FINANCING
AND INVESTMENT
You dream of buying a property in Montreal, but how to finance it? Do you know your borrowing capacity and how much of a down payment you have? Are you feeling a little lost among the different mortgage loans? And finally, is real estate in Quebec profitable?
It is advisable to ask yourself these types of questions before buying a property. Draw up a budget to find out if you can buy and become a homeowner, navigate through the maze of mortgage loans. Will your down payment allow you to become a homeowner and will it cover the costs associated with the purchase of your future home?
Let’s demystify this together: it will help you take the step towards profitable investments in Montreal.
IN A NUTSHELL
THE APPEAL OF INVESTING IN MONTREAL!
Consistently ranked by the United Nations as one of the world’s most livable cities, Montreal offers a perfect combination of French joie de vivre and North American business practices. Located in southwestern Quebec at the confluence of the Champlain and Ottawa Rivers, Montreal is an island city whose residents enjoy an enviable quality of life. Imagine a city with elegant architecture, a vibrant and dynamic cultural life, a cosmopolitan and cultured population, a low crime rate, high quality free health care and excellent public education. That’s Montreal in a nutshell for its appeal!
One of the key elements that characterize the high standard of living in Montreal is the quality of its real estate offerings. Even if the supply is insufficient to meet the demand, real estate prices remain significantly lower than in the country’s two other major cities, Vancouver and Toronto.
The market is driven by a real demand for housing that continues to grow with the massive arrival of new professional talent and students. The real estate market in Montreal, and in Quebec as a whole, as proven to be robust and stable over time. The rapid increase in property values that the market has experienced over the past 3 years is explained by a certain catching up of property values and an insufficient inventory.
Thus, real estate investment remains very interesting because the demand does not stop growing, and in spite of the new housing starts to come, they will not be enough to fill the growing demand.
Let’s take a quick look at the rental market, which is somewhat tense, in order to understand part of this equation that benefits investors.
THE MONTREAL RENTAL MARKET
Montreal is a very active city in terms of economy and students.
In 2021, the vacancy rate was 3% for the traditional rental market and 1.4% for the condominium market.
It should be noted that the vacancy rate in the suburbs is 1.1%, as supply is largely insufficient to meet demand.
With the opening of the borders after 2 years of pandemic, it is expected that the vacancy rate will drop even more.
On the other hand, the high number of newcomers and employment growth, particularly among 15 to 24 year olds, will maintain the demand for rental housing. These factors, combined with the limited growth in rental supply, have more than offset the departure of renters to the homeownership market.
Finally, it should be noted that rents in the Montreal metropolitan region are expected to increase by 4% in 2021.
We can therefore understand the enthusiasm for taking the step from renting to owning: investing for peace of mind, buying a property to be at home, without the pressure of the rental market. If you are still hesitating between renting and buying your home, read our article on the subject: Housing in Montreal, buy or rent?
And when you are a real estate investor, it is also reassuring to be able to find tenants in such a dynamic market, and then make your investment profitable. HP & Associés knows how to propose you qualified tenants who are careful to take care of the rented property: buy to rent with peace of mind with our rental services!
The question of the budget to devote to a real estate acquisition then arises, and immediately comes to mind the notion of borrowing to finance your purchase, which is called here: a mortgage loan. We help you to see more clearly.
MORTGAGE LOAN AND PRE-APPROVAL
When you want to buy a property, you have to finance the acquisition and often resort to a loan from a bank, a mortgage loan. To avoid missing out on a coveted property in a very dynamic real estate market, our first piece of advice, to put all the chances on your side, is to think about obtaining a pre-authorization from a reputable financial institution.
The first step is to get pre-approved by a bank. It is important to meet with a financial advisor in order to structure a package for your project and discuss the different options available to you.
Your advisor will propose loan conditions that will be recorded in a mortgage pre-approval and you will have a guaranteed interest rate for a minimum period of 90 days. Should interest rates fluctuate upwards, you will still be entitled to your preferred rate if you make your purchase within the specified time frame.
After studying your file, the lender will give you a pre-approval confirming your ability to purchase a property. With this document, you will be able to start looking for properties with your real estate agent (broker) and make offers to purchase at the appropriate time.
Your financial advisor will be able to propose different mortgage loan offers. An overview to help you on your way…
THE DIFFERENT MORTGAGE LOANS
Fixed-rate mortgages, annually adjustable-rate mortgages, variable-rate mortgages, closed mortgages, open mortgages, protected mortgages, reduced mortgages, regular mortgages, etc. A few explanations are in order!
Closed: this loan, whose term is usually five years, protects you against an increase in interest rates. The term can vary from six months to 10 years. Payments are generally higher than for variable rate loans.
Open: Ideal if your property is up for sale or if you are expecting a large inflow of cash in the short term that you will apply to your loan to avoid paying an indemnity. Its interest rate is higher than that of the closed fixed rate loan. The term is for six months to one year.
5 in 1: Very popular, this loan gives you one of the best fixed rates available on the market. The term is five years, the rate is reviewed annually, and you benefit from a pre-established rate discount.
Protected: It combines the advantages of the variable rate and those of the fixed rate and payments. This loan allows you to benefit from lower rates while protecting you, for the duration of the term, from significant increases. The term length is 5 years.
Reduced: It offers the best interest rate. The rate follows the upward or downward variations of the prime rate and can be converted at any time to a fixed rate, without compensation. You also benefit from a pre-established rate discount.
Regular: It offers a very advantageous interest rate that follows the upward or downward variations of the prime rate. This open loan with a term of 1 or 2 years is distinguished by its flexibility and allows you to repay your loan at any time, in whole or in part, without compensation.
DOWN PAYMENT AND ACQUISITION COSTS
What financial contribution, the down payment, will you need to buy your property in Montreal? And what costs will you incur as a future buyer to complete your acquisition? Here are some answers.
CONTRIBUTION - DOWN PAYMENT
The down payment, your initial financial contribution, is the money you already have available to purchase a property. This amount will affect how much you have left to finance through borrowing in order to complete the purchase of your new property. Of course, the more money you have available at the outset of the project, the lower your monthly mortgage payments will be.
Non-residents are required to make a down payment of 35% of the value of the property purchased. However, it is possible to put down a smaller down payment after a few months in Canada, having established a credit history and demonstrating that you have income.
This is one of the reasons why it is strongly advised to meet with a financial advisor as soon as possible in order to learn about the wide range of options available to newcomers and to discover the North American banking system, which is often very different from your country of origin.
ACQUISITION FEES
The fees for the acquisition of a property are low in Quebec; it is necessary to foresee between 2.5% and 3% of the value of the targeted property to cover certain expenses.
When you make a promise to purchase, it will most likely include an inspection condition. Thus, you will have a certain number of days (usually between 12 and 16 days) to call on an accredited inspector to come and evaluate several components of the building. This could be a building technician, an architect or a certified inspector, from whom you will ask for a written inspection report which will cover the condition of the foundations, the roof, the fenestration structures, the insulation, plumbing, electrical system, heating and ventilation.
At the end of its inspection, you will know the condition of the house, the defects to be corrected and the work to be carried out. The relative costs of this inspection can vary from $600 to $1,500 depending on the size and type of property.
Your financial institution will want to know the market value of the property you wish to purchase. A chartered appraiser will do this appraisal at the request of the bank and will provide it with a report on the market value of the house. The bank often bears the cost of this assessment.
The preparation, signing and registration of the various legal documents related to the purchase of your property requires the intervention of a notary. The notary's fees are at the buyer's expense. The fees certainly vary from one firm to another, but usually amount to between $1,500 and $3,000.
When you become an owner, you must pay property transfer duties, which is a sales tax collected by the municipality corresponding to a percentage of the purchase price of your property (or the amount of its municipal assessment, whichever is higher). ).
The percentage varies from one municipality to another, but in general it is calculated as follows:
The percentage varies from one municipality to another, but in general it is calculated as follows:
| Rate | Tax base brackets |
|---|---|
| 0,5% | Which does not exceed $53,200 |
| 1% | Which exceeds $53,200 without exceeding $266,200 |
| 1,5% | Which exceeds $266,200 without exceeding $500,000 |
| 3% | Which exceeds $500,000 |
Now, with this information in hand and with your budget well set, you are certainly wondering if it is profitable to buy in Montreal. Here are some answers…
IS IT PROFITABLE TO INVEST IN MONTREAL REAL ESTATE?
At the time of writing (summer 2022), we can say without a doubt that YES: it is profitable to invest in Montreal real estate. The profitability is there for investors who buy multiplexes: with a return of more than 20% annually before taxes for the last 15 years, by combining the rental income and the increase in value of the property.
Taking into account renovations and major improvements in the properties, returns ranging from 4.4 to 5.8% on rental income can be achieved.
What are the favorable factors for real estate investment in Montreal? Here is an overview:
- Historically low vacancy rates.
- Growing interest for the aging population to sell their homes and turn to rental units, thus allowing them to dispose of the funds from the sale of their property at their leisure.
- Positive migratory balance in the province of Quebec, and a growing demand over several years to come.
- Aging rental housing stock in need of renovation, leading to acquisition opportunities on the horizon.
- As leasing is well regulated in Quebec, the tenant/landlord relationship is well regulated and both parties are bound by their respective obligations. The reactivity of the Administrative Housing Tribunal allows to sanction the failures of one or the other quickly and efficiently (for example: a tenant who does not pay his monthly rent, could be evicted within 4 months).
The profitability of your investment being already a reassuring point to take the step, we have kept the best for the end, the icing on the cake: the capital gain on the value of your property, due to the increase in its value over time!
THE REAL PAYOFF: RESALE APPRECIATION AND INCREASED VALUE
The resale real estate market is very dynamic: it can take as little as 30 to 45 days to sell a property, from the time it is put on the market to the time it is signed by the notary.
On average, Quebecers change their main property every 5 to 7 years. It is therefore easy to understand why the resale market is so active!
Taking into account the low cost of acquisition, the constant and sustained increase in real estate values and the speed of disposal of the property, the operation is simple and profitable in good conditions.
Note that the capital gain (appreciation) on a principal residence for a resident is not taxable. For a non-resident, the level of taxation will be determined according to the way the property is held. HP & Associés can of course advise you and, if necessary, put you in touch with competent tax specialists.
MONTREAL: A LAND OF OPPORTUNITY
A dynamic real estate market where it’s good to invest, profitability, a gain on the resale of your property, acquiring a property without worries to avoid the stress of rental moves and finally feel good at home. We could go on and on… Montreal is a land of opportunities if you are well accompanied. Take this step with us and you will become happy owners!