What she did

This won’t take long.

Let’s reflect on what the federal government is about to do. In six weeks the biggest changes in real estate financing in a generation come into effect. The results could be trouble for many buyers, and the market as a whole. Be careful.

As you know, our non-financial Finance Minister has decreed two major changes: houses up to $1.5 million in price will be eligible for CMHC insurance and, therefore, lower downpayments. (The limit used to be a million, above which a much larger down was required.) Secondly, all new buyers can stretch their mortgage pay-back times to 30 years (from 25).

Whazzit mean?

Let’s buy a $1.4 million slanty house in Leslieville or East Van – or maybe a SFH in Milton or White Rock.

In the olden days (now) this would require a downpayment of 20%, or $280,000. Setting aside closing costs (land transfer, legals, moving), the mortgage would be $1.12 million. There would be no CHMC insurance, resulting in a slightly higher mortgage rate.

After the middle of November, insurance clicks in. The downpayment drops – to 5% for the first half-mil and 10% above that. In this case, the buyer would need ‘only’ $115,000. Yahoo!

But wait. The mortgage is now $1.285 million, or $165,000 more. Same house. Same price. More debt. But the kiddos are happy because they can move in – and figure a 30-year mortgage will make up for the extra debt.

Here’s the math.

Buyers now, with a higher downpayment, lower amortization and debt of $1.12 million with a three-year fixed rate of 4.8% will pay just over $6,400 a month for the loan.

The buyers who go for a 30-year amortized and insured mortgage of $1.285 million because they had a lower downpayment will pay $6,735 monthly. Yes, more.

And what’s the story after making payments for three years?

The kids with the 25-year loan and the bigger down pay $155,897 in interest, pay off $74,946 in debt and still owe $1,045,053 upon renewal.

Those who had a downpayment of $125,000 and took a 30-year amortization pay $180,501 in interest (about $25,000 more), pay off just $62,000 of the principal, and end up still owing $1,223,o17 at the end of the term.

So, listening to Chrystia cost these newbies $178,000 in additional debt over just three years, for having saved $165,000 in a downpayment, plus higher monthly financing costs as well as the CMHC premium. The have real estate, yes, but less equity, less net worth, more risk if a job vaporizes, the economy turns or rates rise.

And this is Ottawa’s solution to a housing crisis. Dog help us if we get a real one.

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Source: https://www.greaterfool.ca/2024/09/30/what-she-did/