CANADIANS SHOULD BRACE FOR FINANCIAL CHANGE
Welcome to 2010! A New Year, a new decade and as usual likely a fair share of new goals and resolutions to go around.
While you were making plans for the upcoming 12 months the federal government as well was talking about plans of their own. Hot on their list? The possibility of changing the way Canadians buy homes, yet again.
In the fall of 2008, the federal government took away 40-year amortizations, 100 per cent financing (or no money down purchases) and made it so interest-only mortgages and home equity lines of credit could no longer exceed 80 per cent of one’s property value.
This time around they are speculating on the need to further scale back amortizations, to a suggested maximum of 30 years, and proposing increasing the amount of down payment required when buying. Currently applicants can apply for mortgage financing with a five per cent down payment and their mortgage could be amortized over 35 years.
The government’s concern is that low interest rates and increased market activity in 2009 might be creating a housing bubble. So what could that mean if the government follows through with these ideas?
First-time homeowners are the obvious hardest hit group. As of December 2009 Calgary’s Metro average house price was $451,349 according to the Calgary Real Estate Board. That means to purchase an “average” home (right now) buyers would have to come to the table with at least $22,567. Condos are a slightly easier pill to swallow with an average price of $288,640 lowering the currently required down payment to $14,432 — which is part of the reason why condos are so popular with first-time buyers.
So if you were in the market for a single family home and the government did follow through with increasing the down payment required (seven or 10 per cent has been tossed around as a possible new minimum) then any way you look at it your goal just moved that much further out of arms reach. Considering December’s average price on single family homes seven per cent down payment would be $31,594 and a 10 per cent down payment would be $45,135.
Additionally, by reducing the maximum amortization buyers could stretch their mortgage over, purchasing power is reduced as the required mortgage payments would be increased which then pushes against the debt ratio ceilings which lenders use to determine an applicants ability to pay their monthly expenses (gross income vs. monthly payments).
So if you have already made the leap to ownership, should you then take a sigh of relief? Well yes, that is until you want to sell your home and you realize that your pool of eligible buyers has been reduced — especially if your Calgary home is worth $450,000 or less, as this is widely considered the first time buyers arena.
Canadians have earned a reputation as being conservative. Lending in Canada is no different. If we are in fact in a housing bubble, then perhaps the government is right to be concerned. That said, if this is an exaggerated concern than many Canadians will be affected by this proposed scale back, both now and in the future.
It is worth noting that although the prime lending rate is incredibly low right now, historically, the majority of Canadians opt with fixed interest rate mortgages, more proof of our conservative nature. Fixed rates and the prime lending rate operate independently and only the prime lending rate is directly affected by the Bank of Canada’s (BoC) benchmark rate, meaning fixed rates will not automatically climb when the BoC starts bringing the prime rate back to realistic levels.
Also, many homeowners choose extended amortizations, even if they don’t need to for qualifying purposes, for a large variety of reasons. Situations such as maternity leaves, extended travel or wanting greater cash flow to maximize RRSP’s are just a few examples why people prefer to go with a lower mortgage payment then they could swing if need be. Choice is a powerful thing and it is possible our financing options may be further reduced over 2010.
If you have been thinking about making the move from tenant to owner, then why risk it and wait? The same would apply if you are contemplating selling your current home and moving up. Secondly, you can voice your opinion to your Member of Parliament about how you think this change could affect you and your family. If your goals for 2010 involve real estate in any way it is wise to get started early while the options available are still clear. Call today to discuss your plans for the New Year and ensure you avoid disappointment.
source: www.cren.com
