When it comes to buying a luxury property, bigger is not only better – it’s a necessity. The bigger the purchase price, the higher your down payment will need to be, which is precisely why we refer to them as sliding scales. And today I’m here to tell you everything you need to know about them before you set out on your quest.
LUXURY HOME MARKETS
During my years working as a mortgage broker I have noticed various trends that can only be won with experience. Among them, I’ve found that Vancouver and Toronto have slightly more generous sliding scales than other cities. This is not hard science, but my own observation. Perhaps it’s because this is where the bulk of Canada’s luxury properties are located, or maybe it’s connected to income levels; possibly both. Whatever the reason behind it, if it’s a luxury property you’re after, you are probably more likely to find a compatible lender for a luxury property here than elsewhere.
It’s important to remember that while lenders look unfavourably upon debt in general, nowhere is this more true than the luxury real estate market. So in doing research about mortgages on a luxury property, keep in mind that the possibility of borrowing depends greatly, if not entirely, on the words zero debt. Any debt that you carry is factored in your liability and your payments. Most common debts are credit card debt, car loan/car lease, other real estate costs inlcuding mortgage, property taxes, condo fees, utilities, and situational payments inlcuding alimony, and support payments.
BIG PROPERTIES MEAN BIG NUMBERS
Assuming that you will qualify for a mortgage on a luxury property, most big lenders are willing to agree to 80% of the first $1.25 million and 50% of the remaining price. For those who weren’t paying attention in math class, that’s a cool million dollars. Other lenders are more comfortable with 80% of the first $1.5 million, and 50% thereafter. There are some lenders that will be more generous with their sliding scales and some may waive them all together depending on the purchase price and the strength of the file.
To give you an idea of what to expect, the mortgage on a home worth $3 million with 80% of the first $1.5 million and 50% on the remaining price works out like this:
- 80% of $1.5 million = $1.2 million
- 50% of $1.5 million = $750,000.00
- Mortgage grand total = $1.95 million or $1,950,000.00
Looking at these numbers another way, $1.95 million is 65% of the total price of the home. And if it’s a luxury property that you want, that means you need to be ready to put down the remaining 35%, or $1.05 million.
Anyone looking at luxury real estate will be scrutinized carefully by their potential lender. Using the current stress test rate of 5.34 and estimated housing costs, If you are looking to borrow $1 million, your combined reported household income needs to be at least $180k. Of course this is assuming a good credit and no other debt/monthly liability.
Going back to our example of a $3 million dollar purchase, your income should be around $350 000 per year to borrow the 65% mortgage.
SLIPPING & SLIDING
As someone who has dealt with mortgages on luxury properties before, I always point out to potential clients that lenders are almost always willing to adjust their sliding scale based on the strength of your application. An excellent credit score, long history of consistent income, and liquid assets can and will go a long way towards strengthening your application.
The higher the price tag, the more down payment you will have to have. Especially in a changing market, few lenders will approve large sliding scale exceptions.
When it comes to a big mortgage on a luxury real estate property, it takes persistence and know-how on the part of a good mortgage broker to get the deal over the finish line. Finding someone who you are comfortable with and who will take the time to find the right lender is paramount to your success.
For more information on mortgages for luxury homes, feel free to comment below or contact me with your questions.