Shop Your Renewal

Rob McLister, CMT
www.CanadianMortgageTrends.com


Lenders make a lot more money when they renew your mortgage than on your initial term.

That’s partly because they don’t have to compensate anyone for referring you (or compensate them as much). But it’s also because many renewers don’t comparison shop as much or negotiate as hard.

According to a recent Maritz/CAAMP survey, only 56% of borrowers negotiated their mortgage rate at renewal. A remarkable 4 in 10 took the first rate their bank offered.

How good do you think that rate was?

It sure as buttercups wasn’t the best the bank could do.

A while back the Bank of Canada found that borrowers who don’t comparison shop pay rate markups that are more than double those paid by comparison shoppers.

And lenders’ client retention teams are wise to this. So they employ strategies like graduated rate discounts, which means they offer you an okay rate to start, and if you complain or show them better competing offers, they get progressively more competitive.

That’s why trusting your lender to offer a fabulous rate up front is the single worst thing you can do at renewal.

Get Second Opinions

One of the easiest ways to protect yourself is to compare rates with a broker. Unfortunately, only 28% of mortgage holders “definitely” plan to consult a mortgage broker at renewal, according to Maritz research.

But whether you consult a broker or call up multiple banks and credit unions, shopping around your renewal is mandatory. That challenge is convincing bank customers of that. They tend to be a loyal sort. In fact, bank clients are more than 50% more likely to use the same lender when renegotiating or renewing their mortgage than broker clients.

That’s largely because brokers open people’s eyes to better alternatives. At any given time, one of dozens of broker lenders may have rate promotions or mortgage features that save a borrower hundreds, or even thousands, in interest.

Unfortunately, broker clients also switch lenders more often because a minority of less ethical brokers churn their books—i.e., convince borrowers to switch lenders primarily to generate another commission. (Naturally, your success with any advice provider depends on their integrity.)

It Takes Effort

When your mortgage maturity comes around, don’t be satisfied with your lender’s first offer. If you’re well qualified and really want the best deal, do this instead:

1. Check the major rate comparison websites.
2. Call the non-broker banks. (RBC, BMO, etc.)
3. Call a broker, check their broker lender offerings, share your own findings and ask them to compare the pros/cons of the best deals you’ve found.
4. Compare the above to your existing lender’s offer (including all switch costs, if any).
5. Pick the best overall deal (which isn’t necessarily the lowest rate…see this).

These steps should easily shave one-or two-tenths of a percentage point off your rate…or more. A 10 basis point rate savings on a $200,000 mortgage puts $950 back in your jeans over 60 months.
You’ll also improve your odds of finding a mortgage with the optimal term and fewer restrictions. And those two points always save you more than any small rate difference.

Newly-wed home buying mistakes

By Deanne Gage, BrighterLife.ca


These days, getting hitched and buying a home seem to go hand in hand. But if you want your wedded bliss to last, avoid these three classic mistakes.

Top three mistakes newlyweds make in their real estate purchases:

1. Focusing on the interest rate

Who can resist an ad that promises you’ll only pay 2.99% over five years for a fixed-rate mortgage? Very few, it seems. But the lowest interest rate doesn’t necessarily mean the best mortgage for your situation, says Angela Calla, an accredited mortgage professional with Dominion Lending Centres in Vancouver and host of radio’s The Mortgage Show. She says such a mortgage likely has restrictions and penalties. Younger couples may need a more flexible mortgage — one that allows them to pay more when they have more and less when a spouse is on maternity leave or facing job loss, for instance.

While the payments required to carry a hefty mortgage are lower than, say, a decade ago, Calla says the strategy should be to repay the debt as quickly as possible. That means paying more money towards the mortgage than you technically need to. This strategy will pay off greatly when interest rates return to more normal levels. “Today’s interest rates are a gift and young couples have a great opportunity to pay off a significant part of their mortgage,” she adds.

But are they doing this? By and large, the answer is no. Many newlyweds tend to lack an overall plan for paying off the mortgage, notes David Field, a financial advisor with WSC Insurance Group in Oakville, Ont.

2. Not talking about their finances

Picture it: A young couple goes out for a Sunday drive and spots a new housing development in a trendy area. They see the open house signs and decide to take a quick look, since they’re in the neighbourhood anyway. Presto! They’ve found their dream starter home. Calla hears a version of this scenario more often than she’d like. The problem is, couples haven’t run the numbers ahead of time. “A lot of times, they don’t take the time to get preapproved for a mortgage before looking. They don’t even understand about each other’s credit situation,” she says. “One of them may not be in a financial position to even purchase a home. That can put a damper on their plans moving forward.”

3. Not factoring in other expenses

Young couples definitely know the amounts of their mortgage payments for the next three to five years. But when Field asks his newlywed clients about their property taxes, home insurance policy premiums and how much they are setting aside for emergencies, details get scarce. Many couples’ budgets are more mortgage-heavy than they should be. But taxes and insurance can rise significantly each year, and that translates into a lack of cash flow.

The lesson here? Make sure you are saving properly for retirement and emergencies, then see how comfortably your mortgage, utilities and property taxes fit into what’s left over. “If your cash flow is too tight, if something happens like losing your job or having a new baby, you are really constrained,” says Field. “A new marriage has its ups and downs as it is; adding money problems to the mix really affects the marriage.”

Can you handle higher interest rates?

Garry Marr
Financial Post


It may be stressful to think about it but higher mortgage rates are on the horizon.

The questions for homeowners is whether they can handle a hike in interest rates.

Bank of Montreal says consumers should stress test their mortgages a couple of ways, considering higher interest rates and a shorter amortization period.

Canadians new to the home market can be particularly vulnerable to changes in the mortgage market.

“First-time buyers should stress-test their mortgage to ensure they are well financially prepared for home ownership and a potential upswing in interest rates, not only to manage costs but also to pay off their mortgage as soon as possible,” said Frances Hinojosa, a mortgage expert with Bank of Montreal.
 While new governor Stephen Poloz did not raise the overnight lending rate, the Bank of Canada did indicate this past week the long-term goal is still a “gradual normalization” of rates. The overnight lending rate, which prime tracks, has an immediate impact on variable rate mortgage.

Consumers with long-term loans may already be feeling the squeeze. If you are coming up for renewal, it may be time to work in higher rates into your budget.

The fixed-rate five-year closed mortgage, which was once as low as 2.99%, has risen steadily in the past few weeks and is closer to 3.5% at most banks. It’s only a different of 50 basis points but it means a larger payment.

On a $500,000 mortgage with a 25-year amortization, at 3% your monthly payment would be $2,366.23 and you would pay $69,346.66 in interest over a five-year term. Take that same mortgage and raise the rate to 3.5% and the monthly payment jumps to $2,496.36 and the interest over the term reaches $81,180.96.

The real question might be what are you going to do if rates rise to 5%. That $500,000 mortgage with a 25-year amortization would now cost you $2,908.03 and the total interest cost over the five-year term would jump to $117,018.99.

“It remains vital for Canadians, particularly homeowners, to be prepared for for the inevitable rise in interest rates,” said Ms. Hinojosa, adding Canadians should also consider shorter amortization periods.

It’s been just over a year since federal government cracked on the maximum length allowed for amortization for insured mortgages backed by taxpayers. The maximum length is now 25 years, down from a peak of 40 years. A longer amortization period lowers monthly payments and allows consumers to qualify for a larger loan.

That $500,000 mortgage with a 5% rate would become even more burdensome if the amortization length was cut to say 20 years — not something Ottawa is currently considering though.

With a 20 year amortization, the monthly payment would jump to $3,285.63. The good news is the interest over the five-year term would drop to $114,029.48

gmarr@nationalpost.com
Financial Post

David Rosenberg: All’s fine on the Canadian homefront

Pamela Heaven
Financial Post

It looks like the much-maligned Canadian housing market is way more resilient than those Canada-doomsayers would believe

There’s no sign of a housing collapse in Canada, Gluskin-Sheff’s chief economist says.

David Rosenberg, the latest pundit to weigh in on the hard versus soft landing debate, says Canada’s housing market has almost recouped all the losses brought on by Ottawa tightening the mortgage rules in 2012.

Last year the federal government, concerned about Canadians’ rising debt levels, cut the maximum amortization period for a government-insured mortgage to 25 years from 30 years and capped home equity loans at a maximum of 80% of a property’s value — down from 85%.  Economists at the time expected the tightening to shave 10% to 20% off property prices, and cut into Canada’s GDP.

“It looks like the much-maligned Canadian housing market is way more resilient than those Canada-doomsayers would believe,” Rosenberg wrote in his morning briefing Tuesday.

The economist said existing home sales shot up “an impressive” 6.4% in the second quarter, the strongest performance since the end of 2010.

Existing home sales in June strengthened across the country, including a 6.4% leap in Vancouver, the market hardest hit by the slowdown. Even Toronto, ” a notable under performer,” saw sales climb 1%, he said.

“Bottom line: The Canadian housing market is not collapsing, but rather stabilizing after achieving the government-induced soft landing,” said Rosenberg.

Buying a house: Why the numbers 4, 13 and 8 matter

By: Mark Weisleder Real Estate, Special to the Star


Numbers mean different things in some cultures. The wrong one can lower a home’s value by up to $35,000.

What is it about the number 4?
 

Growing up, I quickly noticed that the house numbers on the street went from 11 to 15. There was no number 13. Ancient superstition. Airlines do not have a row 13. The only reference I had to number 4 was Bobby Orr on the Boston Bruins. He made that number famous.
 

How times have changed. Now the number 4, which sounds like the word “death” in Cantonese and Mandarin, is considered very unlucky not only in the Chinese culture, but also in Korean, Vietnamese and Japanese communities. And real estate agents will tell you that in some areas in the GTA, this can lower a home’s value by up to $35,000.
 

New condominium developers are no longer just skipping the 13th floor in a 30 story building; they also skip floor numbers 4, 14 and 24 as well.
 

In Hong Kong, some high rises go from floor 39 to floor 50, to skip any reference to a 4 in the floor description.
 

Richmond Hill council voted on May 15. 2013 to avoid using the number 4 in any new addresses, after residents complained.
 

Many owners are making applications to change their number from 4 to 2, when there is no number 2 already on the street. If there is a number 2, you can apply to change your number to for example, 2B, but only if you get the permission of the owner of house number 2. For example, in Toronto, coincidentally, for a little more than $400, you can apply to change your house number.
 

In Mississauga, the amount is $650 plus HST. You can find information on how to apply at the website: http://www.mississauga.ca/portal/helpfeedback/faq?paf_gear_id=12000021&itemId=100400221n&action=faqAnswer
 

On the other hand, the number 8 in Chinese is considered lucky as it sounds like prosperity. It also has a symmetrical shape which implies perfect balance. Even better if your house number is 88. Remember that the Chinese Olympics started on 08 08, 2008. It was no co-incidence.
 

I doubt that a seller has any obligation to disclose whether their house number may cause a problem later with the re-sale of the home. This is another reason why you need to speak to the neighbours and research any community before buying any home, to learn if there are any local customs or superstitions that you should be familiar with, so you do not get any unwanted surprises later.
 

We now live in a very multicultural country. Numbers matter to a growing group of potential buyers. Be aware of this before you decide to buy any home.

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

Not understanding what insurance covers can cost you

By Linda Nguyen

The Canadian Press

The Globe and Mail

 

 

When Peter Meadows returned to his Calgary home after the recent floods, there was so much water in his basement that it reached the windows.

The water had gushed in from a drain in the floor and destroyed everything from the couches to the drywall.

Meadows estimates the bill will be anywhere from $60,000 to $100,000 to fix his basement, replace his belongings and buy a new furnace.

And it’s unclear if the insurance company is going to pay up.

As many flood victims in Alberta found out last month and Toronto residents discovered earlier this week, most insurance policies do not cover damages caused by flooding when water comes into homes through doors or windows or what is called overland flooding.

On Monday, a record rainfall led to flooded highways, streets and homes throughout the Toronto area. The water resulted in cancelled flights and public transit, bringing the city to a near-standstill.

Steve Kee with the Insurance Bureau of Canada said the unfortunate reality is most people don’t know what their insurance covers.

“In general, it’s important, no matter what you’re insured for — your car, your home or your business — that you’re aware of what’s inside that policy,” Kee said.

“If you don’t understand something... ask questions of your insurance representative.”

He said it’s important to divulge any special circumstances that you may think will have an effect on your insurance policy.

For instance, check to see if your standard home insurance will cover the daycare you operate out of your house or the woodworking shop you have set up in your garage.

The bureau suggests people should review their policies at least once a year, to determine if their situations have changed, or whether they have enough or too much coverage.

“Insurance policies are not just about signing it back and paying the deductible,” Kee said.

He also cautioned that insurance policies can differ by company, and paying less is not always a good deal if you’re not getting the coverage that you need.

“Shop around. People should be looking around if they’re not happy with what they’re paying,” he said.

Fraser Lyle, the chairman of the Insurance Brokers Association of Canada, said whoever sells you your insurance policy is also responsible for telling you what exactly you’re buying.

“(Brokers) have to understand how the coverage works and have to explain in a very simplified way what the exposure may be,” he said.

“Being an active listener is key. The information that you’re sharing is for the benefit of the customer.”

Meadows said when he bought his house three months ago, he shopped around for a policy that included sewage flooding to cover damages if his pipes burst.

But after filing his claim, he found that his policy may not cover the most recent damages because even though the water may have come up through the drain, it was likely caused by the overland flooding.

“When I was setting up the policy, I specifically wanted coverage for the basement,” said the 31-year-old. “I felt like I asked the right questions.”

He said he doesn’t fault the company, but feels like the language in insurance policies could have been a bit clearer.

Meadows’ claim is still being reviewed, and a decision about whether he qualifies for coverage is pending.

Renegotiating your mortgage agreement

TMG The Mortgage Group


It’s a familiar story. You buy a house and lock into an interest rate for a five-year mortgage term. Then something changes in your life midway through the term and the current mortgage doesn’t meet your needs. Or mortgage rates have gone down substantially and you would like some interest rate relief, so you consider renegotiating the mortgage agreement. However, there will be a cost and that cost will most likely determine whether you renegotiate or not.

The first step is to decide what your new needs are. Do you have to move because you’ve been transferred? Do you simply want to renegotiate to get a lower interest rate to ease your monthly payment? Do you need to make some significant home improvements? Have you accumulated debt and would like to consolidate?

If you opted for a variable rate mortgage, the prepayment penalty may be the least costly. If, however, you opted for a fixed rate, the calculation is a bit more complicated. And different lenders offer different terms and conditions.

Here’s how it works. There are two types of mortgages – fixed and variable-rate mortgages.  For the most part, variable-rate mortgage charges are three months interest. Fixed-rate mortgages have different rules. They use the interest rate differential. Different lenders have different ways of making this calculation but basically it’s the lost interes,t calculated at the current contract rate, minus the market rate at the time the penalty is calculated, for the remaining term.

If at the time of the calculation, the market rate is higher than your contracted rate, then the lender will only charge three months interest penalty. After all, the lender stands to make more money at the higher rate.  However, if the rate is lower, then you get hit with the rate difference.

Some lenders are pretty clear with their calculations, others however are not.  You’ve no doubt heard about penalty fees in the thousands of dollars. Here’s how that happens. Let’s say you have a contracted five-year rate at 2.99% but you want to break it in the second year.  Some lenders won’t use that rate to calculate the differential but will use their posted rate, which is substantially higher.  A posted rate of 5.14 per cent, for example, would create an interest differential of 2.15 per cent. If your mortgage is in the $300,000 range, then the penalty will be in the $10,000 range. That’s a hefty sum.

There are also options to help reduce those prepayment charges. Many mortgage agreements allow you to prepay a certain amount without triggering a charge. You might consider prepaying a portion of the mortgage before renegotiating so your charge is calculated on the balance. But beware; some lenders have rules on how close to the date of renegotiation you can make those prepayments.

If you’re renegotiating because you’re moving, you can avoid prepayment charges by porting the mortgage, which means you take your existing interest rate, terms and conditions to your new home.

If you’re renegotiating to take advantage of lower interest rates, some lenders will allow you to blend- and-extend the mortgage until the end of the term. Your old interest rate gets blended with the new term’s rate. You will probably get charged an administration fee.

There may be benefits over the long term to renegotiating your existing mortgage if it fits with your overall financial goals. It’s always a good idea to get advice from a mortgage broker who can offer options and solutions.

How can I pay down my credit card debt?

RBC Royal Bank of Canada


There may be times in your life when your credit card debt becomes overwhelming and seems to either be staying the same, or increasing. If now is one of those times, you have already made the first step towards making a positive change, and we're here to help.

Simple steps to pay down your debt

There are some simple ways to start paying down your credit card debt, and help ease your mind... and your pocketbook.

As a first step, it's a good idea to create a monthly budget and keep track of your spending. Don't use your credit card to pay for things that are not in your budget; use your card wisely and be careful not to use it to cover gaps in your finances.

Next, pay more than your minimum payment. When you just pay the minimum, you're only paying the interest, so you'll never get ahead of your credit card debt. With help from your monthly budget, determine how much money you can pay towards your credit card balance and stick to that commitment.

Then take a look at all of your credit cards, and compare their interest rates. Pay more to the one with the highest interest rate first, while continuing to pay at least the minimum monthly payment on the others. This will reduce your overall interest costs.

Lower your interest costs

Another good way to lower your interest costs is to consolidate your balances to one card by taking advantage of a low-rate balance transfer offer, or by moving your balances to a low rate credit card. With all of your debt in one place, it will be easier to track your total balance. This makes it easier to manage and pay off, especially with just one bill to pay at the end of the month.

The importance of making your payments

Managing your credit wisely, including making at least your minimum payments on time every month, will help you build a healthy credit rating over time. So if you're planning to buy a house or a car in the future, using your credit card responsibly now will help you qualify for larger loans down the road.

And when you do pay off your credit card debt, make sure you keep up the good spending and payment habits that helped you get to this state. Pay as much of your bill as you can on time every month, and use your credit card to pay for purchases that are within your budget.

Your credit card is a safe, convenient, and often rewarding way to pay, and can help you budget, track expenses and manage your cash flow. So use your credit card, but use it wisely.

The soft-landing squeeze: Ottawa’s mortgage fixes one year later

JEFF GRAY, THANDIWE VELA AND TIM KILADZE

The Globe and Mail

 

Jonathan Coe is anxious to get out of his west-end Toronto apartment and into his first house, but that dream was put on hold again last year when the federal government changed the rules.

Seun Olowolafe, on the other hand, who is articling now, plans to move out of his parents' Toronto-area home and buy a three-storey loft while mortgage rates, though rising, are still low. His brother is helping to lock him in with a mortgage broker, and the property will be ready next year.

Such is the nature of Canada's housing market, which cooled over the past year as new mortgage rules knocked out many potential buyers, but, amid low rates and a stronger employment outlook, remains attractive to those who can afford it.

The measures brought in by Finance Minister Jim Flaherty, exactly one year ago Tuesday, were designed to slow the residential real estate market and head off a crash. The measures essentially eliminated the 30-year mortgage, contributing to a cooling market and rippling through to the country's banks.

Those changes have been praised for preventing a bubble, though some argue the market was already flattening, and could be in for a harder-than-expected landing when interest rates rise.

Mr. Coe, a self-employed website developer, is almost 40 and single, and wants his own home. He has not been completely thrown out of the game just yet, however, and is once again researching the market and talking to an agent.

"I'm finding that what's in my price range when I look is either really cramped one-bedroom condos or studio spaces that I don't find very appealing," Mr. Coe said.

"I would rather wait and save and purchase a larger space, and I'm now open to partnering with somebody. If you can combine the mortgage power of a couple of people or with an investor with history, then all of a sudden you are able to look at properties that are listed for maybe the $650,000-to-$800,000 range. I think if I was to get into a house, that's probably the only way it's going to happen. Either that or I'll have to find and marry a rich girl."

It is potential buyers like Mr. Coe who were pushed out of what had been a red-hot market, partly by Mr. Flaherty's tightening of the rules.

The measures made 30-year mortgages ineligible for basic, mandatory mortgage insurance, reducing the maximum amortization period to 25 years. Any mortgage involving a down payment of less than 20 per cent (so called high loan-to-value mortgages) must be insured, meaning Mr. Flaherty's move priced many lower-income first-time buyers out of the market. Bank of Nova Scotia estimates the measures reduced the pool of home buyers by 10 per cent.

Douglas Porter, chief economist at Bank of Montreal, said the changes have so far had the desired effect of engineering a soft landing for the housing market. But extremely low interest rates offset the move.

"It definitely softened the blow. I think there's no question that the change in the rules did take some serious steam out of sales," Mr. Porter said. "But it looks in recent months that the market had gradually absorbed that change in rules and was actually beginning to firm again."

Will Dunning, chief economist for the Canadian Association of Accredited Mortgage Professionals, argues that the market was already slowing before Mr. Flaherty's tightening. He says the current buoyancy - with what he predicts will be "surprisingly high" sales numbers next week from the Canadian Real Estate Association - only reflects buyers rushing in to the market before mortgage rates shoot upward.

"What's going to be more interesting is what happens after that rush ends," Mr. Dunning said. "Are we going to a reassertion of the slowdown we've had over the past year?"

The slowdown in home sales was felt by the banks, which account for over 70 per cent of the residential mortgage market. Before the federal government acted, the banks' mortgage books were growing handsomely. However, their latest sets of financial results, from May, show that new mortgage clients were harder to come by.

Some banks lowered their mortgage rates earlier this year and enticed customers with discount deals south of 3 per cent. Banks could afford the fire-sale rates because residential mortgages are priced off a spread over the government's five-year bond yield, which dropped to just 1.15 per cent this spring.

Now the tide is turning, with yields rising. The five-year Canada bond now yields 1.8 per cent, and that has forced banks to jack up rates.

Canada Mortgage and Housing Corp. says it expects housing sales to slow this year but increase in 2014, with price increases at or below inflation.

Dianne Usher, president of the Toronto Real Estate Board, says first-time buyers are still finding their way into the city's expensive real estate market. More boomer parents are helping with down payments, she said, and some buyers are deciding to go with smaller homes, in less pricey areas: "I'm seeing them become a little bit more creative," she said. "... It just got people thinking again, and it got people being a little more typical Canadian cautious. And that's not a bad thing."

David Rosenberg: All’s fine on the Canadian homefront

Pamela Heaven
The Financial Post

It looks like the much-maligned Canadian housing market is way more resilient than those Canada-doomsayers would believe

There’s no sign of a housing collapse in Canada, Gluskin-Sheff’s chief economist says.

David Rosenberg, the latest pundit to weigh in on the hard versus soft landing debate, says Canada’s housing market has almost recouped all the losses brought on by Ottawa tightening the mortgage rules in 2012.
Last year the federal government, concerned about Canadians’ rising debt levels, cut the maximum amortization period for a government-insured mortgage to 25 years from 30 years and capped home equity loans at a maximum of 80% of a property’s value — down from 85%.  Economists at the time expected the tightening to shave 10% to 20% off property prices, and cut into Canada’s GDP.

“It looks like the much-maligned Canadian housing market is way more resilient than those Canada-doomsayers would believe,” Rosenberg wrote in his morning briefing Tuesday.

The economist said existing home sales shot up “an impressive” 6.4% in the second quarter, the strongest performance since the end of 2010.

Existing home sales in June strengthened across the country, including a 6.4% leap in Vancouver, the market hardest hit by the slowdown. Even Toronto, ” a notable under performer,” saw sales climb 1%, he said.

“Bottom line: The Canadian housing market is not collapsing, but rather stabilizing after achieving the government-induced soft landing,” said Rosenberg.

Poloz could surprise with first policy decision by pushing back rate rise

KEVIN CARMICHAEL

The Globe and Mail

 

 

Canada’s central bank could surprise financial markets this week and signal a longer period of ultra-low interest rates, as exports languish and executives display little enthusiasm for spending their excess profits.

Bay Street’s expectations for new Bank of Canada Governor Stephen Poloz’s first policy decision on Wednesday are muted. The economy continues to muddle along, and Mr. Poloz has revealed little about how he will seek to influence policy, making predictions difficult.

“On the nuts and bolts of the decision – keeping the target rate at 1 per cent and maintaining the ‘eventual’ hiking bias – we are unlikely to see any differences,” Mark Chandler, head of Canadian fixed-income strategy at RBC Dominion Securities in Toronto, wrote in a report last week.

Whatever he does, Mr. Poloz will be competing for attention. In London, the Bank of England will release the minutes of Mark Carney’s first policy meeting as governor. Later, Federal Reserve chairman Ben Bernanke will make his first of two appearances on Capitol Hill this week. Mr. Bernanke still will be sparring with lawmakers when Mr. Poloz holds a press conference in Ottawa to explain the Bank of Canada’s latest thinking.

Mr. Poloz easily could get lost in the mix. But that’s not a certainty. It’s possible to imagine a scenario in which the Bank of Canada makes some noise by pushing out the timing of an eventual interest-rate increase. The reason: dimmer short-term economic prospects are preventing the lift-off that the central bank has been anticipating since last year.

Conventional wisdom is that Canada’s central bankers will raise the benchmark interest rate in the later part of 2014, when it will have been frozen at 1 per cent for about four years.

In the spring, the Bank of Canada estimated that the output gap – the difference between actual gross domestic product and what policy makers think the economy can produce without stoking inflation – would close around the middle of 2015.

Since interest-rate changes affect the economy with a lag, the central bank likely will begin raising borrowing costs before the output gap closes. Hence the guesses that the Bank of Canada will lift its benchmark rate in the second half of 2014.

It would be a surprise if the Bank of Canada scrapped its guidance that the benchmark rate eventually is going higher. Central bankers the world over are worried that their aggressive stimulus measures are inflating bubbles. The Bank of Canada’s warning of higher rates is a studied attempt to contain irrational exuberance.

More plausible, if still a long shot, would be a signal this week that the central bank is prepared to follow the Federal Reserve and wait until 2015 to raise its benchmark interest rate.

In June, Mr. Poloz told reporters that the Bank of Canada had done plenty to encourage more business investment and that the time had come to “let Mother Nature do her usual job.” He has compared the state of Canada’s economy to “postwar reconstruction,” explaining that stronger growth is contingent first on a boost in exports, which in turn will inspire executives and business owners to invest more.

The near-term outlook for exports and business investment has weakened since the Bank of Canada’s last quarterly outlook in April.

Last week, the International Monetary Fund cut its 2013 growth forecasts for the United States, China and Europe. That will do nothing to encourage Canadian executives, whose investment intentions are near their lowest level since the third quarter of 2009, according to the Bank of Canada’s summer business outlook survey.

Nor will the sudden jump in the cost of credit. The yield on 10-year Canadian debt has jumped 80 basis points (a basis point is 1/100th of a percentage point) since April, as global rates adjust to the Fed’s inclination to slow its bond-buying program later this year. If the trend continues, it could have a “meaningful impact on growth,” Mr. Chandler said.

At the same time, consumer spending continues to falter, leaving Canada’s economy without an engine capable of driving momentum. “That gives you more of a runway” to leave interest rates low, said Peter Hall, chief economist at Export Development Canada in Ottawa.

Mr. Hall still thinks faster U.S. economic growth next year will prompt the Bank of Canada to raise interest rates at the end of 2014. That makes Mr. Bernanke’s testimony almost as important as Mr. Poloz’s press conference. The long-standing assumption in financial markets is that the Bank of Canada would raise interest rates before the Fed. That assumption no longer is inevitable.

Canadian home prices climb but at slower pace

TARA PERKINS - REAL ESTATE REPORTER

The Globe and Mail

 

 

Canadian home prices were 1.8 per cent higher in June than a year earlier, the smallest annual gain since November, 2009.

The pace of home price increases has been slowing in the wake of the sharp downturn in home sales that began last summer and has only recently begun abating. But, while home prices aren’t rising by as much as they used to, they are rising more than many economists expected.

Indeed, many economists had been expecting prices to dip into negative territory this year, but now say that is now looking less likely given the latest data.

June’s prices are 1 per cent higher than May’s. While prices usually rise a bit more than that from May to June, the increase topped economists’ expectations at a time when the market is still recuperating from a significant slump.

“It looks like the market is stabilizing and picking up a little bit,” says Royal Bank of Canada economist Robert Hogue, who now expects house prices for all of 2013 to be slightly higher than in 2012, rather than slightly lower. “It’s a fairly sanguine pricing environment at this stage.”

But Mr. Hogue is sticking to his forecast that prices will fall a bit in 2014, when many of the condos that are currently under construction will be completed, putting pressure on prices at a time when interest rates are likely to increase. While Toronto’s condo boom is front and centre, a significant number of condos are also under way in Montreal and Vancouver, Mr. Hogue said.

Cities with stronger-than-average price gains in June included Hamilton (at 7 per cent), Quebec City (5.6 per cent), Calgary (5.5 per cent), Winnipeg (3.9 per cent), Toronto (3.6 per cent), Edmonton (3 per cent), and Halifax (2.3 per cent), according to the Teranet-National Bank Index. Montreal (1.3 per cent), Ottawa-Gatineau (1.1 per cent), Victoria (-4.6 per cent) and Vancouver (-2.8 per cent) dragged down the national average.

National Bank economist Marc Pinsonneault said he too is no longer expecting prices to fall this year.

“The rises in May and June were stronger than I was expecting, even if they’re not exceptional for that time of year,” he said. “We see subdued increases in the next few months.”

In a research report, he did warn however that rising mortgage rates could still put a damper on things. “While home resale activity has strengthened in recent months, this resilience may be put to the test given the rapid increase in mortgage rates in June,” he wrote.

First-time home buyers undeterred by mortgage rules, rates

Garry Marr
The Financial Post


About two-thirds of first-time buyers say they’ll purchase a home as planned and are unaffected by new mortgage rules brought in by Ottawa a year ago, says a new survey.

The findings come as the banks continue to increase long-term interest rates in the face of rising bond yields but refuse to bump up the posted rate for a five-year, fixed rate closed mortgage — a key measure in deciding how much a consumer can borrow after the new rules were introduced.

Rates on the five-year mortgage have been rising steadily since the beginning of May in response to bond yields. At one point the Bank of Montreal offered a five-year, fixed rate closed mortgage for as little as 2.99% but that’s now up to 3.59%.

Meanwhile the posted rate has stayed at 5.14% at most banks. That posted rate is used by Ottawa to establish what is called the qualifying rate for consumers who require mortgage default insurance. Consumers not locking in for five years or more face the qualifying rate but since it has hasn’t risen they can borrow as much as ever.

A department of finance spokeswoman noted the five-year is set by the Bank of Canada and is based on the posted rates at Canada’s largest banks.

“The Government continues to monitor the mortgage market and protect taxpayers,” said Stéphanie Rubec manager, media relations, via email. “Prices for financial products, including mortgage interest rates, reflect a financial institution’s business decisions. Due to the fact that taxpayers are the ultimate backstop for government-backed insured mortgages, financial institutions are expected to lend prudently.”

Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, said for most consumers it hasn’t had an impact because the majority of mortgages are for longer than five years — meaning consumers can use the lower rate on their contracts to qualify.

“The profile for our customers is the longer term anyway so it hasn’t had a material impact,” said Ms. Haque.

The Bank of Montreal survey, conducted by Pollara, found on the one year anniversary of the latest mortgage rule changes 66% of Canadians buying for the first-time will do so as planned.

Among the other changes was shortening of amortization lengths from 30 years to 25 years. The survey found 14% of Canadians will buy sooner, partially out of fear rules could get even tougher.

Meanwhile there is very little to indicate the posted rate will be rising any time soon, despite the fact government of Canada five-year bond has risen about 65 basis points since May 1.

“You do have to remember when rates where at all-time lows they didn’t lower the qualifying rate either,” said Rob McLister, editor of canadianmortgagetrends.com. “I have never talked to a banker or lender who has openly admitted they are keeping the rates low to qualify more people.”

He says it’s mostly a practical issue for qualification because very few people actually take the posted rate. Mr. McLister said some lenders like to keep it low to appear more competitive.

But there is no question the qualification rate will have to rise if bond yields keep rising. Plus, rising long-term rates might send people back to cheaper variable rate products, creating a more urgent need to tighten loan requirements.

“Once you get a one percentage point gap between short-term and long term, people start looking at variable,” said Mr. McLister.

David Madani, an economist for Capital Economics, agrees it is just a matter of time before the qualifying rate and posted rates start to jump. “There is usually a bit of a lag,” said Mr. Madani.

One bank economist, who asked not to be named, said there is a caution at the banks right now about the bond market. “They want to know that these rates are here to stay,” said the economist.

Ever heard of mortgage cancellation fees? You soon might

Robert McLister

Special to The Globe and Mail

 

You’re probably used to seeing cancellation fees from hotels, airlines and cellphone providers, but not when you’re getting a mortgage.

Such fees are slowly becoming more common as a small but growing number of discount mortgage brokers are tying cancellation fees to rock-bottom rates. Here’s why.

Many Canadians use mortgage brokers, who have access to multiple lenders, to get the lowest possible mortgage rate. To get the best terms, lenders require brokers to maintain high “closing ratios.” That means brokers must generally complete three out of four mortgages that they get approvals for.

But as mortgage shoppers become more informed and more rate sensitive, many become less loyal. And that is leading to an increase in costly cancellations, as borrowers use one lender’s approval to get a better deal with another lender or broker.

One may rightly ask, “What’s wrong with that?” Consumers should shop aggressively for the best mortgage deal around, and pitting lenders and brokers against one another is a sound financial strategy.

The issue, say some in the business, is that consumers can enjoy the same benefit simply by shopping around their rate quotes. It’s when they take the extra step of asking for a full approval, and then cancelling that approval, that the problem arises.

In order to stem these cancellations and preserve lender relationships, more brokers are instituting cancellation fees.

A case study

True North Mortgage is one of the nation’s largest brokerages, having closed almost $700-million worth of mortgages in 2012. Earlier this year, it started charging a 1 per cent cancellation fee in cases where:

a. A client asks True North to obtain a firm lender approval
b. True North arranges that approval at the client’s requested lender
c. The client then asks another lender to match True North’s rate, and
d. The client cancels his or her True North application.

Simply asking a broker to shop for rates entails no fees. And if it does, you should find another broker. Cancellation fees like the one outlined above usually apply only if a client has already received a quote and says, “Yes, I want you to approve me,” – and then abandons that approval to go with another lender.

“If a client pulls out for legitimate reasons, or if it’s for a better rate, then we understand,” says True North CEO Dan Eisner. For example, if the client cancels because of circumstances beyond their control, like a purchase falling through, the fee would not apply. But if the person uses True North’s low rates and approval solely as leverage to get a rate match from their bank, a cancellation fee may apply. Mr. Eisner estimates less than 1 in 10 approved applicants cancel because of the rate.

Consumer and industry reaction

Anything that restricts consumer options is bound to be criticized and there are undoubtedly some people who will view these charges as another fee grab.

So far, however, the fee isn’t scaring off True North’s customers. Despite introducing it this year, the company’s volume has risen 50 per cent. “A client who doesn’t sign [our borrower agreement when applying] was never going to be a customer anyway,” Mr. Eisner says. He admits that it’s occasionally a hard sell, since most banks don’t charge cancellation fees (yet). But brokers who do must provide better rates, better advice and a better customer experience.

“The biggest competitors for brokers are the banks, and brokers have long been impacted by banks matching rates,” says Jim Murphy, President and CEO of the Canadian Association of Accredited Mortgage Professionals. One of the major benefits of using a broker is that you do not pay, he added, especially on a well-qualified deal.

Opinions in the mortgage industry are mixed. Realtors have had exclusivity agreements for years. And in the U.S., fees are commonplace, with a median mortgage application fee of $365 (U.S.), according to the Federal Reserve. But $365 is a lot more tolerable than 1 per cent standard cancellation fee, which amounts to about $1,750 on the average Canadian mortgage.

Another challenge with cancellation charges is that enforcing them can get messy. And there are also disclosure risks if clients are not explicitly made aware of such fees (e.g., if they’re buried deep in the paperwork). As a result, some brokers believe they could reflect poorly on the industry.

Will they stick?

In an ideal world, the lender or broker with the best overall deal should win the client’s business. That seems logical. But cancellation fee advocates say that doesn’t mitigate customers who ask for a complete approval with little intention of closing with that lender. That increases costs in a market with razor thin margins, costs that are eventually transferred back to consumers.

Going forward, there will unquestionably be more lenders and brokers that tie better rates to such fees. Whether it’s a trend with legs will depend on how superior the value is, and if no-fee lenders or brokers are willing to match that value. In the end, mortgage consumers will vote with their signatures.

Robert McLister is the editor of CanadianMortgageTrends.com

Rising rates creating increasing dilemma for homeowners

Garry Marr
The Financial Post


The interest rate dilemma has arrived again for homeowners.

What once was a no-brainer decision, locking in your mortgage rate for five years or even 10 years, now has a question mark attached to it.


Blame the U.S. federal reserve for easing up on its bond buying program. Bond rates have climbed fast and mortgage rates are just following.

Variable rate mortgages, which track prime and are vulnerable to Bank of Canada decisions, are still being offered at about 2.6% for five years. But instead of competing with a 3% fixed rate five-year close mortgage, the competition is a 3.5% product.

It may be just 90 basis points but on a $500,000 mortgage, that’s not small change. Based on a 25-year amortization and $500,000 mortgage, the 2.6% variable would mean monthly payments of $2268.35 and about $60,000 in interest on a five-year term.

The 3.5% product means a monthly payment of $2496.36 and about $81,000 in interest over the term.
Once again it’s the first-time buyer, who is on the edge of being able to crack this market, squeezed out.

“It’s hurting them but also benefiting the rental market,” said Benjamin Tal, deputy chief economist with CIBC Markets.

Mr. Tal said the surge in the housing market we are seeing happens every time there is a fear of rising rates — consumers try to get into the market before it’s too late.

“I’m hearing a lot about people trying to blend and extend,” said Mr. Tal. Under that scenario, consumers contact their bank before their mortgage is due, hoping to extend their current loan at today’s still historically low rates.

If anything, the gap might widen between rates for short-term and long-term mortgages, after being historically low. “It means sensitivity to interest rates will rise because people will go to what is affordable,” said Mr. Tal.

None of this will likely make Jim Flaherty, the finance minister, happy. His government has gone to great lengths to slow the market and wants people locked into long-term mortgages so they don’t face the shock of suddenly rising rates.

What has gone on is the discounting has shrunk. It’s absolutely sneaky and it’s done on purpose

One of Ottawa’s subtle rules changes was to allow consumers to qualify for a loan based on the rate on their contract as long as they agreed to lock in for five years or longer. If you go with a variable rate, you must qualify for a loan based on the much higher 5.14% posted rate for a five-year fixed closed mortgage.

The Canadian Association of Accredited Mortgage Professionals found that in 2012, 79% of new mortgages were for a locked-in product, 10% for variable and 11% a combination of the two. Ottawa’s rule changes had an impact on those numbers but so did the deal of a lifetime on a five-year mortgage.
 Jim Murphy, chief executive of CAAMP, wonders about what the impact of higher rates will be for new buyers when stacked on top of tougher rules.

His groups pointed out this month that sales for homes under $400,000 in the greater Toronto area were down 18% in May from a year ago. For homes priced above that level, sales were down just 5%.

“All of these changes have impacted the first-time buyer,” said Mr. Murphy. “Now we are seeing rising rates and that will have an impact too.”

Vince Gaetano, a principal at monstermortgage.ca, said the gap has become wide enough to convince him to go variable now.

Strangely enough, banks have not moved quickly to change their 5.14% posted rate — the percentage nobody actually accepts but which everybody qualifies based on.

“What has gone on is the discounting has shrunk. It’s absolutely sneaky and it’s done on purpose because they don’t want to move people away from not qualifying at all,” said Mr. Gaetano.

Another reason the banks don’t want to change the posted rate is it’s used to calculate any penalty on your mortgage. A higher posted rate would shrink your penalty, said Mr. Gaetano.

“It’s a very cleaver way for the banks to keep the handcuffs on people,” he says. “I still see people just break their mortgages outright. Variable is attractive too because of all the games banks play with breaking mortgages and penalties. With a variable mortgage, it’s three-months straight and simple.”

Canadian housing market defies skeptics as starts top expectations

Jeffrey Hodgson, Reuters | 13/07/09 | Last Updated: 13/07/09 12:13 PM ET
More from Reuters

 

TORONTO — Canadian housing starts were stronger than expected in June and May figures were revised higher, according to data released on Tuesday, the latest report to show the property market rebounding from last year’s government-induced slowdown.

The seasonally adjusted annualized rate of housing starts was 199,586 units in June, according to data from the Canadian government’s housing agency. Analysts polled by Reuters had expected 187,000 starts in June.

The Canada Mortgage and Housing Corp also revised May starts higher, to 204,616 from the 200,178 originally reported.

The stronger-than-expected numbers helped boost the Canadian dollar in early trading.

The latest data come exactly one year after tough new mortgage rules aimed at cooling the market came into effect. Canada’s Conservative government tightened the rules in a bid to prevent a possible housing bubble.

Those rule changes, the government’s fourth such crackdown since the financial crisis, succeeded in dampening housing market activity.

But after nearly a year of cooling sales and concern that Canada could have a U.S.-style housing crash, demand has roared back in key markets, helped by borrowing costs that remain near historic lows.

“Canada’s housing market continued to defy the skeptics in June, not to mention Mother Nature and a bout of labour market unrest,” BMO Capital Markets economist Robert Kavcic said in a note to clients.

“With sales finding a floor in recent months, prices well behaved and homebuilding close to demographic demand, the soft landing story looks firmly in place.”

 

The data on Tuesday showed starts of single urban homes decreased by 4.1% to 62,743 units in June. Starts in the multiple urban starts segment, which includes Toronto once-booming condominium sector, decreased by 2.0% to 114,342 units.

Urban starts increased in the west coast province of British Columbia, but fell in all other regions, including Atlantic Canada, Ontario and Quebec.

The report suggest homebuilding was likely a mild contributor to second-quarter economic growth, rather than a drag, said Emanuella Enenajor, an economist with CIBC World Markets.

“We still see housing slowing in later quarters, although that softening will likely be deferred until late 2013 and 2014,” she said in a note.

© Thomson Reuters 2013

Genworth Takes its Own Tack on Debt Ratio Policies

Rob McLister, CMT
www.canadianMortgageTrends.com


Last week we wrote about how CMHC will be rolling out more conservative debt ratio calculation methods by year-end.

On Friday we learned that Genworth Canada may not be adopting all of those policies, at least not for now.

In an emailed statement to CMT, Genworth Canada's Chief Risk Officer, Craig Sweeney said:

“The debt ratio guidelines recently announced by CMHC do not apply to Genworth.
We have our own underwriting guidelines and policies that reflect our 18 years of experience underwriting high-ratio loans for mortgage insurance. Our underwriting guidelines are fluid and will evolve over time based on acceptable market practices and our current risk appetite.
There have always been minor differences between how CMHC and Genworth view risk and we expect this to continue going forward.”

As for Canada’s other private insurer, Canada Guaranty, it says it is “currently reviewing the new debt ratio guidelines.”

There’s a chance, however, that OSFI (which regulates all three insurers) may eventually require CMHC, Genworth and Canada Guaranty to use similar inputs in their GDS/TDS calculations. We wouldn’t be surprised to see such guidance later this year.

Moreover, the major banks and many smaller lenders will probably operate under one guideline for all insurers—which means they’ll likely follow CMHC’s policies. But there could certainly be exceptions among non-OSFI regulated lenders.

---

Rob McLister, CMT

Fixed vs. variable mortgage rates: why the trend is changing

By Alison Griffiths, Metro Canada

 

 

It’s the talk of the town once again. Interest rates. Savers are praying for an increase while those in debt have their fingers tightly crossed that any rise will come oh so slowly.

 

The big issue for most is the mortgage. Variable used to win hands down over fixed rate when it came to saving money.

 

But as five year fixed rates sunk below three per cent and the spread between fixed and variable rates shrunk to less than 40 basis points or 0.4 per cent, locking in has been a no brainer. There is little point in taking on the additional risk of a rate rise for less than half a per cent.

 

Based on the Canadian Association of Accredited Mortgage Professionals’ recent survey, 85 per cent of those who bought a home in the past 18 months locked in, compared to 69 per cent of existing mortgage holders. The appeal of the fixed rate will only grow with the flurry of talk about impending interest rate increases.

 

Already a number of lenders have nudged their five-year rate over three per cent. This could signal that the variable rate mortgage may start to become more appealing as the difference between it and the fixed rate widens.

 

According to canadianmortgagetrends.com, consumer interest in variable rates increases when the spread between them and fixed rates is 100 basis points or one per cent.

 

It is easy to see why. Paying one per cent less on a $200,000 mortgage keeps about $2,000 after tax dollars in your pocket in the first year and saves nearly $32,000 in interest costs over a 25-year amortization.

 

Canadians choosing a fixed rate can enjoy the benefits of a variable rate simply by paying a bit more monthly. On a $200,000 mortgage an extra $50 cuts two years off the life of the mortgage and saves nearly $7,000 in interest costs. Or, make a lump sum payment, amounting to the average tax refund of $1,500, and the mortgage is gone in 21 years with interest savings of nearly $15,500.

 

Contact Alison at griffiths.alison@gmail.com or alisongriffiths.ca

Stricter Debt Ratio Standards on the Way

Rob McLister, CMT
CanadianMortgageTrends.com


If you’re a typical borrower, your debt ratios will largely determine if you’re approved for a mortgage.

For applicants who push the limits of qualification, those approvals have been tougher to come by. That’s a direct result of last year’s mortgage rule tightening, which imposed stricter debt ratio calculations (among other things).

And by year-end, those calculations will get even more conservative.

On June 27, CMHC issued new guidelines for calculating debt ratios and confirming income documents.

“Under current practice, CMHC stipulates standard formulas for calculation of debt service ratios but has not been specific as to how each key input is to be treated,” says CMHC spokesman Charles Sauriol.

These new guidelines will clarify that, and they become effective on December 31, 2013. (In practice, many lenders already apply them.)

These standards will apply to all insured 1-4 unit residential mortgages, regardless of the loan-to-value ratio. Uninsured (conventional) mortgages are allowed different policies, but most lenders will use the same rules for all their approvals.

Here are some of the newly minted insured mortgage “clarifications”:

• For variable income: Lenders must use “an amount not exceeding the average income of the past two years.” Variable refers to things like bonuses, tips, seasonal employment and investment income.
• For rental income:  If a borrower owns other non-owner occupied rental properties, the principal, interest, property taxes and heat (P.I.T.H.) on those properties must either be:
  • deducted from gross rent revenue to establish net rental income; or
  • included in ‘other debt obligations’ when the Total Debt Service (TDS) ratio is being calculated.
• For guarantor income:  A guarantor’s income must not be used in GDS/TDS ratios “unless the guarantor…occupies the home and is the spouse or common-law partner of the borrower.”
• Unsecured credit lines & credit cards: For these debts, “No less than 3% of the outstanding balance” must be included in monthly debt payments. Interest-only payments are no longer considered on credit lines. Furthermore, lenders must assess the borrower’s credit history and borrowing behaviour when determining the amount of revolving credit that should be accounted for in debt ratios.
• Secured lines of credit:  Lenders must factor in “the equivalent” of a payment that's based on “the outstanding balance amortized over 25 years.” That payment must use the contract rate (of the LOC) or the 5-year Benchmark rate (V121764) published by Bank of Canada (if the contract rate is unknown). Again, interest-only payments are no longer allowed for debt ratio calculation purposes.
• Heating costs:  Lenders must now obtain the “actual heating cost records” of a property. When no such history is available, the heat expense used in debt ratio calculations “must be a reasonable estimate taking into consideration factors such as property size, location and/or type of heating system.” That’s why some lenders have now moved to a set heating cost formula, like:
  
         (square footage x $0.75) / 12 months

Compared to past methods (which entailed flat heating costs, like $100/month), the new guidelines can double or triple the heating cost that must be factored into debt ratios on larger properties, and reduce it on smaller ones.

It’s important to note that most of these policies are already being followed by most lenders. But there are exceptions.

Those exception-case lenders are commonly viewed as go-to sources when borrowers have tight debt ratios. These new guidelines are designed to minimize those “loopholes.”

All of this has come about, in part, because of Ottawa’s rule changes last July. At that time, the government fixed the maximum Gross Debt Service and Total Debt Service ratios for insured mortgages at 39% and 44% respectively.

Sauriol says that change “reinforces the importance for CMHC to ensure that debt service ratios provide the same measure of a specific borrower’s ability to service the mortgage debt, regardless of the lender submitting the application to CMHC for insurance.”

Negotiating your first mortgage? Check out these tips

Derek Raymaker

Special to The Globe and Mail

 

 

It’s been a lot of hard work, but you are finally ready to join the ranks of the home-owning class.

You’ve paid off your debts, socked away enough money for a decent down payment, trolled through open houses and found the perfect place. Your offer has been accepted and you have two months to close the deal.

This is when many first-time home buyers finally get around to arranging their mortgage, according to Larry White, a 20-year veteran mortgage broker.

“A lot of people spend more time researching a television purchase than their mortgage,” says Mr. White, a broker with Invis.“I have had a lot of people call me when they’re closing in two or three weeks and they haven’t done any of the background work.”

The good news is that mortgage competition is so fierce right now that you can negotiate better terms on rates, fees and restrictions - provided you go in armed with some knowledge. Mortgage rates are not quite at an all-time low, but they are very attractive in the historical sense and easy to compare online.

One thing to keep in mind is that the rates posted at your bank or blinking at you in online ads are just a starting point. These rates are not only high, they are also likely to come loaded with caveats, including tight restrictions on making lump-sum payments and high fees when leaving the mortgage prior to renewal. (There is a reason why they’re called "sucker rates.")

Here’s our list of five things to remember as you prepare to wheel and deal:

Start early and be prepared

The bank where you have your chequing account will be more than happy to do a basic mortgage pre-approval document for you, but that won’t be enough to close the deal. You will need an up-to-date personal credit score, tax assessments from the last two years, and a thorough accounting of your income, including non-salaried contracts and debt.

Along with your down payment, you’ll need enough cash on hand to cover pay closing costs - roughly 2 per cent of the purchase price - for legal fees, mortgage insurance, title insurance and land transfer taxes. You should also be prepared to pay utility deposits in your new home. If you’re moving into a condo, don’t forget to budget for maintenance fees.

Have a strategy in place and a product in mind to achieve it

This is where a mortgage broker can really help you. Keep in mind, however, that they are paid by the financial institution to whom they bring your business - not you. Familiarize yourself with the mortgage basics - read up on how a fixed–rate mortgage compares to a variable-rate and the difference between a closed and open mortgage. Don’t automatically take a five-year-fixed mortgage, but research the various terms that are available.

This is where you should consider how important features like pre-payment options and break fees are to you. If you come into large sums of cash, you should consider a flexible mortgage that does not restrict you from making lump-sum payments. If you are due for a raise, hone in on pre-payment features that allow you to increase your payments without penalty.

Think about what will work best for you

If you’re starting a family or are in line for promotion that involves moving to another city, you could be upgrading sooner than you think. Unexpected life events, like an illness or divorce, can also lead to you paying a hefty break fee, which is basically a penalty for leaving your mortgage early.

Most lenders calculate penalties based on the amount left owing in your mortgage term and the rate differential between your interest rate and the current posted rate or the lender's discounted rate. In other words, they usually do not make it easy. As a general rule, expect to pay at least three months of interest multiplied by the rate differential to break your mortgage. Definitely probe the lender on their break fees. Hidden or vague break fee policies are the most common consumer complaint regarding mortgage products.

If your property is going to need renovations, make sure you have access to a home-equity line of credit. Remember: The mortgage that is right for your neighbour might not be the right one for you. Don’t be intimidated as a first-time buyer or feel pressured to accept a one-size-fits-all mortgage that might look cheap but comes loaded with expensive restrictions.

Approach it like you’re searching for a financial planner

First-time buyers looking for a mortgage will probably automatically go to where they do their daily banking. And the person they speak to could very well be the same person that sells them investment products like GICs.

“Experience counts,” says Mr. White. “Some institutions are more experienced than others. Some are order-takers. Some will help shape a product based on the information you share.”

That information should include your future financial goals and craft a payment schedule to achieve that. Your financial plan needs to reflect many things - like how much you are putting away for retirement, saving for a child’s education, or investing in home improvements.

There are an abundance of mortgage calculators around, including this one from the Globe, that can help you determine what you can afford and over how long.

Remember you have more leverage than you think

The bottom line is that the mortgage lending market is extremely competitive, and that makes first-time buyers highly prized clients.

Furthermore, the recent decline in the volume of home sales has put pressure on lenders to reach their goals of signing new business. The Financial Consumer Agency of Canada has produced this slick video of how to negotiate a mortgage with several lenders.

“Lenders are trying to maintain numbers from a year ago,” Mr. White said. “They are all jockeying for position to keep volume.”

Your first mortgage is not just a big loan. It will be a crucial element in determining your net worth, lending risk and ability to plan your financial future. There’s a lot at stake. You can save yourself thousands of dollars in interest alone.

And if interest rates rise, your negotiating prowess could make the difference between being able to make or miss your mortgage payment.

Young homebuyers learn from experience

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Ora Morison

The Financial Post

 

 

Canadian homeowners tend to buy and sell in patterns that mirror their passage through various life stages.

With each stage and each purchase, homebuying comes with its own set of mistakes as buyers’ priorities change and their experience in the housing market develops, said Yousry Bissada, the chief executive officer of Kanetix, a web portal that allows consumer to compare quotes for insurance and other financial products online.

First time buyers often don’t think about the likely resale value of their first home, despite the fact that the average Canadian outgrows their first home within three to five years, Mr. Bissada said.
“I just wanted to get my foot in the door,” said Fabian Bavis, a 29-year old technician at a security alarm company. Mr. Bavis recently purchased a townhouse in Nanaimo, B.C., and said he plans to remain in his new house for about five years until the term of his mortgage is up.


Even with re-sale on his mind within a relatively short time horizon, Mr. Bavis said he didn’t do much research on the neighborhood or house itself.

Mr. Bissada suggests first-time buyers look into the circumstances surrounding their own purchase of the home – such as how long the property was on the market and whether there were multiple offers – to get an idea for how hard or easy it will be to re-sell when the time comes.

Like many his age, Mr. Bavis locked into a fixed mortgage rate to take advantage of today’s relatively low rates.

Locking in before rates rise is a great move for young buyers who are likely stretching their budgets to afford their first home, Mr. Bissada said.

Many young people are already following that advice. Research from the Canadian Association of Accredited Mortgage Professionals shows that 70% of homebuyers between the ages of 18 and 34 have a fixed rate mortgage, compared with 63% of those between 35-55.

A fixed rate can also bring some simplicity to what can otherwise be an overwhelming experience for young homebuyers.

“I like not having to not deal with any price changes,” Mr. Bavis said.

At the next stage of the homeownership lifecycle, he, like many Canadians, will be looking to upgrade his starter home for something larger. The average Canadian purchases three homes within their lifetime, Mr. Bissada says.

For some this might mean dipping into savings through the RRSP Home Buyers’ Plan to come up with the down payment, but Mr. Bissada cautions that this plan isn’t for everyone.

Many people don’t weigh the long-term financial implications of borrowing this money, he said. The amount withdrawn from the RRSP generally has to be paid back over 15 years, and buyers should consider what effect this might have on their retirement income in the years to come.

While homeowners who are a little older have more experience, they’re not immune to pitfalls. Their experience can translate into a level of comfort that stops them from doing the same amount of research as they might have when they were new to the housing market. As many as 70% of those renewing their mortgage do so without shopping around for a lower rate, Mr. Bissada said.

In the later stages of homeownership, concerns about mortgages are less relevant. The average Canadian has paid off their mortgage by their mid- to late-forties Mr. Bissada said.

Once you reach the requisite age of 55, a reverse mortgage becomes an option.

While reverse mortgages reduce the equity in a home and do come with higher interest rates that standard mortgages, retirees who are equity rich and cash poor might find this to be a good way to avoid downsizing, he said.

“People have found [the reverse mortgage to be] a lovely way to stay in the home they love, … but you’re going to leave less for your estate.”

A Home that Adapts to Your Life

TMG The Mortgage Group

FlexHousing™: A Home that Adapts to Your Life

As you go through life, your housing needs will change. A bachelor apartment is fine for your first home away from home but as you get established, you tend to need more space. Whether you are single, have a growing family, are an "empty nester" or looking for a way to care for aging relatives, most people require different household spaces, amenities and functionality to meet changing needs over time.

While it is always possible to move to a home that meets your needs, this can be disruptive and expensive. For some, adapting your existing home may be the better option. However, some homes are not easily, or cost-effectively, altered given how they were designed and built.  Fortunately solutions to this problem are being developed.  One approach, championed by Canada Mortgage and Housing Corporation is FlexHousing™. This is an approach to designing homes that are versatile and flexible, and can be adapted to meet the varying and changing needs of a household. This makes it possible for people to stay in their homes through significant events and shifts in their lives, without having to undertake costly renovations or move to another home.

Adaptability

Essentially, this means that the floor plan and layout of your home has built-in features that allow you to easily change the use of your available space as needed or preferred at a future date. This might include providing expandable space where certain areas of the home, say an attic, rooms over the garage or basement area, are roughed in and left for later finishing to accommodate a growing family or expanded household, or to create a home office.

Adaptability also means that you plan to have an easily convertible space where you can adjust the size, or function, of existing areas. This may include making provisions to allow a large bedroom to be converted into two smaller rooms or the reverse, by using moveable or removable walls and locating windows accordingly.

An adaptable house can also be easily sub-divided into separate spaces to provide a secondary suite with a private entrance and separate heating and electrical services. This can provide living space for a younger or older member of the family, a rental unit for additional income, or accommodation for a caregiver. Adaptability also applies to making allowance for future amenities that you can install later as your needs change and budget permits. For instance, by stacking your closets you can more easily accommodate a home elevator when you need one. A "Flex" room on the main level for use as den, home office or master bedroom, is another example of adaptable, flexible housing design.

In all cases, careful pre-planning is key. For instance, the placement of load-bearing walls, windows and electrical outlets affects how easily interior spaces can be rearranged. Pre-plumbing and pre-wiring for future needs reduce significantly the cost of installing services later. A potential secondary suite must meet all building code regulations, including fire safety and exit requirements.

Accessibility

Accessibility focuses on safe, easy movement and function in the home. A flexible home is accessible for people with mobility, visual and other special requirements. For example, it facilitates seniors' independence and ability to remain in their home as they age. It offers a comfortable and convenient living environment for everyone in the home, at all times.

Accessibility features include on-grade exterior access with no threshold that impedes movement.  The doorway should also be covered to protect against rain and snow, and be well lit. In the home, wider doorways and hallways leave plenty of room for wheelchairs, walkers, a baby carriage, and more. A main-floor self-contained living space-living room, kitchen, bathroom (wheelchair-accessible),and "Flex" room  --can eliminate the need for stair climbing for people with mobility issues. Having all living areas at the same level (e.g. no sunken living room or elevated great room or kitchen area) facilitates access throughout.  Lever handles on doors and cabinetry should be easy for all to operate, young and old. Non-slip flooring and lower-height light switches are useful and safe features for all. In the bathroom, either install grab bars or provide the necessary reinforcement behind the walls to reduce the work required for future installation.  A roll-in shower area can be both accessible and attractive.

Also think about

A number of other aspects contribute to making FlexHousing™ an ideal starting point to help you plan your new home or home renovation for the long term.

• Energy efficiency reduces the cost of owning your home, and softens the impact of future increases in energy prices. Plus an energy-efficient home is more comfortable to live in.

• Water efficiency also helps to reduce your operating costs. In addition to water-saving fixtures, you may want to include low-maintenance landscaping, rainwater collection, and grey water recycling.

Indoor air quality: the air you breathe has an effect on your health and well-being. Keep the air fresh by choosing low-emission, easy-to-clean products, furnishings and finishes.  Installing a heat recovery ventilator will help keep your air fresh and operating costs low.