This is where your finance takes place

I was at the CMHC (Canada Mortgage and Housing Corporation) the other day to see who they are and what they offer. Until that meeting I found completely ridiculous the idea of having 100% financing mortgages. I thought it was stupid to give people the ability to buy a property when they cannot afford the payments. What is ironic is that the CMHC is a Canadian Government organization and its main purpose is to help people buying a property.

But how can you help people when you are helping them to jump into a bottomless pit of debts?

This is what I asked them after a 20 minutes speech about how CMHC is a great organisation and bla bla bla… I was surprised to get a concise, clear and logical answer to my cynicism!

Please consider the following example:

You want to buy a property today that worth 200K. Unfortunately, you don’t have sufficient cash down (a minimum of 20% cash down is required in Canada to avoid the mortgage insurance – CHMC). Therefore, you plan on putting 10K aside per year in order to have your 40K cash down in 4 years.

Housing price history showed us that the market is going up by 4 to 5% per year on average. Let’s be optimistic and take only 4%. In 4 years from now, the house you want to buy will worth 234K. You will then need almost 47K cash down to buy it without the insurance. You are still 7K short.

However, if you decide to buy the property today at 200K with $0 cash down, the insurance premium will be 6,2K but you will get your house right away. In four years, your house will worth 234K so you would make a paper profit of 34K while you paid only 6,2K in premium to realize this gain. That’s a 448% yield over 4 years.

If you are able to put 10K aside (plus your existing rent), you are able to make some pretty good mortgage payments. Considering this example, I have no other choice but to understand that the 100% financing mortgage could be a good option for some individuals. However, before you go run at your bank to ask for this kind of loan, you must consider the following points:

- If you think that you are able to save 10K per year, how come did you not do it in the past?

- A property cost much more than only the mortgage payment; you have to think about heating, taxes, maintenance, decoration and tools you could need to take care of your property.

- You don’t need cash down to finance your property, but you still need some savings to buy your property. Lawyers, appraisers, movers don’t work for free and won’t finance your expenses. It is suggested to have between 1,5% to 3% of the value of the property for other expenses.

- Make your own calculation related to your specific situation. You may be able to save more money per year or buy a smaller house. Look at the market study for your area, the increase in this specific market might be lower.

- Consider other mix-financing before getting the 100% mortgage. You might be able to put some money aside, borrow money at a good rate from your parents or to take a loan or a line of credit to finance a part of your cash down. The more you offer as cash down, the lower the insurance premium will be.

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This week I received the “blue envelope”. I was expecting it since the end of December. They never forget us. They always think of you at the end of the year and they always want you to financially worth more than last year. Can we say that they wish you a prosper 2008? I would say so.

On that day, my wife picked-up the mail but left the “blue envelope” on the counter. She usually don’t open these, they are addressed to the family banker…

When I got home, I opened the said envelope and look at the first page of the document. They want you to know that you are richer than you think first. They want to scare you in the first place. I looked briefly and I fold the paper as fast as I would have read “I know what you did last summer”.

I put the blue sheet on the counter and stared at my wife. She looked at be with a glance of panic in her eyes. That was it; she knew what it was about. She knew that it was ugly and that we had to pay the price of what we did. What we did last fall…

- 231 I whistled. I can’t believe it. 231!

- They didn’t even come to see us. Ask us questions, nothing! My wife replied, discouraged.

This is when I gather all my courage and pick up the blue envelope again. I will get to the bottom of this now, I told myself. I went rapidly to the second page of the document to actually acknowledge what could be one of our financial day ever… Huh? That’s it? I looked back at my wife and start laughing.

- The city increased our municipal evaluation by 25% but they didn’t care charging us a penny more! They simply dropped down the tax rate in order to bill the same thing as usual. That’s neat!

As you now realized, every year we receive our tax bill through a blue envelope. Since our house was built in 2002 and no new assessment was made since then, I was expecting a big raise this year. The raise of my property value was there, but fortunately, our city is making enough money that they can let their resident breath a little.

While the property tax assessment is showing a higher amount, it is still underestimating the value of our property. I think the city will never be able to keep up with such strong market. However, I will not complain as the tax bill remain the same!

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My parents have been in the property market for several years. So far, They have bought and sold over 15 properties and they lived into each of them. The first reason why they moved so much is because they were always able to make a decent profit out of each transaction. The second is that they always find their “dream home” every two years or so. However, one thing has remained consistent over their choices: the options included within the property.
Looking at a house with another pair of eyes While most people fall in love with the beautiful color used in the living room or the nice Italian ceramic in the bathroom, my parents were looking at what needs to be done or redone in a property. At the time of selling, you are not making money on what you already paid for but you can make money on what you added to the property. For example, you will also pay a cheaper price for a house where the basement is not completely finished. On top of that, it will be cheaper for you to finish it yourself (or with a little help!) than if you buy a property where the owner finished the basement. Looking into the future By looking at the structure or how the house is designed, you can see what you can add, remove or change within the walls. For example, I do have the option of building another room over my garage as the structured was mad for it but the builder preferred not to incurred additional cost at the time of building. Adding another room could increase my comfort within my property and obviously increase the value of my house. Once my children will get older, they will surely move into the basement and I will probably loose my computer and home theatre. I better have my room on top of my garage ready when it happens! Another point to keep in mind is what your area may look like in the next five years. Are you stuck in a new development where construction trucks (that bring a lot of noise and dust by the way) will pass in front of your property every morning at 6am for the next three years? While it may be a source of irritation over a short period of time, in the long run, your property will gain in value. So when you are about to buy a property, look if it offers the following options: - Can you build an additional rooms (from the kitchen or on top of your garage) - Can you finish the basement? - Can you add an additional bathroom somewhere? - Can you divide or undivided rooms to create a more efficient and good looking space - Can you build garage? - Can you have a pool? All those options and many others could help you increasing your property value and also your comfort while your are enjoying your property.
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