By Ephraim Vecina
22 Jul 2021
In the current environment, many first-time home buyers are wrestling with a troubling dilemma: go for mortgages that either permit them to borrow the funds needed for their down payment, or loans that provide cash back after the closing.
Sherry Corbitt, a broker based in Whitby, Toronto, said that her business is seeing more clients go for these unconventional loans, which bear a remarkable similarity to those seen in the United States just before the Great Financial Crisis of 2008.
However, Corbitt takes heart in the fundamental robustness of the Canadian housing market, which has so far defied all doomsaying predictions in its roughly 25-year run of buoyant conditions – including a 21% across-the-board price gain since the pandemic took hold, Bloomberg Economics reported.
“We’re never going to see what happened in the States,” Corbitt told Bloomberg. “It’s just not possible here.”
At the same time, the broker admitted that “a lot of first home buyers are not ready,” with much of her transaction volume in the past year coming from former renters whose landlords have decided to sell their properties.
“‘Well if I have to be evicted, maybe now’s the time to buy,’” Corbitt quotes her clients as saying.
The Bank of Canada is taking a more cautious tone, saying that consumers are taking on increasingly unsustainable debt loads.
“The initial equity stake – or down payment – is the most economically significant factor associated with future financial stress. Generally, a high loan-to-value ratio (a smaller equity share) increases the likelihood of falling behind on loan payments,” the central bank said in its latest Financial System Review.
“Previously introduced mortgage stress tests and higher interest rates had slowed the accumulation of household debt and improved the quality of mortgage borrowing leading into 2019,” the BoC added. “But since mid-2020 this trend has reversed. Some households have taken on significantly more mortgage debt, which is reflected in an increase in the share of new mortgages with high loan-to-income ratios.”
These trends are shaping up to be a potentially fatal risk to the market’s bull run.
“Key developments in the housing market – exceptionally strong demand relative to supply, rapidly rising prices, expectations becoming extrapolative – all point to growing imbalances compared with a year ago,” the bank’s report warned. “Increasing house prices relative to income contribute to rising leverage for homebuyers. Also, a misalignment of house prices in comparison to fundamentals can lead to a correction in Calgary prices in the future.”
A new program helps to make homeownership more affordable.
The The First-Time Home Buyer incentive helps qualified first-time homebuyers reduce their monthly mortgage payments without adding to their financial burdens.
The First-Time Home Buyer Incentive is a shared-equity mortgage with the Government of Canada. It offers:
The Incentive’s shared-equity mortgage is one where the government has a shared investment in the home. As a result, the government shares in both the upside and downside of the property value. By obtaining the Incentive, the borrower may not have to save as much of a down payment to be able to afford the payments associated with the mortgage. The effect of the larger down payment is a smaller mortgage, and, ultimately, lower monthly costs.
The homebuyer will have to repay the Incentive based on the property’s fair market value at the time of repayment. If a homebuyer received a 5% Incentive, they would repay 5% of the home’s value at repayment. If a homebuyer received a 10% Incentive, they would repay 10% of the home’s value at repayment.
The homebuyer must repay the Incentive after 25 years, or when the property is sold, whichever comes first. The homebuyer can also repay the Incentive in full any time before, without a pre-payment penalty.
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