It's no secret real estate has been on a tear. CMHC and Genworth, the two Canadian mortgage insurance companies, would like to see that homes continue to be affordable. That is actually part of their mandate.
In that vein, they both have introduced new mortgage insurance products that should increase home affordability.
With housing prices reaching stratospheric heights in certain major Canadian markets and interest rates on the way up, many in the market place are wondering how the real estate market can sustain year over year increases. In 2005, house prices across Canada increased 9.8%.
Homes need to be more affordable, but because of the factors mentioned above, they are becoming less affordable. At times like these in the past, Canada's two mortgage insurance companies (CMHC/Genworth) have stepped in with products meant to stimulate affordability of home.
Some of those products which are now mainstream are 5% down mortgages, which were followed by 5% down mortgages with no purchase price limit, which were eventually followed by no-down payment mortgages. These are but a few of the products introduced in the past to make home ownership more affordable.
In February CMHC launched a pilot for a 30 year amortized mortgage (as opposed to the conventional 25 year amortization) which effectively reduces the amount of payment necessary to fully amortize the mortgage. This program was launched with little fanfare at a few lenders of choice.
Last week, CMHC's smaller rival, Genworth, not to be outdone, issued a press release launching on an industry wide basis not just a 30 year amortized mortgage, but also a 35 year amortized mortgage!
What will the impact be on the current real estate market? The best way to demonstrate the possible impact on the market place is through an example. Below I have laid out an example that will demonstrate the impact on affordability of this new program:
Imagine that prior to the launch of this new program, if your household income was less than $76,731, you could not afford a $300,000 home. Now, the same home could be purchased by a family that has $8,500 less in household income. The new Genworth program can only add to the demand of homes, and is a good thing for those shopping for more house than they could have afforded in the past.
There is a flip side to everything though. The increased affordability will come at a price. Everything else being equal, after 10 years you will have paid $37,194 less principal under a 35 year amortization mortgage than you would have under a 25 year amortization!
Despite the costs, many will opt for the 35 year amortized mortgage to acquire their "dream" home. I would advise those getting this type of mortgage to fully utilize their prepayment privileges (to the extent possible) in order to reduce the amortization of the mortgage sooner rather than later.
So, if you are thinking of selling and buying a homes this year, should you buy or sell first? I've had many clients purchase before they sell. I just want you to have all the information so you can make the best decision for yourself and your family. You may read more about buying or selling first here
Read about what happened in real estate last month.
I wish you much success, good health and happiness today and always!
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