New Mortgage Rules Attempt to Curb Housing Market Risk

The Rules for Getting a CMHC Backed Mortgage are Changing Yet Again.

The housing market un Canada is doing pretty well.  Although not all local markets are seeing the activity levels that are typically found in markets like Toronto and Vancouver overall house prices have been on a steady rise for quite some time now.  To help mitigate risk in the housing market, the government backs and regulates the Canadian Mortgage and Housing Corporation (CMHC), which provides insurance on mortgages in the case of a homeowner going into default.  This helps to prevent a massive devaluation in house prices like was seen in the US housing crisis.

To address potential new risks due how high home prices have risen in the housing market over the past decade with interest rates being so low CMHC has made several changes over the past few years.  In the past 24 months the  mortgage insurance premiums have been increased twice.  They've also increased downpayment requirements for both rental properties and houses over $1 million to 20% instead of the 5% required for houses not in those categories.  None of these changes seem to have cooled the market off.

Valentine's Day Gift?

The newest change being introduced by CMHC will affect any approvals granted after February 14, 2016 or any deals that close in July 2016 or later.  It attempts to balance the desire to help people to own their own home with the desire to protect existing homeowners from a potential rapid devaluation of housing if potentially rising interest rates make it difficult for people to keep paying their mortgages.  This protection would hopefully help those who base their retirement on their home.  The Finance Minister, Bill Morneau announced:

“The  Government’s role in housing is to set and maintain a framework that is equitable, stable and sustainable. The actions taken today prudently address emerging vulnerabilities in certain housing markets, while not overburdening other regions...  This measure will increase homeowner equity, which plays a key role in maintaining a stable and secure housing market and economy over the long term. It also protects all homeowners, including many middle class Canadians whose greatest investment is in their homes.”

When people have more skin in the game, they find ingenious ways to overcome adversity and they also benefit from lower mortgage payments.  The change that has been announced works in a graduated manner, so it only affects homes that are sold in between $500,000 and $1million.  While the 5% requirement will remain the same for houses up to $500,000, any house that costs more than this will have to pay an additional 5% downpayment for the amount of the purchase price that is between $500,000 and $1 million.  With the national average MLS house price under $500,000, this is a measure that is clearly targeted at some of the hotter marketplaces.

To see how this may affect your purchase take a look at the table below:

What do you think about this newest measure?  Leave your comments below.

10 Steps to Getting Financially Prepared for Home Ownership

To get home, you might need some directions.

For most people real estate is their largest financial holding and for many who don't own any real estate it can seem like a daunting game to get into.  Many people who don't own their home think that they aren't able to afford one right now.  I've heard a lot of people say "I'm going to save up for a couple of years and improve my credit, before I get a house."  While that's not an altogether bad idea, most people with this mindset are always "a few years away" from making that purchase.

A question that I get asked a lot is "when do you think will is a good time to buy?"  The fact of the matter is that now is always the best time.  However, I do understand the reservations of some, so I thought that I'd outline a few steps that one could take to help turn "I'll be ready in a few years" into "I'm ready now", sooner than you think.

 

"Now is always the best time [to buy]"

 

1. Watch the small stuff:  Keep track of recurring costs and look at your monthly statements.  Make sure to avoid late payments, those fees can add up.

2. Spend less than you make: Once you've accounted for your regular expenses, make sure that they don't add up to more than you make.  Also try reducing your basic expenses for long term savings.

3. Give yourself a pay cut: If you have debt, you're already living off of less than you make due to interest payments.  Imagine that you earn anywhere from 10% - 50% less than you actually do and see if you can build a budget around that amount.

4. Kill your debts:  Remember, paying interest means that you're already living off of less than you make.  Pay off your highest interest debts first to free up more cash.  Also, stop using credit unless you can clear it the same month.

 

"If you have debt, you're already living off of less than you make..."

 

5. Ask for Help: See if you can get better interest rates on your debts or even have late fees or overbalance fees forgiven.  Talk to a mortgage broker to find out what you can do to put yourself in the best possible position for buying a home.

6. Save:  Any bonus cash you get should immediately go into debt reduction and then savings once you've managed to kill your unsecured, open ended debts.  This will be where you put the money that you'll use for your down payment.

7. Think long term: Have a financial goal in mind.  Sit down and think of a financial goal that you'd like to achieve in the next 10 years, beyond just buying a house.

8. Break it down:  A long term goal is nice, but somewhat abstract for most, so break it down into steps that you'd like to achieve for each year.  Whenever you feel the impulse to spend (or maybe eat out too often), consider whether or not that purchase will help or hinder your long term goal.

9. Spend what you like:  It might be a good idea to establish a weekly allowance account for your personal spending.  Set up an automatic transfer of the same amount from your savings account into this account each week and when the account is empty you're out of money for the week.

 

"Spend on [life] experiences..."

 

10. Enrich your life: When given a choice, I'd say it's always better to spend on experiences rather than stuff.  You'll feel more fulfilled and it'll be easier to avoid the temptation of that doodad that'll be gathering dust by next year.  Even a few dinner parties can be more affordable than a night out with friends.

If you follow these steps, you should be able to accurately determine when you'll be ready to make the move and change someday into today.  Once you get that house, you can really accelerate your journey to financial freedom.

Bonus tip: Revisit your expenses, savings and goals at least every year (and up to 4 times a year), to make adjustments and make sure that you stay on track.