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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This morning, CHMC released its Fourth Quarter report of 2015
Does 2015 CMHC Fourth Quarter Report support promises made by the Liberals?
Members of the media had full plates for the majority of October–Between the Federal election and Post-Season baseball, it’s been difficult to cover much else. Now, with Trudeau’s win and the Blue Jays’ loss, Canadian consumers can set their sights back on the health of our Economy–and the future of the Housing Sector.
This morning, the Canadian Mortgage and Housing Corporation released its Fourth Quarter report, which includes economic forecasts for 2016 and 2017. For those who recall promises made during the 78-day federal campaign, this report may offer some insight on what’s to come in 2016 and 2017. A highlight of the report focused on migration to Ontario, with the increase of new residents expected to outpace other parts of the country. Despite modest movement in recent years, Ontario’s economy is predicted to gain momentum in 2016 and 2017. Improving business conditions and expansion will increase hiring in the province, enabling job growth to rise to 1.6 per cent and 1.3 per cent in 2016 and 2017, as well as the unemployment rate to hover around 6.5 and 6.4 per cent respectively. This is one contributing factor to the appeal Ontario has to migrants, both nationally and internationally.
The CMHC quarterly report could not have been released at a more appropriate time. Following the federal election and Trudeau’s win, we can better gauge what type of action we’ll see in the housing sector. During their campaign, the Liberals focused on the best interests of the middle class; the high-tax battle, maximizing savings, and the accessibility of affordable housing. The high cost of housing in hubs such as Toronto and Vancouver has limited home ownership to those whose incomes far surpass the national average. In response to this issue, the Liberals propose new incentives for first-time homebuyers, including breaks on mortgage policies, as well increased amortization periods. To the discerning consumer, the promises sound more like suggestions, as nothing has been set in stone. Additionally, the Liberals propose to make changes to the Home Buyers’ Plan. Implemented in 1992, the Home Buyers’ Plan (HBP) allows Canadian residents to withdraw up to $25,000 from their RRSPs, tax-free to use toward the down payment of their first home. Participants of the HBP are given 15 years to replenish the amount withdrawn from their RRSPs. Although the withdraw limit isn’t expected to increase, the Liberal party proposes to make the HBP more accessible, by opening up eligibility beyond first-time homebuyers. Although interest rates are forecast to rise, the increase would be slight at worst, and are not expected to have a substantial impact on home buying.
Good news for Investors and Renters
Benefits that are also included in Trudeau’s plans surround the 10-year investment in social housing infrastructure, focusing on affordable housing and facilities dedicated to seniors. The investment will fund new buildings, as well as refurbish existing housing. As an investor, you will experience tax breaks and new capital investments will not be charged GST. This initiative is to encourage the construction of new affordable rental housing, as well as converting other multi-dwelling units and freehold homes into rentals.
It is predicted that high-rise unit ownership and rental demand will continue to be supported by first-time buyers with limited funds, as well an influx of Baby Boomers, who are looking for a maintenance-free lifestyle. Resale housing will remain vigorous over the course of the forecast, with numbers ranging between 193,000 and 225,000 units in 2016, before easing to the range of 175,000 to 220,000 units in 2017. Ontario home prices are predicted to grow, however, at a slower rate than previous years. This is due to a more balanced market, an increase in new listings, and the demand for more cost-effective housing options such as condominiums and townhomes. For Investors looking to expand their portfolios, this report, coupled with the results of the recent election should be kept in consideration when purchasing an income property. With several consumers turning toward more affordable housing options, new condominium and purpose-built rental segment are predicted to be solid investments.
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If you think housing prices in Toronto are high now, brace yourselves. Industry experts and economists expect them to surge as Canada’s biggest city saw another record month in June. Last week, newly appointed Toronto Real Estate Board President Mark McLean announced that GTA REALTORS® reported 11,992 sales through TREB’s MLS® System in June 2015. This number represents an increase of 18.4 per cent compared to the result for June 2014—which paled at only 10,132 sales.
Overall, selling prices for all home types across the city were significantly higher when compared to the numbers for June 2014. Last month, the MLS® Home Price Index (HPI) Composite Benchmark was up by 8.9 per for the same period in 2014, while the average selling price was up by 12.3 per cent in a year-by-year comparison, to $639,184.
According GTA REALTORS®, “High-end homes have accounted for a greater share of overall transactions this year compared to last year.” This is a key factor in the rate difference between the average price and the HPI composite benchmark, which is regarded to be a more accurate system of measuring Toronto Real Estate Market conditions.
Following its upward trend, the average price of a detached home in Toronto was at an astounding $1.05 million, a 14.2 surge over June of 2014. The surrounding 905 area also saw an increase of 15 per cent to $738,000.
Toronto and Vancouver represent Canada’s strongest markets, and if the Bank of Canada cuts its rates again, we can definitely expect another boost in sales. Despite low mortgage rates, the affordability of housing, particularly detached homes remains out of reach for many in these cities. As active listings are still far and few in between, bidding wars for determined buyers show no sign of stopping—nor does the strong upward climb of our robust market.
Mr. McLean could not have started his new career at a better time. With the Pan Am Games in full swing and our city receiving international recognition and accolades, it is clear to local residents that Toronto and its surrounding area is home to a wealth of culture and an economy with a very promising future.
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A Look at the Numbers:
1982: Average house price in Canada — $72,500
2015: Average house price in Canada — $439,100
1982: Average five-year fixed mortgage rate (March) — 19.4%
2015: Average five-year fixed mortgage rate (March) — 3.8%
1982: Outstanding residential mortgages — $30-billion
2015: Outstanding residential mortgages — $953-billion
Sources: CREA, Statscan
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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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