Home Suite Home Income
April 19th brings new rules for CMHC insured mortgages, but the one that may affect the Vancouver housing market the most seems to be poorly understood. Many buyers rely on income from rental suites to get approved for a larger mortgage, but suite income will no longer be counted towards your mortgage approval limit in the same way. At first glance it looks like a relatively small shift, from 80% to 50%, but that’s not the case.
Currently if you buy a house with a basement suite you can take 80% of the rental income and use it to top off your monthly payment. A $1000 a month suite would mean you have an extra $800 counted towards your monthly ability to pay your mortgage.
Under the new rules, you can only take 50% of your suite income and add it to your income. It sounds similar and that’s why it gets confusing, but the difference is dramatic. a $1000 suite means ($500 x 12) $6000 more added to your income to qualify. Some of you have been busy doing the math for different circumstances, here’s a couple recent figures, please check the math for any errors:
$60,000 median household income. $1000 per month suite income. 35 year am. 5% down. Payments on 5 year fixed.
- March 19, 3.29% qualifying rate, maximum mortgage $575,082
- April 19, 4.4% qualifying rate, maximum mortgage $357,269
= A 37% decrease in purchasing power.
Before April 19th:
–$60,000 annual household income
–5% down
–35-year amort., with 5-yr fixed at 3.29%, means
–Annual property taxes of $2100.
–Zero additional debt
–Zero condo fees
–You can qualify for a mortgage of $333,381
–With monthly payments of 1333With a
–$1,000 monthly mortgage helper, you can use 80% of that to top off your monthly payment.
–So, your monthly payment can be as high as $1333+$800, or $2133.
–This will allow you to take on a mortgage (using the same terms as above) of about $533,500Post-April 19th:
–$60,000 annual household income
–5% down
–35-year amort., with 5-yr fixed at 4.4%
–With 50% of rental income topping off your annual income
–Yields a total annual income of $66,000.
–Zero additional debt
–Annual property tax of $2100So, you can qualify for a mortgage of about:
–$319,605Which is a ($533,500-$319,605)/$319,605, or 40.1% drop in purchasing power.
And here’s an earlier post by Joycer that goes into more detail and includes formulas – not ideal for those whose response to math class was “when am I ever going to need this in real life?”
And just for fun, here’s an editorial by a real estate investor who apparently believes that the previous CMHC provisions should be viewed as an immutable law of nature and the new rules represent government interference:
But with the new rules, which take effect on April 19, the government is now insisting investors need a larger down payment to purchase a property. And there are a number of other qualifying rules. As a result, there will be fewer investors buying and more properties will be available. Properties will stay on the market longer and prices will decrease. To me, this is counterproductive. The good news is that people will stop wasting their money on CMHC fees and CMHC will make less money.
Clearly the words of an expert, perhaps we should organize a letter writing campaign to make sure the big bad CMHC doesn’t ruin all the great investment opportunities for the little guy.
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April 15th, 2010 at 2:07 pm
One of the mortgage lenders in town is offering one of these as a teaser for getting in under the deadline and giving them business…
Apparently those who are rushing in to sign on the dotted line, seem to think they are a great time saver.
huge prices drive listing boom | Vancouver Condo Info Says:
April 15th, 2010 at 1:14 am
[...] We’ve got two regular posters here who have been providing regular updates so data addicts can watch the listings grow through the day, let’s hear it for paulb and inventory! As of the end of Wednesday listings sat at 15,789. [...]
April 15th, 2010 at 1:02 am
@buff_butler: What is the normal term to expiry of mortgage pre-approvals. My sister’s family is in the process of getting their home ready to sell and I’m trying to impress upon them the need to get their house on the market as quickly as possible.
April 14th, 2010 at 11:33 pm
@VHB:
“’tis true that inventory is higher still, but that doesn’t mean that sales aren’t high too.”
I talked to a few buddies. “word on the street” is people are pulling the trigger before their pre-approval expires and they have to qualify with a higher rate.
April 14th, 2010 at 11:22 pm
Jesse,
That would be great news – if inventory from recent buyers is yet to come on the market. And held on bridging loans no less – talk about weak hands! Any insights on how common this is?
April 14th, 2010 at 10:48 pm
inventory is now higher than my collection of pogs…anyone want my pogs at a 45% haircut?
April 14th, 2010 at 10:44 pm
On the OP, there are some caveats with the maths presented:
1) CMHC only gives credit for legal suites. I am unsure how many properties in Vancouver area have “legal” suites according to CMHC.
2) Banks can use whatever policy they want if they don’t require buyers to purchase mortgage insurance. Even after April 19th, banks can and will count rental income as offset, as long as borrowers have adequate downpayments.
3) I believe someone stated here that Genworth will continue to use rental offset but I don’t know for sure.
April 14th, 2010 at 10:22 pm
@me, I re-checked, we’re on pace for around 3800 sales. My conjecture why May ’08 was so weak is that current owners who move will buy early in the spring selling season. They list their existing properties later on in the spring, after they hire a Realtor, clean it, stage it, etc. etc.
In 2008 there were few near the bottom of the real estate ladder to meet the supply and, coupled with high prices and some investors getting cold feet, it was curtains for sales.
I have no idea what to make of this year; there are significant changes in government intervention, prices are high, but mortgage rates are still relatively low. Still, I’d put the chances of a repeat of ’08 sales patterns at 75% or better.
If readers don’t know what a “bridge loan” is, they should look it up. The term may be showing up in the media in the coming months.
April 14th, 2010 at 10:22 pm
Ooops. While I was off checking Agent Will, VHB was bringing the hard data.
April 14th, 2010 at 10:16 pm
Jesse,
In the week ending April 4=650 sales,April 11=776 sales and this week in three days 613 sales that makes Total for this month=2037 sales so far but only if week ending April 4 is included in this month.We still have 12 more bussiness days to go.
Tony Danza,
Rents will move up more higher with higher interest rates.Housing starts are not that many and completion is not near us,Scarcity of land will nab down housing starts going forward.What ever starts show up in the news most of them rebuilt on the old teardown.Tenants will also follow the owners rising payments.Lower interest rates discount pass from owners to tenant will come to full stop to make V shape rise in rents.
April 14th, 2010 at 10:15 pm
Sales for the last four Aprils:
2006: 3345
2007: 3387
2008: 3218
2009: 2963
I wouldn’t be surprised if we hit close to 4000 this month.
Jesse is right about sales.
’tis true that inventory is higher still, but that doesn’t mean that sales aren’t high too.
To me, this seems like the big crescendo at the end of a fireworks show. Everything is shooting to the sky at once.
What a way to end the housing boom! Exciting!
April 14th, 2010 at 10:07 pm
Jessie you might be right, I thought sales were much lower, but sales may not have spiked until May of last year – sorry, I got a bit emotional there, my bad.
I do see a lot of Sold signs to be honest.
But, 16,000 beckons, and 17,000 thereafter. I don’t think, this time, that the downward bound train can be stopped.
April 14th, 2010 at 9:51 pm
@Jesse – I checked Agent Will’s site, and of course this week’s not up yet, but last week is, in his target area. (Which is different, of course, than Inventory/Paulb.)
His graph suggests that as of last week sales are strong, but similar to 2008. There were less in 2009, but the trend in 2009 was coming off the downturn, and went as high as 900 in mid July.
April 14th, 2010 at 9:45 pm
Supraboy, is your real name Jerry?
April 14th, 2010 at 9:44 pm
Poster “me” is a next “realpaul” in making and Romeo Jordan is following “me” the poster again.What a Vancouver super fast boom2 it’s pulling all the mentally ill bloggers from chipmans to vci.