Affordable Homes and the New CMHC Rules

The 2019 Federal Budget introduced two changes aimed at making it easier for first-time home buyers to purchase a home in Canada. This is important due to the new mortgage stress test, and also raises other important questions should housing prices drop.

According to the April 2019 New Housing Index just released by Statistics Canada, average new home prices are still on the rise in many parts of Canada. On average, the cost of a new home increased 0.1% over the past year. However, there is some good news for those looking to break into the housing market: in some markets, prices are decreasing. The largest decrease was in Regina where prices dropped 4.1% with smaller drops in the most expensive markets: Vancouver -0.6% and Toronto -0.3%.

A report from the Royal Bank in March 2019 stated that the average cost of home ownership in Canada is 51.9% of gross family income. In major metropolitan areas this ranges from 34.8% in Edmonton to 84.7% in Vancouver! In Canada, the banks use a 30% rule to determine how much families should spend on their mortgage. The rule says that no more than 30-32% of gross income should be spent on mortgage payments, property taxes, and heating costs. Buying in Canada’s metropolitan areas may be challenging for new home buyers as a result, but the two changes in the 2019 Federal Budget are aimed at making it easier for new buyers to purchase a home. 

First, under the Home Buyer’s Plan, couples can now withdraw up to $70.000 from their RRSP ($35,000 each) in order to purchase a new home. That amount has to be repaid in equal instalments over a period not exceeding 15 years, beginning the second calendar year after the withdrawal.

The budget also introduced the CMHC Shared Equity Loan program. This program, which has a planned start date of September, will provide first-time home buyers a loan of up to 5% of the value of a resale home or 10% of the value of a new home. Though not all details of how this program will work have been released, here’s what we do know now. No payments will be required on the loan but when the home is sold, the repayment amount will be the same percentage of the sale price. These loans will be available only to families with income below $120,000 and will be available on homes with values no more than four times the family’s annual income.

With the average home price in Vancouver coming in over $1 million and in Toronto over $900,000, these programs are not going to be of much assistance to new home buyers in these markets. However, in other markets, these programs could help new buyers.  Here’s an example of how it might work:

Trevor and Tracy are first-time home buyers in Calgary. They have a combined annual income of $100,000 and have saved a total of $50,000 in their respective RRSPs. Using the $50,000 withdrawn under the Home Buyers’ Plan, they are hoping to purchase a new home for $450,000. That’s below average for Calgary, but the maximum that they could pay and qualify for the CMHC Shared Equity Loan program. According to the Mortgage Affordability Calculator Tool from the Financial Consumer Agency of Canada, they would likely be denied the mortgage on the property without help.

 Under the CMHC Shared Equity Loan program, CMHC would provide an additional $45,000 (10% of the purchase price) so their mortgage requirement is reduced from $412,000 (includes CMHC insurance) to $367,000. Assuming their other monthly payments (including debt service) is not too high, they could qualify for that amount.  Assuming they negotiate a 3% annual rate, their monthly payments would be $1,737.  In addition, they’ll have to repay about $280 per month on their Home Buyers’ Plan loan.

What happens five years later when the couple sells their home for $510,000? CMHC provided a loan for $45,000. Their equity stake in the home is 10% so they will have to be repaid $51,000. The outstanding balance of the mortgage will be about $314,000.  They have $510,000 - $51,000 - $314,000 - $21,000 (real estate commission and closing costs) = $124,000 equity to be used as down payment on their next home. Unless they want to pay CMHC insurance again, the maximum they can spend on their new home would be about $615,000.

On the other hand, if the couple sells their home for only $425,000, they will have to repay only 10% of the proceeds ($42,500) rather than the $45,000 originally borrowed from CMHC.  

An important question remains, who will make up the shortfall?

Stay tuned to Knowledge Bureau Report for more details of these new programs as they’re released.

Additional educational resources: Wealth management in a new and turbulent economy requires new approaches. Learn to help clients prepare for the future by enhancing your own knowledge: the secret to economic resilience is the theme for the 2019 Distinguished Advisor Conference taking place from November 10-13 in Puerto Vallarta, Mexico.