Posted by TMG The Mortgage Group
There has been a lot of interest in collateral mortgages since CBC’s Marketplace
took a stab at TD Canada Trust’s product on January 27, 2013.
Up until a
few years ago, most mortgages were registered as a standard charge mortgage. The
major decisions were to opt for a fixed or a variable-rate mortgage and what
term to select.
In 2010 some banks switched to collateral charge
mortgages. Traditionally, Home Equity Lines of Credit (HELOC) and revolving
credit lines are considered collateral because they allow borrowers to readvance
their loan, to access extra funds, without re-negotiating. Collateral mortgage
charges register loans at a certain percentage of your property, up to 125%,
regardless of the initial amount borrowed. If your home is valued at $250,000
and you borrowed $200,000, a mortgage could still be registered against your
home for $312,500.
With a standard charge mortgage, you agree to how much
you’re borrowing, the interest rate, and the term. So if your home is valued at
$250,000 and you have $50,000 down, then your mortgage is $200,000. And with a
standard charge your mortgage is registered at $200,000. If you wanted a line of
credit, for example, you would have to reapply.
With collateral
mortgages, the bank thinks you will likely want to borrow more money in the
future so it is establishing a global limit. The reasoning is that it will cost
consumers less because there are no additional legal fees if the customer needs
to refinance. Another reason is that it keeps customers from moving their
mortgage business elsewhere.
There are pros and cons to collateral
mortgages with the banks having the advantage. It’s an okay product for
homeowners who want extra borrowing ability along with their mortgage but it’s
not for everyone.
“Yes, homeowners can refinance throughout the term without
incurring legal costs as long as they’re not asking for a total loan greater
than the collateral charge at the time of renewal or refinance, said Steve
Nipius, TMG’s Deal Centre Manager. “However, if a homeowner only has a 5% or 10%
down payment, then it’s pointless to have a collateral charge.”
The cons
may outweigh the pros. First of all, if a homeowner wants to switch to another
lender, they are forced to pay legal and registration fees. More importantly,
most banks won’t allow transfers because of the other loans tied to the
collateral charge. This makes it harder to leave the lender since all your debt,
if any, is under one agreement.
“Banks know there are costs involved to
the borrower if they decide to move, so there no need to offer the best rates,
“Steve said.
Also, consider this scenario: Your mortgage is in good
standing but you default under a credit line with the same bank. The bank could,
in most cases, start default proceedings under your mortgage, meaning you could
lose the house.
However, if you carry a lot of debt, require a
readvanceable loan and frequently need access to cash, a collateral mortgage
will save you money in the amount of legal fees you are paying.
But, if
you want to the freedom to move your business elsewhere, it’s not likely the
best option. Collateral mortgages mean less choice and flexibility for
consumers. Most experts advise to shop around at the end of a mortgage term
because you can save up to 0.5% on your interest rate, which can translate into
substantial savings.
Getting a standard or collateral charge mortgage is
just another complication for many homebuyers and owners. Get advice through
your mortgage professional whose focus is on mortgages and who deals with a
variety of lenders to get the best mortgage for your situation.
Thursday 31 January 2013
Wednesday 30 January 2013
Prospective homebuyers in Alberta confident in the market
22% are first-time purchasers in the next two years
CALGARY — A national survey of prospective homebuyers, who intend to buy within the next 24 months, indicates nearly one-in-five in Alberta are single people.
The RE/MAX Canadian Homebuying Trends Survey 2013-2014, released on Tuesday, said 42 per cent are couples and 38 per cent are families.
The report also indicated 22 per cent of them are first-time buyers, 32 per cent second-time buyers and 47 per cent multi-time buyers.
“Today’s real estate consumer is more experienced and financially prudent than in the past,” said Elton Ash, regional executive vice-president with RE/MAX of Western Canada. “Recent global events — in concert with new mortgage finance rules — have fuelled a more conservative mindset that will serve Canadians well moving forward. It seems the lessons of excess are being heeded.”
In Alberta, the survey found that prospective homebuyers fell in the following age categories — 18 per cent are 55 plus years old; 40 per cent are 18-34 years old; and 42 per cent are 35-54 years old.
The survey said 50 per cent of them are looking to buy in an urban area, 24 per cent suburban and 10 per cent rural.
The vast majority intend to buy in the $250,000 to $500,000 price category at 58 per cent, followed by 21 per cent in the under $250,000 range and 17 per cent in the $500,000 to $1 million range.
The survey also found that 32 per cent of Albertans intend to have a down payment of more than 30 per cent.
“Serious equity gains have bolstered the level of down payment homeowners can put forth,” said Ash. “As a result, they’re clearly in a stronger financial position.”
The survey also said that 50 per cent of Albertans believe housing values will rise in their area while 34 per cent believe they will remain the same. Seven per cent believe housing values will decline.
“Canadians remain confident in the future of housing — and this was demonstrated nationally across all demographics — regardless of income, gender, age, or location,” said Ash. “The level of enthusiasm bodes well, as a substantial barometer of market health. The outlook is positive.”
According to the Calgary Real Estate Board, month-to-date from January 1 to January 21, there have been 681 MLS sales in the city, up 6.24 per cent from the same period a year ago and the average sale price has risen by 12.84 per cent to $430,861.
mtoneguzzi@calgaryherald.com
Twitter: MTone123
The RE/MAX Canadian Homebuying Trends Survey 2013-2014, released on Tuesday, said 42 per cent are couples and 38 per cent are families.
The report also indicated 22 per cent of them are first-time buyers, 32 per cent second-time buyers and 47 per cent multi-time buyers.
“Today’s real estate consumer is more experienced and financially prudent than in the past,” said Elton Ash, regional executive vice-president with RE/MAX of Western Canada. “Recent global events — in concert with new mortgage finance rules — have fuelled a more conservative mindset that will serve Canadians well moving forward. It seems the lessons of excess are being heeded.”
In Alberta, the survey found that prospective homebuyers fell in the following age categories — 18 per cent are 55 plus years old; 40 per cent are 18-34 years old; and 42 per cent are 35-54 years old.
The survey said 50 per cent of them are looking to buy in an urban area, 24 per cent suburban and 10 per cent rural.
The vast majority intend to buy in the $250,000 to $500,000 price category at 58 per cent, followed by 21 per cent in the under $250,000 range and 17 per cent in the $500,000 to $1 million range.
The survey also found that 32 per cent of Albertans intend to have a down payment of more than 30 per cent.
“Serious equity gains have bolstered the level of down payment homeowners can put forth,” said Ash. “As a result, they’re clearly in a stronger financial position.”
The survey also said that 50 per cent of Albertans believe housing values will rise in their area while 34 per cent believe they will remain the same. Seven per cent believe housing values will decline.
“Canadians remain confident in the future of housing — and this was demonstrated nationally across all demographics — regardless of income, gender, age, or location,” said Ash. “The level of enthusiasm bodes well, as a substantial barometer of market health. The outlook is positive.”
According to the Calgary Real Estate Board, month-to-date from January 1 to January 21, there have been 681 MLS sales in the city, up 6.24 per cent from the same period a year ago and the average sale price has risen by 12.84 per cent to $430,861.
mtoneguzzi@calgaryherald.com
Twitter: MTone123
© Copyright (c) The Calgary Herald
Read more: http://www.calgaryherald.com/homes/Prospective+homebuyers+Alberta+confident+market/7853639/story.html#ixzz2JWgORZ6t
Tuesday 29 January 2013
Seven secrets to finding a good handyman - and avoid reno hell
Andrea Cornish, special to the Globe and Mail
The following article is from Canadian Real Estate Wealth Magazine.
Hunting for the right handyman to help you with your next home improvement? The search is easier than you think A good handyman is an important player on any real estate investors’ team. Having someone you trust for renovations and can depend on in an emergency will really make a difference to your portfolio’s potential – not to mention your stress levels.
So who do you turn to when you’re looking to renovate or repair a property? Here’s a simple guide to finding the right (handy) man for the job.
1) Who’s who.
Before you start looking for home improvement help it’s a good idea to figure which type of professional is best suited to the job. “A handyman doesn’t have a trade license, he knows a little bit about everything,” says Jim Caruk, master contractor of The Caruk Group. “What you have to understand is a contractor doesn’t necessarily have to be a tradesman either. He contracts everything out and he makes sure that the people he brings in are licensed tradespeople – that’s his job.”
If you’re planning a large project that requires the expertise of a number of different professionals then you’re better off looking for a qualified general contracting company. Smaller jobs are usually best suited to a handyman who has a broad range of skills and extensive experience, but is not necessarily licensed.
2) Where to look.
There are several ways to find a good handyman or contractor, says David Foster, director of environmental affairs for the Canadian Home Builders’ Association. “There are some companies that specialize in this, and the time-tested method is asking friends, neighbours and family who they use and would recommend.”
He also suggests checking with HBA websites for “RenoMark” contractors. These contractors are members of the CHBA association and comply with the association’s code of ethics, as well as renovation-specific codes of conduct. In addition they provide warranties, meet regularly to keep up to date with current trends, materials and regulations. Caruk also suggests looking at contractors’ signs in the neighbourhood. “If you see a lot of their signs then obviously they’re on the up and up and you would think that they do good work if everyone keeps hiring them.”
3) What to ask the contractor.
When calling around, there are some key questions to ask that will help you narrow down your search.
· References – ask for at least three names
· Licensing – Licenses expire annually; so you’ll need to look at it to make sure the license is still valid. A license does not guarantee the contractor is a quality tradesperson. Foster adds, “Licensing and so forth varies from jurisdiction to jurisdiction – consumers should check with their municipal building department to determine if any local licensing is required.”
· Insurance – Business liability and WSIS insurance is a must, says Foster. If the contractor doesn’t have valid insurance coverage, you can request him or her to buy temporary insurance. Alternatively real estate expert Paul Hecht suggests having your lawyer draft a general release that stipulates the contractor fully understands that they are responsible for any accident and damage and cannot sue you. This will protect you should something break on your property or there is an injury.
4) What to ask referrers.
Whether you’re asking friends for references, or checking out the list of names provided by the handyman, there are several questions to ask that will help you determine if you’ve found the right person for the job.
· Have you personally used them?
· How many times have you worked with them?
· What did the job entail?
· Did the project start on time?
· Was the work completed on time?
· Was it on budget?
· Were there any problems?
· Would you use them again?
· Are you getting a referrer’s fee?
5) How to get the best estimate.
Price plays a major part in deciding whom to hire. Provide each home improvement professional with the same information. This may include: plans (with simple sketches or full construction drawings), and detailed descriptions of materials and products. According to Caruk they should all be within 10 per cent to 15 per cent of each other. “If you’ve got four or five and you’ve got one that’s really, really high and one that’s really, really low what you usually do is discard the highest and lowest one and work with the three guys in between. Then go with your gut feeling.” Caruk warns homeowners not to get too carried away getting estimates. “If you start getting 10, it just makes it more confusing.”
There is also a risk of alienating good professionals. Caruk usually asks how many others are bidding for the job and if there are more than five he won’t even provide a quote. According to the CHBA, a written offer becomes legally binding and becomes part of the contract between you and the handyman should you accept it. That said there are always unexpected challenges in any project. Make sure you set aside a contingency fund in your budget.
6) What to expect from the contract.
The Canadian Mortgage and Housing Corporation suggests a typical contract might include:
· Description of the work to be done – make this as detailed as possible. Include: prep work, items to be salvaged or reused, waste disposal, structural details, product information, size and location of things like doors, windows, closets and finishing work such as coats of paint and stain.
· Any permits needed and who is responsible for providing and paying for them
· Supplies and materials
· Sub contractors (if needed)
· Timing – when work is to commence and full completion date
· Terms of payment – fixed cost basis, cost plus or cost plus fixed fee
· Payment schedule – Never pay huge sums of money upfront. Some contractors will ask for a down payment as a show of good faith – on average this is about $2,500. Additional payments should be based on the work completed, not time put into the job
· Extras and how they will be calculated
· Washroom facilities and Utilities
· Standards of work (level of clean-up, hours permitted on site)
· Third-party liability insurance details
· Compliance with Workers’ Compensation and other laws
· Warranty
· Default by owner or contractor – indicates what happens if either owner or contractor defaults on terms of contract
· Dispute resolution – an agreed upon process to deal with potential conflicts
7) How to manage your handyman.
The contract forms the basis of your relationship with your contractor or handyman. According to Foster, “In all situations, effective management of a contractor requires clarity about what they are being hired to do, how and when they will do it, what their services will cost and when payment will be due, and what warranty do they provide on their work. It needs to be in writing. Every time. Period.” Once the job is underway, communication and mutual respect will play a vital role in keeping things rolling along smoothly. A good handyman or contractor should not make you feel uncomfortable for asking questions.
On the other side, try to be reasonable with your expectations. The CMHC advises homeowners, “Don’t overreact if something is wrong. Allow sufficient time for a response. As well, things the contractor can’t control, like bad weather and back-ordered components, can delay the job, so leave a little leeway in your schedule for them.” If things start to go pear-shaped, follow the dispute resolution method outlined in the contract. And if all else fails, you can cancel the contract. However, this will likely result in a cancellation fee. Be aware that there are several laws protecting consumers, which vary across the provinces and territories.
In addition to contacting your consumer protection authority, you can also get in touch with the Better Business Bureau. If legal action is necessary, you can take the contractor to small claims court. Small claims are less complicated than a formal court case and do not require the services of a lawyer. Decision in small claims courts are binding.
How to spot a handyman from hell
From Canadian Real Estate Wealth Magazine, a monthly publication focused on building value through property investment, covering topics such as values and trends, mortgages, investment strategies, surveys of regional markets and general tips for buyers and sellers.
Hunting for the right handyman to help you with your next home improvement? The search is easier than you think A good handyman is an important player on any real estate investors’ team. Having someone you trust for renovations and can depend on in an emergency will really make a difference to your portfolio’s potential – not to mention your stress levels.
So who do you turn to when you’re looking to renovate or repair a property? Here’s a simple guide to finding the right (handy) man for the job.
1) Who’s who.
Before you start looking for home improvement help it’s a good idea to figure which type of professional is best suited to the job. “A handyman doesn’t have a trade license, he knows a little bit about everything,” says Jim Caruk, master contractor of The Caruk Group. “What you have to understand is a contractor doesn’t necessarily have to be a tradesman either. He contracts everything out and he makes sure that the people he brings in are licensed tradespeople – that’s his job.”
If you’re planning a large project that requires the expertise of a number of different professionals then you’re better off looking for a qualified general contracting company. Smaller jobs are usually best suited to a handyman who has a broad range of skills and extensive experience, but is not necessarily licensed.
2) Where to look.
There are several ways to find a good handyman or contractor, says David Foster, director of environmental affairs for the Canadian Home Builders’ Association. “There are some companies that specialize in this, and the time-tested method is asking friends, neighbours and family who they use and would recommend.”
He also suggests checking with HBA websites for “RenoMark” contractors. These contractors are members of the CHBA association and comply with the association’s code of ethics, as well as renovation-specific codes of conduct. In addition they provide warranties, meet regularly to keep up to date with current trends, materials and regulations. Caruk also suggests looking at contractors’ signs in the neighbourhood. “If you see a lot of their signs then obviously they’re on the up and up and you would think that they do good work if everyone keeps hiring them.”
3) What to ask the contractor.
When calling around, there are some key questions to ask that will help you narrow down your search.
· References – ask for at least three names
· Licensing – Licenses expire annually; so you’ll need to look at it to make sure the license is still valid. A license does not guarantee the contractor is a quality tradesperson. Foster adds, “Licensing and so forth varies from jurisdiction to jurisdiction – consumers should check with their municipal building department to determine if any local licensing is required.”
· Insurance – Business liability and WSIS insurance is a must, says Foster. If the contractor doesn’t have valid insurance coverage, you can request him or her to buy temporary insurance. Alternatively real estate expert Paul Hecht suggests having your lawyer draft a general release that stipulates the contractor fully understands that they are responsible for any accident and damage and cannot sue you. This will protect you should something break on your property or there is an injury.
4) What to ask referrers.
Whether you’re asking friends for references, or checking out the list of names provided by the handyman, there are several questions to ask that will help you determine if you’ve found the right person for the job.
· Have you personally used them?
· How many times have you worked with them?
· What did the job entail?
· Did the project start on time?
· Was the work completed on time?
· Was it on budget?
· Were there any problems?
· Would you use them again?
· Are you getting a referrer’s fee?
5) How to get the best estimate.
Price plays a major part in deciding whom to hire. Provide each home improvement professional with the same information. This may include: plans (with simple sketches or full construction drawings), and detailed descriptions of materials and products. According to Caruk they should all be within 10 per cent to 15 per cent of each other. “If you’ve got four or five and you’ve got one that’s really, really high and one that’s really, really low what you usually do is discard the highest and lowest one and work with the three guys in between. Then go with your gut feeling.” Caruk warns homeowners not to get too carried away getting estimates. “If you start getting 10, it just makes it more confusing.”
There is also a risk of alienating good professionals. Caruk usually asks how many others are bidding for the job and if there are more than five he won’t even provide a quote. According to the CHBA, a written offer becomes legally binding and becomes part of the contract between you and the handyman should you accept it. That said there are always unexpected challenges in any project. Make sure you set aside a contingency fund in your budget.
6) What to expect from the contract.
The Canadian Mortgage and Housing Corporation suggests a typical contract might include:
· Description of the work to be done – make this as detailed as possible. Include: prep work, items to be salvaged or reused, waste disposal, structural details, product information, size and location of things like doors, windows, closets and finishing work such as coats of paint and stain.
· Any permits needed and who is responsible for providing and paying for them
· Supplies and materials
· Sub contractors (if needed)
· Timing – when work is to commence and full completion date
· Terms of payment – fixed cost basis, cost plus or cost plus fixed fee
· Payment schedule – Never pay huge sums of money upfront. Some contractors will ask for a down payment as a show of good faith – on average this is about $2,500. Additional payments should be based on the work completed, not time put into the job
· Extras and how they will be calculated
· Washroom facilities and Utilities
· Standards of work (level of clean-up, hours permitted on site)
· Third-party liability insurance details
· Compliance with Workers’ Compensation and other laws
· Warranty
· Default by owner or contractor – indicates what happens if either owner or contractor defaults on terms of contract
· Dispute resolution – an agreed upon process to deal with potential conflicts
7) How to manage your handyman.
The contract forms the basis of your relationship with your contractor or handyman. According to Foster, “In all situations, effective management of a contractor requires clarity about what they are being hired to do, how and when they will do it, what their services will cost and when payment will be due, and what warranty do they provide on their work. It needs to be in writing. Every time. Period.” Once the job is underway, communication and mutual respect will play a vital role in keeping things rolling along smoothly. A good handyman or contractor should not make you feel uncomfortable for asking questions.
On the other side, try to be reasonable with your expectations. The CMHC advises homeowners, “Don’t overreact if something is wrong. Allow sufficient time for a response. As well, things the contractor can’t control, like bad weather and back-ordered components, can delay the job, so leave a little leeway in your schedule for them.” If things start to go pear-shaped, follow the dispute resolution method outlined in the contract. And if all else fails, you can cancel the contract. However, this will likely result in a cancellation fee. Be aware that there are several laws protecting consumers, which vary across the provinces and territories.
In addition to contacting your consumer protection authority, you can also get in touch with the Better Business Bureau. If legal action is necessary, you can take the contractor to small claims court. Small claims are less complicated than a formal court case and do not require the services of a lawyer. Decision in small claims courts are binding.
How to spot a handyman from hell
- Bad presentation – Late for your initial meeting? Reluctant to answer questions? Vague about the technical aspects of how they’d handle the job? These are all indications that they might not be capable or trustworthy
- Poor communication skills – Communication is absolutely vital to the success of any project. You need someone that is willing to listen to our ideas, concerns and suggestions and who in turn, is able to effectively discuss challenges with you as they come up
- Requests cash only payments – Don’t be tempted if they offer a discount to you if you pay in cash. You want to keep as much of a paper trail as possible and all payments should be cheques or certified cheques
- Doesn’t provide receipts – make sure you get a receipt for all your payments, signed and dated by the contractor
- Does not want signage – Many renovation companies ask to promote their services to your neighbours by displaying signs on the property. According to the Canadian Mortgage and Housing Corporation, if the company does not want to display a sign, it could be an indication it is trying to avoid scrutiny
From Canadian Real Estate Wealth Magazine, a monthly publication focused on building value through property investment, covering topics such as values and trends, mortgages, investment strategies, surveys of regional markets and general tips for buyers and sellers.
Moody’s downgrades Canadian banks over consumer debt exposure
By John Greenwood
More from John Greenwood
More from John Greenwood
One of the world’s leading debt rating agencies on Monday downgraded five of Canada’s big banks because of exposure to over-leveraged consumers, but stock markets seemed not to notice as bank shares continued on a winning streak that’s been going on more than six months.
The action “reflects our ongoing concerns that the Canadian banks’ exposure to the increasingly indebted Canadian consumer and elevated housing prices leaves them more vulnerable to unpredictable downside risks facing the Canadian economy than in the past,” said David Beattie, a senior credit analyst at Moody’s and lead author of the report.
Bank stocks have moved up more than 5% since June, suggesting investors are confident that real estate “is not going to crash,” said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier Inc., a Toronto-based asset manager.
Even debt markets appear to be brushing off the move.
Theoretically, ratings downgrades make it more expensive for firms to borrow. But in today’s zero interest rate environment, yields on Canadian bank debt are close to the lowest in living memory and it’s hard to see how — especially at a time when demand for highly rated bonds is so strong — that’s going to change any time soon.
Lenders affected by the single-notch downgrade were Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank and Caisse centrale Desjardins.
Royal Bank of Canada, the largest lender, is not included in the group.
For the last several years Bank of Canada Governor Mark Carney has been warning about the dangers of ballooning consumer debt and the vulnerability it creates for the Canadian economy.
Household borrowing has been rising steadily for more than a decade as more Canadians jumped into the housing market, driving up prices and the value of mortgages they had to take on.
The ratio of household debt to income is sitting at nearly 165%, the highest on record, according to the latest numbers from Statistics Canada.
Moody’s is predicting economic growth for the country of between 2% and 3% for the current year “but downside risks have increased,” it warned, pointing out that Canada’s open, commodity-oriented economy is exposed to global trends.
Banks are largely protected from the direct impact of losses in their mortgage portfolios that might result from a housing correction through the use of default insurance provided by the Canada Mortgage and Housing Corp. But the concern is that a sharp drop in home values might spark negative changes in the broader economy such as a decline in consumer spending and borrowing, potentially even a drop in home construction, a major driver in cities such as Toronto and Vancouver. That sort of fallout would weigh heavily on bank results.
Monday’s ratings action comes about seven months after Moody’s downgraded 15 global banks, including Royal Bank of Canada, because of exposure to increasingly volatile international capital markets.
Housing prices have been on a tear since the financial crisis but over the past few months most markets have started to cool with sales down 17% nationally, following moves by Finance Minister Jim Flaherty and the banking regulator to tighten mortgage lending rules.
For now most analysts are calling for a soft landing and Moody’s Mr. Beattie said in an interview he does not anticipate further ratings changes in the near future.
But even a gentle correction in household borrowing could be bad news for the banks, which over the past 10 years have increasingly relied on consumer borrowing as a key earnings driver. Lenders say retail lending has decelerated in the past few months and they expect the trend to continue.
The question is, how will they replace those revenues? The entire sector is aggressively pursuing opportunities in wealth management and business lending but analysts are skeptical they will entirely fill in the hole left by retreating consumers.
Canada’s banking giants headed for earnings iceberg
By Theresa Tedesco
More from Theresa Tedesco
Apparently, a great reckoning is fast approaching inside the country’s gleaming bank towers. Canada’s major banks are said to be on the verge of hitting a revenue iceberg that could slice earnings per share growth in half this year.
And it’s all Mark Carney’s fault. The Bank of Canada governor’s obsession with aggressively low interest rate policies and his get-tough message on climbing household debt are really putting a crimp in the historically predictable and reliable sources of income the big banks have enjoyed at home.
The two engines that have fuelled strong earnings momentum during the global economic turmoil— growth in consumer credit and residential mortgages — are stalling.
All six of the majors — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank — are said to be feeling the squeeze.
To pick up the imminent slack, they’re being forced to look outside the country to boost their balance sheets in 2013. Except the problem is that it isn’t a whole lot rosier out there either, which is why the mighty financial institutions will likely see their credit ratings lowered a notch next week by Moody’s Investors Service Inc.
Basically, the rating agency is concerned about the banks’ exposure to record high levels of consumer debt and elevated house prices, which has made them more vulnerable to the downside risks than they have been of late.
The big red flag is that current Canadian household debt resembles rates in the United States before the housing market tanked in 2008. According to Statistics Canada, the ratio of household debt-to-income in this country reached 163.4% in the second quarter of 2012, up from 161.8% in the first three months of last year. The trend continued in the third quarter of 2012, showing Canadian households owed $1.65 on average for every after-tax dollar they earn.
Compare that to the U.S., where household debt-to-income at the height of the housing bubble in 2007 was 170%.
This is causing considerable angst because a shock to the Canadian economy will inevitably reverberate on bank balance sheets.
Already, bank retail margins are under pressure. Consumer lending is falling; 5.1% in November, 2012, from 5.8% during the same month in 2011.
At the same time, a series of initiatives to tighten mortgage requirements has had a cooling effect as the resale of homes in Canada fell 17% in December from 2011. The end of the boom in residential mortgages has a double whammy effect on banks because that revenue stream helped cushion the blow of slimmer margins on loans and shrinking revenues courtesy of persistently low interest rates.
Stalling income growth at home means the banks have to find other ways to shore up their balance sheets. Obviously, that means focusing on their operations outside Canada. Except for Scotia, which has carved a unique presence in Latin America and risky developing markets where the margins are wide, the focus for the rest will likely be in the U.S. For RBC, that means trying to capitalize on the exodus of European players in capital markets and wealth management. TD and BMO will continue to scratch out a presence in the lucrative and hugely competitive U.S. regional banking sector.
Nonetheless, the challenge on the home front will be keeping expenses at, or below, diminishing revenues. In order to maintain a competitive position in Canada, the banks have to make major investments to their retail banking infrastructures, while at the same time, making sure expenses don’t get ahead of income growth.
The bottom line: expect bank earnings to be stunted this year, with predictions of industry revenue growth in personal and commercial banking to be a paltry 1%. That translates into estimated earnings per-share growth to be in the 5% range this year — hardly the end of the world, but still below 10% from 2012.
Even so, the trends may be going in the wrong direction, but much of the balance-sheet consequences will be played out at the margins. It may be harder to make the kinds of heady returns bank shareholders have enjoyed in recent years, but in Canada banking will always be a profitable proposition. So chin up, no matter what Moody’s says.
Saturday 26 January 2013
Is Canada talking itself into a housing crisis?
Larry MacDonald, The Globe and Mail
Little was heard of housing bubbles in Canada up to about a year ago. Now, predictions of crashes are on the front cover of Maclean’s and other publications. One might wonder if we are talking ourselves into a housing miasma, even though the fundamentals don’t point to one.
Consider affordability. The Bank of Canada’s housing affordability index shows that newly built standard houses are as affordable as 10 years ago. And the Royal Bank of Canada’s affordability indexes for existing housing only “exceed their long-term averages modestly, although the national figures are exaggerated by extremely poor affordability in Vancouver.”
Moreover, credible analysts don’t see a U.S.-style crash. Professor Robert Shiller told CBC News in September that Canada should be spared because its banks have low subprime exposure. And Gluskin Sheff economist David Rosenberg wrote in a November note “that the U.S. plunge five years ago followed years of credit-tightening moves… anyone think that [the Bank of Canada] is going to raise interest rates 450 basis points with inflation barely above 1 per cent?”
Yet, some media sources are now painting a dire prognosis for Canadian housing. It brings to mind the 2012 paper, “What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets,” written by Mr. Shiller and co-authors, Karl E. Case and Anne Thompson.
The paper looks at press coverage leading up to the U.S. housing collapse and documents the increasing frequency of articles depicting U.S. housing as a bubble. June of 2005 was particularly busy, with cover stories in the Economist, Barron’s, and Time Magazine.
Mr. Shiller and co-authors argue the prominence of the bubble theme produced “a turning point in public thinking” that led to prices turning down, beginning in 2006. A similar point was made by Mr. Shiller in a 2006 paper, in which he wrote: “there are reasons to suspect that the price changes … are related to public swings in opinions rather than fundamentals.”
Could Canada similarly be talking itself into a housing crash (possibly followed by a financial crisis and years of stagnation)? Or will the fundamentals usher in the soft landing that the federal government is trying to achieve through tighter mortgage rules? Messrs. Shiller and Rosenberg believe the fundamentals will win because the Canadian setting is more supportive. Let’s hope so, if only so that Canadians are spared the trauma Americans have experienced.
READERS: Do you see signs of a crash? Or do you just hear the talk and worry?
Little was heard of housing bubbles in Canada up to about a year ago. Now, predictions of crashes are on the front cover of Maclean’s and other publications. One might wonder if we are talking ourselves into a housing miasma, even though the fundamentals don’t point to one.
Consider affordability. The Bank of Canada’s housing affordability index shows that newly built standard houses are as affordable as 10 years ago. And the Royal Bank of Canada’s affordability indexes for existing housing only “exceed their long-term averages modestly, although the national figures are exaggerated by extremely poor affordability in Vancouver.”
Moreover, credible analysts don’t see a U.S.-style crash. Professor Robert Shiller told CBC News in September that Canada should be spared because its banks have low subprime exposure. And Gluskin Sheff economist David Rosenberg wrote in a November note “that the U.S. plunge five years ago followed years of credit-tightening moves… anyone think that [the Bank of Canada] is going to raise interest rates 450 basis points with inflation barely above 1 per cent?”
Yet, some media sources are now painting a dire prognosis for Canadian housing. It brings to mind the 2012 paper, “What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets,” written by Mr. Shiller and co-authors, Karl E. Case and Anne Thompson.
The paper looks at press coverage leading up to the U.S. housing collapse and documents the increasing frequency of articles depicting U.S. housing as a bubble. June of 2005 was particularly busy, with cover stories in the Economist, Barron’s, and Time Magazine.
Mr. Shiller and co-authors argue the prominence of the bubble theme produced “a turning point in public thinking” that led to prices turning down, beginning in 2006. A similar point was made by Mr. Shiller in a 2006 paper, in which he wrote: “there are reasons to suspect that the price changes … are related to public swings in opinions rather than fundamentals.”
Could Canada similarly be talking itself into a housing crash (possibly followed by a financial crisis and years of stagnation)? Or will the fundamentals usher in the soft landing that the federal government is trying to achieve through tighter mortgage rules? Messrs. Shiller and Rosenberg believe the fundamentals will win because the Canadian setting is more supportive. Let’s hope so, if only so that Canadians are spared the trauma Americans have experienced.
READERS: Do you see signs of a crash? Or do you just hear the talk and worry?
More Young Buyers Being Sidelined
Rob McLister, Canadian Mortgage Trends
When Ottawa cut the maximum allowable amortization and gross debt service ratio on insured mortgages, it was bound to have a disproportionate impact on first-time buyers (FTBs). Young buyers are extra sensitive to anything that impairs affordability.
That may explain why first timers are staying out of the market in increasing numbers, at least according to a new RE/MAX survey.
The survey suggests that only 30% of prospective buyers over the next two years will be FTBs. If that doesn’t seem unusual, consider that 43% of buyers were first timers as recently as 2009.
When Ottawa cut the maximum allowable amortization and gross debt service ratio on insured mortgages, it was bound to have a disproportionate impact on first-time buyers (FTBs). Young buyers are extra sensitive to anything that impairs affordability. That may explain why first timers are staying out of the market in increasing numbers, at least according to a new RE/MAX survey.
The survey suggests that only 30% of prospective buyers over the next two years will be FTBs. If that doesn’t seem unusual, consider that 43% of buyers were first timers as recently as 2009.
The trend in FTB activity has steadily fallen for more than three years.
That affordability factor has been hurt by more than just mortgage rules. Another reality delaying FTB purchases is that home prices in some areas have risen at over double the pace of income. That’s left young people with fewer options than older buyers with more resources.
The survey revealed other notable stats as well:
Survey details: RE/MAX says that this national survey, hosted on the Angus Reid Forum in December, was conducted among 1,109 prospective purchasers who intend to buy within the next 24 months.
Rob McLister, CMT
Chart source: RE/MAX, 2013
“There’s no question that first-time buyers are experiencing a period of readjustment,” says Gurinder Sandhu, EVP and Regional Director of RE/MAX Ontario-Atlantic Canada. “…Affordability took a hit in 2012.”
The survey revealed other notable stats as well:
- 36% of intended home buyers earn less than $50,000.
- 40% of purchasers aged 18-34 intend on putting down 20% or more on their home.
- 7% of buyers expect to make a down payment of 5%.
- 14% plan to put down 10%.
- Of all buyers putting down 30% or more, 45% were aged 55+.
- Just 1% of those surveyed intended to spend over $1 million on their home.
(Killing high-ratio mortgage insurance on homes over $1 million was a politically easy target for Jim Flaherty. Yet, of the four mortgage rule changes last July, this one will have the least practical effect on reducing insurer and governmental risk.)
Survey details: RE/MAX says that this national survey, hosted on the Angus Reid Forum in December, was conducted among 1,109 prospective purchasers who intend to buy within the next 24 months.
Rob McLister, CMT
Wednesday 23 January 2013
Bank of Canada signals no rate hikes anytime soon
Gordon Isfeld
OTTAWA — While the Bank of Canada acknowledges the economic outlook here and elsewhere “is slightly weaker” than thought, policymakers are also offering up some hope for the near future.
OTTAWA — While the Bank of Canada acknowledges the economic outlook here and elsewhere “is slightly weaker” than thought, policymakers are also offering up some hope for the near future.
In a nutshell, Canada’s economy is growing at a slower pace than expected — although a pickup is likely later this year —and inflation remains weak at near recession levels, for now, while consumer debt and the housing market appear to be stabilizing, if not cooling. At the same time, the global outlook has also slowed, while fiscal and debt concerns in the United States and Europe have dissipated slightly.
The bottom line for Canada: Interest rates aren’t going anywhere soon.
On Wednesday, for the first time, policymakers combined their regular-rate decision announcement with the bank’s Monetary Policy Report, a closely-watched quarterly reading on domestic and global factors affecting the economy.
As expected, the Bank of Canada kept a lid on borrowing costs, with its trendsetting overnight rate — the main instrument used to guide inflation toward the bank’s 2% target — remaining at a near-record low 1%, unchanged since September 2010 and now the longest dormant stretch since the early 1950s.
The only wrinkle in its usually pact statement accompanying a rate announcement was to highlight “the more muted inflation outlook and the beginning of a more constructive evolution of imbalances in the household sector,” adding that “the timing of any such withdrawal is less imminent than previously anticipated.”
That represent presents a slightly more dovish view of current monetary policy than previously. Given the still-hesitant outlook for Canada and other countries, most forecasters now see little chance the bank can begin raising rates again until late this year or early 2014.
By the numbers, the Bank of Canada on Wednesday pegged global economic growth slowed in 2012 to 3% from 3.9% the previous year. In 2013, that growth will slow to 2.9%, before picking up next year at a rate of 3.5%.
For Canada, growth will be limited to about 2% this year, down from the bank’s October forecast of 2.4%, following estimated growth of 1.9% in 2012, which is below the previous outlook of 2.3%. The bank is calling for a 2.7% advance in 2014, with full economic capacity kicking in in the second half of next year, later than previously thought.
“External demand for Canada’s manufacturing exports remain quite modest relative to its pre-recession level, largely because of the still-low level of activity in the U.S. housing sector,” the bank said.
As for the U.S. economy overall, the bank’s outlook is for growth of 2.1% this year and 3.1% in 2014. “The economic expansion in the United States is continuing at a gradual pace, restrained by ongoing public and private deleveraging, global weakness and uncertainty related to fiscal negotiations.”
The eurozone will likely remain in negative growth this year, down 0.3%, after a contraction of 0.4% in 2012. However, the currency region is forecast to post a positive performance in 2014, with growth of 0.8%
“The economic expansion in the United States is continuing at a gradual pace, restrained by ongoing public and private deleveraging, global weakness and, more recently, by uncertainty related to fiscal negotiations,” the bank said.
“Europe remains in recession, and recent indicators point to a somewhat more protracted downturn than expected in October,” it said. “While growth in China is improving, economic activity has been slowing further in some other major emerging economies.
Still, those estimates assume the eurozone debt crisis “will remain contained and that a severe tightening of U.S. fiscal policy will be avoided,” the bank said. “Overall, recent developments support these assumptions.”
Also in its report, the bank said near-historic low lending rates has slowed the growth in household credit to 5.5% last year to slightly more than 3% in the first quarter of 2013.
“This is the lowest rate of growth since 1999, and reflects a slowdown in the growth of both residential mortgage and consumer credit,” it said. “Even with the recent slowing, household credit still grew slightly faster than disposable income in the third quarter.”
The latest reading by the bank puts the ratio of household debt to income at 165%.
Bank of Canada governor Mark Carney — who steps down on June 1 to take the top position at the Bank of England — will hold a news conference later on Wednesday to provide more insight into the bank’s most recent domestic and global outlooks.
Tuesday 22 January 2013
Home sales plunge, market 'clearly in correction mode'
Michael Babad, The Globe and Mail
Housing coolsCanada's housing market continues to cool markedly, with sales plunging 17.4 per cent in December from a year earlier. Prices, however, still held up, with a gain of 1.6 per cent from December, 2011.
On a month-over-month basis, sales were little changed from November, the Canadian Real Estate Association said today. New listings slipped 1.3 per cent from November as home sellers pulled back.
The MLS Home Price Index, which factors out changes in the types of properties sold, rose 3.3 per cent from a year earlier, marking the slowest growth since April, 2011, The Globe and Mail's Tara Perkins reports.
For 2012 as a whole, sales of 452,372 slipped 1.1 per cent from a year earlier, and were 1.4 per cent below a 10-year average to 2011.
Sales in December fell in four of every five housing markets measured, the real estate group said, with Calgary the standout exception.
Canada’s housing market can best be plotted on two timelines: pre-Flaherty and post-Flaherty. And for many, the post-Flaherty era is a good thing.
Sales have slipped since Canada's Finance Minister Jim Flaherty brought in new mortgage restrictions in July in an attempt to engineer the slowdown we're now seeing, and most observers expect a soft landing, not a crash.
“National sales activity continues to hold fairly steady at lower levels since mortgage rules were changed earlier in 2012, but there are still some real differences in trends between and within local housing markets,” said CREA president Wayne Moen.
The Toronto area saw the biggest drop in New listings, the group said, but they also slumped in fully half of all markets, including, and as expected, the Vancouver area, the Fraser Valley and Vancouver Island.
Vancouver, in particular, has taken it on the chin, and observers believe it is the one market to have gone beyond a soft landing.
“The decline in new supply may reflect purchase offers below asking price that are made to sellers who are under no pressure to sell. Instead they choose to take their homes off the market once their listing expires,” said CREA's chief economist, Gregory Klump. “In the absence of economic stresses like a spike in interest rates or a sharp drop in employment, this dynamic can be expected to keep the housing market in balance.“
Home sales are expected to continue at a lower level, as is construction of new homes.
The average price in Canada still climbed to $352,800 in December. If you take out Vancouver and Toronto, CREA said, the national average would be 3.3 per cent.
"Canada’s housing market is clearly in correction mode as we had been warning would occur well before the figures began to roll over," Derek Holt and Dov Zigler of Bank of Nova Scotia said before the CREA report.
As for inventory, the supply of unsold homes would take almost 7 months to deplete, but that hasn't changed much since late 2010, said senior economist Sonya Gulati of Toronto-Dominion Bank.
Ms. Gulati expects the market will stabilize now over the next few months, and that the impact of Mr. Flaherty's changes are now priced in.
"When looking at previous mortgage rule tightening episodes, the housing market impacts have been temporary in nature," she said. "There is no reason to think that this time will be any different."
Both the sales-to-listings ratio and the timeline for unsold inventory are within a normal range, she added, though at some point prices will slip.
"When we compare prices to other standard metrics like price-to-income, we still believe that prices have deviated from underlying economic fundamentals. With this in mind, house prices will likely resume their trek downwards once higher interest rates come into effect in the fourth quarter of 2013."
Housing coolsCanada's housing market continues to cool markedly, with sales plunging 17.4 per cent in December from a year earlier. Prices, however, still held up, with a gain of 1.6 per cent from December, 2011.
On a month-over-month basis, sales were little changed from November, the Canadian Real Estate Association said today. New listings slipped 1.3 per cent from November as home sellers pulled back.
The MLS Home Price Index, which factors out changes in the types of properties sold, rose 3.3 per cent from a year earlier, marking the slowest growth since April, 2011, The Globe and Mail's Tara Perkins reports.
For 2012 as a whole, sales of 452,372 slipped 1.1 per cent from a year earlier, and were 1.4 per cent below a 10-year average to 2011.
Sales in December fell in four of every five housing markets measured, the real estate group said, with Calgary the standout exception.
Canada’s housing market can best be plotted on two timelines: pre-Flaherty and post-Flaherty. And for many, the post-Flaherty era is a good thing.
Sales have slipped since Canada's Finance Minister Jim Flaherty brought in new mortgage restrictions in July in an attempt to engineer the slowdown we're now seeing, and most observers expect a soft landing, not a crash.
“National sales activity continues to hold fairly steady at lower levels since mortgage rules were changed earlier in 2012, but there are still some real differences in trends between and within local housing markets,” said CREA president Wayne Moen.
The Toronto area saw the biggest drop in New listings, the group said, but they also slumped in fully half of all markets, including, and as expected, the Vancouver area, the Fraser Valley and Vancouver Island.
Vancouver, in particular, has taken it on the chin, and observers believe it is the one market to have gone beyond a soft landing.
“The decline in new supply may reflect purchase offers below asking price that are made to sellers who are under no pressure to sell. Instead they choose to take their homes off the market once their listing expires,” said CREA's chief economist, Gregory Klump. “In the absence of economic stresses like a spike in interest rates or a sharp drop in employment, this dynamic can be expected to keep the housing market in balance.“
Home sales are expected to continue at a lower level, as is construction of new homes.
The average price in Canada still climbed to $352,800 in December. If you take out Vancouver and Toronto, CREA said, the national average would be 3.3 per cent.
"Canada’s housing market is clearly in correction mode as we had been warning would occur well before the figures began to roll over," Derek Holt and Dov Zigler of Bank of Nova Scotia said before the CREA report.
As for inventory, the supply of unsold homes would take almost 7 months to deplete, but that hasn't changed much since late 2010, said senior economist Sonya Gulati of Toronto-Dominion Bank.
Ms. Gulati expects the market will stabilize now over the next few months, and that the impact of Mr. Flaherty's changes are now priced in.
"When looking at previous mortgage rule tightening episodes, the housing market impacts have been temporary in nature," she said. "There is no reason to think that this time will be any different."
Both the sales-to-listings ratio and the timeline for unsold inventory are within a normal range, she added, though at some point prices will slip.
"When we compare prices to other standard metrics like price-to-income, we still believe that prices have deviated from underlying economic fundamentals. With this in mind, house prices will likely resume their trek downwards once higher interest rates come into effect in the fourth quarter of 2013."
Canada Guaranty’s Special Deal With RBC
Rob McLister, Canadian Mortgage Trends
How do you get Canada's #1 lender to send you business when you’re the country’s smallest mortgage insurer?
One way is to offer outstanding service and an atypical $140 per closed mortgage.
In fact, that may have been the deal that Canada Guaranty (CG) pitched to RBC when it won its business in Q3 2012. The $140 per mortgage is especially interesting.
How do you get Canada's #1 lender to send you business when you’re the country’s smallest mortgage insurer?
One way is to offer outstanding service and an atypical $140 per closed mortgage.
In fact, that may have been the deal that Canada Guaranty (CG) pitched to RBC when it won its business in Q3 2012. The $140 per mortgage is especially interesting.
According to this disclosure, “RBC Royal Bank receives a one-time fee in the amount of $140 for each mortgage insurance application approved by Canada Guaranty, provided the mortgage to which the mortgage insurance relates is funded.” This is the only case we know of where a Canadian lender gets paid cash to route mortgage applications to an insurer.
Canada Guaranty President & Chief Executive Officer Andy Charles told CMT, "This is a commercial relationship between RBC and Canada Guaranty with no consumer impact on the service or cost of their mortgage insurance premiums."
A casual observer might call it paying for business—not that there’s anything wrong with that. It may very well be smart business for CG…that is, unless all lenders start expecting cash inducements.
CG battles well-entrenched incumbents, so it’s forced to go the extra mile. Its top competitor, CMHC, commands an estimated 65-70% of the default insurance market, with Genworth taking most of the rest. CMHC also has a 100% federal guarantee, which reduces lenders’ theoretical risk compared to CG’s and Genworth’s 90% backstop.
CG is obviously hungry to rip business from both of these rivals. RBC, which it added as a customer in Q3 2012, is a huge win. (It’s unknown whether the $140 per closed deal was the carrot that enticed RBC into its fold.)
To be fair, we don’t know the details of what RBC is offering CG in return (besides deal flow). RBC says it provides Canada Guaranty with “services necessary for the effective credit adjudication/underwriting of mortgage insurance applications as well as services necessary for the ongoing administration of mortgage default insurance policies.” Thus, it’s unclear how much RBC is netting from this $140 in extra revenue.
Canada Guaranty seems to be setting a precedent among the current mortgage insurers. In speaking with CMHC, it confirms that it does not engage in similar cash payments in return for business. We’re fairly certain that Genworth doesn’t either.
In a way, this is potentially a smart customer retention strategy for RBC. The reason: fewer lenders offer free switches on Canada Guaranty-insured mortgages. Therefore, if consumers find it more expensive to switch CG-insured RBC mortgages to other lenders, RBC keeps more renewal business.
RBC's disclosure says, “The bank, not the borrower, selects the mortgage insurer.” So this is something consumers may want to consider when evaluating an RBC mortgage. Mind you, as Canada Guaranty adds more lenders (and it will), concerns about switching limitations should diminish.
About Canada Guaranty
Canada Guaranty is owned by Ontario Teachers’ Pension Plan and National Mortgage Guaranty Holdings Inc. (the private holding company of Stephen Smith, co-founder of First National Financial LP). These two partners bought AIG United Guaranty Mortgage Insurance Company Canada in 2010 and changed the name. (See Canada Guaranty Launches.) CG is thus the only 100% Canadian-owned default insurer in Canada.
Canada Guaranty President & Chief Executive Officer Andy Charles told CMT, "This is a commercial relationship between RBC and Canada Guaranty with no consumer impact on the service or cost of their mortgage insurance premiums."
A casual observer might call it paying for business—not that there’s anything wrong with that. It may very well be smart business for CG…that is, unless all lenders start expecting cash inducements.
CG battles well-entrenched incumbents, so it’s forced to go the extra mile. Its top competitor, CMHC, commands an estimated 65-70% of the default insurance market, with Genworth taking most of the rest. CMHC also has a 100% federal guarantee, which reduces lenders’ theoretical risk compared to CG’s and Genworth’s 90% backstop.
CG is obviously hungry to rip business from both of these rivals. RBC, which it added as a customer in Q3 2012, is a huge win. (It’s unknown whether the $140 per closed deal was the carrot that enticed RBC into its fold.)
To be fair, we don’t know the details of what RBC is offering CG in return (besides deal flow). RBC says it provides Canada Guaranty with “services necessary for the effective credit adjudication/underwriting of mortgage insurance applications as well as services necessary for the ongoing administration of mortgage default insurance policies.” Thus, it’s unclear how much RBC is netting from this $140 in extra revenue.
Canada Guaranty seems to be setting a precedent among the current mortgage insurers. In speaking with CMHC, it confirms that it does not engage in similar cash payments in return for business. We’re fairly certain that Genworth doesn’t either.
In a way, this is potentially a smart customer retention strategy for RBC. The reason: fewer lenders offer free switches on Canada Guaranty-insured mortgages. Therefore, if consumers find it more expensive to switch CG-insured RBC mortgages to other lenders, RBC keeps more renewal business.
RBC's disclosure says, “The bank, not the borrower, selects the mortgage insurer.” So this is something consumers may want to consider when evaluating an RBC mortgage. Mind you, as Canada Guaranty adds more lenders (and it will), concerns about switching limitations should diminish.
About Canada Guaranty
Canada Guaranty is owned by Ontario Teachers’ Pension Plan and National Mortgage Guaranty Holdings Inc. (the private holding company of Stephen Smith, co-founder of First National Financial LP). These two partners bought AIG United Guaranty Mortgage Insurance Company Canada in 2010 and changed the name. (See Canada Guaranty Launches.) CG is thus the only 100% Canadian-owned default insurer in Canada.
Canadian homebuyers more experienced, financially prudent moving forward, says RE/MAX
Christine Martysiewicz Eva Blay/Charlene McAdam
RE/MAX Ontario-Atlantic Canada Point Blank Communications
Mississauga, ON (January 22, 2013) -- Changing market conditions have triggered a shift in the Canadian homebuyer mix and mindset, a fact identified and confirmed by the RE/MAX Canadian Homebuying Trends Survey 2013-2014 released today.
The national survey, hosted on the Angus Reid Forum in December, was conducted among 1,109 prospective purchasers who intend to buy within the next 24 months. From consumer demographics to buyer intentions, the survey provides a snapshot of Canadian homebuyers heading into a period of moderation. Among the key findings:
Who will drive the market?
Second-time and multi-time buyers represent 70 per cent of those serious about making a move—a trend that emerged in the latter half of 2012 and is expected to continue over the next two-year period. First-time buyers will continue to play a role in the market—at 30 per cent— but this cohort’s more experienced counterparts will lead the charge for housing over the next 24 months.
“There’s no question that first-time buyers are experiencing a period of readjustment,” explains Sandhu. “While affordability took a hit in 2012, homeowners with considerable equity remain confident and well-positioned. They will be the driving force fuelling the bulk of home sales in the months ahead. ”
Canadian Homebuyers – The Financial Picture
Spending patterns were conservative for the most part. Thirty-eight per cent of purchasers indicated they would spend under $250,000 on their home, while 42 per cent would spend between $250,000 and $500,000, 10 percent would spend between $500,000 and $1 million and one per cent intended to spend over $1 million. The singles cohort was most prudent, with 47 per cent of purchasers intending to spend under $250,000. Of the buyers spending $500,000 to $1 million, almost half resided in Ontario, while the remaining 50 per cent were almost evenly divided between British Columbia and Alberta.
Although 37 per cent of purchasers who own homes are expected to spend more than the value of their current properties, 23 per cent indicated that they would spend an equivalent amount on the next buy. Forty per cent intended to spend less on their new home, with four out of 10 of those respondents over age 55.
“It’s clear by the findings that most Canadians are certainly not over-extending themselves,” says Sandhu. “When it comes to their home purchase, many intend to downsize or make lateral moves. Yet, considering the substantial equity amassed by many of those trading up, we feel the fundamentals of the market are firm and will remain solid in the foreseeable future.”
Despite all the dire warnings coming from the central bank and other sources, one of the most surprising findings of the survey was the fiscal responsibility of Canada’s young homebuyers. Four out of 10 (40 per cent) purchasers between the ages of 18 - 34 intended to put down 20 per cent or more on their home.
Not surprisingly, of those putting down 30 per cent or more, 45 per cent were aged 55 and over. Just seven per cent of purchasers had a down payment of five per cent, while 14 per cent indicated that they were putting down 10 per cent.
The financials of those purchasers intending to buy a home were relatively sound, with 40 per cent earning between $50,000 and $99,999. Twenty-four per cent earn $100,000 plus.
Consumer Confidence in Housing Performance
“Regardless of income, gender, age, or location, most Canadian respondents shared considerable confidence in Canada’s housing market,” says Sandhu. “This stands as perhaps the greatest indicator that homebuying intentions will remain healthy and stable. Combine this with an economic engine that is expected to gain momentum, and the outlook is most certainly positive.”
Overall, 48 per cent of those surveyed believed housing values in their area would rise in the next 12 months and 35 per cent believed housing values would remain the same. Ten per cent believed housing values would decline. Purchasers were most bullish in Ontario, where 85 per cent indicated prices would remain the same or rise, and least bullish in British Columbia where 71 per cent believed values would climb or remain the same. Twenty-four percent of British Columbia purchasers believed that values would drop in the next 12 months, while just seven per cent in neighbouring Alberta thought this would come to fruition.
Low vacancy rates and higher rental costs, combined with favourable interest rates, are the primary impetus for those currently renting accommodations, and ultimately, behind their decision to buy a home. At present, 29 per cent of those surveyed rent, while 68 per cent owned their own.
The Buyer Pool
Of those purchasing in the next 24 months, 18 per cent are single, 43 per cent are couples, and families account for 33 per cent. Almost half of single purchasers (45 per cent) are female—confirming suspicions that women now represent a considerable force in the market. According to Statistics Canada, the number of women with postsecondary school diplomas/degrees has increased steadily. In 2011, 72 per cent of women aged 25 to 44 had completed post-secondary education, as opposed to 65 per cent of men. Income and employment rates among women have also been on the rise.
“Today’s female homebuyers are more established, independent and financially secure than ever before,” says Sandhu. “This has likely contributed to the greater number of single women—many successful, young professionals—entering Canada’s housing market. The trend had been noticed by our realtors across the country for some time, but it’s encouraging to finally see the progress in numbers. Statistics Canada indicates that homeownership rates for both women and men living alone climbed several percentage points during the 2001 to 2006 census period—a trend we suspect has likely risen again over the subsequent years.”
While the 18-34 cohort represents 37 per cent of buyers, the 35-54 grouping is by far the largest at 40 per cent. The 55-plus category trails, representing just 23 per cent of homebuyers. The greatest percentage of younger buyers can be found in Alberta, where they represent 40 per cent of the purchasing pool. Job opportunities abound and salaries are generous as a result of a robust economy, and housing is still relatively affordable in the province. The oldest buyers are found in Quebec, where they represent 29 per cent of all purchasers—many of whom may be taking advantage of serious equity gains realized over the past decade.
Housing Choices
The vast majority of purchasers continue to seek out single-detached homes (53 per cent), while condominiums ranked second at 17 per cent, followed by both semi-detached/duplex and townhouse/rowhouse each at 11 per cent. Affordability has factored into the equation, especially in larger centres. Five per cent of purchasers indicated that they were interested in recreational properties, which bodes well for Canada’s recreational property market moving forward. Properties outside of Canada are represented as well, but to a lesser extent at two per cent. This may be indicative of a cooling trend, as rising prices and fewer opportunities south of the border discourage Canadian buyers. Commercial properties also made the list, representing one per cent.
Lifestyle and investment were the principle drivers in the decision to purchase a home. Buyers, for the most part, were interested in larger properties (17 per cent), updated homes (six per cent), and different neighbourhoods (11 per cent), while others were intent to downsize to smaller accommodations (14 per cent). Inheritance (two per cent) was as a factor in a nominal number of instances.
The breakdown in terms of location was tight nationally, with 35 per cent of buyers going urban and 32 per cent going suburban. Only 16 per cent said that they would go rural. Almost half of purchasers aged 18 - 34 indicated that they were going urban. Alberta has the largest component of urban-bound purchasers at 50 per cent, followed by 38 per cent in Ontario. The suburbs were a major draw in British Columbia (39 per cent) and Quebec (36 per cent), where purchasers were able to get more bang for their buck.
The Canadian Homebuying Trends Survey was conducted online from December 5th to December 10th, 2012, among a sample of 1,109 Canadians that are looking to buy a residence in the next 24 months, who are Angus Reid Forum panel members. The results have been statistically weighted to ensure a representative sample. The margin of error on the full base — which measures sampling variability — of 2013 respondents is +/- 2.2%.Discrepancies in or between totals are due to rounding.
RE/MAX is Canada’s leading real estate organization with over 19,000 sales associates situated throughout its 750 independently-owned and operated offices in Canada. The RE/MAX network, now in its 39th year, is a global real estate system operating in 85 countries, with over 6,324 independently-owned offices and 88,854 member sales associates. RE/MAX realtors lead the industry in professional designations, experience and production while providing real estate services in residential, commercial, referral, and asset management.
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For more information:
Christine Martysiewicz Eva Blay/Charlene McAdam
RE/MAX Ontario-Atlantic Canada Point Blank Communications
905.542.2400 416.781.3911
RE/MAX Ontario-Atlantic Canada Point Blank Communications
Mississauga, ON (January 22, 2013) -- Changing market conditions have triggered a shift in the Canadian homebuyer mix and mindset, a fact identified and confirmed by the RE/MAX Canadian Homebuying Trends Survey 2013-2014 released today.
The national survey, hosted on the Angus Reid Forum in December, was conducted among 1,109 prospective purchasers who intend to buy within the next 24 months. From consumer demographics to buyer intentions, the survey provides a snapshot of Canadian homebuyers heading into a period of moderation. Among the key findings:
- Almost one in five purchasers is single
- More than two-thirds are second or multi-time purchasers
- Four out of 10 purchasers between the ages of 18 to 34 have a downpayment of 20 per cent or more.
- Just over 80 per cent of buyers believe housing values in their area will rise or remain the same.
Who will drive the market?
Second-time and multi-time buyers represent 70 per cent of those serious about making a move—a trend that emerged in the latter half of 2012 and is expected to continue over the next two-year period. First-time buyers will continue to play a role in the market—at 30 per cent— but this cohort’s more experienced counterparts will lead the charge for housing over the next 24 months.
“There’s no question that first-time buyers are experiencing a period of readjustment,” explains Sandhu. “While affordability took a hit in 2012, homeowners with considerable equity remain confident and well-positioned. They will be the driving force fuelling the bulk of home sales in the months ahead. ”
Canadian Homebuyers – The Financial Picture
Spending patterns were conservative for the most part. Thirty-eight per cent of purchasers indicated they would spend under $250,000 on their home, while 42 per cent would spend between $250,000 and $500,000, 10 percent would spend between $500,000 and $1 million and one per cent intended to spend over $1 million. The singles cohort was most prudent, with 47 per cent of purchasers intending to spend under $250,000. Of the buyers spending $500,000 to $1 million, almost half resided in Ontario, while the remaining 50 per cent were almost evenly divided between British Columbia and Alberta.
Although 37 per cent of purchasers who own homes are expected to spend more than the value of their current properties, 23 per cent indicated that they would spend an equivalent amount on the next buy. Forty per cent intended to spend less on their new home, with four out of 10 of those respondents over age 55.
“It’s clear by the findings that most Canadians are certainly not over-extending themselves,” says Sandhu. “When it comes to their home purchase, many intend to downsize or make lateral moves. Yet, considering the substantial equity amassed by many of those trading up, we feel the fundamentals of the market are firm and will remain solid in the foreseeable future.”
Despite all the dire warnings coming from the central bank and other sources, one of the most surprising findings of the survey was the fiscal responsibility of Canada’s young homebuyers. Four out of 10 (40 per cent) purchasers between the ages of 18 - 34 intended to put down 20 per cent or more on their home.
Not surprisingly, of those putting down 30 per cent or more, 45 per cent were aged 55 and over. Just seven per cent of purchasers had a down payment of five per cent, while 14 per cent indicated that they were putting down 10 per cent.
The financials of those purchasers intending to buy a home were relatively sound, with 40 per cent earning between $50,000 and $99,999. Twenty-four per cent earn $100,000 plus.
Consumer Confidence in Housing Performance
“Regardless of income, gender, age, or location, most Canadian respondents shared considerable confidence in Canada’s housing market,” says Sandhu. “This stands as perhaps the greatest indicator that homebuying intentions will remain healthy and stable. Combine this with an economic engine that is expected to gain momentum, and the outlook is most certainly positive.”
Overall, 48 per cent of those surveyed believed housing values in their area would rise in the next 12 months and 35 per cent believed housing values would remain the same. Ten per cent believed housing values would decline. Purchasers were most bullish in Ontario, where 85 per cent indicated prices would remain the same or rise, and least bullish in British Columbia where 71 per cent believed values would climb or remain the same. Twenty-four percent of British Columbia purchasers believed that values would drop in the next 12 months, while just seven per cent in neighbouring Alberta thought this would come to fruition.
Low vacancy rates and higher rental costs, combined with favourable interest rates, are the primary impetus for those currently renting accommodations, and ultimately, behind their decision to buy a home. At present, 29 per cent of those surveyed rent, while 68 per cent owned their own.
The Buyer Pool
Of those purchasing in the next 24 months, 18 per cent are single, 43 per cent are couples, and families account for 33 per cent. Almost half of single purchasers (45 per cent) are female—confirming suspicions that women now represent a considerable force in the market. According to Statistics Canada, the number of women with postsecondary school diplomas/degrees has increased steadily. In 2011, 72 per cent of women aged 25 to 44 had completed post-secondary education, as opposed to 65 per cent of men. Income and employment rates among women have also been on the rise.
“Today’s female homebuyers are more established, independent and financially secure than ever before,” says Sandhu. “This has likely contributed to the greater number of single women—many successful, young professionals—entering Canada’s housing market. The trend had been noticed by our realtors across the country for some time, but it’s encouraging to finally see the progress in numbers. Statistics Canada indicates that homeownership rates for both women and men living alone climbed several percentage points during the 2001 to 2006 census period—a trend we suspect has likely risen again over the subsequent years.”
While the 18-34 cohort represents 37 per cent of buyers, the 35-54 grouping is by far the largest at 40 per cent. The 55-plus category trails, representing just 23 per cent of homebuyers. The greatest percentage of younger buyers can be found in Alberta, where they represent 40 per cent of the purchasing pool. Job opportunities abound and salaries are generous as a result of a robust economy, and housing is still relatively affordable in the province. The oldest buyers are found in Quebec, where they represent 29 per cent of all purchasers—many of whom may be taking advantage of serious equity gains realized over the past decade.
Housing Choices
The vast majority of purchasers continue to seek out single-detached homes (53 per cent), while condominiums ranked second at 17 per cent, followed by both semi-detached/duplex and townhouse/rowhouse each at 11 per cent. Affordability has factored into the equation, especially in larger centres. Five per cent of purchasers indicated that they were interested in recreational properties, which bodes well for Canada’s recreational property market moving forward. Properties outside of Canada are represented as well, but to a lesser extent at two per cent. This may be indicative of a cooling trend, as rising prices and fewer opportunities south of the border discourage Canadian buyers. Commercial properties also made the list, representing one per cent.
Lifestyle and investment were the principle drivers in the decision to purchase a home. Buyers, for the most part, were interested in larger properties (17 per cent), updated homes (six per cent), and different neighbourhoods (11 per cent), while others were intent to downsize to smaller accommodations (14 per cent). Inheritance (two per cent) was as a factor in a nominal number of instances.
The breakdown in terms of location was tight nationally, with 35 per cent of buyers going urban and 32 per cent going suburban. Only 16 per cent said that they would go rural. Almost half of purchasers aged 18 - 34 indicated that they were going urban. Alberta has the largest component of urban-bound purchasers at 50 per cent, followed by 38 per cent in Ontario. The suburbs were a major draw in British Columbia (39 per cent) and Quebec (36 per cent), where purchasers were able to get more bang for their buck.
The Canadian Homebuying Trends Survey was conducted online from December 5th to December 10th, 2012, among a sample of 1,109 Canadians that are looking to buy a residence in the next 24 months, who are Angus Reid Forum panel members. The results have been statistically weighted to ensure a representative sample. The margin of error on the full base — which measures sampling variability — of 2013 respondents is +/- 2.2%.Discrepancies in or between totals are due to rounding.
RE/MAX is Canada’s leading real estate organization with over 19,000 sales associates situated throughout its 750 independently-owned and operated offices in Canada. The RE/MAX network, now in its 39th year, is a global real estate system operating in 85 countries, with over 6,324 independently-owned offices and 88,854 member sales associates. RE/MAX realtors lead the industry in professional designations, experience and production while providing real estate services in residential, commercial, referral, and asset management.
###
For more information:
Christine Martysiewicz Eva Blay/Charlene McAdam
RE/MAX Ontario-Atlantic Canada Point Blank Communications
905.542.2400 416.781.3911
Thursday 17 January 2013
Quick Facts on Canadian Mortgages
CMI, Canadian Mortgages Inc.
The panic that has surrounded Canadian mortgages has gotten a bit out of control. Yes, our rules are tighter; and yes, the housing and mortgage market is going to slow down for a bit. But we’re still okay!! Whenever you’re tempted to become too depressed about the “dismal” state of today’s market, just review these quick facts. They’ll probably make you feel better!
Our homes are mostly paid off
Much of the panic is regarding the fact that our housing prices, and therefore our home values, are going to fall. Experts predict by as much as 10 – 15 per cent in the next two years. However, the average Canadian home is 70 per cent paid off. That’s near seven times the amount prices and values are expected to fall. No reason to panic.
We are not overextended
Taking a look at the chart above, you can see that even those with mortgages, and even those with second mortgages on their homes, still own a great deal of the equity in their homes. HELOCs, one type of second mortgage, have often criticized for being used by homeowners as “ATMs.” But those who have HELOCs own the majority of their homes. In fact, the only homeowners that own more equity in their homes are those who own them outright!
We want to pay our mortgages
Everyone is worried that we’re going to run into the same trouble that we saw in the United States four years ago. That fear is not unfounded, and with household debt levels sitting at 164.6 per cent, we do have to be careful. But there’s a difference. We’re not willing to, and in fact, we cannot walk away from our homes or our mortgages as they did in the States. We know that, and so we often pay more towards our mortgage than we need to. As you can see from the chart below, 975,000 mortgage holders increased their monthly payments by $300; and 875,000 mortgage holders contributed a lump sum of $22,500.
The new mortgage rules won’t hurt us that much
People have been talking about the new mortgage rules since four years ago when the first changes were made. Now, they’ve become so tight that economists and analysts in all four corners of the country are worried that they’ll be devastating to our housing market. Buyers of all types will be shut out, they say, and it’s simply too hard to get a home. In fact, as you can tell from the chart below, only 9 per cent of homebuyers will be affected by the rules.
But what an effect they’ll feel! There’s no doubt that for that 9 per cent, it’s going to be harder. Much, much harder. That unlucky bunch will need to save an additional $25,000 for their down payment. And this will take, on average, three and a half years.
We’re smart with our equity
We talk about tapping into your equity a lot here on this blog. And that’s because it can be a great thing, if you use it properly. Of the 600,000 homes that borrowed against their home equity, 150,000 homebuyers used it to consolidate their debt at a much lower rate. Just how low?
The chart above shows what a big difference there is between home loans, and other types of borrowing. As you can see, mortgages fall far below any other type of debt.
While some of our stats may mirror those of the United States just before their collapse, it’s important to remember that we’re not exactly the same. And that just because something happens over there, doesn’t mean that it’s going to happen here.
The panic that has surrounded Canadian mortgages has gotten a bit out of control. Yes, our rules are tighter; and yes, the housing and mortgage market is going to slow down for a bit. But we’re still okay!! Whenever you’re tempted to become too depressed about the “dismal” state of today’s market, just review these quick facts. They’ll probably make you feel better!
Our homes are mostly paid off
Much of the panic is regarding the fact that our housing prices, and therefore our home values, are going to fall. Experts predict by as much as 10 – 15 per cent in the next two years. However, the average Canadian home is 70 per cent paid off. That’s near seven times the amount prices and values are expected to fall. No reason to panic.
We are not overextended
Taking a look at the chart above, you can see that even those with mortgages, and even those with second mortgages on their homes, still own a great deal of the equity in their homes. HELOCs, one type of second mortgage, have often criticized for being used by homeowners as “ATMs.” But those who have HELOCs own the majority of their homes. In fact, the only homeowners that own more equity in their homes are those who own them outright!
We want to pay our mortgages
Everyone is worried that we’re going to run into the same trouble that we saw in the United States four years ago. That fear is not unfounded, and with household debt levels sitting at 164.6 per cent, we do have to be careful. But there’s a difference. We’re not willing to, and in fact, we cannot walk away from our homes or our mortgages as they did in the States. We know that, and so we often pay more towards our mortgage than we need to. As you can see from the chart below, 975,000 mortgage holders increased their monthly payments by $300; and 875,000 mortgage holders contributed a lump sum of $22,500.
The new mortgage rules won’t hurt us that much
People have been talking about the new mortgage rules since four years ago when the first changes were made. Now, they’ve become so tight that economists and analysts in all four corners of the country are worried that they’ll be devastating to our housing market. Buyers of all types will be shut out, they say, and it’s simply too hard to get a home. In fact, as you can tell from the chart below, only 9 per cent of homebuyers will be affected by the rules.
But what an effect they’ll feel! There’s no doubt that for that 9 per cent, it’s going to be harder. Much, much harder. That unlucky bunch will need to save an additional $25,000 for their down payment. And this will take, on average, three and a half years.
We’re smart with our equity
We talk about tapping into your equity a lot here on this blog. And that’s because it can be a great thing, if you use it properly. Of the 600,000 homes that borrowed against their home equity, 150,000 homebuyers used it to consolidate their debt at a much lower rate. Just how low?
The chart above shows what a big difference there is between home loans, and other types of borrowing. As you can see, mortgages fall far below any other type of debt.
While some of our stats may mirror those of the United States just before their collapse, it’s important to remember that we’re not exactly the same. And that just because something happens over there, doesn’t mean that it’s going to happen here.
Wednesday 16 January 2013
Title Insurance Tidbits
Rob McLister, Canadian Mortgage Trends
Title insurance is usually an afterthought for people getting a mortgage. But it’s becoming more of a decision point since so many lenders now require it.
The purpose of title insurance is to protect you if there’s a problem with your title. Those problems can turn into expensive nightmares in the small chance that you encounter them. Examples include ownership disputes on your property, title fraud, un-discharged liens, encroachments, zoning issues, survey problems, property tax arrears and so on.
Title insurance is usually an afterthought for people getting a mortgage. But it’s becoming more of a decision point since so many lenders now require it.
The purpose of title insurance is to protect you if there’s a problem with your title. Those problems can turn into expensive nightmares in the small chance that you encounter them. Examples include ownership disputes on your property, title fraud, un-discharged liens, encroachments, zoning issues, survey problems, property tax arrears and so on.
Real estate lawyer Bob Aaron wrote a recent overview of title insurance here. He says, “Most real estate lawyers today regard title insurance as a critical component…and will usually not close a purchase without it.”
And no, lawyers don’t get big kickbacks for pushing title insurance. Aarons says lawyers "are not permitted to get referral fees/commissions" on title insurance. Lawyers recommend it because it protects the homeowner, limits the lawyer’s liability and makes closing more efficient.
Once you pay for title insurance, you can often avoid paying for it again. Here are some cases where that’s true:
Title insurance can be switched to a new lender only under certain conditions, says Reta Coburn, president of FNF Canada, the Canadian division of the world’s largest title insurance organization. “Loan policies for lenders are transferable when the original mortgage is not being discharged from title and is simply being transferred by way of a registered assignment of mortgage,” she says.
The stipulations are that, "The original mortgage security must remain unchanged and no additional funds can be advanced, unless provided for under the original mortgage terms and conditions. The date of policy is the date of registration of the original mortgage, so the new lender assumes the coverage under the policy of the original lender at the date of that mortgage registration."
Eric Haslett, LLB, VP Residential Title Insurance at FCT, adds that: “Provided the new lender agrees to take an assignment of the existing mortgage, the…title insurance policy will follow the mortgage to the new lender and no additional title insurance premium is charged.”
But lenders don’t always accept a mortgage that a prior lender has registered. That’s because, as Haslett puts it, “The new lender is stuck with whatever the language is in the existing lender’s mortgage documents.”
And here’s an interesting side note:
Haslett says, “New lenders often don’t request assignments from an existing lender because (doing so) provides that lender an opportunity to…retain the borrower.” If the old mortgage is discharged and a new mortgage is registered, however, “The existing lender often doesn’t know about the borrower moving until it’s too late.”
In addition, when clients change lenders using a refinance instead of an assignment, the party requesting the discharge statement (from the existing lender) doesn't need to disclose the new lender's name. As a result, the existing lender cannot see who they are competing against.
Haslett adds that, “If a lender wants the old mortgage discharged and a new mortgage registered, it will attract a new title insurance policy in the name of the new lender and result in a title insurance premium.”
And no, lawyers don’t get big kickbacks for pushing title insurance. Aarons says lawyers "are not permitted to get referral fees/commissions" on title insurance. Lawyers recommend it because it protects the homeowner, limits the lawyer’s liability and makes closing more efficient.
*******
There are two broad types of title insurance:- Homeowner policies, which:
- Cover the homeowner
- Last as long as you own the property
- Are priced based on the property value
- Lender policies, which:
- Protect the lender’s interest in your mortgage
- Last as long as you have your mortgage
- Are priced based on the mortgage size
Once you pay for title insurance, you can often avoid paying for it again. Here are some cases where that’s true:
- You purchase a homeowner policy and stay in your home
(Homeowner policies generally cover your property for as long as you own it.) - You pick a lender that doesn't require a lender title policy
(Many do, but some don't.) - You refinance and choose a lender that pays for its own mortgage-only title policy
(A broker can tell you which lenders do this. Keep in mind, a lender-only policy doesn't protect you.) - You switch lenders and your existing policy is "ported” to the new lender
(If it can't be ported, many lenders will pay the new title insurance premium for you on a straightforward switch.)
Title insurance can be switched to a new lender only under certain conditions, says Reta Coburn, president of FNF Canada, the Canadian division of the world’s largest title insurance organization. “Loan policies for lenders are transferable when the original mortgage is not being discharged from title and is simply being transferred by way of a registered assignment of mortgage,” she says.The stipulations are that, "The original mortgage security must remain unchanged and no additional funds can be advanced, unless provided for under the original mortgage terms and conditions. The date of policy is the date of registration of the original mortgage, so the new lender assumes the coverage under the policy of the original lender at the date of that mortgage registration."
Eric Haslett, LLB, VP Residential Title Insurance at FCT, adds that: “Provided the new lender agrees to take an assignment of the existing mortgage, the…title insurance policy will follow the mortgage to the new lender and no additional title insurance premium is charged.”But lenders don’t always accept a mortgage that a prior lender has registered. That’s because, as Haslett puts it, “The new lender is stuck with whatever the language is in the existing lender’s mortgage documents.”
And here’s an interesting side note:
Haslett says, “New lenders often don’t request assignments from an existing lender because (doing so) provides that lender an opportunity to…retain the borrower.” If the old mortgage is discharged and a new mortgage is registered, however, “The existing lender often doesn’t know about the borrower moving until it’s too late.”
In addition, when clients change lenders using a refinance instead of an assignment, the party requesting the discharge statement (from the existing lender) doesn't need to disclose the new lender's name. As a result, the existing lender cannot see who they are competing against.
Haslett adds that, “If a lender wants the old mortgage discharged and a new mortgage registered, it will attract a new title insurance policy in the name of the new lender and result in a title insurance premium.”
Tuesday 15 January 2013
Are stubborn sellers killing the real estate crash?
Garry Marr, The Financial Post
Like many others, Toronto public relations manager Megan Vickell is sitting on the real estate sidelines dreaming of bargains to come.
“I’m waiting for that bubble to pop that everybody is talking about so I’m not sitting there owning a condo in the city that later everybody else has for a much cheaper price,” said Ms. Vickell. “I mean look at everything that’s being built, who is going to live in all those? There’s lots of beautiful spots out there.”
You can’t blame her for wanting to wait. Research firm Urbanation Inc. says Toronto’s average condo prices climbed to as high as $407 per square foot in 2012, a sharp rise from the $229 per square foot fetched in the first quarter of 2003.
The picture is not much different nationally. The average sale price across the country was $364,260 over the first 11 months of 2012, according to the Canadian Real Estate Association. Compare that to beginning of this boom when the average sale price across the country was $158,303 in 1999.
But what if the crash never comes?
Urbanation says preliminary condo results for the fourth quarter show prices are down 0.8% in Toronto year over year and Canada-wide home prices were also down 0.8% in November from a year ago. But, so far, that’s about it.
The one thing missing from the market, for all those people looking for a crash, is a catalyst or an event that will force people to reduce their asking prices. Before this housing market burns up in flames, it needs some type of spark.
“Crashes don’t just happen in a vacuum, you need a trigger,” says Benjamin Tal, deputy chief economist with CIBC World Markets. “I can’t point to any crisis in the history of crashes that didn’t have a trigger.”
In the United States, the trigger proved to be a sub-prime market and the expiry of teaser rates that jumped as much four percentage points on some mortgages. Overnight, people couldn’t afford their homes.
“If you have a gradual increase in the rates this doesn’t happen,” says the economist, who predicts a decline in prices but only in the 5% to 10% range. The real estate industry is on the same page, continually calling for a soft landing.
What has people like Ms. Vickell excited and looking for a major decline in prices is the massive drop off in sales activity in some major markets. Nationally, sales were down almost 12% in November from a year ago. Vancouver remains the leading example where sales were down 22.7% in 2012 from a year earlier.
So you’re sitting on the sidelines, not buying at what many consider ridiculously high prices — the product of a 14-year boom that has only seen one mild pullback during the recession in 2008. But what if sellers simply refuse to lower their price, something that has happened so far in the markets where sales are drying up very fast. What’s next?
“I think stagnation is a good word for what will happen, it’s what we saw in the market from 1992 to 1997,” says Mr. Tal.
The CREA stats show the market nationally — albeit real estate can be a very regional story — did not move all that much in the 1990s before it took off in 1999. There were some corrections in the 5% range on a yearly basis but average prices from a bottoming out of $142,091 in 1990 had climbed to $154,768 by 1997 — an 8% increase that is paltry by today’s standards for such a long period.
“We are going to see a correction and the question is ‘what will emerge from that,’” said Mr. Tal. “The scenario is the market will not be strong, it will be stagnant.”
In this scenario, instead of people of people selling in a panic, they pull their homes off the market, waiting for a better day, refusing to sell at distressed prices. New listings and active listings will start to shrink.
“In the U.S., you had to sell your house because you were delinquent. If you tell me tomorrow the unemployment rate [in Canada] will jump to 12%, we will have a crisis,” said Mr. Tal.
“The economy continues to be okay, people have jobs, interest rates are low,” said Mr. Lawby. “Historically, anytime when prices dropped it was tied to high unemployment and interest rates. It’s not the case today, people are not forced to sell, they are staying with their price.”
Still, Ms. Vickell’s patience may pay off. Even Mr. Lawby concedes that the condo sector may be hit. Developers who already have buildings under construction may be forced to scale down projects or lower prices on unsold units.
“They are going to be throwing in packages to sell,” says Mr. Lawby. “But the average homeowner, without an economic event, they have no need to sell.”
David Madani, Canada economist with Capital Economics, takes a more extreme view, predicting a price-drop of 25% in the next year or two across the country. Rapidly flagging sales are a sure sign his prediction will come to fruition, he says.
“We have to tell our clients ‘you don’t necessarily need a trigger.’ You reach a threshold point where people get afraid, where valuations have lost touch with fundamentals,” he says, adding there is a standoff between buyers and sellers before any crash. “Sellers eventually realize the market has shifted beneath them and they capitulate and drop their asking price.”
But Mr. Madani’s calls for a crash are being largely drowned out by the real estate industry’s steady calls for a soft landing.
Gregory Klump, chief economist with CREA, says history supports the notion that some sort of major event is needed to create a housing market collapse.
“In the late 1980s, it was a case of a spike in interest rates, in late 2008 and early 2009 it was a massive layoff,” said Mr. Klump. “You need a massive and extended economic shock and none of that is in the forecast.”
In the interim, people waiting for a decline a major decline in price will have to keep waiting, says Mr. Klump. Only time will tell if it ever materializes.
Like many others, Toronto public relations manager Megan Vickell is sitting on the real estate sidelines dreaming of bargains to come.
“I’m waiting for that bubble to pop that everybody is talking about so I’m not sitting there owning a condo in the city that later everybody else has for a much cheaper price,” said Ms. Vickell. “I mean look at everything that’s being built, who is going to live in all those? There’s lots of beautiful spots out there.”
You can’t blame her for wanting to wait. Research firm Urbanation Inc. says Toronto’s average condo prices climbed to as high as $407 per square foot in 2012, a sharp rise from the $229 per square foot fetched in the first quarter of 2003.
The picture is not much different nationally. The average sale price across the country was $364,260 over the first 11 months of 2012, according to the Canadian Real Estate Association. Compare that to beginning of this boom when the average sale price across the country was $158,303 in 1999.
But what if the crash never comes?
Urbanation says preliminary condo results for the fourth quarter show prices are down 0.8% in Toronto year over year and Canada-wide home prices were also down 0.8% in November from a year ago. But, so far, that’s about it.
The one thing missing from the market, for all those people looking for a crash, is a catalyst or an event that will force people to reduce their asking prices. Before this housing market burns up in flames, it needs some type of spark.
I’m waiting for that bubble to pop that everybody is talking aboutAnd, if you talk to some people, that key event — two that come to mind are a spike in interest rates or job losses — is not happening any time soon.
“Crashes don’t just happen in a vacuum, you need a trigger,” says Benjamin Tal, deputy chief economist with CIBC World Markets. “I can’t point to any crisis in the history of crashes that didn’t have a trigger.”
In the United States, the trigger proved to be a sub-prime market and the expiry of teaser rates that jumped as much four percentage points on some mortgages. Overnight, people couldn’t afford their homes.
“If you have a gradual increase in the rates this doesn’t happen,” says the economist, who predicts a decline in prices but only in the 5% to 10% range. The real estate industry is on the same page, continually calling for a soft landing.
What has people like Ms. Vickell excited and looking for a major decline in prices is the massive drop off in sales activity in some major markets. Nationally, sales were down almost 12% in November from a year ago. Vancouver remains the leading example where sales were down 22.7% in 2012 from a year earlier.
So you’re sitting on the sidelines, not buying at what many consider ridiculously high prices — the product of a 14-year boom that has only seen one mild pullback during the recession in 2008. But what if sellers simply refuse to lower their price, something that has happened so far in the markets where sales are drying up very fast. What’s next?
“I think stagnation is a good word for what will happen, it’s what we saw in the market from 1992 to 1997,” says Mr. Tal.
The CREA stats show the market nationally — albeit real estate can be a very regional story — did not move all that much in the 1990s before it took off in 1999. There were some corrections in the 5% range on a yearly basis but average prices from a bottoming out of $142,091 in 1990 had climbed to $154,768 by 1997 — an 8% increase that is paltry by today’s standards for such a long period.
“We are going to see a correction and the question is ‘what will emerge from that,’” said Mr. Tal. “The scenario is the market will not be strong, it will be stagnant.”
In this scenario, instead of people of people selling in a panic, they pull their homes off the market, waiting for a better day, refusing to sell at distressed prices. New listings and active listings will start to shrink.
“In the U.S., you had to sell your house because you were delinquent. If you tell me tomorrow the unemployment rate [in Canada] will jump to 12%, we will have a crisis,” said Mr. Tal.
People are not forced to sell, they are staying with their priceDon Lawby, chief executive of the Century 21 Canada, and a charter member of the club that doesn’t see home prices dropping anytime soon, can’t see any desperation from sellers.
“The economy continues to be okay, people have jobs, interest rates are low,” said Mr. Lawby. “Historically, anytime when prices dropped it was tied to high unemployment and interest rates. It’s not the case today, people are not forced to sell, they are staying with their price.”
Still, Ms. Vickell’s patience may pay off. Even Mr. Lawby concedes that the condo sector may be hit. Developers who already have buildings under construction may be forced to scale down projects or lower prices on unsold units.
“They are going to be throwing in packages to sell,” says Mr. Lawby. “But the average homeowner, without an economic event, they have no need to sell.”
David Madani, Canada economist with Capital Economics, takes a more extreme view, predicting a price-drop of 25% in the next year or two across the country. Rapidly flagging sales are a sure sign his prediction will come to fruition, he says.
“We have to tell our clients ‘you don’t necessarily need a trigger.’ You reach a threshold point where people get afraid, where valuations have lost touch with fundamentals,” he says, adding there is a standoff between buyers and sellers before any crash. “Sellers eventually realize the market has shifted beneath them and they capitulate and drop their asking price.”
But Mr. Madani’s calls for a crash are being largely drowned out by the real estate industry’s steady calls for a soft landing.
Gregory Klump, chief economist with CREA, says history supports the notion that some sort of major event is needed to create a housing market collapse.
“In the late 1980s, it was a case of a spike in interest rates, in late 2008 and early 2009 it was a massive layoff,” said Mr. Klump. “You need a massive and extended economic shock and none of that is in the forecast.”
In the interim, people waiting for a decline a major decline in price will have to keep waiting, says Mr. Klump. Only time will tell if it ever materializes.
Monday 14 January 2013
Housing Market headed for soft landing, agency, CEOs say
Tara Perkins, Grant Robertson, The Globe and Mail
While the drop in Canadian house sales that began in the second half of 2012 is likely to continue, the market is headed for a soft landing rather than a crash, one of the country’s largest real estate agencies and a number of bank CEOs predicted Tuesday.
Their comments came as the latest data suggest that the steep drop in year-over-year home sales persisted through to the end of the year.
“The number of existing homes sold fell by an average of 18.6 per cent year-over-year using a sample that includes Vancouver, Toronto, Ottawa, Calgary, Edmonton, Kitchener, the Fraser Valley, Victoria, Saskatoon and Regina, according to a composite number compiled by Bloomberg,” economists at Bank of Nova Scotia wrote in a research note. The data, they added, are “not pretty.”
But high-profile voices in the banking and real estate sectors suggested that the impact of the sales downturn will not be severe.
“Our expectation is we’ve got this sort of soft-landing scenario on the real estate side,” Royal Bank of Canada CEO Gord Nixon told investors at a conference in Toronto on Tuesday. “We have seen a slowdown in sales and we’ve certainly seen a slowdown in mortgage demand, but price levels are relatively stable.”
Speaking at the same conference, Bank of Montreal CEO Bill Downe said that a drop in house prices is to be expected. “House prices may just stagnate for a couple of years, and that’s the definition of a soft landing,” he said.
Real estate agency Royal LePage is forecasting a mild correction in the coming months. It believes that sales in the first half of the year will be slower than last year, tempering the pace at which prices have been rising. But it is predicting that by the end of 2013, the average national house price will be 1 per cent higher.
Fewer home owners listed their properties late last year as more potential buyers moved to the sidelines, Phil Soper, CEO of Royal LePage, said in a press release. The slowdown in listings kept inventory levels lower, and supported house values, he said.
The real estate agency said that it saw the price of standard two-storey houses rise 4 per cent year-over-year in the fourth quarter, to $390,444, while the national average price of condominiums sold increased 1 per cent to $239,374.
Royal LePage expects the year-over-year declines in sales that characterized the latter part of 2012 to continue. Sales volumes should improve a bit in the third quarter, it said, becoming essentially flat when it comes to year-over-year comparisons, and then show year-over-year growth in the final months of the year.
“With economic fundamentals such as employment levels improving, we expect this cyclical correction to be short-lived,” Mr. Soper said.
Sal Guatieri, senior economist at BMO Nesbitt Burns, told reporters on a conference call Tuesday that a soft landing appears to be under way in most regions of the country in the wake of a decade-long boom.
“We expect it to continue this year, with sales and housing starts moderating further and prices generally stabilizing,” he said, adding that the market will be supported by factors such as moderate job growth and steady immigration. “Most importantly, demand will be supported by continued low interest rates with the Bank of Canada likely on hold for another year,” he said.
On the downside, the market will be restrained by elevated household debt, moderately high valuations, little pent-up demand and, most importantly, tighter mortgage rules, he added.
Royal LePage is predicting the average house price in Vancouver will decline by 3 per cent this year, while most parts of the country will see small price increases. Gains will be larger in Calgary (2.5 per cent) and Regina (4 per cent), it predicts. It expects average prices to rise by 1 per cent in Toronto.
Their comments came as the latest data suggest that the steep drop in year-over-year home sales persisted through to the end of the year.
“The number of existing homes sold fell by an average of 18.6 per cent year-over-year using a sample that includes Vancouver, Toronto, Ottawa, Calgary, Edmonton, Kitchener, the Fraser Valley, Victoria, Saskatoon and Regina, according to a composite number compiled by Bloomberg,” economists at Bank of Nova Scotia wrote in a research note. The data, they added, are “not pretty.”
But high-profile voices in the banking and real estate sectors suggested that the impact of the sales downturn will not be severe.
“Our expectation is we’ve got this sort of soft-landing scenario on the real estate side,” Royal Bank of Canada CEO Gord Nixon told investors at a conference in Toronto on Tuesday. “We have seen a slowdown in sales and we’ve certainly seen a slowdown in mortgage demand, but price levels are relatively stable.”
Speaking at the same conference, Bank of Montreal CEO Bill Downe said that a drop in house prices is to be expected. “House prices may just stagnate for a couple of years, and that’s the definition of a soft landing,” he said.
Real estate agency Royal LePage is forecasting a mild correction in the coming months. It believes that sales in the first half of the year will be slower than last year, tempering the pace at which prices have been rising. But it is predicting that by the end of 2013, the average national house price will be 1 per cent higher.
Fewer home owners listed their properties late last year as more potential buyers moved to the sidelines, Phil Soper, CEO of Royal LePage, said in a press release. The slowdown in listings kept inventory levels lower, and supported house values, he said.
The real estate agency said that it saw the price of standard two-storey houses rise 4 per cent year-over-year in the fourth quarter, to $390,444, while the national average price of condominiums sold increased 1 per cent to $239,374.
Royal LePage expects the year-over-year declines in sales that characterized the latter part of 2012 to continue. Sales volumes should improve a bit in the third quarter, it said, becoming essentially flat when it comes to year-over-year comparisons, and then show year-over-year growth in the final months of the year.
“With economic fundamentals such as employment levels improving, we expect this cyclical correction to be short-lived,” Mr. Soper said.
Sal Guatieri, senior economist at BMO Nesbitt Burns, told reporters on a conference call Tuesday that a soft landing appears to be under way in most regions of the country in the wake of a decade-long boom.
“We expect it to continue this year, with sales and housing starts moderating further and prices generally stabilizing,” he said, adding that the market will be supported by factors such as moderate job growth and steady immigration. “Most importantly, demand will be supported by continued low interest rates with the Bank of Canada likely on hold for another year,” he said.
On the downside, the market will be restrained by elevated household debt, moderately high valuations, little pent-up demand and, most importantly, tighter mortgage rules, he added.
Royal LePage is predicting the average house price in Vancouver will decline by 3 per cent this year, while most parts of the country will see small price increases. Gains will be larger in Calgary (2.5 per cent) and Regina (4 per cent), it predicts. It expects average prices to rise by 1 per cent in Toronto.
What direction are home prices headed? Depends on who you ask
Garry Marr, The Canadian Press
It has become the new mantra of real estate watchers — there’s no crash coming, just a soft landing and an ever-so-minor correction in prices.
It has become the new mantra of real estate watchers — there’s no crash coming, just a soft landing and an ever-so-minor correction in prices.
Speaking to a RBC banking conference in Toronto on Tuesday, the country’s top bankers said they don’t expect a dramatic downturn like one experienced by the United States about five years ago.
The message came through loud and clear from three separate sources Tuesday: a Bank of Montreal roundtable of industry players, a new forecast from one of the country’s largest real estate companies and the head of the country’s largest bank.
But nobody can escape the fact sales are falling fast in the housing sector. In Canada’s most expensive city for housing, the Real Estate Board of Greater Vancouver said in January total sales in 201 were off 22.7% from a year earlier. The decline in Toronto was not as steep but sales were off about 3.8% in 2012 compared to 2011, with the trend picking up steam later in the year.
Prices have remained relatively firm in most parts of the country. Toronto prices ticked up 7% over the past year to an average of $497,298. In Greater Vancouver, the Board’s MLS Home Price Index reached $625,000 in May and has dropped 5.8% since.
David Madani, an economist at Capital Economics and a noted bear who has predicted home prices will decline as much as 25% on average in Canada, says the rhetoric from organized real estate is typical for any housing cycle.
“Look what happened in the United States, people started calling for a soft landing. It’s almost to be expected. It’s the narrative in the boom, bust housing cycle. You can look to other countries, too,” Mr. Madani said. “The industry insiders say ‘don’t worry.’ ”
He sees the dropoff in sales as a standoff between buyers and sellers, and the next phase will see prices cut if people want to move their homes.
It has come down to an argument over how much prices will pull back. Phil Soper, chief executive of LePage, added his voice to the debate Tuesday with a report from his company calling for a “brief, mild correction,” with prices actually rising 1% overall by the end of 2013.
“The silver lining in every real estate market correction is that there is a balance shift. After an extended period of frustrating bidding wars in key, supply-constrained regions, and spring markets characterized by price increases that make financial planning difficult, Canadian homebuyers will see momentum shift in their favour this spring. They should be met with more choice — and stable prices,” he said.
At the BMO conference, the bank’s senior economist Sal Guatieri said much of what is happening in the market was to be expected and generally in line with past performances.
“In most regions demand is down from last year but remains healthy at near the past decade norm,” said Mr. Guatieri. “After a decade-long boom, the so-called soft landing appears to be underway in most regions. We expect it to continue.”
Gord Nixon, chief executive of Royal Bank joined the fray at an RBC banking conference in Toronto, telling audience members the real estate market is relatively solid in Canada. “We have seen a slowdown in sales and we’ve certainly seen a slowdown in mortgage demand but price levels are relatively stable,” he added, noting that by most metrics — other than debt-to-disposable-income — indicators are in line with historic standards. “So our expectation is we’ve got this sort of soft landing scenario on the real estate side.”
At the BMO roundtable, the message was that markets in Alberta and Saskatchewan could buck the national trend, driven by growth in both provinces.
“Alberta is the talk of the country, planning on leading the country in economic growth. Of course, it’s been buoyed by our strong oil and gas industry,” said Charron Ungar, president of the Canadian Home Builders’ Association, Calgary Region.
With files
from The Canadian Press
Sunday 13 January 2013
Alternative Down Payment Sources
Robert McLister, Canadian Mortgage Trends
This week’s Globe column looks at ways people scrape together down payments when they don’t have enough non-registered savings of their own.
It’s still perplexing that regulators let homebuyers borrow their 5% down payment from high interest sources, yet the government bans lower-interest cash-back down payment mortgages and 100% financing.
That’s not to say that borrowing a down payment is advisable (it isn’t in most cases). It’s more a statement that there is regulatory inconsistency here, which is peculiar in a hyper risk-sensitive lending environment.
CANADIANS CAN STILL BUY A HOME WITHOUT SAVING THIER PENNIES
Purchasing a home without your own down payment is often risky. One exception is when a borrower is well-qualified (apart from the down payment), has enough potential resources to withstand a loss of income and falling home prices, and is better off owning than renting. But exceptions are just that, and not the rule.
Young people use alternative down payment sources more often than most. Why? The main reason is a lack of savings. At a time when the average national home price has jumped to $356,687, the Canadian Association of Accredited Mortgage Professionals finds that more than one in four renters have less than $5,000 saved for a down payment. Yet, many of these folks are dead set on owning a home, so they end up using one of the down payment methods listed below.
Borrowing from other credit sources
When buying a home, you generally need at least 5 per cent of the purchase price as a down payment. Ottawa prohibits you from borrowing that 5 per cent from your mortgage lender if that lender is a bank or federal trust company.
Meanwhile, you’re free to borrow your down payment from a line of credit, personal loan or even a credit card. That’s right, if you’re creditworthy you can throw your down payment on a VISA at 20 per cent interest. Mind you, not all lenders allow this and the ones that do check that you can afford the extra debt payment.
One obvious problem with borrowing your down payment is the higher interest cost. Even if you use a line of credit, the interest rate on your down payment loan can be much higher than a regular mortgage, or have a riskier variable rate.
“Borrowing a down payment from less suitable sources is a potential issue,” acknowledges Gord McCallum, broker and president of First Foundation Inc. “Often times, with new mortgage regulations there can be unintended consequences that are worse than the problem they’re purported to solve, and this may be one of them.”
Getting a cash-back down payment mortgage
In many provinces, lenders that aren’t federally regulated (like credit unions) can still offer cash-back down payment mortgages. The few that actually do will give you 5 per cent cash to use for your down payment. You then need to cough up only your closing costs, which include legal and inspection fees, the land transfer tax and so on.
Not surprisingly, the interest rate on cash-back mortgages is well above a normal mortgage. But when you factor in the “free” cash, the overall borrowing cost isn’t that horrible. The main downside of a cash-back mortgage is that you have little equity cushion if home prices fall and you need to sell. And if you break the mortgage early, your lender can take back much or all of the cash it gave you.
Going forward, the days of cash-back down payment mortgages may be numbered. There is speculation that they’ll be eliminated in 2013–by either mortgage insurers, provincial regulators or both. For now, however, a handful of credit unions still offer them to people with strong credit, with Ontario-based Meridian Credit Union being the biggest such lender.
Using a gifted down payment
If you’re a young home buyer with a generous relative, you may be lucky enough to get your down payment as a gift. Most lenders will consider a gifted down payment if the donor is a parent, grandparent or sibling.
Unfortunately, while not an epidemic problem, it’s no secret that a small number of borrowers fraudulently claim their down payments as “gifts,” even though they fully intend to repay the money. That raises the risk level for lenders because the borrower’s debt obligations increase. Of course, both the borrower and giftor must attest in writing to gifted funds being non-repayable, but that is hard to police after closing.
RRSP Home Buyers Plan (HBP)
First-time buyers can borrow up to $25,000 from their RRSP as a down payment. But this is a very different kind of loan, for three reasons:
1. You’re borrowing from your own retirement savings, as opposed to a third party.
2. You don’t have to start repaying the loan until the second year after the year you make your withdrawal.
3. Even though Revenue Canada wants the funds paid back in 15 annual instalments, lenders don’t include those repayments in a borrower’s debt calculations. As a result, some people get approved for a mortgage only to find themselves caught in an annual cash crunch because they didn’t budget for their HBP payment.
The RRSP HBP comes with other perils. By draining your retirement savings, you risk losing years of tax-deferred investment gains. That’s a decision that some will later regret.
Moreover, any instalments that aren’t paid back on time are taxed as income in that year. And as many as one-quarter of HBP participants have missed or underpaid their instalments in the past.
Special lender and government programs
Various provinces and municipalities provide down payment assistance grants. These programs are typically for people with low or moderate income. Despite these borrowers being higher risk, in some cases, they’re permitted to buy a home with nothing down.
There are also specialized programs at individual lenders. For example, Canada’s biggest credit union, Vancity, currently finances an affordable condo project in Vancouver whereby it lends 90 per cent of the purchase price while the developer provides a 10 per cent second mortgage with no interest and no payments.
All of these down payment alternatives have one thing in common. They all come with some degree of added risk. It’s curious how Ottawa encourages people to have their own skin in the game, yet sanctions various substitutes to the traditional 5 per cent down payment.
If you do use one of these down payment alternatives, remember these two things: Buying a home without your own cash is not a decision to take lightly. And qualifying for a mortgage doesn’t mean can successfully carry one.
Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at VERICO intelliMortgage. You can also follow him on twitter at @CdnMortgageNews
This week’s Globe column looks at ways people scrape together down payments when they don’t have enough non-registered savings of their own.
It’s still perplexing that regulators let homebuyers borrow their 5% down payment from high interest sources, yet the government bans lower-interest cash-back down payment mortgages and 100% financing.
That’s not to say that borrowing a down payment is advisable (it isn’t in most cases). It’s more a statement that there is regulatory inconsistency here, which is peculiar in a hyper risk-sensitive lending environment.
CANADIANS CAN STILL BUY A HOME WITHOUT SAVING THIER PENNIES
It would seem that regulators want to dissuade Canadians from buying homes with nothing down. Yet despite all of the recent changes, buyers can still get into the real estate market with little cash on hand.
Ottawa did away with Canada Mortgage and Housing Corp .-insured 100 per cent financing back in 2008. Home buyers with few savings searching for an alternative were left with cash-back down payment mortgages. (That’s where a lender gives you your 5 per cent required down payment, in exchange for a higher rate.) But those didn’t last long because in 2012, regulators barred banks from offering cash back for down payments.
Ottawa did away with Canada Mortgage and Housing Corp .-insured 100 per cent financing back in 2008. Home buyers with few savings searching for an alternative were left with cash-back down payment mortgages. (That’s where a lender gives you your 5 per cent required down payment, in exchange for a higher rate.) But those didn’t last long because in 2012, regulators barred banks from offering cash back for down payments.
Purchasing a home without your own down payment is often risky. One exception is when a borrower is well-qualified (apart from the down payment), has enough potential resources to withstand a loss of income and falling home prices, and is better off owning than renting. But exceptions are just that, and not the rule.
Young people use alternative down payment sources more often than most. Why? The main reason is a lack of savings. At a time when the average national home price has jumped to $356,687, the Canadian Association of Accredited Mortgage Professionals finds that more than one in four renters have less than $5,000 saved for a down payment. Yet, many of these folks are dead set on owning a home, so they end up using one of the down payment methods listed below.
Borrowing from other credit sources
When buying a home, you generally need at least 5 per cent of the purchase price as a down payment. Ottawa prohibits you from borrowing that 5 per cent from your mortgage lender if that lender is a bank or federal trust company.
Meanwhile, you’re free to borrow your down payment from a line of credit, personal loan or even a credit card. That’s right, if you’re creditworthy you can throw your down payment on a VISA at 20 per cent interest. Mind you, not all lenders allow this and the ones that do check that you can afford the extra debt payment.
One obvious problem with borrowing your down payment is the higher interest cost. Even if you use a line of credit, the interest rate on your down payment loan can be much higher than a regular mortgage, or have a riskier variable rate.
“Borrowing a down payment from less suitable sources is a potential issue,” acknowledges Gord McCallum, broker and president of First Foundation Inc. “Often times, with new mortgage regulations there can be unintended consequences that are worse than the problem they’re purported to solve, and this may be one of them.”
Getting a cash-back down payment mortgage
In many provinces, lenders that aren’t federally regulated (like credit unions) can still offer cash-back down payment mortgages. The few that actually do will give you 5 per cent cash to use for your down payment. You then need to cough up only your closing costs, which include legal and inspection fees, the land transfer tax and so on.
Not surprisingly, the interest rate on cash-back mortgages is well above a normal mortgage. But when you factor in the “free” cash, the overall borrowing cost isn’t that horrible. The main downside of a cash-back mortgage is that you have little equity cushion if home prices fall and you need to sell. And if you break the mortgage early, your lender can take back much or all of the cash it gave you.
Going forward, the days of cash-back down payment mortgages may be numbered. There is speculation that they’ll be eliminated in 2013–by either mortgage insurers, provincial regulators or both. For now, however, a handful of credit unions still offer them to people with strong credit, with Ontario-based Meridian Credit Union being the biggest such lender.
Using a gifted down payment
If you’re a young home buyer with a generous relative, you may be lucky enough to get your down payment as a gift. Most lenders will consider a gifted down payment if the donor is a parent, grandparent or sibling.
Unfortunately, while not an epidemic problem, it’s no secret that a small number of borrowers fraudulently claim their down payments as “gifts,” even though they fully intend to repay the money. That raises the risk level for lenders because the borrower’s debt obligations increase. Of course, both the borrower and giftor must attest in writing to gifted funds being non-repayable, but that is hard to police after closing.
RRSP Home Buyers Plan (HBP)
First-time buyers can borrow up to $25,000 from their RRSP as a down payment. But this is a very different kind of loan, for three reasons:
1. You’re borrowing from your own retirement savings, as opposed to a third party.
2. You don’t have to start repaying the loan until the second year after the year you make your withdrawal.
3. Even though Revenue Canada wants the funds paid back in 15 annual instalments, lenders don’t include those repayments in a borrower’s debt calculations. As a result, some people get approved for a mortgage only to find themselves caught in an annual cash crunch because they didn’t budget for their HBP payment.
The RRSP HBP comes with other perils. By draining your retirement savings, you risk losing years of tax-deferred investment gains. That’s a decision that some will later regret.
Moreover, any instalments that aren’t paid back on time are taxed as income in that year. And as many as one-quarter of HBP participants have missed or underpaid their instalments in the past.
Special lender and government programs
Various provinces and municipalities provide down payment assistance grants. These programs are typically for people with low or moderate income. Despite these borrowers being higher risk, in some cases, they’re permitted to buy a home with nothing down.
There are also specialized programs at individual lenders. For example, Canada’s biggest credit union, Vancity, currently finances an affordable condo project in Vancouver whereby it lends 90 per cent of the purchase price while the developer provides a 10 per cent second mortgage with no interest and no payments.
All of these down payment alternatives have one thing in common. They all come with some degree of added risk. It’s curious how Ottawa encourages people to have their own skin in the game, yet sanctions various substitutes to the traditional 5 per cent down payment.
If you do use one of these down payment alternatives, remember these two things: Buying a home without your own cash is not a decision to take lightly. And qualifying for a mortgage doesn’t mean can successfully carry one.
Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at VERICO intelliMortgage. You can also follow him on twitter at @CdnMortgageNews
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