Toronto Real Estate Guide
Toronto Spring Real Estate Market Is On Fire
The real estate market in Toronto is heating up this spring, with marked growth in real estate prices and sales. Rising prices can be explained with a growing gap in supply and demand, low interest rates, and a flow of immigrants to cities such as Toronto and Vancouver. Data by the Toronto Real Estate Board indicates growth in sales volume of 11 percent in just a year which clearly shows that the real estate market is overpriced.
With estate real estate prices soaring, many future homeowners resort to subprime loans. Detached homes in Toronto cost about $1 million on average, and many doubt that the Crown Corporation and Canada Mortgage and Housing Corporation will back million-dollar home loans. The problem with pricey real estate is that this limits the choice of lenders dramatically. A down payment of about $200,000 is also hard to come by, and many borrowers are forced to resort to subprime loans. A down payment of 20 percent is usually required to apply with major banks such as RBC, CIBC, and Toronto-Dominion. Subprime lenders offer loans with higher rates of about 13 percent. People with poor credit are able to get financing with almost no down payment which makes these loans risky. Major players in the subprime market provide second mortgages to borrowers who are unable to come up with a down payment of 20 percent. Thus if the borrower has $120,000, the lender provides the remainder under a second mortgage.
Many worry about rising prices and subprime loans and rightfully so. Subprime loans are often offered to borrowers with poor credit because lenders consider them high risk. Given the higher interest rates, the monthly payment is also higher, with home prices in Toronto skyrocketing. Some borrowers are unable to provide proof of sufficient income and are still approved. Customers with no assets and a credit score below 620 - 650 are often turned down by major banks and other traditional lenders and resort to subprime lenders. In addition to higher interest rates, lenders also charge higher fees which add to the cost of financing which is already high enough. And unlike standard borrowing solutions, subprime loans, rates, and terms vary widely from one lender to another. Many lenders employ risk-based pricing models to assess risk and calculate interest rates. As a rule, customers with poor credit are offered higher rates and more unfavorable terms. The lower your credit score, the higher the fees and interest charges. What is more, borrowers are not allowed to repay the loan early (before the term) and face prepayment penalties. Refinancing is also more expensive compared to conventional solutions. Some lenders also offer loans with balloon payments whereby a significant lump sum payment is required at the end of the term. There are lenders that advertise low interest rates to attract new customers and then raise the rates. The monthly payment often becomes unaffordable.
Given that lenders offer different types of borrowing solutions and often use complex terminology, borrowers are rarely aware of the fact that they got themselves into trouble. While subprime lenders add to the pool of opportunities available to homebuyers from all walks of life, it is mainly risky borrowers who resort to high-risk loans. Borrowing from a bad credit lender can be very costly and makes a $1 million-dollar home extremely expensive. Another problem is that subprime lenders are not regulated by the federal government. Bad credit loans also have higher default rates (courtesy of https://www.lifeoncredit.ca/), which means that the rate of foreclosure is also higher. Finally some home buyers use their credit cards to cover a portion of the down payment and card rates are significantly higher compared to traditional mortgages. While some specialty cards feature affordable rates and plenty of add-ons and extras, bad credit borrowers are usually offered cards with higher interest charges. In high priced areas such as Toronto, the combination of a credit card and a subprime loan often puts borrowers at a double disadvantage.