Advisors urge caution as CMHC eases rules for home buyers

(February 26, 2004) A move by the Canada Mortgage and Housing Corporation (CMHC) to scrap minimum down payment requirements might appear to be an attractive option for prospective home buyers. But it’s probably not a wise move for most clients, advisors say.

“This idea that people who have absolutely no savings discipline whatsoever can actually still go out and buy a house completely on borrowed money is a bit of a concern to me,” says Jonathan Sceeles, CFP, with Edward Jones in Toronto.

Earlier this week, the CMHC lifted its requirement that home buyers must put up at least 5% of the purchase price from their own funds in order for the mortgage to be approved by the Crown corporation.

Starting March 1, that down payment can come from a variety of sources, such as credit cards, personal loans, lines of credit or cash-back incentives offered by mortgage lenders.

“They’re making it more flexible and easier to borrow money, which is a good thing if you know the risks, but it can be a recipe for disaster if you haven’t done any planning,” says David Burnie, CFP, of Ryan Lamontagne in Ottawa.

“It means that many people who normally wouldn’t be able to buy a house now can,” said Bradley Roulston, CFP, of Roulston/Map Financial Group in Mississauga, Ontario in an e-mail to clients. “It also means that many people who financially shouldn’t be buying a home, will be.”

Low interest rates have helped fuel a red-hot housing market in Canada. That’s tempted some people to take on mortgages they can’t really afford, says Sceeles.

“We could see people being forced into redemptions five years from now if interest rates rise to historic norms,” Sceeles says. “You can avoid that pitfall by taking on a mortgage that you could still afford if rates were higher. But if you’re maxing yourself out today because rates are low, you could be in for a terrible shock a few years down the road.”

Burnie agrees. “Household income can decline and you could end up running into problems. A 1% change in interest rates has a huge effect on a large mortgage.”

Burnie says he recommends that clients choose a housing debt service ratio of no higher than 25% of gross household income (most lenders offer up to 33%) and that the mortgage be amortized for no more than 20 years. “The amount the banks will lend will be a bit less, but it’s more manageable if rates go up, and they will.”

Sceeles says the CMHC announcement comes at an odd time, considering the fuss that’s been made in recent years regarding the high level of consumer debt in North America.

CMHC admits the change entails some risk, but says it’s targeted at a very specific group, such as those earning a good salary who have somehow been unable to save for a down payment.

Sceeles says there are few situations where the no down payment strategy makes sense. “Let’s say you’re a medical student, just out of university and your current income is low. But your income outlook is very positive for years to come. You can probably enter in a no-money-down mortgage situation and be relatively certain you’d be able to carry the mortgage.”

“But for just about anyone else, I would caution against it.”

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How are you counselling clients about the CMHC’s new rule? Share your thoughts and opinions about this issue with your fellow advisors in the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(02/26/04)

Doug Watt