Garry Marr, Financial Post
It’s become the new retirement savings plan — owning a home.
What else is one to make of a country where about half of Canadians said they didn’t make a contribution to a registered retirement savings plan this year but close to 70% of households now own their home.
Your money grows tax free . . . Even in your RRSP, there are forced withdrawals and it’s fully taxable [when taken out]
“Your money grows tax free,” says Jason Heath, a fee-based certified financial planner with Objective Financial Partners Inc. “Even in your RRSP, there are forced withdrawals and it’s fully taxable [when taken out].”
The main advantage of home ownership is the forced savings it generates. The real estate industry has its tired lines like “you can’t live in your investment” or “you have to live somewhere” but it’s the discipline of payments a mortgage forces that makes it a decent investment for most Canadians.
It’s hardly a rational argument for housing but it’s a practical one. Renting regularly beats out housing for cost but that savings ends up burning a hole in many pockets rather than being socked into an RRSP.
“The age old argument that renting is throwing away money is not valid or consistent if you are away for a year or two for work on temporary assignment, going to school or because you are just retired and want to try living somewhere else,” says Mr. Heath.
Housing makes no sense if you are on the move, which is probably why the nomadic among us choose to rent. With real estate commissions about 5% of the sale price, transaction costs can easily be close to 10% in a jurisdiction like Toronto with two land transfer taxes. Imagine a mutual fund with that type of trailer fee.
The other problem with housing as an investment is there’s not much liquidity. We’ve gotten used to homes selling in a couple of days or a week but that’s not the norm. It’s usually more difficult to get out of a housing investment but Mr. Heath says that’s another thing that saves us from ourselves. “It’s a lot easier to take something out of an investment savings account,” he says.
You also can’t ignore the tax benefits that come from home ownership because of the exemption you get from any gains on your principal residence. Put in sweat equity by fixing your house to raise the value and that’s about the only legal way not to pay tax in this country.
Then there’s the leverage. Nobody will let you leverage any other investment with 95% debt to 5% equity. If you are borrowing money at 3% and your investment is going up 5% every year, you can’t lose. What happens if prices reverse?
Phil Soper, chief executive of Royal LePage Real Estate Services, said periods of non-price appreciation on a national level have been very short. Prior to 2008-2009, it was 15 years before prices dropped.
“In a typical price appreciating environment you get the leverage effect on borrowed money which works best when the interest costs are low which is what it is today,” says Mr. Soper.
The divide has widened between renting and owning but he adds many families end up turning to buying because they can’t find what they are looking for in the rental market.
But at some point the gap has to grow so large that one has to really take a second look at the home ownership option. A survey from RateSupermarket.ca found average Canadian will have save 12 years to afford the 5% down payment on home which would rise to $553,008 by 2020 based on a 4.9% annual price increase.
“There are a lot more people considering renting for a longer period of time as prices increase and we’ll see if the market flattens,” says Kelvin Mangaroo, president of the RateSupermarket.ca.
Thursday 27 September 2012
Canada Housing: Correction vs. Bust – Let the Finger Pointing Begin
Article written by Boris Bozic, in Canada,Current Events, Merix Financial
One doesn’t have to be an expert in the real estate market to grasp that there’s something different in the market today. Call it what you will, a sense, intuition or just plain old gut feel but there’s little doubt that things are changing. The only question that remains is the degree of change?
Here are the facts as we know it:
Look for the Vancouver market place to garner special attention in the coming months. As an example, “the housing market correction appears to be under way, driven by the sharp downturn in Vancouver”, according to TD’s Chief Economist, Craig Alexander. He went on to say, “we expect the slowdown will become broader based following a fourth round of mortgage insurance regulation tightening by the federal government”. The way I interpret this is what goes for Vancouver, also goes for the entire country. And then there’s the obvious, if it all goes bad, you know who to blame.
One doesn’t have to be an expert in the real estate market to grasp that there’s something different in the market today. Call it what you will, a sense, intuition or just plain old gut feel but there’s little doubt that things are changing. The only question that remains is the degree of change?
Here are the facts as we know it:
- Home sales have dropped month over month by 5.8%, which is the biggest monthly drop in two years
- Number of newly listed homes is down 1.7% month over month
- Greater Vancouver Real Estate Board states that re-sales were down 30.7% as compared to August 2011.
- Toronto Real Estate Board states re-sales were down 12.5% as compared to August 2011
- According to the August 2012 CMHC quarterly report, second quarter insured mortgages unit volumes were down 25%
Look for the Vancouver market place to garner special attention in the coming months. As an example, “the housing market correction appears to be under way, driven by the sharp downturn in Vancouver”, according to TD’s Chief Economist, Craig Alexander. He went on to say, “we expect the slowdown will become broader based following a fourth round of mortgage insurance regulation tightening by the federal government”. The way I interpret this is what goes for Vancouver, also goes for the entire country. And then there’s the obvious, if it all goes bad, you know who to blame.
Wednesday 26 September 2012
Did OSFI Kill the Smith Manoeuvre?
Rob McLister, CMT, CanadianMortgageTrend.com
Tens of thousands of Canadians employ leveraged investing strategies like the Smith Manoeuvre. They rely on these techniques to magnify their investment gains and to pay down their mortgage faster.
For those not familiar with it, the Smith Manoeuvre entails:
Tens of thousands of Canadians employ leveraged investing strategies like the Smith Manoeuvre. They rely on these techniques to magnify their investment gains and to pay down their mortgage faster.
For those not familiar with it, the Smith Manoeuvre entails:
- re-borrowing your regular mortgage principal payments
- investing that money in the market
- writing off the investment loan interest, and
- using the resulting tax refunds to prepay your mortgage.
The Smith Manoeuvre hit a roadbump this past June when Canada’s banking regulator, OSFI, officially announced lower HELOC borrowing limits.
As of October 31, 2012, investors with bank-issued HELOCs will be able to borrow only 65% of their home value via a revolving credit line, as opposed to 80% before the changes. Most banks have already implemented this new guideline, impacting the Smith Manoeuvre in the process.
Fortunately, leveraged investing is far from dead.
“The Smith Manoeuvre is still a huge potential benefit to Canadians,” says Rob Smith, son of author Fraser Smith, founder of the Smith Manoeuvre.
“The limit drop is occurring only on the non-amortizing facility,” he notes. That means lenders will still offer 80% loan-to-value (LTV) financing—giving leveraged investors the option of a 65% credit line plus a 15% mortgage portion.
To the extent that lenders “allow readvancing on the 65% portion, but not on the 15% portion,” then the effect (of OSFI’s changes) “relates mostly to the lower amount of principal that can be readvanced,” says financial planner Ed Rempel.
“This effect could be minimized by amortizing the mortgage portion as long as possible (e.g., for 30-35 years), while paying down the readvanceable portion more quickly.”
While it’s not typical, “the fact that 15% of a readvanceable mortgage is now amortizing does not mean that 15% isn’t useful for investment purposes.”
"Qualified candidates can still use a regular mortgage for investment borrowing," he says. Albeit, borrowing from an amortizing mortgage and deducting the interest requires additional tax/accounting considerations.
Related Factoids:
As of October 31, 2012, investors with bank-issued HELOCs will be able to borrow only 65% of their home value via a revolving credit line, as opposed to 80% before the changes. Most banks have already implemented this new guideline, impacting the Smith Manoeuvre in the process.
Fortunately, leveraged investing is far from dead.
“The Smith Manoeuvre is still a huge potential benefit to Canadians,” says Rob Smith, son of author Fraser Smith, founder of the Smith Manoeuvre.
“The limit drop is occurring only on the non-amortizing facility,” he notes. That means lenders will still offer 80% loan-to-value (LTV) financing—giving leveraged investors the option of a 65% credit line plus a 15% mortgage portion.
To the extent that lenders “allow readvancing on the 65% portion, but not on the 15% portion,” then the effect (of OSFI’s changes) “relates mostly to the lower amount of principal that can be readvanced,” says financial planner Ed Rempel.
“This effect could be minimized by amortizing the mortgage portion as long as possible (e.g., for 30-35 years), while paying down the readvanceable portion more quickly.”
While it’s not typical, “the fact that 15% of a readvanceable mortgage is now amortizing does not mean that 15% isn’t useful for investment purposes.”
"Qualified candidates can still use a regular mortgage for investment borrowing," he says. Albeit, borrowing from an amortizing mortgage and deducting the interest requires additional tax/accounting considerations.
Related Factoids:
- Most existing HELOC holders are not affected by OSFI’s new 65% LTV HELOC limit unless they make changes to their HELOC. Any such changes would likely lower their credit line LTV to 65% maximum.
- “There will be a regulatory gap between OSFI-regulated banks and provincially-regulated lenders,” says Sandy Aitken, president of Tax Deductible Mortgage Plan (TDMP). “Therefore, it’s possible that some non-OSFI-regulated lenders (like credit unions) might exploit the opportunity to provide highly qualified HELOC borrowers with an 80% LTV credit line after the banks abandon this market segment.”
Tuesday 25 September 2012
Housing market cool down widespread across Canada
OTTAWA — Canada’s housing market appears to be cooling across the board in the face of tighter mortgage rules that affect many first-time buyers of modest means, a new analysis from the Conference Board shows.
The think-tank’s snapshot of resales for August shows a widespread decline in sales of existing homes, with 21 of 28 metropolitan markets registering a drop from July, and 16 of the markets showing a falloff of five per cent or more.
As well, listings fell in 17 of the 28 markets, an indication that owners were reluctant to place their homes for sale due to soft conditions.
Senior economist Robin Wiebe of the Conference Board said there was evidence of cooling in some markets — particularly Vancouver and Victoria — before the new rules went into effect July 9. But the new data shows the slowdown has spread to most markets and from coast to coast.
“When you see sales down in three-quarters of the market, that means it’s pretty widespread,” he said. “It’s knocked down previously high-flying markets like Regina and Saskatoon down a peg. Vancouver had been showing signs of cooling, now it’s spread out into the Fraser Valley.”
At the time Finance Minister Jim Flaherty announced maximum amortization period for mortgage would be reduced to 25 years from 30 years, the government estimated it would increase monthly payments by $184 on a $350,000 mortgage.
It had been the fourth time Flaherty tightened mortgage requirements in four years, but the July measure was regarded as the one likely to be the most effective.
While sales and prices were only temporarily sidetracked by the previous announcements, only to recover a few months later, this might “be the one that broke the camel’s back,” said Wiebe.
Last week, the Canadian Real Estate Association reported that sales of existing homes fell 5.8% in August from July, and were down 8.9 per cent from August 2011.
Still, the latest data shows that while sales and listings are down, prices appear to be holding steady.
The report found prices fell in only nine of the 28 markets in August from the previous month. Compared to last August, prices were up in 25 markets.
Economists have generally been forecasting a correction of between 10 and 25% in prices over the next two or three years. Vancouver, which had for years been Canada’s hottest market, has seen a tumble of about 30% in resale homes.
But Wiebe is not so sure the correction will be as severe as many predict, or that Vancouver’s market is as cold as the numbers suggest.
He notes that Vancouver’s average home prices are skewed by the number of high-end property sold — many to investors from China. Both the meteoric rise and current decline are “overstated,” he said.
Homes in the Toronto area, Canada’s largest market, are also likely to retain their value, he said, because the economy in the city remains healthy and the greater metropolitan area continues to experience strong population growth.
The Canadian Press
Monday 24 September 2012
Canada's economy 'at a crossroads,' TD report says
TD expects 10% house price correction over the next 3 years
CBC NEWS
The Canadian economy is stuck in neutral, dragged down by debt-laden households and deficit-fighting governments, Toronto-Dominion Bank said in its quarterly forecast released today.
"Canada’s economy is stuck in a soft patch," the bank's economics team said. "Fatigued households and debt-laden governments have recently been shifting their attention to restraint. Meanwhile, a weak global environment and an elevated exchange rate are weighing on the export sector."
They're all adding up to keeping Canada's economy in a funk, with growth below two per cent and unemployment above seven per cent for the next while, the bank says.
Government and household spending accounted for roughly 90 per cent of Canada's GDP last year, and those two factors show no signs of being able to pick the economy up by its bootstraps anytime soon. Household debt has hit a record of 152 per cent of disposable income, and government debt-to-GDP ratios have risen considerably in recent years, especially at the provincial level.
"With the household and government sectors preoccupied with repairing their balance sheets, the stage is set for Canada’s export-oriented business sector to step up to help sustain Canada’s expansion," the bank says.
Canadian corporations have quietly amassed significant amounts of cash in recent years. That should serve them well to invest now, with the Canadian dollar strong.
"Overall, corporate profits are likely to advance at a healthy five to seven per cent pace over 2013 and 2014 on the back of improved global demand," TD said.
On the housing front, the bank says it looks like the correction is underway, driven by a sharp slowdown in the Vancouver market. "The tide seems to have finally turned."
TD expects the slowdown will become more broad-based after the government recently moved, for a fourth time, to tighten the rules surrounding who qualifies for a mortgage.
"The economy is now left with a debt overhang and an overbuilt, overpriced housing market," TD said. The bank estimates that on average, Canada's housing market is likely about 10 per cent overpriced, and is due for a slow, gradual correction.
"The adjustment is expected to occur gradually over the next [two or three] years, which should be quite manageable for most Canadian households," TD said.
CBC NEWS
The Canadian economy is stuck in neutral, dragged down by debt-laden households and deficit-fighting governments, Toronto-Dominion Bank said in its quarterly forecast released today.
"Canada’s economy is stuck in a soft patch," the bank's economics team said. "Fatigued households and debt-laden governments have recently been shifting their attention to restraint. Meanwhile, a weak global environment and an elevated exchange rate are weighing on the export sector."
They're all adding up to keeping Canada's economy in a funk, with growth below two per cent and unemployment above seven per cent for the next while, the bank says.
'The tide seems to have finally turned.'—TD on Canada's housing market"With no engine firing on all cylinders," TD says it expects Canada's economy will grow by 1.8 per cent this year, before moving slightly above two per cent in 2013 and 2014. "Canada’s economy appears to be at a crossroads."
Government and household spending accounted for roughly 90 per cent of Canada's GDP last year, and those two factors show no signs of being able to pick the economy up by its bootstraps anytime soon. Household debt has hit a record of 152 per cent of disposable income, and government debt-to-GDP ratios have risen considerably in recent years, especially at the provincial level.
"With the household and government sectors preoccupied with repairing their balance sheets, the stage is set for Canada’s export-oriented business sector to step up to help sustain Canada’s expansion," the bank says.
Canadian corporations have quietly amassed significant amounts of cash in recent years. That should serve them well to invest now, with the Canadian dollar strong.
Housing correction underway, report says
Gradual progress against the major international headwinds such as the ongoing European financial crisis, an anemic U.S. recovery and slowing emerging economies should improve Canadian exporters' performance, but not until early 2013, the bank warns."Overall, corporate profits are likely to advance at a healthy five to seven per cent pace over 2013 and 2014 on the back of improved global demand," TD said.
On the housing front, the bank says it looks like the correction is underway, driven by a sharp slowdown in the Vancouver market. "The tide seems to have finally turned."
TD expects the slowdown will become more broad-based after the government recently moved, for a fourth time, to tighten the rules surrounding who qualifies for a mortgage.
"The economy is now left with a debt overhang and an overbuilt, overpriced housing market," TD said. The bank estimates that on average, Canada's housing market is likely about 10 per cent overpriced, and is due for a slow, gradual correction.
"The adjustment is expected to occur gradually over the next [two or three] years, which should be quite manageable for most Canadian households," TD said.
Friday 21 September 2012
The true cost of home ownership? Ouch!
By Ryan Starr, Moneyville, TheStar.com
Buying a home can be such an exhilarating and nerve-wracking experience for first-timers that they often overlook the true costs.
“They’re so emotionally charged that they forget the cost of the house isn’t just what they need to account for,” says Farhaneh Haque, director of mortgage advice with TD Bank. “There are ancillary costs you need to budget and save for.”
We asked experts what first-timers should expect to pay when purchasing a home, and the costs of ownership over time.
Begin with a budget:Before you begin house hunting, examine your income and create a budget to determine a monthly mortgage payment you can live with. The basic rule of thumb is that your total housing costs shouldn’t exceed one-third of your gross income.
Short-term pain: Initially you’ll need money for a down payment. A typical down payment ranges from 5 to 15 per cent of the home purchase price, or appraised value, whichever is less. The more you put down up front, the less you’ll pay in the long run.
You’ll need a home inspection as part of the condition of purchase agreement: this can cost up to $500.
Then there are closing costs, which can run between 1.5 to 2 per cent of your purchase price.
There’s the provincial land transfer tax and, for homes in Toronto, an additional municipal land transfer tax. On a $400,000 home, that’s a combined one-time payment of $8,200.
Notary and legal fees should be factored in; about $1,000 to $1,300. You’ll also pay $200 to $300 for your title insurance fee.
Dizzy yet? Wait, there’s more! A few other costs to consider:
If you’re buying a condo, you might need to pay for a status or estoppel certificate from the condo corporation.
And if you’re purchasing a new house from a developer, or one that’s been significantly renovated, you’ll likely be paying HST on the transaction.
Finally, there are the costs associated with the actual house move and furnishings to spruce up your new digs.
Not surprisingly, experts recommend establishing a decent-sized financial cushion ahead of time.
“I always tell my clients not to cut themselves short,” says Frances Hinojosa, a mortgage specialist at BMO. “Create a buffer in there for any incidentals, such as moving costs or upgrades to your property; maybe you want to paint or get window treatments.”
Ongoing obligations: Notwithstanding the mortgage payments, there are several other ongoing, long-term costs associated with operating a home.
There are property taxes, which in the GTA are usually about 1 per cent of a home’s purchase price and are based on the assessed value of the home. (Total taxes on a $400,000 home in Toronto are about $3,000 a year.)
A condo will have maintenance fees, which tend to increase over time.
And if you’re buying a house, there will be the ongoing cost of utilities and maintenance.
A home inspection will give you a basic sense of its state of repair, “but something like a furnace can go out overnight,” Haque notes. “So having a little bit of a safety net set aside for that is a good idea.” $100 a month for home maintenance is a safe bet.
Also be mindful of interest rates, which are currently at all-time lows. It’s wise for first-time buyers to account for roughly a 2- to 3-percentage point increase in this rate and provide for that in their budget, says Haque.
Budget stress test: Once you’ve accounted for your housing costs and determined what your new monthly budget will be, experts recommend subjecting your finances to a stress test.
If you’re currently renting, put the difference in the monthly costs into a savings vehicle. “So you actually get used to carrying that expense on a month-to-month basis,’ Hinojosa explains.
“That’s what my husband and I did when we bought our first home; even when we moved up to a second property,” she says. “When the purchase closed and we had to pay (that amount), we’d already been paying it. So there wasn’t this feeling of, ‘Oh my goodness, I can’t afford this.’ ”
Buying a home can be such an exhilarating and nerve-wracking experience for first-timers that they often overlook the true costs.
“They’re so emotionally charged that they forget the cost of the house isn’t just what they need to account for,” says Farhaneh Haque, director of mortgage advice with TD Bank. “There are ancillary costs you need to budget and save for.”
We asked experts what first-timers should expect to pay when purchasing a home, and the costs of ownership over time.
Begin with a budget:Before you begin house hunting, examine your income and create a budget to determine a monthly mortgage payment you can live with. The basic rule of thumb is that your total housing costs shouldn’t exceed one-third of your gross income.
Short-term pain: Initially you’ll need money for a down payment. A typical down payment ranges from 5 to 15 per cent of the home purchase price, or appraised value, whichever is less. The more you put down up front, the less you’ll pay in the long run.
You’ll need a home inspection as part of the condition of purchase agreement: this can cost up to $500.
Then there are closing costs, which can run between 1.5 to 2 per cent of your purchase price.
There’s the provincial land transfer tax and, for homes in Toronto, an additional municipal land transfer tax. On a $400,000 home, that’s a combined one-time payment of $8,200.
Notary and legal fees should be factored in; about $1,000 to $1,300. You’ll also pay $200 to $300 for your title insurance fee.
Dizzy yet? Wait, there’s more! A few other costs to consider:
If you’re buying a condo, you might need to pay for a status or estoppel certificate from the condo corporation.
And if you’re purchasing a new house from a developer, or one that’s been significantly renovated, you’ll likely be paying HST on the transaction.
Finally, there are the costs associated with the actual house move and furnishings to spruce up your new digs.
Not surprisingly, experts recommend establishing a decent-sized financial cushion ahead of time.
“I always tell my clients not to cut themselves short,” says Frances Hinojosa, a mortgage specialist at BMO. “Create a buffer in there for any incidentals, such as moving costs or upgrades to your property; maybe you want to paint or get window treatments.”
Ongoing obligations: Notwithstanding the mortgage payments, there are several other ongoing, long-term costs associated with operating a home.
There are property taxes, which in the GTA are usually about 1 per cent of a home’s purchase price and are based on the assessed value of the home. (Total taxes on a $400,000 home in Toronto are about $3,000 a year.)
A condo will have maintenance fees, which tend to increase over time.
And if you’re buying a house, there will be the ongoing cost of utilities and maintenance.
A home inspection will give you a basic sense of its state of repair, “but something like a furnace can go out overnight,” Haque notes. “So having a little bit of a safety net set aside for that is a good idea.” $100 a month for home maintenance is a safe bet.
Also be mindful of interest rates, which are currently at all-time lows. It’s wise for first-time buyers to account for roughly a 2- to 3-percentage point increase in this rate and provide for that in their budget, says Haque.
Budget stress test: Once you’ve accounted for your housing costs and determined what your new monthly budget will be, experts recommend subjecting your finances to a stress test.
If you’re currently renting, put the difference in the monthly costs into a savings vehicle. “So you actually get used to carrying that expense on a month-to-month basis,’ Hinojosa explains.
“That’s what my husband and I did when we bought our first home; even when we moved up to a second property,” she says. “When the purchase closed and we had to pay (that amount), we’d already been paying it. So there wasn’t this feeling of, ‘Oh my goodness, I can’t afford this.’ ”
Lessons learned from a year as a home owner
By Krystal Yee
A year ago, I made the biggest financial decision of my life and bought a home. Although it hasn’t always been easy, I am still extremely happy with my purchase.
Here are a few lessons I’ve learned:
1. Buy for less than you can affordWhen I first started my home search, I knew that the bank would approve me for more than I was comfortable spending. I was pre-approved for close to $300,000, but decided to cap my mortgage at $250,000, because no matter how stable you might think your life is, things can change.
When faced with the choice between a one-bedroom townhouse, and a two-bedroom option. I ended up buying the one-bedroom option because it freed up more money to put towards other things.
2. Save for home improvement projectsIt can be so tempting to head to Home Depot or IKEA and go on a home improvement and decorating shopping spree. But if you haven’t set aside the money, it’s better to hold off until you can afford to pay for your purchases in cash. Once you’ve made a list of what changes you want to make to your home, and the approximate cost, make sure to save an extra 10 or 15 per cent because you’re bound to spend more than you think you will.
Before I purchased my home, I had saved approximately $4,500 for home improvement projects. I ended up blowing my budget by spending more than $5,000 for new floors, paint, decorations, and furniture. And there's much more I want to do. However, instead of dipping into savings, I plan to set aside extra money for the additional renovations.
3. Buying is for the long-termIf you don’t know where you will be in a couple of years, or if your financial situation might change drastically, home ownership might not be right for you. In today’s real estate market, you might need to stay put in your home for at least four or five years – maybe even more – just to break even. So for that reason, it is extremely important to evaluate where you think you will be in the next five years, as well as whether your home will still be functional for your lifestyle within that time frame.
When I bought my home, I had no idea that, eight months later, I would be presented with the opportunity to move overseas. I consider myself lucky that my mortgage payments are small enough that I was able to afford to take that opportunity to move to Germany for seven months.
4. Have all your finances in order
Before you even start looking at homes, you should be working to get your finances in order. This includes taking into consideration your work history (many lenders look at an average of the past two to three years of income), credit history, and cash savings. You might not think those late payments to your credit card company were a big deal, but the cleaner your overall financial history is, the better chance you will have at snagging the best interest rate possible on your mortgage.
I started thinking about becoming a homeowner six years before I closed on my townhouse. In that time, I eliminated all of my debt, saved for a down payment, created an emergency fund, and tucked money aside for closing costs, moving expenses, renovations, and furniture.
Doing my research and making sure I had enough money to cover every expense made my home buying experience a lot less stressful.
5. Be friendly with the neighbours
You might be annoyed with your neighbour’s loud sound system, or the fact that their cats are always on your porch, but it’s in your best interest to be friendly. You never know when you’ll need someone to pick up the mail when you’re out of town, watch your pet for a few days, or water your garden.
Krystal Yee lives in Vancouver and blogs at Give Me Back My Five Bucks.
A year ago, I made the biggest financial decision of my life and bought a home. Although it hasn’t always been easy, I am still extremely happy with my purchase.
Here are a few lessons I’ve learned:
1. Buy for less than you can affordWhen I first started my home search, I knew that the bank would approve me for more than I was comfortable spending. I was pre-approved for close to $300,000, but decided to cap my mortgage at $250,000, because no matter how stable you might think your life is, things can change.
When faced with the choice between a one-bedroom townhouse, and a two-bedroom option. I ended up buying the one-bedroom option because it freed up more money to put towards other things.
2. Save for home improvement projectsIt can be so tempting to head to Home Depot or IKEA and go on a home improvement and decorating shopping spree. But if you haven’t set aside the money, it’s better to hold off until you can afford to pay for your purchases in cash. Once you’ve made a list of what changes you want to make to your home, and the approximate cost, make sure to save an extra 10 or 15 per cent because you’re bound to spend more than you think you will.
Before I purchased my home, I had saved approximately $4,500 for home improvement projects. I ended up blowing my budget by spending more than $5,000 for new floors, paint, decorations, and furniture. And there's much more I want to do. However, instead of dipping into savings, I plan to set aside extra money for the additional renovations.
3. Buying is for the long-termIf you don’t know where you will be in a couple of years, or if your financial situation might change drastically, home ownership might not be right for you. In today’s real estate market, you might need to stay put in your home for at least four or five years – maybe even more – just to break even. So for that reason, it is extremely important to evaluate where you think you will be in the next five years, as well as whether your home will still be functional for your lifestyle within that time frame.
When I bought my home, I had no idea that, eight months later, I would be presented with the opportunity to move overseas. I consider myself lucky that my mortgage payments are small enough that I was able to afford to take that opportunity to move to Germany for seven months.
4. Have all your finances in order
Before you even start looking at homes, you should be working to get your finances in order. This includes taking into consideration your work history (many lenders look at an average of the past two to three years of income), credit history, and cash savings. You might not think those late payments to your credit card company were a big deal, but the cleaner your overall financial history is, the better chance you will have at snagging the best interest rate possible on your mortgage.
I started thinking about becoming a homeowner six years before I closed on my townhouse. In that time, I eliminated all of my debt, saved for a down payment, created an emergency fund, and tucked money aside for closing costs, moving expenses, renovations, and furniture.
Doing my research and making sure I had enough money to cover every expense made my home buying experience a lot less stressful.
5. Be friendly with the neighbours
You might be annoyed with your neighbour’s loud sound system, or the fact that their cats are always on your porch, but it’s in your best interest to be friendly. You never know when you’ll need someone to pick up the mail when you’re out of town, watch your pet for a few days, or water your garden.
Krystal Yee lives in Vancouver and blogs at Give Me Back My Five Bucks.
New Mortgage Rule Impact
People are itching to know what short-term damage the new mortgage rules will inflict on real estate prices.
So far, in the first full month of tighter insured lending, home sales are down almost 6%.
Additionally, we hear (anecdotally) that insured mortgage application volumes are noticeably lower, even after accounting for seasonal adjustments.
CREA economist Gregory Klump says, "The broadly based decline in August sales activity suggests that some buyers may no longer qualify for a mortgage now that amortization periods for high ratio mortgages have been shortened."
"As the lynchpin of the housing market, lower first-time buying activity will have downstream effects over the rest of the market.”
Klump adds that it could take “a few more months of data” before we can “gauge the broader impact of recent regulatory changes on Canada's housing market."
With fall being the second busiest mortgage season, we should get a good read on things by early December. By then we’ll also get commentary and data from banks reporting their August through October results. Q4 will be their first full fiscal quarter under the new mortgage regime.
In the meantime, we in the business all sense what shorter amortizations, tougher refinance rules and tighter debt ratio limits will do. And it’s not bullish for home values in the near-term...which is exactly what policymakers want.
-Written by Rob McLister of Canadianmortgagetrends.com
Link to actual article http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2012/09/mortgage-rule-impact-to-date.html#more
-Written by Rob McLister of Canadianmortgagetrends.com
Link to actual article http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2012/09/mortgage-rule-impact-to-date.html#more
Wednesday 19 September 2012
Penalty Avoidance
Rob McLister, CMT, CanadianMortgageTrends.com
If you’re getting a new long-term mortgage, odds are you’re going to fiddle with it before maturity.
The majority of people will either:
If you’re getting a new long-term mortgage, odds are you’re going to fiddle with it before maturity.
The majority of people will either:
- Add money to their mortgage
- Add a readvanceable line of credit
- Refinance to get a better rate (which happens less frequently nowadays)
- Increase the amortization
- Port their mortgage to a new home, or
- Discharge it outright.
Other things being equal, avoiding lenders with costly penalty rules is one of many ways to reduce your overall borrowing costs.
Incidentally, the industry prefers that mortgage penalties be called “prepayment charges.” That’s because these charges aren’t supposed to penalize a borrower. They’re supposed to compensate your lender for very real costs it incurs when you pay off your mortgage before agreed. (“Costs” refer mostly to lost interest, but lenders also incur underwriting costs, originator compensation, securitization costs, etc.)
The problem is, some lenders impose far more severe prepayment charges than others. Major banks sometimes charge more than twice what a smaller lender would charge for the same term mortgage, even though the bank has lower funding costs.
DECODING THE MORTGAGE MARKET
Ten questions to help you avoid mortgage-penalty shock
Robert McLister, Special to The Globe and Mail
Incidentally, the industry prefers that mortgage penalties be called “prepayment charges.” That’s because these charges aren’t supposed to penalize a borrower. They’re supposed to compensate your lender for very real costs it incurs when you pay off your mortgage before agreed. (“Costs” refer mostly to lost interest, but lenders also incur underwriting costs, originator compensation, securitization costs, etc.)
The problem is, some lenders impose far more severe prepayment charges than others. Major banks sometimes charge more than twice what a smaller lender would charge for the same term mortgage, even though the bank has lower funding costs.
DECODING THE MORTGAGE MARKET
Ten questions to help you avoid mortgage-penalty shock
Robert McLister, Special to The Globe and Mail
Figuring out the penalty on a fixed-rate mortgage is like solving a calculus equation. Homeowners who try often wind up hitting their head against hard objects in frustration.
It’s been that way for years, and as many unwittingly discover, mortgage penalties can be disturbingly expensive.
Historically, lenders have used cryptic penalty language that disguises just how expensive. As a result, folks trying to break their mortgage are routinely shocked and disappointed by four- or five-figure penalty quotes.
Interest rate differential (IRD) charges, commonly called “penalties,” have long been the biggest culprit. IRD charges compensate a lender for lost interest when you prepay large portions of a closed mortgage early. They’re basically the difference between the interest you promised to pay and what the lender can earn today on a mortgage of your size. Without a computer, even most lender reps cannot calculate IRD penalties with precision.
The biggest penalty I ever saw was $99,000 on a multimillion-dollar property. The average is far less than that – in the four-digit range – but for a homeowner with little discretionary income, it might as well be $99,000.
But things are changing for the better. As of this month, the Department of Finance has convinced banks to peel back a layer of opacity. Most banks now agree to a “voluntary” Code of Conduct that requires them to post plain-English explanations of prepayment charge calculations and provide website calculators so people can run their own penalty estimates.
That latter development is a colossal win for mortgage consumers.
Here, for example, are links to the top 10 banks’ penalty calculators: Bank of Montreal, CIBC, HSBC, ING Direct, Laurentian Bank, National Bank of Canada, Manulife Bank, Royal Bank, Scotiabank, and TD Canada Trust
As helpful as these calculators are, there’s one essential piece of the puzzle that most still don’t provide: the discount you received at the time you got your mortgage.
This discount is key for determining your IRD penalty with the major banks. They could easily permit estimation of discounts online (using their historical posted rates), but omitting this data forces you to call in and listen to their sales pitch to retain your business before you can switch lenders.
Another problem is that few non-bank lenders have taken the initiative to create online penalty calculators. That makes comparing penalties between banks and non-bank lenders unnecessarily difficult, which incidentally plays right into the big banks’ hands.
The majority of long-term fixed-rate mortgage holders terminate or change their mortgage before their term is up. In fact, the average five-year mortgage lasts only three to four years. Penalties apply in only a minority of these cases, but for those who are affected, they can substantially raise your overall borrowing costs
It therefore pays to guesstimate mortgage breakage costs in advance and avoid surprises later. In doing so, you’ll often find that a lender’s bargain interest rate is offset by its harsh penalty.
Before settling on a lender, try this. If you want a five-year fixed term, have your mortgage adviser estimate that lender’s penalty as if you planned to break the mortgage after 3.5 years (the average breakage), assuming rates stay the same. Then ask the adviser to give you a sense for how this penalty would compare to the “typical” lender.
While you’re at it, here are 10 more questions to ask a lender about its penalty:
1. Is your fixed-rate mortgage penalty based on posted rates, bond yields or discounted rates?
The logic: Some lenders – including the Big Six banks – base penalties on posted rates, which can drastically inflate your penalty. Other lenders use bond yields, which can also cost you a small fortune, depending on bond performance. A few are even bold enough to use posted rates when calculating simple “three-month interest” penalties.
2. If I break the mortgage and stay with you, will you forgive a percentage of my penalty or apply unused prepayment privileges, to reduce my penalty?
The logic: More lenders are doing this as competition grows.
3. If not, can I make a prepayment a few weeks before breaking my mortgage to lower the balance used to calculate my penalty?
The logic: When determining a penalty, some lenders refuse to consider prepayments 30-90 days before you request discharge.
4. What term do you use to calculate the nearest comparison rate for an IRD penalty?
The logic: Some lenders use a shorter term than the nearest term, which can significantly increase your prepayment costs.
5. Can I increase my mortgage without a penalty?
The logic: This is important if you ever upgrade your home or need additional funds.
6. If I sell my home and port my mortgage to a new property, how long can I take to close on that new property and still avoid a penalty?
The logic: Some lenders unreasonably require you to close your old and new home on the same day.
7. If I break the mortgage early, do I have to pay “reinvestment fees” on top of the penalty, or pay back any cash incentives that I’ve received?
The logic: Other things equal, why pay a reinvestment fee on top of your penalty? The latter answer is usually “yes.”
8. Can I get out of my fixed mortgage early if I pay a penalty?
The logic: Some “low frills” closed mortgages don’t let you out before maturity – no matter what – unless you sell your home.
9. Do you charge IRD penalties on your variable-rate mortgage, as opposed to the standard three-month interest?
The logic: Despite being highly unorthodox, a few lenders actually do this and it can cost you.
10. How long will you honour your IRD penalty quote?
The logic: This is relevant if you’re trying to discharge a fixed-rate mortgage while rates are dropping. Falling rates can increase your IRD penalty.
Penalties are a realm where borrowers need knowledgeable advice. Sadly, many advisers are inexperienced with penalty calculations and give you a blank stare when you ask too many questions. (That’s a good clue that you should deal with someone else.)
Fortunately, the Financial Consumer Agency of Canada is doing a noble job encouraging clarity with mortgage penalties. By March 5 of next year, it will go a step further by requiring banks to provide: annual information to help consumers calculate their penalty, written penalty statements upon request with clear calculation explanations, and access to exact prepayment penalty quotes by phone.
These initiatives will encourage fairer penalties and help homeowners minimize them, saving many individual Canadians thousands over time.
It’s been that way for years, and as many unwittingly discover, mortgage penalties can be disturbingly expensive.
Historically, lenders have used cryptic penalty language that disguises just how expensive. As a result, folks trying to break their mortgage are routinely shocked and disappointed by four- or five-figure penalty quotes.
Interest rate differential (IRD) charges, commonly called “penalties,” have long been the biggest culprit. IRD charges compensate a lender for lost interest when you prepay large portions of a closed mortgage early. They’re basically the difference between the interest you promised to pay and what the lender can earn today on a mortgage of your size. Without a computer, even most lender reps cannot calculate IRD penalties with precision.
The biggest penalty I ever saw was $99,000 on a multimillion-dollar property. The average is far less than that – in the four-digit range – but for a homeowner with little discretionary income, it might as well be $99,000.
But things are changing for the better. As of this month, the Department of Finance has convinced banks to peel back a layer of opacity. Most banks now agree to a “voluntary” Code of Conduct that requires them to post plain-English explanations of prepayment charge calculations and provide website calculators so people can run their own penalty estimates.
That latter development is a colossal win for mortgage consumers.
Here, for example, are links to the top 10 banks’ penalty calculators: Bank of Montreal, CIBC, HSBC, ING Direct, Laurentian Bank, National Bank of Canada, Manulife Bank, Royal Bank, Scotiabank, and TD Canada Trust
As helpful as these calculators are, there’s one essential piece of the puzzle that most still don’t provide: the discount you received at the time you got your mortgage.
This discount is key for determining your IRD penalty with the major banks. They could easily permit estimation of discounts online (using their historical posted rates), but omitting this data forces you to call in and listen to their sales pitch to retain your business before you can switch lenders.
Another problem is that few non-bank lenders have taken the initiative to create online penalty calculators. That makes comparing penalties between banks and non-bank lenders unnecessarily difficult, which incidentally plays right into the big banks’ hands.
The majority of long-term fixed-rate mortgage holders terminate or change their mortgage before their term is up. In fact, the average five-year mortgage lasts only three to four years. Penalties apply in only a minority of these cases, but for those who are affected, they can substantially raise your overall borrowing costs
It therefore pays to guesstimate mortgage breakage costs in advance and avoid surprises later. In doing so, you’ll often find that a lender’s bargain interest rate is offset by its harsh penalty.
Before settling on a lender, try this. If you want a five-year fixed term, have your mortgage adviser estimate that lender’s penalty as if you planned to break the mortgage after 3.5 years (the average breakage), assuming rates stay the same. Then ask the adviser to give you a sense for how this penalty would compare to the “typical” lender.
While you’re at it, here are 10 more questions to ask a lender about its penalty:
1. Is your fixed-rate mortgage penalty based on posted rates, bond yields or discounted rates?
The logic: Some lenders – including the Big Six banks – base penalties on posted rates, which can drastically inflate your penalty. Other lenders use bond yields, which can also cost you a small fortune, depending on bond performance. A few are even bold enough to use posted rates when calculating simple “three-month interest” penalties.
2. If I break the mortgage and stay with you, will you forgive a percentage of my penalty or apply unused prepayment privileges, to reduce my penalty?
The logic: More lenders are doing this as competition grows.
3. If not, can I make a prepayment a few weeks before breaking my mortgage to lower the balance used to calculate my penalty?
The logic: When determining a penalty, some lenders refuse to consider prepayments 30-90 days before you request discharge.
4. What term do you use to calculate the nearest comparison rate for an IRD penalty?
The logic: Some lenders use a shorter term than the nearest term, which can significantly increase your prepayment costs.
5. Can I increase my mortgage without a penalty?
The logic: This is important if you ever upgrade your home or need additional funds.
6. If I sell my home and port my mortgage to a new property, how long can I take to close on that new property and still avoid a penalty?
The logic: Some lenders unreasonably require you to close your old and new home on the same day.
7. If I break the mortgage early, do I have to pay “reinvestment fees” on top of the penalty, or pay back any cash incentives that I’ve received?
The logic: Other things equal, why pay a reinvestment fee on top of your penalty? The latter answer is usually “yes.”
8. Can I get out of my fixed mortgage early if I pay a penalty?
The logic: Some “low frills” closed mortgages don’t let you out before maturity – no matter what – unless you sell your home.
9. Do you charge IRD penalties on your variable-rate mortgage, as opposed to the standard three-month interest?
The logic: Despite being highly unorthodox, a few lenders actually do this and it can cost you.
10. How long will you honour your IRD penalty quote?
The logic: This is relevant if you’re trying to discharge a fixed-rate mortgage while rates are dropping. Falling rates can increase your IRD penalty.
Penalties are a realm where borrowers need knowledgeable advice. Sadly, many advisers are inexperienced with penalty calculations and give you a blank stare when you ask too many questions. (That’s a good clue that you should deal with someone else.)
Fortunately, the Financial Consumer Agency of Canada is doing a noble job encouraging clarity with mortgage penalties. By March 5 of next year, it will go a step further by requiring banks to provide: annual information to help consumers calculate their penalty, written penalty statements upon request with clear calculation explanations, and access to exact prepayment penalty quotes by phone.
These initiatives will encourage fairer penalties and help homeowners minimize them, saving many individual Canadians thousands over time.
Tuesday 18 September 2012
Slow real estate market sparks renovation revival
By Tracy Sherlock, Vancouver Sun
More people are hunkering down and fixing up existing homes rather than moving
Read more: http://www.vancouversun.com/business
More people are hunkering down and fixing up existing homes rather than moving
With resales falling and the new housing price index slipping, people appear to be staying put a bit longer and renovating their existing homes instead of moving.
Peter Simpson, president and CEO of the Greater Vancouver Home Builders Association, said he spoke with several renovators and very few are fixing up homes for resale.
“Some clients have moved in and want to renovate. The others are folks who have lived somewhere for a number of years and want to stay in the same neighbourhood. They’re renovating for their own use,” Simpson said. “They’re not nervous about spending the money either.”
With year-to-date resales down 18 per cent in Vancouver compared to a year ago, it’s no longer the smoking hot sellers’ market it was a year ago. In fact, the Real Estate Board of Greater Vancouver reported that July sales were the lowest since 2000, with sales 31.2 per cent below the 10-year July sales average.
The new housing price index slipped 0.9 per cent in Vancouver in June 2012 compared with June 2011, according to Statistics Canada, while the MLS Home Price Index composite benchmark price for all residential properties in Greater Vancouver over the last 12 months has increased 0.6 per cent to $616,000 and declined 0.7 per cent in July 2012 compared to the prior month.
New mortgage rules introduced by the federal government in July shortened the maximum amortization to 25 years from 30, which is also expected to dampen the market.
Business is definitely strong this year for Jeff Bain, owner of JKB Construction, who said renovations always pick up when sales of new homes fall off.
“Everybody seems to be keen now to spend money,” Bain said. “It’s been good all year long.”
He said kitchens, bathrooms and basement suites continue to be the most popular renovations, but people are also renovating their entire homes.
“People are staying in their homes longer than they ever have in the past. They want to stay where they are comfortable,” Simpson said.
The amount spent on renovations has gone up every year for the past several years, Simpson said, but added that he isn’t sure if that’s because more people are doing renovations or because they’ve become more expensive.
Canada Mortgage and Housing Corp’s third-quarter Housing Market Outlook, released in August, said renovation spending in 2011 was $61.7 billion in Canada. CHMC says that amount will moderate in 2012, growing to $63.3 billion, but is expected to strengthen in 2013 to $65.6 billion.
In B.C., spending on renovations in 2011 was $7.6 billion. Spending is expected to remain stable in 2012 and grow to $7.8 billion next year.
For the most part, business is good for contractors, even in this year’s moderate market, Simpson said.
“One contractor I talked to said he’s having his best year ever,” Simpson said. “He said one client bought a home and they’re spending money to update it, but most clients want to stay where they are and bring their homes up to date.”
Another contractor told Simpson he’s had some customers having a harder time borrowing money from the bank, which may be a result of new mortgage refinancing rules. “Some people seem to be getting a little pushback from the banks, or they might not be able to borrow as much as they want,” Simpson said. “If they can’t obtain the financing, they just have to scale it back a bit. With a renovation, you don’t have to do it all at the same time.”
Peter Simpson, president and CEO of the Greater Vancouver Home Builders Association, said he spoke with several renovators and very few are fixing up homes for resale.
“Some clients have moved in and want to renovate. The others are folks who have lived somewhere for a number of years and want to stay in the same neighbourhood. They’re renovating for their own use,” Simpson said. “They’re not nervous about spending the money either.”
With year-to-date resales down 18 per cent in Vancouver compared to a year ago, it’s no longer the smoking hot sellers’ market it was a year ago. In fact, the Real Estate Board of Greater Vancouver reported that July sales were the lowest since 2000, with sales 31.2 per cent below the 10-year July sales average.
The new housing price index slipped 0.9 per cent in Vancouver in June 2012 compared with June 2011, according to Statistics Canada, while the MLS Home Price Index composite benchmark price for all residential properties in Greater Vancouver over the last 12 months has increased 0.6 per cent to $616,000 and declined 0.7 per cent in July 2012 compared to the prior month.
New mortgage rules introduced by the federal government in July shortened the maximum amortization to 25 years from 30, which is also expected to dampen the market.
Business is definitely strong this year for Jeff Bain, owner of JKB Construction, who said renovations always pick up when sales of new homes fall off.
“Everybody seems to be keen now to spend money,” Bain said. “It’s been good all year long.”
He said kitchens, bathrooms and basement suites continue to be the most popular renovations, but people are also renovating their entire homes.
“People are staying in their homes longer than they ever have in the past. They want to stay where they are comfortable,” Simpson said.
The amount spent on renovations has gone up every year for the past several years, Simpson said, but added that he isn’t sure if that’s because more people are doing renovations or because they’ve become more expensive.
Canada Mortgage and Housing Corp’s third-quarter Housing Market Outlook, released in August, said renovation spending in 2011 was $61.7 billion in Canada. CHMC says that amount will moderate in 2012, growing to $63.3 billion, but is expected to strengthen in 2013 to $65.6 billion.
In B.C., spending on renovations in 2011 was $7.6 billion. Spending is expected to remain stable in 2012 and grow to $7.8 billion next year.
For the most part, business is good for contractors, even in this year’s moderate market, Simpson said.
“One contractor I talked to said he’s having his best year ever,” Simpson said. “He said one client bought a home and they’re spending money to update it, but most clients want to stay where they are and bring their homes up to date.”
Another contractor told Simpson he’s had some customers having a harder time borrowing money from the bank, which may be a result of new mortgage refinancing rules. “Some people seem to be getting a little pushback from the banks, or they might not be able to borrow as much as they want,” Simpson said. “If they can’t obtain the financing, they just have to scale it back a bit. With a renovation, you don’t have to do it all at the same time.”
In May, the Greater Vancouver Home Builders Association held one of its twice-yearly renovation seminar for 300 homeowners. Attendees were asked to complete a survey and Simpson shared some of the results with The Vancouver Sun.
Fifty-six per cent of respondents said they plan to renovate within the next year, while 26 per cent said within 12 to 18 months, Simpson said.
“There’s a sense of urgency. They want to renovate soon.”
Homeowners were also asked if they would need financing — 59 per cent said no and 41 per cent said yes.
Next year, when the province reverts back to the goods and services tax and the provincial sales tax, it is possible that labour on renovations will not be taxed because it was not taxed under the old provincial sales tax.
Simpson said that while it’s not known exactly what will happen when the tax reverts, the transition does not appear to be causing people too many concerns when it comes to renovating.
In his survey, he asked if people were putting their renovation plans on hold until the provincial sales tax is back and 35 per cent said yes, while 65 per cent said no.
“They’re doing renovations because they want to do them,” Simpson said. “Interest rates are still really low. People are going ahead and renovating. They want to have their new kitchen regardless of the tax.”
Simpson urged homeowners to verify that a contractor is compliant with WorkSafeBC before contracting with them for any work. It’s something that Port Moody homeowner Jan Jasienczyk wishes she had done when she needed a new roof two years ago.
The contractor she hired had documents showing that he was insured and a member of various organizations, but Jasienczyk didn’t independently verify that they were accurate. She ended up taking the contractor to small claims court when it turned out she had to redo the entire roof and her garage was damage by leaking. She eventually recovered most of the money she had paid the contractor, but she says it caused her a lot of stress and heartache.
“When you get an estimate, verify everything. Are they members of the roofing association? Do they have Worksafe?” Jasienczyk said. “Do all of those things before you commit to any kind of a contract. Do your due diligence.”
Jasienczyk ended up getting her roof re-done entirely by Penfolds Roofing, which recently announced it is launching a warranty corporation to support its roofing warranties.
Simpson said cash deals are always a bad idea, but he estimates that about 30 per cent of renovations are done under the table.
“It’s rampant. People want to avoid the harmonized sales tax or any taxes,” Simpson said. “There’s about $7.6 to 7.7 billion to be spent on home renovations in B.C. this year; I believe with that much at play there is a lot of opportunities to deal with the underground economy.”
Fifty-six per cent of respondents said they plan to renovate within the next year, while 26 per cent said within 12 to 18 months, Simpson said.
“There’s a sense of urgency. They want to renovate soon.”
Homeowners were also asked if they would need financing — 59 per cent said no and 41 per cent said yes.
Next year, when the province reverts back to the goods and services tax and the provincial sales tax, it is possible that labour on renovations will not be taxed because it was not taxed under the old provincial sales tax.
Simpson said that while it’s not known exactly what will happen when the tax reverts, the transition does not appear to be causing people too many concerns when it comes to renovating.
In his survey, he asked if people were putting their renovation plans on hold until the provincial sales tax is back and 35 per cent said yes, while 65 per cent said no.
“They’re doing renovations because they want to do them,” Simpson said. “Interest rates are still really low. People are going ahead and renovating. They want to have their new kitchen regardless of the tax.”
Simpson urged homeowners to verify that a contractor is compliant with WorkSafeBC before contracting with them for any work. It’s something that Port Moody homeowner Jan Jasienczyk wishes she had done when she needed a new roof two years ago.
The contractor she hired had documents showing that he was insured and a member of various organizations, but Jasienczyk didn’t independently verify that they were accurate. She ended up taking the contractor to small claims court when it turned out she had to redo the entire roof and her garage was damage by leaking. She eventually recovered most of the money she had paid the contractor, but she says it caused her a lot of stress and heartache.
“When you get an estimate, verify everything. Are they members of the roofing association? Do they have Worksafe?” Jasienczyk said. “Do all of those things before you commit to any kind of a contract. Do your due diligence.”
Jasienczyk ended up getting her roof re-done entirely by Penfolds Roofing, which recently announced it is launching a warranty corporation to support its roofing warranties.
Simpson said cash deals are always a bad idea, but he estimates that about 30 per cent of renovations are done under the table.
“It’s rampant. People want to avoid the harmonized sales tax or any taxes,” Simpson said. “There’s about $7.6 to 7.7 billion to be spent on home renovations in B.C. this year; I believe with that much at play there is a lot of opportunities to deal with the underground economy.”
He says people are at risk of being sued if a contractor gets injured if they are not covered by Worksafe.
“Unless homeowners want to put the contractor’s kid through university, they better make sure their contractor is fully compliant with Worksafe.”
He said it is easy to check if a contractor is compliant with Worksafe, and renovators can even request a no-cost compliance letter.
“Unless homeowners want to put the contractor’s kid through university, they better make sure their contractor is fully compliant with Worksafe.”
He said it is easy to check if a contractor is compliant with Worksafe, and renovators can even request a no-cost compliance letter.
Read more: http://www.vancouversun.com/business
Monday 17 September 2012
Friday 14 September 2012
Buying a home with just 5% down? Make sure you love it.
Robert McLister, The Globe and Mail
There are thousands of 20- and 30-somethings out there who are tired of renting. They’re itching to buy a house but they have one big problem: they don’t have enough of a down payment.
Undeterred, some may fish a few toonies from between the couch cushions and scrape together the 5 per cent minimum down payment required by law.
Many of these folks will then lock in a bargain-basement 10-year mortgage at 3.89 per cent, find a hip property for about $300,000 and move in. For these new happy home owners, life couldn’t be better.
But what if, seemingly overnight, the unexpected happened and home prices dove 15 per cent?
The mortgage balance of these young buyers would suddenly be more than their house is worth. If forced to sell now, they wouldn’t be able to break their mortgage unless they made up this shortfall from their own pocket.
Their only choice is to ride out the real estate cycle - and hope it’s not a long ride.
If the above scenario sounds like a long shot, think again. Home prices are a two-way street. We’ve almost forgotten what selloffs look like but, believe you me, they happen.
When prices finish dropping, they sometimes rebound - or they can stay flat…for years.
If the latter happens and you’ve saddled yourself with a big fat mortgage, you could wind up a prisoner in the home you used to love, a home which is now too far from your new job, too small for your growing family or too expensive with your spouse out of work.
This is the very real risk facing people who leap into a red-hot housing market with a dream, a 5 per cent down payment and very little savings.
While not a prediction, a 15 per cent-plus correction in markets like Toronto and Vancouver is a definite possibility. And that means fringe buyers who put down the minimum - and stretch their amortization to the maximum - are taking a Vegas-style gamble.
This hypothetical chart below shows what might happen if you bought a $300,000 house with 5 per cent down and a 30-year amortization. (The average purchase price for a first-time buyer is about $295,000, according to national figures from mortgage insurer Genworth Financial Canada.)
This chart assumes a 15 per cent drop in home value over three years and flat prices for another six or more years. (It also assumes you make no mortgage prepayments, pay a 2.95 per cent default insurance premium - as required by law, and incur roughly 6.5 per cent in liquidation costs, which include realtor fees, legal fees and disbursements, mortgage discharge fees and penalties, repairs and staging, etc.)
In this hypothetical scenario, if you wanted to sell your house after five years you’d owe at least $16,500 more on your mortgage than you could get from the sale.
So here’s the simple point: If you have to stretch yourself financially to buy a new home, you’re probably not ready to trade in your landlord for a lender.
If you do press forward with just 5 per cent down, be prepared to stay in your home a while - potentially a long while.
Here’s what some people with experience say about 5 per cent down mortgages:
• “5 per cent-down mortgages are geared to someone that’s more than a few years into their career, with path for advancement and income increases; someone who has a savings plan; and someone who’s demonstrated that they’re handling credit responsibility and are well below normal debt ratio limits. If a borrower’s house was worth less than their mortgage debt, things like job loss, pay cuts and overspending would only exacerbate the risks and further limit their options.” — Mortgage specialist Marc Ffrench, Royal Bank of Canada
• “The clients putting five per cent down on a $600,000 house with a high debt ratio are the ones you especially worry about. These are properties where you need two parties with six-figure incomes.” — Mortgage planner Geoff Willis, Dominion Lending Centres Origin
• “A five per cent mortgage really isn’t suited to a lot of people. If you absolutely have to put down 5 per cent, aim to make additional payments every year to amortize the mortgage faster.” — Financial adviser Adrian Mastracci, KCM Wealth Management
• “You should also have some kind of emergency fund - at least three months of living expenses. Put it at an institution that has not lent you any money because they can sometimes use money in savings to offset (delinquent debts).” — Mr. Mastracci
And by all means, if you can’t make a healthy down payment, be sure you’re financially stable and love your house. There’s a chance you could be in it a lot longer than you think.
Robert McLister is the editor ofCanadianMortgageTrends.com and a mortgage planner atMortgage Architects.
There are thousands of 20- and 30-somethings out there who are tired of renting. They’re itching to buy a house but they have one big problem: they don’t have enough of a down payment.
Undeterred, some may fish a few toonies from between the couch cushions and scrape together the 5 per cent minimum down payment required by law.
Many of these folks will then lock in a bargain-basement 10-year mortgage at 3.89 per cent, find a hip property for about $300,000 and move in. For these new happy home owners, life couldn’t be better.
But what if, seemingly overnight, the unexpected happened and home prices dove 15 per cent?
The mortgage balance of these young buyers would suddenly be more than their house is worth. If forced to sell now, they wouldn’t be able to break their mortgage unless they made up this shortfall from their own pocket.
Their only choice is to ride out the real estate cycle - and hope it’s not a long ride.
If the above scenario sounds like a long shot, think again. Home prices are a two-way street. We’ve almost forgotten what selloffs look like but, believe you me, they happen.
When prices finish dropping, they sometimes rebound - or they can stay flat…for years.
If the latter happens and you’ve saddled yourself with a big fat mortgage, you could wind up a prisoner in the home you used to love, a home which is now too far from your new job, too small for your growing family or too expensive with your spouse out of work.
This is the very real risk facing people who leap into a red-hot housing market with a dream, a 5 per cent down payment and very little savings.
While not a prediction, a 15 per cent-plus correction in markets like Toronto and Vancouver is a definite possibility. And that means fringe buyers who put down the minimum - and stretch their amortization to the maximum - are taking a Vegas-style gamble.
This hypothetical chart below shows what might happen if you bought a $300,000 house with 5 per cent down and a 30-year amortization. (The average purchase price for a first-time buyer is about $295,000, according to national figures from mortgage insurer Genworth Financial Canada.)
This chart assumes a 15 per cent drop in home value over three years and flat prices for another six or more years. (It also assumes you make no mortgage prepayments, pay a 2.95 per cent default insurance premium - as required by law, and incur roughly 6.5 per cent in liquidation costs, which include realtor fees, legal fees and disbursements, mortgage discharge fees and penalties, repairs and staging, etc.)
In this hypothetical scenario, if you wanted to sell your house after five years you’d owe at least $16,500 more on your mortgage than you could get from the sale.
So here’s the simple point: If you have to stretch yourself financially to buy a new home, you’re probably not ready to trade in your landlord for a lender.
If you do press forward with just 5 per cent down, be prepared to stay in your home a while - potentially a long while.
Here’s what some people with experience say about 5 per cent down mortgages:
• “5 per cent-down mortgages are geared to someone that’s more than a few years into their career, with path for advancement and income increases; someone who has a savings plan; and someone who’s demonstrated that they’re handling credit responsibility and are well below normal debt ratio limits. If a borrower’s house was worth less than their mortgage debt, things like job loss, pay cuts and overspending would only exacerbate the risks and further limit their options.” — Mortgage specialist Marc Ffrench, Royal Bank of Canada
• “The clients putting five per cent down on a $600,000 house with a high debt ratio are the ones you especially worry about. These are properties where you need two parties with six-figure incomes.” — Mortgage planner Geoff Willis, Dominion Lending Centres Origin
• “A five per cent mortgage really isn’t suited to a lot of people. If you absolutely have to put down 5 per cent, aim to make additional payments every year to amortize the mortgage faster.” — Financial adviser Adrian Mastracci, KCM Wealth Management
• “You should also have some kind of emergency fund - at least three months of living expenses. Put it at an institution that has not lent you any money because they can sometimes use money in savings to offset (delinquent debts).” — Mr. Mastracci
And by all means, if you can’t make a healthy down payment, be sure you’re financially stable and love your house. There’s a chance you could be in it a lot longer than you think.
Robert McLister is the editor ofCanadianMortgageTrends.com and a mortgage planner atMortgage Architects.
Thursday 13 September 2012
Is household debt a threat to our economy?
By TMG, The Mortgage Group, blog
Here are the facts:
Household debt has been increasing steadily over that past 30 years as interest rates continue to decline but, for the most part, Canadians gear their borrowing to what they can afford. Jobs are holding steady and business is confident about future prospects. So, lower interest rates mean less money goes to servicing debts.
In accumulating debt, Canadians also have a large asset, namely their homes. And although some in the financial community are concerned about the massive debt, Eric Lascelles, chief economist at RBC Global Asset Management recently said that assets outweigh debt by a factor of five.
It’s true that high household debt does put homeowners at risk but a closer look at the stats tells a better story. Overall Canadians exercise fairly good judgment when it comes to borrowing. The more vulnerable – seniors and low-income earners -- carry lower debt loads. It’s also true that the housing market carries a big part of household debt, however the percentage of income earmarked for mortgage payments is not burdensome.
The new mortgage rules will certainly have an impact on the housing industry as will declining house prices; and interest rates will rise. Perhaps this will lead to some weakening of the economy. Delinquencies might increase a bit but the risk of the economy going into a recession is low. High-ratio mortgages are insured and our sub-prime market is small.
As for the weaker growth, Flaherty has said that the government could increase its deficit to shore up the economy. “If we ran into a serious world economic crisis arising out of the European situation, or something else, “he said, “Then of course we’d be responsive if we had to be to protect the Canadian economy and protect Canadian jobs as we have done in the past.”
Here are the facts:
- Canadian household debt is indeed equal to 154% of disposable income
- The housing market is softening and prices are going down in many areas of the country
- Canadians will be impacted by higher interest rates
Household debt has been increasing steadily over that past 30 years as interest rates continue to decline but, for the most part, Canadians gear their borrowing to what they can afford. Jobs are holding steady and business is confident about future prospects. So, lower interest rates mean less money goes to servicing debts.
In accumulating debt, Canadians also have a large asset, namely their homes. And although some in the financial community are concerned about the massive debt, Eric Lascelles, chief economist at RBC Global Asset Management recently said that assets outweigh debt by a factor of five.
It’s true that high household debt does put homeowners at risk but a closer look at the stats tells a better story. Overall Canadians exercise fairly good judgment when it comes to borrowing. The more vulnerable – seniors and low-income earners -- carry lower debt loads. It’s also true that the housing market carries a big part of household debt, however the percentage of income earmarked for mortgage payments is not burdensome.
The new mortgage rules will certainly have an impact on the housing industry as will declining house prices; and interest rates will rise. Perhaps this will lead to some weakening of the economy. Delinquencies might increase a bit but the risk of the economy going into a recession is low. High-ratio mortgages are insured and our sub-prime market is small.
As for the weaker growth, Flaherty has said that the government could increase its deficit to shore up the economy. “If we ran into a serious world economic crisis arising out of the European situation, or something else, “he said, “Then of course we’d be responsive if we had to be to protect the Canadian economy and protect Canadian jobs as we have done in the past.”
Wednesday 12 September 2012
Cashbacks here to stay...
By Nestor Arellano, Mortgage Broker News
The clock may be ticking on bank-offered cashback, but the largest credit union in Ontario is now committing to offering 100 per cent financing until its regulator says otherwise.
“We believe that the five per cent cashback down payment is a great product for the right consumer,” said Rick Arnds, senior manager for emerging markets at Meridian Credit Union. “We will continue to offer 100 per cent financing until directed not to do so by DICO (Deposit Insurance Corporation of Ontario).”
The announcement comes as federally regulated lenders begin to announce that they will stop offering cashback mortgage product in compliance with new OSFI guidelines. Many banks have been slowly winding down their cashback offerings, although the first of the official deadline starts October 31.
This week, Scotiabank was the latest to announce it will drop its Free Down Payment program on September 15.
Credit unions have not yet received any directive on the matter from DICO, but the general consensus is that the provincial regulating body will follow its federal counterpart eventually, Arnds told MortgageBrokerNews.ca. “We think, it is only a question of when,” he said.
“Our product is best suited for people who just can’t put together that 5 per cent down because their money may be tied up in RRSPs or what we call good debts such as an outstanding student loan,” he said.
The clock may be ticking on bank-offered cashback, but the largest credit union in Ontario is now committing to offering 100 per cent financing until its regulator says otherwise.
“We believe that the five per cent cashback down payment is a great product for the right consumer,” said Rick Arnds, senior manager for emerging markets at Meridian Credit Union. “We will continue to offer 100 per cent financing until directed not to do so by DICO (Deposit Insurance Corporation of Ontario).”
The announcement comes as federally regulated lenders begin to announce that they will stop offering cashback mortgage product in compliance with new OSFI guidelines. Many banks have been slowly winding down their cashback offerings, although the first of the official deadline starts October 31.
This week, Scotiabank was the latest to announce it will drop its Free Down Payment program on September 15.
Credit unions have not yet received any directive on the matter from DICO, but the general consensus is that the provincial regulating body will follow its federal counterpart eventually, Arnds told MortgageBrokerNews.ca. “We think, it is only a question of when,” he said.
“Our product is best suited for people who just can’t put together that 5 per cent down because their money may be tied up in RRSPs or what we call good debts such as an outstanding student loan,” he said.
Tuesday 11 September 2012
When moving up means moving out
Garry Marr
Even record debt levels — household debt-to-income ratio in Canada is now at 152% — seem to have done little to get Canadians to move for a chance to get ahead
Just pick up and move. Who wouldn’t, if it meant making more money or even just living in a city where the cost of living is lower or the tax burden smaller?
The answer is most Canadians.
Even though it’s probably one of the biggest personal financial decisions you can make — and often a sure-fire way to increase your net worth — we seem to have a degree of inertia other countries don’t share.
You can’t discount the personal attachment people have to their existing addresses tied up in connections to family and friends and familiarity.
Americans consider mobility an essential ingredient to a better life
But none of this seems to stop Americans from moving around their country to look for a better paying job or for a better tax rate. A study from the World Bank found a little over 3% of workers move annually within the 50 states, which compares with just under 1% of Canadian workers moving within the 10 provinces.
“This higher level of mobility partly reflects the culture of a country built through immigration,” said the report. “Americans consider mobility an essential ingredient to a better life.”
Craig Alexander, chief economist with Toronto-Dominion Bank, said labour mobility has always been higher in the U.S.
“The U.S. is an exception because it has the highest labour mobility rate of any country in the world,” he says. “Look at Europe — and they have an economic union — and you don’t get nearly as much labour mobility as the U.S.”
He said the trend of workers to move from the northeast to warmer climates is also hard to replicate in Canada.
“Our north-south is a little different.”
Even record debt levels — household debt-to-income ratio in Canada is now at 152% — seem to have done little to get Canadians to move for a chance to get ahead.
A new government in Quebec — even one that supports separatism and potentially raising taxes in what is already the highest taxed jurisdiction in the country for most income classes — is unlikely to have a major impact on interprovincial migration.
A study released in February by Montreal’s HEC business school suggested the province was already on the way to becoming the country’s poorest province. Quebec’s cheaper cost of living is eroding while the gap in income levels between it and other provinces is widening.
But is personal wealth or lack of it enough to convince people in Quebec — or any province for that matter — to move. “It will be a factor but it’s hard to quantify,” says Martin Coiteux, an economist who wrote the study for the HEC’s Centre for Productivity and Prosperity.
Alberta may have the jobs and the lowest unemployment rate in the country, not to mention no sales tax, but it did little to encourage Quebecers to move there. Statistics Canada says between July 1, 2009 and June 30, 2010 slightly less than 4,000 of them made that move. Much smaller Nova Scotia had 4,233 people make the decision to pack and go West.
Mr. Alexander points out that governments in Canada sometimes make it difficult to move because professional designations are not always recognized in other locales. “Some of the provinces are getting better at recognizing professional accreditation but it’s still not seamless across the country,” he says. “That’s one the biggest barriers [to moving].”
At what point does it make sense to move? That decision depends on the cost of living, which includes such things as the tax rate and housing, but also how much more income you can pull in by pulling up stakes.
“It’s complicated during your working life because the cost of living can be offset by higher wages and salaries,” says Mr. Alexander, adding that moving back home to the East Coast on retirement with its cheaper cost of living has created a windfall for some Atlantic Canadians.
Housing is more expensive in Alberta, for instance, but income levels are higher too. Consider median income for all families in Nova Scotia was $64,100 in 2010, according to Statistics Canada. The figure jumps to $85,380 for the same period in Alberta. Head out to British Columbia, where detached homes in Vancouver average out to nearly $1-million, and you’ve got median family income of $66,970.
You can get some tax savings moving around the country and that will drove your costs down. Punch $60,000 in to Ernst and Young’s online tax calculator for 2012 and you find a B.C. resident would be left with $48,345 in after tax income — the highest among the provinces at that tax level. At $44,619, Quebec would leave you with the lowest after tax income.
I think we are more focused and grounded here on what is important and that’s family and friends
Jamie Golombek, managing director of tax & estate planning with CIBC Private Wealth Management, says Canadians don’t usually move for tax reasons alone but he wonders whether Ontario’s new surtax on people making more than $500,000 will have a direct impact.
“Ontario will ultimately have the highest rate,” says Mr. Golombek. “You have to have a very dramatic tax difference [to move]. I don’t think people will move from Quebec to Ontario for 2%.”
Mr. Golombek’s own theory on why people are unwilling move is more related to tradition than taxes. He says Americans are used to moving out of their home and leaving town for school.
“Once you are away for school it becomes easier to take a job anywhere in the U.S. In Canada, for the most part, people go to school closer to where they live,” he says.
Financial education Talbot Stevens says lifestyle seems as important to Canadians as their personal income statement.
“I think we are more focused and grounded here on what is important and that’s family and friends,” says Mr. Stevens. “The American dream is to get rich and have all the money you need even though it might cost you two or three marriages. You can see that attitude right across the country.”
But there is a point where people will move for the money and it usually starts with the fact you can’t get a job where you live.
“People leave the East Coast because they have to,” says Mr. Stevens. “Income opportunities dominate the discussion more than the tax environment. The lifestyle argument doesn’t work if you don’t have a job.
“Inertia will keep you where you live unless there is an external force that causes you to move.”
Even record debt levels — household debt-to-income ratio in Canada is now at 152% — seem to have done little to get Canadians to move for a chance to get ahead
Just pick up and move. Who wouldn’t, if it meant making more money or even just living in a city where the cost of living is lower or the tax burden smaller?
The answer is most Canadians.
Even though it’s probably one of the biggest personal financial decisions you can make — and often a sure-fire way to increase your net worth — we seem to have a degree of inertia other countries don’t share.
You can’t discount the personal attachment people have to their existing addresses tied up in connections to family and friends and familiarity.
Americans consider mobility an essential ingredient to a better life
But none of this seems to stop Americans from moving around their country to look for a better paying job or for a better tax rate. A study from the World Bank found a little over 3% of workers move annually within the 50 states, which compares with just under 1% of Canadian workers moving within the 10 provinces.
“This higher level of mobility partly reflects the culture of a country built through immigration,” said the report. “Americans consider mobility an essential ingredient to a better life.”
Craig Alexander, chief economist with Toronto-Dominion Bank, said labour mobility has always been higher in the U.S.
“The U.S. is an exception because it has the highest labour mobility rate of any country in the world,” he says. “Look at Europe — and they have an economic union — and you don’t get nearly as much labour mobility as the U.S.”
He said the trend of workers to move from the northeast to warmer climates is also hard to replicate in Canada.
“Our north-south is a little different.”
Even record debt levels — household debt-to-income ratio in Canada is now at 152% — seem to have done little to get Canadians to move for a chance to get ahead.
A new government in Quebec — even one that supports separatism and potentially raising taxes in what is already the highest taxed jurisdiction in the country for most income classes — is unlikely to have a major impact on interprovincial migration.
A study released in February by Montreal’s HEC business school suggested the province was already on the way to becoming the country’s poorest province. Quebec’s cheaper cost of living is eroding while the gap in income levels between it and other provinces is widening.
But is personal wealth or lack of it enough to convince people in Quebec — or any province for that matter — to move. “It will be a factor but it’s hard to quantify,” says Martin Coiteux, an economist who wrote the study for the HEC’s Centre for Productivity and Prosperity.
Alberta may have the jobs and the lowest unemployment rate in the country, not to mention no sales tax, but it did little to encourage Quebecers to move there. Statistics Canada says between July 1, 2009 and June 30, 2010 slightly less than 4,000 of them made that move. Much smaller Nova Scotia had 4,233 people make the decision to pack and go West.
Mr. Alexander points out that governments in Canada sometimes make it difficult to move because professional designations are not always recognized in other locales. “Some of the provinces are getting better at recognizing professional accreditation but it’s still not seamless across the country,” he says. “That’s one the biggest barriers [to moving].”
At what point does it make sense to move? That decision depends on the cost of living, which includes such things as the tax rate and housing, but also how much more income you can pull in by pulling up stakes.
“It’s complicated during your working life because the cost of living can be offset by higher wages and salaries,” says Mr. Alexander, adding that moving back home to the East Coast on retirement with its cheaper cost of living has created a windfall for some Atlantic Canadians.
Housing is more expensive in Alberta, for instance, but income levels are higher too. Consider median income for all families in Nova Scotia was $64,100 in 2010, according to Statistics Canada. The figure jumps to $85,380 for the same period in Alberta. Head out to British Columbia, where detached homes in Vancouver average out to nearly $1-million, and you’ve got median family income of $66,970.
You can get some tax savings moving around the country and that will drove your costs down. Punch $60,000 in to Ernst and Young’s online tax calculator for 2012 and you find a B.C. resident would be left with $48,345 in after tax income — the highest among the provinces at that tax level. At $44,619, Quebec would leave you with the lowest after tax income.
I think we are more focused and grounded here on what is important and that’s family and friends
Jamie Golombek, managing director of tax & estate planning with CIBC Private Wealth Management, says Canadians don’t usually move for tax reasons alone but he wonders whether Ontario’s new surtax on people making more than $500,000 will have a direct impact.
“Ontario will ultimately have the highest rate,” says Mr. Golombek. “You have to have a very dramatic tax difference [to move]. I don’t think people will move from Quebec to Ontario for 2%.”
Mr. Golombek’s own theory on why people are unwilling move is more related to tradition than taxes. He says Americans are used to moving out of their home and leaving town for school.
“Once you are away for school it becomes easier to take a job anywhere in the U.S. In Canada, for the most part, people go to school closer to where they live,” he says.
Financial education Talbot Stevens says lifestyle seems as important to Canadians as their personal income statement.
“I think we are more focused and grounded here on what is important and that’s family and friends,” says Mr. Stevens. “The American dream is to get rich and have all the money you need even though it might cost you two or three marriages. You can see that attitude right across the country.”
But there is a point where people will move for the money and it usually starts with the fact you can’t get a job where you live.
“People leave the East Coast because they have to,” says Mr. Stevens. “Income opportunities dominate the discussion more than the tax environment. The lifestyle argument doesn’t work if you don’t have a job.
“Inertia will keep you where you live unless there is an external force that causes you to move.”
Monday 10 September 2012
Pros and cons of faster mortgage repayment
By Robb Engen, The Toronto Star
Being mortgage free is a top priority for many Canadians. According to a recent poll conducted by CIBC, current mortgage holders believe they’ll be mortgage free by the time they’re 55, which leaves a short window of opportunity to ramp up their savings before retirement.
To reach mortgage freedom faster, you can capitalize on today’s low interest rates by accelerating your mortgage with extra monthly contributions or lump-sum payments. But homeowners should look at the pros and cons of paying down their mortgage debt quickly versus taking a slower approach and using the excess cash for other investments. Here’s why:
With recent changes to mortgage rules and record low interest rates, now might be the right time to carry long-term mortgage debt while you concentrate on building up your investments.
The expected return on stocks has historically been around eight to 10 per cent. While paying off your mortgage is a guaranteed, risk-free return, the low cost of borrowing means there’s potential to earn higher returns by investing in a balanced portfolio.
If you can earn two or three per cent more by investing instead of paying off debt, the compounded returns over a few decades can really add up.
We also need to diversify our investments. Real estate makes up the largest chunk of our net worth, but most of us have nothing else to show for it. By sinking every available dollar into our mortgage in order to pay it off five or 10 years early, we’re neglecting our investments for far too long.
Rather than putting all your money into one asset - your home - take a balanced approach to build up your savings and other investments.
To pay it off, or not to pay it off?
“This is something homeowners should ask themselves every few years as their financial situation changes,” says Bob Stammers, Director of Investor Education at the CFA Institute.
The answer is different for everyone. If you have consumer debt or more pressing financial needs, you need to take care of that first. Some people are risk averse and will always be better off paying their house off faster. Others have a higher risk tolerance and feel more comfortable with investing.
I’m taking a balanced approach by putting an extra $800 a month on top of our regular monthly mortgage payments, saving $800 a month in our tax free savings accounts and investing $400 a month in my RRSP.
Being mortgage free is a top priority for many Canadians. According to a recent poll conducted by CIBC, current mortgage holders believe they’ll be mortgage free by the time they’re 55, which leaves a short window of opportunity to ramp up their savings before retirement.
To reach mortgage freedom faster, you can capitalize on today’s low interest rates by accelerating your mortgage with extra monthly contributions or lump-sum payments. But homeowners should look at the pros and cons of paying down their mortgage debt quickly versus taking a slower approach and using the excess cash for other investments. Here’s why:
With recent changes to mortgage rules and record low interest rates, now might be the right time to carry long-term mortgage debt while you concentrate on building up your investments.
The expected return on stocks has historically been around eight to 10 per cent. While paying off your mortgage is a guaranteed, risk-free return, the low cost of borrowing means there’s potential to earn higher returns by investing in a balanced portfolio.
If you can earn two or three per cent more by investing instead of paying off debt, the compounded returns over a few decades can really add up.
We also need to diversify our investments. Real estate makes up the largest chunk of our net worth, but most of us have nothing else to show for it. By sinking every available dollar into our mortgage in order to pay it off five or 10 years early, we’re neglecting our investments for far too long.
Rather than putting all your money into one asset - your home - take a balanced approach to build up your savings and other investments.
To pay it off, or not to pay it off?
“This is something homeowners should ask themselves every few years as their financial situation changes,” says Bob Stammers, Director of Investor Education at the CFA Institute.
The answer is different for everyone. If you have consumer debt or more pressing financial needs, you need to take care of that first. Some people are risk averse and will always be better off paying their house off faster. Others have a higher risk tolerance and feel more comfortable with investing.
I’m taking a balanced approach by putting an extra $800 a month on top of our regular monthly mortgage payments, saving $800 a month in our tax free savings accounts and investing $400 a month in my RRSP.
What does CMHC insured actually mean?
When you got your mortgage, did your broker or bank tell you it had to be 'CMHC insured' while you just smiled and nodded, not actually knowing what that really meant? Or worse, did you assume when they said insured, it meant your mortgage was life insured, and would be paid off if something were to happen to you? Well, today I'm writing about what CMHC insured actually means, and when you'll come accross it.
CMHC (or Genworth or Canada Guarantee), are the mortgage DEFAULT insurers in Canada currently. A mortgage must be insured by one of these 3 (legally), if the amount of the mortgage, is more than 80% of the value of the home. So if you're purchasing with less than 20% down, then you have no option, your mortgage must be 'CMHC insured`.
Yes, there is a cost to this insurance, premiums range from 1.5% of the total value of your mortgage up to 4.5%, which can be a huge cost depending on the size of your loan. CMHC insurance is typically included in your mortgage, so it`s not a cost you actually pay upfront, but it is amortized over the life of your mortgage.
So, what does CMHC insurance do for you? Well, unfortunately many people would answer this by saying... nothing. When people say CMHC does nothing for you, they're referring to the fact that it's DEFAULT insurance, not life insurance. So in the case that you default on your mortgage (stop paying it, and have your home potentially foreclosed), the loss, will be covered. BUT, here's where many people get confused, the loss is covered yes, but not to you, CMHC insurance covers any loss incurred by the lender if you default. So the lender will be paid back, but that doesn't mean you're free to default without consequenses. You're not covered. CMHC will likely still come after you, and the default will still go against you. But the lender is covered. You're paying to have less risk to the lender.
So why would I disagree with the people saying CMHC does nothing for you? Well, I see CMHC not as something that protects us, but as giving us a priveledge. If CMHC insurance wasn't around, we'd all be waiting until we could save up 20% down payments, to purchase homes. Think about how long it took you, especially first time home buyers, to save that 5% down payment, 20% is simply out of reach for many people. So although CMHC is a large cost, it saves us the time, and money we'll spend along the way renting, of waiting until we save 20% to purchase a home. Thus enabling more people to get into the housing market, and helping keep the market strong with many buyers.
Some misconceptions I've heard about CMHC:
-It's life insurance: If my mortgage is CMHC insured, and I pass away, my mortgage will be paid off. CMHC is not life insurance, it's default insurance. So it is important to still look into getting your mortgage insured in some way, whether that be through mortgage life insurance, or a term or permanent product.
-It's house insurance: I don't need home insurance because my mortgage is CMHC insured. CMHC is not home insurance and doesn't protect your house or it's contents. It's important to still insure your home and contents againts fire, theft, etc.
I hope this has clarified CMHC insurance for people.
CMHC (or Genworth or Canada Guarantee), are the mortgage DEFAULT insurers in Canada currently. A mortgage must be insured by one of these 3 (legally), if the amount of the mortgage, is more than 80% of the value of the home. So if you're purchasing with less than 20% down, then you have no option, your mortgage must be 'CMHC insured`.
Yes, there is a cost to this insurance, premiums range from 1.5% of the total value of your mortgage up to 4.5%, which can be a huge cost depending on the size of your loan. CMHC insurance is typically included in your mortgage, so it`s not a cost you actually pay upfront, but it is amortized over the life of your mortgage.
So, what does CMHC insurance do for you? Well, unfortunately many people would answer this by saying... nothing. When people say CMHC does nothing for you, they're referring to the fact that it's DEFAULT insurance, not life insurance. So in the case that you default on your mortgage (stop paying it, and have your home potentially foreclosed), the loss, will be covered. BUT, here's where many people get confused, the loss is covered yes, but not to you, CMHC insurance covers any loss incurred by the lender if you default. So the lender will be paid back, but that doesn't mean you're free to default without consequenses. You're not covered. CMHC will likely still come after you, and the default will still go against you. But the lender is covered. You're paying to have less risk to the lender.
So why would I disagree with the people saying CMHC does nothing for you? Well, I see CMHC not as something that protects us, but as giving us a priveledge. If CMHC insurance wasn't around, we'd all be waiting until we could save up 20% down payments, to purchase homes. Think about how long it took you, especially first time home buyers, to save that 5% down payment, 20% is simply out of reach for many people. So although CMHC is a large cost, it saves us the time, and money we'll spend along the way renting, of waiting until we save 20% to purchase a home. Thus enabling more people to get into the housing market, and helping keep the market strong with many buyers.
Some misconceptions I've heard about CMHC:
-It's life insurance: If my mortgage is CMHC insured, and I pass away, my mortgage will be paid off. CMHC is not life insurance, it's default insurance. So it is important to still look into getting your mortgage insured in some way, whether that be through mortgage life insurance, or a term or permanent product.
-It's house insurance: I don't need home insurance because my mortgage is CMHC insured. CMHC is not home insurance and doesn't protect your house or it's contents. It's important to still insure your home and contents againts fire, theft, etc.
I hope this has clarified CMHC insurance for people.
Thursday 6 September 2012
Five Tips For Negotiating a Mortgage
Leigh Doyle, Toronto Star
When you’re buying your first house, negotiating for the mortgage can seem like the least fun and most complicated part of the process. But having no experience making one of life’s biggest purchases doesn’t mean you’re destined to pay the bank’s listed rate. Follow these five expert-approved tips to make you a better negotiator.
Know your long-term goals
Farhaneh Haque, director of Mortgage Advice for TD Canada Trust in Toronto says most first-time home buyers don’t realize the average person owns their first home for only three years. It’s important to think about where you might be in the next three to five years, she says. “Ask yourself: How long do you anticipate living in this property? Will your life change dramatically in the next few years? How stable is your income?” For example, if you know your employer wants to transfer you sometime in the next 18-months, a five-year, fixed-term mortgage isn’t the right fit for you. This step helps you identify what needs you might have so you know the characteristics to look for in a mortgage product.
Know your credit score
Before you walk into your bank, check your credit score. It’s a critical factor in determining your mortgage amount. If it’s good, work to maintain that high level. “You want to demonstrate to the bank that you are a good customer,” says Haque. If it’s not so good, talk to your bank about strategies to improve the score, such as making regular on-time payments on your credit cards or paying down existing debt.
[Be aware that the more times your credit score is pulled, your score will actually take a hit! Every bank you go to will pull your score, so be careful. If you use the services of a mortgage broker, however, your score is only pulled once, and your mortgage broker can use that when looking at multiple lenders, including banks.]
Be prepared
Once you have thought about your individual needs, do research before you go talk to your bank (or your mortgage broker), says Christopher Molder, a mortgage blogger with SonofaBroker.com in Toronto. “Find out what the posted interest rate is and look up mortgage options at your bank,” he says. You want to be prepared so you can have a discussion about options and what the ideal mortgage is for you. If you know the rate your bank and the competitors are offering, you’ll be able to tell whether or not you’re getting a good deal. Haque recommends using online tools and calculators to get an idea of what you can afford.
Don’t focus on interest rates
Of course you want to score the lowest interest rate when negotiating, but Haque says focusing on the percentage is the biggest mistake first-time buyers make. “People often don’t know what else to look for,” she says. Remember, mortgages are a product and the interest rate is only one feature. Discuss the other features of the mortgage, such as the payback terms, if you can make lump-sum payments or pre-pay the mortgage and what the penalties are for breaking the terms.
“Having the lowest rate can come with certain costs, like a lack of flexibility,” says Molder, so make sure the mortgage you want matches your needs. It might cost you a little more, but could save you thousands in the long run by avoiding penalties or being able to make extra payments.
Shop around
Before you sign any papers, talk to other mortgage specialists and banks, says Molder. “A bank can only offer you the products they have, which might not be a fit for you,” he says. A broker can shop your mortgage around for you instead of you having to visit five banks individually.
When you’re buying your first house, negotiating for the mortgage can seem like the least fun and most complicated part of the process. But having no experience making one of life’s biggest purchases doesn’t mean you’re destined to pay the bank’s listed rate. Follow these five expert-approved tips to make you a better negotiator.
Know your long-term goals
Farhaneh Haque, director of Mortgage Advice for TD Canada Trust in Toronto says most first-time home buyers don’t realize the average person owns their first home for only three years. It’s important to think about where you might be in the next three to five years, she says. “Ask yourself: How long do you anticipate living in this property? Will your life change dramatically in the next few years? How stable is your income?” For example, if you know your employer wants to transfer you sometime in the next 18-months, a five-year, fixed-term mortgage isn’t the right fit for you. This step helps you identify what needs you might have so you know the characteristics to look for in a mortgage product.
Know your credit score
Before you walk into your bank, check your credit score. It’s a critical factor in determining your mortgage amount. If it’s good, work to maintain that high level. “You want to demonstrate to the bank that you are a good customer,” says Haque. If it’s not so good, talk to your bank about strategies to improve the score, such as making regular on-time payments on your credit cards or paying down existing debt.
[Be aware that the more times your credit score is pulled, your score will actually take a hit! Every bank you go to will pull your score, so be careful. If you use the services of a mortgage broker, however, your score is only pulled once, and your mortgage broker can use that when looking at multiple lenders, including banks.]
Be prepared
Once you have thought about your individual needs, do research before you go talk to your bank (or your mortgage broker), says Christopher Molder, a mortgage blogger with SonofaBroker.com in Toronto. “Find out what the posted interest rate is and look up mortgage options at your bank,” he says. You want to be prepared so you can have a discussion about options and what the ideal mortgage is for you. If you know the rate your bank and the competitors are offering, you’ll be able to tell whether or not you’re getting a good deal. Haque recommends using online tools and calculators to get an idea of what you can afford.
Don’t focus on interest rates
Of course you want to score the lowest interest rate when negotiating, but Haque says focusing on the percentage is the biggest mistake first-time buyers make. “People often don’t know what else to look for,” she says. Remember, mortgages are a product and the interest rate is only one feature. Discuss the other features of the mortgage, such as the payback terms, if you can make lump-sum payments or pre-pay the mortgage and what the penalties are for breaking the terms.
“Having the lowest rate can come with certain costs, like a lack of flexibility,” says Molder, so make sure the mortgage you want matches your needs. It might cost you a little more, but could save you thousands in the long run by avoiding penalties or being able to make extra payments.
Shop around
Before you sign any papers, talk to other mortgage specialists and banks, says Molder. “A bank can only offer you the products they have, which might not be a fit for you,” he says. A broker can shop your mortgage around for you instead of you having to visit five banks individually.
Wednesday 5 September 2012
Canada's future prospects are good
Despite the continuing crisis in the Eurozone and the still sluggish US economy, there is still good news for the Canadian economy. Although growth has slowed and inflation is clearly in check at 1.3%, Canadians are optimistic about job security; the real estate market is balancing itself out; and consumer debt is under control. The real estate market in the country's three major cities - Vancouver, Toronto and Montreal have softened somewhat, but mainly in the condo market. While most parts of the country have seen a slowdown in sales activity, there is probably no need to be concerned for the future given the changing demographics.
A study by the Bank of Montreal (BMO) found nearly two-thirds, or 64% of respondents, are optimistic about their job security. And 41% believe their company will be growing and hiring in the future. This optimism exists despite job losses in July, which are likely due to seasonal adjustments, and relatively high unemployment at 7.3%, but still below historic norms.
Wages will rise modestly in the next twelve months, led by non-union employers and will stay ahead of inflation according to BMO economist Sal Guatieri, which will support household purchasing power.
With Finance Minister Jim Flaherty calling on Canadian businesses to use its cash reserves to invest in the economy and the Bank of Canada Governor Mark Carney telling Canadian companies with substantial cash assets to give back to shareholders, it's likely employee optimism is justified.
On the home front, a report by CIBC examined the changing demographics and found that the housing market will stay strong over the next 10 years. House prices may decrease but will stabilize. The vast majority of first time home buyers are between the ages of 25 and 34. The number of Canadians in this age group will grow and housing demand will see an annual growth of 9%, which is roughly the same growth as we have seen in the last ten years.
So what's going on right now?
The real estate market has slowed somewhat but people are still purchasing in most areas of the country. Prices are coming down for single residential dwellings. Mortgage interest rates are historically low and we are starting to see some discounting again of variable rates. The pace of growth in the economy has slowed but there are still jobs available. Inflation is in check, consumers are still shopping, and managing their debt loads. Overall, it's business as usual for consumers.
A study by the Bank of Montreal (BMO) found nearly two-thirds, or 64% of respondents, are optimistic about their job security. And 41% believe their company will be growing and hiring in the future. This optimism exists despite job losses in July, which are likely due to seasonal adjustments, and relatively high unemployment at 7.3%, but still below historic norms.
Wages will rise modestly in the next twelve months, led by non-union employers and will stay ahead of inflation according to BMO economist Sal Guatieri, which will support household purchasing power.
With Finance Minister Jim Flaherty calling on Canadian businesses to use its cash reserves to invest in the economy and the Bank of Canada Governor Mark Carney telling Canadian companies with substantial cash assets to give back to shareholders, it's likely employee optimism is justified.
On the home front, a report by CIBC examined the changing demographics and found that the housing market will stay strong over the next 10 years. House prices may decrease but will stabilize. The vast majority of first time home buyers are between the ages of 25 and 34. The number of Canadians in this age group will grow and housing demand will see an annual growth of 9%, which is roughly the same growth as we have seen in the last ten years.
So what's going on right now?
The real estate market has slowed somewhat but people are still purchasing in most areas of the country. Prices are coming down for single residential dwellings. Mortgage interest rates are historically low and we are starting to see some discounting again of variable rates. The pace of growth in the economy has slowed but there are still jobs available. Inflation is in check, consumers are still shopping, and managing their debt loads. Overall, it's business as usual for consumers.
Tuesday 4 September 2012
Renovations you may regret
Rob Carrick, The Globe and Mail
You might think wall-to-wall carpet, fancy wallpaper or a sauna are dandy additions to your home, but chances are good that prospective buyers won’t. Here’s a list of the renovations least likely to add value to your home. This website might help you get started on the right track for home renos. It’s called Houzz and it offers tens of thousands of photos of state of the art bathrooms, kitchens, bedrooms and more.
By Martha Uniacke Breen (http://www.styleathome.com)
Find out which home upgrades are least likely to return their full investment when you sell your home.
Wall-to-wall broadloom
Once considered a selling feature, this is now a liability in many buyers’ eyes. Broadloom is incompatible with pets and people with allergies, and is perceived as hard to clean. If you have hardwood floors, have them refinished or consider installing them if you don’t.
Whirlpool baths, saunas and indoor hot tubs
Once considered chic, these are now often seen as just expensive, energy-guzzling extras. Kathy says she once saw a home with a hot tub installed in the living room!
Expensive built-in sound systems and home theatres
Some buyers will be attracted to this, but not everyone is an audio/cinephile, nor will they pay a premium for a house with this feature.
Colourful bath fixtures
These went out with poodle skirts. Chances are the buyer will just see them as a renovation to-do and will plan to get rid of them after the purchase.
Ornate chandeliers, wallpaper and paint treatments
Taste is very individual and idiosyncratic decorating can turn buyers off; stick with neutral, simple decor.
You might think wall-to-wall carpet, fancy wallpaper or a sauna are dandy additions to your home, but chances are good that prospective buyers won’t. Here’s a list of the renovations least likely to add value to your home. This website might help you get started on the right track for home renos. It’s called Houzz and it offers tens of thousands of photos of state of the art bathrooms, kitchens, bedrooms and more.
10 worst home upgrades for
resale
By Martha Uniacke Breen (http://www.styleathome.com)
Find out which home upgrades are least likely to return their full investment when you sell your home.
Some renovation upgrades, such as
kitchens and bathrooms, are usually fairly reliable for adding to a home’s
resale value. But there are others (and if you’ve gone househunting in the last
few years, perhaps you’ve seen a few) that are just plain bone-headed. What’s
worth the cost and what isn’t?
Kathy Monahan, an agent with Forest Hill Real Estate Inc. in Toronto, has seen some real eye-rollers in her time. We asked her which home upgrades are least likely to return their full investment (or close to it) when you sell, or can even turn buyers off. Some of her answers might surprise you.
Kathy Monahan, an agent with Forest Hill Real Estate Inc. in Toronto, has seen some real eye-rollers in her time. We asked her which home upgrades are least likely to return their full investment (or close to it) when you sell, or can even turn buyers off. Some of her answers might surprise you.
Wall-to-wall broadloom
Once considered a selling feature, this is now a liability in many buyers’ eyes. Broadloom is incompatible with pets and people with allergies, and is perceived as hard to clean. If you have hardwood floors, have them refinished or consider installing them if you don’t.
Whirlpool baths, saunas and indoor hot tubs
Once considered chic, these are now often seen as just expensive, energy-guzzling extras. Kathy says she once saw a home with a hot tub installed in the living room!
Expensive built-in sound systems and home theatres
Some buyers will be attracted to this, but not everyone is an audio/cinephile, nor will they pay a premium for a house with this feature.
Colourful bath fixtures
These went out with poodle skirts. Chances are the buyer will just see them as a renovation to-do and will plan to get rid of them after the purchase.
Ornate chandeliers, wallpaper and paint treatments
Taste is very individual and idiosyncratic decorating can turn buyers off; stick with neutral, simple decor.
Monday 3 September 2012
Building a Cash Cache
Robert McLister, Special to The Globe and Mail
For years, financial experts have advised home buyers to sock away emergency savings. Most advisers view contingency funds as a prerequisite to getting a mortgage.
You might be surprised then, at how many Canadians mortgage holders don’t have them. We were. (Although we probably shouldn't have been.)
This week’s Globe column looks at emergency savings funds and their alternatives. It turns out that cash in the bank isn’t the optimal backup plan for everyone.
The Perils of Home Buying without a Rainy Day Fund
Few people would walk even a 10-foot-high tightrope without a net. Even with a reward, the fall wouldn’t be worth it if something went wrong.
Yet people who buy homes without access to emergency funds are walking a figurative tightrope every day.
When you get a mortgage with no savings, the unforeseen is your enemy. Things such as a job loss, drop in income, home expense, divorce or medical problem can come out of nowhere. No one expects misfortune but it pays to be prepared with at least three months of living expenses set aside.
But not everyone heeds this advice: A recent CIBC survey on contingency funds found that 40 per cent of Canadians with mortgages have no emergency savings.
For tapped-out homeowners with no savings or borrowing power, an unexpected $5,000 to $10,000 expense can quickly put them at risk of missing a mortgage payment. Luckily, the number of people in that precarious boat is nowhere near 40 per cent of mortgage holders. But it’s not an immaterial number either.
Either way, the thought of being escorted off one’s property by a court officer makes people go to amazing lengths to avoid foreclosure. When times get tough, folks with no savings will beg, steal or most likely borrow to make their mortgage payments. They take cash advances from their credit card, hit up friends or family, sell assets, borrow from a line of credit, or scramble to get a second job.
As far as credit card cash advances go, that’s not a backup plan. If 20-per-cent interest credit cards are a homeowner’s only source of liquidity, they’re better off renting. Climbing out of a high-interest debt hole takes way too long and costs far too much.
Borrowing from others is also a poor contingency plan. For one thing, it’s unreliable. For another, it can add considerable stress to personal relationships.
Selling assets to raise cash is another option, depending on your holdings. Though it’s often a question of how fast you can liquidate the asset, as well as any tax or retirement ramifications.
The most popular failsafe for Canadians who can’t make a mortgage payment and don’t have savings is the home equity line of credit (HELOC). Thirty-four per cent of mortgage holders have a HELOC, according to the Canadian Association of Accredited Mortgage Professionals.
“Over the last decade, lines of credit have replaced emergency funds in the Canadian economy,” says John Parker, a president of Tudor Mortgage Corporation.
Mr. Parker, a 32-year mortgage industry veteran, says most people with credit lines would rather use their personal savings to pay down the principal of their mortgage than earn a skimpy 1 to 2 per cent in interest.
For thousands of homeowners, this makes perfect sense. Mortgage prepayments provide a better after-tax return than virtually any savings account, and low rates make emergency borrowing from a HELOC less costly. Funneling savings into your mortgage is even more appealing if your mortgage has a built-in (a.k.a. readvanceable) credit line that lets you reborrow those funds in urgent situations.
The growth in HELOCs – up roughly 170 per cent since 2001 – is the chief reason why so many mortgage holders don’t have emergency funds. But HELOCs don’t work for everyone. You need a down payment of 20 per cent or more to get one, and one out of five homeowners don’t have that kind of equity. (An unsecured credit line may be an alternative for some people.) You also need the fiscal discipline not to blow your credit line on impulse purchases.
If you don’t have 20-per-cent-plus equity, options become more limited. Conventional wisdom holds that someone with minimal equity and no emergency funds should save at least three to four months of living expenses before going shopping for a home.
On the other hand, a large war chest of savings is somewhat less critical for qualified borrowers with strong stable jobs, low debt-to-income, and/or mortgage payments that are comparable to what they’d pay in rent.
In the end, the decision to buy now or save more depends on your circumstances, as it always does.
If your finances do need reinforcing, don’t lament about being stuck on the real estate sidelines while you accumulate cash. In most parts of Canada, there is no urgency to buy.
“The risk of being priced out of the market is less than it’s been in a long time,” Mr. Parker says. “In most places, prices are unlikely to increase by any significant number for the next few years.”
That’s a realistic prediction that virtually every housing analyst on Bay Street would agree with.
Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at Mortgage Architects. You can also follow him on twitter at @CdnMortgageNews.
For years, financial experts have advised home buyers to sock away emergency savings. Most advisers view contingency funds as a prerequisite to getting a mortgage.
You might be surprised then, at how many Canadians mortgage holders don’t have them. We were. (Although we probably shouldn't have been.)
This week’s Globe column looks at emergency savings funds and their alternatives. It turns out that cash in the bank isn’t the optimal backup plan for everyone.
The Perils of Home Buying without a Rainy Day Fund
Few people would walk even a 10-foot-high tightrope without a net. Even with a reward, the fall wouldn’t be worth it if something went wrong.
Yet people who buy homes without access to emergency funds are walking a figurative tightrope every day.
When you get a mortgage with no savings, the unforeseen is your enemy. Things such as a job loss, drop in income, home expense, divorce or medical problem can come out of nowhere. No one expects misfortune but it pays to be prepared with at least three months of living expenses set aside.
But not everyone heeds this advice: A recent CIBC survey on contingency funds found that 40 per cent of Canadians with mortgages have no emergency savings.
For tapped-out homeowners with no savings or borrowing power, an unexpected $5,000 to $10,000 expense can quickly put them at risk of missing a mortgage payment. Luckily, the number of people in that precarious boat is nowhere near 40 per cent of mortgage holders. But it’s not an immaterial number either.
Either way, the thought of being escorted off one’s property by a court officer makes people go to amazing lengths to avoid foreclosure. When times get tough, folks with no savings will beg, steal or most likely borrow to make their mortgage payments. They take cash advances from their credit card, hit up friends or family, sell assets, borrow from a line of credit, or scramble to get a second job.
As far as credit card cash advances go, that’s not a backup plan. If 20-per-cent interest credit cards are a homeowner’s only source of liquidity, they’re better off renting. Climbing out of a high-interest debt hole takes way too long and costs far too much.
Borrowing from others is also a poor contingency plan. For one thing, it’s unreliable. For another, it can add considerable stress to personal relationships.
Selling assets to raise cash is another option, depending on your holdings. Though it’s often a question of how fast you can liquidate the asset, as well as any tax or retirement ramifications.
The most popular failsafe for Canadians who can’t make a mortgage payment and don’t have savings is the home equity line of credit (HELOC). Thirty-four per cent of mortgage holders have a HELOC, according to the Canadian Association of Accredited Mortgage Professionals.
“Over the last decade, lines of credit have replaced emergency funds in the Canadian economy,” says John Parker, a president of Tudor Mortgage Corporation.
Mr. Parker, a 32-year mortgage industry veteran, says most people with credit lines would rather use their personal savings to pay down the principal of their mortgage than earn a skimpy 1 to 2 per cent in interest.
For thousands of homeowners, this makes perfect sense. Mortgage prepayments provide a better after-tax return than virtually any savings account, and low rates make emergency borrowing from a HELOC less costly. Funneling savings into your mortgage is even more appealing if your mortgage has a built-in (a.k.a. readvanceable) credit line that lets you reborrow those funds in urgent situations.
The growth in HELOCs – up roughly 170 per cent since 2001 – is the chief reason why so many mortgage holders don’t have emergency funds. But HELOCs don’t work for everyone. You need a down payment of 20 per cent or more to get one, and one out of five homeowners don’t have that kind of equity. (An unsecured credit line may be an alternative for some people.) You also need the fiscal discipline not to blow your credit line on impulse purchases.
If you don’t have 20-per-cent-plus equity, options become more limited. Conventional wisdom holds that someone with minimal equity and no emergency funds should save at least three to four months of living expenses before going shopping for a home.
On the other hand, a large war chest of savings is somewhat less critical for qualified borrowers with strong stable jobs, low debt-to-income, and/or mortgage payments that are comparable to what they’d pay in rent.
In the end, the decision to buy now or save more depends on your circumstances, as it always does.
If your finances do need reinforcing, don’t lament about being stuck on the real estate sidelines while you accumulate cash. In most parts of Canada, there is no urgency to buy.
“The risk of being priced out of the market is less than it’s been in a long time,” Mr. Parker says. “In most places, prices are unlikely to increase by any significant number for the next few years.”
That’s a realistic prediction that virtually every housing analyst on Bay Street would agree with.
Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at Mortgage Architects. You can also follow him on twitter at @CdnMortgageNews.
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