Ottawa tightens mortgage rules to avoid 'bubble'

[Claeren]

Originally Posted by flamey_mcflame

Although we haven't seen homebuilders go bankrupt and real estate agents out of jobs, there are major problems in Calgary. Housing starts this last month sank to 1995 levels. Think about that, our population has increased by over 300,000 people and we had 125+ housing starts. Not to mention the massive amounts of homes on the resale market. Don't even get me started on the condo market.

Agreed! And the scary part, as you allude to, is that the single family home market is down right healthy compared to the condo market! (Yikes!!)

At least single family home builders can scale back production immediately. Condo developers are building now based on 2006-2007. Speculators who bought up those units did so based on 2006-2007. Unfortunately 2006-2007 is a LONG time ago when it comes to investments and the upcoming supply glut is going to leave a lot of people hurting > without even going into what all those people who develop condos are going to do with themselves for the 2-5 years after this upcoming glut hits the market and takes years to be absorbed.

(Imagine adding high interest rates and/or high inflation to the scenario on top of that? Or lower oil and gas prices? Home prices are already dropping despite all time highs in employment, oil and gas pricing and wages and historical lows in interest rates and inflation. That balance simply cannot be maintained long term - which means further market fundmental reasoning for home price drops.)



Claeren.

[Eddie Bronze]

Since this doesn't kick in until October 15, I wonder if we see a rush of people trying to get a mortgage before then if they know they wouldn't be able to make a mortgage work under those criteria?

[Mike Oxlong]

Originally Posted by Eddie Bronze

Since this doesn't kick in until October 15, I wonder if we see a rush of people trying to get a mortgage before then if they know they wouldn't be able to make a mortgage work under those criteria?

I'm a mortgage broker and we are starting to get notifications from lenders today that effective immediately 40 year ammortizations are no longer available. It hasn't been every lender so far but I'm guessing the others will follow suit fairly quickly.

Like Photon was saying, I understand the zero down mortgages being eliminated. However going from 40 to 35 year ammortizations doesn't really make sense. It isn't going to change things that much.

[ken0042]

I can see them saying you cannot do both, but one or the other on it's own wouldn't be so bad. Like a 40 year mortgage with 5% down, or a 25 year mortgage with 0 down.

I can also see allowing a down payment of less than 5%- but not 0. For some people I can see them trying to save their 5% down- they almost get there and then house prices bump up- meaning they have further to go.

[Fire]

IMO they should eventually reduce the number of years on a mortgage back to a max of 25 years with 5% down. Houses would return to a reasonable amount and people wouldn't have to be in debt for the rest of their life. The biggest supporters of long-term mortgages are the banks collecting insane amount of interest.

[jtfrogger]

Originally Posted by ken0042

I can see them saying you cannot do both, but one or the other on it's own wouldn't be so bad. Like a 40 year mortgage with 5% down, or a 25 year mortgage with 0 down.

I can also see allowing a down payment of less than 5%- but not 0. For some people I can see them trying to save their 5% down- they almost get there and then house prices bump up- meaning they have further to go.

I feel that a down payment of less than 5% should not be allowed. If someone is struggling to save 5%, they will probably struggle with home ownership. What will they do when the roof leaks, the water heater blows or the washing machine stops working? The monthly cost of a $250,000 home with no down payment would be about $2,000 if you include property tax, insurance and utilities. If you can afford that much for monthly living expenses, you should be able to save the $12,500 in a reasonable amount of time.

And there are options for making this easier. I have some friends that just bought a home together. This was a couple and the wife's brother. This won't be a permanent living arrangement, but it helps them get established.

[ken0042]

Originally Posted by jtfrogger

I feel that a down payment of less than 5% should not be allowed. If someone is struggling to save 5%, they will probably struggle with home ownership. What will they do when the roof leaks, the water heater blows or the washing machine stops working? The monthly cost of a $250,000 home with no down payment would be about $2,000 if you include property tax, insurance and utilities. If you can afford that much for monthly living expenses, you should be able to save the $12,500 in a reasonable amount of time.

Fair enough, but consider this. How much do you think said person is currently paying in rent, insurance, and utlilities? You'd be hard pressed to find a family home for under 1500 per month, plus utilities and insurance. But let's say that person does only pay $1500 all in while renting. At $500 per month that would still take over 2 years to save up the down payment, and in 2 years they might now be looking at the same home for $300K

I just say all of this because my cousin had a chance to buy what is now a $425K house for $300K, but they wanted to save the 5% down payment. Finally they gave up and bought a much smaller house for $325K 2 years later with only 2% down. And part of the problem they faced was that as they tried to save money, not only did house prices go up but so did their rent.

[jtfrogger]

Originally Posted by ken0042

Fair enough, but consider this. How much do you think said person is currently paying in rent, insurance, and utlilities? You'd be hard pressed to find a family home for under 1500 per month, plus utilities and insurance. But let's say that person does only pay $1500 all in while renting. At $500 per month that would still take over 2 years to save up the down payment, and in 2 years they might now be looking at the same home for $300K

I personally do not believe that two years is too long to save to buy a house. Or even three or five years. In addition to the savings between rent and home ownership, most people also spend money on luxuries that they can do without. I think it is fine for people to eat out frequently, travel, buy designer clothes, nice furniture, hockey games, etc. I do the same. If someone does this at the expense of saving for a home, that is their choice. But when they complain about not being able to save for a home, I don't have much pity for them. This is not everyone, but it is most people.

I just say all of this because my cousin had a chance to buy what is now a $425K house for $300K, but they wanted to save the 5% down payment. Finally they gave up and bought a much smaller house for $325K 2 years later with only 2% down. And part of the problem they faced was that as they tried to save money, not only did house prices go up but so did their rent.

I see this as a couple of issues.

First and foremost, we can not look at the last three years as anything but an anomaly in Calgary. Over the long run (i.e. 20+ years), housing prices do not increase at a rate substantially more than inflation. I got caught by the same thing, having purchased two years ago and paying much more than I would have just one year before.

The other thing, is why didn't your cousin look at buying a smaller home to begin with? If they only saved $6,000 over two years, they probably still bought a home that was a little too much for them. (Don't attack me if I am wrong, there are a number of assumptions that go into my statement.) Can they afford a random expense of $2,000 now?

[Slava]

I think that this is a good move to limit the borrowing. The major piece of protection here for the market is that people will be less likely to default on their mortgages going forward.

If someone can buy a property with zero down and a forty year amortization that they otherwise will not qualify for, they are more likely to walk away when the value of the home drops by 10-15%. Quite simply people are more likely to walk away because they are not invested as deeply as someone who has put up a downpayment as well as the monthly mortgage amount. If they can now walk away and rent for cheaper its a recipe for defaulted mortgages. When that happens you get a glut of homes on the market and this affects all of the homeowners (as it has in the US).

[ken0042]

Originally Posted by jtfrogger

The other thing, is why didn't your cousin look at buying a smaller home to begin with? If they only saved $6,000 over two years, they probably still bought a home that was a little too much for them. (Don't attack me if I am wrong, there are a number of assumptions that go into my statement.) Can they afford a random expense of $2,000 now?

At the same time that they were trying to save money, they were faced with landlords who jacked up the rent several times on them. So the way it worked out for them is that even with their 98% financed mortgage, they are still paying less than what they were paying for rent.

The big thing for them, and possibly others is that once you buy your cost of "rent" will stay the same for the life of the mortgage; assuming interest rates don't go up too much.

I'm not saying that 0% down mortgages are the way to go, but perhaps there should be something different done. The mortgage insurance; maybe give a certain amount back to the homeowner once the mortgage becomes less than 90% of the home's appraised value. Or something- just don't penalize people trying to own a home based on what they might do. It's too easy to tell people "Don't do X." What I would prefer is that if the gov't wants to get involved with my banking; give me options that work for me.

[Slava]

^ This makes sense to me Ken (the part about the gov't giving some options that work). The thing I would like to see is the entire banking industry make an attempt to do whats right for the client:

Why are there maximum lump sum amounts payable on your mortgage each year? Oh yeah...so that the bank can keep you in debt longer.

If the banks were really on the same side of the table as their clientele the industry would be a vastly different place.

[albertGQ]

We (CIBC) are no longer doing 40 year amortizations effective immediately

[jtfrogger]

Originally Posted by ken0042

At the same time that they were trying to save money, they were faced with landlords who jacked up the rent several times on them. So the way it worked out for them is that even with their 98% financed mortgage, they are still paying less than what they were paying for rent.

So, they got caught with a bad landlord in a (hopefully) once-in-a-lifetime housing crisis in Calgary. I am lucky that I had a good landlord during that time. A low down payment mortgage option helped them find something reasonable in that situation, but if our economy & housing prices dropped right after a lot of people did this, it would be ugly.

Even without the low down payment mortgage, they would still have had other options. Not good ones, but options anyway. Renting a smaller place, cutting back elsewhere, getting roommates, etc. These aren't ideal, but I would rather have these as potential options for the crazy scenario that we just experienced in Calgary rather than risk the meltdown that is happening in the US.

The big thing for them, and possibly others is that once you buy your cost of "rent" will stay the same for the life of the mortgage; assuming interest rates don't go up too much.

That is true for many costs. The amount left over after paying your mortgage should just go up over time. There are maintenance costs that do go up, so it isn't completely flat. Another thing that goes along with this to support your point, is that many people buying their own home are also getting established in their careers. So, their income usually goes up much faster than inflation as they go from little experience to some experience.

I'm not saying that 0% down mortgages are the way to go, but perhaps there should be something different done. The mortgage insurance; maybe give a certain amount back to the homeowner once the mortgage becomes less than 90% of the home's appraised value. Or something- just don't penalize people trying to own a home based on what they might do. It's too easy to tell people "Don't do X." What I would prefer is that if the gov't wants to get involved with my banking; give me options that work for me.

I agree that there is probably something that can be done to improve the insurance side of things. I think the CMHC insurance costs are quite excessive in some scenarios. When we bought 2 years ago, we were originally going to put 15% down. I figured with our assets, income and downpayment that we were a relatively low risk to the bank. However, they still wanted to charge $10,000 for our CMHC insurance. We ended up selling some investments earlier than originally planned to bump up the down payment to 25%.

Originally Posted by Slava

^ This makes sense to me Ken (the part about the gov't giving some options that work). The thing I would like to see is the entire banking industry make an attempt to do whats right for the client:

Why are there maximum lump sum amounts payable on your mortgage each year? Oh yeah...so that the bank can keep you in debt longer.

If the banks were really on the same side of the table as their clientele the industry would be a vastly different place.

I think the limit is reasonable. My mortgage allows a one time payment of up to 20% and a once a year increase in regular payments of up to 25%. I understand that these are normal caps for most mortgages. With this, you can pay off your mortgage in less than 5 years. I have been quite aggressive at using both methods to pay off the mortgage faster, and I don't find it to be limiting. Anyone that has that type of money to exceed these limits can come up with other options. I know of a few people that have a line-of-credit mortgage and can pay it off whenever they want.

[Slava]

^ My issue is not with the speed though...its with the intent. The bank is just keeping people in debt for as long as possible. Mortgage rates rise when the prime rate doesn't, you can't pay it off any faster than what they allow...it just shows the real motive there is to make money and has nothing to do with helping the average consumer.

[onetwo_threefour]

A couple of other things I haven't seen mentioned yet that also make this a wise move IMO.

One of the biggest issues in the US were teaser rates on variable mortgages that had a jump in payments or a balloon payment that your average homeowner couldn't (or wouldn't) budget for.

Althought these teaser rates are much rarer here, they do exist on some mortgage products and many are choosing to have floating payments. The problem with a 40 year am is that there is no wiggle room. If you're on a 25 the bank can always bump it a little higher. If you're on a 40, there's no room to move, you simply can't get the payments lowered. Even without teaser rates this can be a problem where there is a fairly sharp rise in interest rates which may happen soon if there is a recession or a rise in inflation.

Even with a fixed payment, variable rate, you can theoretically run into balloon payments here. Most such mortgages have what is called a triggering rate and/or triggering amount which when reached gives the bank the right to ask for an increased payment or a balloon payment to pull away from the brink.

If we are going to see increasing rates from the Bank of Canada to counter inflation, it's not such a terrible thing to pull people away from these borderline mortgages to save them from themselves.

The other thing this does is take some ressure off of the mortgage insurers such as CMHC. If there are higher default rates on these mortgages CMHC premiums will have to go up, after finally being lowered only a couple of years ago. That would make it even harder for those who have collected 5% or 10% down to qualify.

BTW, jtfrogger, I think you're oversimplifying a little. There have been two separate booms in the last decade, as well as a serious housing shortage in the late nineties - early oughts that drove rents through the roof throughout the city. For a person to keep up in an average paying job trying to save a down payment and start a family, it was brutally challenging.

I was in law school during that period, and if it hadn't been for my sister moving to Cali and letting me assume her mortgage, I probably would have been a minimum of five years later in buying a house and starting my family. I know what the rents were doing at that time. There was a mini-boom between about '01 and '02 then the crazy boom from '04 to July '07. In between was fairly healthy growth. I've seen it from both sides, a renter scrabbling to save a DP and a lawyer working the industry side. It's been getting worse, not better. Since being in the industry for the past 7 years, I can say that the trend was first to make assumptions disappear. Prior to January of this '07, I could count on one hand the number of ams longer than 30 years i had seen in the previous 5+ years. Since January of '07 40 year ams grew to probably 20% of the mortgages I've seen. In my practice I see about 80 mortgages a month, if those proportions hold across the industry, that is a crazy shift in risk for the lenders and insurers to take on. On the other hand, first-time purchaser's savings have simply not been able to keep pace with the 10% per year (approx) increase in housing costs averaged over this whole last decade.

[onetwo_threefour]

Originally Posted by Slava

^ My issue is not with the speed though...its with the intent. The bank is just keeping people in debt for as long as possible. Mortgage rates rise when the prime rate doesn't, you can't pay it off any faster than what they allow...it just shows the real motive there is to make money and has nothing to do with helping the average consumer.

See my post above. The longer ams weren't driven by the banks, they were consumer and industry driven because first-time buyers were being priced out of buying homes and there was a real scarcity of available rental units in all major cities in this country. (other than the ones with negative immigration nos.)

[Claeren]

Another thing worth noting is how many new homes and new condos I see being advertised in the last year or so based not on total price, but on monthly payment (based on 40 years with 0 down).

That should be illegal IMO.

It is sad that so many people need such nanny-state babysitting but they do...

MAYBE total price with the payment/month as well - but never just the monthly payment as i have seen frequently lately. Although i am guessing that will be less prevelant with these new rules.



Claeren.

[ken0042]

Originally Posted by Claeren

Another thing worth noting is how many new homes and new condos I see being advertised in the last year or so based not on total price, but on monthly payment (based on 40 years with 0 down).

I heard an ad on the radio today that I think was something like that, and I was going to take them to task on it. The ad stated "For only $675 per month for 2 years you can own this condo."

I wouldn't mind owning a condo and only paying $16,200 for it!
I know that isn't what they meant, but that's what the ad said.