CMHC mortgages based on posted 5 year rate

When Flaherty announced new rules for CMHC insured mortgages in Canada a few weeks ago, there were a lot of questions that remained unanswered. One of the big ones was about the new rule requiring approval based on the 5 year interest rate. The question was which 5 year rate would that be, the posted rate or the discount rate?

Canadian Mortgage Trends is reporting that it will be the 5 year posted rate, which makes sense since the discounted rate is infinitely variable, whereas the posted rate is consistent across all lenders. The posted rate can be found on the Bank of Canada’s website. That rate is posted weekly on Mondays, and as of Sunday night it is 5.39%. The current rule, set to expire April 19th allows lenders to approve insured mortgages based on a discounted 3 year rate, which is currently 3.29%.

This means that as of April 19th, buyers who don’t have at least 20% down and require a CMHC insured mortgage will be approved based on a rate that is more than 2% higher than it currently is to ensure that they can weather rising interest rates.

Just to illustrate what that 2.1% represents in real money, I used the ING mortgage calculator and plugged in some round numbers:

Household income: $100,000
down payment $30,000
Monthly loan credit card payments: Zero
Term: 25 years Property taxes: $2000 Condo fees: Zero

3 year discount rate: 3.29% – you can borrow $491,551

5 year posted rate: 5.39% – you can borrow $397,349

As always, corrections to my math or reasoning is welcome in the comments section below!

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[…] talked a lot around here about the new rules and how they’ll affect interest rate approvals and how suite income is calculated, but there’s one aspect of the new rules that I […]

Vic

As much as I would like to see the Vancouver RE drop like a rock due the new rules inposed by the government, at least I feel better that some potential buyers won't get caught in the buying frenzy and experience financial hell in 5 years time.

patriotzed

@crabman:

IMHO the Efficient Market Theory is total crap. It says that all information available is immediately acted upon by investors, and no investment strategy is better than a coin toss.

You can't have an efficient market if:

1. Bears can't sell short.

2. Bulls can get financing not properly priced for risk (CMHC).

The RE market is not efficient because it can't be.

That's not a claim that any other market is efficient BTW.

Disbelief

That explains a lot. The bulls are borking each others brains out.

No Longer Looking

Or in this case, a systematic attack on a blog. Dave's multiple personalities are really stinking up this place. 😛

Drachen

I should add – Dictionary.com

Drachen

@Mark Downs:

"bork

   /bɔrk/ Show Spelled[bawrk]

–verb (used with object)

to attack (a candidate or public figure) systematically, esp. in the media."

VHB

Bork you.

Mark Downs

@bigtimemortgageborker: Just how does one go about borking mortgages anyhow?

Once again

131

So that means the new rules will have zero effect. Maybe next time bears…so sad

bigtimemortgageborke

I'm a big mortgage borker and I talked to my bank reps and they all said that the 5 year discount rate will be used for 5 year terms or greater. Most people get 5 year fixed anyway.

superboomtime

1) Interest rate continue to go DOWN

2) Vancouver condo market continue to BURN RED HOT LIKE FIRE

3) Olympic distraction over buyer back in buying mood

What does it all mean? It means it's time for another vancouver boom time. Because remember bears VANCOUVER REAL ESTATE NEVER GO DOWN

scoop

On the discussion re: 5-year posted vs. 5-year discount, let's look at what the Minister's backgrounder says: Currently, the interest rate used to determine the mortgage payment for these calculations is either the rate fixed for the term of the mortgage or, in the case of a variable-rate mortgage and mortgages with terms of less than three years, the greater of the contract rate and the prevailing three-year fixed rate. The adjustments to the mortgage framework will require mortgage insurers to ensure that borrowers qualify for their mortgage amount using the greater of the contract rate or the interest rate for a five-year fixed rate mortgage when calculating the GDS and TDS ratios. Note: (1) it doesn't say that the 5-year rate only applies to terms less than 5 years, (2) while it doesn't say "posted" or "discount" the analogy… Read more »

arit

Oh tincup, How will I sleep at night after seeing that? What were they thinking? Did they never ever clean that house? My wife wouldn't take it for free (but she is 'a bit special'). Can someone explain to me what is up with the bull attacks? What? Is it too lonely at the open houses? The phone doesn't ring at the agency? If we bears are so deluded, and 'only 37 crazy contrarians', so be it! Go buy three, tell your huzbah to buy three and put your money where your mouth is. What are you doing here? We bears are insignificant, a tiny blip in the radar… Why do you care about us? Go invest in real estate and make sure to take a big fat mortgage before April 19th. Leave us alone to 'cry in our basements'.… Read more »

tincup

Someone posted this eastvan listing on Garth's blog. Check out this sweet eastvan estate, only $580k:
http://www.realestateburnaby.com/ActiveListings.p

What I like best is the dramatic, emotional panning of the camera. All it needs is a soundtrack.

I'd have to ask the listing realtors if it was really necessary to include all those interior shots. How about one shot of the exterior, say "land value only" and leave the rest up to the imagination.

oneangryslav2

@Patrick: You forgot about the opportunity cost of not investing the original down payment (80,000).

bestplaceonmeth

You know what isn't "just bear porn"?

Another round of severely BEARISH daily numbers.

Vancouver All Areas*

Attached & Detached

as of:03/08/2010

New Listings – 335

Back On Market Listings – 1

Price Changes – 102

Sold Listings – 63

That's just the BEAR naked reality.

Purp

Mark Downs 106 – I should have been more clear, there isn't really a problem with the calculations, just the assumptions. Until we know for sure what the changes are in terms of qualifying interest rates, these crazy calculations are just 'bear porn'.

Purp

Domus 118 "…Could it be that they are not setting down the rules clearly so that they can play it by the ear? Wait until early April, see how things look, then set the standards for implementation…" — I was wondering about that as well, pretty shrewd politically if it's true.

Disbelief

Patrick

That is the truth plain and simple. Lots of luck trying to convince Dave and other thick skulled bulls on here.

Anonymous

@Furlong is Paranoid:

Wow a waterfront condo, you must be a real pimp. Your more annoying than the bulls…

logic

or tims donuts?

Anonymous

Would those be real donuts or nominal donuts?

domus

Interesting thread, I actually find the discussion about the new rules very helpful.

I said it before and I will say it again: until the government (Flaherty) and the CMHC do not clarify the actual implementation of the new rules, there is space for subjective interpretation.

Could it be that they are not setting down the rules clearly so that they can play it by the ear? Wait until early April, see how things look, then set the standards for implementation.

With this government I would not be surprised. They are masters of spin, but the substance seems to be lacking.

Patrick

I see SUPERDUMBBULL is still at it. Let's put him down like the antiquated realtor he is. If house prices keep going up at 6-9 % every year and wages only go up 0-3 % per year within 10 years the discrepancy is 60 % (6% per year x 10 years). We have already seen 10 years of this disparity from 2000 to now. Are we to assume that the market can handle 10 – 20 more years of this? I am an owner but I am also a realist and you don't have to have a PHd in economics to realize that this trend is untenable. My child attends a private school (1 of the best) here in Vancouver and as you can imagine a good percentage of the students are asian (chinese). I speak with the parents everyday… Read more »