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!
April 19th effect on presales | Vancouver Condo Info Says:
April 19th, 2010 at 7:34 am
[...] 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 [...]
March 9th, 2010 at 4:03 pm
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.
March 9th, 2010 at 7:32 am
@crabman:
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.
March 9th, 2010 at 12:15 am
That explains a lot. The bulls are borking each others brains out.
March 8th, 2010 at 11:58 pm
Or in this case, a systematic attack on a blog. Dave's multiple personalities are really stinking up this place.
March 8th, 2010 at 11:09 pm
I should add – Dictionary.com
March 8th, 2010 at 11:08 pm
@Mark Downs:
"bork
/bɔrk/ Show Spelled[bawrk]
–verb (used with object)
to attack (a candidate or public figure) systematically, esp. in the media."
March 8th, 2010 at 11:07 pm
Bork you.
March 8th, 2010 at 10:54 pm
@bigtimemortgageborker: Just how does one go about borking mortgages anyhow?
March 8th, 2010 at 10:49 pm
131
So that means the new rules will have zero effect. Maybe next time bears…so sad
March 8th, 2010 at 10:32 pm
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.
March 8th, 2010 at 10:29 pm
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
March 8th, 2010 at 10:19 pm
On the discussion re: 5-year posted vs. 5-year discount, let's look at what the Minister's backgrounder says:
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 would seem to be to the three year rate under the existing rules which is the posted rate.
It's not conclusive but I would say this lines up better with the release from reknab's bank (no doubt reviewed by their legal department) than the Mortgage Trends blog posting.
March 8th, 2010 at 10:18 pm
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'. Don't waste your time here, the boat is sailing, you don't want to miss it. RealEstateNeverGoesDown ThereIsNoLandMakingMachine VancouverIsLandlocked TheRichasiansAreBuying and TheOlympicsAreComing.
Best of luck,
arit
March 8th, 2010 at 9:48 pm
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.
March 8th, 2010 at 9:26 pm
@Patrick: You forgot about the opportunity cost of not investing the original down payment (80,000).
March 8th, 2010 at 9:24 pm
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.
March 8th, 2010 at 8:55 pm
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'.
March 8th, 2010 at 8:46 pm
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.
March 8th, 2010 at 8:40 pm
Patrick
That is the truth plain and simple. Lots of luck trying to convince Dave and other thick skulled bulls on here.
March 8th, 2010 at 8:26 pm
@Furlong is Paranoid:
Wow a waterfront condo, you must be a real pimp. Your more annoying than the bulls…
March 8th, 2010 at 8:08 pm
or tims donuts?
March 8th, 2010 at 8:04 pm
Would those be real donuts or nominal donuts?
March 8th, 2010 at 8:01 pm
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.
March 8th, 2010 at 7:56 pm
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 and they all say the same thing.
Vancouver is great for living but terrible for business. They are not investing anymore in Vancouver because they "don't buy at the top of the market".
The apartment I purchased in '98 which I now rent for $2k a month pays the mortgage but if I were to buy it at todays prices I would never be able to cover the mortgage with the rent. It would be a negative cash flow investment. which what one should expect if they are "investing" in the Van real estate market now.
Dumb bull loves to denigrate the non-owners. So lets do the math and see who is wiser in the long run.
Owner: purchase home for $800,000. 10% down. $720,000 mortgage. 5% interest x 30n years is about the amount of the mortgage again $720,000. lets calculate the property taxes paid over the next 40 years @ 2.89% per year again almost the purchase price again. Now lets multiply $720,000k x 3 = $2,160,000
Rent: $2000.00 a month x 12 = $24,000 .00 a year x 30 years = $720,000
Lets not forget that property values go up and they go down. I know because I have owned houses for the last 25 years. Prices went way down in the early '80's and agin in the mid '90's.
March 8th, 2010 at 7:52 pm
@Anonymous:
Perhaps he's just a masochist? If he lived in New York he'd move to Harlem and start putting up posters for the local chapter of the KKK.
Nah, you're probably right.
March 8th, 2010 at 7:31 pm
" I hope that Dave is retired for his sake, or at least self employed, because any employer would not put up with this level of posting. "
you're assuming he's not paid for this, or somehow profits from doing so. I bet dollars to donuts you're wrong.
March 8th, 2010 at 7:27 pm
“Dave likes to switch back and forth and use whichever one supports his argument the best.”
Hmmm… maybe he needs a new name.
How about this: "Ujjaldossanjhmichaellevydave"
Seems to fit. Has a nice ring.
March 8th, 2010 at 7:26 pm
@Dave:
"I have been pretty cordial in the face of persistent bear anger."
"I can’t think of a time where you have demonstrated that you understand the difference."
"A muppet could figure that one out."
Yes… Cordial. Do you resort to physical violence when your anger gets the better of you?
You still haven't shown that an ageing apartment building appreciates in value. Let's see some data Dave! I thought a muppet could figure that one out. If you don't produce soon I'll have to assume you're dumber than a muppet.
March 8th, 2010 at 7:23 pm
#107 @Dave: So, which was the most prosperous society in history?
1) Germany in 1923
2) Hungary in 1945
3) Zimbabwe in 2007
March 8th, 2010 at 7:20 pm
Charts Don't Lie
See:
http://www.patspapers.com/images/uploads/flush_ga…
[OT, okay, but you gotta see this!]
March 8th, 2010 at 7:15 pm
I like John Hussman's thesis (from ZeroHedge). He's talking about the stock market, but it seems to apply to every market now.
http://www.hussman.net/wmc/wmc100308.htm
Over the past decade, it has been an uncomfortable lesson to accept that investors can be relied on to behave in ways that are ultimately unsustainable and destructive to their wealth, as long as market internals are temporarily supportive. It's one thing to say, "From every historical precedent, we know that this is going to end badly, and investors will lose a great deal of their wealth, but for now, they are speculating anyway." It's another thing to add, "and since they are, we are actually going to rely on investors to continue behaving dangerously, and join them."
March 8th, 2010 at 7:12 pm
My landlord gave me some good news yesterday. He is not going to raise the rent as he had been suggesting he would. I have a very luxurious waterfront 2 bdrm condo with 1010 sq ft for 1650.00
Living the good life with not a care in the world and lots of cash in the bank
March 8th, 2010 at 7:01 pm
@Anonymous:
Both numbers serve a purpose and hence both should be used.
Nominal dollars are generally the better term to use because they are representative of what people actually experience. Every financial transaction is done in nominal dollars. Hence, people can relate directly to it. Nobody goes out and buys a car and says they paid $5,000 real dollars fixed to prices in 1972. It's stupid. The same applies to real estate. You buy and sell in nominal dollars.
Only dummies and academics stick to real numbers.
March 8th, 2010 at 6:55 pm
@Drachen:
I can't think of a time where you have demonstrated that you understand the difference.
I think it is best for you to stick with just one type of number.
March 8th, 2010 at 6:30 pm
@Purp: If you actually read the link to canadian mortgage trends (which outlines the purported changes) it says that for terms less than 5 years, the posted rate will be used. But for terms of 5+ years, the discounted rates will be used.
I think the problem is we don't actually have an official word yet. The linked article says that, but it makes no sense. Banker, er sorry 'reknab' says that his bank understands the rule to be 5 year posted rate for ALL insured mortgages, no matter what the term. I guess we'll just have to wait and see until someone has a link to an official source that lays the question to rest.
The topic is still interesting, particularly if the linked article is correct. Being allowed to qualify for ANY discounted rate makes no sense, since it wouldn't give any solid number to qualify against. If this change allows that, it's really not much of a change at all. If it doesn't its a pretty major change. You say theres a problem with the math, but you don't specify what it is. The math seems correct to me.
March 8th, 2010 at 5:52 pm
@Anonymous:
"Dave likes to switch back and forth and use whichever one supports his argument the best."
That applies to everything in the world of Dave. Not just money.
New construction numbers are up, it's proof that the market is solid! Lots of employment!
New construction numbers are down, it's proof the market is solid! Less supply!
March 8th, 2010 at 5:49 pm
@Lone wolf:
I prefer to work with real dollars. I can't think of any time(certainly not recently) where I've put forward an argument using nominal dollars. If you can find an example I will stand corrected, but I don't think you can.
March 8th, 2010 at 5:27 pm
Note taken LW…
How about ground rules need to be set for everyone.
March 8th, 2010 at 5:24 pm
101
Please, Drachen does the same thing….
March 8th, 2010 at 5:21 pm
I think we need to set guidelines on using either real dollars or nominal dollars. Dave likes to switch back and forth and use whichever one supports his argument the best. Please stick to one and use it.