# Avoiding CMHC young couple...



## argos1 (Nov 21, 2010)

We are in our young 20's and our first home purchase together (I have owned a property in the past)

We want to know what is the financially smart thing to do right now in our situation.

We make an annual combined salary just over $100,000k

Both student loans paid in full, wedding paid in full, zero debt, 2 full time careers.

We have purchased a house north of Toronto new development for $500,000.

$50,000 has been put down as a deposit on the house.

Our house closes in 6 months and we have about $20,000 in savings right now, with 6 months to save money.

We do not want to pay CMHC, but probably will have aboout $40,000-$50,000in savings by closing with about $30,000 in a LOC.

Would you go with a downpayment of 10% and ay the CMHC.

or should we dip into our LOC to cover up the 20%? and live with basically no money in the savings accounts with a little debt to avoid CMHC?

What would you advise?


----------



## FrugalTrader (Oct 13, 2008)

argos, if it was me, I would pour the savings into the house to avoid CMHC. With your savings habits, you'll build that fund back up pretty quickly.


----------



## the-royal-mail (Dec 11, 2009)

Yeah I agree. 

The risk to keep in mind if that adversity strikes between down payment time and when you build up your savings in the future (how will this be possible with this type of mortgage?), you will have less credit available to you and no cash. So you will immediately be using credit to pay the basics. Not good.

Had you of posted here earlier, I would have recommended that you hold off on your purchase for a year to build up more savings for yourself so as to 1) avoid CHMC and 2) have a safety cushion in case something happens right after you move in. Sh-t happens.

Welcome to the forum btw!


----------



## FrugalTrader (Oct 13, 2008)

Note that your deposit counts as part of your down payment, so $50k deposit + $50k savings = 20% down payment.


----------



## argos1 (Nov 21, 2010)

Thanks.....

However waiting longer is no fun plus renting to me right now is wasting money. Our property was purchased at $500k and now selling closer to $600k, I dont think it was a poor investment, just GTA pricing is so high!

Basically is it better to move in with a 10-15% downpayment and a $20-$30k in the bank for an emergency fund and put extra towards principal but pay CMHC.

or

Put 20% down have no money in the bank no savings and live off LOC but avoid CMHC.


----------



## DavidJD (Sep 27, 2009)

Also - since you are both financailly disciplined, any lender should be fawning over you and your business. Now is the time for them to forge a relationship with you. So - if you are going to have a large mortgage you should be very determined to get the best rate/package available. Local managers only have so much to offer but any lenders' 'roving mortgage specialists' can usually do much better. They can get you a low rate and waive a bunch of up front costs. Definately shop around and let them know that you are. I ended up with another lending institution altogether and apart from the great rate, I am being treated like a king and get really excellent service.

I would recommend you and your partner take a good look at your financial services and costs/fes and see where you can get further perks/costs waived so your savings includes more than just a great mortgage rate.

Good luck.


----------



## kcowan (Jul 1, 2010)

I second that motion. Shop around for an FI when getting your mortgage. Go with 20% down. Look at an accelerated repayment schedule too. With your combined income and savings discipline, you can look forward to a secure financial future.

Welcome to our forum. How far north?


----------



## Berubeland (Sep 6, 2009)

CMHC Insurance is a very large extra charge and because it's added to your mortgage people don't realize how much extra they have to pay over time. 

It's probably better to go the LOC route.


----------



## Taxsaver (Jun 7, 2009)

Does that insurance keeps existing until you have completely paid off the mortgage?


----------



## w0nger (Mar 15, 2010)

Taxsaver said:


> Does that insurance keeps existing until you have completely paid off the mortgage?


that's a good question... if a home-owner still doesn't have 20% equity in their home by the time it comes to renew their mortgage, do they have to pay CMHC again?


----------



## Jungle (Feb 17, 2010)

Taxsaver said:


> Does that insurance keeps existing until you have completely paid off the mortgage?


Yes. 



w0nger said:


> that's a good question... if a home-owner still doesn't have 20% equity in their home by the time it comes to renew their mortgage, do they have to pay CMHC again?


No

My question is this: What happens if you buy your house at $500k. Mortgage is $400K (No CMHC) on five year term. 

Five years passes, your mortgage term is up and needs a renewal. Housing market has dropped, house is worth $250K, mortgage is still $350k+??


----------



## HaroldCrump (Jun 10, 2009)

I suppose it depends on _how_ the CMHC insurance is paid for.
If it is rolled into the principal amount of the mortgage, it will get amortized like the rest of it and you will be paying for it until the last payment.
Or you can make that payment up-front and not roll it into the mortgage.
I guess lenders quietly roll it into the principal because that works better for them, unless you tell them not to.


----------



## the-royal-mail (Dec 11, 2009)

Jungle said:


> Five years passes, your mortgage term is up and needs a renewal. Housing market has dropped, house is worth $250K, mortgage is still $350k+??


Yep. It's the inherent risk of owning real estate. You are responsible to pay back the bank, whatever they handed over to purchase the house on closing day.

Apartments do not carry this risk.


----------



## JayRoc (Apr 4, 2009)

How much does the insurance amount to? Is it a fixed %age?


----------



## Berubeland (Sep 6, 2009)

for premiums go here 

http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm

Plus if I'm not mistaken there's also an application fee. 

I'm not sure I'd want to be self employed with a 90% LTV at a 4.75% premium cost.


----------



## JayRoc (Apr 4, 2009)

Thanks Berube, and definitely agree; those are high rates.


----------



## Sustainable PF (Nov 5, 2010)

If it is feasible, you may want to have the (not always comfortable) conversation with your relatives that may be able to lend to you at or close to inflation. Write up a short term contract where the payments are defined and scheduled and the interest added. It sounds like your relatives will recognize you and your spouse are financially responsible and reliable and that they WILL get their money back, on full, on schedule.

Figure out how much you'll save yourselves in the upcoming months and ask for the rest. 

If this is not feasible, use the LOC and pay it off ASAP (as it sounds like you would).

Avoid this tax at all cost either way you approach it. 

Congrats on the new house!


----------



## argos1 (Nov 21, 2010)

family help is not an option.....

I was reading that there is a 10% refund to CMHC when buying an energy star home, which ours qualifies.....small silver lining.

What if we paid the full CMHC penalty up front without adding to mortgage, does that make more financial sense?

It seems unsubstanable to not need CMHC without going into serious LOC debt, in our situation.

That sucks!


----------



## FrugalTrader (Oct 13, 2008)

FrugalTrader said:


> Note that your deposit counts as part of your down payment, so $50k deposit + $50k savings = 20% down payment.


Argos, as mentioned, if you use your deposit + savings at time of closing, it looks like you'll have enough to avoid CMHC.


----------



## Taxsaver (Jun 7, 2009)

HaroldCrump said:


> I suppose it depends on _how_ the CMHC insurance is paid for.
> If it is rolled into the principal amount of the mortgage, it will get amortized like the rest of it and you will be paying for it until the last payment.
> Or you can make that payment up-front and not roll it into the mortgage.
> I guess lenders quietly roll it into the principal because that works better for them, unless you tell them not to.


From what I understand from what you wrote is that the insurance fee is just a one initial, one-time fee.


----------



## MoneyGal (Apr 24, 2009)

It is an initial, one-time fee - just like the cost of your house is an initial, one-time fee. 

However, because the CMHC premiums can be thousands of dollars, many purchasers pay them as part of their overall mortgage (i.e., the one-time fee is added to the mortgage balance and the total loan is amortized), as opposed to paying them upfront. 

Which, when you think about it, makes sense - if you don't have enough money to avoid CMHC premiums, you are unlikely to have enough money to pay the CMHC premium separately from your mortgage.


----------



## argos1 (Nov 21, 2010)

Well yes as of closing I will have the $100k to avoid CMHC, but thats all!

that leaves me with nothing for closing costs ($10-$15k)

nothing to furnish ie appliances furniture (another $10k)

and no emergency savings.

All I have is a LOC

is that the wise idea?


----------



## Taxsaver (Jun 7, 2009)

argos1 said:


> All I have is a LOC
> 
> is that the wise idea?


It depends how much LOC. For instance, $15K in LOC would be like a monthly payment of $550. If you add the mortgage...


----------



## FrugalTrader (Oct 13, 2008)

When we built, although we had some furniture from the last house, there were rooms that went empty until we saved enough to furnish them. I think our living room only had a fireplace until about 12 months in.


----------



## kcowan (Jul 1, 2010)

Our first home had cardboard boxes for end tables in the LR and a used kitchen suite, no diningroom suite, only one bed in a 3 BR home...etc. Took about 2 years to fill it up out of free cash flow.


----------



## the-royal-mail (Dec 11, 2009)

argos1 said:


> Well yes as of closing I will have the $100k to avoid CMHC, but thats all!
> 
> that leaves me with nothing for closing costs ($10-$15k)
> 
> ...



I don't believe that it is. That's why I always advocate for the following order of operations as people go through life:

1. establish 3 tiers
2. if something major such as a new baby or home purchase is anticipated, save in advance to pay for this (independent of the 3 tiers)
3. only once items 1 and 2 established, should you then put a down pmt down or make the purchase decision

What good is an empty house if you have no furniture and no money to operate the household? Imagine losing your job or suffering other adversity after you've just put down every last penny of your money towards something like this. Without the 3 items mentioned above, you are putting yourself in serious risk very quickly. And getting a job pumping gas won't be enough to sustain yourself. It will take years to recover after getting back on your feet.


----------



## HaroldCrump (Jun 10, 2009)

This post also goes to show the madness of the real estate market.
Which was my point on that thread about why super low interest rates are bad.
After buying the house, people are left with nothing. Not even enough to buy used furniture.
And for the next several years, the lion's share of their net income will go towards servicing the debt on the property and all the furnishings.
And right when they are starting to breathe again, the interest rates will go up and the claw will tighten again.


----------



## Y&T2010 (Dec 29, 2009)

Yeah, I agree. I would hate to pay more money to anyone except for myself 

That's good your closing date is in 6 months! (Is it a new development?) You got lots of time to save your money.


----------



## Pigzfly (Dec 2, 2010)

Along the lines of the "appliances and furniture cost money" theme:

Ensure you have a few hundred dollars kicking around (or access to) for the first month or two you are in your new place. Every time I move I feel like I live at Canadian Tire for a week, even after moving into a brand new place. 

Things like missing lightbulbs, your garbage can won't fit where there's space for it, cleaning products, turns out you don't own a mop, you need to grease some hinges, etc etc. This will be especially a problem if you have both been living with your folks for awhile. 

All in all - yes, houses are expensive and that sucks, but if your risk-tolerance is okay and you can see yourself giving 5 digit figures away to your landlord's pocket, buying is a good choice. 

100K down on 500K doesn't sound terrible (I grew up in Vancouver), best of luck with getting that bad boy paid down some! And congrats on the marriage.


----------



## OhGreatGuru (May 24, 2009)

argos1 said:


> Thanks.....
> 
> ...
> 
> .


_
OTOH, from an estate planning point of view, a good case case be made for a young couple to life insure their largest asset/debt._

Please ignore my post. i was confusing CMHC insurance with mortgage life insurance.


----------



## HaroldCrump (Jun 10, 2009)

OhGreatGuru said:


> OTOH, from an estate planning point of view, a good case case be made for a young couple to life insure their largest asset/debt.


But CMHC doesn't insure you...it insures the lender.


----------



## OhGreatGuru (May 24, 2009)

HaroldCrump said:


> But CMHC doesn't insure you...it insures the lender.


My Bad. You're quite right. I was confusing it with mortgage life insurance.


----------



## marina628 (Dec 14, 2010)

My husband and i bought a cheap semi for our first home and lived in it 9 years until it was paid for.Our second house was a brand new bungalow on a 30ft lot and we lived there for 9 years as well and when we moved this last time to our $600,000 house we had a $300,000 Cash Payment and I had $14,000 for top of the line appliances and an additional $60,000 cash for the basement to get finished and some furnishings .First shock i had was house insurance ,I went from paying $700 a year to $1421!Double the house = double the insurance.My water bill went from $110 every quarter to $180 a quarter thanks to the fancy hot tubs and shower room my kids love.
I have a disability so the cleaning bill has doubled if not tripled.We use weed man this is also double now!

This couple sounds like my niece and nephew ,they bought the most expensive house they could buy 8 years ago when they were two people earning $110,000 a year.Baby #1 comes along and they see cut in income for a year then the day care bill.19 months later baby#2 comes along and they realize daycare for two kids is $1300 a month after taxes , add the diapers etc and they are down quite a bit of money.They are struggling so badly ,I rather have a cheaper house and sleep at night.

They bought expensive furniture and by time kids were five you can see teeth marks and writing on every chair of their $8000 dining table.
I had the same furniture from 1986 -2001 , I don't know if you can remember how the brick would sell a sofa ,love seat ,coffee ,end tables lamps ,kitchen table and chairs as a set but we paid $1200 to furnish our entire place .

My advise to this couple is make do and do without until you have LOC paid off and some savings in the bank.I think you pay CMHC on the amount of loan over the 80% not entire thing .I know in April i was juggling three houses until my old home sold and TD offered us an option as we were super tight to come up with last $20,000 .Thank god we sold off a house and only had to carry the three of them for 10 weeks.


----------

