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In Mortgages, What’s Old is New Again

In Mortgages, What’s Old is New Again - The "One Week's Salary" Rule

Back in the good old days – assuming you deem pre-Second World War the good old days – there was a time-honoured maxim. It went like this: "One week's salary for one month's mortgage payment."
That was the measuring stick for how large of a mortgage you should get. It defined a comfortable life whereby your payment would never be big enough to cause ulcers, marriage breakups and other bad stuff.
Over the years, for reasons that follow, that measuring stick got bigger. But in 2016 and 2017, regulators put the smackdown on free-spending mortgagors, bringing us all the way back to the days when families gathered around the radio and ate dinner at the same table.
As the 1980s began, homeowners spent an average of 17 per cent of their income on mortgage payments, property taxes and heat. But as people demanded nicer homes closer to big cities, home prices climbed faster than incomes, and so did debt-servicing costs. By the fall of 2016, new home buyers were spending an average of 25.6 per cent of their income on basic housing outlays.
Most new buyers have never heard of the one-week pay rule because one week's pay stopped buying what it used to. Today, it doesn't get you to first base in our biggest cities. As of December, the average wage earner making $992.87 a week and putting down 20 per cent could get a $289,000 mortgage with a payment that's 25 per cent above their weekly earnings. As years went by, lenders and policy makers catered to home-buyer demand by allowing a bigger percentage of income to be consumed by housing costs. Whereas the old rule of thumb suggested no more than one-quarter of your income should go to housing, the industry let that number rise, up to 39 per cent (or even 50 per cent at pricey non-prime lenders).
The trouble is, not only did debt ratios and allowable amortizations go up, but interest rates went down. So people could take on more and more debt with the same payment size. That's a concern when rates are falling. But it's a macroeconomic danger when rates are climbing.
Until somewhat recently, the stats hadn't been overly alarming. Most people were merely taking on the same amount of debt as they always have, relative to income. But a rising-rates environment changes everything. A significant minority of those same borrowers would find it much harder to make those payments if interest costs "normalized."
Seemingly overnight, federal policy makers have taken us back to yesteryear.
By imposing new mortgage stress tests, they've required most lenders to use a two-percentage-point higher interest rate when assessing people's debt-service capacity.
Effectively, that has pushed down the maximum mortgage payment that the average Canadian can be approved for to, you guessed it, about one week's pay.
So, it seems what's old is new again. Whether it was Ottawa's intention or not, they've single-highhandedly brought us back to a quaint historic metric: "One week's salary for one month's mortgage payment."


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What is a pre-sale?

Example scenario: When the developer intends to build an apartment building and applies for financing, the bank will grant financing under certain conditions. One of them will likely be a certain percentage of pre-sales the developer will need to secure before receiving the funds.
It is common practice for a developer to approach several real estate investors and offer them an opportunity to purchase units of the non-existent building at a discounted price, and on good terms.

Once the number of pre-sales is accomplished, the developer goes ahead with the construction, which will likely take two years or longer to complete. During construction, their marketing team offers the remainder of the units for sale at market value to the public.

If you are a RE investor, you know that it is preferable to be buying at the pre-sale prices, not market value prices.

The question is, how do you get the invitation to buy a pre-sale?
In the past many years, investors have made substantial income by buying at wholesale prices and selling at retail prices even before they needed to complete their purchase. I saw many of them lining up and sometimes even camping overnight in front of the sales center to get a chance to buy at lower prices, but not everyone was lucky enough. You needed to be well-connected to get an opportunity, and you had to act fast.

Today is a bit of a different story. Several projects in the Lower Mainland and Fraser Valley offer really good prices and incentives to secure a unit now and complete the purchase two or three years later. The list of incentives varies from one project to the next. Besides attractive prices, you can get low deposit amounts (5-15%), low or no assignment fees, free updates, a mortgage rate buy-down program, extra parking and more.

A month ago, I helped a few of my clients purchase a presale in Surrey that sold out in 2 days, and I know of another good developer that will be offering a few units for sale as well.

If you would like to know more about these opportunities, I would encourage you to call or email me, and I’ll be happy to send you details on those projects.
Kind regards,
Tibor Bogdan
Century 21 Creekside Realty Ltd.
45428 Luckakuck Way #190, Chilliwack, BC V2R 3S9
cell: 604-855-2521
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