# New Mortgage Rules



## kubatron

New mortgage rules:

Maximum refinance 85% from 90%

Maximum 30 year amortization

no more CMHC-insured HELOCs


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## onomatopoeia

http://www.cbc.ca/money/story/2011/01/17/flaherty-mortgage-changes.html



> * The maximum number of years the government will back a mortgage was lowered from 35 to 30.
> * The upper limit that Canadians can borrow against their home equity was lowered to 85 per cent from 90 per cent.
> * Government insurance backing on home equity lines of credit, or HELOCs, has been removed.


Opinion?

At first I didn't like it, but if it limits the speculators i'm happy. I have a feeling that the HELOC thing will be complained about by speculators, and not understood by non-investors.

I'm not a fan of the rules changing every 2 years however i like getting rid of the 40 year....35 seemed pretty standard though

The 40 year mortgage was around for a couple of years, and is now down to 30. for someone who "qualified" for just the 40 year in 2007, next year (2012) might be tough at refinance time when they are forced down to a 30 year.....


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## andrewf

Will this impact rates/availability of HELOCs that are under 80% LTV?


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## briant

I think its great what Flaherty is doing. Household debt is alarmingly high in Canada and this should help bring it down. 

I also agree with shortening amortizations. I wonder how much of an effect this will have on prices?


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## Four Pillars

I'm not sure what to make of this rule change. 

I'm not convinced that changing the amortization maximum (up or down) has all that much influence on bank and house buyer behaviour.

Part of the problem, is that some buyers will just borrow as much as they can from the bank and then buy as much house as they can with that money.

Banks can loosen their lending criteria and compensate for this amortization change.

So I don't know - in theory it should help a bit, but it might not be a significant change.


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## MoneyGal

Yes, but it transfers more risk to the banks. 

If CMHC takes on less risk, in order for the conditions to remain the same (and for there to be no impact on the housing market writ large), all else being equal the banks will have to voluntarily absorb *more* risk. I'm not sure how much appetite for this there is among the bank cohort. 

And I recognize that all else is almost never equal.


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## Four Pillars

MoneyGal said:


> Yes, but it transfers more risk to the banks.
> 
> If CMHC takes on less risk, in order for the conditions to remain the same (and for there to be no impact on the housing market writ large), all else being equal the banks will have to voluntarily absorb *more* risk. I'm not sure how much appetite for this there is among the bank cohort.
> 
> And I recognize that all else is almost never equal.


Are you talking about the HELOC change? I was referring to the amortization change.


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## MoneyGal

Four Pillars said:


> Banks can loosen their lending criteria and compensate for this amortization change.


I was talking about this quote from you. If banks loosen their lending criteria, they are taking on the risk that CMCH has abandoned.


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## DavidJD

So HELOC levels will be reduced to the banks' comfort level since no CMHC insurance is available for higher ratios...so for a 25%+ equity balanced HELOC - no change?


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## kubatron

remember one thing; cmhc may be forced to enact this legislation but it does not mean canada guaranty or genworth will. example, as of last april cmhc had to enact the business-for-self guideline (which makes ZERO sense: if in business for more than 3 years you must prove real income) - but genworth still goes based on a "stated" income model for clients with 3+ years experience

(reason why I say what I said - whoever here is BFS will know that expenses/writedowns etc are a part of life, so is the inherent risk of being self-employed. we get no benefits, we have no pension etc., why should we show as high an income as our full-time peers and gain no taxation benefit and no other benefits as well?)


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## Four Pillars

MoneyGal said:


> I was talking about this quote from you. If banks loosen their lending criteria, they are taking on the risk that CMCH has abandoned.


Ahh yes, now I remember. 

I don't think it matters who takes on the risk, if the risk is not being reduced. That's my point - the change is amortization is supposed to reduce risk, but it can be circumvented.


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## MoneyGal

Look at it the other way, though: if the banks do NOT take on more risk, the same conditions cannot prevail and the housing market will be tightened. 

For lending conditions to remain the same, given the new rules, the banks (in aggregate, for consumers affected by this change) MUST take on new risk.


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## CanadianCapitalist

andrewf said:


> Will this impact rates/availability of HELOCs that are under 80% LTV?


I'm interested in this as well. There must be a number of forum members who have borrowed against their home to purchase investments and such. What happens to these lines of credit? Will the rates rise now that the Government has removed CMHC backing? Have you seen any informed discussion on this in the media?


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## sprocket1200

truly, terrible news. now more people will be saving thousands of dollars of interest and not able to consolidate their credit card debt into the mortgage to free up credit card balances for more material spending.

many of us on this forum just got relatively poorer...


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## Four Pillars

CanadianCapitalist said:


> I'm interested in this as well. There must be a number of forum members who have borrowed against their home to purchase investments and such. What happens to these lines of credit? Will the rates rise now that the Government has removed CMHC backing? Have you seen any informed discussion on this in the media?


Here is the press release

http://www.fin.gc.ca/n11/11-003-eng.asp

All it says about the HELOCs is:

_•Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers._

It seems to me that this change could be by far and away the largest change of the three, since HELOCs are pretty common I believe.

I don't know anything about bank lending and the effect of the CMHC on HELOCs, but the questions I have are:

1) Will the banks reduce the HELOC availability? ie reduce the percentage of your house you can borrow against. This seem like a logical step to me.

2) Will this change the interest rates for HELOCs. It's been pretty common for home owners to get prime or prime + 0.5%, but that could change. Depending on other factors (salary etc), perhaps some people could be looking at much higher interest rates? I'm not sure if this is realistic or not.

Carrick has an online chat today - maybe I'll ask him.


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## MoneyGal

The backgrounder adds more detail:

_Many lenders now offer multiple loans or a multi-segment loan secured against a borrower’s home. *If a loan or a segment of a multi-segment loan is in the form of a revolving line of credit that does not amortize over time, it will no longer be eligible for government-backed insurance.* However, with established scheduled principal and interest payments, a loan will continue to be eligible for government-backed insurance, provided it meets the underwriting standards set by the mortgage insurer._

(bolding added)

Seems to me a lot of these non-amortizing lines of credit will either (1) have the interest rate raised (to compensate for the increased risk the bank is now taking on) or (2) be converted to amortizing lines requiring regular repayment. 

Consumers may be offered the option of choosing one scenario over the other, or may be required to accept a new scenario which may combine elements of both.


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## CanadianCapitalist

New mortgage rules will bite 



> Now, the government is withdrawing its insurance backing of these lines of credit. Lenders will be on their own, and it’s reasonable to expect them to be a lot tougher about who gets one. As for people who already have home-equity lines of credit, Mr. Cocomile said they should be unaffected.


I'm not sure I understand. If existing loans are getting riskier, how can the rates on existing SLOCs remain unaffected? Banks were handing out SLOCs as if they were candy back when credit was cheap. Will they stop at just tightening their lending standards to new clients?


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## MoneyGal

CC - I expect in practice it will depend on the customer's existing relationship to the bank. If the relationship is thin, expect the rate to be raised / loan to be converted.


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## Four Pillars

CanadianCapitalist said:


> New mortgage rules will bite
> 
> 
> 
> I'm not sure I understand. If existing loans are getting riskier, how can the rates on existing SLOCs remain unaffected? Banks were handing out SLOCs as if they were candy back when credit was cheap. Will they stop at just tightening their lending standards to new clients?


I'm not clear on if it is just NEW HELOCs that are not eligible for the insurance or existing ones as well? I don't see how they can just "cancel" the insurance on all the old HELOCs. Plus it doesn't jive with their statement that existing HELOCs won't be affected.

I'm thinking the change only affects new HELOCs.


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## CanadianCapitalist

Four Pillars said:


> I'm not clear on if it is just NEW HELOCs that are not eligible for the insurance or existing ones as well? I don't see how they can just "cancel" the insurance on all the old HELOCs. Plus it doesn't jive with their statement that existing HELOCs won't be affected.
> 
> I'm thinking the change only affects new HELOCs.


Here's some explanation from TD Economics:



> The other two changes are more likely to impact consumer durables and housing-related spending. Fro instance, household usage of HELOCs is mostly directed towards renovations, vehicle purchases, and debt consolidation. Yet, on that front as well, the impact is not expected to be large. Our macroeconomic forecasts already embedded a significant slowdown in household debt accumulation and consumer durable spending. The withdrawal of HELOC insurance may cause some substitution toward more traditional mortgages, but very few financial institutions insure their HELOC portfolios. As such, the change is unlikely to register significantly on the aggregate lending scale. Moreover, less than a fifth of refinancing deals are high loan-to-value (LTV >80%), and lowering the LTV threshold to 85% likely impacts less than a tenth of refi loans through lower amounts and/or alternative vehicles. All said, aside from some distortion on the timing of some heavily credit dependent activities, the policy changes do not alter our forecasts.


http://www.td.com/economics/comment/pg011711_CMHC_rules.pdf


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## MoneyGal

Read the backgrounder. I read it as a requirement for non-amortizing loans to convert to retain government insurance.


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## Four Pillars

CanadianCapitalist said:


> but very few financial institutions insure their HELOC portfolios.


Thanks - that clarifies things a lot.

It also indicates to me that this change is very minor, if most banks aren't getting insurance in the first place.


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## dilbert789

What happens to the guy that took a 5% down mortgage for 35yrs and now has to refinance? After his 5yr term he won't have paid down 10% let alone be up to 15% of his house value. 

We did a 35yr 10% down and after our 5 years we might not be at 15%(ignoring any extra payments, or house value increase). Do I just need to come up with this extra cash at renewal time now?


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## jamesbe

Get a 30 year amortization, or shorter....


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## dilbert789

dilbert789 said:


> What happens to the guy that took a 5% down mortgage for 35yrs and now has to refinance? After his 5yr term he won't have paid down 10% let alone be up to 15% of his house value.
> 
> We did a 35yr 10% down and after our 5 years we might not be at 15%(ignoring any extra payments, or house value increase). Do I just need to come up with this extra cash at renewal time now?


I read this as if it was a down payment, not refinancing to increase your mortgage amount and put cash in hand.


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## kubatron

dilbert789 said:


> What happens to the guy that took a 5% down mortgage for 35yrs and now has to refinance? After his 5yr term he won't have paid down 10% let alone be up to 15% of his house value.
> 
> We did a 35yr 10% down and after our 5 years we might not be at 15%(ignoring any extra payments, or house value increase). Do I just need to come up with this extra cash at renewal time now?


absolutely not. your contract would not stipulate you needing to put more money down at renewal time, you just continue on.

remember, this is for *new* applications not existing.


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## kubatron

Four Pillars said:


> Thanks - that clarifies things a lot.
> 
> It also indicates to me that this change is very minor, if most banks aren't getting insurance in the first place.


Scotiabank offers a STEP mortgage up to 90% - can be combo mortgage + line of credit.

As you say, MOST banks go to 75 some even 65%. MCAP offers a HELOC to 80%. This HELOC change will not do much at all since most are not insured.

One thing I'm surprised about that isn't discussed is how come 5% cash-back mortgages are still OK? When the Gov't reduced the 0-down / 40-year, they allowed Scotia/National and Laurentian to provide "free down payment" mortgages which mean a client can simply "get" the 5% down from the lender, send it to the lawyer on closing, and pay it back (usually 2x more) with a higher rate.

Why is this ok?? I can't get an answer from my colleagues.


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## marina628

My friend did a 5% cash back with TD Bank ,they had to have the 5% down but got the down payment back 1 business day after the house closed.I can't understand how banks can do that either.
We have investment properties and we have to put down 20-35% once you own more than 2 homes.Most investors don't want to pay CMHC so doubt it will affect investors in the market.Probably the people who will be hurt are those trying to buy that first home.
I have never had more than 25 year amortization and I know many who had to take 35 year to qualify on paper but pay extra money each month and probably closer to the 20-25 year amortization .


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## Plugging Along

I think a shorter amortization will take many out of the market who probably shouldn't be in the market. It shouldn't take more then 25 or 30 years to pay off your mortgage. If it does, then it's probably a little too tight for you buy at that time.

I've heard of a few people that did get the 40 year because they 'had to get in before they got priced out'. They were sure that their incomes would increase, so it was just a short term. Well, market prices have since gone down, one of them lost their job, and their lost everything. 

I know there are exceptions, but I think having these stricter rules will help them in the long run.

For investors, well, I know we put more than the minimum down, and we just have to save more before we buy our next place.


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## Sustainable PF

Four Pillars said:


> Thanks - that clarifies things a lot.
> 
> It also indicates to me that this change is very minor, if most banks aren't getting insurance in the first place.


Banks had no need to insure against the HELOC as long as CMHC was doing so for them. Unless i'm reading this incorrectly that is ... 

My guess is that we'll see worse HELOC rates. The banks won't take a hit (ever) for the client and if they are forced to insure the additional loans people take out against the residence we'll likely see interest rates rise.

Seems logical to me ... but I may have missed something.


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## investnoob

marina628 said:


> My friend did a 5% cash back with TD Bank ,they had to have the 5% down but got the down payment back 1 business day after the house closed.I can't understand how banks can do that either.
> We have investment properties and we have to put down 20-35% once you own more than 2 homes.Most investors don't want to pay CMHC so doubt it will affect investors in the market.Probably the people who will be hurt are those trying to buy that first home.
> I have never had more than 25 year amortization and I know many who had to take 35 year to qualify on paper but pay extra money each month and probably closer to the 20-25 year amortization .


I got a 5% cash back mortgage as well. There was a credit check. Also I needed to provide a statement of income, and proof that I had funds to cover closing costs. Finally, the mortgage payment, taxes and insurance amounted to 33% of gross income and I had only one small outstanding student loan payment. The mortgage is amortized over 25 years, but I've accelerated the payments.

Uh, not sure what my point is....I guess its that these loans tend to be portrayed as ticking time bombs. I'm not necessarily convinced. I've had my home for 5 years, and now my LTV is around 78% while the house has appreciated by about 15%. I never struggled with the payments as even with the mortgage I had plenty of disposable income left over.

So, I don't know, I'm not sure if there will be bust similar to what was experienced in the States. Does anyone have the inside scoop on the Canadian mortgage industry? Are there a lot of NINJA and Liar Loans out there? It's my understanding that it was those types of practices that created a lot of trouble.


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## dilbert789

I think there's some confusion on what really the change is here.

Let me know if I'm wrong here, but if you are getting a new mortgage nothing in this change will prevent you from getting that 5% down mortgage and have it insured through CMHC. Therefore it doesn't really limit that many more people from getting a new mortgage.

The only difference is that it can only be a 30 year mortgage and no longer a 35yr. The change from 90% to 85% is ONLY for refinancing your house and pulling equity out of it that you've already paid. If you haven't paid it yet, you're fine... 

In 2008 they cut the amortization from 40yrs to 35max, and put a 5% min on down payments. However I believe all of the rules really could be gotten around via private financing if the lender is willing to take the risk.


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## kubatron

dilbert789 said:


> I think there's some confusion on what really the change is here.
> 
> Let me know if I'm wrong here, but if you are getting a new mortgage nothing in this change will prevent you from getting that 5% down mortgage and have it insured through CMHC. Therefore it doesn't really limit that many more people from getting a new mortgage.
> 
> The only difference is that it can only be a 30 year mortgage and no longer a 35yr. The change from 90% to 85% is ONLY for refinancing your house and pulling equity out of it that you've already paid. If you haven't paid it yet, you're fine...
> 
> In 2008 they cut the amortization from 40yrs to 35max, and put a 5% min on down payments. However I believe all of the rules really could be gotten around via private financing if the lender is willing to take the risk.


Nail on the head.

Nothing will change with down payment on a principal residence.

amortization will mean you'll be able to "afford" less house.

Yes to refinance.

To your final point - Equitable Trust was offering 40year amortization mortgages until as early as mid 2010, so yes.

*These rules only affect mortgages will less than 20% down. Conventional mortgages may/may not be affected because lenders must decide on their own if you have 20%+ down, will you be allowed to have 35 year amortization*.


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## marina628

I think too many people treat their home as a ATM ,I know plenty of people who refinance every few years to roll credit cards and cars into the mortgage.The 85% is good idea IMO .Even in my own family I have relatives who owe more on houses now than they did when they bought 10 years ago.
I invest in Real Estate and plan to buy even more but my husband and i buy new homes under 5 years old with intention to keep 10-15 years and Budget to have them paid off in 15-20 years.
I have an employee who was planning to buy very soon but now said she will have to pay off the last $7000 of her car loan before buying because that $450 payment is going to mean she wont qualify for the 30 year rate.Her numbers are that tight.


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## OhGreatGuru

kubatron said:


> ...
> 
> *These rules only affect mortgages will less than 20% down. Conventional mortgages may/may not be affected because lenders must decide on their own if you have 20%+ down, will you be allowed to have 35 year amortization*.


OTOH, most people, by the time they have accumulated 20% down, have learned enough about mortgages to know better than to take out a 30-40 year amortization. So the net effect is that amortizations over 30 years will become rare for principal residences.


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## marina628

I think most people would rather pay an extra $250 a month to knock 10 years off that $300,000 mortgage than let it drag on for 35 years.Young families with small kids may feel every small increase and the 35 year amortization may help as well as these with low incomes but generally once kids are in school full time and the daycare expenses are gone they can get on track to a 25 year mortgage or less.
These changes will affect people trying to get into a first mortgage but majority of us are not affected.I don't think the 30+ year amortizations have been in Canada long enough for most of us to take them for granted.


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## Jon_Snow

I was actually hoping they were going to bump up the minimum down payment to 10%... or better yet, 15%. 

THAT would have shaken things up a bit...


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## Berubeland

I too have a friend who refinanced herself out of her house after multiple new cars and rolling her credit cards into the mortgage. After 16 years of payments, she owed more on her house than she paid. She started off with a $100,000 mortgage and a large house and three steadily smaller houses later she owed $160,000. She "couldn't afford" to pay that much so now she's renting for $1500 per month. The money she made on the house she has now spent as well. 

The point is that most people are foolish and they have to be protected from their own stupidity. Needless to say every refinancing and move cost thousands, no big deal rolled into the mortgage. 

As for HELOC's, it is my understanding that most mortgages and Helocs are insured we just don't see it because the bank pays for it. I could be wrong about this, I'm no banker. I think we'll see a reduction in these loans as well. 

Quite frankly I think it's high time the banks took on the risks of their lending practices. They are in business and collect the profits but don't have any risks they pass that on to the taxpayer. Nice business... wish I could do that.


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## MoneyGal

Berubeland said:


> Quite frankly I think it's high time the banks took on the risks of their lending practices. They are in business and collect the profits but don't have any risks they pass that on to the taxpayer. Nice business... wish I could do that.


The banks are acting in their rational self-interest. If you and I (through CMHC) are willing to bear the risk, why shouldn't they develop products and practices that take advantage of that? I don't blame the banks.


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## marina628

I think they could have a higher % requirement down as prices go up .Keep first time buyers in the $400,000 or less bracket with 5% down if they go over than make it 10% down.


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## FrugalTrader

I'm not sure I understand the issue with HELOCs. CMHC doesn't jump in unless the HELOC is greater than 80% appraised value (under old rules).


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## marina628

I read an article about a month or so about Asians in Vancouver wanting to get longer amortizations.In Japan I think they can pass the debt to next generation.Wish I had the link now but I know we have touched on house prices being expensive for these living in BC(ESPECIALLY VANCOUVER!).Do you guys see this impacting house prices at all?
Next step 25 year amortization?


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## Bupp

On a typical week I disburse one heloc or mortgage.

In the past year I have only one client ask to refinance to an amount greater than 80% loan to value.

It just is not typical that someone would want to pay CMHC fees when they already have significant equity in the home.

Anyone doing that is going to be in pretty desperate financial shape.


On the other hand, reducing the amortization available for homebuyers with less than 20% downpayment will make a significant difference.


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## Berubeland

My understanding is that all mortgages even those lower the 80/20 loan to value are insured by the banks using CMHC or Genworth. 

The difference is that in a high ratio mortgage the buyer pays the fees and in a low ratio mortgage the bank pays the fee. 

Heloc's are the same. They are insured by the banks against default. So now they'll have to be amortizing or they won't be covered 

Again I could be wrong about this, I believe it's one of those things I read during my mortgage course that stuck in a stray brain cell that happened to be idling.


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## osc

A small first step. 
I wish the government would stop interfering in the free market and dismantle CMHC.


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## K-133

osc said:


> A small first step.
> I wish the government would stop interfering in the free market and dismantle CMHC.


Perhaps you should consider moving South. They are big on allowing the free market to live free...


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## Square Root

Berubeland said:


> My understanding is that all mortgages even those lower the 80/20 loan to value are insured by the banks using CMHC or Genworth.
> 
> The difference is that in a high ratio mortgage the buyer pays the fees and in a low ratio mortgage the bank pays the fee.
> 
> Heloc's are the same. They are insured by the banks against default. So now they'll have to be amortizing or they won't be covered
> 
> Again I could be wrong about this, I believe it's one of those things I read during my mortgage course that stuck in a stray brain cell that happened to be idling.


Banks do not insure all mortgages. Those with a low loan to value ratio(used to be 75%) are not insured. As well they generally do not insure HELOC's unless they are deemed to be very risky. In all cases the borrower pays the premium.


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## Square Root

osc said:


> A small first step.
> I wish the government would stop interfering in the free market and dismantle CMHC.


That would be a poor decision. CMHC and the banks did much better in this country than in the US. We ar lucky to have such a stable system here.


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## Berubeland

Square Root said:


> Banks do not insure all mortgages. Those with a low loan to value ratio(used to be 75%) are not insured. As well they generally do not insure HELOC's unless they are deemed to be very risky. In all cases the borrower pays the premium.


"There are also some mortgage lenders in Canada that insure all of their mortgages, regardless of the loan to value. For the mortgages that are under 80% loan to value, these lenders pay the insurance fee instead of the borrower. These lenders will have to use these new rules for all of their mortgages, regardless of the loan to value in order to be able to continue to self insure the mortgages that they lend out."

I found this little snippet about it. It is my belief that the Big 5 insure all mortgages. Sometimes they pay for the insurance. This why they no longer offer 40 year mortgages even with 20% down. This is why if you have bad credit (below the 620 point) you are wasting your time at your bank and a private lender is required. They will not lend to you if you are not insurable by CMHC. They will also not give you a mortgage on a property that CMHC won't insure even with 50% down. 

Commercial mortgages on properties that CMHC won't insure starts at 6% and goes up.


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## osc

K-133 said:


> Perhaps you should consider moving South. They are big on allowing the free market to live free...


That's false. US system was worse than the Canadian one, with Fred and Fannie and with the mandatory rules to allow poor people and banks to gamble in the real estate. 
But they were lucky with the big correction and now is a good time to sell Canada and buy US.

It's amazing that every time someone criticizes the massive government interference in Canadian free market and people's lives, people always start talking about US. Like those were the only 2 options.


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## osc

Square Root said:


> That would be a poor decision. CMHC and the banks did much better in this country than in the US. We ar lucky to have such a stable system here.


Who would want to buy the same house in Seattle for $400k instead of in Vancouver for $1M, or who would want to have their mortgage tax deductible. We are so lucky that the banks are doing so well, and that the government is doing such a good job in supporting their bottom line.


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## Plugging Along

osc said:


> Who would want to buy the same house in Seattle for $400k instead of in Vancouver for $1M, or who would want to have their mortgage tax deductible. We are so lucky that the banks are doing so well, and that the government is doing such a good job in supporting their bottom line.


I think it would be worse off if the Cdn government didn't intervene in terms of housing prices. The cost of homes would be higher IMO if we allowed for tax deductable mortages, as people would think it's alight to buy more than they could afford because you can write it off. 

How is the government driving up home prices in Vancouver? Perhaps if they change the immigration laws, that may help, but that's different thing that changes the rates, or mortgage lending rules. You could use the same analogy of buying a $1Mil Calfornia home vs a home in Saskchewan (or whereever)


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## NotMe

Plugging Along said:


> I think it would be worse off if the Cdn government didn't intervene in terms of housing prices. The cost of homes would be higher IMO if we allowed for tax deductable mortages, as people would think it's alight to buy more than they could afford because you can write it off.
> 
> How is the government driving up home prices in Vancouver? Perhaps if they change the immigration laws, that may help, but that's different thing that changes the rates, or mortgage lending rules. You could use the same analogy of buying a $1Mil Calfornia home vs a home in Saskchewan (or whereever)


Whenever people talk about how the US allows mortgage interest deductions and Canada doesn't, they never mention how Canada has a capital gains exemption on selling primary residences and the US doesn't.


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## Square Root

osc said:


> Who would want to buy the same house in Seattle for $400k instead of in Vancouver for $1M, or who would want to have their mortgage tax deductible. We are so lucky that the banks are doing so well, and that the government is doing such a good job in supporting their bottom line.


I guess if you didn't own any real estate or equities before the meltdown you might think things are better in the US. For most of us we are better off here. At some point they will need to pay their huge deficit down and that will almost certainly mean higher taxes too.


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## Cal

Jon_Snow said:


> I was actually hoping they were going to bump up the minimum down payment to 10%... or better yet, 15%.
> 
> THAT would have shaken things up a bit...


Yeah...me too. I think 7% would have been reasonable for a down payment. 10% would definitely be a news maker.

Also to note the rules don't take effect for 60 days.


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## Four Pillars

NotMe said:


> Whenever people talk about how the US allows mortgage interest deductions and Canada doesn't, they never mention how Canada has a capital gains exemption on selling primary residences and the US doesn't.


Actually, they do. It's just not a blanket exemption like we have here.


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## kubatron

Why exactly do sideline armchair quarterbacks want to see 5% down to 10% down instituted? so that you may profit from other's losses? I don't get it. 

If you want to save up to get to 10%, be my guest. Perhaps in 2002 when you could buy a semi-detached home in Leslieville (a gentrifying 'hood in T.O) for $250,000 with 3 bedrooms and 1 parking spot - 10% down would be rather feasible. Fast forward to today that home is $550K. Same condition. Not so easy now, is it, especially with the double-land tax in Toronto.

Make a justification why it would be good to have 10% down - oh, and before you bother, it will never happen. Flaherty may be an idiot with his big-screen TV comment but he's not a total idiot.


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## Potato

kubatron said:


> Make a justification why it would be good to have 10% down



To save people from their own stupidity, and reduce systematic risk.

Houses are illiquid, they can go down, and changing life circumstances (job loss/move, divorce) can sometimes mean you're forced to sell rather than riding out a small downturn. Due to the transaction costs involved, selling with less than 10% down (or even then if there's a big enough reduction in prices) can leave people trapped: without enough equity to cover the transaction costs, they have to dip into other savings (which recent first time buyers may not have).

Saving for a down-payment also serves as a crude test of financial acumen: can a person actually stick to a budget and put money aside? A homeowner is exposed to granular maintenance cost risk, so an ability to save up beyond forced savings is important.

And having a down-payment requirement also reduces systematic risk. The second-biggest predictor of default is LTV. Requiring a down-payment also serves as a brake on bubbles and manias (though an imperfect one): with easy credit, no need to save, and fears of being "priced out forever" buyers can rush in and shoot prices to the moon. If prices run beyond their ability to front a down-payment, it can limit the scale of a bubble.


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## marina628

I agree first time buyers should get in with 5% down but if that first time buyer has to sign up for a $532000 mortgage to buy that $560,000 home they are probably better off paying rent.


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## Four Pillars

Potato said:


> To save people from their own stupidity, and reduce systematic risk.
> 
> Houses are illiquid, they can go down, and changing life circumstances (job loss/move, divorce) can sometimes mean you're forced to sell rather than riding out a small downturn. Due to the transaction costs involved, selling with less than 10% down (or even then if there's a big enough reduction in prices) can leave people trapped: without enough equity to cover the transaction costs, they have to dip into other savings (which recent first time buyers may not have).
> 
> Saving for a down-payment also serves as a crude test of financial acumen: can a person actually stick to a budget and put money aside? A homeowner is exposed to granular maintenance cost risk, so an ability to save up beyond forced savings is important.
> 
> And having a down-payment requirement also reduces systematic risk. The second-biggest predictor of default is LTV. Requiring a down-payment also serves as a brake on bubbles and manias (though an imperfect one): with easy credit, no need to save, and fears of being "priced out forever" buyers can rush in and shoot prices to the moon. If prices run beyond their ability to front a down-payment, it can limit the scale of a bubble.


The problem is that having a down payment is not the only factor when evaluating if someone can make the mortgage payments.

http://www.moneysmartsblog.com/zero-down-payment-on-a-house-is-just-fine/


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## kubatron

I have a guy who makes $175,000 / year. Why is he buying with 5% down? Simple. He's moving back here from London England (where prices are you know... 5x higher) and has 2 kids, one of which is starting school. Sure he can rent but he wants to buy. So what's the rub? he qualifies for $800,000 and even at 5% - he wants in.

Secondly, this notion of making people save up is crazy. Those who have been sitting on the sidelines cheering for a market crash have been sitting, and losing. I'm not one to argue our prices can't fall BUT they have not risen like in other metro areas (US, Vancouver etc). I'm not going to dig deep and say immigration will keep us afloat, but I am confident in saying that even if prices remain in check with inflation (or even a 0% price increase for a year or so), *fact is it's very tough to save money these days* with everything else going up! (taxes, user fees in toronto, gas prices, costs of schooling, food prices etc etc). So what's one of the best ways to build savings? *forced savings* through mortgage payments.

I disagree wholly. 10% down would cripple the 1st-time buyer market. None of this "if you want it you should save for it" crap. Take that to your seniors meeting. Sure my italian father-in-law would save for his cars when he was in his 30s and just moved here. he's now 70. People live off credit. If you can manage it well (like hundres of my clients do) then it's OK. 

Remember - a crippled first-time market is a crippled resale market. Thus your asset is also going to go down, that 2nd or 3rd house up the property ladder.

Be careful what you wish for is what I'm saying.


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## marina628

As a couple ,we own 4 properties (two each) and shopping for a 5th ,I don't think we will see much of a price change .What I do see changing is the interest rates which may affect the ability to carry a mortgage .We have always looked at our mortgage payments as forced savings ,we use to pay 10% on our mortgage way back so even to go back to 7-8% would not bother us.I am sure people here paid 18% ,the problem is all these first time buyers paying 2.25% -3% for past 5 years or so and thinking they can take it for granted. They count on these rates when budgeting and probably in 3-5 years when all these mortgages come up we will see many of these people in trouble.


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## Berubeland

_10% down would cripple the 1st-time buyer market. None of this "if you want it you should save for it" crap. Take that to your seniors meeting. Sure my italian father-in-law would save for his cars when he was in his 30s and just moved here. he's now 70. People live off credit. If you can manage it well (like hundres of my clients do) then it's OK. _

If 5% down didn't cripple the market then 10% will not be the end either. 

You and people like you who think this is OK are seriously mistaken. 

It is not OK and it is not safe for people to be overextended the way they are. Credit has to be paid back! 

I can say this from my own personal experience paying the piper. These days I drive an old car, I live in a rather dumpy house that's 100% completely paid off. I look at tenant credit reports all the time and there is a a significant amount of people who used to have great credit applying for apartments because they dropped the ball. It wrecks lives, splits marriages and creates stress of all kinds. 

Your attitude of "everybody" does it so go with the flow is nonsense. I don't care what other people do. I will save and prosper and take educated risks. 

Saving is crazy like a fox... I pay almost less than you for everything. That's apart from my scraping and scrounging for the best price. If you finance something who knows how much you will eventually pay for it.


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## houska

This forced savings idea is an interesting one....if ppl are bad at savings, then let's force them to save by making mortgage payments that build equity in their homes if they don't have too much to begin with.


 ...but wait. That's exactly what the rules are doing. If you have 20%+ down (i.e. have demonstrated the ability to save), go ahead and get a long amort mortgage, even a HELOC with no principal payments - it's just between you and the bank. If you have 10-20% down, we as a society will give you a leg up by insuring your loan, but we insist you pay back the loan over a reasonable time frame, in particular so that in 5 yrs when your mortgage is up you'll be in less dangerous territory. And given elevated real estate values, a real level of risk, and transaction costs of selling and moving, we won't insure you with taxpayers on the hook if you're so close to the edge that you don't even have a 10% downpayment.

Now the numbers are changing, and sure this is a blunt instrument (other debts, etc.) but the rough parameters seem exactly consistent with this philosophy. And the number tweaks seem to bring it closer to this philosophy rather than further away.


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## Plugging Along

kubatron said:


> I have a guy who makes $175,000 / year. Why is he buying with 5% down? Simple. He's moving back here from London England (where prices are you know... 5x higher) and has 2 kids, one of which is starting school. Sure he can rent but he wants to buy. So what's the rub? he qualifies for $800,000 and even at 5% - he wants in.


Just because someone wants something, doesn't mean they should do it. It doesn't matter if the prices in the UK are 5X higher, they have different rules there. In some parts of Europe you can get 100 year mortgages. 

If he makes $175K he really shouldn't qualify for $800K. He would be paying 50% of his take home just for mortgage. Though his income is high, I'm guessing his spending is higher, otherwise he would be able save more than 5% in a short period of time. If he can't save more, then he really shouldn't be spending so much on a house. If he has kids, then there are a whole bunch of extra costs. I'm sure that he may also be complaining that he can't pay for his children's future, his retirement, the hockey, soccar, dance, the nicer SUV, and everything else. I bet if he made some cuts, then he would have the 10 or 20 % down. Its this attitude that you have to have it all NOW. 



kubatron said:


> this notion of making people save up is crazy. Those who have been sitting on the sidelines cheering for a market crash have been sitting, and losing. I'm not one to argue our prices can't fall BUT they have not risen like in other metro areas (US, Vancouver etc). I'm not going to dig deep and say immigration will keep us afloat, but I am confident in saying that even if prices remain in check with inflation (or even a 0% price increase for a year or so), *fact is it's very tough to save money these days* with everything else going up! (taxes, user fees in toronto, gas prices, costs of schooling, food prices etc etc). So what's one of the best ways to build savings? *forced savings* through mortgage payments.
> 
> I disagree wholly. 10% down would cripple the 1st-time buyer market. None of this "if you want it you should save for it" crap. Take that to your seniors meeting. Sure my italian father-in-law would save for his cars when he was in his 30s and just moved here. he's now 70. People live off credit. If you can manage it well (like hundres of my clients do) then it's OK.
> 
> Remember - a crippled first-time market is a crippled resale market. Thus your asset is also going to go down, that 2nd or 3rd house up the property ladder.
> 
> Be careful what you wish for is what I'm saying.



I think the idea of forced savings through having someone pay an extraordinary amount of interest. Why not just put some money aside, make a little interest, and pay a lot less in the longer term?


I don't believe the best way to save is to pay interest to force savings. The best way is to be disciplined, put money aside, delay gratification and not buy when you don't have to, until you at least meet your goals. There are tonnes of ways to save. It's about making scarfices to reach the greater goal. We planned our dream vacation overseas, we put aside the money and were ready to go until we were approached with an investment deal. We REALLY wanted to go, but couldn't do both. We choose to take the chance, not go on our trip. Its tough to save money when you're spending it on other things, or paying interest on it.



kubatron said:


> I disagree wholly. 10% down would cripple the 1st-time buyer market. None of this "if you want it you should save for it" crap. Take that to your seniors meeting. Sure my italian father-in-law would save for his cars when he was in his 30s and just moved here. he's now 70. People live off credit. If you can manage it well (like hundres of my clients do) then it's OK.
> 
> Remember - a crippled first-time market is a crippled resale market. Thus your asset is also going to go down, that 2nd or 3rd house up the property ladder.
> 
> Be careful what you wish for is what I'm saying.



Going from 5% to 10% would cripple those who probably shouldn't be in the market in the first place. There are still lots of buyers that put much more than 10% each time. All of our properties we saved at least 25 - 50% for the down payment, and that was not through refinancing. 

Don't think that only seniors are saying to save. I'm in mid thirties, and bought in my twenties and still came with a larger than 20% down payment. 

I do think its sad that people live off credit. I did it in my early 20's. Its awful, and I did it well. I just think its a waste to pay up to double what the item was because of interest. I work hard for my money and like to get the maximum value. I think it adds to the stress of life. It's worse if they are even over leverage and lose everything. How does one decide if they are managing well? There's a lot more risk. What happens if one loses there job, gets ill, has any life changing circumstance? You can't control those things, but you sure have a better chance of surviving it if you don't have debt. 

Just my random thoughts.


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## kubatron

*

If 5% down didn't cripple the market then 10% will not be the end either. 

*

What do you mean if .. then?

bringing the 0-down mortgages to an end was a brilliant move. Brilliant in the sense that we always had zero-down mortgages (at higher rate). Then in 2006 exotic loans were the topic du jour, so Flaherty decided to intro them here with 40 - year amortizations. I did so few of these loans because they did not make sense 95% of the time.

HOWEVER

They were so short lived that eliminating them did not eliminate the market because MOST people wanted to put down 5% anyways to "feel" like they saved for something.

In the GTA, going from 5% to 10% will cripple the market, or at least drastically slow it down.

*You and people like you who think this is OK are seriously mistaken. 

It is not OK and it is not safe for people to be overextended the way they are. Credit has to be paid back!*

I agree - BUT - why should someone with a 750+ beacon score, some minor debts, be punished? Because "people like you" think that the government needs to TELL us when to spend and when not to spend? 

IF YOU DONT WANT US TO SPEND - don't keep PRIME rate at 3%, and thus variable rate mortgages at 2.1% Or HELOCs at 3%.

IF YOU DONT WANT US TO SPEND - don't make credit cards easier to get than a bag of milk.

*I can say this from my own personal experience paying the piper. These days I drive an old car, I live in a rather dumpy house that's 100% completely paid off. I look at tenant credit reports all the time and there is a a significant amount of people who used to have great credit applying for apartments because they dropped the ball. It wrecks lives, splits marriages and creates stress of all kinds. 
*

That's fantastic. Glad you drive a crap car and live in a dump to have a "quality of life" of not enjoying ... life.. Your decision. I choose to have a little bit of debt and enjoy certain things like family functions in a home I am proud to call home, and not over extending myself. I'm not saying your way is wrong and mine isn't either. People that you mention who dropped the ball are those who were never taught properly or didn't learn from their mistakes. We (you or I) can't change that. 

*
Your attitude of "everybody" does it so go with the flow is nonsense. I don't care what other people do. I will save and prosper and take educated risks. 
*

Good for you.

*Saving is crazy like a fox... I pay almost less than you for everything. That's apart from my scraping and scrounging for the best price. If you finance something who knows how much you will eventually pay for it.*

Well, if you finance something, you can easily figure out how much you'll pay for it. You're lucky enough you "saved" enough (and probably bought in a down market) to have a house paid off by now. How old are you? I'm 33. I'm not in the generation where I was able to buy a 3 bedroom house in downtown T.O. for $250,000 (like in 2003/2004) nor was I given anything by anyone unlike MANY of my fellow friends/colleagues. No will no estate no nothing. So I had to take a risk - and guess what, it paid off. Sure I am in debt, sure I have a mortgage, but I know how to control risk.

Famous saying: if you ain't in debt you ain't living. One thing we can't quantify is the type of life we have and want. Good for you you're frugal, I'm not saying "Hey people, go blow your money on TVs and boats". I'm saying - hey, you can afford it, you make good money, you are withing your limits, buy that house.


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## kubatron

Plugging Along said:


> Just because someone wants something, doesn't mean they should do it. It doesn't matter if the prices in the UK are 5X higher, they have different rules there. In some parts of Europe you can get 100 year mortgages.
> 
> If he makes $175K he really shouldn't qualify for $800K. He would be paying 50% of his take home just for mortgage. Though his income is high, I'm guessing his spending is higher, otherwise he would be able save more than 5% in a short period of time. If he can't save more, then he really shouldn't be spending so much on a house. If he has kids, then there are a whole bunch of extra costs. I'm sure that he may also be complaining that he can't pay for his children's future, his retirement, the hockey, soccar, dance, the nicer SUV, and everything else. I bet if he made some cuts, then he would have the 10 or 20 % down. Its this attitude that you have to have it all NOW.
> 
> 
> 
> 
> I think the idea of forced savings through having someone pay an extraordinary amount of interest. Why not just put some money aside, make a little interest, and pay a lot less in the longer term?
> 
> 
> I don't believe the best way to save is to pay interest to force savings. The best way is to be disciplined, put money aside, delay gratification and not buy when you don't have to, until you at least meet your goals. There are tonnes of ways to save. It's about making scarfices to reach the greater goal. We planned our dream vacation overseas, we put aside the money and were ready to go until we were approached with an investment deal. We REALLY wanted to go, but couldn't do both. We choose to take the chance, not go on our trip. Its tough to save money when you're spending it on other things, or paying interest on it.
> 
> 
> 
> 
> Going from 5% to 10% would cripple those who probably shouldn't be in the market in the first place. There are still lots of buyers that put much more than 10% each time. All of our properties we saved at least 25 - 50% for the down payment, and that was not through refinancing.
> 
> Don't think that only seniors are saying to save. I'm in mid thirties, and bought in my twenties and still came with a larger than 20% down payment.
> 
> I do think its sad that people live off credit. I did it in my early 20's. Its awful, and I did it well. I just think its a waste to pay up to double what the item was because of interest. I work hard for my money and like to get the maximum value. I think it adds to the stress of life. It's worse if they are even over leverage and lose everything. How does one decide if they are managing well? There's a lot more risk. What happens if one loses there job, gets ill, has any life changing circumstance? You can't control those things, but you sure have a better chance of surviving it if you don't have debt.
> 
> Just my random thoughts.


random replies:

please tell me how much your houses were and where you live that you were able to save 25% to 50% for each of them. quantify this. you live in moncton? toronto? vancouver? winnipeg? strathroy? see, it matters.

said lawyer from above example should do what he wants, and if he doesn't 10 other people will. said lawyer will also probably want all those things you mentioned, and he'll keep the economy going by borrowing and buying. said lawyer needs to buy now and not wait and wait because he's worried prices will get ahead of him as they did in England. 

never said best way is to save is by forced savings, if I did, then what I meant is, it's a good way to save for some people. Why do you think we have RRSP loans and their prevalence? because it forces people to save. simple psychology. most of my buyers NEVER increase their minimum monthly payments. Why? Because they don't have to. Unfortunately most people in this world are stupid and lazy. FORCING them to do something changes their patterns. If they don't have to, they won't.

agreed on your last post - it's awful to be over leveraged and the doors closing in on you, can't refinance, can't extend, miss your payments etc. 

agreed many people in our age group (mid 30s) are starting to see benefits of saving, BUT - compared to our seniors their savings won't go nearly as far. Example; friend's grandfather paid $25,000 for his house at york mills / yonge. SUPER pricey area today - lot of land goes for $1M. Paid for it in 1946. Was working at RBC making 1/3rd the salary. Today same friend lives in that house still, makes $110,000/year. House is $1M in 1946-condition. Needs $500K to be rebuilt (at least). 1/15th the salary.

Tell me - asides from having Life-brand products vs name brand and the numerous ways to save pennies, how does one save THOUSANDS?


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## kubatron

marina628 said:


> As a couple ,we own 4 properties (two each) and shopping for a 5th ,I don't think we will see much of a price change .What I do see changing is the interest rates which may affect the ability to carry a mortgage .We have always looked at our mortgage payments as forced savings ,we use to pay 10% on our mortgage way back so even to go back to 7-8% would not bother us.I am sure people here paid 18% ,the problem is all these first time buyers paying 2.25% -3% for past 5 years or so and thinking they can take it for granted. They count on these rates when budgeting and probably in 3-5 years when all these mortgages come up we will see many of these people in trouble.


100% correct.

Those people will be in a world of hurt. 

Now with shorter amortizations offered, even more so. The 0/down/40/year amort guy, god forbid he needs to refinance, is dead meat.

Furthermore, over 75% of people leave a 5 year mortgage at / around year 3 mark ESPECIALLY for refinancing and / or porting.

Dead MEAT. 

(at least the realtors and lawyers will be busy)


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## Plugging Along

kubatron said:


> random replies:
> 
> please tell me how much your houses were and where you live that you were able to save 25% to 50% for each of them. quantify this. you live in moncton? toronto? vancouver? winnipeg? strathroy? see, it matters.
> 
> said lawyer from above example should do what he wants, and if he doesn't 10 other people will. said lawyer will also probably want all those things you mentioned, and he'll keep the economy going by borrowing and buying. said lawyer needs to buy now and not wait and wait because he's worried prices will get ahead of him as they did in England.
> 
> never said best way is to save is by forced savings, if I did, then what I meant is, it's a good way to save for some people. Why do you think we have RRSP loans and their prevalence? because it forces people to save. simple psychology. most of my buyers NEVER increase their minimum monthly payments. Why? Because they don't have to. Unfortunately most people in this world are stupid and lazy. FORCING them to do something changes their patterns. If they don't have to, they won't.
> 
> agreed on your last post - it's awful to be over leveraged and the doors closing in on you, can't refinance, can't extend, miss your payments etc.
> 
> agreed many people in our age group (mid 30s) are starting to see benefits of saving, BUT - compared to our seniors their savings won't go nearly as far. Example; friend's grandfather paid $25,000 for his house at york mills / yonge. SUPER pricey area today - lot of land goes for $1M. Paid for it in 1946. Was working at RBC making 1/3rd the salary. Today same friend lives in that house still, makes $110,000/year. House is $1M in 1946-condition. Needs $500K to be rebuilt (at least). 1/15th the salary.
> 
> Tell me - asides from having Life-brand products vs name brand and the numerous ways to save pennies, how does one save THOUSANDS?


Okay, I'll bite... I live in Calgary. I would say that qualifies as being one of the more expensive cities. I'm not quite sure about sharing exact dollars yet, that's just my own thing about the internet yet. I can tel you that properites combined are well over $1mil, our mortages for all of them combined is less than $400K, and we bought all within the last 10 years, and the last one right during the boom.  

I know alot of people like your lawyer friend. High income earners, that won't save very much. Everything will be fine for them often. It's more for when something goes wrong. Like I said what happens if he loses his job, or gets ill? Will the banks let him miss his $4300 payments, will they loan him the money to pay for his vehicles, or his other debt? At his income it shouldn't be a wait wait wait... more like a wait a little bit... 

In terms of how does one save thousands or ten or hundreds of thousands... for us, a combination of many things. It would take me a long time of writing everything we do, here are a few,

Paid off our debt (student loans, consumer debt from when I was a student), this was killing us, even though it was well managed, the amount that we paid in interest was keeping up from getting ahead. This was really hard. After a big overseas trip, that I financed with credit cards, I grew up and reigned in my spending. 

We put aside money from every check for retirement, this was our 'safe' money and an investment fund was more for if the big deal come in. We always made sure there was extra money in case opportunities to invest came around. For the first while, I banked a part of my raises right into my savings. 

We made some scarfices early on. Our first place was a two bedroom downtown, to come up with the 25% it was living at home longer, and just putting some aside. When we moved out, we got a room mate in our two bedroom, she paid for half of the mortage each month. It was really tight. We used our camping equipment for furniture for the first while. Then we wanted to upgrade when we got married, but didn't have the money saved yet. We found a house in a dumpier part of town for lower rent, rented out our condo for more than what were were paying, and got a roommate for the second place. It took us about 4 years to save, and that was at the same time my spouse took time off to get a Masters degree (which we also paid for). It was an old house, but it was cheap. 

It's not just about saving for us, alot of it was finding ways to make more money. We make good incomes, and they have always been a little above average. We made choices to live off of one income and bank most of the higher. We have multiple streams of income which we have built, and put away all of the extra income as part of our savings. 

Don't think that we don't spend our money, we've just been wise with it. We do save for everything (that is not an appreciating asset). We have a nanny, kids in private school, multiple cars, luxuery vehicle, recreation property, and the toys, but we still manage to put money aside every month. I'll even admit, I don't even have a budget. We just make sure we pay as little as possible for the things that we do buy, and that includes not paying interest or any fees. 

Not sure if this answers anything, as there are many things to do.


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## kubatron

Kudos to you. Thats all i can say. Inspiring post.


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## Plugging Along

We really haven't done anything really special. There many more people smarter than us here, and much more disciplined. With our incomes and even more discipline, we would be really really well off now. So really, I think we could have done a lot better, but we were fortunate in some aspects and have just made some sacrifices earlier on in life so we can get more benefit later (not that 30's is late). I do believe the earlier one makes the sacrifices, the bigger the benefit over the years. To be honest, I was brought up in a very frugal, financialloy responsible household and fought it the whole time through spending. It was my older siblings who 'forced' me to save against my will. They were actually quite disappointed that I had not saved for my whole house in cash, as that's what was done in our family. 

I agree with your point about RRSP's and borrowing. My first RRSP I used a 1 yr loan to start it off. I then took the tax refund, and put it towards the loan, and kept paying every month. Then when I paid off the loan, I just kept putting the money in for retirement. As I made more, I did increase my amounts too until I maxed out my rrsps. I see a short term loan to get started much more differently than a 20 year mortgage. The interest I paid over the year was about $200 and was a one time thing.


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## osc

Higher downpayment requirements would lead to price decreases which may allow some people to actually be able to become debt free before retirement. This will also have the negative effect (negative from government perspective) of reducing banks profits. That's why it doesn't happen. 
The high prices are a direct result of government actions: CMHC (transferring risk from non-qualified buyers to taxpayers), very low downpayment requirements, very high debt ratio allowed, mind-boggling amortization terms (which were introduced a few years ago by the same irresponsible government which now takes credit for this minor rollback). All for the benefit of a few monopolistic banks.
The repeal of these regulations would mostly benefit young people and be disadvantageous for the older homeowners, unlike how some naive young people imagine.


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## houska

*Some numbers for discussion...*

Some numbers, hopefully at least directionally correct. 

As taxpaying members of society, we are the reinsurers for CMHC. Their underwriting decisions ultimately put us on the hook.

Up to now, someone could put 5% down, 35 year amort, and get insured by CHMC. At e.g. 3.85% interest, they will have 93% of the mortgage balance outstanding after 5 years – that’s 88% of the original purchase price. If anything goes wrong with the market, there is very little leeway until CHMC and therefore us are on the hook. There’s a minimum of 5% frictional losses if you or I calmly sell in a value maximizing way through a realtor – the frictional losses I imagine are much higher if it is a short sale and incentives are not aligned. It feels like a nominal 2-5% market drop (12-15% after inflation) over the next 5 year period would put this into the red. I don’t have the information or ability to do the loss exposure calculation, but a 3.15% premium for this insurance coverage, given the current state of the market, seems like a poor risk-return tradeoff for us, the reinsurers.

OK, now consider a 10% down, 30 year amort. Run the same numbers, in 5 years the mortgage balance is at 81% of the original purchase price. That’s a lot more leeway – probably needs a 20+% or so drop over 5 years (after inflation) to put into the red. The premium is 2.2%. Feels a lot safer to us reinsurers, though of course not completely safe.

Of course, we are not only reinsurers but also (many of us) asset holders. So we worry this change will drive down the value of our assets. In particular, forgetting about the downpayment condition, the amort decrease means payment increase of about 10% and therefore about 10% less maximum “affordable” house for the hypothetical 10% down, maximum-amort purchase. So if everything were completely rational, I’d expect a price hit of over 10% for typical starter homes (where the downpayment issue will be most severe), around 10% for the homes the typical 10% downpaymenter would buy, and somewhat less propagating to properties where most purchasers are trading up and have enough equity to not need CHMC insurance. Of course it’s not that simple and market behaviour is not fully rational, but hey…gotta guess something
. 
Other opinions? Challenges?


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## Berubeland

I'm 38 and my house was paid off the year I was 30 I live in Toronto. It took five years to pay off. 

People come to my house to see me not my house. My house is 2 bedroom with a 2 bedroom apartment downstairs that I use for my office. I don't understand how it would increase the quality of my life to have a bigger fancier house. I don't enjoy cleaning and the extra space would go to waste. If I did need more space I could always build a 2nd floor on the house I already have if I wanted to. 

I have a freedom that you could only dream of. I can do what I like when I like. I don't have to work for a couple months if I don't want to. 

I have one credit card with a $1000 limit to place ads and buy stuff I want online. 

I am the only person I know who lives in a paid off house in Toronto. I make choices every single day not to be a rampant consumer. I got my van for $400 off my dad (that's what the dealer offered him) and it works well. Why would I go buy a new car? I've had plenty of vehicles at one point I had five vehicles, a cargo van, pickup, cube van, and 2 cars. None of these were ever financed all of them were old and they all worked just as well as new ones.

The only thing I am considering these days is getting a spare car in case the one I have kicks the bucket. I have a 60 foot driveway so parking another car wouldn't be a hardship. In this way I could self insure against breakdowns for less than a couple monthly payments combined with the increased insurance coverage of a new car. Breakdowns are inconvenient. 

I don't consider a payment free life not enjoying myself. I have rather lived the "Big Hat No Cattle" way and learned from my mistake.


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## kubatron

osc said:


> (which were introduced a few years ago by the same irresponsible government which now takes credit for this minor rollback). .


Remember that when you vote.


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## kubatron

Plugging Along said:


> They were actually quite disappointed that I had not saved for my whole house in cash, as that's what was done in our family.


It's impossible these days to save for a house and pay for it in cash, in Toronto.

Example-

Young couple (friends of mine). 1 car lease. Rent: $1800/month, with a 2 year old. Combined pre-tax income $120,000. After-tax about $75000 or so (with certain child tax benefits etc). 

Can you imagine how long it would take them to save $400,000?

MIND YOU - had they started at 16 from their first paycheck, that's another story..

*problem* is our education system fails us in money management.


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## kubatron

Berubeland said:


> I don't consider a payment free life not enjoying myself. I have rather lived the "Big Hat No Cattle" way and learned from my mistake.


Are you married?

Do you have children?


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## kubatron

houska said:


> Some numbers, hopefully at least directionally correct.
> 
> As taxpaying members of society, we are the reinsurers for CMHC. Their underwriting decisions ultimately put us on the hook.
> 
> Up to now, someone could put 5% down, 35 year amort, and get insured by CHMC. At e.g. 3.85% interest, they will have 93% of the mortgage balance outstanding after 5 years – that’s 88% of the original purchase price. If anything goes wrong with the market, there is very little leeway until CHMC and therefore us are on the hook.


But you're assuming that the market will dictate that these people will sell. Usually people will sell because of other circumstances (divorce, job loss) and not market downturn, no?

Furthermore, you're assuming a 0% growth in r/e prices. Possible in a bubble market like Vancouver but unlikely in T.O. 5 years is a decent stretch to assume at least a flat-line in market prices (vs a severe down turn).

Finally - 12% is not a little, it's decent. assume 4% in r/e costs + 1% in legal / other, you've got 7% of a $400,000 house to play with. Again, decent.

And another finally, you're assuming people would walk away from their home which isn't as easy in Canada as elsewhere.



> There’s a minimum of 5% frictional losses if you or I calmly sell in a value maximizing way through a realtor – the frictional losses I imagine are much higher if it is a short sale and incentives are not aligned. It feels like a nominal 2-5% market drop (12-15% after inflation) over the next 5 year period would put this into the red. I don’t have the information or ability to do the loss exposure calculation, but a 3.15% premium for this insurance coverage, given the current state of the market, seems like a poor risk-return tradeoff for us, the reinsurers.
> 
> OK, now consider a 10% down, 30 year amort. Run the same numbers, in 5 years the mortgage balance is at 81% of the original purchase price. That’s a lot more leeway – probably needs a 20+% or so drop over 5 years (after inflation) to put into the red. The premium is 2.2%. Feels a lot safer to us reinsurers, though of course not completely safe.
> 
> Of course, we are not only reinsurers but also (many of us) asset holders. So we worry this change will drive down the value of our assets. In particular, forgetting about the downpayment condition, the amort decrease means payment increase of about 10% and therefore about 10% less maximum “affordable” house for the hypothetical 10% down, maximum-amort purchase. So if everything were completely rational, I’d expect a price hit of over 10% for typical starter homes (where the downpayment issue will be most severe), around 10% for the homes the typical 10% downpaymenter would buy, and somewhat less propagating to properties where most purchasers are trading up and have enough equity to not need CHMC insurance. Of course it’s not that simple and market behaviour is not fully rational, but hey…gotta guess something
> .
> Other opinions? Challenges?


Another thing I wanted to point out is the historically low nature of CMHC-defaults. Lower than 3%, in some years at 1%. That's pretty decent!


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## Plugging Along

kubatron said:


> It's impossible these days to save for a house and pay for it in cash, in Toronto.
> 
> Example-
> 
> Young couple (friends of mine). 1 car lease. Rent: $1800/month, with a 2 year old. Combined pre-tax income $120,000. After-tax about $75000 or so (with certain child tax benefits etc).
> 
> Can you imagine how long it would take them to save $400,000?
> 
> MIND YOU - had they started at 16 from their first paycheck, that's another story..
> 
> *problem* is our education system fails us in money management.


I had the same argument with my family about saving buying the house in cash. My spouse was the one that convinced me that it was okay to put only 30% down on our house and have a mortgage. I do think paying for it completely in cash is difficult. However, I still believe 10% is not unreasonable. It's work, and takes a lot of planning.

I do agree about the education system not provided for financial education. However, I'm not sure even if they did do more would I have been ready to take the lessons. I had an excellent financial education from my family, but still ended up in debt at first. Also, I'm not sure how well the educators would be able to able to teach. Most of them do not understand it either. 

I think it would be helpful for schools to put more in financial education, but ultimately, the kids are going to learn from their parents and those around them. In Rich Dad Poor Dad, they an indication of how wealthy you are, is look at the 10 closest people you associate the most with. There needs to be more in terms of teaching people (not just kids) about finances. 

I've been working with my daughter since she stopped try to eat coins, and started asking for things about the concept of money. We talk about choices all the time now, and she's only 5. We can't rely on educators to teach about things they know little about.


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## Berubeland

kubatron said:


> Are you married? Yes
> 
> Do you have children?


Yes 

Why are you interested


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## kubatron

I'm having a little one in 3 months and can't wait to start teaching them, especially about the mistakes I have made (and my parents).

I grew up poor in a single-parent household, mom died, dad worked too much, no concept of money and no money to be had. Spent what I made when I was a kid and never grasped until I decided to buy a house with (egads) 5% down! (which went up from 400k to $540K in 3 years, tidy profit, 20+% on the next one, etc etc, got married and now the kidlet is coming).


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## kubatron

to those calling for the sky to fall, from CAAMP:

* Vast majority of borrowers holding highest risk mortgages have considerable room to absorb interest rate increases
* Assuming a 5 per cent interest rate (1 per cent increase on fixed and 2.5 per cent increase on variable mortgages)
o the average gross debt service (GDS) would increase to 24.6 per cent and the average total debt service (TDS) would increase to 33.7 per cent
*o Less than 1 per cent of these highest risk mortgages would have TDS ratios of 45 per cent or more*
o Applying these results to the broader population, there might be about 800 to 950 buyers whose mortgages were funded during 2010, with variable/adjustable rate mortgages, whose TDS ratio would be 45 per cent or higher
* Among the high ratio loans approved in 2010 - with the reduced amortization period (30 years versus the prior 35 year limit), a small minority (about 2 per cent) would have TDS ratios above 45 per cent and those loans would probably not qualify. Some of those consumers would still be able to buy, by buying lower priced homes.
* Unaffordable premium increases are a negligible risk factor at present and in the near-to-medium term future. Recent discussions have focused on this negligible factor.
* Most mortgage defaults stem from reduced ability to pay mostly because of job loss or reduced income. Over-extension - adding more debt after taking a mortgage - is another risk.
* A third cause - unaffordable increases in mortgage payments - is the source of recent concerns about future threats.
** The study concludes that very few Canadians face unaffordable increases in mortgage costs and Canadian lending criteria are already tight.*


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## Plugging Along

kubatron said:


> I'm having a little one in 3 months and can't wait to start teaching them, especially about the mistakes I have made (and my parents).
> 
> I grew up poor in a single-parent household, mom died, dad worked too much, no concept of money and no money to be had. Spent what I made when I was a kid and never grasped until I decided to buy a house with (egads) 5% down! (which went up from 400k to $540K in 3 years, tidy profit, 20+% on the next one, etc etc, got married and now the kidlet is coming).


Congratulations, you're life is going to enter the newest and wildest roller coaster. Get as much sleep as you can now, and if you have a baby that doesn't sleep, that is one time NOT to be frugal. You buy whatever it takes to give you and your wife a little break. I remember doing a cost vs benefit for swing, and some other things that would make my like easier, now, I think why did I wait even a day to decide.


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## kubatron

Yeah I was just wondering out loud if berubeland is indeed married or has a child(ren) because those two factors can greatly affect one's ability to pay a house off by 38.


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## marina628

Berubeland said:


> _1
> 
> I can say this from my own personal experience paying the piper. These days I drive an old car, I live in a rather dumpy house that's 100% completely paid off. I look at tenant credit reports all the time and there is a a significant amount of people who used to have great credit applying for apartments because they dropped the ball. It wrecks lives, splits marriages and creates stress of all kinds. _


_

I think Rachelle has a child and she says she lives in a dumpy house!I had my old house paid off at 41 ,I paid $172,000 for it.Now i have a few houses and two mortgages .We also had a old car when we bought that house.It can be done ,the first four homes i bought was under $180,000.I f I was having to pay $300,000 for my first home then I think it would be a bit more difficult._


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## Plugging Along

kubatron said:


> Yeah I was just wondering out loud if berubeland is indeed married or has a child(ren) because those two factors can greatly affect one's ability to pay a house off by 38.


I am married with 2 young kids, and our goal is to have our house paid off by the end of this year, spouse 39, me 37. 

Kids definately make it harder, especially with youngs one and child care, activities, and then saving for their futures. It is possible though. Like I said earlier, we had a larger down payment, waited until we were quite establish in our careers, and had started investing right out of university. For us, things seemed to line up pretty well,


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## jamesbe

I could have easily had my house paid off by 33. My first home a townhome I was on track to have it paid off by 33. I'm now 32, but then we bought a larger / more expensive house so now we keep paying.

It isn't impossible to have your home paid off, it all depends on what and where you want to live. We wanted something nicer and larger, some care, some don't. Depends on how you want to live your life.

Personally I enjoy a nice car, a nice house, and lots of toys. I don't live in debt because of it but I am only going to live once so I am not going to save every last penny until I retire then turn 65 and drop dead.


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## Berubeland

Being self employed also makes you make different choices. This business I am in now is extremely variable. In the past I've had to weather several months with no income at all, or severely reduced income. 

Just this spring when a property I was managing sold, I lost about $2000 per month of income. At the same time my husband got sick and I had to stay home to take care of my son. I am also the sole income in this family, if my husband worked I'd have more leeway to not be so nuts about spending. 

Make no mistake my company is no giant multinational. I am still building this company I started it 5 years ago but I got pregnant about 3 seconds after I started the company. Not exactly optimal business building time. If you are not frugal enough to withstand those times, you'll starve to death and have to get a job. 

If I'm so against debt and taking those easy monthly payments it's because I know from first hand experience how devastating overhead is to a burgeoning business. I know from my first business how stressful it is to have a payroll and rent and mortgage to pay, I used to break out in hives on those horrible months when payday fell on the first. I also know what it's like to see tons of money come in and just disappear because no attention is being paid to the expenses, the small baby ones that steal your money. 

For example, one of my trucks got robbed once, and all the tools stolen. I had to find the receipts for all the tools. While I was doing that I noticed that almost every time I went to the store I had purchased on of those high quality Purdy paint brushes @ $22 each. Just for a lark I started counting how many I had bought. It was well over 100... over $2200 worth of paint brushes. I went to the paint brushes and counted how many were there. There were 8. This is just one item. 

So it really doesn't matter too much how much money you make but rather how much sticks to you


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## marina628

Rachelle,
Very sorry to hear about your husband's illness,will he eventually be able to go back to work?I have gone through illness first hand and my husband and I were very happy we lived in a small semi at the time with a basement apartment. 
People make assumptions they can take their health for granted ,we have a friend who had two kids a year and a bit apart ,they planned for her mat leave and extra expenses but when her baby was 9 months old she was diagnosed with breast cancer.So then they went through 2.5 years of additional expenses and now she is on disability which is 60% of her pay.
Your paint brush story reminds me of my domain addiction lol.I am in process to sell 71 websites for $13,000 ,they are all older pr3-pr6 sites sites but really they don't make me any money as I have no time to develop them.It cost me $15-$25 a year to have them plus $349 server costs.
If i took time i probably could get more money but I am having a fire sale ,going to invest that cash and instead of paying iweb.ca the 349 a month I will deposit it into my savings.


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## Eclectic12

kubatron said:


> Yeah I was just wondering out loud if berubeland is indeed married or has a child(ren) because those two factors can greatly affect one's ability to pay a house off by 38.


It certainly helps but then again knowing about finances helps more.

I'm not sure what age they were (I'd guess about 35 or so) but my buddy's sister/hubby bought and paid for their Oakville house in three years. That's with one child before the purchase and one born within the three years.

By all accounts, they both learned finances younger than most which set them up to optimise their salaries.


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## Eclectic12

osc said:


> That's false. US system was worse than the Canadian one, with Fred and Fannie and with the mandatory rules to allow poor people and banks to gamble in the real estate.
> But they were lucky with the big correction and now is a good time to sell Canada and buy US.
> 
> It's amazing that every time someone criticizes the massive government interference in Canadian free market and people's lives, people always start talking about US. Like those were the only 2 options.


Can you provide some links showing how broad ranging and restrictive the US system was/is?

My personal experience suggestions the opposite. An example is opening one bank account in nine years. The bank was bought by another bank twelve times. Each buyout changed the account (ex. all/two/thee free cheques, charge/no charge to see a teller/ATM etc.). Keeping up with the changes was not trivial. So far, Canada has restricted buyout.

As for the mandatory rules to allow ... banks to gamble in the real estate, I am skeptical that the legislation required banks to do so, except possibly to the extent of helping the poor rule. I can recall when the US bank executives lobbied for this right as "we can't compete" with the existing conservative rules - globalization is about competing which needs a larger profit. (Sounds similar to the Canadian bank executives from a few years ago about the need for bank mergers in Canada, but I digress.)

As for how quick US/Canada comparisons are made - proximity, similarity and availability of info make this natural. Then too, most Americans I've chatted with have promoted that there is more freedom.


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## Berubeland

Well I'd like to claim all reponsability for the events that led to paying the house off in 5 years but that wouldn't be true. 

First I was self employed and even with 25% down I couldn't get a mortgage. I had to ask my parents for help to get the mortgage . The paying it off in 5 years was their condition. 

I was already paying $800 per month plus hydro. Then there was a basement apartment in the house which was kept rented for $750 at first then $900 after I turned it into a 2 bedroom. The double mortgage payments were $1500 per month. Then annual prepayments of 10% for 4 years then $16,000 balance at year 5. 

I was making great money at the time. I had my own construction company. Still it was very hard, I didn't spend on anything extra and I worked many 18 hour days. I was single at one point in there for a while. It was hard to get construction jobs once I told my customers that my partner was gone. I lost a huge contract for $50,000 to redo 10 floors of a condo. This house was paid off mostly repairing drywall damages in condo buildings. I could do about 5 per day myself going from floor to floor. Not very glamorous. Then I went to work for the Catholic School Board doing mold abatement for $18 per hour. I was the only woman on a 50 man crew and I was paid the least. Still you could work as many hours as you wanted. The most irritating thing about that job was the lack of toilet facilities. Every time I turned around someone was hanging a leak. Pretty sure I could have sued for that. 

So most people would be unwilling to do what I did. I had to give up any semblance of "lifestyle" even for me it was rough. Still I'm glad I did it because it gives me a freedom that most people don't have. I wouldn't be able to start my business like I did if it weren't for that. Still not my idea...but for me it was the only option. You can't run a construction company from an apartment.


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## kubatron

Interesting that with 25% down and being self-employed you could not get a mortgage - times must've been different then but as recent as 7 years ago (provided good credit) you would've been a prime client for getting one.


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## marina628

Kubatron ,
Banks usually won't consider self employment until you have minimum 3 years income taxes filed.


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## Berubeland

This was 13 years ago, income was the problem as it is for most self employed people. The clincher to the plan was than I already paying the same rent monthly.


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## sprocket1200

good on your parents for making you pay it off fast. it should never take more than 10 years to pay off a mortgage...


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## Addy

kubatron said:


> *I can say this from my own personal experience paying the piper. These days I drive an old car, I live in a rather dumpy house that's 100% completely paid off. I look at tenant credit reports all the time and there is a a significant amount of people who used to have great credit applying for apartments because they dropped the ball. It wrecks lives, splits marriages and creates stress of all kinds.
> *
> 
> That's fantastic. Glad you drive a crap car and live in a dump to have a "quality of life" of not enjoying ... life.. Your decision. I choose to have a little bit of debt and enjoy certain things like family functions in a home I am proud to call home, and not over extending myself. I'm not saying your way is wrong and mine isn't either. People that you mention who dropped the ball are those who were never taught properly or didn't learn from their mistakes. We (you or I) can't change that.
> 
> Famous saying: if you ain't in debt you ain't living. One thing we can't quantify is the type of life we have and want. Good for you you're frugal, I'm not saying "Hey people, go blow your money on TVs and boats". I'm saying - hey, you can afford it, you make good money, you are withing your limits, buy that house.


Grasshoppers are a dime a dozen. Soon to be discounted half price for bankruptcy sale!


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## kubatron

marina628 said:


> Kubatron ,
> Banks usually won't consider self employment until you have minimum 3 years income taxes filed.


yes I know that I am in the business  !


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