# Proposed RE/mortgage changes



## Cal (Jun 17, 2009)

Any thoughts on the proposed changes to RE/mortgages?

http://www.globeinvestor.com/servlet/story/GI.20100216.escenic_1469432/GIStory/

1. Anyone applying for a new mortgage has to qualify for a current 5-year fixed rate, which is 5.390% instead of the absurd 1.8%-2.25% currently being offered.
2. Ottawa will cap refinancings which qualify for CMHC insurance at 90% of home value, down from 95%.
3. Increase the minimum downpayment for getting insurance on a spec house to 20%, up from 5%.


IMO hoembuyers should qualify for the current 5 year anyways, thats how a prudent lender should lend when there is unprecedented low rates, assuming they want to get paid back.

I don't think #2 will have much of an impact. And if it is my tax dollars that would be used to bail out CMHC, then for speculative purposes (#3), 25% down seems more reasonable.

Karl Denninger has an opinion too: http://market-ticker.denninger.net/


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## bean438 (Jul 18, 2009)

I thought banks already qualified people at 5 year fixed rates??


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## Dr_V (Oct 27, 2009)

I'm generally opposed to governments interfering in the financial matters of Canadians, but ... 

Since I've seen so many stories, over the years, of people who spend lavishly on things that they cannot afford, I can only assume that there exists a (large) percentage of the population which is utterly incompetent when it comes to planning their own finances. 

Flaherty's rules are designed to protect these people from their own stupidity. (And that, I guess, is a good thing.)


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## HaroldCrump (Jun 10, 2009)

Very good move by the FM.
Now the next thing is for bank, lenders and brokers to actually enforce it and not find ways around it.
Not sure if this will control the raging RE madness but it is a prudent move nevertheless.
The fact that Jim Flaherty said _In introducing the tougher mortgage requirements, Mr. Flaherty said there was "no clear evidence" of a real estate bubble in this country_ sounds to me like they (his govt.) are fully aware that there is a RE bubble and these are their first steps to control it.

It shouldn't affect most folks who are in control of their finances but will affect RE flippers (esp. condo flippers) the most.


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## Racer (Feb 3, 2010)

I like the changes too. Despite the poorly handled income trust tax policy reversal (*cough*), this is an example of adroit manoevring on Flaherty's part. Acknowledge the bubble by not acknowledging the bubble.

Hopefully this will cool things down a tiny bit, although I don't have my hopes up.


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## financeguru (Jan 18, 2010)

Not sure if i like the part about 20% down for an investment property - i was thinking of buying a property, renting out and perhaps flipping it. 20% down, means for a typical property $300000, i would have to put down $60K in addition to closing costs etc. Seems a huge jump from $15K + closing costs....
I'd also be interested in seeing the impact this has on the downtown condo market in Toronto - should slow down toronto downtown market by quite a bit as i'd imagine there is a lot of speculation going on.


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## RetireIn10Years (Apr 4, 2009)

It's still not enough. The 30 & 35 year mortgages are still the big problem. They are keeping prices up artificially high. If we allowed 50 year mortgages, house prices would probably double from where they are rather quickly. Conversely, reduce it back to 25 years and house prices will follow back towards reality. 
It's good that they did something about the housing bubble, but more needs to be done in my opinion.

I think if more people understood the role the CMHC plays in this whole thing, they would be screaming for changes and tighter restrictions on lending.


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## bean438 (Jul 18, 2009)

financeguru said:


> Not sure if i like the part about 20% down for an investment property - i was thinking of buying a property, renting out and perhaps flipping it. 20% down, means for a typical property $300000, i would have to put down $60K in addition to closing costs etc. Seems a huge jump from $15K + closing costs....
> I'd also be interested in seeing the impact this has on the downtown condo market in Toronto - should slow down toronto downtown market by quite a bit as i'd imagine there is a lot of speculation going on.


Looks like the new rules are already having an impact on the people they were intended to impact.


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## FrugalTrader (Oct 13, 2008)

I actually wrote about this topic today. Here are my thoughts on the new mortgage rules

Overall, I think the changes are good, but i'm not as impressed by the investor changes. Gonig from 5% -> 20% down payment for a rental property is quite the change.


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## Financial Highway (Apr 3, 2009)

I also wrote about it today New Mortgage Rules: Good or Bad? 

I think overall it was a nice attempt, but highly doubt it will do much. There were no real changes for new home buyers except that they have to qualify based on a five year fixed rate. I think they needed to increase the minimum down payment from 5% and only this would have slowed down the bubble. Most lenders were already using 5 year fixed rate to calculate the debt ratios.

The 20% down payment for investors is way too extreme and unnecessary.

The only thing I like the the change in loan to value to 90% this will create some buffer and potentially reduce possible default rates. 

Overall it was a nice attempt, but not very effective.


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## Dr_V (Oct 27, 2009)

financeguru said:


> 20% down, means for a typical property $300000, i would have to put down $60K in addition to closing costs etc. Seems a huge jump from $15K + closing costs....


I dunno, I think that this is probably the smartest change of them all.

- investing loans often have very strict loan:collateral ratios, so requiring a 5:1 loan:collateral ratio for an investment property doesn't seem unreasonable to me. More than anything, it's a move to protect the _lenders_ (and, the greater banking industry) from a collapse in asset prices like we saw in the US. 1

- I can't count the number of people I've met over the years who've said to me: "Investing? No way, that stuff is way too complicated!", but then go on to explain how they own 3 _highly-leveraged_ rental properties, and how they're thinking of adding a fourth. People who don't know anything about investing shouldn't be holding stupidly-leveraged positions in any asset, imo.


K.

1. Maybe "collateral" isn't the best phrase to describe how I'm thinking about this, since I suppose that renters could always offer their other (presumably, better-paid-off) homes as collateral. But from people I've spoken to, the banks seem to waive typical debt/service ratio requirements for people investing in rental homes, and this strikes me as what the finance minister is trying to crack down on.


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## Berubeland (Sep 6, 2009)

I personally do not know any investors that don't put 20%-25% down on their investment properties. 

And not to mention they only count 50% of the rental income. 

Commercial Property is even more onerous with 2/3 down usually and 6% interest rates are not unusual (though I have seen 4.75% on 10 year mortgage)

So I'm not really sure what they are doing. I guess this will affect like 5% of buyers 

You know if they really wanted to do something for BUYERS they would decrease the amortization period. But these mortgages are extremely lucrative for the lenders.


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## HaroldCrump (Jun 10, 2009)

Berubeland said:


> You know if they really wanted to do something for BUYERS they would decrease the amortization period. But these mortgages are extremely lucrative for the lenders.


I totally agree.
Amortization should be 25 years or less.
Ideally, 20 years.
At the same time, they can't clamp down on the RE industry either.
There is an entire cross-section of professionals depending on this industry, from mortgage brokers, RE agents, appraisers, etc.
If they were to take a pin to this bubble <cough><cough>, a lot of folks would be upset.


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## Dana (Nov 17, 2009)

Many investors will be unimpressed with the effect the new 20% rule will have on their ROI. Using Financeguru's example, if you put $15k down on a $300,000 property and earn $5k cash flow per year, your return is 33%. If you put $30k down on the same property, your return becomes 16.6%. Ouch! 

This new rule also means investors can purchase fewer properties. Instead of using that $30k downpayment to purchase two investment properties, you can only purchase one. More risk concentrated on fewer tenants and fewer locations.


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## HaroldCrump (Jun 10, 2009)

Dana said:


> Many investors will be unimpressed with the effect the new 20% rule will have on their ROI. Using Financeguru's example, if you put $15k down on a $300,000 property and earn $5k cash flow per year, your return is 33%. If you put $30k down on the same property, your return becomes 16.6%. Ouch!
> 
> This new rule also means investors can purchase fewer properties. Instead of using that $30k downpayment to purchase two investment properties, you can only purchase one. More risk concentrated on fewer tenants and fewer locations.


If that turns out to be true, I would say the policy has been successful!
BTW, in your example, I don't understand how your "return" is any less just because you put more down payment.
More down payment means more equity to begin with and less time to pay off the mortgage on the investment.
It shouldn't change your return at all - if anything your return should be better because you pay less interest overall.


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## Dana (Nov 17, 2009)

HaroldCrump said:


> I don't understand how your "return" is any less just because you put more down payment.
> More down payment means more equity to begin with and less time to pay off the mortgage on the investment.
> It shouldn't change your return at all - if anything your return should be better because you pay less interest overall.


Your return is measured against the actual cash you have invested in the property, not the equity you have. Think of it as a dividend yield. If you pay $10 for a stock with a $1 dividend, your return is 10%. If you have to pay $12 for that stock and the dividend remains at $1 your return is now 8.3%. 

So, if you pay $30k to get into a property your return on investment will be lower than if you pay $15k to get into the same property. 

You are right that the mortgage payment will be lower with the higher downpayment, but not enough to offset the extra $15k of initial investment.


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## HaroldCrump (Jun 10, 2009)

Dana said:


> Your return is measured against the actual cash you have invested in the property, not the equity you have. Think of it as a dividend yield. If you pay $10 for a stock with a $1 dividend, your return is 10%. If you have to pay $12 for that stock and the dividend remains at $1 your return is now 8.3%.
> 
> So, if you pay $30k to get into a property your return on investment will be lower than if you pay $15k to get into the same property.
> 
> You are right that the mortgage payment will be lower with the higher downpayment, but not enough to offset the extra $15k of initial investment.


So RE investment return is calculated differently than other leveraged investments?
You still have to pay off the mortgage on the property at some point...if you made lower downpayment, the interest paid will be higher over the amortization period.
Therefore, lower returns overall.
Less interest means more money in your pocket.

I think you are looking purely at the cash flow perspective, not the true return on your investment.
By considering only the cash flow and ignoring the interest paid out of your income, you are overestimating the true return on your investment.


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## Dana (Nov 17, 2009)

HaroldCrump said:


> You still have to pay off the mortgage on the property at some point...if you made lower downpayment, the interest paid will be higher over the amortization period.
> Therefore, lower returns overall.
> Less interest means more money in your pocket..


Yes, but the interest is a tax deduction against the income. Also, the tenants pay the mortgage off for me. In fact, when considering the ROI on an investment property, investors also consider the reduction in mortgage balance each year in their calculations. So, If you invest $15k, earn $5k in cash flow and the mortgage has been reduced by $2k through normal payments, the ROI would be 46.6%. This is called cash-on-cash-plus. The interest is already included in this calculation as it is paid with the mortgage payment each month. 

My goal as a real estate investor is to tie up as little money as I can in each property and still have it be cash-flow-positive and well-maintained. 



HaroldCrump said:


> I think you are looking purely at the cash flow perspective, not the true return on your investment.


Most real estate investors focus on the cash flow. Any appreciation of the property is the "icing on the cake". Even if the property does not appreciate, as long as the mortgage is being paid down by the rental income, the investor comes out ahead.


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## houska (Feb 6, 2010)

Dana said:


> This new rule also means investors can purchase fewer properties. Instead of using that $30k downpayment to purchase two investment properties, you can only purchase one.


In the corporate world, the leverage ratio (debt to equity) and its interplay with the amount of risk to which the company is exposed have a real impact on the company's credit rating, ability to borrow, and cost of borrowing.

For individuals buying investment property, due to competition for volume by mortgage providers and the distortive role of government-sponsored mortgage insurance, this is not true. For a solid credit rating individual, the only difference in cost of borrowing due to leverage has been whether you need to pay for mortgage insurance or not.

Because this link between risk and cost of borrowing doesn't work the way it should, there is a need for bright-line limits. Might be even better to break the constraints that prevent the link from existing, but that isn't in the cards. So tweaking the limit is the only feasible solution - we limit the leverage.



Dana said:


> ...you can only purchase one. More risk concentrated on fewer tenants and fewer locations.


You are right that your vacancy risk (and credit risk from your tenants) is less diversified. However, your market risk exposure is much reduced and so your total risk exposure is less.


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## houska (Feb 6, 2010)

It's interesting that by and large (not 100%) on this board we agree that the new limits are not unreasonable - i.e., we generally agree that situations that go past these limits are dangerous.

Where perspectives differ is how often this situations were happening, and therefore how big a change this really is and what impact it will have on the market.

If this sweeps the rug out from the markets, we will know there was really a speculative bubble. And while it might be painful, it had to come down. If it just slightly moderates growth, then it means there really isn't that huge a bubble - a bit of overexuberance. 30 or 35 year amortizations, while painful, aren't really that harmful if we're not in a speculative bubble.


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## HaroldCrump (Jun 10, 2009)

I don't believe any of this will "sweeps the rug out from the markets", as you put it.
If that risk were there, Mr. FM would never have done it - that is the last thing he (and his boss) need at this time.
To "sweeps the rug out from the markets" they would have to really clamp down hard, like putting hard limits to amortization periods (25 years, for example), minimum holding time for primary residence properties (3 years or whatever), capital gains tax on sale of primary residence, mandatory energy audit (already proposed last year) and similar measures.


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## Financial Highway (Apr 3, 2009)

I am not sure if I am on the shortening the amortization boat. I personally don't like 35yrs terms, but fail to see how this would effect others. It will cost the individual a lot more to have a 35yr term over a 25 year term, but I dnt see the danger of having a 35 year term. 

I'd much rather see a higher down payment requirement, maybe 10%, before purchasing a home. Increasing the down payment requirement will force people to save more before jumping in and it will provide a large buffer in case of a market correction.


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## MoneyGal (Apr 24, 2009)

FH: I think this is a timing issue. 

Requiring a larger downpayment theoretically stalls the purchase point, as people need to spend longer building their savings before purchasing. 

Reducing the amortization period doesn't change the purchase point directly, but requires that the purchaser be able to sustain larger payments over the life of the mortgage. It may shift the purchase decision later in time until people have higher salaries that are more able to carry mortgages (especially when rates rise). 

All things being equal, I'm in favour of shorter amortizations - but I'm thinking about the exit points, not the entry points, to home ownership. People are way too willing to deprive their future selves to the benefit of their current selves. In general, we have too many people nearing or in retirement with outstanding mortgage balances and/or insufficient private retirement savings pools. Shortening amortizations theoretically solves for this issue, by allowing or requiring people to finish paying their mortgages with time in the labour force left to accumulate retirement savings.


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## CanadianCapitalist (Mar 31, 2009)

I wonder what effect boosting down payment requirements on rental properties will have on prices. From all accounts, a number of real estate investors take equity out of their residence, purchase a rental property with 5% down (or less). With ever increasing property prices, they could then take equity out of their rental property purchase another one and so on. The new rules make such speculation impossible but I've also been told that few banks were willing to give 95% loans on rental properties anyway. So, I don't know what to make of these new rules.

http://www.canadiancapitalist.com/new-mortgage-rules-and-rental-properties/


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## Harper77 (Nov 11, 2009)

Cal said:


> Any thoughts on the proposed changes to RE/mortgages?
> 
> http://www.globeinvestor.com/servlet/story/GI.20100216.escenic_1469432/GIStory/
> 
> ...



I didn't think 5yr fixed was that high...??!! I just check and it ranges approx 3.60ish......


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## Cal (Jun 17, 2009)

Harper77 said:


> I didn't think 5yr fixed was that high...??!! I just check and it ranges approx 3.60ish......


I just used the rate in the article I read.

However that isn't really the point to the thread. More so that borrowers will have to be qualified at a higher rate. As rates have nowhere to go but up.

I think it is good for the lenders to have to qualify the borrowers at the higher rate now, before rates go up, to protect the borrowers. However shouldn't the lenders do that anyways....at least I would want to ensure that I got paid back borrowed funds.

I guess we will know by year end how fast and by how much rates are going to increase.


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## wealthyboomer (Feb 1, 2010)

MoneyGal said:


> FH: I think this is a timing issue.
> 
> Requiring a larger downpayment theoretically stalls the purchase point, as people need to spend longer building their savings before purchasing.
> 
> ...


Why does government feel they should dictate the lives of people. Are people really wanting a 'NANNY' state? A government that chooses your every choice for you? Why can't people be responsible for their own choices. If people are nearing retirement and have outstanding mortgages, etc. Guess What...it was THEIR choices in life that got them there.


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## wealthyboomer (Feb 1, 2010)

CanadianCapitalist said:


> I wonder what effect boosting down payment requirements on rental properties will have on prices. From all accounts, a number of real estate investors take equity out of their residence, purchase a rental property with 5% down (or less). With ever increasing property prices, they could then take equity out of their rental property purchase another one and so on. The new rules make such speculation impossible but I've also been told that few banks were willing to give 95% loans on rental properties anyway. So, I don't know what to make of these new rules.
> 
> http://www.canadiancapitalist.com/new-mortgage-rules-and-rental-properties/


I know of at least 120 ways to finance a property and they don't always involve just a first mortgage held by a chartered bank. True INVESTORS will either know the ways, or find them. So it shouldn't have much of a bearing on their portfolios. They will become more 'creative'.

Besides, there are 'Banks' that will LOAN you the downpayment. That takes away some of he projected fear of having the save more for a downpayment.


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## MoneyGal (Apr 24, 2009)

Well, I suppose we could always move to 99 year mortgages like Japan, or England.


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## HaroldCrump (Jun 10, 2009)

wealthyboomer said:


> Why does government feel they should dictate the lives of people. Are people really wanting a 'NANNY' state? A government that chooses your every choice for you? Why can't people be responsible for their own choices. If people are nearing retirement and have outstanding mortgages, etc. Guess What...it was THEIR choices in life that got them there.


No, sorry, the Govt. has every right to impose such rules if it has the right to use my (and your) tax money to bail out the same banks when they fail because of bad loans.

By your logic, the Govt. should NOT help save large corporations from failing, like GM, Chrysler, JP Morgan, Bank of America, etc.
If you don't want a nanny state, first stop the bailout of those large corporations.
In a world like that, all provincial, municipal and local governments would be required to balance their budgets.
Provinces like ON should not be allowed to run deficit budgets and then turn to Ottawa for help, cities like Toronto should not turn to the province for bailout, etc.

You can't expect the govt. to let banks and brokers run amuck issuing irresponsible mortgages that bankrupt large financial institutions who then turn to the govt. for bailout money who simply turn around and raid your and my pocket to squeeze more tax dollars.


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## steve_jay33 (Aug 29, 2009)

Love the new rules coming in. It will especially clamp down on the flippers. 
Hopefully if more rules are implemented it will stagnant the crazy home prices in major cities.


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## financeguru (Jan 18, 2010)

Berubeland said:


> I personally do not know any investors that don't put 20%-25% down on their investment properties.
> 
> And not to mention they only count 50% of the rental income.
> 
> .


Berubeland,
Why would it be advantageous for someone to put down more equity than necessary in an investment property? Is this because when investors have less equity than that the property is cash flow negative? 

My understanding is that if you are buying an investment property with the intention to rent, you should put in the minimum principle possible and get the highest term mortgage (35 years) so that your cash flow is positive and all the interest becomes tax deductible.
Also what is meant by investors count 50% of the rental income?


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## Potato (Apr 3, 2009)

Dr_V said:


> I dunno, I think that this is probably the smartest change of them all.
> 
> - investing loans often have very strict loan:collateral ratios, so requiring a 5:1 loan:collateral ratio for an investment property doesn't seem unreasonable to me. More than anything, it's a move to protect the _lenders_ (and, the greater banking industry) from a collapse in asset prices like we saw in the US. 1



Just to nit-pick, the lenders were already protected by the CMHC insurance. This is to protect the _system _as a whole. Speculators act as accelerants: as the market is going up, they see it's going up and want in, so they buy, which drives the market up higher. It also works on the way down though. They're destabilizing influences. It never made sense for the taxpayer to insure them in the first place.


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## Accter (Jan 29, 2010)

Can't say I'm a big fan of the new rules and the proposals out there from some of you are just plain nuts. The logic of this all kind of escapes me. So the market went up so lets make it more difficult for new homeowners to purchase? Yes the market will cool abit but if you are in your 20s this is a knife in your hopes of getting a home.

Really lets assume that you are a solid young couple that can save 10% a year. Lets assume in your 20s you already earn the national average family income of 65K. That means you can save 6.5K a year. To buy that "normal" 300K starter home right now at 5% you have to save for 2.5 years. Up that to 10% or higher and it gets to be 5-10 years of saving before you can start ownership. How is this going to allow people to pay off their mortgages at a younger age?

Yes more open rules increase the house prices but there is natural innate growth there as well so if you close down the rules you will slow growth but you will really crush any individual trying to enter the market.

Anybody that already owns a house is already in the market and so simply rolls with the up and down, its the people entering the housing market that will most be hurt.

Personally I got in the market in my early 20s with a 5% mortgage. When I met my now wife she had just bought a condo with $20 a 40 year mortgage. With a little financial wizardry we turned this into 3 rentals and a nice house for us while still in our 20s. It has been over 2 years and the market has been good to us (yes we are still in our 20s). If those rules had been tighter I would probably still be renting (as friends of mine are with similar jobs) and would be hundreds of thousands of dollars poorer in networth. Do you have any idea what our future is because of the real estate market? Why take that away from future generations?

And no, I sleep easy at night and my leverage has dramatically decreased (at one point we were at 5:1 but now it is around 3.5:1) and will continue to each year as long as the rules haven't tightened up so much by the time the renewals occur.


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## Financial Highway (Apr 3, 2009)

MoneyGal said:


> FH: I think this is a timing issue.
> 
> Requiring a larger downpayment theoretically stalls the purchase point, as people need to spend longer building their savings before purchasing.
> 
> ...


I see the point from a financial planning angle, but in terms of protecting the economy and housing market a shorter amortization will not have an effect. And it is even worse for real estate investor who purchase rental properties, shorter amortization would mean increase in rent prices for a positive cash-flow. 

If someone chooses to rush into purchasing a home and pay a few hundred thousand extra in interest payments that is their issue, but if they just put in 5% and we have a correction prices drop and they'll be stuck with an upside down mortgage ......here come the defaults......and everyone is in a mess. I agree with your statement in terms of financial planning, but to protect the real estate market I think increase in down payment is needed. The ideal situation would be at least 10% down and 25yr amortization.


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## canadianbanks (Jun 5, 2009)

The problem as always is government meddling in a market that is supposed to be free, and I'm not talking about the recent changes. The big problem is that CMHC is backed by us taxpayers. Do you think that CHMC would insure all these 5/35 mortgages if it wasn't for the government guarantee (read taxpayer) behind it? Do you think that the banks will lend those 5/35 mortgages to anybody if they weren't insured? No, of course not. So the mandate of CHMC is affordable housing for everybody, but all they do is make housing more and more unaffordable. 

Even if the low interest rates we have are here to stay for several years (not likely), and no changes are made to the required downpayment and amortization periods, the Canadian RE market will hit a wall very soon. Most who bought in the last 3-4 years with 5/35 or 0/40 will be underwater for many, many years to come, and as you know when you are in such a situation you cannot simply mail the keys to the bank as you can in many US states...


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## Berubeland (Sep 6, 2009)

financeguru said:


> Berubeland,
> Why would it be advantageous for someone to put down more equity than necessary in an investment property?
> 
> *Banks will not lend without a sizable down payment on a property that is not a principal residence. If you buy a cottage I believe they require 50% down*
> ...


*The lender will only count 50% of the rental income as income when qualifying you for the loan even if the property is cash flow positive. This has two effects first it lowers your actual income received and also requires a higher down payment to qualify 

On bigger properties a personal guarantee is required even if buying through a company. For example on the townhouse property I manage that is very cash flow positive the owner must put up a personal guarantee of $900,000 the purchase price was 2,300,000 the mortgage is about 8000 per month and the expenses are about 5000 per month and positive cash flow is about 12000 per month. Total gross income is about 25000 per month *


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