Trying to Preserve Our Real Estate Utopia

17. January 2011

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We are the envy of the world. We have a stable government, solid economy, peaceful culture, and the Toronto condo market is the biggest and best in North America. Unfortunately the US is still a total gong show and continues to threaten to drag us and the rest of the free world down. The government is trying their best to preserve our little ‘Real Estate Utopia’ by cooling down our market using artificial means-anything other than raising interest rates (the easiest, and most obvious solution).

The news out this morning is that 3 changes to mortgage rules are going to take place:

  1. Reduce the maximum amortization period from 35 to 30 years for government insured mortgages (mortgages with loan to value ratios higher than 80%/mortgages where clients are putting less than 20% down). This new rule goes into effect on March 18th.
  2. Reduce the loan to value ratio for refinances from a max 90% to 85%. This new rule goes into effect on March 18th.
  3. Withdraw government insurance backing on lines of credit secured by homes. This new rule goes into effect April 18th

These changes will not impact the overall market very much but they are aimed at shaving off some of the ‘froth’ from the market – borderline buyers will be shut out, and all buyers who were thinking about a 35 yr amortization will have to scale back their purchasing plans based on the new 30 year max. The new rule does not apply to buyers who put down 20% or more, so investors can still buy and amortize their mortgages over 35 years (which many choose to do to get positive cash flow on their properties).

Questions or comments? Please contact me.

Side note: I’m glad they did not go with the idea that was being thrown around last week to put 100% of the condo fees in the mortgage calculations for condo buyers. On the surface, the 100% condo fee idea seems sound, but it’s flawed. Condo fees include the built-in costs of building maintenance and upkeep as well as utility costs (for the building and usually for the suite itself) and insurance. Houses also have maintenance, upkeep, utility costs and insurance, but these are NOT included in the mortgage qualification calculations. There is a myth that owning a house is cheaper than owning a condo. That’s BS! One single repair to a house can amount to a year’s worth of condo maintenance fees or more-especially in the core of the city where most houses are 60+ years old. Owning a condo is expensive, owning a house is very expensive!

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New Mortgage Rules Aimed at Cooling the Condo Market

16. February 2010

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Federal Finance Minister Jim Flaherty announced changes to the way mortgages are given out in this country today that are said to help prevent a housing bubble from forming. The keyword being prevent, meaning the government is very clear that they do not believe a housing bubble exists. I would have to agree with the sentiment in this city, however, I would add as I have been saying on this blog for months, the current pace we are at is not sustainable.

Personally I am not a fan of government intervention in the markets in this way, however, I don’t think these new rules will dramatically affect the market in any significant way. It seems more than anything, the moves today are meant to send a message to Toronto condo buyers in particular that condo flipping is not cool and real estate investing is not the same thing as speculation. Flaherty even mentioned “multiple-condo markets” in his statements to the press. Hmmm…I wonder what cities he is referring to?

My thoughts on the 3 key points in the release:

  • Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.

Many lenders already do this by my understanding, so no big change here – if you want a 35 year amortization variable rate mortgage, you can get it, you just have to qualify for the mortgage funds at a 25 year fixed rate mortgage.

  • Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.

This change is so marginal that I don’t know why they did it other than to send a message that borrowing money against your home is just about always a really bad idea financially.

  • Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

This one is aimed at all those looking to buy with 5% down and flip in a year for a profit. Flaherty is looking right at you crazy capitalists and saying don’t even think about it.

For the full statement by the government of Canada after the jump. Questions or thoughts on this? I’d love to hear them – leave a comment or email me.

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Mortgage Rates Heading Back Down?

10. July 2009

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Mortgage rates have risen sharply over the past 2 months. Getting a 5-year fixed rate in the mid to low 3s was possible just a few weeks ago, but now 5-year rates are hovering around the low 4s with most lenders. Still, rates are very close to all-time lows and money is cheap.

I got an interesting email from a mortgage broker this week that seems to suggest rates could actually be heading back down in the months to come. Read on for a copy of the email newsletter I received from Marcus Tzaferis of MortgageMarcus.com.

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Mortgage Rates Going Up Tomorrow

9. June 2009

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I’ve been telling my active buyer clients this for the past couple of weeks, but for those of you who are just readers and subscribers to this blog, get your application for pre-approval in ASAP because mortgage rates are definitely going up this week. Remember that most pre-approvals last for 90-120 days so if you get in your application in the next 24 hours then maybe, just maybe you will get locked in to today’s rates.

One of the mortgage brokers I work with informs me that rates on 5-year fixed mortgages will be bumping up by 40 basis points. So that juicy 3.79% rate that many lenders are throwing around will now be a slightly less juicy 4.19%.

Of course, this should come as no surprise as when it comes to mortgage rates, what goes down, must come up! Rates have been at all time lows for a few months now, and bond rates have been on the rise (fixed rate mortgages are usually tied to the bond market).

For a good blog on Canadian mortgages, check out Canadian Mortgage Trend. Check out this great chart they have right now on the 5-year posted rate trend over the past couple of years. Pretty revealing and it looks like we have already hit the bottom and are coming back up.

Looking for a mortgage broker or wondering about the pre-approval process? Contact me.

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Deposit Structure and Mortgage Approval for Pre-Construction Condos

18. August 2008

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Not a very sexy post title I know, but just because you are buying a pre-construction condo in Toronto doesn’t mean that you can avoid the world of traditional mortgages.

Normally when you buy a pre-construction condo you have to put down a series of deposits to secure your suite with the developer. How much you pay and when you pay varies. Factors affecting the deposit structure include:

  • The developer’s bank – what they require. Developers need to get mortgages too! The banks require them usually to get a 15% down payment as a minimum from purchasers.
  • When you buy – when you purchase in the condo’s marketing life cycle. The earlier you buy, the less flexibility there generally is in the deposit structure. When a project has reached their benchmark amount of units sold to get their financing approvals and permits to begin construction, sometimes they ease up on the deposit structure and this is often a good time for purchasers to jump in again.
  • The developer’s preferences and promotions. Some developers require more as a rule of thumb, some require less. Some offer promotions with flexible payment schemes, others do not.
  • Who you are. Yes, developers have been known to practice deposit structure discrimination – that is, changing the deposit structure requirements based on who the purchaser is. Usually though this ‘discrimination’ is simply tied to whether or not the purchaser is a Canadian resident (often non-residents must pay significantly higher deposit amounts).

So deposit structure on new condos varies, but usually you can find something like 15% to be paid out in 3 or 4 installments over the course of 6-9 months after initially signing the agreement of purchase and sale. Then an additional 5-10% also is usually required at occupancy (not to be confused with condo registration date).

So you have manged to scrape together the money you need for your deposits and you are ready to go ahead with your purchase. Are you finished? By no means. The developer will gladly take your 15-25%, but they also require mortgage approval for the remaining amount. Here’s an example: say you buy a 1 bedroom and den condo for $300,000. You must pay out 20% in deposits over the next 3 years. 20% of $300,000 is $60,000. That leaves $240,000 in unaccounted for funds for which you need to get a mortgage pre-approval.

Sometimes buyers have the funds for the deposits, but for various reasons, getting a mortgage approval can be tricky. If you fit into this category, tune in the blog tomorrow for some tips on how to get around this dilemma.

If you have any questions about deposit structures and mortage approvals, feel free to drop me an email any time.

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