LOOKING TO GET CREATIVE WITH MORTGAGE FINANCING TO BUY A LUXURY HOME? THE DETAILS MIGHT SURPRISE YOU

Are you looking for mortgage financing for your luxury home purchase? You’ve come to the right place. Most homebuyers assume that getting a mortgage for a luxury home is the same as with any other home. While that’s true for the most part, there are a few key differences you need to be aware of.

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Minimum down payment

The definition of a luxury home depends on the market you’re buying in. If you’re buying in a real estate market like Toronto and Vancouver, $1 million doesn’t go as far as it used to. However, if you’re buying in a more affordable market like Halifax or Charlottetown, $1 million can practically buy you a mansion there.

If you’re a wealthy individual, you’re probably not looking to tie up more money than you need to in a home purchase. A lot of wealthy individuals can afford to purchase their homes in cash, but choose not to because they can earn a higher rate of return from their other investments.

There’s an important rule that comes into play when you spent at least $1 million on a home. When you spend less than $500,000 on a home, the minimum down payment is only five percent.

Not bad. When you spend between $500,000 and $999,999 on a home, it’s five percent on the first $500,000 and 10 percent on the portion of the purchase price between $500,000 and $999,999. Again not so bad.

20 percent down

However, when you spend at least $1 million on a home, you’re required to make a 20 percent down payment on the entire purchase price. That means if you bought a home for $1 million, you’d need a down payment of at least $200,000 for mortgage financing. Many homebuyers are surprised to learn this.

The government lets you put less than 20 percent on purchase prices over $1 million, but that has since been discontinued several years back. You’ll have to be able to afford to put 20 percent down from your own resources and/or a gift. Otherwise, you won’t be able to move forward with the purchase.

Sliding scale

But that’s not all. Sometimes you have to make an even more sizable down payment on a luxury home purchase. That is due to something called a sliding scale. A sliding scale requires you to make a larger down payment on a home purchase above a certain price point.

Each lender has a different sliding scale. That’s why it makes sense to work with an independent mortgage broker who has access to many different lenders. A broker can find you a lender that meets your down payment needs.

For example, one lender may require you to put 20 percent down on the first $1.25 million and 50 percent down on any amount above that. Meanwhile, another lender may only need you to put 20 percent down on the first $1.5 million and 40 percent down on any amount above that. That’s the mortgage financing sliding scale at work.

More lead time

If you’re making an offer conditional on financing or your new property purchase has a quick close date (i.e. 30 days), it’s important to give yourself some more time for the mortgage approval. That’s because larger mortgages often need to be escalated to management for special approval.

Again, this is all about risk. If you’re a strong borrower, mortgage lenders still want your business. The lenders just need to be extra careful since there’s an added level of risk. A mortgage for $1.5 million is riskier than two mortgages for $750,000 in most cases. In the former, all the lender’s money is tied up in one property; whereas in the latter, the money is evenly split between both properties.

If the lender had difficulty selling the home in the first option or had to sell it for less, it could result in a huge loss. Meanwhile, the likelihood of both homes needing to be sold at once under option two is a lot less.

The bottom line

By understanding the above lender policies and working with a good mortgage broker, you’ll be well prepared the next time you want to buy a luxury home.

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