now that I'm back at a computer, I can go further into my sources and "qualifications" to discuss the subject.

Any bank's lending rules and criteria are classified documents and cannot be accessed by the general public. So, we have to take information from sources that are available, mostly news articles.

Not a lot of articles talk about renewals with the new rules, which went into effect on July 9, 2012. This is simply because most mortgages which were signed after that date do not come up for renewal for a couple of years and there has not been a market correction, i.e prices haven't dropped. Banks, realtors, mortgage brokers and even news agencies don't want to rock the boat and scare the general public about potential implications of their equity dropping below 20% when it comes time to renew. Scared population = questions and panic. People would start re-thinking their current positions and may decide to get out of the market. You get too many people like that and guess what happens? The prices crash.

Now I'm not one for speculation so let's move on from that.

One of the sources I have found which talks about renewals with the new rules:

New rules for mortgage finance in Canada | Real Estate Board of Greater Vancouver
Here's one of the Q&A's:

Q Will the new refinancing rules allow a borrower with a mortgage above 80 per cent loan-to-value (LTV) to refinance by extending the amortization period?

A No. Effective July 9, 2012, borrowers will not be permitted to refinance a mortgage above an 80 per cent LTV, unless the borrower has a binding refinance agreement dated prior to July 9, 2012, and a mortgage insurance agreement has been made prior to that date.

I've highlighted it for you in case you miss it. This is new Government regulation. They put these new rules in place to avoid a crash similar to that of the 2008 US fiasco.

Granted, this is talking about refinancing and not renewing, which I will have to dig deeper to find rules for.

This is what i was asking for.
I look forward to more info if you are able to find it on these new rules.

No need to get snarky. I've just never dealt with a bank that had either branches open or more than typical emergency 1-800 numbers available on Sundays, so it was more genuine confusion than anything else.

The CMHC will never publish guidelines specifying when, in term of conditions not dates, lenders are obligated to renew a mortgage with an existing customer.

They cannot force a bank to provide you with financing, they can only establish restrictions with regards to who is eligible for financing. (As the Fed. Gov. also establishes how banks are allowed to leverage their capital, aka the capital of their customers, this is necessary)

So your initial argument cannot be disproven, in the same sense that I can't prove Jesus did not exist as there is no "evidence" to disprove something that has never existed.

Just accept that you can be refused @ renewal.

Another article for you

20 Observations on the New Mortgage Rules

"18. Renewals:

mortgage-renewal

If you have a high-ratio insured mortgage with an amortization over 25 years, you shouldn’t have a problem renewing with your existing lender.

You’ll also still be able to switch lenders and keep an existing amortization over 25 years, assuming:

1. You don’t increase your loan amount.
2. Your loan-to-value doesn’t increase (which could happen if home prices dive), and
3. You have a regular mortgage (i.e., it’s not a collateral charge mortgage).

Of course, if you need to increase your mortgage in the future and have less than 20 per cent equity, you’d be limited to a 25-year amortization. People should keep that in mind if they’re buying with a 30-year amortization today and thinking of upgrading their property down the road."

Bold section is what I was referring to, your home value dropping and you not having enough equity to qualify for a renewal.

One of the things I also want to bring up in this thread is extremely record-low cap rates in Vancouver.

Capitalization Rate Definition | Investopedia


Vancouver has super low cap rates that many in the non-residential market are concerned that we may be primed for a correction/crash etc.

imagine paying a cap rate of 2-5%. In terms of an investment, that's really really low. Think of the many other investment assets that can net you 2-5% annual returns? Even safe assets like GICs can get you those rates.

The valuations are just crazy when you consider non residential properties. But that's a whole different issue.

From reliable sources (i.e. mortgage specialists, etc.), if you tell them you will be renting out your basement suite or coach house, or whatever, half of the potential income generated from doing that can be used as "income" for mortgage qualification purposes.

Only HALF (take note).

Not sure if the rules changed or if they are different policies with different banks.

It hasn't changed...the banks will still do that, but its a shitty thing to rely on. If I can't afford a $4000/month mortgage without basement refugees...there is no fucking way I'd take it one out regardless is the bank approved me.

I wouldn't be able to sleep at night. One small fuck-up and you could lose everything.

I have renters in my townhouse....if their cheque is late or it bounces, I can afford to cover it. I could not imagine my stress level if that were not the case.

Reading this thread has definitely given me more insight. I'll stick with rent. I have enough space and get along with my landlord.

Man, if I want a crappy ROI, I'll just buy another car. At least those are fun :badpokerface:

TD Branches are open 7 days a week.

I wouldnt worry too much on the mortgage renewal.

Heres why. Its canada. No one is going to sit there and watch 30% of people lose their houses. They didnt even get there in the states, and those bastards hate the poor and stupid.

The banks wont win. People wont win. So anyone that didnt buy a 5% mortgage for forty years on a house they cant afford will get screwed again. Should have at least lived large.

Fixed it.

At least, with car depreciation, you can easily figure out what the car will be worth X number of years from now.

And, I definitely agree with "those are fun" (the cars).

House example, for those interested
 

Calculations for a house in Burnaby. These are a lot more complicated so bare with me.

V1031795, 145 N ELLESMERE AV, Burnaby, British Columbia $ V5B1J9

Property on Capitol Hill, typical Vancouver Special, listed for $788,000. Market is a little slow right now due to the season, so let’s say you get it for $750,000

Purchase Price $750,000
Land Transfer tax $13,000
Total purchase amount $763,000
Down payment required 20% = $152,600
25 year amortization
Option (1) 3.790% interest locked in for 5 years,
Option (2) 4.59% locked in for 10 years. (not a lot of people do this, but just as an example)
Option (3) lock in for 5 years at 3.79% and then renew again at the same rate for another 5 years

I got those rates from RBC’s website. Screenshot:
http://imageshack.us/a/img854/1638/0q6f.jpg

Option (1) $3,148.00 monthly payment

Option (2) $3,425.80 monthly payment

Option (3) $3,148.00 monthly payment

Option (1) amortization schedule

Option (2) amortization schedule

Option (3) amortization schedule


Burnaby property tax: $3,343.18 or $278.60/month

Calculated from the following rates and the houses assessment value of $781,000 found on the Burnaby website

http://imageshack.us/a/img13/8674/em7n.jpg

http://imageshack.us/a/img405/157/3nin.jpg


Hydro cost: $150/month
TV/Internet: $150/month
Garbage disposal fee: $205/year for a large container since you will need it for your potential tenants to use as well. $17/month
Water/Sewer fee: $1055.25 or $87.94/month
Home Insurance: $2,500/year or $208.33/month


Schedule of fees for Burnaby found here:

http://www.burnaby.ca/Assets/city+se...s+Brochure.pdf

Total cost of your house per month:
Option (1) & option (3) = $4,039.87
Option (2) = $4,317.67

Now, to actually be able to afford this mortgage, you and whoever you’re buying the place with need to make $140,000/year total, assuming you have the 20% = $152,600 down payment. (And you don’t have any car/other loans and payments). If you get the rental credit for your suite, $1200*50%=$600/month credit, the income requirement drops to around $120,000.

So, let’s say everything is going well, you find good tenants to rent your 2 bedroom basement suite for $1200/month. Your monthly payments drop to:
options (1) & (3) $2,839.87 and option (2) $3,117.67

If for some reason, your basement goes un-rented, you will need to be able to make the full mortgage payment.

Let’s assume that your basement suite will be rented 75% of the time or 9 months out of the year, on average. Sometimes you may get tenants who move in and never leave and sometimes you may have to look for a new tenant every 6 months. This reduces your annual rental income to $1,200/month * 12 months = 14,400 * 75% = $10,800/year
In turn, this changes your monthly payments to

options (1) & (3) $3,139.87 and option (2) $3,417.67

Total cost of your mortgage:
Option (1) over 5 years: Interest paid $107,519.46 + $18,000 (tv/internet/hydro) + $1,025 (garbage disposal) + $5276.25 (water/sewer) + $12,500 (home insurance) + $16,715.90 (property tax) = $161,036.61 - $54,000 (rental income) = $107,036.61

Option (2) over 10 years: $366,676.33 - $108,000(rental income) = $258,676.33

Option (3), same as option (1) multiplied by 2 = $161,036.61 * 2 = $214,073.22



Rental option:
There are a number of homes for rent in Burnaby, most comparable places are renting for $1,800-$2,500/month, for the entire house, including the basement suite. For this example, let’s say you rented a nicer place for $2,500/month. Utilities are usually not included in house rental, so we’ll add those to the cost.

Hydro cost: $150/month
TV/Internet: $150/month
Tenants insurance: $400/year or $33.33/month
Total cost of rental: $2,833.33/month

Savings from renting:
options (1) & (3) $ 306.54/month and option (2) $584.34/month

Cost of rent for 5 years:


$159,274.07 + $2,000 (insurance) + $18,000 (tv/internet/hydro) = $179,274.07

Investing your down payment for 5 years at 2.75% = $4,196.5 per year x 5 = $20,982.50
10 years at the same rate =$41,965.00

Renting is more expensive than buying by $179,274.07 (cost of rental for 5 years) - $107,036.61(mortgage cost for 5 years) - $20,982.50 (investment income) = $51,254.96 over 5 years.

This would probably double for 10 years to $144,474.92 – $41,965 (investment income) = $102,509.92, considering another 5 years worth of rent increases at 3%/ year, but the property taxes would probably increase at least by that much as well.

Savings from paying less in rent than mortgage:

After 5 years:
options (1) & (3) $ 306.54/month * 12 * 5 = $18,392.40 and option (2) $584.34/month *12 *5 = $35,060.4
After 10 years: options (1) & (3) $ 306.54/month * 12 * 10 = $ 36,784.80 and option (2) $584.34/month *12 *5 = $70,120.80

I won’t speculate too much what your bottom line will be if you decided to sell, since no one knows what houses will do.

Let’s assume the value of your house increases by 10% over 5 years and 20% over 10 years:
Selling after 5 years:
Sale Price $825,000
Seller’s agent $13,572
Buyer’s agent $11,553
GST $1,256
Seller Receives $798,619.00

Pay off $529,416.26 remaining mortgage, you are left with $269,202.74
Original down payment was $152,600, $80,983.74 principal paid = $35,619 profit

As opposed to renting: 152,600 original down payment + $20,982.50(investment income) + $35,060.40 savings = $208,642.90

Selling after 10 years:
Sale Price $900,000
Seller’s agent $14,575
Buyer’s agent $12,425
GST $1,350
Seller Receives $871,650.00

Pay off $444,237.43 remaining mortgage = $427,412.57
Original down payment was $152,600, 166,162.57 principal paid = $108,650 profit

As opposed to renting: $152,600 original down payment +$41,965.00 (investment income) + $70,120.80 savings = $264,685.80

TL;DR

Out of curiosity, how come you include the $152600 as part of the renting number? Shouldn't it just be the investment income plus savings since both cases you still walk away with the down payment?
So renting should have saved you $112Kish plus whatever interest you can get for investing the savings or am I not reading the numbers correctly.

actually those calculations show that you lost money renting...

Thanks for the analysis!!! I would adjust the vacancy a little higher than 75% and I think the 20% over ten years is conservative.
Also, the 2nd 5 yr amortization on the mortgage would include more gains (ie more principal repayment) because the mortgage amount would be lower and the payment lower, and if you plug all the surplus from the new lower payment against the principal, you'd also get more savings or equity gain in the house.

However what I would like to highlight just by reading your analysis is that ownership means the homeowner has 427K in proceeds as opposed to the renter who only has 264K in proceeds. So as an investment over a longer period of time, it certainly is a feasible argument.

This probably has to do with your use of the GIC risk free rate to calculate rental investment gains. Fair enough to use the conservative measure. One can argue that over ten years you can use an 8-10% rate to represent gains in the stock market etc.

And if you want to go bass mode you can calculate the tax status of principal residence cap gain vs investment income tax rate!

Again, thanks for your analysis.

you're welcome. There's also an assumption that the home value would increase by 20% over 10 years... if that doesn't happen, the outcome is a bit different.....

I think thats fair, you can argue 2% inflation over 10 years to justify that. Oh and you can also add rental income to the rental scenario as well to put it on equal ground.

Great post, xpl0sive.

There's one significant oversight, however. A major expensive of home ownership is maintenance, and you've not taken that into account.

I second the vote for vacancy rate as well. You usually allocate between 5 and 7% vacancy rate.

An $800 apartment at 5% would accrue $40 a month in vacancy, which works to an empty month every 20 months.

It's one of those things that looks one way on paper and another in real life. One building right now is running a 0% vacancy for 2013(something I'm quite proud of) but others are getting hit hard.

A basement suite is of course more susceptible to the vacancy rate as of course, you don't have 15 or 20 other apartments that even things out.

Honestly, I wouldn't worry about the vacancy rate on high leverage mortgages. You can game the system, and in a crunch rent to shit for bad money. We always joke that its not the last numbers in the rent that make or break, its the first ones. My worry on high leverage is repairs and damage. You have amateurs as landlords that combine: a vacant month, full mortgage payment and $2-3000 in repairs from a bad tenant. I had a tenant drop something burny on my brand new carpet. One year old carpet being ripped out..there's $800 gone. Hell, tack in the real amateur move of letting them get a month behind. THAT's where you start to hurt people that are on the edge.

You could potentially subtract $25-50k from the 5 year bottom line and $50-100k from the 10 year bottom line. Although I would think that most of the money you spend on "maintenance" would end up actually being an upgrade, which in turn would increase the value of the home. Especially when you use the home which I posted as an example. From the photos that home looks mostly original.
Posted via RS Mobile

Depends. On a new home, maintenance should theoretically be kept down to a minimum cost... provided you don't feel like splurging on doing new landscaping or extending a deck or something. However, on a home older than 10 years, then yeah, it's definitely something to consider. On a 20+ home... new roof, new furnace, new water heater, etc. Sure, you can recoup a bit of that money back if you plan on reselling, but just like doing basic repairs on a car, you can only get back so much before you're asking for $7500 for an '87 Tercel simply because it has a rebuilt transmission and new tires within the last year.

Great analysis Xplosive and thank you for taking the time to "SHOW ME (us) THE MONEY!" in the form of calculations.

I know it took you a while.

Thank you.

Took me a good 10 minutes to figure out what the conclusion was, based on your calculations.

So, here is what I derived from your numbers:

------------------
After 5 years, selling, 10% increase in price, you are left with:
$269,202.74 in your bank account (note, this is NOT how much you profited; it is how much you get back from selling after 5 years).

Versus

After 5 years of renting, you are left with:
$208,642.90 in your bank account.
-----------------------

After 10 years, selling, 20% increase in price, you are left with:
$427,412.57 in your bank account

Versus

after 10 years of renting, you are left with:
$264,685.80 in your bank account

-------------------------

By using these numbers, the longer you own your house, the more benefits (in monetary terms) you reap from owning, rather than renting.

You mentioned a 10% growth in price from year 1 to year 5 (5 years).

one of the posters mentioned it was 2% per year in price appreciation.

Because it is compounded (because the increase in price is not "sold off" like what you can do with stock investments or mutual funds, etc.), the effective price increase is a little less than 2% per annum.

----------------------------

What I derived is that if a home buyer is buying to own for the long-term, even if they decide to upgrade to a bigger/more expensive house in the future, over 10+ years, it makes more sense to own than to rent.

----------------------------

This does not take into account when the market will decrease in price.

Lets take the US housing market into consideration.

Admittedly, it is not exactly like the Canadian housing market because the mortgage rules 10 years ago in the USA were MUCH looser than Canadian rules right now.

So, the US policies back then were much riskier.

Anyway:

So, it took the US housing market 3 to 7 years for the prices to normalize depending on location and the cities.

So, what I derived from this and your calculations is that, over 10+ years, to own, even with a crash/price decreases similar to the US, buyers are better off than renters, especially when longer term scenarios are used (like your 10 year scenario).

---------------------------

5 years with correction in price of 10%:
So, lets say, there is a correction of 10% and after that, the price appreciates a little over 2% a year after the 10% decrease/correction, then:

After 5 years, selling, 10% correction/decrease in price and then increases, so that the price stayed the same for the 5 years, you are left with:
$269,202.74 minus $35,619 (profit you would have garnered had the prices increased 2% a year, without the 10% correction) in your bank account.

So: $233,583 left over after selling after 5 years.

Versus

After 5 years of renting, you are left with:
$208,642.90 in your bank account.

------------------------

Of course, there are many factors not taken into account like:

1- The assumed price increases and whether that is too low, or too high, or just right?
2- Home maintenance fees (like our posters mentioned)
3- Rental increases (like you mentioned)
4- and the biggie: mortgage interest rates increases.

I researched into this and found:
Mortgage Rate History - CanEquity

which is based on the BoC rate (overnight rate):
Mortgage Rate History - CanEquity


It looks like the mortgage (average) rate varied by 0 to 1.8% over the last 10 years, which means:

1-It's not that much if you are able to pay the increases in monthly payments when you renew.
2-BUT, if you cannot afford the increase in monthly payments, then...
3-Right now, the lending rules are tighter than they were, 3, 5, 7 years ago, so for any person to quality for a mortgage, banks are scrutinizing and using more conservative measures to make sure than borrowers can pay their payments even if rates increase by 1.8%.
Keep in mind that the 1.8% difference(from 2007's 7% to 2013's 5.2%) took 5 years.
It's not an overnight phenomenon, so this further supports the fact that the longer you buy and hold, the longer it is better to own.

---------

Which brings me back to my statement that a potential buyer should buy to live, not buy to invest.

And:

Over longer periods, the difference or spread between buying and renting is much more obvious, with buying being the better choice (and gains more ground the longer you buy to hold and live).

And:

Buy somewhat less than what you can afford and don't buy more than you need in sq. footage.

And:

Don't time the market because NOBODY (economists, the Finance minister, bankers, whoever) can predict next year's or the year after that, or the next 3 years' prices.

I think the conclusion that a lot of people can draw from the calculations I did is that, the smart thing to do when you first move out, is to rent. Don't buy a 1 bedroom apartment and then hope to "upgrade" to a home later. I keep hearing my friends talk about buying an apartment so they can have equity and be able to buy a house later on. The math clearly shows that if you rent and save money, you will be better off and take a lot less risk.

Once you are ready to buy a house, have at least 20% to put down, have enough income to qualify for a low-interest mortgage and actually need a house, thats when you make the move to buy. Most single people don't need a 5 bedroom house with a basement suite.

When you actually are ready to settle down with someone and buy a house together, you can hopefully each put down 50% of the downpayment and use both of your incomes to pay the mortgage. That way everything is fair and if anything were to ever go sour, you sell the house and both parties walk away with their half. Of course, it's ususally not as clean as that, but you do your best.

As far as prices dropping on homes, it's a bit relative. As long as you're in a good spot on your mortgage and didn't buy with 5% down, even if the prices drop 20%, I think you would be OK. Remember, all the other houses would also drop, so if you decided you needed to upgrade, you would sell cheaper but buy cheaper as well...

People would start running into issues if they bought a $750k house with 5% down ($37,500) and 10 years down the road their house is worth 20% less ($600k) and they have $522,103.85 (calculated at 4.79% with a 10 year mortgage) left on their mortgage. They will barely break even, if they sell the house, after commissions. That would mean that they start from scratch again, just with their downpayment, 10 years worth of payments down the drain.