Friday, March 21, 2014
Mark Weisleder Real Estate, Published on Fri Mar 07 2014
Canada Mortgage and Housing Corp., the federal agency that insures mortgages, is raising its rates by an average 15 per cent on May 1.
Although this is not good news for homebuyers since it will add to the cost of many purchases, the overall impact isn’t disastrous.
If you have less than 20 per cent for a down payment, you must obtain mortgage insurance, either through CMHC or a private insurer such as Genworth Canada or Central Guaranty. The cost is typically added to your mortgage and paid over the 25 year amortized term.
The reason for mortgage insurance is that banks would likely not lend money to people who, for example, only have 5 per cent for a down payment, unless the mortgage is insured. CMHC essentially guarantees the loan to the bank so that if the borrower defaults and the property is sold at a loss, CMHC pays the difference. CMHC claims that they need to raise the premiums so that they have more cash in case more consumers default in the future.
For example, if you have a 5 per cent down payment today and want to borrow $300,000, the cost of mortgage insurance is 2.75 per cent or $8,250. You do not pay this up front. Instead, it is added on to your mortgage, so you would borrow a total of $308,250. Under the new rules, the rate would increase to 3.15 per cent, or $9,410, so you would borrow of $309,410 to net the same $300,000.
If you took a 5 year mortgage at 3.49 per cent interest today, your monthly payment would rise from $1,537 per month, to $1,543. This is an increase of $6 per month.
Some say that this could now make a home unaffordable for many first time buyers. I disagree. While no one likes an increase in costs, we are still in a period of historically low interest rates. Compare this to 1990, when interest rates were 12 per cent. The same mortgage would cost you $3,193 per month. In 2008, when the interest rate was 7 per cent, the payment would have been $2,167 per month.
Many believe that since CMHC is owned by taxpayers, we should not be in the business of protecting the banks, just so that more people can afford to buy a home. There are strong opinions on both sides of this issue.
It seems that every day someone else comes out with a prediction on the future direction of house prices in Canada. For every bank economist who says that we will still see stable growth over the next few years, there are others who predict a soft landing, with perhaps a price correction of 2 to 3 per cent. And then others predict that we are headed for a major price crash of 20 per cent over the next 5 years. All I know is that we have seen a period of steady growth in the Canadian real estate market for the past 14 years, despite many earlier predictions of crashes. Canada remains one of the most stable places in the world to live and raise a family.
For buyers, the main message is that you do not have to rush out and buy a home to beat the May 1, 2014 date when the mortgage insurance rates go up. It is more important to just make sure you can afford the home you are interested in and that you properly inspect any home before you buy it.
Monday, March 10, 2014
ROB CARRICK The Globe and Mail Mar. 05 2014
Someone ought to explain the facts of life to the nation’s bankers.
They’re handing out mortgages to people without any apparent understanding that today’s home-buying couple is tomorrow’s family of three or four. A lot happens to one’s ability to afford mortgage payments when kids come along, but you’d never know it by the way lenders qualify borrowers.
ever take a lender’s word for it that you can afford a house. Instead, try a new tool I’ve created called the Real Life Ratio.
Download the Real Life Ratio interactive spreadsheet here.
It’s designed to show how well you’ll be able to handle the basic monthly costs of home ownership, plus real life expenses such as cars, daycare and long-term home maintenance. Prospective home buyers should try it, and so should existing homeowners who want to see how well they’re handling their finances.
The Real Life Ratio is an expansion of a simple affordability measure I introduced last year called the Total Debt Service and Savings Ratio, or TDSS. The idea of creating something more comprehensive came to me after a Globe and Mail series on daycare was published last fall. We heard from many people about how hard it was to manage the cost of a mortgage in today’s expensive housing market, on top of daycare and other costs.
Use the Real Life Ratio and you’ll know what you’re getting into before you buy a house. You may decide you need to save a bigger down payment, buy a smaller house, live in a cheaper location or not buy at all.
Here are a few important things to know about the ratio:
1. Household take-home pay is used here: Other ratios use gross income, which is less relevant for practical financial planning.
2. This is not a budget: Only fixed costs are included here; food, clothing and other costs aren’t discretionary, but you decide how much to spend.
3. Costs for home maintenance and improvement are included: You won’t face these costs every year, but on a long-term basis they might average about 1 per cent of your home’s value annually; maybe less for brand new homes and more for older ones.
4. There’s a slot to include condo fees: Be sure to add any monthly utility costs that are not included in your condo fees.
5. Your local real estate market plays a big role: A liveable Real Life Ratio may be harder to achieve in big cities with roaring real estate markets.
Guidelines on how to interpret the ratio are provided. For optimum results, make a list of your monthly spending on food, transportation, entertainment and everything else not included in the ratio. Then, see whether your lifestyle is affordable. If your Real Life Ratio is 80, could you get by on 20 per cent of your take-home pay?
Keep in mind that your ratio will change – for the worse if you have kids in daycare and have a couple of cars, and for the better once your kids are out of daycare and you move into your prime earning years.
To ensure the Real Life Ratio reflects real life, I consulted four financial planners. Thanks to Rona Birenbaum, Barbara Garbens, Kurt Rosentreter and Renée Verret for some useful suggestions based in part on spending patterns of their own clients.
Download the Real Life Ratio interactive spreadsheet here.