Some people just don’t get enough abuse. Like Carl. He wrote me this week – an elegant email with the final words carefully crafted. “Eff you Garth,” he said. Naturally, I had to share.
About eighteen months ago Carl wrote me, saying this pathetic blog had encouraged him to sell his condo and pocket $50,000. “I was happy,” he told me. “I thought I had it all figured out, my fiancé and I would rent, save a ton of money and put 50% down on our next house, in 5 years. Well 5 years turned into 6 months as we bought a semi-detached in the Upper Beaches for 640,000.”
Well, so much for the staying power of my advice. Not only was the fifty grand burning a hole through Carl’s shorts, but his GF wouldn’t quit. “I couldn’t argue my renting philosophy any longer, and she didn’t want to ‘pay someone else’s mortgage’, so I caved.”
When Carl and his house-lusty mate wrote me in the summer of ’12 they had total liquid assets of $20,000, and $15,000 in debt. Yep, just about 100% of their net worth was in that house. “I am an accountant and she is a Teacher with the TDSB. We make 130,000 a year, netting about 6,300 a month and have about 800 remaining after all our costs are paid.” Accountant? Gulp.
Here’s why Carl wrote: “My main concerns are 1) She’ll want to move in 5 years and 2) our exposure to high interest rates when we refinance in 5 years and 3) our house losing value… Are we screwed?”
Of course, I cheerily replied. You have no diversification, a half-million-dollar mortgage and a house in a hood with a wild inconsistency in values and neighbours. Oh yeah, and no money. That means you have accepted market risk, interest rate risk and (of course) matrimonial risk. Plus, you get some guy living in your basement. How quaint.
Well, he’s back. “After you posted my story on your website, yourself and 130 of your loyal followers torn me a new one,” he says. “I couldn’t walk for weeks. Well I wanted to write to you show that even if one buys an overvalued house, overextends themselves that with a little discipline things aren’t that bad.”
And how has life improved, Carl?
“We are now carless. Cars are way too expensive and soul sucking, and if you live in the city, no need for one. Because we needed extra monthly income, we both got part-time jobs on top of our full time jobs (accountant, teacher). This brings in another net 1000. Another 830 is coming in from the basement renter.
“We cancelled our 30,000 dollar wedding for a 6,000 budget with 30 close friends and family. European honeymoon was spent in Georgian Bay. We have budgeted 1500-2000 to cover everything else per month (food, entertainment, TTC ). It gets tight, but I like living simple now. We are much happier.
“We also decided to delay having children for another 2 years, to save more for our retirement, and day care costs. We save anywhere from 1500 to 2000 a month. So ya, a mistake is a mistake, but it doesn’t mean things can be done to avoid all the disaster you are talking about. Eff you Garth.”
There you go. The cost of this house? All their cash, plus a $500,000 mortgage. No more car. Two extra jobs. Canadian Tire marriage. Guy in the basement. No family. Lots of attitude. And she’s 18 months closer to wanting a bigger place.
Carl wished to share this little success story with you, and I am happy to be his servant.
Is that little rascal F about to mess with mortgages again? Could be. CMHC, the federal agency which dominates the mortgage insurance business, without which untold numbers of moist virgins would never buy houses, has a big announcement set for Friday in Ottawa as the Peace Tower clock chimes eleven.
How do we know this? Because CMHC made an announcement that it has an announcement to announce. Reporters have been summoned. The mortgage industry’s vaguely apoplectic. Real estate boards are on alert. And speculation is rampant.
Not like we didn’t know this was coming. The recent federal budget (which blew up the Immigrant Investor Program and shocked Vancouver) said there would be “a number of further changes to the Canadian Mortgage and Housing Corporation, which includes reducing the amount of new guarantees CMHC is authorized to provide.” Hmm. What does that mean?
Among the bets mortgage brokers (who seem to have more time on their hands) are placing with each other:
* The minimum down payment to score an insured mortgage will rise from 5% to 10%.
* The threshold for mortgage insurance will be pushed from 20% to 30%. In other words, any buyer with less than about a third of the purchase price would be required to pay for CMHC coverage.
* A meaningful cap on the size of any mortgage to be insured will be implemented – similar to that imposed in the United States after the meltdown.
* A lowering of the sale price of houses qualifying for insurance. As you might remember, F already imposed a $1 million limit, meaning anyone buying a seven-figure property will not qualify for insurance, and therefore must have at least 20% down. Could this drop to, say, $800,000?
Well, as you might imagine, almost any of these changes would be a nuclear event in the pants of the real estate and mortgage business, especially the requirement of a 10% minimum down payment. The consequences would be immediate as buyers stormed the spring market like voracious locusts, devouring every listing in their path, panicked at the changes to come. And then, of course, prices would drop, making them all look like idiots.
So what are the odds?
Not high, actually. Given the run-up in prices in seriously whacked markets like Toronto, Calgary and Vancouver, changes of that magnitude would forever alter the lives of poor hipsters, yuppies and hormonal couples who would then have to spend decades in both therapy and their parents’ basements. Oh, the humanity.
So what’s the deal?
More likely CMHC will be announcing an increase in the amount of money the moist ones have to pay when they take out an insured mortgage. The agency hasn’t raised premiums in years, even though it’s easy to argue the risk of more defaults in any downturn has swollen substantially.
As you know, any time a buyer closes a deal with less than 20% down, insurance is a must. The smaller the amount of money you have, the more that insurance costs you. For example, with 20% down the premium would be 1% of the mortgaged amount. With 5% down, it escalates to 2.75%. How much CMHC will be raising the bar is unknown (until 11 am tomorrow, if that in fact is the announcement), but it’s likely to be a lot.
So will this deter the virgins from buying? Nope. That’s because almost everybody takes the CMHC premium, ignores it, then folds it into the mortgage principal, meaning it adds a few bucks a month with no need for cash upon closing. Unless, of course, that’s the news tomorrow – forcing new buyers to actually have the money to pay all closing costs. The impact of that would be substantial.
Or, maybe that’s not it at all. Veteran housing consultant Will Dunning says this might be about to happen: CMHC will establish a qualifying interest rate for fixed-rate mortgages with terms of five years or longer. There is already a benchmark rate if the kids borrow for a shorter term, but none for the five-year itself. That would mean an end to using the 2.99% special that I wrote about here a few days ago, and force everyone to qualify for financing at something north of 5%.
Then again, maybe F has arranged for all new homebuyers to get a free ticket to the PM’s next rock concert.
Wave your phones. Let it be.
UPDATE: Pfft. As expected, CMHC premiums are increasing, about 15%. Go back to hugging your dog.