Finding the upside of the home market

Jim Stirr, a 48-year-old brewery worker, had rented in Edmonton for seven years and suddenly found himself facing a monthly increase that would nearly double his original payments.

So he decided the time was right last November and bought a condo nine blocks away, just weeks after stricter mortgage-lending rules took effect -- changes that did nothing to dampen his enthusiasm for home ownership.

On Oct. 15, the federal government had reduced the maximum insurable amortization period in which to pay off a mortgage from 40 to 35 years, and took aim at interest-only mortgages by requiring a minimum five-per-cent down payment.

"I wouldn't even look at that," said Stirr, of interest-only mortgages. "I realize eventually you have to pay something off the principal. I knew when I was buying I wanted something I was putting some equity in. Now I look at the $300 or $400 more a month [than renting], and it was definitely worth it."

He opted for a 30-year mortgage with bi-weekly payments only $58 more than those on a 35-year mortgage.

"When I looked at the amortization, I didn't want to pay longer than I had to, but I wanted something affordable as well."

The Canadian government has been wrestling with the dilemma of making home mortgages readily available to stimulate the economy, while at the same time preventing a glut of housing foreclosures because payments cannot be maintained.

The result has been a rash of changes in mortgage restrictions, and some new incentives.

A homebuyer with less than a 20-per-cent down payment must get mortgage insurance with a firm covered by the Bank Act.

The Canada Mortgage and Housing Corp. (CMHC), a Crown corporation with 70 per cent of the mortgage insurance market, said in early 2006 that it would insure mortgages with amortization periods of 30 years, compared to the traditional 25.

Genworth Financial Canada, one of a small group of private insurers, said it would insure 35-year mortgages.

Then CMHC matched that and went one better by also insuring interest-only loans that effectively required no down payment.

Soon CMHC, Genworth and AIG United Guaranty all insured 40-year mortgages -- and there was talk of insuring 50-year mortgages.

Former Bank of Canada governor David Dodge warned that a glut of homebuyers would cause a run-up in prices. At the same time, people extending the amortization period from 35 to 40 years lowered their payments on a $240,000 mortgage at 5.75 per cent by $50 a month, but it cost them an additional $55,220 in interest.

And interest-only loans meant people with a house falling in value could quickly owe more on their home than it was worth.

"If you couldn't afford five per cent down or have a conventional mortgage because your gross debt-service ratio was greater than 30 per cent, reducing your payments means you're going to pay for your house three times," said York University finance professor Moshe Milevsky. "It's instant gratification."

When more than half of the mortgages taken out in Canada during the first six months of 2008 had 40-year amortizations, and as housing foreclosures mushroomed in the United States because mortgages had become too easily obtained, Canada tightened lending practices on new mortgages last fall.

Then the federal government introduced measures in January's budget to make home purchases and renovations easier to handle.

The First Time Home Buyers' Tax Credit was created, meaning first-time homebuyers acquiring a qualifying home will be eligible for a non-refundable tax credit, based on an amount of $5,000 and worth up to $750 for 2009.

The amount first-time homebuyers may withdraw tax-free from their RRSP under the plan was also increased, from $20,000 to $25,000.

And existing homeowners are allowed to claim a non-refundable tax credit on eligible home improvement expenses between Jan. 27, 2009 through Feb. 1, 2010, on expenses greater than $1,000, up to a total of $10,000. That's a savings of as much as $1,350.

Receipts are necessary and may be claimed for projects such as renovating a kitchen, bathroom or basement; installing carpet or hardwood floors; building an addition, deck or fence; replacing a furnace or water heater; painting a house; resurfacing a driveway; or laying new sod.

These are things Stirr wishes he had known were coming before he purchased his condo.

"When I bought, it was vacant and I repainted and redid all the carpets, but, definitely, if I had some inkling I would have waited," said Stirr. "It would have made a huge difference."

(prepared by Ray Turchansky/Vancouver Sun)