What the ads don't say

Here is a builder ad for new condos in Edmonton I got in the mail:


Wow! $824/month
The fine print:
4.15% with a $9875 down payment & combined income of $51,364.

On the back:
*Based on a variable rate of 4.15%, OAC, clients to qualify at a 3 yr posted rate with 5% ($9,875) down. Own with a combined income of $51,364. Rates subject to change without notice. E&O apply.

So I assume the payment is based on the lowest priced unit at$197,500 at a low variable interest rate that is subject to change.

What's not on the ad:

1. 40-year amortization. The only way to get this type of payment is to use an extended amortization. Not surprisingly, this is pretty much standard for first time buyers now.

2. CMHC fees. When putting down less than 20% CMHC fees apply. This is a percentage of the loan balance based on size of down payment and amortization used.

Here is a table of premiums from the CMHC site.

Financing Required	Premium % of Loan Amount
Up to and including 65%	0.50
Up to and including 75%	0.65
Up to and including 80%	1.00
Up to and including 85%	1.75
Up to and including 90%	2.00
Up to and including 95% Traditional Down Payment Flex Down	2.75 2.90
Up to and including 97% Traditional Down Payment Non-Traditional Down Payment	2.90 3.00
Up to and including 100%	3.10
Secured Line of Credit Surcharge Non-amortized repayment option: 5 years 10 years	0.25 0.50
Extended Amortization Surcharges Greater than 25 years, up to and including 30 years Greater than 30 years, up to and including 35 years Greater than 35 years, up to and including 40 years	0.20 0.40 0.60
*Premiums in Ontario and Quebec are subject to provincial sales tax — the sales tax cannot be added to the loan amount.

So with 5% down and 40 year amortization the expect CMHC premium is 2.75+0.6= 3.35%. This gets rolled into the loan balance calculated as follows

$197,500 (purchase price)
-
$9,875 (down paymnet)
=
$187,625 (mortgage balance before CMHC premium)
+
$6285 (CMHC premium)
=
$193,910 (mortgage balance)

Using the above loan amount 40-year amortization and an interest rate of 4.15% returns a monthly payment of $828 using this mortgage calculator. Basically the same as the number used in the ad.

3. Floor plan details

So I am making the assumption that this price refers to the smallest 1 bedroom floorplan on the main floor of the complex. This floorplan is 610 sqft and shown below.

I thought I would be creative and add a 6ft tall person laying on the floor of the master bedroom. (estimated from dimensions on drawing)

It is also interesting to add up the square footage of the rooms above:

living: 11`x 9`2 = 100.83 sqft
dining: 11`x 5`4= 58.67 sqft
kitchen: 7`9 x 8`3 = 63.94 sqft
bedroom: 10’-1 x 11’4 = 114.28 sqft
bath: 5’-1 x 8’2 = 41.51 sqft
total of these 5 rooms:
379.23 sqft

Note that I did not include some of the other areas such as the laundry/"storage"or the "walk-in" closet or hallways/balcony so i do not dispute that it is possible to arrive at the 610sqft using an alternate method. Even still there is more fine print on the floorplan:

The developer reserves the right to make modifications and changes to building design, specifications, features, and floor plans. Suite sizes are approximate, and are based on building area not the legal measurements as shown on condo plan.


4. Condo fees - the quoted price does not include condo fees.

5. Property tax - the quoted price does not include property tax. You know the tax that pays for stuff like this.

These ads are very common in the industry. Take a look at a different one shown below, I wonder what type of financial engineering is used to arrive at the payment shown.


I strongly recommend watching this CBC Marketplace video on buying a new condo.