Buying a Home in East London: Mortgages and Older Houses

Pre-approved is not the same as approved

East London's established areas — Old East Village, Hamilton Road — hold a mix of older houses, carefully renovated homes and properties that plainly need work. Which means the question in front of a buyer isn't only what you qualify for. It's how the particular house affects the financing.

The mortgage view here is ours: Stephen Green, Founder and Mortgage Broker, The Financial Collective. The local real-estate perspective was contributed by Zach Boulert, REALTOR with RE/MAX Icon Realty Brokerage in London, Ontario, whose East London guide covers those neighbourhoods.

Every lender makes two assessments before money moves. It assesses the borrower — income, obligations, credit, down payment. And it assesses the security, meaning the house itself. A pre-approval only speaks to the first one, because when it was issued there was no address to look at.

A pre-qualification is not a pre-approval

A pre-qualification is a conversation and an estimate built on what you tell us. It is genuinely useful for orientation, and it is not the same instrument as a pre-approval. A proper pre-approval is documented, and the document list is the whole point of it.

• Income verification and confirmation of employment
• Existing debt obligations and a look at your credit file
• Bank and investment statements
• Proof that the down payment funds exist and are yours
• A conversation about the payment you're comfortable with, not only the one the file supports

Do this before you start looking, not against an offer deadline on a Sunday evening. You can begin with our pre-qualification tool and then sit down and build the documented version properly.

One mechanical point worth understanding: the qualifying figure a lender applies sits above what you would actually be paying, because federal underwriting expectations require a stress test on the borrower. The practical effect is that your approved amount is smaller than simple payment arithmetic would suggest.

Qualifying isn't affording

Two houses can carry the same asking price on the same street and produce very different lives. Property taxes differ. Insurance differs, sometimes sharply, once an insurer looks at the wiring, the roof and the plumbing. Utilities on an uninsulated century home are not utilities on a home that has been gutted and redone. Condo fees, where they apply, are a fixed monthly obligation the lender counts.

A renovated Old East Village home and a same-priced fixer a few blocks away carry entirely different ownership profiles. The mortgage payment may be identical. The cost of living in the house is not, and the difference tends to show up in the first two years, which is exactly when your cash reserves are thinnest.

The cash you need beyond the down payment

Buyers plan the down payment and then get surprised by everything sitting behind it. Budget for these on top:

• Legal fees and disbursements
• Land transfer tax
• Home inspection, and any specialist follow-up it triggers
• Moving costs
• Property-tax and other closing adjustments payable to the seller
• Immediate repairs in the first ninety days

If your down payment is under 20%, default insurance applies. CMHC's premium information page for homeowner and small rental loans describes the premium as a one-time charge which may be added to the insured loan amount, and CMHC's consumer cost page, dated March 31, 2018, explains that lenders pay the premium and typically pass the cost through to the borrower as a percentage of the loan based on the size of the down payment.

Here is the Ontario wrinkle. The same CMHC premium page states that some provinces — currently Ontario, Quebec and Saskatchewan — apply provincial sales tax to that premium. In practice the premium goes onto the mortgage and the provincial tax on it is settled at closing instead, out of your own funds. It is not an enormous percentage and it arrives at precisely the wrong moment. Ask your lawyer for the figure on your file well before closing week.

If you are porting an existing insured mortgage into an East London purchase, CMHC's premium page also sets out a 0.60% surcharge where amortization periods are blended. Worth knowing before you assume a port is cost-free.

The house gets underwritten too

This is the section that matters most in older neighbourhoods. Where an appraisal is required, the lender is looking at value and at marketability — could this property be sold in a reasonable period if it ever had to be. Condition feeds directly into both.

Knob-and-tube wiring, evidence of basement water, deferred maintenance, an unpermitted addition, or difficulty obtaining home insurance can all surface at this stage. None of that makes an older home unfinanceable. Century homes in London and in Waterloo Region are financed every week. But a pre-approval is not a commitment on any particular address, and the honest thing to say is that some houses suit some lenders and not others.

Zach's older-home guide covers the real-estate side of the same question, and we work through the financing side with buyers across London and Middlesex as well as at home in Waterloo Region.

Renovation financing has to be arranged before the offer

Buyers who purchase a fixer usually spend their available cash on the purchase and then discover the kitchen has to wait three years. There is another route worth asking about: Purchase Plus Improvements. Depending on the lender, the borrower and the plan, eligible improvements may be built into the mortgage instead of paid out of pocket after closing.

It depends on quotes, a scope the lender has actually seen, and a value assessment that reflects the work. How and when the money is advanced varies by lender. What does not vary is the sequencing: this is an before the offer conversation, because it changes the structure of the deal you are writing. Our Reno and Roll page walks through how the improvement side is put together.

One related item: CMHC's premium page describes a 25% partial premium refund under its Eco products for purchasing or building an energy-efficient home or making energy-efficient improvements. Whether your plan and your lender qualify is a question to ask up front, not an assumption to make.

The financing condition, and the appraisal gap

The financing condition exists so the property-side assessment can finish before you are legally bound. That is its only job, and on older housing stock it is doing more work than it does on a 2019 subdivision build.

Should you waive it to win a house? For most buyers, no. The honest exception is a buyer with liquid funds and a real plan to close without the expected mortgage — and most buyers are not that buyer. Waiving is not a formality. It is a decision to self-fund any shortfall. Make it deliberately, with your broker, or don't make it.

The clearest illustration is the appraisal gap. If the lender's value comes in below the agreed price, the financing is generally sized against the lower of the two figures and the difference becomes your cash on closing. A larger loan does not solve it and the insurer's involvement does not change it. Know that before you write an offer above the comparables.

Come to us before offer night knowing four things: your price range, your down payment, your closing-cost buffer, and the monthly payment you are comfortable with. Bring any property-specific questions with you.

• Get properly pre-approved before you shop, with documents reviewed.
• Use an experienced team that communicates — financing, offer, inspection, insurance and legal work are all connected.
• Use a REALTOR who knows the local market; these neighbourhoods raise questions a new subdivision never will.

A single deal can involve a REALTOR, a broker, a lawyer, an inspector, an insurer and an appraiser. The best outcomes happen when those people are talking to each other early. The neighbourhood is only the starting point — the financing, the property, its condition and the cost of owning it all have to work together.