10 Reasons to use a Real Estate Professional

Just like it is vital to seek the unbiased expert advice of a mortgage professional who can shop the market through a number of different lenders and best assess your personal needs, so too is it important to seek out the professional advice of a licensed realtor when shopping for a new house or to list your existing home for sale.
A real estate professional...

1. Knows the market. They are local market experts. They can provide you insights and detailed information about a specific neighbourhood.
   
   
2. Has the training and experience. A real estate professional understands the process, opportunities and issues when it comes to buying and selling homes.
   
   
3. Offers price guidance. An agent will help guide clients to list their homes at the best selling price.
   
   
4. Offers professional networking. Real estate agents network with other professionals, many of whom provide services that you will need to buy or sell. Due to legal liability, many agents will hesitate to recommend a certain individual or company over another; however, they can give you a list of references with whom they have worked and provide background information to help you make a wise selection.
   
   
5. Markets your property to other real estate agents and the public. Over 50 per cent of real estate sales are cooperative sales; that is, a real estate agent other than yours brings in the buyer. Your agent acts as the marketing coordinator, disbursing information about your property to other real estate agents through a Multiple Listing Service or other cooperative marketing networks, open houses for agents, etc.
   
   
6. Knows when, where and how to advertise your property. When a property is marketed with the help of your real estate professional, you do not have to allow strangers into your home. Your agent will generally prescreen and/or accompany qualified prospects through your property.
   
   
7. Helps you negotiate. The purchase agreement usually provides a period of time for you to complete appropriate inspections of the property before you are bound to complete the purchase. Your agent can do more than negotiate price; they can get you the best terms and conditions to protect you. This can be advice about home inspections, who to contact with regard to financing, information about home insurance and most aspects of home buying and selling.
   
   
8. Understands Market Conditions. Real estate agents can disclose market conditions, which will govern your selling or buying process and will offer you a Comparative Market Analysis.
   
9. Guides you through the closing process.
   
   
10. Answer questions after closing. Many questions can pop up after closing and agents are there to help answer them.

S&P cuts outlook on 7 Canadian banks

Tara Perkins - Financial Services Reporter, The Globe and Mail

Ratings agency Standard & Poor’s has revised its outlook downwards on seven Canadian financial institutions, citing high housing prices and consumer debt.

S&P affirmed the ratings for Bank of Nova Scotia, Central 1 Credit Union, Home Capital Group Inc., Laurentian Bank of Canada, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank, but in each case it cut its outlook from stable to negative.

“A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks,” the rating agency stated in its decision. “Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.”

The dimming prospects for the global economy added further impetus for the change, because Canada could see unemployment rise, further constraining income growth. That, in turn, could make it harder for Canadians to pay off their debts and amplify the country’s vulnerability to a housing market correction at some point in the future, the agency said.

The negative outlook recognizes that Canadian banks could see their financial performance and capital levels hurt by these factors, and could also suffer from stiffer competition among one another for loans as consumers try to tackle their debt loads.

House prices have roughly doubled over the past decade while, relative to GDP, consumer debt has risen from about 70 per cent to more than 90 per cent, S&P pointed out. And it suggested that Ottawa’s actions have not done enough to stem what could be a significant problem for the economy. “Successive government efforts since 2008 to counteract the stimulative effect of low interest rates on consumer borrowing and home prices have done less than we expected to counteract the growing level of consumer leverage and housing market risk in Canada,” S&P said. The agency is now watching to see if the most recent moves that the government has made will have better results.

Save on your mortgage

Paying off your mortgage faster has the excellent benefit of reducing the amount of interest that you pay on your mortgage. How? By using privileges provided by the lender.
There are two types of mortgages; open and closed mortgages.
With OPEN mortgages there are no limits as to how fast you can pay down your mortgage; however you do pay a higher interest rate for this privilege. Typically, this type of mortgage is used by real estate investors who know they are only going to hold the property for a short time. Their interest expense is also tax deductible.
CLOSED mortgages are the preferred choice for owner occupied properties and also offer privileges for paying down the mortgage faster with the ultimate benefit of reducing the interest you pay over the life of your mortgage. These programs differ from lender to lender; at the end of the day you would not choose a lender based solely on this.
Payment Privileges offer a Few Different Options:

• Annual or periodic lump sum payments: Payments of up to 15%, 20%, or even 25% of the original principal amount are allowed each year.
• Increase your payment: You may also increase your current payment by up to 15%, 20%, or even 100% each year.
• Double your payments: Some lenders also offer the option of doubling any and all payments.

The above options are "non-cumulative": Lenders embrace a "use it or lose it" policy, meaning that if you do not use your 15% or 20% privilege in year one, you cannot make a 30% or 40% lump sum payment is year two. Passing up on privileges in any one year does not affect your privileges in future years.

• Accelerated or rapid payments: With each payment (weekly, bi-weekly, or semi-monthly) you apply a small incremental amount of money directly to the principal. This privilege is designed so that every 12 months you make the equivalent of 13 payments.

An example of how taking advantage of even one of these privileges can save you thousands is easily illustrated with the Accelerated Payment Privilege.

On a $280,000 mortgage that is amortized for 35 years at 5.3%, the regular bi-weekly payment would be $671.54. The accelerated bi-weekly payment would be $728.36. This would allow you to pay your mortgage off in 28.4 years. Using a constant interest rate, you would save $73,068 in interest expense.
If you were to make a lump sum payment of 2% each year on that same mortgage and just make regular payments, you would pay off the mortgage in 19.75 years and save $161,451 in interest expense...all for an investment of only $5,600 each year, and you would be mortgage free 15.25 years earlier!

Why consumers are unprepared for the next financial crisis

Anil Giga, Special to Financial Post 

Bank of Canada governor Mark Carney has been warning about the high level of consumer debt in Canada since 2011, and this advice has been largely ignored.

Canadian consumers’ debt levels today are by any measure higher than they have ever been. The irony is that we are on the cusp of the second phase of the financial crisis that began in 2008 and, this time, Canadians are more vulnerable than Americans or even the Europeans.

We knew the cause of this financial crisis when it arrived in 2008. The previous 20 years, consumers in the Western world had embarked on a spending binge financed by debt.

Consumers piled on unprecedented levels of debt to purchase their homes, investment properties, cars and anything else the banks and credit card companies would finance. Economic reality arrived in 2008, initially in the U.S., and the rest is history.

We do not need to be financial experts to understand that if we keep eating tomorrow’s lunch today, then when tomorrow arrives, there is no lunch. Consumers faced that moment in 2008. The world’s financial system almost went off the cliff. We know how we pulled back from the brink: The U.S. and other economies bailed out the banks and stimulated their economies with trillions of dollars of freshly created debt.

Of course, we never really solve a debt problem by creating more debt, although this is a good Band-Aid that kicks the can down the road. However, now, as we see in Europe (and soon in the U.S.), the governments have too much debt and are finding it difficult to borrow more without paying very high interest rates.

The question that needs to be asked is, who bails out the governments? After 19 economic summits in two years, Europe is still trying to figure this out.

‘It was debt that caused the crisis to begin with and, in Canada, we are happy to ignore the lessons’
And what of the Canadian consumer — what has he been doing while the euro Titanic struggles to stay afloat? China’s response during the economic crisis was to undertake a huge spending binge, building new cities, malls, office towers and condos. This lifted the commodity prices that had crashed and cushioned Canada’s downturn.

We should remember that oil prices had sunk to $40, and the other resources responded in a similar fashion. In a way, this has given Canadians a false sense of security. While house prices have been crashing in the U.S. and Europe, Canadians have gone on a borrowing binge, bidding up house prices to frothy levels completely oblivious of the reality.

Canadians look at the news that emerges daily from places such as Greece, Portugal and Spain as if these events are taking place in a far distant galaxy. Huge austerity measures and 25% unemployment rates in some of these countries have done little to temper the Canadian consumer’s appetite for debt.
It was debt that caused the crisis to begin with and, in Canada, we are happy to ignore the lessons. That is, of course, until the same movie arrives in Canada.

Canadian consumers should be aware that “GREECE R US” will probably arrive by 2014. This is not a prophecy, just economics.

Europe represents almost 25% of the world’s trade, and Europe is in a recession that is getting worse by the day. The U.K. is also in a recession, while the powerhouse economies of China, Brazil and India are decelerating so fast that we can see the skid marks.

Finally, look at the U.S. economy. We see it muddling through with the risks of a recession rising by the day. The International Monetary Fund has once again reduced its growth forecasts and issued the following statement: “Growth in most major economies has showed signs of slowing in recent months, partly due to Europe’s chronic debt crisis and economic malaise.”

This is stating the obvious. So what we have taking place right in front of our eyes is a synchronized global economic slowdown.

The fact this is happening at a time when interest rates are almost at zero in the U.S. and Europe, and that the Western governments are already burdened with too much debt, which limits what they can do, should be a warning sign to everyone, especially the Canadian consumer.

‘Canadians will be going into a very slow economic period, and maybe even a global recession, with unsustainable debt levels’

Here it is in plain English: Every economy we trade with is slowing down, and this will impact us more than most. Why? Because Canadians will be going into a very slow economic period, and maybe even a global recession, with unsustainable debt levels.

The high debt levels will have a magnified effect as unemployment increases during the slowdown, and house prices start to drop from their overinflated valuations.

Our federal government obviously doesn’t get it. In fact, besides tinkering with the mortgage amortization, it has done little to prepare Canadians. So Canadians would be wise to take proactive steps to anticipate and prepare for a crisis that is heading to Canada.

The best thing Canadians can do is go back to the basics of prudence and financial management. Recessions come and go; it is the weak hands that get into trouble.

Here is a checklist:

- Build up a safety nest of at least six month’s expenses.

- Don’t live within your means, live below your means. The bigger the margin, the more you save.

- Get rid of debt. If you have investment properties, consider selling them as soon as possible, as this winter may be too late.

- If you have a mortgage on your home with a floating rate, consider locking in the rate for between three to five years. Similarly, with lines of credit that you cannot pay off. Interest rates may jump without warning.

- Pay off your higher interest rate debt, such as credit cards, first.

- Look for a secondary source of income to increase your safety net, such as a part-time job or by renting out an eligible basement.

- Expect a lot of volatility in the stock markets. If you have money invested in the markets that you may need soon, you shouldn’t be in the market.

- We are entering an age of frugality, so be frugal, but not cheap.

- It would be wise to put off big-ticket purchases and make do with what you have.

- If you are considering selling your home to buy another, make sure yours is sold first or you risk being stuck with two homes and extra debt in an uncertain economy.

- Think twice about quitting your job.

- Reconsider whether you need all the cars you have. Each car has hidden costs.

Canadian housing looks to be in soft landing, but actually heading for 25% crash: Capital Economics

John Shmuel 

A day after RBC put out a report saying that Toronto’s condo market is not in a bubble, Capital Economics has come out with its own report saying that Canadian housing, including Toronto, is most certainly in a bubble.

David Madani, economist with Capital Economics, said on Wednesday that Canada’s housing market is currently experiencing what appears to be a soft landing, but is, in fact, a bubble in the process of bursting.

“There is always a stand-off period at the end of a housing bubble, when prospective buyers refuse to meet the price of sellers, who refuse to drop the asking price,” he said in a note. “Eventually it begins to dawn on sellers that the market has shifted and, as they become more desperate, they eventually agree to lower their asking price. But until that happens, any stagnation in prices can be misinterpreted as a successful soft landing.”

Mr. Madani said that he expects housing prices in Canada to crash 25% over the next couple of years. He originally made that forecast in June of 2011 and reaffirmed it Wednesday. His update follows a report from the Royal Bank of Canada, the country’s largest mortgage lender, that said that Toronto’s red hot real estate market is not a bubble.

In that report, RBC’s senior economist Robert Hogue said that demand in Toronto is in line with supply, dismissing claims that a condo bubble has emerged in the city.

A flurry of speculation has emerged about the fate of Canada’s housing market following changes to mortgage lending rules recently. Last month, Finance Minister Jim Flaherty changed the maximum amortization period for a mortgage from 30 years to 25 years. Those changes, combined with the prospect of looming interest rate hikes from the Bank of Canada, have raised questions over the effects they will have on Canada’s housing market.

Mr. Madani said that the changes will affect first-time home buyers the most, who make up 50% of new home sales and a quarter of resales.

Housing prices typically respond to changes in the market with a lag of five to nine months, according to Mr. Madani. He points out that home sales have already seen material declines, down 4% over the last two months. Vancouver in particular has been hard hit, with sales down 28% year-over-year.

“Overall, the willingness of buyers to pay these historically high house prices now looks to be proving fragile against the increasingly disappointing macroeconomic backdrop,” he said. “The housing bubble in Vancouver already appears to be deflating, with only Toronto defying the inevitable. Accordingly, we expect substantial declines in house prices over over the next year or two.”

Meet the one-year fixed rate mortgage

Robert McLister

Vancouver — Special to The Globe and Mail

Over last few years, banks, economists, the mortgage industry and even Finance Minister Jim Flaherty have all been singing the same tune: That rates have nowhere to go but up.

Instead, mortgage rates have dropped even further. That hasn’t discouraged the mortgage establishment, which continues to push long-term fixed rates. And for some people, that’s good advice.

But with no sign of imminent rate hikes, borrowers are starting to question the professionals. Clearly, locking into a long-term fixed rate is not the no-brainer many are painting it to be. If variable rate discounts were as good as they once were, lenders would be selling a lot more of them than they are.

Unfortunately, the variable rate du jour is a stingy prime minus 0.25 per cent (2.75 per cent). That makes the interest savings of a floating-rate mortgage pale in comparison to the rate security of the more popular 3.09-per-cent five-year fixed.

Luckily, the mortgage world isn’t limited to two terms. There are a heap of options besides the five-year fixed and variable.

One term, in particular, gets overlooked: the one-year fixed. Only one in 16 mortgage shoppers opt for a one-year fixed, according to the Canadian Association of Accredited Mortgage Professionals.

Yet, despite its obscurity, the one-year is becoming the new variable rate. Why? Because one-year fixed mortgages sell for just 2.39 per cent at the moment. That’s the rate equivalent of prime minus 0.61 per cent, which is a decent variable rate historically.

Moreover, in a rising rate environment, one-year rates offer a bonus compared to variable rates: They reset more slowly. That means your rate increases less frequently, reducing your interest costs as rates climb. (The reverse is also true.)

Interestingly, one-year and variable rates happen to be close cousins. They have a 93 per cent correlation which, as you can see in the accompanying graph, indicates they generally move together.

Both the one-year and variable are highly dependent on what the Bank of Canada does with rates. On that note, it’s worth mentioning that bond market traders – who always put their money where their forecasts are – currently expect a greater chance of a rate cut in the next year than a rate hike. For those who give credence to the financial markets, this may make one-year terms slightly more attractive.

Looking further out, many believe Canada’s mature economy, a lacklustre U.S. economy and the Bank of Canada’s inflation vigilance will likely keep growth and inflation restrained for the foreseeable future. Add to that the European debt crisis, the pending U.S. fiscal cliff, and a slowdown in Asia, and the rate outlook starts looking benign.

If you end up taking a one-year for the reasons outlined above and you end up being right, you’ll enjoy a bit of savings. At current rates, a one-year term will save almost $700 of interest per $100,000 of mortgage in the first 12 months.

What’s more, you can lock in your renewal rate three to six months in advance, depending on the lender. Some one-year terms are even convertible, which means they give you the option of switching to a five-year fixed rate at any time without penalty. (The tradeoff: The rate you receive when converting will not be the best in the market.)

And speaking of penalties, one-year terms make it far easier to avoid them. If you need to change your mortgage or make a large lump-sum payment, you don’t have to wait long for renewal to avoid getting hit with those fees.

But one-year mortgages are not without shortcomings:

Greater rate risk: Your interest rate resets more often. If rates surge one per cent, your payments could jump roughly $50 a month for every $100,000 of mortgage.

Re-qualification risk: If your employment changes, your finances deteriorate, or mortgage rules change (again), you could find it hard to switch lenders or get re-approved at renewal. Most lenders offer renewals without re-qualifying you, but that is never guaranteed.

Upfront qualifications: It’s usually harder to qualify for a one-year fixed than a five-year fixed. With a one-year mortgage, lenders make you prove you can afford much higher payments in case rates go up by your renewal.

Frequent renegotiation: Some people just loathe haggling with a lender every 12 months.

Switching fees: If you need to switch lenders at renewal to get a better rate, the minimum you’ll pay is a discharge or assignment fee. Your new lender will rarely cover that cost. There may be additional fees as well, like legal and appraisal costs, depending on the lender you move to and your type of mortgage.

One-year rates are generally suited to financially sound risk-tolerant borrowers, or those needing a short-term mortgage. If more than a third of your income goes toward housing expenses and you have minimum savings or equity, a one-year term probably isn’t for you.

For others, a one-year mortgage makes for a fitting variable-rate substitute. And that will probably be the case for a while – at least until the variable discounts of old return.

Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at Mortgage Architects. You can also follow him on twitter at @CdnMortgageNews.

Canadian Housing Bubble: Data is Not Art

Article written by Boris Bozic

“No Condo Bubble Here.

Really? Everything I’ve been reading indicates that the condo market in Toronto and Vancouver was going to play a key role in the Canadian housing bust.”

Ever look a painting and say to yourself “it looks like something my six year old painted in art class”. That’s the thing about art – it’s all in the eye of the beholder. One person’s interpretation can be radically different than someone else’s. That’s perfectly acceptable when it comes to art. Art is about taste. We all know that data can be manipulated to make a point but it’s fascinating how simple raw data can paint completely different pictures. And is there any room for taste when analyzing data? I was stuck by a story in the Financial Post this morning, the headline read; ”Toronto not in condo bubble: RBC”

Really? Everything I’ve been reading indicates that the condo market in Toronto and Vancouver was going to play a key role in the Canadian housing bust. Surely this article is based off the same data that Robert Hogue, RBC’s senior economist, used for his most recent report. According to Mr. Hogue, “Toronto’s condo building frenzy over the last few years is mainly a response to the steep drop in new single-family homes being built. Efforts by the Ontario government to stem urban sprawl in the GTA is one of the reasons why developers are being forced to build laterally, said Mr. Hogue. To accommodate the 38,000 or so net new households it sees every year, the GTA must increasingly expand its housing stock ‘vertically’”.

Hang on a second, Mr. Hogue is the only economist to factor in that 38,000 new households are required to meet Toronto’s needs, and that the Ontario government is making it difficult for builders of single family homes outside of the GTA? Kudos to Mr. Hogue and RBC for discovering that super-secret bit of information. Let’s see what other nuggets Mr. Hogue came up with, like investors buying up condo’s with the sole purpose of flipping the property. “Their involvement has not inflated overall housing demand beyond household formation and may contribute only to a modest overshoot in the coming years if demographics weaken”. Well, what are we supposed to think now? I say that with tongue firmly planted in cheek.

For transparency purposes, Mr. Hogue did sound an alarm bell, “if investors overwhelmingly buy single-bedroom units, for instance, it could skew demand and result in a bubble.” Let’s also not forget that if aliens land and suck the brains out of every builder and then program them to build one bedroom units only, that too could contribute to a bubble. I think we have it all covered now. The fact is that facts are interpreted differently. One analysts’ “slight overshoot” is another’s “Armageddon”. For debating purposes that’s okay, for making public policy, not so much.

To read the full story in the National Post, please click here.

Questions to ask your lender before signing onto a mortgage.

Posted on Jul 19, 2012 in Mortgage Market Updates and News

It’s comments like these, “He also reduced the amount consumers can borrow against their house to 80 per cent, down from 85 per cent,” that have really confused many borrowers.

Since the new mortgage qualification guidelines were announced and came into effect July 9th, 2012, I’ve had many people call me and ask if they now need 20% down to purchase a home. I can see how this rule change could be misconstrued but to clarify, no, this is not the change that was made.

Although the wording of the rule change says ‘the amount a consumer can borrow against their home’ they’re not speaking about the initial purchase, and that’s where the confusion is coming in.

When purchasing a home, the initial mortgage can still go to 95% loan to value, and therefore a down payment of 5%, this hasn’t changed. What the rule change refers to is the amount you can re-mortgage to later on in your mortgage life.

You’ll still be able to renew with your current lender even if your equity is less than 20%, you simply won’t be able to pull any extra cash out of your home or change lenders until you get to that 20% mark. If you’re buying with 5% down (adding CMHC or Genworth Insurance to that as well), it will likely take you quite a while to get to 20% equity, starting at less than 5%.

So now more than ever, it’s important to begin your initial mortgage with a quality lender.

What makes a good lender? There are a few things to consider and Sharie Marie Francoeur, Mortgage Professional with TMG The Mortgage Group Canada Inc, can help you find the best lender for you. Consider this:

• Initial rate – this one’s obvious, you want the best initial rate available when you sign on with a lender. It’s easy to see what rates are, look online every lender, bank, broker, etc displays their rates online. That being said, please do be aware that different rates have different requirements, and you may not always qualify for the best rate.
  
• Renewal rate – not all lenders offer their best rate at renewal. If you’re going to be unable to change lenders at renewal due to not having 20% equity in your home, you want to ensure you’re with a lender who will give you their best discounted rate, and or rate special upon renewal and not their posted rate. A lot of lenders unfortunately know that they have the client stuck and therefore don’t offer their best rates at renewal
  
• Prepayment privileges – most lenders offer something, but it’s important to understand what the terms of the prepayment rights are. Is there a certain day of the year you have to make your prepayments on or can you do it any time? Is there a minimum amount? Can you make multiple prepayments in a year? If you think about the likelihood of you actually making prepayments on your mortgage if you can do it any time, minimum $100 payment, and multiple times per year. Vs if you can make one payment per year, minimum $1000, and if you miss that date you have to wait until the next year. The easier it is to do, and the more flexible, the more likely you are to actually make prepayments.
  
• Early Payout Penalties – This is a huge one. Does your lender calculate prepayment penalties based on their POSTED RATE? Lenders that have high ‘posted rates’ and much lower discounted rates, have much higher penalties if you need to pay your mortgage out early. I recently had a client who was charged a penalty with her lender of $13,473 to pay out her mortgage 2 years into her 5 year term. If she had been with a lender who doesn’t use posted rates, Merix Financial for instance, her penalty on the exact same mortgage, would have been $2981. This is an insane difference. Now of course it’s best to not pay your mortgage out early, transfer it if you can, have someone assume it, etc. But sometimes you need to pay out your mortgage, and it’s best to know when you get into a mortgage if you could be stuck with a huge penalty or not. Ask your lender if they use posted rates and what their current posted rate is compared to their discounted rate. If it’s more than half a percent difference (sometimes up to 2%!!!), you’ll be looking at a much larger penalty with that lender.

These are the questions I reccommend asking before signing onto a mortgage agreement. Most lenders won’t volunteer the information if it’s not positive, so you have to ask to protect yourself.

The decision on debt: What's the right mortgage?

Variables at play with recent rule changes and coming hikes

By Martha Uniacke Breen, National Post

For some weeks now, Bank of Canada governor Mark Carney, Finance Minister Jim Flaherty and most of the major Canadian banks have been warning that the record low interest rates of the past several years are over, and that a hike - perhaps even several - is on the horizon. At the same time, the banks have been offering truly incredible deals on longterm fixed rate mortgages, some of them barely higher than prime.

So all of this leaves the variable-rate mortgage holder with the inevitable question: Is it time to lock in from a variable to a fixed rate? Well, as it turns out, the answer is a indisputable, unequivocal - maybe.

For every expert who says that absolutely, you should lock in now while rates are still low, there's another who argues just as confidently that rates are likely to stay put at least till the end of the year, and only a fool would give up a great variable. Here's the essential case both in favour and against locking in; only you can decide which argument feels right to you.

THE CASE FOR LOCKING IN

Both Governor Carney and Finance Minister Flaherty have repeatedly expressed concern at the level of consumer debt Canadians have racked up over years of low interest rates, and rate hikes can be an effective way of cooling excessive credit spending and encouraging us to pay down what we owe. Mr. Flaherty recently made some adjustments to the mortgage rules, designed to soften the rate of mortgage debt Canadians are taking on, though some bankers are arguing the new rules are comparatively toothless. (We'll explore this in more detail in a later column.)

If you're willing to shop around, it's possible to get some real deals on fixed mortgages right now. As of this writing, you can get a five-year closed for as little as 3.09%. According to David Potter, an independent financial planner and the principal of Potter & Partners in Toronto, these deals won't be around forever, and it's unlikely that you'll lose in the long run if you grab one of them, especially if you're taking out a new mortgage or renewing.

Mr. Potter is making the case with many of his clients that they consider locking in to the low long-term fixed rates. The most pertinent issue to ask yourself, he says, is how much uncertainty you can handle - since perhaps the only thing the experts agree on is that no one really knows what the world economy will look like even a year from now. The reassurance of a consistent mortgage payment, no matter where interest rates go from here, takes some of the worry out of being a mortgagee; and if you lock in to one of these bargain rates, you'll be sitting pretty when rates eventually do start to go up.

THE CASE FOR STAYING VARIABLE

But before you go running to the bank, consider the other side of the coin. Kathryn Kotris, a mortgage broker with Mortgage Architects in Toronto, is recommending to at least some of her variable-rate clients that they resist the urge to panic. "Even though some indicators point to the possibility that rates are set to rise, I don't believe we will actually see a hike at least until the end of this year or early 2013," she says.

The principal reason for her skepticism, she says, has to do with the lacklustre state of the international economy; if we were to unilaterally raise our rates even slightly, the value of the Canadian dollar would automatically rise, hurting exports and possibly putting the brakes on the modest growth we've managed since the end of the recent recession. Add to that the simple fact that inflation, the prime target of Bank of Canada monetary policy, is virtually nonexistent at the moment, offering little pressure to move just yet.

If you have a variable rate at prime less a half-point or more, Ms. Kotris says, hang on to it; the banks are no longer offering these highly attractive rates. Current variables as of this week are at 2.79% to 4%. (For new or renewal mortgages, Ms. Kotris, like Mr. Potter, is recommending the long-term fixed rate products.)

Worried about your mortgage payment going up if there's a rate hike? Ms. Kotris has a simple answer. If you have prepayment privileges, and you can voluntarily raise your regular monthly payment by even a few dollars, go ahead and do it; the extra money will go directly toward the principal, and there's less shock to the budget if rates go up later. If you have a variable now and move to a fixed, you will be paying a higher monthly payment and that difference between the variable payment and fixed payment goes to the bank because of higher interest.

"If I needed help to sleep at night, I'd sleep a lot more soundly knowing those extra dollars were paying off my principal, rather than just enriching the bank," she says.

© Copyright (c) The Vancouver Sun

Bank of Canada’s Carney talks up domestic strengths, sees moderate growth on horizon

Gordon Isfeld

OTTAWA — Even after cutting growth prospects for Canada and much of the world, and noting that household debt remains worrisome, as does Europe, Mark Carney remains among the few voices not crying wolf — at least not yet.

But the Bank of Canada governor still expects growth in the domestic economy — along with other economies — to eventually ramp up, and that the banking and debt problems will be contained in Europe.

As for consumer debt, Mr. Carney sees the gap between household income and spending narrowing eventually.

“While global headwinds are restraining Canadian economic activity, domestic factors are expected to support moderate growth in Canada,” he told reporters Wednesday, following the release of the bank’s quarterly monetary policy report.

That report came one day after policymakers again held their key interest rate at a near-record low of 1%.

“Consumption and business investment are expected to be the primary drivers of growth, reflecting very stimulative domestic financial conditions,” Mr. Carney said.

While the global slowdown has depressed commodity prices, “they remain elevated,” he said, adding that inflation is likely to remain near the bank’s 2% target level.

The Bank of Canada has left its trendsetting rate on hold since September 2010, and is not expected to touch it again until mid or late 2013. As policymakers here continue to lean toward raising borrowing costs, other countries have recently lowered their rates.

That is not something Mr. Carney sees in the cards, saying a rate of 1% is “very low.” He dismissed the view that the lack of action has isolated Canada among other major economies.

“We’re as clear as we’re going to be,” he told reporters.

“We make policy for conditions in Canada … Global monetary policy is not a cut and paste.”
Avery Shenfeld, chief economists at CIBC World Markets, said “in a sluggish, but not disastrous economy, the bank can afford to wait it out at 1%.”

“Whether they end up hiking next year will depend on whether the economy can, in fact, accelerate with interest rates at this level, given what’s going on in the rest of the world.”

Low interest rates were meant to help stimulate the economy coming out of the 2008-09 recession, encouraging spending by businesses and consumers. But while firing up growth, they also caused many households to take on unsustainable debt loads — increasing demand and prices in the real estate market along the way.

“What’s important is the borrowing that’s done, and borrowing will be done both by households and by businesses in Canada, that it is done sensibly by those who can bear the debt,” Mr. Carney said.
What should help consumers, in particular, are the new rules brought in this month by the Ottawa aimed at tightening mortgage lending, he said.

“While we see a better evolution of the gap between household income and spending on consumption, spending on housing … narrows, but it doesn’t fully go away immediately so there is an additional increase, in our view of household debt.”

Concerning Europe, Mr. Carney said “authorities have resolution on taking a variety of measures [to control the debt crisis and move toward a stronger monetary union]. They have other options.”
But, he said he would not characterize containment of the euro crisis as “wishful thinking,” adding: “Containment is a pretty low bar.”

In its Wednesday report, the Bank of Canada adjusted economic growth projections made in its April’s policy document.

The bank lowered its outlook for Canada, saying expansion will be limited to 2.1% this year and 2.3% in 2013. That’s down from the previous estimate of 2.4% for both years. “There’s no harm in hoping for something better in 2013, as long as you’re not making interest rate decisions based on that hope,” CIBC’s Mr. Shenfeld said.

Meanwhile, the outlook for the global economy was also downgraded. The bank now expects growth of 3.1% this year, compared to its previous estimate of 3.2%. For 2013, the forecast is also for 3.1% expansion, down from 3.4%.

Good for homeowners – and the economy

Robert Brown
The Globe and Mail

Could Canada could slip into the same traps that hurt the U.S. economy in 2008-09? Some are sounding the alarm bells – at least on the housing front.

Clearly, Ottawa is worried about the debt levels being carried by the average household. Witness Finance Minister Jim Flaherty’s recent announcement that he was changing the maximum amortization on a government-backed mortgage to 25 years from 30 years.

The announcement was greeted with mixed reviews, including loud criticism from those who worry younger generations will have a significantly harder time being able to afford first homes.

But reducing the limit for mortgage amortization is not only good public policy – cooling the speculative real-estate sector without killing the home-construction industry – it is good for homeowners in general. Here’s why.

U.S. banks and lending institutions took part in two inappropriate activities in the U.S. housing and mortgage market prior to 2008, both passively allowed by the government in the hope of assisting low-income Americans to own their own homes.

First, banks were offering mortgages with low introductory interest rates that would later (one to three years later) rise to higher ultimate rates. Second, banks were offering mortgages at very high ratios to the value of the house (even up to 100 per cent). This was all fine – for both banks and home owners – so long as incomes and house values rose.

It all came to a thunderous halt in 2008.

As homeowners’ mortgages with low introductory rates came up for renewal, many could not afford the new higher payments that went along with the higher ultimate rates. Americans had to walk away from their loans, and therefore, from their homes – in droves.

At the same time, for those who had leveraged a very high percentage of their home value in their mortgage, the falling house prices meant that they now had a mortgage with an outstanding value that was larger than the value of the house. So, they too, simply walked away, handing the keys to their homes to the lending institutions.

This all snowballed into the exponential fall in American home values in 2008-09, and the accompanying loss in value of the mortgage assets held by the lending institutions – a very important piece of the global financial crisis.

In Canada, we are fortunate that our successive governments have always forced higher down payments for homes here than those required in the U.S. With the new limits on the amortization period, our government wants to dodge the American crisis. This is prudent, and safeguards the economy in general. But the new limits are also good for the individual home owner.

Let’s do some arithmetic. Consider a $100,000 mortgage. (Most mortgages are much larger, but you can get to the answer to your personal situation easily by multiplying by the size of your mortgage.) I will assume today’s five-year mortgage rate of 5.24 per cent.

If you take out a mortgage to be paid off over 30 years, your monthly payment will be $548.10. Over 30 years, you will pay a total of $197,316, including $97,316 in interest. If, however, you choose the 25-year mortgage, your monthly payment is $595.34 ($47.24 more a month). Over 25 years, you will pay a total of $178,602 – $78,602 in interest, just 80 per cent of the interest you would pay on the 30-year mortgage. Further, you will own the house debt-free five years sooner.

If interest rates rise, the arithmetic becomes more dramatic.

Consider a $500,000 mortgage at 6 per cent. If you choose the 30-year mortgage, you pay $2,974.12 a month for 30 years, a total of $1,070,683, including $570,683 in interest. Using a 25-year mortgage requires monthly payments of $3,199.03 ($224.91 more a month) for a total payment of $959,709, including $459,709 in interest.

In other words, for an extra $7.39 a day, you can own your house five years sooner and pay a whopping $110, 974 less in interest.

If a home buyer cannot afford an extra $7.39 a day in mortgage payments, should they be in the market? Aren’t we all really better off with the shorter amortization period?

The bottom line: The impact of this new legislation is less pain than pragmatism. For once, we should be thankful to our big brother in Ottawa.


Robert L. Brown was professor of actuarial science at the University of Waterloo and a past president of the Canadian Institute of Actuaries. He is currently an expert adviser withEvidenceNetwork.ca.

Top 5 takeaways from the Bank of Canada’s decision

John Shmuel 
Christinne Muschi/Reuters

The Bank of Canada cut its economic growth forecast for this year and next in its interest rate decision Tuesday. Above, Bank Governor Mark Carney addresses the International Economic Forum of the Americas.

The Bank of Canada turned slightly more dovish Tuesday as it trimmed its growth outlook for Canada and warned that the global economic situation had weakened.

In an expected move, Governer Mark Carney and his team left the bank’s overnight lending rate unchanged at 1%. It has remained at the near-historic low since September 2010.

But the bank continued to retreat from some of the more hawkish language it hinted at in previous statements in April and June.

“This is a substantially more dovish statement,” said Derek Holt, economist with Scotia Capital.

Below, we outline the top five takeaways from the bank’s July 17 statement.

Global growth prospects have weakened

In its April outlook, the Bank of Canada said that it was seeing signs of improvement in the global economy. That is no longer the case.

“Global growth prospects have weakened since the Bank’s April Monetary Policy Report,” the bank said.

It said that developments in Europe point to a renewed contraction, while emerging market countries such as China have seen their growth slow “greater than anticipated.”

The bank also warned that global financial conditions have deteriorated since its April report.

Despite the gloomy outlook, however, the bank said it still assumes the eurozone crisis will be contained.

Canada’s economic outlook cut this year and next

Canada won’t be spared from a slowing global economy. The Bank of Canada trimmed its forecast for economic growth in 2012 to 2.1% from its earlier 2.4% target.

It also sees slightly weaker growth in 2013, lowering its outlook to 2.3% from 2.4%.

“While global headwinds are restraining Canadian economic activity, domestic factors are expected to support moderate growth in Canada,” the bank said.

There are risks, however. The bank expects consumption and business investment to be the main growth drivers, but record household debt and slowing housing activity could negatively impact that growth.

On the upside, the bank does view a rebound in growth occuring in 2014, saying the economy will grow by 2.5% for that year.

Housing to cool

This marks the first interest rate announcement since Finance Minister Jim Flaherty announced new mortgage rules in Canada that, among other things, lower the maximum amortization period to 25 years.

“Housing activity is expected to slow from record levels,” the bank said.

June data already reveals some cooling in home sales following the introduction of the new mortgage rules. Existing home sales dropped 1.3% in June from the month before and were down 4.4% from the year before

“The Bank of Canada will likely want to see the impact these new rules have on domestic spending before lifting rates,” said Diana Petramala, economist with TD Economics.

Output gap to close in latter half of 2013

In another sign that the bank sees global headwinds slowing Canada’s economy, it said that it now expects the country’s output gap to remain until 2013. The output gap is the spare economic capacity of a country (e.g. the difference between the actual capacity and what it could achieve at its most efficient, productive level).

The bank had previously expected the output gap to close in the first half of 2013.

“This is consistent with guidance we’ve been consistently providing on how the BoC has been underestimating spare capacity in the Canadian economy partly via over-estimating 2012 growth prospects,” Mr. Holt of Scotia Capital said.

Bank eyeing lower commodity prices

Concerns over lower commodity prices have crept into the bank’s latest statement.

In April, the bank warned about the effects of high commodity prices on economic momentum. Now the bank expects the recent pullback in prices to keep inflation below its 2% target until mid-2013.

“Given the recent drop in gasoline prices and with futures prices suggesting persistently lower oil prices, the Bank expects total CPI inflation to remain noticeably below the 2 per cent target over the coming year,” the bank said.

Five reasons why falling house prices aren't so bad

ROB CARRICK

The Globe and Mail

Before we start getting all torqued about a falling housing market, let’s remember a few things.

Early indications in June of a slowing market in some cities do not necessarily presage a U.S.-style plunge in housing prices. Forecasters have talked about declines of 10 to 15 per cent being possible, or just a period of drifting sideways. Without a surge in unemployment, it’s hard to see a real crash.

Also, there are some good reasons why a decline in houses prices won’t be so bad. Let’s take a look at five of them:

1. First-time buyers get a break

First-time buyers have it rough. As of this week, the maximum amortization for people with less than a 20-per-cent down payment has fallen to 25 years from 35. Net result: Mortgages are harder to carry for new buyers.

And then there are high prices. Even with historically low interest rates, homes are expensive enough in many places that young adults are either priced out of the market or buying houses they can’t really afford to carry with all their other financial obligations (such as retirement saving and putting money away for their kids’ education). Some young buyers are also heading to the distant suburbs, where homes are cheaper but the commute leaves them juggling two car payments.

Lower prices put more young people in houses they can afford. This gives us a stock of homeowners who can move up years from now to buy houses being sold by downsizing baby boomers. Remember, first-time buyers account for up to half the housing market.

2. Established home owners can still book good gains

Don’t torture yourself by measuring your house price gains from purchase to the high-water-mark price, which in some cities may have been already been reached. This happens with stocks all the time – people buy for $10 and the stock goes to $15 before settling back to $12. Result: The investor agonizes over an imagined loss of $3.

The national average resale house price 10 years ago was $205,333 and the most recent tally was $375,605. That’s an annualized increase of 6.2 per cent. If house prices fall 10 per cent to $338,044, then that drags the 10-year gain down to 5.1 per cent. You’re still doing well here when you consider that the average inflation rate for the past 10 years has been 2.1 per cent.

If you only bought your home in the past few years, why do you care what housing prices do? Sensible buyers plan to stay in a home at least seven to 10 years before moving – otherwise, they blow too much equity on moving costs.

3. Maybe the foreign buyers will go away

Let’s not overstate the impact of condo and home buying by wealthy investors outside Canada, because definitive statistics are lacking. But there’s no doubt that in cities such as Vancouver and Toronto, money from offshore has helped bid up prices. A classic example is the drab three-bedroom bungalow in Toronto’s Willowdale neighbourhood that in March went for $1.2-million – $421,800 over the asking price. CBC reported that the buyer was a university student whose parents live in China. We welcome foreign investment here in Canada, but in the case of the housing market that money has fed a pre-existing over-exuberance. It’s healthy for the market if that $1.2-million bungalow falls in price and makes other investors pause.

4. The return of rationality

Too many people are in the housing market today because they fear that if they don’t buy now, rising prices will keep them out of the market forever. And so they push themselves to do things that aren’t sensible or comfortable, like upping their offer to win a bidding war or borrowing close to the limit of what the bank will offer.

An overheated housing market produces an auction mentality, where people almost think they’re in a competition to buy homes. Falling house prices take the adrenalin out of housing decisions. Buyers have a chance to reflect, and that means more rational buying.

5. Show time for patient real estate investors

Anyone remember what could easily be the No. 1 tip in successful investing? It’s buy low. The smart money doesn’t follow the herd into an asset class that is soaring in price – it waits however long is necessary to buy at cut-rate prices.

If you’re looking to buy an income property, show time begins when people are worried about the real estate market.

Banks warn Ottawa over lending rules

GRANT ROBERTSON Banking Reporter

The Globe and Mail

The federal government’s efforts to cool the overheated housing market are raising concerns among Canada’s biggest banks that the changes might hit the economy harder than intended, particularly if the new measures are left in place for too long.

Just over a week after Finance Minister Jim Flaherty introduced new mortgage rules designed to slow the pace of household borrowing, Royal Bank of Canada and Toronto-Dominion Bank have both signalled that the steps will have a dampening effect on the country’s economy. Though both banks say they support the government’s actions, RBC and TD caution there are also risks associated with trying to slow down the housing market.

“It’s hard to argue that they shouldn’t be doing something to slow this down,” David McKay, head of Canadian banking at RBC, Canada’s largest bank, said in an interview. “But what is the longer term implication of all this in a higher rate environment? And do we pull back too tightly on the reins?”

Though he argues rising household debt and escalating housing prices required Ottawa to step in, Mr. McKay said he is concerned the changes may only be needed on a temporary basis and could do inadvertent damage to the economy in the long run if they are permanent.

“This is not like turning a Ferrari,” Mr. McKay said. “This is like a big ship. And it takes a while to turn. And sometimes if you over steer, you can’t re-steer the other way.”

In a bid to slow the pace of borrowing in Canada as consumers take advantage of low interest rates, Mr. Flaherty changed the maximum amortization on a government-backed mortgage to 25 years from 30 years.

He also reduced the amount consumers can borrow against their house to 80 per cent, down from 85 per cent.

Shortening the maximum amortization of a government-backed mortgage will result in higher monthly payments for many consumers who would otherwise have taken out a 30-year mortgage, but will also cool demand in the housing market. But Mr. McKay wonders whether it could hinder economic growth too much, once rates rise again. The government has been reluctant to raise interest rates, for fear of hindering the broader economic rebound, but needed other ways to lower appetite for household borrowing.

“Would we consider going back to a 30-year amortization when we are able to raise rates, to alleviate the strain on the consumer wallet, and balance growth in the economy?” Mr. McKay said. “That is obviously a long-term worry.”

His comments come after a Toronto-Dominion Bank report said last week that the mortgage changes will likely dampen growth in Canada by 0.2 percentage points next year, creating a drag on the economy and keeping a lid on consumer spending.

The banks expect the changes to slow their loan growth in the next year. RBC forecasts growth in mortgages will be in the low single digits, down from more than 6 per cent.

Mr. Flaherty says the government is aware of the potential economic problems that could result from trying to slow the housing market, but said Ottawa is more concerned about avoiding a crash in housing prices.

“We are prepared to take that risk, quite frankly, because of the greater risk of the development over time of a housing bubble,” Mr. Flaherty said on a conference call with reporters Friday. “I realize it may have some dampening effect on the economy and I realize it may have some dampening effect in the residential real estate market,” he said.

Among the government’s main concerns is the rise in average household debt in Canada to 152 per cent of income. Though it’s not known what impact such record levels of household debt will ultimately have in Canada, some economists note that the housing markets in the United States and Great Britain ran into problems when figures reached similar heights.

“You know money is cheap these days. Mortgage rates are low, the banks are lending money at low rates and some people can’t resist that temptation,” Mr. Flaherty said. “So we are making it more difficult to obtain insured mortgages at low monthly payments by going to the 25-year amortization in particular.”

A government official said it was too soon to know whether Ottawa will contemplate a return to 30-year amortizations.

Though banks are taking a cautious approach to the changes, most argue the steps are needed.

“It’ll probably do a little bit to make people think twice about buying more home than they can afford or even getting a second home,” said Peter Aceto, chief executive officer of ING Direct Canada.

Bank of Canada interest rate decision: What you need to know

Eric Lam

Mark Carney, governor of the Bank of Canada, again held interest rates at 1% in June, but warned of deteriorating global conditions and continued domestic pressure from housing and household debt.

Once again the Bank of Canada maintained interest rates at 1% Tuesday, staying the course despite confirming global financial turbulence is creeping ever closer to our shores, while housing and household debt remain domestic risks.

The Bank of Canada has now held rates at a stimulus-level 1% since September 2010.

“Beneath the calm exterior, the tone of today’s press statement took only a moderate shift,” Doug Porter, deputy chief economist with BMO Capital Markets, said in an analysis Tuesday morning.

Here’s a few of the key points from the governor’s June rate decision statement, and what they mean:

Global problems are not going away

The outlook for global economic growth has weakened in recent weeks. Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions.

These are some of the strongest comments from the Bank on the re-escalating eurozone financial crisis yet, in line with the escalating rhetoric both within the region and abroad.

“The Bank of Canada is in a holding pattern, waiting for the weather to clear over the rate-hike runway,” Mr. Porter said. “Given the sudden re-accumulation of heavy European clouds, we suspect it could be a long wait.”

About those interest rates …

To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.

While the second part of this line has been present for a while, fuelling speculation of a possible rate hike after it popped up in April, the first phrase is new.

“Adding this language to already soft words like ‘may’ demonstrates a further lack of conviction toward the outlook than even the rest of the statement implies,” Derek Holt and Dov Zigler, economists with Scotia Capital, said in a report. “That’s fair game given the significant binary event risk that lies ahead.”

And there’s certainly nary a hint of the possibility of a rate cut at this point, even as some analysts have speculated based on bond rates.

“Today’s statement struck a very prudent balance, acknowledging the weaker global economic outlook, but also reminding markets (who had priced in a chance of a rate cut by year end) that barring a global catastrophe the next interest rate move will be up, not down,” Leslie Preston, economist with TD Economics, said in a note.

Commodity weakness bad news for Canada

While the U.S. economy continues to expand at a modest pace, economic activity in emerging-market economies is slowing a bit faster and a bit more broadly than had been expected. More modest global momentum and heightened financial risk aversion have reduced commodity prices.

This is troubling on two levels. First, with both Europe and the United States mired in middling to flat growth, many economists have come to depend on emerging markets to drive global growth. However, with many of these markets now also struggling, especially China, the prospects for a global slowdown increase.

Meanwhile, with emerging market economies driving much of the demand for commodities over the past few years, a continued slowdown in those countries also means further downside for commodity prices — bad news for Canada and the many resources stocks on the Toronto Stock Exchange.

Housing, household debt still a concern

Housing activity has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth.

Mr. Carney remains ever-vigilant about the housing market in Canada, and the continued accumulation of household debt, as he has been for much of the past few years.

“In my opinion, this nevertheless ignores the marked slowdown in the pace of growth in household debt and the lagged effects of numerous forms of regulatory tightening that should be encouraging to the BoC assuming the policy goal here isn’t total flatness in household lending,” Mr. Holt said.

0 CommentsMortgage & Housing Industry: It’s all About the Timing

Article written by Boris Bozic, Merix Financial

“If I’m a home owner in the Greater Vancouver Area, and just read the National Post article, I think I would be coughing up my latte through my nose about now. But fear not Vancouver, you’re not alone. Toronto joined in with its own negative results.”

It’s always easy to use the word “timing” to categorize success or failure. We’ve all heard it before, “he was in the right place at the right time”. Those who chalk up people’s success, purely based on timing, are usually the ones who missed the same opportunity because of a lack of skill and vision. In politics timing is used to justify ineptitude and a lack of positive results. If using timing as an excuse for failure, and if it was an Olympic sport, then the Obama administration would own the podium. After 3 ½ years of being in power all you here out of Washington is that it’s all George Bush’s fault, and that the Obama administration needs more time to set the country on the right path. Blaming the last guy, after all this time, is laughable. The President wanted the gig and he knew the mess he was inheriting. It was his job to fix it or at the very least put the country back on track. Time might be running out for Obama, and we’ll all find out in November. Should he end up being a one term President, I’m sure the Dem’s will rationalize his failure with “he was the right guy at the wrong time”.

Here in Canada many have supported and questioned the timing of the most recent changes to mortgage rules. As of July 6th it’s our new reality. I’m looking out the window right now and it’s sunny, stinking hot here in Toronto, and the ground hasn’t opened up and swallowed up all of us in the industry. Then again it’s been less than a week. I was thinking of the timing of the new mortgage rules while reading an article in the National Post recently, “On Wednesday (July 5^th) the Real Estate Board of Greater Vancouver released June figures showing sales down 27.6% from a year earlier and down 17.2% from just May. The benchmark price index was 1.7% from a year ago but the city has seen prices drop in the shorter term and economists expect more declines to come”. If I’m a home owner in the GVA, and just read the National Post article, I think I would be coughing up my latte through my nose about now. But fear not Vancouver, you’re not alone. “Toronto joined in with its own negative results as sales in the city declined 13% from a year ago while the entire GTA was off 5.4%”. Prices have remained steady in the GTA but that appears to have a short shelf life. For so long now pundits eagerly predicated a housing bust and I guess if they say it often and long enough they will be able to say, “I told you so”.

The most recent changes to mortgage rules had zero impact on the stat’s noted above. There were many in the mortgage and housing sector, including CAAMP, who publicly stated that previous changes to mortgage rules went far enough. Of course it’s easy for critics to dismiss the industry as being self-serving but based on the data available today, maybe, just maybe, the industry was not that far off. The IMF (International Monetary Fund) is tweaking economic forecast for the remainder of the year. There’s a general malaise as it relates to investments, jobs and manufacturing for the U.S., Europe, Brazil, India and China. As we have all learned, what happens in the rest of the world impacts us here in Canada. There’s merit to the argument that economic data justified the changes to the most recent mortgage rules. But what if the most recent changes to the mortgage rules just adds to an already stagnant economy and slowing housing sector? Not good if you’re an home owner and certainly less than optimal for those who could have a finger pointed at them, accompanied with a simple message,”you made it worse”. Indeed, it’s all about the timing.

Thinking of renting that basement suite? Tips for first-time landlords

Roma Luciw
The Globe and Mail

When my husband and I were shopping for a home, a basement apartment seemed like a no-brainer.
House prices in downtown Toronto were already sky-high, so we loved the idea of someone paying us $800 a month to live in a space we could do without. We knew we’d have to find tenants, fix leaky taps, spruce the place up, and comply with various bylaws, but these seemed like tasks we could easily deal with in order to buy in the neighbourhood we wanted and become mortgage-free sooner.

Seven years later, we’ve learned that finding the right tenant is more time-consuming than it appears, that things can and often do break at inconvenient times, that you can’t evict someone just because you don’t like their new boyfriend, and that being a landlord is a demanding, round-the-clock responsibility.

Don Campbell, the Vancouver-based president of theReal Estate Investment Network and the author of a number of books on real estate investing, says a rental suite can be an effective way to help pay the mortgage, but you have to treat it like the business it is.

“It is a great way to get on the property ladder and live in an area you want but can’t otherwise afford, but it comes with a cost,” he says. “If you don’t do it right, it can drive you crazy, both financially and psychologically.”

The biggest shock for most first-time landlords, he says, is the diminished privacy. “You walk into your backyard and there is your tenant, sunning themselves. You want to have a BBQ that night with your friends or boss and there is your tenant, sitting and smoking. Most people don’t think of that – they just want the 800 bucks.”

To avoid problems, here is Mr. Campbell‘s list of considerations for aspiring mom-and-pop landlords:

1. Consider your privacy.

Can you live with seeing a stranger around your house or using your property outside? Is the extra money worth it?

2. Try to avoid renting to family.

It is best not to rent to family, as it completely changes the relationship and is difficult to use “eviction” or “collection” rules against a non-paying family member without destroying the relationship and having the repercussions ripple out into the rest of the family.

3. Sign a proper written lease.
Always – even with family members – have a properly written lease between you and the tenant that clearly outlines the rules, late rent penalties, expectations, and length of term. It must be signed by every adult who is to reside in the suite.

4. Don’t set your rent too low.
Never be the lowest rent in the market – you will attract the type of renter whose focus is solely on dollars. It will also lead to more rapid turnover as they leave to the next “lowest rent” spot. To set the proper rent for your suite, go online and search for available units in your area. Make sure to look at a number of different sites and be location-specific in your comparisons. Look at the amenities and picture them through the eyes of a potential renter. Then place your price in the middle or higher end of the average comparable.

5. Do your research.
Each province and territory has its own landlord-tenant legislation so make sure to read up on the rules that apply where you live. In addition, make sure to research your local municipal bylaws, which include things like guidelines and standards for fire and building safety. Municipal bylaws also cover issues like zoning and permits. For example, some cities are now looking to shut down secondary suites in specific neighbourhoods. Not conforming to these rules means you could be shut down at a moment’s notice, so check with the city to make sure that your suite is legal. The Canada Housing Mortgage and Housing Corp. has auseful website with many good links.

6. Tell your home insurance company.
When you rent out a unit in your home, you are obliged to inform your home insurance company – something that the vast majority of people fail to do. If anything were to happen, for instance if a fire starts in the rental suite, the insurance company could say they were not informed of the tenant and that the policy is voided.

7. Research the tax repercussions.
Once you have a rental suite in your home, you have to claim that rental income on your tax return. In addition, once you start using the property for revenue, a portion of the capital gain when selling the property could be deemed taxable.

8. Learn from other landlords.
Knowing the tricks of the trade is important and who better to learn from than other landlords? A great free way is to visitwww.myREINspace.com and use the search function to read discussions between Canadian property owners and their experiences and strategies when dealing with tenants.
For my husband and I, $800 a month in rental income has gone a long way (especially when I was on maternity leave) and given the choice, we’d likely do it again. But my advice for anyone considering renting out part of their home is: Do your homework and be prepared for to do the work – and deal with the hassle – that comes with being a landlord.

Mortgage rules change today, but about half Canadians don’t know it

Financial Post Staff

TORONTO — New mortgage rules go into effect today in Canada but a recent survey suggests many people are unfamiliar with the changes.

Starting Monday, lenders can only issue home equity loans up to a maximum of 80% of a property’s value — down from 85%.

The maximum amortization period also drops to 25 years from 30 years — giving borrowers less time to repay the debt in full.

In addition, the federal government is capping the maximum debt ratios for households and limiting government insurance to mortgages on homes with a purchase price of less than $1-million.
A poll conducted by Pollara for Bank of Montreal found only about half of those surveyed were familiar with the changes brought in by the federal government last month.

“For two years now, we’ve been talking to our customers about the financial implications of carrying debt over the long term and how opting for a maximum 25-year amortization can help them manage and meet their long term goals,” said Laura Parsons, a mortgage expert at Bank of Montreal.

“The recent changes are prudent, measured, responsible and timely, and will have an effect on how Canadians purchase property, so it’s more important now than ever to seek clarity on the current guidelines in place.”

And only 45% of those surveyed June 29 to July 4 were aware that the maximum amortization period has been shortened by five years.

The tightening, announced by Finance Minister Jim Flaherty June 21, was Ottawa’s latest attempt to slow down the accumulation of debt of Canadian households, which reached a record 152% of income in the fourth quarter of last year.

Central bank governor Mark Carney has been warning for several years that some Canadians are getting in over their heads with debt, and that they could face problems once interest rates — which sit at historic lows — start rising or if there is a second economic crisis.

Recently, the Bank of Canada estimated that the number of households in arrears could almost triple to 1.3% if the unemployment rate were to rise by 3%, about the same as occurred in the 2008-09 slump.

Flaherty has tightened mortgage insurance rules four times since 2008. Following each move, national average resale housing prices declined, only to regain the lost ground and continue climbing, according to data from the Canadian Real Estate Association. Canadian home prices increased 19% from the start of 2007 through April.

The new rules could also take the heat out of a Toronto real estate market where average prices have surged by a third to $516,787 from five years ago and there are more skyscrapers under construction than any city in North America.

Flaherty singled out Toronto — where the number of completed condo units next year will be double the five-year average — for its “continuous building, without restriction.”

“This concerns me because it’s distorting the market, quite frankly,” Flaherty told reporters when he announced the rule changes. “And for that reason we’re taking the steps that we have today.”

This time the measures are also expected to hit Canada’s economic growth.

TD Bank estimates that Ottawa’s move to reduce the maximum amortization period to 25 years from 30 will curtail economic growth by about 0.2 percentage points in 2013.

Flaherty’s million dollar mortgage change hits only 0.1% of buyers

JACQUELINE NELSON

The Globe and Mail

By now you’ve undoubtedly heard about the mortgage lending changes ushered in by federal Finance Minster Jim Flaherty, including his move to kill government-backed mortgage insurance on homes worth more than $1-million.

Although shorter amortizations will clearly affect a wide range of people, you may wonder how many people will be affected by the million-dollar change. The answer: hardly any.

One CMHC report indicates that only 5 per cent of all the loans it insures are for amounts over $550,000 (its highest bracket), up 1 per cent in 2011 from the year before. But it appears that for homes worth $1-million or more, the percentage of properties with mortgage insurance is much, much smaller than 5 per cent.

“My team’s estimation is that only 0.1 per cent of $1-million and above home sales have had mortgage insurance,” said Craig Alexander, senior vice-president and chief economist at TD Bank Financial Group, in an e-mail on Monday.

Industry watchers agree with Mr. Alexander, and many noted that down payments on these homes often well exceed the 20 per cent mark. “The larger the purchase price, the more people tend to put down. Usually when people are buying $2-million properties they’re putting 50 per cent down, that’s the trend,” said Dan Eisner, the CEO and founder of True North Mortgage.

Mr. Eisner said that the new restrictions could make a difference for buyers who might have chosen to make a smaller down payment in order to invest the rest elsewhere, but says that group would be very small. “When I looked at all purchases in 2012 so far that either have closed or are about to close only 15 of the 488 purchases were above $1-million, and of those only one was CMHC insured,” Mr. Eisner of his firm’s portfolio. True North has offices across the country from Vancouver to Halifax and in several major markets in between.

Ross McCredie, founder and chief executive officer of Sotheby’s International Realty Canada, which is a luxury real estate portfolio management brokerage, believes that this rule change is more of a symbolic statement than anything, as the Globe and Mail argued Saturday. “Actions like Flaherty’s will shape some people’s confidence. But there isn’t a big problem in this space,” he said.

Like Mr. Eisner, he sees the average payment on a multi-million dollar home far exceeding the 20 per cent line. “The majority of our clients are putting 35 per cent down,” he said. “I encourage them to think long-term on these purchases – at least 5 years. I think the scary thing for anyone putting 5 or 10 per cent down is that it doesn’t take a lot of movement in the market to wipe out your equity.”

Bank of Canada likely to hold interest rates until July 2013: BMO

The Canadian Press 

TORONTO — The Bank of Montreal predicted Tuesday that the Bank of Canada will keep interests rates lower for longer than it expected.

Economists at the bank now believe the central bank will not raise its key rate until July 2013, six months later than their earlier prediction of January 2013.

Senior economist Michael Gregory said the change stems from the easing policy of the U.S. Federal Reserve, a downgraded Canadian economic outlook and tightened mortgage rules.

The changes, which include a cut to the maximum amortization period for government insured mortgages cut to 25 years from 30, should stem some fears around growing household debt that would otherwise push the Bank of Canada to increase rates sooner.

“The tightening of the government’s mortgage insurance rules does serve to act like higher interest rates specifically for that sector,” Gregory said. “So that takes some of the urgency away from the Bank of Canada to adjust rates any time soon.”

The Bank of Canada has kept its key interest rate at one per cent since September 2010.

The rate affects the prime lending rates at Canada’s major banks and in turn influences all kinds of interest rates including those charged to variable rate mortgages and lines of credit.

Gregory said he expects that the Bank of Canada will change its projections for economic growth when it releases its new monetary policy report on July 18.

“I suspect it will show softer growth in Canada, partly because of global factors and in part because of what’s going on in the U.S,” said Gregory.

New mortgage rules to slow growth: TD

Julian Beltrame, The Canadian Press

OTTAWA — Canada’s economy will underperform even moderate expectations in the next two years, TD Bank economists predicted Wednesday, adding that recent tightening of mortgage and credit rules is contributing to the slowdown.

In a new forecast, the TD Bank now expects growth in Canada this year to average 2.1%, shaving a tenth of a point from its March outlook. And it expects two per cent growth in 2013, down four-tenths of a point from the earlier forecast.

That is still enough to generate modest job creation and TD says Canada’s national unemployment rate should decline slightly to 7.1% in 2013 from the current rate of 7.3%.

TD is the latest of a list of forecasting groups to officially or unofficially downgrade their outlook for the economy, with some — particularly Capital Economics — coming in even weaker.

The Bank of Canada is expected to follow suit at its next policy announcement in mid-July and write down a call for 2.4% growth in both 2012 and 2013.

TD Bank chief economist Craig Alexander said conditions have deteriorated through much of the world in the past few months.

Europe’s problems with government debts in countries that use the euro currency have resurfaced, while China and the U.S. are both underperforming expectations.

Europe remains by far risk No. 1, he said.

His expects European leaders will stare the abyss squarely in the face and come up with the policies needed to avert a disaster, but he warns the situation will be dire if they don’t.

“In the case of Europe, they are toying with the possibility of a global financial catastrophe,” he said. “The good news is that the politicians realize this, so it makes it more likely they will do what is necessary.”

Alexander wouldn’t put a number on the odds of another economic slump in Canada because all the risks depend on political decisions in Europe, United States and China “and I have no way of calculating those.”

“If I were to make a guess, I’d say it is one in four,” he added.

For Canada, the slower global growth and tumbling commodity prices are responsible for about half the reduction in TD’s domestic growth estimate, particularly in 2013.

The other half — or about 0.2 percentage points — comes from expectations of lower consumer spending, particularly for housing, as a result of changes to mortgage rules and new restrictions on borrowing.

Last week, Finance Minister Jim Flaherty announced that after July 9, the maximum amortization period on a government-insured mortgage would be dropped to 25 years from 30, which will increase monthly payments assuming all other factors are stable.

As well, the federal regulator of financial institutions has told lenders they can only issue home equity loans up to a maximum of 65% of the property’s value, down from the previous 80%.
“We think the housing market will cool down even more than we anticipated because of the new regulations,” Alexander said.

Overall, he expects consumer spending on durable goods will fall by more than one percentage point from previous expectations, impacting the overall economy.

But Alexander noted that he believed the changes were needed for the long-term health of Canada’s housing market, and to rein in household debt.

The bright spot in the Canadian economy is business investment, but TD economists believe that will also be dimmer than it might have been because of the risky global situation.

On Tuesday, the Conference Board reported its consumer confidence index for June had fallen to where it stood in January, when fears about a European crisis were also elevated.

Canadians Deserve More Answers

Boris Bozic, CAAMP Chair and President/CEO ofMerix Financial wrote this about the latest mortgage rule changes:

“…Stakeholders have every right to call out decision makers if there’s concerns that [mortgage rule changes] may have unintended consequences. We also have every right to ask decision makers to articulate, in a clear and cogent fashion, the rationale behind the decisions they made.”

As usual, Boris is practical and thoughtful in his commentary, and clearly right.

It makes you wonder, however. If people question policymakers, how much do they really listen?
Finance Minister Flaherty has been pulling puppet strings at will in the housing market. In doing so, he’s erased significant borrowing options and elevated short-to-medium-term housing risk, while providing only the skimpiest of details about his decision-making process.

The government professes it changed the rules to reduce Canadians’ interest costs, encourage equity accumulation and prevent overborrowing.

Those are seemingly worthy objectives. But economic and housing stability is hanging in the balance. Folks deserve more details on the alternatives to, and side effects of, Flaherty's forced savings plan and retreat from housing finance.

Flaherty states his team has done the analysis. “We have lots of people who look at the numbers,” hesays.

If so, the Finance Department should share its research on topics like:

1.    The potential risk to home equity that further borrowing restrictions create for Canada’s 9.6 million existing homeowners

2.    The alternatives to applying blunt rule changes on all Canadians, irrespective of borrower qualifications
      a.    Certain fringe borrowers needed tighter limits. But the vast majority ofinsured homeowners are unequivocally not a risk to the system.
      b.    Alternatives could have included limitations on the subset of riskier borrowers, enacting regional restrictions, talking the market down with warnings of future rule changes, letting supply catch up with demand naturally, or a combination of these.

3.    The lost economic output resulting from reduced real estate investment, consumer spending and housing-related employment losses:
      a.   TD Economicsstates: "While these new lending rules are not intended to severely impede household spending and housing demand, their impact will be substantial."
      b.   Flaherty responds, “I realize it may have some dampening effect on the economy and I realize it may have some dampening effect in the residential real estate market.”
      c.    Meanwhile, the rest of the country waits for Flaherty to define the word “some?”

4.    The logic of imposingnational rules for localized problems (like Toronto condo risk)

5.    The impact of tighter home buying rules onrental costs

6.    What sort ofcompounding effect these regulations will have if/when unemployment spikes or interest rates rise.

Interest rates, not overborrowing, are the #1 creator of excess housing demand. And interest rates can go up, believe it or not.

In a Globestory today, RBC banking head David McKay acknowledged this by asking: “…What is the longer term implication of all this in a higher rate environment?”

Canada’s housing market “…is like a big ship,” he says. “And it takes a while to turn. And sometimes if you oversteer, you can’t re-steer the other way.”

Yet, with the stroke of a pen, our public servants have changed our ship’s course and summarily eliminated financing choices, choices that are clearly beneficial when used responsibly.

When it comes to the decision-making process behind major housing changes, Canadians deserve more insight than a carefully crafted press release and a hurried press conference. Without such details, one might surmise that our well-paid officials have not fully contemplated the ramifications, or perhaps, that there’s something they don’t want us to know.