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Mortgages

New rules crimp home buying power Add to ...

The GTA's new homes market has reached a significant milestone. Anyone with a family income of less than $100,000 a year and a down payment of 10 per cent or less doesn't have a snowball's chance in July of qualifying for a mortgage on any condo with a price tag greater than $410,000 or a detached home costing more than $450,00.

To put this into perspective, at the end of March, the last month for which up-to-date figures are available, the average new GTA condo sold for $420,097 and the average new home cost $490, 395. Nor can would-be home buyers find much relief in the resale market. The average price for homes sold in April through the multiple listing service was $437,087.

Nor do the months ahead hold any hope of relief. With increases in interest rates forecast and with house prices certain to continue to rise as long as demand outstrips supply, and other factors such as the harmonized sales tax, ever larger municipal development charges plus rising land and construction costs are factored in, the cut-off point for family incomes needed to qualify for mortgages is certain to rise.

Where are rates headed? Should you lock in or float your mortgage? Join the discussion.

So what happened? How did a huge number of people get disenfranchised from home ownership? Headlines say interest rates continue at record low levels. You can still get variable rate mortgages at 2 per cent or less. Even five-year fixed term mortgages can still carry deep discounts from posted rates.

April 19 is what happened. That was the day federal Finance Minister Jim Flaherty's changes to the Canada Mortgage and Housing Corp. mortgage insurance plan came into force.

The idea was to prevent a meltdown in the real estate market as interest rates started to rise, he said when he announced the changes in February.

He wanted to make sure that people borrowing at anywhere from 1.75 per cent to 4.5 per cent could still make payments if rates jumped to 6 per cent or more. The last thing the country needed was massive foreclosures and defaults on mortgage payments.

Any housing purchase made with less than a 20-per-cent down payment must have its mortgage insured. CMHC and a couple of private companies provide that insurance. Rates average about 2.4 per cent of the principal sum and are tacked onto the face value of the mortgage.

Borrow $200,000 and you pay back $204,800.

To qualify for mortgage insurance you have to meet certain income standards. Take the amount you want to borrow, tack on mortgage insurance, figure out the payments over the term of the mortgage then add on taxes and in the case of condos half the monthly maintenance fees.

If the resulting dollar figure is about 30 per cent of your gross family income or less and you have a reasonable credit record and can prove that you do earn that much on a regular basis, you will likely get the loan. If, however, that dollar figure exceeds that 30-per-cent mark, forget it.

On April 19, the new rules said everyone seeking CMHC insured loans had to qualify based on the five-year fixed term interest rate applicable at the time the loan was made. If they qualified, they could choose the much lower variable rate or negotiate a deep discount from the posted five-year rate and make payments at those levels.

To give you a better idea, On May 7 the Canadian Imperial Bank of Commerce's five-year fixed term rate was 6.25 per cent but the discounted rate was between 4.5 and 4.8 per cent, and variable rates could still run as low as 1.75 per cent from some lenders.

I asked Paula Roberts, a mortgage broker with Roberts Group in Unionville, Ont., to run some numbers for me. What level of family income would you need to qualify for a CMHC mortgage on a $410,000 condo or a $450,000 single family house if you could put 10 per cent down and the mortgage was amortized over 25 years?

Use today's 6.25 per cent five-year, fixed interest rate. Figure in taxes at $350 a month and in the case of the condo set half the monthly fees at $225.

The result was the same in both cases. You would need $96,000 in total family income to qualify. And that was only if you could come up with $41,000 in cash for the condo down payment and $45,000 for the low-rise house. Remember I used prices significantly below the end of March averages.

"That five-year fixed term qualifier makes a huge difference," Ms. Roberts says. "If it was 4.5 per cent, for example, the discounted rate available today, you would only need about $80,000 in family income to qualify."

While longer amortization periods can reduce monthly payments, they may soon be offset by increasing interest rates and rising home prices.

"The problem is that family incomes just have not kept pace with rising house prices,"

says Boris Bozic, president of Merix Financial, another mortgage broker.

"Affordability has become a major issue for any family with a total income of less than $100,000 in the GTA."

 

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