With Canadians getting ready to vote on October 21st in our federal election, all parties are promising new benefits almost every day.
But one enticement affects many voters more than others. And that’s housing and how we pay for it.
Let’s explore what the two leaders in the race are offering by way of mortgage incentives and what that means to your bottom line.
Last week, the Conservative Party of Canada announced their housing plans with a focus on four measures in relation to first-time home buyers.
I weighed-in with James Laird, Co-Founder of Ratehub Inc. for his insights and the impact of these new measures on first-time home buyers.
Remove the stress test from mortgage renewals.
- “The Conservatives announced that when Canadians switch their mortgage from one lender to another, they no longer will have to pass the stress test. This is an intelligent and long overdue amendment to the stress test because it never made sense that your existing lender did not have to stress test you where as if you move to another lender, you had to requalify completely including the stress test. Those differing qualifying standards at renewal allowed those existing lenders to charge high mortgage rates because they knew that their customers would have to pass the stress test to go with a different lender. This inhibited Canadians with mortgages up for renewal from shopping around to find the best rate.”
- “There was no logic to the existing lender not having a stress test and the new lender having a stress test.”
Increase amortization periods on insured mortgages to 30 years.
- “Allowing first-time home buyers who put less than 20 per cent down to amortize their mortgage over 30 years instead of the existing 25 years is the most effective and simple way to help young Canadians enter the housing market. It will allow first-time home buyers to qualify for an additional 10 per cent, without their monthly mortgage payments increasing at all.”
- “The extended amortization allows Canadians to own their home 100 per cent. It just allows them a little bit more time to pay it off. It is also easy to understand and to implement. The 30-year amortization is a superior way to help first-time home buyers than the First-Time Home Buyer Initiative, which is complex and defers a growing debt burden.”
- “The 30-year amortization is a simple and effective way to help first-time home buyers in Canada.”
Changes to Home Affordability between 25 vs 30 year amortization (based on calculations from Ratehub.ca):
- According to Ratehub.ca, a family with an annual income of $100,000 with a 10% down payment and 5-year fixed mortgage rate of 2.40%amortized over 25 years would qualify for a home valued at $522,000 (with a monthly mortgage payment of $2,145.74).
- If they are allowed to amortize their mortgage over 30 years, they would qualify for a home valued at $567,500 (with a monthly mortgage payment of $2,050.13).
- With the 30-year amortization, the family is able to qualify for 8.6% more.
- Assumptions: Heating Costs: 125/month, Property tax: 3,000 per year
A couple of weeks ago, the Liberal Party of Canada announced a pledge to increase the maximum home value allowed under the First-Time Home Buyer Incentive in select regions where housing prices are higher than the national average.
How does this impact home buyers?
Again, I weighed-in with James Laird, Co-Founder of Ratehub Inc. for his analysis.
“In the three selected 'high-cost' cities for the First-Time Home Buyer Incentive expansion, the combined maximum between your mortgage and the FTHBI is now five times household income. However, using the stress test and OSFI-enforced debt servicing ratios, consumers will only be able to qualify for a home valued at 4.5 to 4.7 times their income regardless of their participation in the FTHBI. In cities where five times the income is the limit the standard debt-servicing ratios will be a constraint, and buyers will qualify for 4.5 to 4.7 times their income as usual. However, in cities where FTHBI limits buyers to four times their income, that will remain the qualifying constraint. Home buyers will always be subject to the more stringent of the two qualifying constraints.
James is perplexed as to “why the Liberals are not relying on established qualifying criteria for their program. New qualifying rules make things unnecessarily confusing and complex, regardless of whether a Canadian lives in a high-cost community or outside of one.”
“The numbers published by the Liberal party of Canada in their press release on the expansion of the FTHBI program are also incorrect, for two reasons. Firstly, the minimum down payment amount used for their calculations is 5%, however when a home’s value is between $500,000 and $999,999 a home buyer is required to put a 10% down payment for the home’s value in excess of $500,000. Additionally, the mortgage would still be susceptible to debt servicing ratios based on the stress-test. With no other debt, a buyer can only qualify for a maximum of 4.5 to 4.7 times their income.
This program is being positioned to first-time home buyers as a way to save money, which is misleading because it defers the amount that they owe, and doesn't save them anything. The program will lower a buyers' monthly mortgage payment, but in exchange they have a growing debt burden. This burden grows by the amount that your house appreciates, which is often between 5 to 10 per cent per year.
The alternative is to borrow this money from your mortgage provider at the historically low rates available today -- fixed rates are at less than 3 per cent -- and pay it off in a manageable way over a 25 year period.
The program requires home buyers to repay this obligation at the earlier of when they sell their house or 25 years. Those who remain in their home for the full 25 year period can expect the government to knock on their door and tell them that they owe 2 to 3 times the initial incentive that they took from the government. These will be people nearing retirement age, and close to paying off their mortgage, but the government's ownership stake in their house will remain.
Those who sell their first home and buy another home may be surprised when the government eats into the equity from that sale. This may limit their ability to afford the home they want to move into.”
James ended our interview with, “Ratehub does not recommend this program for any Canadians.”