03 Oct 2019

Hey There!

Last week I was discussing the various platforms and ideas that all the political parties are coming up with when facing voters. We know that the Liberals are increasing the “Shared Equity Program” to $750,000 max in GTA for first-time buyers only. The Conservatives and NDP are trying to increase amortization to 30-years for high-ratio borrowers (people with less-than 20% down) – for first-time or any-time buyers.

So, which plan is better? I’ll let the numbers decide that.

Let’s use a $500,000 purchase as an example since this is a nice and round number.  Let’s use a buyer with the minimum 5%-equivalent down payment as well.

The Liberals plan would work like this.

You buy a property for $500,000 and your minimum down payment on this is $25,000. The Liberals Government will kick in another 5% – or $25,000 – towards your down payment, thus giving you a 10% down payment. Your CMHC mortgage insurance fee is $13, 950, which is added to your mortgage – so your total loan is $463, 950.00. Your payment at a typical 2.69% rate is $2122 per month and in 5 years, assuming NO pre-payments made, on a monthly schedule, you owe $394 170.01, and you’ve paid $69 779 towards principal and $57 569 towards interest. Remember: once you sell the home you must pay back 5% of the home’s value at repayment. This can be either when you sell OR money from your pocket if you don’t want to sell but want to pay it off OR it can be once 25 years is up – and you HAVE to pay it off.

Example – you sell your house for $600K. This means you’ll have to give back 5% of $600K or $30,000 (which includes the $25,000 you got), so this program now has cost you $5000 from your equity. Assuming you paid 5% + HST Realtor commission (a standard number) plus lawyer fees of $2000, MINUS the $30,000, MINUS the $394K you owe, you would stand to make $139 930.00 in your hand.

The Conservatives and NDP plan is a little easier to understand. How about the numbers, though?

Using $500,000 as our example, at 5% down, your mortgage is $475,000 PLUS CMHC fee. NOTE: the CMHC fee is 4% of the mortgage amount at 5% down, and 3.1% at 10% down, so the CMHC fee would work out to be a little bit more: $19, 000. Therefore, your total mortgage would be $494,000 and your amortization is 30-years, therefore your payment per month would work out to $1997 per month vs $2122. The offset here is, the end balance in 5 years is $436, 552.30, to which you’ve paid $57 447 to principal and $62 381 to interest.

Now, it’s time to sell. You sell for $600,000. You don’t pay back the Government any funds, but, you owe more since you took a longer amortization. You would pay the same Realtor+HST+Lawyer fees. Here you would have $129 548.

So what’s better?

I hate to be wishy-washy on this, but it really depends. It depends on the following:

  1. Is cash-flow per month important to you? If yes: advantage amortization plan because it makes payments per month lower.
  2. Are you planning on increasing the value of your home? (by renovation, or buying in a developing area etc) If yes advantage amortization plan because it won’t dig into your pocket once you sell. Remember: the more you make, the more they take.
  3. Are you planning on staying put in your neighborhood for a long, long time, and never planning on refinancing? If yes; advantage Shared Equity plan because it means you will have your house paid off quicker (25 vs 30 years) and you’re not worried about paying off the shared equity component (but you have to in 25 years at the end).

My take?

  • I prefer LESS Government intervention and bureaucracy in the future. This is a 25-year maximum program time limit. As a result, we’re going  to be at the mercy of the Government when it comes time to discharging and paying off this CMHC program (once you sell or refinance).
  • I don’t like there to be a second mortgage charge like we’ll see here – from CMHC. It may be a nasty surprise you forgot about when it comes time to refinancing or selling.
  • do like that they are limiting the equity share to only 5% on those loans (and 10% on new builds). This is great because it really limits how much  they will take back from the sale or refinance.
  • I don’t like that when you sell, you still need an appraisal done, and they will use the higher of the two – sold or appraised price – to determine their net result.
  • don’t like that the Liberals are only helping first-time buyers. I’ve seen many cases where someone sells, and buys again, but isn’t considered a first-time buyer a second time around.

Right now neither of these two programs are available because 1. The Liberals’ plan is capped at $480K, and 2. The PC/NDP has yet to be voted in, so extended amortization is just a proposal. I wanted to share with you my thoughts and breakdown of each plan in case it helps your voting decisions (and, it’s one small part of the overall policy platforms of all parties, but an important one).

Thanks for reading! Comments are welcome always.

 

 

 

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