Regulator eyes tighter mortgage rules

TARA PERKINS - REAL ESTATE REPORTER

The Globe and Mail

 

 

Canada’s banking regulator has been gathering detailed mortgage information from financial institutions, in what could be a precursor to changes in the rules for home loans.

The Office of the Superintendent of Financial Institutions (OSFI) has spent months considering a tightening of mortgage rules for lenders, a decision that’s being weighed as the housing market begins to pick up after a year-long slump. That slide began when Finance Minister Jim Flaherty tightened the rules for mortgage insurance in July, 2012.

Policy-makers in Ottawa, including OSFI head Julie Dickson, have been concerned consumers are taking on too much debt and that house prices have risen too much. Toronto-Dominion Bank economists estimate that home prices are 8 per cent above what they’re actually worth, nationally. The average selling price of existing homes in July was 8.4 per cent higher than a year earlier, driven by a resurgence in the pricier markets of Vancouver and Toronto.

Years of ultra-low interest rates have spurred consumers to take on more mortgage debt than they might have otherwise. To rein the market in, Ottawa has tightened the rules around mortgage insurance four times since 2008 – Mr. Flaherty’s latest move cut the maximum amortization period for an insured home loan to 25 years from 30. Insurance is mandatory for home buyers who have less than 20 per cent of the purchase price of a house as a down payment.

But banks have continued to sell uninsured 30-year mortgages to consumers who have a down payment of at least 20 per cent. The continued resilience of the housing market has economists wondering if Mr. Flaherty has sufficient ammunition left to cool the market again.

OSFI’s ability to directly regulate bank lending practices is a tool that has not been used to a great degree. The regulator could, for example, tighten the uninsured portion of the mortgage market, a move that The Globe and Mail reported in May it was considering.

Sources within the financial sector say that both the finance department and OSFI have been asking banks a variety of questions in recent months, in an effort to get a handle on the impact of last year’s rule changes. A spokesperson for OSFI said the regulator has not yet reached any decisions about whether it will be altering rules for lenders.

Any changes would come in the form of revisions to OSFI’s guideline B-20, a set of mortgage underwriting principles that the regulator first issued last year. The principles outline, among other things, how much due diligence banks must conduct on potential borrowers, when they should conduct appraisals and what paperwork they should have. It also places limits on the size of home-equity lines of credit.

Ms. Dickson said earlier this year that the regulator welcomed the slowdown in the growth of household credit that ensued after the guidelines were issued and the mortgage insurance rules were tightened.

The Canadian Association of Accredited Mortgage Professionals estimates that mortgage credit growth is now about 5 per cent, having peaked at about 13 per cent at the start of 2008. The association estimates that it will fall to between 2.5 and 3 per cent next year. Still, the group expects the total amount of residential mortgage credit to grow to between $1.24-trillion and $1.25-trillion by the end of 2014, having more than doubled in 10 years.

Mortgage rates, which sank to new lows over the past two years, have been slowly rising this summer, which could restrain the market without the need for further regulatory intervention. As of May, the average mortgage rate that homeowners were paying was 3.52 per cent, but posted rates have increased by more than 60 basis points since then.

For now, sales of existing homes are edging back toward the levels they were at before Mr. Flaherty tightened the mortgage insurance rules last summer, driven by rebounding markets in Vancouver and Toronto. Vancouver saw a 40.4-per-cent year-over-year gain in sales of existing homes over the Multiple Listing Service in July, while Toronto posted a 16 per cent increase.

“That deafening silence you hear is the sound of the Canadian housing bears gone quiet,” Bank of Montreal economist Robert Kavcic wrote in a research note Friday. “Not only has the resale market absorbed last year’s round of mortgage rule tightening, but the supposedly at-risk banks have just recorded a unanimously better-than-expected earnings season, with a handful of dividend increases to boot.”

Getting ready to turn a new financial leaf

Melissa Leong
Financial Post, Personal Finance


When Scott Plaskett sits down with his clients in September, he begins with a simple: “What’s new?”
Usually, a lot. After Labour Day, people have stories, the certified financial planner says. These stories lead to financial conversations.

“January 1 isn’t really the beginning of the year for most families. It tends to be Labour Day because everything starts fresh again,” he says. “September seems to be the reset button for most families. The summer is over. They’ve had time off and now everything gets back to the normal routines.”

September is one of her busiest seasons, says Lise Andreana, a certified financial planner in Burlington, Ont., and author of No More Mac ‘n’ Cheese: The Real World Guide to Managing Your Money for 20-Somethings.

“After a full summer of binging on BBQ, beer and Canada’s Wonderland, it’s time for them to weigh in,” she says. “Their expenditures and wants have exceeded their needs. They recognize that they may have gone overboard. Even if they haven’t, it’s a time of sobering up for clients in September.”

After the summer, the most frequent calls that Ms. Andreana fields are about RESPs and concerns regarding investment returns.

“The summer returns are typically lower than the fall to spring. There’s even a saying, ‘sell in May and go away’,” she says. “They’ll see that their statements are not as productive. They’re going to be calling us about their statement that they’ve received in July. This opens the doors for the conversation that we want to have about looking at their asset allocation, how much risk they’re taking versus the return and is that suitable to that particular client.”

The Post spoke to financial planners about people’s biggest money concerns in September and how to start anew with finances.

How am I going to get myself organized?

The vacation is over. You’ve spread out your bank statements, your investment reports and a financial spreadsheet and unless you’re an accountant or Russell Crowe’s numerically inclined character in A Beautiful Mind — it might be intimidating. And if you’re parents to young kids, you’re being tugged in so many different directions (literally and figuratively): Should the money go to RESPs, RRSPs, mortgage payments, credit card debt, child care, new clothes for school, etc.

“There are only two ways of getting out of the mindset [of being overwhelmed]. One is ignoring it and hoping that la-dee-dah things will be fine. For a lot of people, they just muddle through,” Sandi Martin, a fee-only financial planner, says. “Then there’s the other kind of person who does a lot of homework. They feel like they have it under control.”

Take control by figuring out where you stand. “Go through your bank statements with a fine-tooth comb. Just see where your money has been going and ask how far off am I?” Ms. Andreana says.

Did you put the trip to Disneyland on your credit card? If so, you have to get your consumer debt down. “The debt on my card shouldn’t last any longer than the consumable product,” she says. “A coffee shouldn’t go on a credit card ever.”

Create a budget for the month or year. How much can you spend on back-to-school items, for example? Those with children in Kindergarten to Grade 12 in the U.S. anticipate spending an average of $428 on back-to-school items, according to a Deloitte survey.

TIP: Figure out what your clothing budget is (in an average Canadian household, 6.5% of all household spending was on clothing). Consider portioning out a chunk and giving it to the kids to shop. “It was a tool to teach them how to spend their money wisely: ‘This is it. It’s up to you to budget’,” Ms. Andreana says. “It also helps parents because it stops them from giving in to every request for something new.”

How am I going to pay for my kid’s post-secondary education?

Your little ones may just be returning to grade school. But in the future, you could be standing on the lawn, waving at your son as he leaves for university with tears in your eyes. Let those tears be from joy, rather than from stress at being financially pinched.
To figure out how much you’ll need to save, ask yourself, what are your goals?

“Do they want to pay for 100% of the child’s post-secondary education?” Mr. Plaskett says. “Do they want to pay for half? Do they want to have 100% but not let the child know that so the child can work and contribute?”

The best plan to start with is the RESP, he adds.

The government will give you a Canada Education Savings Grant equal to 20% of the first $2,500 you contribute annually to an RESP to save for your child’s post-secondary education, up to a maximum of $7,200.

“The money accumulates on a tax sheltered basis and it gets topped up. When the child goes to school and the money is pulled out, any of the growth is taxed in the child’s hand … and chances are, their tax bracket is quite low,” Mr. Plaskett says.

“The con would be if your child doesn’t go to a qualified post-secondary school. If they decide to become an entrepreneur and skip the schooling process, then they would have to pay back the grant money on … their redemption.”

If a family contributes $50 a month from the time the child is born to when she’s ready to attend university, they will have almost $24,000 with the government’s savings grant and assuming a 5% rate of return, Ms. Andreana says.

TIP: Take the monthly $100 from your Universal Child Care Benefit (for each child under 6) and put it into your RESP. “Take government money to earn some more government money,” Ms. Martin says.

Am I prepared for the unexpected?

Fifty-one per cent of Canadians have three-months worth of expenses set aside for unforeseen costs such as car repairs and job loss, says a recent BMO report. But setting it aside doesn’t mean hiding it under the mattress or leaving it in a savings account.

“I make a clear distinction between having access and having that liquid sitting in a savings account,” says Al Nagy, a certified financial planner and regional director at Investors Group. “I hate money sitting there doing nothing. People deserve to have their money working for them by investing it…I often recommend establishing a line of credit.”

Over the summer, clients have often spent time with friends and family and may be thinking of better caring for their own dependents or they’ve experienced loved ones becoming ill, Mr. Plaskett says.

“It gives us an opportunity to revisit that part of their financial plan: Let’s have a conversation about what would happen to you?” he says. “It’s not a great conversation to have; but it’s one that has to be had.”

You might want to consider death insurance benefits (life insurance) to care for your loved ones and living insurance benefits (disability, critical illness and long-term care) to protect yourself and the family if you cannot work.

TIP: “[People] say, ‘I’ve got coverage through my employer.’ Have you looked at the booklet to see what type? It’s typically not enough. Let’s determine if you might want to top it up,” Mr. Nagy says. “Ask about the definition of disability in your work policy, the limitations and exclusions, and the waiting period before your benefits kick in.”

Will I have enough to retire on?

There’s no magic number to retire on. It will vary depending on your lifestyle. Do you think you’re going to be spending your time reading on the porch and bike riding into town for groceries in retirement? Or will you be traveling the world and sailing on a yacht in the Mediterranean?

“People ask, ‘Is there an actual number that I should be shooting for?’ That number is about how much you’ll spend,” Ms. Martin says. “The only way to rationalize what you will spend in retirement is to look at what you spend now. How much of it is absolute necessary living expenses? Is your mortgage going to be paid off? Are your kids going to be out of your house? Are you going to downsize your home?”

Remember to take into account how long you think you’ll live. Also, will you be getting income from other sources such as an employee’s pension plan or the Canada Pension Plan and Old Age Security?

TIP: Don’t wait. Start early. Time is a huge advantage. If you begin saving at 25, putting $2,000 away a year ($166 a month) until you’re 65, you’ll have $560,000, assuming an 8% annual rate of return, according to Bankrate.com.

Financial Post • Email: mleong@nationalpost.com

No ugly downturn for condo market, even in Toronto: report

TARA PERKINS - REAL ESTATE REPORTER

The Globe and Mail

 

 

A new report from the Conference Board of Canada predicts that the much-watched condo sector will avoid an ugly downturn, even in Toronto.

Economists and policy-makers are keeping a close eye on condos, especially in the country’s most populous city, where cranes dot the sky. A number of economists say that too many units are being built, a development that would put pressure on prices. The Bank of Canada has highlighted the risks that this market could pose to the economy.

Condo sales plunged in most Canadian cities last year, and are expected to be down again this year.
But Wednesday’s report, which was done for mortgage insurer Genworth Canada, argues that the market will not sink too low, and will be propped up in part by population growth and modest employment gains.

While the report does say that higher mortgage rates could cool things off later this year or early next year, it adds that “a flood of foreclosures, and subsequent sharp supply increases, is simply not in the cards.”

Homeowners are taking advantage of low interest rates to pay down their mortgages, offering a cushion when it comes time for them to renew, it says.

“Markets in Toronto and Montreal are cooling, but we think they will avoid major downturns, partly because, on the demand side, demographic requirements remain decent,” the report says. “Also, the banks will continue to require builders to have healthy pre-sale levels before advancing construction financing, keeping supply somewhat in check.”

Vancouver’s condo market, it notes, is already well into a slowdown.

“While regional markets clearly vary in strength, all will benefit from an expanding population and a rising share of condominium-loving empty-nesters aged 55 or more,” the report adds.

It also says that “weak pricing will help affordability.” It predicts that principal and interest payments will drop in at least five major cities this year, led by a 2.5 per cent decline in Victoria.

While payments are expected to rise in Alberta, the report says that Calgary and Edmonton are still the most affordable condo markets when local incomes are taken into account, with mortgage payments taking only about 9 per cent of household income. “By contrast, we expect payments to eat up roughly 20 per cent of Vancouver incomes,” it says.

The report forecasts a 0.5 per cent drop in Vancouver resale condo prices this year, to $364,593. Victoria and Montreal are also expected to record price declines, with Montreal’s average resale price dropping 0.7 per cent to $265,344. Toronto is forecast to see its average price remain flat this year, at $305,239.

The report predicts that all cities will see some price growth, ranging from 1.4 to 3.6 per cent, in 2014.

The Longevity Conundrum: Could Your Retirement Savings Last You to 120?

WalletPop Editor
http://www.walletpop.ca/blog/bloggers/walletpop-editor/
By Matt Brownell


Medical science hasn't conquered death, but it's making some progress.

The number of centenarians has increased by 66 percent in the last 30 years. The Census Bureau projects that 400,000 Americans will be over the age of 100 by 2050. And advances in medical science mean that lifespans of 120 -- and beyond -- are within reach.

But not everyone is thrilled with our increased longevity. A recent survey by Pew Research found that 83 percent of Americans put their "ideal lifespan" at 100 years or less, and just 4 percent said they'd actually want to live to 120. It's possible to live longer and longer, but so far, the vast majority of Americans just aren't that interested in sticking around more than a century.

While much of that has to do with concerns over the quality of life beyond 100, there are also real financial concerns at play: No one wants to outlive their money, and living forever loses its luster when you realize that you're going to be spending the last years of your life struggling to make ends meet.

"Parents have a real desire to leave a nest egg to their children when they pass," says Christopher Hickey, a financial planner for Merrill Lynch. "But if I live to 100, someone's taking me in."

In other words, the difference between living to 85 and living to 105 may be the difference between leaving your kids a nice inheritance and becoming a burden on them. So as medical advances extend the human lifespan ever longer, we have to ask: How do you plan for a retirement that could last as long or longer than you spent working?



Less Saving, More Living

It's a question that many financial planners are taking seriously.

A recent ad campaign by Prudential looked at some of the challenges posed by longer lifespans, with one billboard that read, "The first person to live to 150 is alive today." And concerns over longer lifespans are compounded by the fact that we have less retirement savings to rely upon.

"Look at what's going on with the traditional three-legged stool -- Social Security, pension plans and personal savings," says Prudential vice president Robert Fishbein. Social Security, he says, is due for adjustments that will likely decrease benefits to retirees.

Personal savings rates aren't what they used to be. And far fewer people have pensions these days, as companies have moved from defined benefit plans to 401(k)s.

"And then you throw in the fact we're living longer, and you see why this is the central dilemma," he adds.

Michael Tucker, a professor of finance at Fairfield University who has studied optimal retirement strategies, says that living into your 100s simply requires more retirement savings than most people have.

"If you're going to retire at 65 and live to 120, you need a lot of money," he says. "It's really not feasible to live in retirement for 50 years unless you have $5 million."

Changing Strategies

So if you don't have $5 million at retirement, how can you prepare for an extended lifespan? There are a few solutions, but fair warning: None of them are particularly good.

One is to simply put off retirement. It stands to reason that if we're able to live longer, we'll also be able to work longer. That probably doesn't mean working full time into your 80s, but it might mean working part time or doing consultant work to supplement your retirement income.

Another strategy is one that might give pause to older Americans, considering that it runs counter to the decades-old accepted wisdom -- continuing to grow your nest egg by staying heavily invested in the stock market even into your golden years.

That's a controversial notion. It's generally accepted that you want to transition your portfolio away from equities as you approach retirement age. The idea is that the closer you are to retirement, the less time you have to recover from a market downturn. Most advisers will suggest that you get less into stocks and more into bonds at that point. But that simple calculus goes out the window if you think there's a real possibility of outliving your money.

"You have to take higher risks," says Tucker. "60/40 is the rule, typically -- 60 percent stocks, 40 percent bonds. But if you're going to live that much longer, you'll run out of money." He suggest a portfolio closer to 80/20 or even 90/10.

Of course, there isn't a one-size-fits-all approach when it comes to determining your asset allocation, and leaving 80 percent of your nest egg in the stock market during retirement is something that most advisers will counsel you to avoid at all costs.

"An individual's pension and Social Security benefit will definitely affect what portions of their monies get allocated to equities," says Hickey. "When I'm planning for someone, I want to make sure we have all the bare necessities covered by a guaranteed income."

(Hickey also worries about how stressful it would be to have so much of your money in the stock market when you're retired. "Grandma doesn't get any sleep and dies of a heart attack because she watches CNBC," he quips. "Nobody wants that.")

Indeed, maintaining a riskier portfolio is far from a perfect solution: If you have a 40-year-long retirement, it's inevitable that you'll see your portfolio get burned by at least one downturn. But if living past 100 becomes the norm, you might not have a choice.

So here's the plan for beating the longevity curse: Save more. Spend less. Retire later. Plan for the worst. And most of all, accept that you have to take risks with your retirement money if you want it to last.

But that's not a foolproof strategy, and it's one that a lot of retirees won't follow, anyway. So in the not-so-distant future, we could see a lot of centenarians bemoaning their "good luck" as they watch their retirement savings dwindle with each passing year.

Tucker makes a blunt prediction: "Suicide will be very popular."

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.

Bridge financing can ease closing day stress

Mark Weisleder

Special to the Star
www.thestar.com

Bridge financing could have saved the day last month when a series of disasters on closing day caused three related real estate deals to fall apart.

Bridge financing could have saved the day last month when a series of disasters on closing day caused three related real estate deals to fall apart.
 

When a bank pulled the financing from one buyer at the last minute, it caused all the deals to fall apart because each one was contingent on the previous seller getting the money to close their own sale. This is what real estate lawyers refer to as a train wreck.
 

If bridge financing had been used, it is likely that this could have all been avoided. In a typical bridge situation, the buyer closes their purchase a few days before their sale. They go to their bank and ask for a loan, to pay for the entire purchase, with the understanding they will repay the loan as soon as their sale closes. The interest is usually prime plus 3 or 4 per cent per day. By closing a few days early, the interest cost is typically $100 to $200.
 

One of the benefits of closing a few days early is that you can slowly move into your new home. I have heard plenty of stories where buyers are moving out and moving in on the same day and while they are packed up at 1 p.m., they cannot get into the new home until after 6 p.m., resulting in additional moving costs, since you typically pay by the hour.

 

In my client’s situation, we were fortunate to be able to extend their purchase agreement because our seller did not need the money on closing to buy another property. Still, the sellers could have cancelled the contract and sued for the deposit and any losses that they may have incurred in any resale of the home. In order to extend the closing, my clients had to pay interest on the money owed to the seller during the period of the extension. They also had to pay extra moving and storage costs because their furniture had already been picked up from their home when they found out that the deals could not close.
 

You might wonder how a lender can cancel a loan at the last minute. You would be surprised how often this happens. When a buyer is pre-approved for financing, or even given a commitment from a lender on a specific purchase, it is still conditional on the buyer satisfying all of the lender’s conditions before the closing. This could include providing proof of income, employment letters, as well as proof that they have the entire down payment from their own resources, and are not receiving it from third parties. If there is any suspicion on the part of the lender that their conditions have not been properly satisfied, they have the right to cancel the loan, even at the last minute.
 

If you are considering selling and buying on the same day, first ask your seller whether they need the money to buy another property. Ask the same question of the person buying your home. If the answer to either question is yes, consider closing your purchase a few days earlier and obtaining bridge financing so that you do not become involved in your own train wreck.
 

Buying and selling on the same day is normally a stressful experience even if it all works out, but by taking extra precaution, you can avoid unwelcome surprises later, provided that everyone is properly prepared in advance.
 

More columns by Mark Weisleder

Mark Weisleder is a Toronto real estate lawyer. Contact him at mark@markweisleder.com .

 

RBC hikes special and posted residential mortgage rates

Canadian Press
Financial Post


TORONTO — The Royal Bank is increasing several of its residential mortgage rates, including fix posted rates as well as special offer rates.

Royal Bank’s announcement Wednesday came a day after the Bank of Montreal raised some of its mortgage rates.

For the most part, Royal Bank is increasing the rates by 20 basis points, with its fixed five-year closed mortgage rising to 5.34% and its five-year special rate to 3.89%.

The rate changes are effective Thursday.
 Other rates rising 0.2 percentage points include the bank’s posted three- and four-year closed rates to 3.95% and 4.74% respectively.

Royal’s special offer four-year closed rate also goes up 20 basis points to 3.59%, its seven-year special offer closed rate by 20 basis points to 4.19% and its 10-year special offer closed rate to by 30 basis points to 4.59%.

On Tuesday, Bank of Montreal boosted two of its rates by 20 basis points.

The five-year fixed closed rate and the five-year special fixed closed rate are now both 3.79%.

Laurentian Bank followed suit on Wednesday, announcing 20-basis point boosts to its three-year, four-year and five-year fixed rates.

The rates are now 3.95%, 4.74% and 5.34%, respectively.

No more tightening needed after measures averted housing bubble: Flaherty

Greg Quinn and Theophilos Argitis, Bloomberg News
Financial Post


Finance Minister Jim Flaherty said he isn’t planning new measures to restrain the country’s housing market because his past four rounds of action have already worked to avoid a bubble.

“So far, I’m satisfied that we have a balance in the real estate sector,” Flaherty told reporters in Wakefield, Quebec, at the start of a policy retreat with business leaders. “There are some bumps along the road in Toronto and Vancouver, in particular in the condo markets, but overall, I’m satisfied,”

Flaherty has warned consumers to avoid mortgages that could become unaffordable when borrowing costs rise, after Canadians took on record household debts relative to disposable income.

Flaherty said that “we have been watching the condo market and the housing market very closely for at least five years.” He also said that he does have “contingency plans” he can use if the need arises.

The Bank of Canada has identified household finances as the biggest risk to the domestic economy, while Governor Stephen Poloz has said there are recent signs of a “constructive evolution” in that area.

Flaherty today also reiterated his own commitment to pare the federal budget deficit and spoke out against the extraordinary monetary stimulus seen in the U.S. and Europe.

“We are going to balance the budget without doubt in 2015,” Flaherty said, adding that this will “put Canada in a position of strength” to react to any future global weakness.

Not Fans

“We in Canada haven’t been fans of quantitative easing, unlike the United States and elsewhere,” Flaherty said. “The danger in the longer term to me as a finance minister is inflation.” He said the policy may be discussed at the next meeting of Group of 20 officials.

Canada has been a destination for global bond investors because of the country’s top credit ratings, deficit reduction and stable economy, Flaherty said.

“We can sell anything we produce in Canada around the world, whether it’s in Canadian dollars, U.S. dollars or euros,” Flaherty said in reference to sales of his government’s bonds.

He attributed the record $19-billion divestment of Canadian bonds by foreign investors in June to “some weakness in the Canadian dollar,” without elaborating.

Canada’s dollar depreciated by 1.4% against the U.S. dollar in June following a May decline of 3%. Investors and economists attributed the bond sale to concerns that interest rates will rise as the U.S. Federal Reserve scales back its bond purchases and signs of faster growth in the U.S. and Europe.

As rates rise, brace for mortgage renewal time

ROB CARRICK

The Globe and Mail

               

 

The era of pleasant surprises for people renewing their mortgages is over.

 

After five years of trending lower, mortgage rates have reversed course and started to rise. Aspiring first-time home buyers are being priced out of the market by these increases, but at least they’ve avoided a costly mortgage entanglement. Existing homeowners may simply have to pay more.

 

Current fixed rates are still lower than they were five years ago, but it’s a different story with the once-popular variable rate mortgage. Veteran mortgage broker Vince Gaetano of MonsterMortgage.ca says he has clients coming in with maturing variable-rate mortgages at 2.1 or 2.2 per cent, an all-time great deal. “They know their cash flow is going to get crunched,” he said.

 

A variable-rate mortgage goes for 2.6 per cent with a good discount these days, while a fully discounted five-year fixed rate mortgage rate has risen to 3.49 per cent from 2.89 per cent a few months back. Over the decades you own a house, you’ll win some at mortgage renewal time and you’ll lose some. We’ve had quite the winning streak in recent years for people renewing at lower rates, but now it’s coming to an end.

 

In the years ahead, the biggest financial mistake you make just might be failing to think well in advance about a mortgage coming up for renewal. You have options: Your lender may let you renew early (within 90 days) into a new five-year term, or you may be able to do a “blend and extend.” That’s where you convert the remains of your existing fixed-rate mortgage into a new loan with a blended interest rate. We’ll look at a more aggressive strategy suggested by Mr. Gaetano in a minute.

 

But first, there’s the question of how people will afford higher mortgage payments. We’ve been assured by people in the mortgage industry that homeowners can absorb higher mortgage payments. A 2011 report from the Canadian Association of Accredited Mortgage Professionals said there is “very substantial room” for households to pay higher mortgage rates. Will Dunning, CAAMP’s chief economist, said Monday that he stands by that view.

 

But the issue is not whether you can afford higher mortgage payments. Rather, it’s what you’ll have to sacrifice to make them. Mr. Dunning’s take: “Discretionary spending disappears. A lot of that is in the service sector – people going to coffee shops and restaurants.”

 

With the need for future sacrifices in mind, let’s look at a strategy suggested by Mr. Gaetano for lessening the impact of renewing a big mortgage at a higher rate. The plan: Break your existing mortgage a few months before the renewal date and refinance at current rates so you avoid higher costs in the future.

 

Let’s say your mortgage is coming up for renewal in six months, which leaves plenty of time for more rate increases. Start by getting a commitment from your lender to hold today’s best discounted five-year fixed mortgage rate for 120 days. Then, wait until two to three months before renewal to break the mortgage.

 

Yes, there will be penalties. But by waiting until just a few months before the renewal date, you’ll minimize them. It’s also important to understand that rising rates may actually reduce your penalty.

 

Penalties on fixed-rate mortgages are usually equivalent to the higher of three months’ worth of interest (Mr. Gaetano said two months’ interest would be charged if you had only two months to go) or a calculation called the interest rate differential, or IRD. Among the factors that go into the IRD are the rate on your existing mortgage and the rate the lender can get today. If rates are rising, then your IRD should decline.

 

Mr. Gaetano said an additional $1,000 or so in legal fees would apply if you broke your mortgage and took it to another lender. Even so, he thinks borrowers will end up saving money if the balance on their mortgage is more than $200,000 to $250,000 and the difference between the rate on hold for them and market rates is roughly 0.4 of a percentage point or more.

 

In some cases, it can pay to break a mortgage with even a year to go. Mr. Gaetano said he has clients who owed $980,000 on a mortgage maturing next June 1, with an interest rate of 3.79 per cent. Earlier this summer, he secured a 120-day hold on a 2.89 per cent mortgage. With five-year fixed rates now at 3.49 per cent, the strategy plays out as: Total costs of $8,428 or so in penalties and legal fees versus interest cost savings of $27,766. Net benefit to the clients: Savings of more than $19,300.

 

For more personal finance coverage, follow Rob Carrick on Twitter (@rcarrick) and Facebook (robcarrickfinance).

What’s happening with interest rates?

TMG The Mortgage Group
blogger@mortgagegroup.com


Interest rates are on the rise.  The Big banks have been inching up their rates since May, but have now moved quickly to 5-year fixed rates ranging from 3.79% or 3.89%, which is a 60 basis point hike from what they were six months ago.  The 5 year bond yields have themselves increased by 80+ basis points since the Spring.

However, variable mortgage rates and the prime lending rates are not increasing – yet. So, if you have a line of credit, your rates are staying the same.  If you have a variable mortgage rate or an adjusted rate mortgage (ARM), you’re safe for now.Only fixed mortgage rates are increasing.  If you are renewing a mortgage, this is where you’ll likely feel the impact.

If you opted for a variable rate mortgage, today’s variable rates are, on average, around 2.65% compared to 2.1% five years ago. However, 5-yr. fixed posted rates were hovering around six per cent in 2008, but a mortgage professional could get a discounted rate from 4.2% to 4.9%. As fixed rates rise and the Prime rate stays put, now may be a good time to speak with a mortgage professional about the benefits of going variable.

But if banks follow RBC’s lead, then it will be tougher to qualify for a variable rate. The Royal Bank not only increased its fixed rates but also its benchmark rate for qualifying borrowers for variable rates and for fixed rate terms less than five years. The increase is a 20 basis points jump, from 5.14% to 5.34%, which means a household will need approximately $1,100 more income to get a variable-rate mortgage on a $300,000 house with 5% down.

This is also not a good time to wait it out, thinking that rates will come down as they have in the past. It may not be the case this time. Consumers have been getting the message about curbing household debt and have become better money managers.The housing market is showing signs of life and house prices are stabilizing. The economy is moving forward and low rates are just not sustainable anymore.

Fixed rates rely of bond markets. Bond yields are climbing higher so fixed rates climb right along with them. In June, the 5-year yield was up as much as 20+ basis points in less than 48 hours, driven by optimistic economic comments from the U.S. Fed. In CIBC’s Weekly Market Insight for July 12, 2013, chief economist Avery Shenfeld said, “As we move into 2014, better growth will see the Fed accepting a further climb in long rates.”

Stephen Poloz, the new Governor of the Bank of Canada said he would be holding the prime rate at 1 per cent. This is the number banks use to determine their lending rates for lines of credit and variable-rate mortgages. Poloz also added, “Over time, as the normalization of these conditions unfolds [growing economy], a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2-per-cent inflation target.”

That’s a nice way to say that rates will be going up. When is hard to predict,  but all indications are for early-to mid 2014.

Housing market breathes again

TMG The Mortgage Group
blogger@mortgagegroup.com

After months of somewhat depressing news for the housing industry, Canada’s housing market is showing signs of life. The buzz now is about a soft landing rather than a bubble bursting. Demand has increased in most parts of the country and new construction activity is increasing. Home prices are rising as well.
Despite warnings from analysts about a housing bubble, housing-market data are showing few signs of a sharp correction. A housing bubble is a type of economic bubble that occurs periodically in real estate markets,  characterized by rapid increases in valuations of housing until they reach unsustainable levels and then decline.

Minister Jim Flaherty tightened mortgage rules for a fourth time last year, concerned that an overbuilding of condos could lead to sharp price declines. Former Bank of Canada Governor Mark Carney identified record household debt as the biggest domestic risk to the economy.

However, our low interest rate environment has kept any bubbles or sharp corrections in check.  Now, the impact of Flaherty’s changes seems to be fading.

Households that put their purchase decisions on hold because of the stricter deadlines are now becoming more active. The latest data from Statistics Canada show that the number of homes changing hands is relatively steady, after a period of steep year-over-year sales declines. Even condo developers, who scaled back their activity, seem to be jumping back in. 

Even the Canadian Real Estate Association (CREA) has updated its forecast for home sales activity. May's sales were up 3.6 percent from April, a sign of momentum and the largest month-over-month increase in almost two and a half years. However, affordability may continue to be an issue as home prices tick upwards.

Benjamin Tal, deputy chief economist with CIBC predicts that prices will go down in the next year or two, but not by much. “Prices have held up so far because, as demand has fallen, so has the number of homeowners listing their properties for sale, Tal said in an interview with the Globe be and Mail. “I do not see smoke. I see a boring, slow process over five to seven years that will take fundamentals and prices back in line.”

All the signs point a recovery in the housing market and consumers are deciding to move forward with their purchase intentions. It’s a great time to discuss options with your mortgage professional who can help you navigate the waters of interest rates and mortgage products to find something that fits your financial goals.