a good position to determine if the potential tenant is a good fit for the rental space.

However, keep in mind that you cannot refuse to rent to a tenant based on any discriminatory aspects such as race, gender, sexual orientation, religion, etc. In addition, you cannot refuse to rent to individuals on income assistance.

While it can seem like a lot, with the proper preparation and understanding of tenant laws and regulations in your area, you can ensure a smooth and successful rental process!

written by DLC Chief Economist Dr. Sherry Cooper.

Let’s talk about escrow! While this arrangement may not necessarily impact your mortgage, it can be helpful to understand should anything come up throughout your term.

What is Escrow

Starting with the basics, what IS escrow exactly?

Escrow refers to a financial agreement where assets or finances are held by a third party on behalf of two other parties (such as a homeowner and bank). The escrow party is a neutral entity that holds funds during the transaction process.

Homebuyer’s Escrow

Most of you will likely be familiar with this from a real estate and notary perspective, which is known as a homebuyer escrow. This is when you sell or purchase a home, your money is transferred to the notary for processing property transfer taxes, existing overdue payments, real estate fees, etc. Once they have processed it and the transaction is completed, the remaining funds then get deposited to you and your mortgage begins.

Escrow is also the instance where you put a deposit down on a property and the cheque or deposit is held until the transaction is completed.

Homeowner’s Escrow

There is also another escrow known as homeowner escrow. This is slightly different from your homebuyer’s escrow whereby the agreement ends when the sale is closed. For homeowner escrow, the account is designed as a holding area for funds to pay off various property-related costs, such as:

• Homeowners insurance premiums
• Private mortgage insurance (PMI) premiums
• Flood or wildfire insurance premiums
• Property taxes

Homeowners may choose to have their funds in escrow for these expenses to avoid missing any payments. Lenders would generally collect these expenses as part of the borrower’s monthly mortgage payment.

Benefits of Escrow

There are a variety of different benefits for using an escrow depending on whether you are a buyer, seller or lender including:

• Buyers:
  • Buyer may get their earnest money back if a sale falls through.
  • Earnest money is often applied to down payment or closing costs.
  • Mortgage escrows break insurance premiums and property taxes into monthly payments.
  • A lender manages the mortgage escrow account on the homeowner’s behalf.
• Sellers:
  • Escrow ensures that a property doesn’t change hands before the sale is complete.
  • If the buyer doesn’t uphold the purchase agreement, the seller could keep the earnest money.
• Lenders:
  • Can ensure payments are made on time and reduce lending risks.
  • Managing the account can help avoid late fees or liens against the property.

Drawbacks of Escrow

As with any potential agreement, there can be drawbacks to escrow that are important to consider and understand before you jump in. These disadvantages include:

• Setting up your escrow account may require an upfront deposit.
• You may be charged additional fees for escrow services.
• Insurance premiums or property tax increases could affect monthly mortgage payments.
• Moving your money into escrow can limit the amount of cash flow on hand.

If you are looking at buying or selling in the future, don’t hesitate to reach out to a DLC mortgage expert to determine how escrow could affect the process and your mortgage agreement! They would be happy to review your situation and recommend the best course of action before you move ahead.

written by DLC Chief Economist Dr. Sherry Cooper.

Are you thinking about co-signing on a loan? If you’re looking to help out a family member or loved one, this is a great way to do that as a co-signer can help overcome stress testing and borrowing limits.

However, it is important to be aware of the implications when co-signing on any loan.

1. Credit History: If you are acting as a co-signor or guarantor on any loan, you essentially allow them access to your credit history. This means, if the borrower is late on the payments or there are issues with the loan, it will affect your credit score as well as theirs.
2. Legal Implications: Always be sure to understand the taxes, legal and estate situations that go along with co-signing, should the borrower fail to pay. A lawyer can help you review the loan agreement and advise of any items you may need to take note of.
3. Timeline: Understanding how many years the co-signer agreement will be in place and what your options are for making changes will help you determine the scope of the loan and if you are able to make changes at any point should the borrower become able to assume the entirety of the mortgage on their own in the future.
4. Personal Income Tax: Depending on the loan, you may have an obligation to pay capital gains taxes so it is a good idea to review your personal tax situation with an accountant prior to signing off on the co-borrower agreement to ensure no surprises.
5. Relationship with Borrower: This is a vital consideration for going in on any loan. Do you trust the individual? Are you aware of their financial situation? Are you willing to potentially put yourself at risk to assist them? These are all important questions as many of us may want to help out family or loved ones, but it is important to ensure that the individual is reliable.
6. Future Finances: Lastly, consider your future finances and if you had any plans in the future that could be impacted by an additional loan. How much flexibility do you need for yourself and your family? If you have plans to refinance for a renovation or make changes to your own mortgage, being a co-signor could affect your options.

Co-signing for a loan always requires careful consideration as it is a large responsibility. However, when done correctly and with people you trust, it can be a great way to assist family members or loved ones with their goal of homeownership. If you are considering co-signing on a loan and have any questions or would like more clarity, please don’t hesitate to reach out to a DLC Mortgage Expert today!

written by DLC Chief Economist Dr. Sherry Cooper.

As you may have heard, The Bank of Canada opted to maintain its policy rate at 5% as of September. The recent rate hikes over the spring and summer have slowed the housing and mortgage markets as potential buyers were unsurprisingly spooked by the rise in mortgage rates. More recently, fixed-rate loans have become more expensive because of the rise in longer-term interest rates. As a result, housing affordability became a bigger hurdle and led to a slight decrease in home prices by 6% in major markets over the summer.

With The Bank of Canada currently maintaining the 5% policy rate, many hope this will be the peak in overnight rate changes. If so, homeowners and potential buyers will be granted some breathing room. We will find out more with their upcoming announcement on October 25th.

As we turn the corner into Fall and start looking ahead to the coming year, analysts are forecasting stronger housing markets. The expectation is that The Bank of Canada will gradually cut interest rates by mid-year, allowing potential buyers to better navigate their affordability.

As the supply shortage continues, new listings are likely to rise and provide much-need inventory. As we move into 2024 and start to see interest rates decrease, motivated sellers will move off the sidelines and housing demand is expected to be resilient.

For anyone who is thinking about purchasing this season, it is important to get pre-approved to guarantee your interest rate for 90-120 days while you shop the market. This way, you will avoid being impacted by potential rate changes and can properly estimate your budget for mortgage costs. Plus, pre-approval will indicate to the seller that you will not have issues obtaining financing (assuming nothing changes between now and the purchase with your job, savings, etc.), which is key during the current economic landscape.

To help you make the best decision possible, download the My Mortgage Toolbox app to determine what you can afford, and what your mortgage would look like at various interest rate levels.

You can also reach out to a DLC Mortgage Expert today for unbiased advice if you have any concerns, questions or just want to get started on your pre-approval!

written by DLC Chief Economist Dr. Sherry Cooper.

When it comes to getting a mortgage, one of the more overlooked elements is the option to be able to port the loan down the line.

Porting your mortgage is an option within your mortgage agreement, which enables you to move to another property without having to lose your existing interest rate, mortgage balance and term. Thereby allowing you to move or ‘port’ your mortgage over to the new home. Plus, the ability to port also saves you money by avoiding early discharge penalties should you move partway through your term.

Typically, portability options are offered on fixed-rate mortgages. Lenders often use a “blended” system where your current mortgage rate stays the same on the mortgage amount ported over to the new property and the new balance is calculated using the current interest rate. When it comes to variable-rate mortgages, you may not have the same option. However, when breaking a variable-rate mortgage, you would only be faced with a three-month interest penalty charge. While this can range up to $4,000, it is much lower than the average penalty to break a fixed mortgage. In addition, there are cases where you can be reimbursed the fee with your new mortgage.

If you already have the existing option to port your mortgage, or are considering it for your next mortgage cycle, there are a few considerations to keep in mind:

1. Timeframe: Some portability options require the sale and purchase to occur on the same day. Other lenders offer a week to do this, some a month, and others up to three months.
2. Terms: Keep in mind, some lenders don’t allow a changed term or might force you into a longer term as part of agreeing to port you mortgage.
3. Penalty Reimbursements: Some lenders may reimburse your entire penalty, whether you are a fixed or variable borrower, if you simply get a new mortgage with the same lender – replacing the one being discharged. Additionally, some lenders will even allow you to move into a brand-new term of your choice and start fresh. Keep in mind, there can be cases where it’s better to pay a penalty at the time of selling and get into a new term at a brand-new rate that could save back your penalty over the course of the new term.

To get all the details about mortgage portability and find out if you have this option (or the potential penalties if you don’t), contact a Dominion Lending Centres mortgage expert today for expert advice and a helping hand throughout your mortgage journey!

written by DLC Chief Economist Dr. Sherry Cooper.

As adults, we all know the critical importance of managing money wisely and the impact our financial situation has on our overall well-being. As parents we do our best, but there are plenty of life lessons we need to teach our kids, and personal finance doesn’t always top the list. We may also not be the best person for the job since around 50% of adult Canadians live paycheque-to-paycheque! So how do we choose which financial lessons, habits, and tactics to teach our children, especially if our own money management skills may be lacking?

Wants vs needs & cost vs value

Tweens and teens need to differentiate between needs and wants and how to prioritize what they spend their money on. Value and cost are two more important concepts they need to understand. A top-of-the-line iPhone or a carbon fiber mountain bike will really impress their teenage friends, but a cheaper version may perform very similarly and provide a lot more value, especially given the limited amount of funds they have. Kids are bombarded by marketing messages, and they need to learn how to avoid hype and be objective, so they can make smart financial decisions. There is a reason plenty of rich folks (even billionaires like Warren Buffett) drive basic cars – it’s all they really need.   If your teen or tween wants the latest and greatest must-have item, challenge them to explain the value beyond being new, trendy, or fashionable. When they want to buy something, encourage them to research the product, read reviews, and compare prices to make informed decisions.

Introduce basic investing concepts

Introduce your teens to basic investing and the concept of how to make money with money. Explain how investments can grow over time and the power of compound interest. Should you buy a stock (or an ETF, GIC, mutual fund or some other financial product) for a 14-year-old… absolutely!  There are lots of kids out there with parents who invested the time to explain shareholding and how it works at a level they can understand.

Kids are very familiar with many publicly traded companies like Disney, Roblox, Mattel and McDonalds. Holding a few shares (in an informal trust account or simply in your name) may not return enough to put them through college, but it will teach them the basics of investing, risk, and return for managing their finances in the future. It’s true that a savings mindset develops early and pays back over the course of a lifetime, but developing an investing mindset pays back HUGE over the course of a lifetime and will set your kids up for long-term financial security and wealth building. As soon as your kids turn 18, have them open a tax-free savings account (TFSA) and invest the funds, even if they can only muster $50 or $100 monthly to contribute.

Teach the bad (and good) about credit and debt

Credit is very easy to access these days and even first-year post-secondary students are often able to get a credit card. Responsible use of this first credit card can help establish a credit score and they are very convenient — almost a necessity for some online transactions. On the other hand, easy access to credit cards (with generous spending limits and 20% interest!) and a few spontaneous/poorly thought-out spending decisions can derail a future before it even gets started.

Failing to understand the impact and obligations of a student loan can also lead to a nasty surprise when it comes time to repay that money or get a car loan or mortgage down the road. Although federally issued Canada Student Loans are now interest-free, provincial loans may still carry interest. Either way, your kids need to realize that a student loan isn’t free money and that paying it back will definitely crimp their post-graduation lifestyle.

Remember that financial education is an ongoing process. Encourage openness about money and create an environment where your children feel comfortable discussing money matters with you. Starting to instill good money habits from an early age and being a supportive resource as they develop their financial skills will help your money-savvy kids grow into financially responsible, money-savvy adults.

written by DLC Chief Economist Dr. Sherry Cooper.

Your payment schedule is the frequency that you make mortgage payments and ranges from monthly to bi-monthly, bi-weekly, accelerated bi-weekly or even weekly payments. Below is a quick overview of what each of these payment frequencies mean:

Monthly Payments: A monthly payment is simply a single large payment, paid once per month; this is the default that sets your amortization. A 25-year mortgage, paid monthly, will take 25 years to pay off but includes the added burden of one larger payment coming from one employment pay period. With this payment frequency, you make 12 payments per year.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have a monthly payment of $4,156.19. No term savings; no amortization savings.

Bi-Weekly Payments: A bi-weekly mortgage payment is a total of 26 payments per year, calculated by multiplying your monthly mortgage payment by 12 months and divided by the 26 pay periods.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have a bi-weekly payment of $1,915.98 with term savings of $177 and total amortization savings of $1,769.

Accelerated Bi-Weekly Payments: An accelerated bi-weekly mortgage payment is also 26 payments per year, but the payment amount is higher than a regular bi-weekly payment frequency. Opting for an accelerated bi-weekly payment will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the term of your mortgage. This frequency also allows the mortgage payment to be split up into smaller payments vs a single, larger payment per month. This is especially ideal for households who get paid every two weeks as the reduction in cash flow is more on track with incoming income.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have accelerated bi-weekly payments of $2,078.10 with term savings of $1,217 and total amortization savings of $145,184. Plus, you would save 4 years, 12 months of payments by reducing scheduled amortization.

Weekly Payments: Similar to monthly payments, your weekly mortgage payment frequency is calculated by multiplying your monthly mortgage payment by 12 months and dividing by 52 weeks in a year. In this case, you would make 52 payments a year on your mortgage.

Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have weekly payments of $957.50 with term savings of $253 and total amortization savings of $2,526. You can move to accelerated weekly payments to save even more!

Prepayment Privileges: In addition to fine-tuning your payment schedule, most mortgage products include prepayment privileges that enable you to pay up to 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This can help reduce your amortization period (the length of your mortgage).

By exercising your prepayment privileges, you can take time off your mortgage. For instance:

• Extra $50 bi-weekly is $32,883 total savings and an additional 1 year, 2 months time saved
• Extra $100 bi-weekly is $62,100 in total savings and an additional 2 years, 3 months time saved on your mortgage
• Extra $200 bi-weekly is $111,850 in total savings and an additional 4 years, 1 month of time saved on your mortgage.

Understanding the different payment frequencies can be key in managing your monthly cash flow. If you’re struggling to meet a large payment, breaking it up can be effective; while the same can be true of the opposite. Individuals struggling to make a weekly or bi-weekly payment, may benefit from one monthly sum where they have time to collect the funds.

Contact a Dominion Lending Centres mortgage expert for more information or download our My Mortgage Toolbox app from Google Play or the Apple Store and check out the different payment calculators!

written by DLC Chief Economist Dr. Sherry Cooper.

Although credit card interest rates have not been affected by the recent surge in the prime lending rate, the fact remains that credit card debt is usually the most expensive debt you can have. The average is around 20% and even the so-called ‘low interest’ cards carry a rate in excess of 10%. Expediting the demise of your credit card balance should be the number one focus for anyone looking to improve their financial situation. Here are five actions to get you started.

1. If you are carrying a balance, the first step is to put the card(s) away. Whether you put them in the food processor or just temporarily turn them off (our recommendation), you need to own up to your mistake and not add any more fuel to the fire. If it’s the case where you have no choice but to use the card (a prepayment for example) make sure to make a payment to cover that charge right away.
2. Take a minute to fully understand the consequences of a credit card balance. Search out the details of your credit card statement until your find the section that tells you exactly how many years it will take to eliminate that balance with minimum payments. While you are at it, make sure to confirm the interest charge for that month and just how little of your payment is actually going toward reducing the balance. It can be a bit shocking, but also quite motivating! The government has a simple online calculator for you to easily analyze different repayment options.
3. Plan your repayment attack. Making a few random spending sacrifices and hoping that you will have a little more left at the end of the month to pay towards your card is wishful thinking. You need to figure out ASAP the maximum amount you can throw at your credit card debt every month and chart out when you are going to be debt-free. Set up an automatic transfer from your bank account to your card every payday and make that money invisible – you can’t spend what you can’t see!
4. Investigate balance-transfer credit card options… but only if you have a plan and are confident you can pay off the balance within the prescribed period! A balance transfer card shifts your debt to a new card (for little or no fee) which offers a limited time period (usually 6 -12 months) with a very low interest rate (often 0%) to pay off the balance. This cuts your interest expense to zero and ensures that 100% of your payment goes to reducing the balance. However, you have to be very disciplined and have the income to make regular payments. The card company is literally banking on you to fail and hopes you will miss the payment deadline, because that will trigger an avalanche of penalties, fees and interest charges that will put you worse off than ever!
5. Pick up the phone and call your card company. It might be more possible and easier than you think to actually negotiate a lower interest rate on your credit card. If you have had a card for a while and have been carrying a balance and making the minimum payments, you are a valued customer! Your card issuer is very interested in keeping your business and may be willing to negotiate. You will have to get through to the right people and know what to say, but 15 or 20 minutes on the phone could save you a chunk of cash – even a few percentage points would help.

The above tips will help you get started on the road to eliminating your credit card balance. There are no shortcuts and it may require a lot of sacrifice depending on how much debt you have, but the mental burden that lifts when you see a big zero under “balance due” it will be worth it!

written by DLC Chief Economist Dr. Sherry Cooper.

When it comes to purchasing a home, most offers include conditions or subjects, which are requirements or criteria to be met before the sale can be finalized and the property is transferred. Some of the most common subjects include:

• Financing approval
• Home inspection
• Fire/home insurance protection
• Strata document review if appliable

The purpose of these subjects is to protect the buyer from making a poor investment and ensure that there are no hidden surprises when it comes to financing, insurance, or the state of the property.

These conditions are written up in the purchase offer with a date of removal. This is agreed to by the seller before the sale is finalized. Assuming the subjects are lifted by the date of removal, the sale can go through. If the subjects are not lifted (perhaps financing falls through or something is revealed during the home inspection), the buyer can waive the offer and the purchase becomes void.

However recently, especially in heightened housing markets, there has been an emergence of subject-free (or condition-free) offers. These are purchase offers that are submitted without any criteria required! Essentially, what you see is what you get.

Below we have outlined the impact of subject-free offers on both buyers and sellers to help you better understand the risks and outcomes:

Pros of Subject-Free Offers

• Buyers: The main benefit of a subject-free offer for a buyer is the ability to “beat the competition” in a heated market. However, it is not without risks.
• Sellers: Typically, a subject-free offer will include a competitive price, willingness to work with the dates the seller prefers, and evidence that the buyer has already done as much research as possible. If time is sensitive for the seller because they are trying to purchase another home or want to move as soon as possible, they may also choose your offer over subject offers to expedite the process.

Cons of Subject-Free Offers

• Buyers: As a buyer submitting a subject-free offer, you are assuming a great deal of risk in several areas including financing, inspection, and insurance:
  • Financing: While buyers may feel that they have a pre-approval and so they don’t require a subject to financing, it is important to recognize that a pre-approval is not a guarantee of financing. If you are submitting a subject-free purchase based on a pre-approval, buyer beware. The financing is subject to the lender approving the property and the sale; from the price and location to type of property or other variables the lender deems important. By submitting a subject-free offer without a financing guarantee (or an inspection, title check, etc.), there is a risk that the deal can fall through. Even when you do not include subjects on the offer, you still are required to finance your purchase. In addition, as deals are submitted typically with a deposit, there is a risk that if the subject-free offer falls through the buyer will lose their deposit. This amount can range vary in the thousands and is typically a percentage of the purchase price or down payment.
  • Inspection & Insurance: If a buyer is also opting to skip the home inspection and home insurance protection subjects to have the offer accepted, then they assume huge risk as they do not know what they are getting and whether or not the property is up to code for insurance.
  • Due Diligence: With subject-free offers, there is no opportunity for due diligence after the offer has been made. This requires the buyer to do all their research before their initial bid. Because it is firm and binding, a buyer who decides to back out will likely be met with serious legal ramifications. Submitting an offer without subjects is not due diligence and it is at the buyer’s behest.
• For Sellers: When it comes to the individual selling the property, there is less risk with subject-free offers but not zero. While the benefit is essentially there is no wait to accept the offer on the seller’s side, they do not know for sure if financing will come through.

Financing Around Subject-Free Offers

When submitting a subject-free offer, it is essentially up to the buyer to do as much due diligence as possible before submitting. They will need to identify what the lender is looking for to make sure they walk away with a mortgage. Though approval is never certain, prospective buyers placing a subject-free offer should do their very best to secure financing beforehand.

Contractual Obligations

Be mindful when it comes to purchasing offers versus purchase agreements. While your purchase offer is a written proposal to purchase, the purchase agreement is a full contract between the buyer and seller. The purchase offer acts as a letter of intent, setting the terms you propose to buy the home. If financing falls through, for example, then the contract is breached and this is where the buyer may lose the deposit.

It is also important to be aware of a breach of contract in the event that a seller chooses to take action. For example, if you submit a subject-free offer of $500,000 and cannot secure financing for that offer and the seller turns around and is only able to get a $400,000 deal with another buyer, they could potentially sue the initial buyer for the difference due to breach of contract.

Preparing a Subject-Free Offer

If you have decided to go ahead with a subject-free offer, regardless of the risks, there are some things you can do to mitigate potential issues, including:

• Get Pre-Approved: Again, this is not a guarantee of financing when you do make an offer, but it can help you determine whether you would be approved or not.
• Financing Review: Identify what the lender is looking for to make sure they walk away with a mortgage. Though approval is never certain, prospective buyers placing a subject-free offer should do their very best to secure financing beforehand.
• Do Your Due Diligence: Look into the property and determine if there have been major renovations or a history of damage. This could come in the form of a Property Disclosure Statement. While this statement cannot substitute a proper inspection, it can help identify potential issues or areas of concern. If possible, conduct an inspection before submitting your bid/offer.
• Get Legal Advice: This can help you determine your potential risk and ramifications of the offer should it be accepted, or otherwise.
• Title Review: Be sure to review the title of the property.
• Insurance: Confirm that you are able to purchase insurance for the home. Keep in mind, an inspection may be required for this but in some cases, you can substitute for a depreciation report if it is recent.
• Strata Documents (if applicable): Thoroughly review strata meeting minutes and any related documents to determine areas of concern.

While there are things that can be done to help with subject-free offers, it is still risky. Ultimately submitting an offer with subjects gives you the time and ability to gather information on the above, as well as access to the property or home for inspections.

If you are intent on submitting a subject-free offer, be sure to discuss it with your real estate agent as they can determine if a subject-free offer is necessary, or if perhaps a short closing window would suffice to seal the deal. A good realtor will keep you informed of potential interest and other bids during the process as well. Their goal should be to maximize your opportunity and minimize your risk. In addition, before making any offers, be sure to check with your DLC mortgage expert to discuss your mortgage and financing so you can make the best decision.

written by DLC Chief Economist Dr. Sherry Cooper.