CMHC has brought to the forefront the need for affordable housing by allowing not only Vancouver and Toronto but for all of Canada to get a 100% offset for a secondary suite. The secondary suite has been discussed in every major city in Canada where housing affordability has been eroded by the high cost of buying a home. In Edmonton it was even addressed allowing a suite over the top of a detached garage and back lane housing in Vancouver has been around for quite some time.
What this change means for First Time Home Buyers
Is the change significant enough to give the first time buyer a hand up in purchasing their first home? I think it does now, not only have they created affordable housing but the buyer can now be given consideration by the insurer for adding in the income that will be produced by the suites. This will still be a 5% purchase and may move the first time buyer from a condo to a single family home.
Let’s look at it as a case study, client has an $80000.00 a year house hold income, credit score of 700 plus and a monthly car payment of $400.00, Property taxes of $3,000.00 and $150.00 heat component and rental income of $2000.00, when we look at the current 50% rental off set using the Filogix setting of “Add Percentage of Gross Income” the client would then qualify for a mortgage of $600,000.00 with a 5% down payment based on today’s average 5 Year fixed rate of 2.69%. The monthly payment of the mortgage would be $2,701.00 per month so the client could be living in the upstairs for $701.00 a month.
Take the same scenario with the same settings except that we have increased the rental offset to 100% and the client would now qualify for $675,000.00 payment increases to $3,039.25 but $75,000.00 can move you a long ways up the real estate scale. Now I know the numbers probably seem low for many cities in Canada but I think it shows how big a difference this may mean for clients looking to get into the market as a first time buyer with a 5% down payment. Take the same property make it $900,000.00 in Vancouver or Toronto or for that case Fort McMurray where you can get $2800.00 a month for your basement suite and while you do have a $4000.00 a month mortgage payment you could be living there for $1200.00 a month.
Pros and Cons of CMHC’s Rental Offset Program
So what are the dangers of this program, first and foremost I think the biggest danger will be that what happens to the client when he has a month where they have no renter. Unlike a seasoned real estate investor we may be putting them into a scenario where they might be unable to make their mortgage payment should there be a drastic change in the economy of their area? This is what has happened in Ft McMurray with the down turn of oil and vacancy rates jumping from zero to 24% in less than a year and many home owners have lost their tenants and that extra income they had relied on to make the mortgage payment. Some who have been able to keep a tenant have had to reduce the rents just to keep some cash flow coming from the suites.
CMHC reported in June the vacancy rates across the country and they are a mixed bag of number with the east coast seeing numbers in 8% range. Toronto, Vancouver and Victoria all under 2% vacancy and Calgary and Edmonton, both which were under 2% a year ago, have moved up to 3.2% and 2.4% respectively.
I’m hoping we will see some savvy first time buyers maybe buying more home than they might have done originally but being cautious not to max themselves out on budgets that are so tight they would face issues should the suite not be rented.I think the onus will be on the mortgage industry to explain the possible pitfalls of this program and the need to suggest that clients be prudent in how much they spend on these purchases. Will the change be significant, in some markets perhaps, but not all will benefit from it as rental vacancies obviously vary across the country.