The buyer is a Vancouver mortgage broker with a keen interest in the economics of real estate in BC.
Real estate is a hot topic in BC…will prices hold, will they increase or tip over the edge into the abyss.
The hype is how a slow down in the market will affect this group; especially with a change to the rules regarding the maximum refinance LTV (loan to value) of 85% as of March 18, 2011 under CMHC guidelines.
I thought it would interesting to run the numbers and see how things stack up. I have look at a modest high ratio mortgage for new buyer.
The analysis shows that the risk to the home owner increase substantially as the amortization increases. The policy that allowed for speculation in the housing marketing has resulted in Canadian home owners taking on significant risk . They are playing the market with the most important investment in their lives.
The shift of housing from a personal asset for shelter to a speculative investment has changed the risk profile for Canadians. The old 25 amortization with 10% down will prove to be a wise guideline for new buyers.
Here are the numbers….
Home owner A:
Selling price of $315,000 with a 35 year amortization, 5% down, CMHC insured (4.75% of mortgage amount.) I have looked at two options for interest rates – Fixed @ 3.5% and variable @ 2.2% (no increase in rates is assumed.) The payment schedule is biweekly. I have also assumed no change in the market and a decline in the market of 10%.
Mortgage amount including insurance: $ 313,465
No change in market value LTV 85%
maximum under CMHC; $ 267,750
No change in market values.
Balance of mortgage in 5 years – Fixed
rate option 3.5%: $ 288,129
Underwater: $ 20,379
No change in market values.
Balance of mortgage in 5 years – Variable
rate option 2.2%: $ 281,900
Underwater: $ 14,150
Assume a 10% drop in the market with
a drop in the maximum LTV – 85% $ 240,975
Underwater fixed rate mortgage: $ 47,154
Underwater variable rate mortgage: $ 40,925
Home owner B:
Selling price of $315,000 with a 30 year amortization, 5% down, CMHC insured (3.75% of mortgage amount.) I have looked at two options for interest rates – Fixed @ 3.5% and variable @ 2.2% (no increase in rates is assumed.) The payment schedule is biweekly. I have also assumed no change in the market and a decline in the market of 10%.
Mortgage amount including insurance: $ 311,250
No change in market value LTV 85%
maximum under CMHC; $ 267,750
No change in market values.
Balance of mortgage in 5 years – Fixed
rate option 3.5%: $ 278,101
Underwater: $ 10,351
No change in market values.
Balance of mortgage in 5 years – Variable
rate option 2.2%: $ 271,705
Underwater: $ 3,955
Assume a 10% drop in the market with
a drop in the maximum LTV – 85% $ 240,975
Underwater fixed rate option: $ 37,126
Underwater variable rate option: $ 30,730
Home owner C:
Selling price of $315,000 with a 25 year amortization, 5% down, CMHC insured (2.75% of mortgage amount.) I have looked at two options for interest rates – Fixed @ 3.5% and variable @ 2.2% (no increase in rates is assumed.) The payment schedule is biweekly. I have also assumed no change in the market and a decline in the market of 10%.
Mortgage amount including insurance: $ 307,480
No change in market value LTV 85%
maximum under CMHC; $ 267,750
No change in market values.
Balance of mortgage in 5 years – Fixed
rate option 3.5%: $ 265,890
Room 85% LTV on refinance: $ 1,860
No change in market values.
Balance of mortgage in 5 years – Variable
rate option 2.2%: $ 259,342
Room under 85% LTV on refinance: $ 8,408
Assume a 10% drop in the market with
a drop in the maximum LTV – 85% $ 240,975
Underwater fixed rate option: $ 24,915
Underwater variable rate option: $ 18367
Life could get interesting as the market begins its adjustment phase.
