The CMHC Improvements Program — Making Toronto Real Estate More Affordable for Home Buyers
CMHC Helps Buyers Transform Fixer-Uppers into the Homes of their Dreams.
It wasn’t long ago when a home that “may need a little TLC” was enough to make a homebuyer turn the other way. Now, in Toronto’s tight market, where affordability is a growing concern for home buyers, even homes in dire need of repair and renovation are stirring up bidding wars.
CMHC’s Improvements Program, (formerly known as the Purchase Plus Improvements Program) is a little-known option that qualified buyers can take advantage to improve their odds of affording a fixer-upper. How does it work? The program allows you to tack the cost of renovations to the overall purchase of the home and include it in their mortgage loan amount. Qualified buyers have that ability to borrow up to 10 per cent of the estimated value of the home after renovations.
To give you a better idea of how the program works, let’s say you’re interested in purchasing a home listed at $650,000. The home has great bones, however, would require renovations to the kitchen and washrooms. It’s estimated that this home’s value, once improved would have a market value of $700,000. As a result of the estimated increase, you can borrow up to 10 per cent, or $70,000 of the new value. This is a great program for first-time buyers who would otherwise be unable to afford renovations because the majority of their money was used toward a down payment.
To qualify for the program, borrowers must provide a quote from a contractor and submit it to the CMHC and their mortgage lender before closing on the house. In order for the CMHC and lender to approve the amount, your Agreement to Purchase must include the condition that states you would like a contractor to perform an inspection of the home. Once approved, the amount will be added to the mortgage loan. Upon closing, the improvement amount is forwarded to your lawyer who is authorized to release the funds when the proposed renovations are complete. Because buyers do not have immediate access to the funds, it is recommended they open an unsecured line of credit in the interim.
There are a few provisos that buyers need to keep in mind—things that are not permanently affixed to the structure of the home, such as appliances are not covered under the program. Additionally, the CMHC would not approve a renovation that would convert a section of the home into a separate apartment.
For new homebuyers, the Improvements Program is a fantastic opportunity to build up thousands in equity instead of purchasing a more costly renovated home—and transform that fixer-upper into a dream home.
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In an announcement made by Toronto Real Estate Board President Mark McLean last week, GTA REALTORS® reported 7,385 home sales through TREB’s MLS® System in November 2015 – a 14 per cent increase compared to November 2014 and a record number for November sales to date.
Toronto’s real estate market saw 96,401 sales for the first eleven months of this year. There is no doubt that 2015 will go down in history as a year Toronto real estate made the record books. High housing prices, the number of homes sold, and benchmark indexes as well as a low number of active listings, average days on market and the amount of square footage you get for a dollar–not to mention the value of the Canadian Dollar itself. However, as the year winds down, people are turning their focus away from the red-hot real estate market and putting themselves in gear for the holiday season.
Credit: Toronto Real Estate Board
December is often an interesting month in for the Toronto real estate market–sometimes, buyers bid to get into the market right before the new year while other years they wait for the fresh listings that often arrive in January. Mr. McLean remains optimistic for December, as well as the upcoming year. With one more month to go until 2016, we’ve still managed to set a record in for home sales in the TREB market area for an entire calendar year (the previous record set in 2007 and reflected all 12 calendar months).
McLean believes the widespread demand for homeownership is a priority for families in the GTA and attributes it to real estate being the best long-term investment. Despite rumours of a housing crash, Toronto continues to prosper and doesn’t seem to show signs of stopping. The other question remains–if there is no crash, will there be a correction? Will the market get out of control?
The federal Department of Finance wants to step in and increase the minimum down payment for a home from 5 per cent to 10 per cent. With stiffer borrowing rules, the market has a better chance of cooling without a drastic crash. An increase will also alleviate the taxpayers exposure to insured default losses and possibly boost sales in the condo market. First time home buyers who are only prepared to put a 5 per cent down payment must either wait until they have twice the amount of money they initially had or settle for a condo. While all these pros sound fantastic for markets like Toronto and Vancouver, other markets in the Country, especially cities that have already experienced losses in the housing market, will suffer. When will these proposed changed come into effect? We can expect the Federal Department of Finance to present the motion for additional 5 per cent on down payments to the Minister of Finance as early as January 2016.
With what seems to be a very small window to decide whether to toss the whole idea of buying a home, borrowers looking to put a smaller down payment on a home should seek the advice of a mortgage professional and reassess their budgets realistically. Increase or not, the New Year is the perfect time for families to analyze their finances to ensure sound decisions in the future.
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Effective today, June 1, 2015, Canada Mortgage and Housing Corporation (CMHC) is increasing mortgage insurance premiums by 15 per cent for homebuyers making less than a 10 per cent down payment.
Mortgage insurance is typically required by lenders if a homebuyer’s down payment is less than 20% of the total purchase price of the home. The insurance is paid by the homeowner and is usually tacked onto their monthly mortgage payments. With the current state of the Toronto real estate market, many home buyers cannot afford a 20 per cent down payment—the insurance makes ownership more accessible for many, and benefits first-time buyers by enabling them to make a 5 per cent down payment on a home. It also benefits lenders by protecting them in the event that payments are not made and from potential defaults.
For an example of how the policy change might affect you, let’s pretend you’re buying a $600,000 home. With a 5 per cent down payment of $30,000, you would need a $570,000 mortgage. Before June 1, 2015, your premium would have been $17,955, however, at the new rate of 3.60 per cent, the cost would be $20,520— a difference of $2565.
Changes effective June 1, 2015
95% Loan-to-Value
|
Loan Amount
|
$150,000
|
$250,000
|
$350,000
|
$450,000
|
Old Premium
|
$4,725
|
$7,875
|
$11,025
|
$14,175
|
New Premium
|
$5,400
|
$9,000
|
$12,600
|
$16,200
|
Additional Premium
|
$675
|
$1,125
|
$1,575
|
$2,025
|
Increase to Monthly
|
$3.12
|
$5.20
|
$7.29
|
$9.36
|
With the new changes, there are many things to consider if you are planning to purchase a home with a smaller down payment. A down payment of 5 per cent, less the new premium of 3.6 per cent leaves you with only 1.4 per cent equity in your home. Although it might seem like your monthly payments are only going up by a few dollars, it is important to think about the impact a down payment of 5 per cent combined with the premium increase, would have on your investment in the long-term.
Questions about real estate, investments, or property management in Toronto? Contact us! We’d love write about it and feature your topic on our highgateproperties.ca blog!
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