Jul
22

Why You Should STOP Reading The Newspaper Immediately If You Want To Buy A House.

This sort of thing makes me REALLY REALLY mad. Today morning I woke up and glanced over the Report on Business by the Globe and Mail. Not surprisingly, my arch-nemesis (just kidding, sort of) Rob Carrick writes another article about how hard it is for an average person to save a down payment in Toronto. He touts his new “down payment savings calculator” (which I won’t even link to because it’s rubbish) and shows everyone how the average person who makes $45,000 per year will take SIX YEARS to save for an average house in Toronto.

Why does this make me so mad?

Simple.

Rob forgets to tell his readers that he failed at basic mortgage math 101. Here’s why.

On average the property price in Toronto is $623,000. Note I said property, not house. Property means house, condo, townhouse, etc., so to get a key to your own dwelling of any kind you need to find $623K. Hard to do, so let’s save.

A $623K house means your minimum down payment is $46 645 including closing costs. At $500 savings per month (Rob uses .08% savings rate, I’m going to use 0.00) it will take you 7.7 years to save for an average house in Toronto.

So, what’s the problem? That’s pretty awful, right?

Yes. It is. However what the article fails to mention is that someone who makes $45,000 per year can’t qualify for a house that expensive. No! The maximum they could is $225,000. Using $225,000 as our house price, we need $14 625 down payment and closing costs, which means we need not 7.7 years but 2.43 years. A little more feasible wouldn’t you agree?

Hopefully the users of the calculator are able to figure out first what house they can afford, then to see…

Jul
07

It Is About To Get Even Harder To Finance

Why? How?

The body that oversees mortgage financing, OSFI, isn’t happy with what is going on and wants to ensure that lenders are following the rules as set out in their guidelines released in the last 2 years called B20 and B21. Those sound like world-war 2 bombers but they are not - they were the framework for mortgage underwriting and what each bank & lender is supposed to do when processing a loan request.

Note I said, “supposed to do”.

Most of us heard about the “student” who bought a $24M mansion in Van-city and took out a $9M+ CIBC mortgage, here on a student visa, right? Well that’s not what the intention of the B20 and B21 rules was, and now it appears that it’s causing OSFI to cast a wider net and look at five major underwriting components:

Income verification - OSFI is concerned too much fraud is going on, and not enough check and balance is happening with income verification. My take: Although I hear of it, I don’t see it. The lenders could certainly do a much better job and standardize the process or ask for CRA authorization, but they never will.

Non-conforming loans - should be limited to 65% of the value of the home when the typical income/credit/down payment rules don’t apply. My take: I see this being pushed to 80% all the time and the credit unions who don’t act under OSFI can still easily qualify at this level.

Debt Service Ratios - our rates are way too low now and it is too easy to get a mortgage. TRUE. For example, someone with a $75,000 income at 2.39% (a good 5 - year fixed rate) can qualify for $475,000 in mortgage lending. If you bump that rate up to…

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