Finance minister Jim Flaherty's rule book

The GTA story can be mirrored here

By Mark Schadenberg

Don’t let anyone tell you a different story.

The real estate market has changed in the past couple years due to the changing of Bank of Canada and federal government rules about the necessity of a real down payment and the length of time permitted for amortization.

Examples can be drawn everywhere – Woodstock and Oxford County – the Maritimes, prairies, mountains, from coast-to-coast and the Lake Ontario coastal town of Toronto too.

I present this well-written story from The Toronto Star because it depicts the dilemma there. Everything is relative remember as a first-time purchaser here of perhaps $175,000 is comparably equal to a $300,000 sale of a condo in the GTA.

I always tell people that attractive interest rates are keeping the real estate market strong locally, but if a first-time buyer is having difficulty entering the market, then a family seeking to buy its second house in a higher price range will have stumbling blocks in trying to sell their current home first.

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A first-time buyer's condo-hunting dilemma

The federal government’s tightening of the rules related to CMHC-insured mortgages has put one buyer in a quandary.

By: Carola Vyhnak TORONTO STAR Staff Reporter., Published on Wed, May 1, 2013

TORONTO -- Shalini Devid was excited about the prospect of buying her first condo. Then mortgage lending rules were tightened, choking her hopes of home ownership. At least for now.

Devid, a financial analyst who works in downtown Toronto and rents in Etobicoke, has been caught by the federal government’s move to reduce the maximum amortization period from 30 years to 25 years on CMHC-insured mortgages. (Buyers with a down-payment of less than 20 per cent of the purchase price are required to buy mortgage insurance through Canada Mortgage and Housing Corporation.)

DOING THE MATH

The shorter amortization means higher monthly payments, equivalent to paying almost 1 per cent more on your mortgage rate.

“I was ready to jump right in and buy,” says Devid, who was looking for a condo in the $350,000 to $400,000 price range. “But the change in the amortization period made a huge difference.”

For example, a $300,000-mortgage at 4 per cent and amortized over 30 years would cost $1,426 a month to pay back. The same mortgage amortized over 25 years would cost $1,578 per month, an increase of $152.

After she did detailed calculations using different scenarios, Devid worried that, once she pays the mortgage, condo fees and utilities, she’ll be stretched too thin.

“Looking at monthly payments, (amortization) is one of the biggest things for me,” says the first-time buyer, who now thinks she’ll save for a few more years until she has a 20 per cent down payment.

“It’s unfortunate, because I’d rather be an owner than a renter,” she says.

Devid is not alone in her disappointment. Others who are caught in the amortization crunch are either putting off their purchase or buying less house, says Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals.

THE NOT-SO-NEW RULES

Since the lending rules changed last July, house sales have dropped more than eight per cent, despite mortgage interest rates being at an almost record low, according to Murphy. He points out that 17 per cent of buyers who qualified for a mortgage in 2010 would not qualify today under the new rules, Finance Minister Jim Flaherty’s fourth round of changes since 2008.

In the past, Murphy says a “large percentage” of buyers opted for an amortization of 30 years or longer, for the flexibility in financial planning it offered. His organization is concerned about the impact of the changes on a real estate market that’s already slowing.

Brampton realtor Jaspal Cheema, who’s been helping Devid in her search, says first-time buyers are being squeezed out of the market, because they typically have a smaller down-payment.

“It’s hard to balance between emotions and pocketbook,” he says, noting the urge to buy is especially strong among immigrants.

Toronto mortgage broker Joe Walsh believes “there are still lots and lots of people who want to buy.”

Among the clients he sees for pre-approval are those who offset the impact of a reduced amortization by settling for property of a lesser value. One couple, for example, opted for a townhouse instead of a semi-detached home. Others may choose a less-expensive condo as a stepping stone to a single-family home.

The aim of the new rules is to help homeowners curb their debt load, says Walsh.

The government is telling buyers: “We don’t want anyone pushing and pushing and getting into trouble,” he says. At the same time, lenders have been put on notice that “you’ve been a bit loose with the purse strings and you need to tighten them up.”

Along with the reduction in amortization periods, Walsh says the government also toughened underwriting guidelines, which translates into more paperwork for both buyers and lenders.

In the past, mortgage-seekers might have had to produce a letter from an employer stating their salary and a pay stub, but now it could be a letter, two pay stubs, a tax return and a notice of assessment.

But there is a silver lining to the amortization cloud: With five fewer years to pay off a mortgage, home owners will see substantial savings in interest charges. That $300,000 loan, for example, will cost almost $47,000 less than if it was repaid over 30 years.

THE LINK

http://www.thestar.com/business/personal_finance/spending_saving/2013/05/01/a_firsttime_buyers_condohunting_dilemma.html

Mark Schadenberg

Sales Representative

Royal LePage Triland Realty

757 Dundas St, Woodstock

www.wesellwoodstock.com

(519) 537-1553, cell or text