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Wednesday, 30 May 2012
Why Use a Mortgage Broker
Tuesday, 29 May 2012
Is another round of mortgage wars on the way?
John Greenwood
Renewed concern around the crisis in the eurozone has investors heading for the exits, and once again Canada is emerging as one of the biggest beneficiaries with rising demand pushing yields on even corporate bonds close to record lows.
But analysts warn the soaring popularity is a double-edged sword. Bank funding costs have tumbled as well, and that typically translates into falling mortgage rates which in turn drive increased consumer borrowing — the last thing Canada needs according to its policy makers.
‘In a world almost devoid of triple-A credit in the sovereign space, Canada is taking on a new importance’
“What you’re seeing is a tremendous flight to quality in the Canadian market,” said Ian Pollick, a fixed income strategist at RBC Capital Markets. “In a world almost devoid of triple-A credit in the sovereign space, Canada is taking on a new importance.”
The yield on Government of Canada five year bonds, a market benchmark, slipped to a record low of 1.84% on Wednesday. And where government bonds go, so go bonds issued by banks.
Bottom line: It now costs a whole lot less for a bank to borrow money than it has historically.
According to Mr. Pollick, five-year bonds issued by banks to fund their home loans are enjoying such high demand that their funding costs are lower today than they were in the so-calledmortgage wars of early February, “when we stated to see the 2.99% specials.”
Coming in the wake of repeated warnings from Bank of Canada Governor Mark Carney about the country’s excessive household debt levels, the mortgage wars drew criticism from Finance Minister Jim Flaherty, who made his concerns known directly to the banks.
Low interest rates especially after the financial crisis have created incentive for consumers to take on more debt and helped drive a run-up in housing prices across Canada, especially in Vancouver and Toronto. Economists worry that a rise in interest rates or unemployment could precipitate a serious housing correction with potentially disastrous consequences for consumers as well as the broader economy.
The federal government has taken a series of steps to try to cool the market, most recently by putting theCanada Mortgage and Housing Corp., the biggest provider of mortgage default insurance, directly under the control of the Office of the Superintendent of Financial Institutions. Earlier this spring OSFI announced proposals for tough new mortgage rules that will likely come into force before the end of the year.
Analysts say those efforts have already begun to have the desired effect, with a sharp deceleration in consumer loan growth in the first four months of the year.
But with bank funding costs now slumping again, some worry that it’s only a matter of time before phase two of the mortgage wars gets underway.
“The Canadian banks as a group have enjoyed very good access to wholesale funding since the crisis and borrow at spreads well inside those of their global peers,” said David Beattie, an analyst at credit rating agency Moody’s.
With yields where they are banks “can absolutely afford to cut mortgage rates again,” said another leading credit analyst who asked not to be named. “But factors such as “pressure from [the federal government] will probably lead them to hold off on more rate cuts — but anything’s possible.
Observers said the spread between Government of Canada bonds and bonds issued by banks has been up and down in recent years — they’re wider now that it was six weeks ago, before the eurozone flared up — but yields have come in so much that banks are still better off.
Renewed concern around the crisis in the eurozone has investors heading for the exits, and once again Canada is emerging as one of the biggest beneficiaries with rising demand pushing yields on even corporate bonds close to record lows.
But analysts warn the soaring popularity is a double-edged sword. Bank funding costs have tumbled as well, and that typically translates into falling mortgage rates which in turn drive increased consumer borrowing — the last thing Canada needs according to its policy makers.
‘In a world almost devoid of triple-A credit in the sovereign space, Canada is taking on a new importance’
“What you’re seeing is a tremendous flight to quality in the Canadian market,” said Ian Pollick, a fixed income strategist at RBC Capital Markets. “In a world almost devoid of triple-A credit in the sovereign space, Canada is taking on a new importance.”
The yield on Government of Canada five year bonds, a market benchmark, slipped to a record low of 1.84% on Wednesday. And where government bonds go, so go bonds issued by banks.
Bottom line: It now costs a whole lot less for a bank to borrow money than it has historically.
According to Mr. Pollick, five-year bonds issued by banks to fund their home loans are enjoying such high demand that their funding costs are lower today than they were in the so-calledmortgage wars of early February, “when we stated to see the 2.99% specials.”
Coming in the wake of repeated warnings from Bank of Canada Governor Mark Carney about the country’s excessive household debt levels, the mortgage wars drew criticism from Finance Minister Jim Flaherty, who made his concerns known directly to the banks.
Low interest rates especially after the financial crisis have created incentive for consumers to take on more debt and helped drive a run-up in housing prices across Canada, especially in Vancouver and Toronto. Economists worry that a rise in interest rates or unemployment could precipitate a serious housing correction with potentially disastrous consequences for consumers as well as the broader economy.
The federal government has taken a series of steps to try to cool the market, most recently by putting theCanada Mortgage and Housing Corp., the biggest provider of mortgage default insurance, directly under the control of the Office of the Superintendent of Financial Institutions. Earlier this spring OSFI announced proposals for tough new mortgage rules that will likely come into force before the end of the year.
Analysts say those efforts have already begun to have the desired effect, with a sharp deceleration in consumer loan growth in the first four months of the year.
But with bank funding costs now slumping again, some worry that it’s only a matter of time before phase two of the mortgage wars gets underway.
“The Canadian banks as a group have enjoyed very good access to wholesale funding since the crisis and borrow at spreads well inside those of their global peers,” said David Beattie, an analyst at credit rating agency Moody’s.
With yields where they are banks “can absolutely afford to cut mortgage rates again,” said another leading credit analyst who asked not to be named. “But factors such as “pressure from [the federal government] will probably lead them to hold off on more rate cuts — but anything’s possible.
Observers said the spread between Government of Canada bonds and bonds issued by banks has been up and down in recent years — they’re wider now that it was six weeks ago, before the eurozone flared up — but yields have come in so much that banks are still better off.
Monday, 28 May 2012
Canada’s economic growth expected to come up short of Bank of Canada’s forecast
Randall Palmer, Reuters
OTTAWA — The Canadian economy probably expanded at a significantly slower rate in the first quarter than the Bank of Canada had predicted in January, and in fact its spare capacity may have risen, a Reuters survey of analysts showed on Friday.
The median forecast of an annualized growth rate of 1.9% compared with the central bank’s 2.5% forecast and matched the lukewarm fourth-quarter rate.
The Bank of Canada has estimated that the growth in economic capacity rises by 2% a year, so any economic growth below that rate means a wider output gap.
And a wider output gap – the difference between potential and actual output – would make the Bank of Canada (BoC) less likely to raise interest rates because it reduces the chances of a pickup in inflation.
for hikes in the second half,” said Doug Porter, deputy chief economist at BMO Capital Markets, which predicts 1.8% growth in the quarter.
“But at the same time we’re seeing a major flare-up in concerns about Europe and some cooling of the U.S. economy.”
The central bank said on April 17 that it might have to start raising interest rates and referred again to that language as recently as May 8. But overnight index swaps, which track the central bank’s main policy rate, are now beginning to point to the possibility of a rate cut instead.
Still, more than a third of the analysts surveyed by Reuters see first-quarter growth at 2% or more.
“As long as you’re above 2%, you’re still absorbing capacity, you’re still describing a Canadian economy that remains fairly strong domestically but still struggled a little bit against some of those external headwinds,” said David Tulk at TD Securities, which is predicting a 2.2% first-quarter growth rate.
Net exports, an inventory build and, to a lesser extent, consumption are expected to have contributed to growth, partly counteracted by a dropping off of government stimulus.
On a monthly basis, real gross domestic product rose by 0.1% in January from December before falling by 0.2% in February. The Reuters survey points to a much stronger March performance of 0.4% growth.
OTTAWA — The Canadian economy probably expanded at a significantly slower rate in the first quarter than the Bank of Canada had predicted in January, and in fact its spare capacity may have risen, a Reuters survey of analysts showed on Friday.
The median forecast of an annualized growth rate of 1.9% compared with the central bank’s 2.5% forecast and matched the lukewarm fourth-quarter rate.
The Bank of Canada has estimated that the growth in economic capacity rises by 2% a year, so any economic growth below that rate means a wider output gap.
And a wider output gap – the difference between potential and actual output – would make the Bank of Canada (BoC) less likely to raise interest rates because it reduces the chances of a pickup in inflation.
for hikes in the second half,” said Doug Porter, deputy chief economist at BMO Capital Markets, which predicts 1.8% growth in the quarter.
“But at the same time we’re seeing a major flare-up in concerns about Europe and some cooling of the U.S. economy.”
The central bank said on April 17 that it might have to start raising interest rates and referred again to that language as recently as May 8. But overnight index swaps, which track the central bank’s main policy rate, are now beginning to point to the possibility of a rate cut instead.
Still, more than a third of the analysts surveyed by Reuters see first-quarter growth at 2% or more.
“As long as you’re above 2%, you’re still absorbing capacity, you’re still describing a Canadian economy that remains fairly strong domestically but still struggled a little bit against some of those external headwinds,” said David Tulk at TD Securities, which is predicting a 2.2% first-quarter growth rate.
Net exports, an inventory build and, to a lesser extent, consumption are expected to have contributed to growth, partly counteracted by a dropping off of government stimulus.
On a monthly basis, real gross domestic product rose by 0.1% in January from December before falling by 0.2% in February. The Reuters survey points to a much stronger March performance of 0.4% growth.
Sunday, 27 May 2012
Rising mortgage debt rendering ‘Canadian households stretched thin’: DBRS
Barry Critchley
DBRS, the Canadian headquartered credit rating agency, has joined a long list of organizations that have weighed in on the matter of the Canadian residential housing market.
Like many of those previous studies and against the background of concerns being raised by the federal government and the Bank of Canada, DBRS found some positive — and negative — aspects about the sector that seems to consume Canadians. And with good reason: in many cases, the family home is the largest source of household wealth.
For instance, despite record high levels of household debt, DBRS argued that Canadian households have net worth that could withstand a property value decline of 40%.
But “rising household financial leverage and reduced affordability are of concern, rendering Canadian households stretched thin and vulnerable to liquidity shock or cash flow shortage, such as loss of income or unexpected expenses,” wrote DBRS.
At the end of 2011, Canadian mortgage lending amounted to $1.1-trillion — or more than double what it was a decade earlier. Add in home equity lines of credit and outstanding mortgage-related debt was about $1.3-trillion.
Along with rising mortgage and consumer debt, average house prices are now 4.9 times average gross family income — a level that would require Canadian household to allocate 37% of its pre-tax income to housing-related costs — the so-called “housing affordability ratio.” (House prices have risen faster than average household income.)
DBRS noted that the 37% ratio “is aided by the low interest rate environment and is only slightly worse than the long-term average.” But if interest rates were to jump by 2% the ratio could rise to 43% or more of pre-tax income. “Adding in other household expenses and payments, the average household is left with little residual cash flow or savings,” it said.
Affordability measurements based on national average values “are misleading and do not consider regional or market-specific preferences, differences or even property types,” DBRS said.
Accordingly and “barring a nationwide economic contraction, the real estate market for most Canadian cities appears balanced based on sales activities or housing inventory supply, but moderately overvalued based on the price-to-average income or affordability ratio, with potential overvaluations or pockets of vulnerability in certain markets and segments.”
So what are the big levers?
DBRS said that “a combination of higher interest rates, lower property values and a drastic increase in unemployment would be of great concern as mortgage defaults are closely related to employment and individual family situations.”
DBRS, the Canadian headquartered credit rating agency, has joined a long list of organizations that have weighed in on the matter of the Canadian residential housing market.
Like many of those previous studies and against the background of concerns being raised by the federal government and the Bank of Canada, DBRS found some positive — and negative — aspects about the sector that seems to consume Canadians. And with good reason: in many cases, the family home is the largest source of household wealth.
For instance, despite record high levels of household debt, DBRS argued that Canadian households have net worth that could withstand a property value decline of 40%.
But “rising household financial leverage and reduced affordability are of concern, rendering Canadian households stretched thin and vulnerable to liquidity shock or cash flow shortage, such as loss of income or unexpected expenses,” wrote DBRS.
At the end of 2011, Canadian mortgage lending amounted to $1.1-trillion — or more than double what it was a decade earlier. Add in home equity lines of credit and outstanding mortgage-related debt was about $1.3-trillion.
Along with rising mortgage and consumer debt, average house prices are now 4.9 times average gross family income — a level that would require Canadian household to allocate 37% of its pre-tax income to housing-related costs — the so-called “housing affordability ratio.” (House prices have risen faster than average household income.)
DBRS noted that the 37% ratio “is aided by the low interest rate environment and is only slightly worse than the long-term average.” But if interest rates were to jump by 2% the ratio could rise to 43% or more of pre-tax income. “Adding in other household expenses and payments, the average household is left with little residual cash flow or savings,” it said.
Affordability measurements based on national average values “are misleading and do not consider regional or market-specific preferences, differences or even property types,” DBRS said.
Accordingly and “barring a nationwide economic contraction, the real estate market for most Canadian cities appears balanced based on sales activities or housing inventory supply, but moderately overvalued based on the price-to-average income or affordability ratio, with potential overvaluations or pockets of vulnerability in certain markets and segments.”
So what are the big levers?
DBRS said that “a combination of higher interest rates, lower property values and a drastic increase in unemployment would be of great concern as mortgage defaults are closely related to employment and individual family situations.”
Thursday, 24 May 2012
Mortgage brokers warn about new refinancing rules
TARA PERKINS— FINANCIAL SERVICES REPORTER
From Tuesday's Globe and Mail
Canada’s mortgage brokers are warning the banking regulator that its proposed mortgage underwriting rules could result in people losing their homes.
The brokers are concerned about a number of the potential rules, but the one that worries them most outlines what banks would have to do when a consumer wants to renew or refinance their mortgage.
The proposed rules suggest that banks recheck areas such as employment status, current income and the current value of the home for renewals and refinancings.
“This would be a significant, significant change,” Jim Murphy, the head of the Canadian Association of Accredited Mortgage Professionals (CAAMP).
Currently, when mortgages come up for renewal, banks tend to focus on the borrower’s payment history. They rarely appraise the property again and not all banks will check the borrower’s updated income level, Mr. Murphy said.
“CAAMP strongly recommends that this concept be clarified so that mortgages continue to be renewed at maturity without requalification,” the industry association said in a submission to the Office of the Superintendent of Financial Institutions (OSFI).
“If not, homeowners who have been in compliance may no longer qualify. This would result in a number of properties hitting the market at the same time and thereby driving down prices.”
Such a phenomenon could add further fuel to a real estate downturn if lower house prices and higher unemployment caused more people to lose their homes upon renewal, Mr. Murphy suggested.
Household debt driven by mortgage credit expansion is the main threat to the credit risk profiles of Canadian financial institutions, Fitch Ratings said in a report Monday.
OSFI unveiled the proposed new rules in March, and requested submissions from the industry. Rod Giles, a spokesman for the banking regulator, said it has received a significant number of submissions from trade associations, lenders, insurers and the brokers as well as private citizens.
OSFI is still reviewing them, but hopes to release final rules by the end of June, along with a summary of the submissions and the reasons for its decisions.
It released the potential rules after the Financial Stability Board, a global financial oversight body, called on all regulators to ensure mortgage lenders were adhering to certain underwriting principles.
But, with Ottawa seeking to prevent a runup in Canadian house prices from leading to a crash, Canada’s proposed guidelines go a bit further.
OSFI has signalled it wants banks to limit home equity lines of credit to 65 per cent of a property’s value.
“Many borrowers use HELOCs to invest in capital markets or even for their own business purposes,” CAAMP says in its submission. “In this way, many Canadians are using their HELOCs for retirement and job creation – a positive goal which the government is trying to encourage.”
Canada's six biggest banks held $912-billion worth of exposure to the residential mortgage market at the end of January, according to figures compiled by Fitch. That included $730-billion of mortgages and $182-billion of home equity lines of credit.
The mortgage brokers would like to see people with good credit and income be able to borrow more than 65 per cent of the value of their home.
One proposed rule that the group applauds would eliminate so-called “cash back” mortgages, which essentially allow a consumer to borrow their down payment from the bank.
In 2008, Finance Minister Jim Flaherty changed the rules so that consumers had to put at least 5 per cent down (after a period of time during which Ottawa had allowed mortgages with a zero down payment). However, Ottawa left the door open for consumers to borrow that 5 per cent. The big banks subsequently came out with products in which they will lend a mortgage and give the borrower an amount equal to 5 per cent of the value up front (at a steeper rate).
“Borrowers should have ‘skin in the game,’ ” CAAMP said in its submission.
From Tuesday's Globe and Mail
Canada’s mortgage brokers are warning the banking regulator that its proposed mortgage underwriting rules could result in people losing their homes.
The brokers are concerned about a number of the potential rules, but the one that worries them most outlines what banks would have to do when a consumer wants to renew or refinance their mortgage.
The proposed rules suggest that banks recheck areas such as employment status, current income and the current value of the home for renewals and refinancings.
“This would be a significant, significant change,” Jim Murphy, the head of the Canadian Association of Accredited Mortgage Professionals (CAAMP).
Currently, when mortgages come up for renewal, banks tend to focus on the borrower’s payment history. They rarely appraise the property again and not all banks will check the borrower’s updated income level, Mr. Murphy said.
“CAAMP strongly recommends that this concept be clarified so that mortgages continue to be renewed at maturity without requalification,” the industry association said in a submission to the Office of the Superintendent of Financial Institutions (OSFI).
“If not, homeowners who have been in compliance may no longer qualify. This would result in a number of properties hitting the market at the same time and thereby driving down prices.”
Such a phenomenon could add further fuel to a real estate downturn if lower house prices and higher unemployment caused more people to lose their homes upon renewal, Mr. Murphy suggested.
Household debt driven by mortgage credit expansion is the main threat to the credit risk profiles of Canadian financial institutions, Fitch Ratings said in a report Monday.
OSFI unveiled the proposed new rules in March, and requested submissions from the industry. Rod Giles, a spokesman for the banking regulator, said it has received a significant number of submissions from trade associations, lenders, insurers and the brokers as well as private citizens.
OSFI is still reviewing them, but hopes to release final rules by the end of June, along with a summary of the submissions and the reasons for its decisions.
It released the potential rules after the Financial Stability Board, a global financial oversight body, called on all regulators to ensure mortgage lenders were adhering to certain underwriting principles.
But, with Ottawa seeking to prevent a runup in Canadian house prices from leading to a crash, Canada’s proposed guidelines go a bit further.
OSFI has signalled it wants banks to limit home equity lines of credit to 65 per cent of a property’s value.
“Many borrowers use HELOCs to invest in capital markets or even for their own business purposes,” CAAMP says in its submission. “In this way, many Canadians are using their HELOCs for retirement and job creation – a positive goal which the government is trying to encourage.”
Canada's six biggest banks held $912-billion worth of exposure to the residential mortgage market at the end of January, according to figures compiled by Fitch. That included $730-billion of mortgages and $182-billion of home equity lines of credit.
The mortgage brokers would like to see people with good credit and income be able to borrow more than 65 per cent of the value of their home.
One proposed rule that the group applauds would eliminate so-called “cash back” mortgages, which essentially allow a consumer to borrow their down payment from the bank.
In 2008, Finance Minister Jim Flaherty changed the rules so that consumers had to put at least 5 per cent down (after a period of time during which Ottawa had allowed mortgages with a zero down payment). However, Ottawa left the door open for consumers to borrow that 5 per cent. The big banks subsequently came out with products in which they will lend a mortgage and give the borrower an amount equal to 5 per cent of the value up front (at a steeper rate).
“Borrowers should have ‘skin in the game,’ ” CAAMP said in its submission.
Wednesday, 23 May 2012
Is there ever a bad time to invest in a rental property?
Fabio Campanella, Special to Financial Post
Record low interest rates coupled with an overly extended bull market for Canadian residential real estate has some investors questioning the validity of investing in a rental property.
Current economic indicators support these fears: mortgage rates scheduled to rise, a global economy not yet out of the recessionary trenches, residential real estate prices in Canada that have clearly outpaced increases in general earnings over the last decade.
This all paints a compelling picture supporting the hesitation some investors have when dealing with rental properties. But is this hesitation legitimate? Is there ever really a good or bad time to get into the real estate rental market? The answer is yes, and also no; it all depends on your current financial situation.
If the Toronto residential market is used as a barometer we can see that residential real estate has treated us quite well over the past 20 years. During the period from 1992 to 2011 the average sale price for a home in Toronto increased from $214,971 to $465,412 according to the Toronto Real Estate Board (TREB).
That’s a 116.50% ROI over 20 years or 3.94% compound annual return, and that’s just the price increase not including any potential rental profits. In fact, over the last 20 years we have only seen four years of negative returns in the Toronto market and they all fell between 1992 to 1996.
Assuming you were to have purchased an average single-family Toronto rental property in 1992, put 25% down, taken a mortgage for the rest, and found a tenant who’s rental payments covered only your property’s basic operating expenses, taxes, maintenance and the interest portion of your mortgage (leaving you to cover the principal portion yourself) you’d have achieved an 11.40% annualized return on investment as at the end of 2011.
Not bad considering that the TSX would have given you 8.69% over the same time period. Using the same assumptions in the previous example on rolling 20-year periods from 1966 to 2011 the average investor would have achieved annualized compound returns of 13.96%.
In fact even if you were to have purchased a property at the bull market peak just before the infamous GTA real estate crash of 1990 you would still have achieved an 8.94% ROI if you held the property with a decent tenant until 2008 even though the value of your investment would have dropped by 25% over the first 4 years.
So what’s the point? Are rental properties a good investment and is this the right or wrong time to make a move? The answer is yes but only if you’re in it for the long-haul and only if your current financial position allows you to do so. Novice investors tend to follow market momentum and stretch themselves thin. They see prices increasing year over year then go out and take massive amounts of leverage to get in on the action “before it’s too late.”
What often happens is they buy more than they can handle, they don’t do proper due diligence on their tenants, and they get caught with a dud investment that they can’t support with their personal cash flow. This frequently leads to panic selling in order to raise funds to pay off large amounts of debt consequently resulting in losses.
Smart investors take their time. They seek out properties in desirable neighbourhoods, scrutinize their tenant’s ability to make rent payments before they take them on, manage the property with a keen eye, but most importantly they do not over-extend their leverage. Smart investors realize that there may be times that tenants can’t make rent or that markets may temporarily turn south.
Even if the original intention for a real estate investment is a short term flip, the smart investor will not purchase a property they aren’t able to hold over a long period of time should price momentum not go their way in the short run.
Direct investment in real estate is not like buying a passive investment such as a mutual fund. It requires a time commitment, experience, and patience but the long-term results can be superb when done properly.
Record low interest rates coupled with an overly extended bull market for Canadian residential real estate has some investors questioning the validity of investing in a rental property.
Current economic indicators support these fears: mortgage rates scheduled to rise, a global economy not yet out of the recessionary trenches, residential real estate prices in Canada that have clearly outpaced increases in general earnings over the last decade.
This all paints a compelling picture supporting the hesitation some investors have when dealing with rental properties. But is this hesitation legitimate? Is there ever really a good or bad time to get into the real estate rental market? The answer is yes, and also no; it all depends on your current financial situation.
If the Toronto residential market is used as a barometer we can see that residential real estate has treated us quite well over the past 20 years. During the period from 1992 to 2011 the average sale price for a home in Toronto increased from $214,971 to $465,412 according to the Toronto Real Estate Board (TREB).
That’s a 116.50% ROI over 20 years or 3.94% compound annual return, and that’s just the price increase not including any potential rental profits. In fact, over the last 20 years we have only seen four years of negative returns in the Toronto market and they all fell between 1992 to 1996.
Assuming you were to have purchased an average single-family Toronto rental property in 1992, put 25% down, taken a mortgage for the rest, and found a tenant who’s rental payments covered only your property’s basic operating expenses, taxes, maintenance and the interest portion of your mortgage (leaving you to cover the principal portion yourself) you’d have achieved an 11.40% annualized return on investment as at the end of 2011.
Not bad considering that the TSX would have given you 8.69% over the same time period. Using the same assumptions in the previous example on rolling 20-year periods from 1966 to 2011 the average investor would have achieved annualized compound returns of 13.96%.
In fact even if you were to have purchased a property at the bull market peak just before the infamous GTA real estate crash of 1990 you would still have achieved an 8.94% ROI if you held the property with a decent tenant until 2008 even though the value of your investment would have dropped by 25% over the first 4 years.
So what’s the point? Are rental properties a good investment and is this the right or wrong time to make a move? The answer is yes but only if you’re in it for the long-haul and only if your current financial position allows you to do so. Novice investors tend to follow market momentum and stretch themselves thin. They see prices increasing year over year then go out and take massive amounts of leverage to get in on the action “before it’s too late.”
What often happens is they buy more than they can handle, they don’t do proper due diligence on their tenants, and they get caught with a dud investment that they can’t support with their personal cash flow. This frequently leads to panic selling in order to raise funds to pay off large amounts of debt consequently resulting in losses.
Smart investors take their time. They seek out properties in desirable neighbourhoods, scrutinize their tenant’s ability to make rent payments before they take them on, manage the property with a keen eye, but most importantly they do not over-extend their leverage. Smart investors realize that there may be times that tenants can’t make rent or that markets may temporarily turn south.
Even if the original intention for a real estate investment is a short term flip, the smart investor will not purchase a property they aren’t able to hold over a long period of time should price momentum not go their way in the short run.
Direct investment in real estate is not like buying a passive investment such as a mutual fund. It requires a time commitment, experience, and patience but the long-term results can be superb when done properly.
Tuesday, 22 May 2012
Canada’s big banks facing credit risks, Fitch warns
Julia Johnson
Fast-rising home prices and record-levels of household debt are posing a possible threat to Canadian banks’ credit portfolios, according to a report Monday by U.S. ratings agency Fitch.
The agency examined the exposure of Canada’s six largest banks to mortgage risk and found that household debt fuelled by mortgage credit expansion in Canada is the largest threat to credit profiles.
‘We’re not talking about a U.S.-style situation at this juncture’
“These are quite high levels of debt for households and the movement in house prices, we don’t think this is sustainable in the long term,” said report author Fabrice Toka, senior director at Fitch.
The six banks have a combined $730-billion in mortgage exposure and an additional $182-billion in home equity loan exposure, the report noted.
High unemployment or interest rate shock “could aversely affect the ability of leveraged homeowners to meet their mortgage obligations,” the report said.
Fitch said the debt-to-income ratio in Canada is higher than pre-recession levels in the U.S., but Canadian banks aren’t vulnerable to a similar sub-prime mortgage crisis because of fundamental differences in the markets and the way the industry is regulated.
“We’re not talking about a U.S.-style situation at this juncture and there are market structure elements that are different between the two countries that you have to keep in mind as you go between the analysis,” Mr. Toka said.
He pointed to the fact that mortgages were often sold on in the U.S., whereas in Canada banks tend to hold the origination themselves. Also, independent mortgage brokers — often blamed in the mortgage crisis for loose lending — are used much less in Canada.
Fitch analyzed the risk by testing the affect of cumulative bank losses in scenarios where the losses were between one and 10%.
When comparing the banks’ domestic mortgage value relative to total loans, CIBC and RBC were exposed to the most potential risk, while TD Canada Trust and Bank of Montreal were the least. The agency also noted that TD uses more insurance relative to the others while RBC had the least.
“BMO has a different approach to the market than others. For two years now, we have been actively promoting fixed rate products with a maximum amortization of 25 years. With our offering, Canadians can pay less in total interest, become mortgage free faster, and protect themselves against the risk of rising rates,” said Paul Deegan, vice-president government and public relations at BMO Financial Group
“If you run that limited single-factor stress test what you would see is that RBC and CIBC would be viewed as the most exposed, given the size of their mortgage books and also the fact that in the case of RBC, you have a comparatively lower usage of insurance,” Mr. Toka said.
‘Under moderate stresses the banks were all in a position to absorb moderate stress cases’
The agency said Canadian households have become more vulnerable to adverse market shocks in the past decade. The housing market has been pushed upward by low interest rates in the past 10 years. Since housing prices have risen at a faster pace than household income, household debt levels are at record highs, the report said.
“Interest rate levels – being where they are – it still makes debt appear affordable,” Mr. Toka said.
Canadian banks are all regulated by a single regulator. “That would tend to help in terms of reducing conflict of interest and making sure the players behave in the same way,” Mr. Toka said.
Overall, the report found that Canadian banks had sufficient capital to withstand reasonable market stress.
“Generally we found that under moderate stresses the banks were all in a position to absorb moderate stress cases,” Mr. Toka said.
Fast-rising home prices and record-levels of household debt are posing a possible threat to Canadian banks’ credit portfolios, according to a report Monday by U.S. ratings agency Fitch.
The agency examined the exposure of Canada’s six largest banks to mortgage risk and found that household debt fuelled by mortgage credit expansion in Canada is the largest threat to credit profiles.
‘We’re not talking about a U.S.-style situation at this juncture’
“These are quite high levels of debt for households and the movement in house prices, we don’t think this is sustainable in the long term,” said report author Fabrice Toka, senior director at Fitch.
The six banks have a combined $730-billion in mortgage exposure and an additional $182-billion in home equity loan exposure, the report noted.
High unemployment or interest rate shock “could aversely affect the ability of leveraged homeowners to meet their mortgage obligations,” the report said.
Fitch said the debt-to-income ratio in Canada is higher than pre-recession levels in the U.S., but Canadian banks aren’t vulnerable to a similar sub-prime mortgage crisis because of fundamental differences in the markets and the way the industry is regulated.
“We’re not talking about a U.S.-style situation at this juncture and there are market structure elements that are different between the two countries that you have to keep in mind as you go between the analysis,” Mr. Toka said.
He pointed to the fact that mortgages were often sold on in the U.S., whereas in Canada banks tend to hold the origination themselves. Also, independent mortgage brokers — often blamed in the mortgage crisis for loose lending — are used much less in Canada.
Fitch analyzed the risk by testing the affect of cumulative bank losses in scenarios where the losses were between one and 10%.
When comparing the banks’ domestic mortgage value relative to total loans, CIBC and RBC were exposed to the most potential risk, while TD Canada Trust and Bank of Montreal were the least. The agency also noted that TD uses more insurance relative to the others while RBC had the least.
“BMO has a different approach to the market than others. For two years now, we have been actively promoting fixed rate products with a maximum amortization of 25 years. With our offering, Canadians can pay less in total interest, become mortgage free faster, and protect themselves against the risk of rising rates,” said Paul Deegan, vice-president government and public relations at BMO Financial Group
“If you run that limited single-factor stress test what you would see is that RBC and CIBC would be viewed as the most exposed, given the size of their mortgage books and also the fact that in the case of RBC, you have a comparatively lower usage of insurance,” Mr. Toka said.
‘Under moderate stresses the banks were all in a position to absorb moderate stress cases’
The agency said Canadian households have become more vulnerable to adverse market shocks in the past decade. The housing market has been pushed upward by low interest rates in the past 10 years. Since housing prices have risen at a faster pace than household income, household debt levels are at record highs, the report said.
“Interest rate levels – being where they are – it still makes debt appear affordable,” Mr. Toka said.
Canadian banks are all regulated by a single regulator. “That would tend to help in terms of reducing conflict of interest and making sure the players behave in the same way,” Mr. Toka said.
Overall, the report found that Canadian banks had sufficient capital to withstand reasonable market stress.
“Generally we found that under moderate stresses the banks were all in a position to absorb moderate stress cases,” Mr. Toka said.
Friday, 18 May 2012
Half of Canadians plan to retire with mortgage: survey
Garry Marr
The one thing Canadians won’t be retiring anytime soon is their mortgage debt, according to a new survey.
Bank of Montreal says 51% of Canadian homeowners plan to carry their mortgage into their retirement years.
“It’s a phenomenal number I think,” said Tino Di Vito, head of the BMO Retirement Institute.
‘People are more sophisticated in their approach to personal finance today than the previous generation’
But Phil Soper, chief executive of Royal LePage Real Estate Services, said times have changed and he believes Canadians can handle the burden.
“People are more sophisticated in their approach to personal finance today than the previous generation,” says Mr. Soper. “People are living longer, working longer and making real estate plans longer or further into their lives.”
Another trend, one which was not considered by the industry before, is people moving into more expensive, upscale homes after retirement. “Traditionally people paid off their mortgage and people lived in their home until it was time to downsize,” he says. “It’s not necessarily a dangerous trend.”
Another part of the trend could very well be strategic. With rates on a five-year closed mortgage at about 3.5%, paying down that debt might not seem as high a priority for many homeowners. That logic might not be so sound, says Doug Porter, deputy chief economist at Bank of Montreal.
“The extremely low level of interest rates is acting both as an inducement for people to take on more debt than they would have in the past and on the flipside not encouraging them to save as in the past.”
People could end up working longer and it might also mean there will be that much less equity in the home you’ll be leaving to heirs.
The attitude of homeowners could also reflect the longer amortizations the mortgage industry saw before the government cracked down on the rules, Mr. Porter said.
Traditionally, mortgages were amortized over 25 years, but that number ballooned to 40 before Ottawa twice lowered the limit, which now stands at 30. Many are calling for it to be reduced back to 25 years.
Ms. Di Vito says the issue is how it’s affecting retirement with half of Canadian homeowners saying their debt load was hindering their ability to plan and save.
‘Carrying debt into retirement is a threat to financial security’
“Carrying debt into retirement is a threat to financial security,” says Ms. Di Vito, who believes Canadians need about 70% of their pre-retirement income to maintain the same lifestyle. “That assumes other expenses such as mortgages are already taken care of.”
She says half of Canadian homeowners age 50 to 59 still have mortgage debt based on Statistics Canada information. By 60 to 69, 25% of those people still have a mortgage.
It doesn’t help that real estate prices continue at all-time highs. The Canadian Real Estate Association said this week the average home price reached $372,608 in April. In Vancouver, even though prices dropped almost 10% year over year, the average sale price in April was $735,315. Almost 60% of B.C. homeowners expect to take mortgage debt into retirement.
Author Talbot Stevens wonders how people will survive in their retirement.
“People get a hold of a line of credit and they spend $40,000 on upgrading their home. At least with that, you have something to show for it, maybe 40¢ on the dollar,” says Mr. Stevens, who worries about more frivolous spending. “We really have to be more responsible with debt and what we are using it for.”
The one thing Canadians won’t be retiring anytime soon is their mortgage debt, according to a new survey.
Bank of Montreal says 51% of Canadian homeowners plan to carry their mortgage into their retirement years.
“It’s a phenomenal number I think,” said Tino Di Vito, head of the BMO Retirement Institute.
‘People are more sophisticated in their approach to personal finance today than the previous generation’
But Phil Soper, chief executive of Royal LePage Real Estate Services, said times have changed and he believes Canadians can handle the burden.
“People are more sophisticated in their approach to personal finance today than the previous generation,” says Mr. Soper. “People are living longer, working longer and making real estate plans longer or further into their lives.”
Another trend, one which was not considered by the industry before, is people moving into more expensive, upscale homes after retirement. “Traditionally people paid off their mortgage and people lived in their home until it was time to downsize,” he says. “It’s not necessarily a dangerous trend.”
Another part of the trend could very well be strategic. With rates on a five-year closed mortgage at about 3.5%, paying down that debt might not seem as high a priority for many homeowners. That logic might not be so sound, says Doug Porter, deputy chief economist at Bank of Montreal.
“The extremely low level of interest rates is acting both as an inducement for people to take on more debt than they would have in the past and on the flipside not encouraging them to save as in the past.”
People could end up working longer and it might also mean there will be that much less equity in the home you’ll be leaving to heirs.
The attitude of homeowners could also reflect the longer amortizations the mortgage industry saw before the government cracked down on the rules, Mr. Porter said.
Traditionally, mortgages were amortized over 25 years, but that number ballooned to 40 before Ottawa twice lowered the limit, which now stands at 30. Many are calling for it to be reduced back to 25 years.
Ms. Di Vito says the issue is how it’s affecting retirement with half of Canadian homeowners saying their debt load was hindering their ability to plan and save.
‘Carrying debt into retirement is a threat to financial security’
“Carrying debt into retirement is a threat to financial security,” says Ms. Di Vito, who believes Canadians need about 70% of their pre-retirement income to maintain the same lifestyle. “That assumes other expenses such as mortgages are already taken care of.”
She says half of Canadian homeowners age 50 to 59 still have mortgage debt based on Statistics Canada information. By 60 to 69, 25% of those people still have a mortgage.
It doesn’t help that real estate prices continue at all-time highs. The Canadian Real Estate Association said this week the average home price reached $372,608 in April. In Vancouver, even though prices dropped almost 10% year over year, the average sale price in April was $735,315. Almost 60% of B.C. homeowners expect to take mortgage debt into retirement.
Author Talbot Stevens wonders how people will survive in their retirement.
“People get a hold of a line of credit and they spend $40,000 on upgrading their home. At least with that, you have something to show for it, maybe 40¢ on the dollar,” says Mr. Stevens, who worries about more frivolous spending. “We really have to be more responsible with debt and what we are using it for.”
Thursday, 17 May 2012
The Costs of Buying a Home - Closing Costs
Before you take possession of your new abode, you need to consider any and
all additional costs of obtaining your mortgage. We call these closing costs.
Generally estimated around 1 - 1.5% of the price of the home, these are the
unavoidable costs that are the last hurdle between you and glorious home
ownership.
Deposit
Due upon the acceptance of your purchase offer, a deposit is essentially a gesture of good faith between the buyer and the seller. A minimum deposit is usually around $5000.00. This is something your realtor will help you with.
Mortgage loan insurance
This is a mandatory expense for buyers who make a down payment of less than 20%. Administered through one of the three insurers we have in Canada; the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial or AIG, the cost of this insurance depends on the amount of your down payment and also certain details of your application. The premium ranges from between 0.5% all the way up to around 6% if you are self employed and putting only 5% down. This premium is charged on the amount of the mortgage and can be added on to the mortgage.
Home inspection
Real estate agents normally counsel buyers to make an offer on a home conditional on the outcome of an independent home inspection. A home inspector looks for items that could affect the price and desirability of a home, such as outdated wiring, shabby roofing, an elderly furnace or cracks in the foundation. The fee depends on the home's size, age and the amount of time it takes to do a thorough inspection. Approximate cost $400-500.00.
House insurance
Canadian law states that a home owner must have fire insurance on his or her new property effective when he or she takes possession. If the home inspection turned up antiquated wiring or other problematic features, a potential insurer may refuse to cover you unless you get it fixed. Rule of thumb: Factor in all costs required to pacify the insurance company.
Legal fees
A lawyer is vital to any home deal. He or she is responsible for research, handling documents, mediating with the seller's attorney, transfer of land title and much more. Approximate cost $800-1300.00.
Title insurance
This protects you from any unpleasant revelations about your property's history that might crop up in the future. Unless you pay for a survey, it's difficult to ascertain a comprehensive history of your property. In order to deal with potential errors or omissions in the public registry or secret heirs to the land, most new homeowners buy title insurance. The fee depends on two factors. The first is whether the property is urban or rural; title insurance costs more out in the country because there's a greater chance that the property may contain an undisclosed structure, such as a well or a septic tank. The second factor depends on whether it's a single residence or a multiple-family dwelling (such as an apartment); the cost is more in the latter case. This is obtained through your lawyer and is approximately $200-250.00
Interest adjustment
Unless you take possession on the first of the month, you must prepay the amount of interest accrued up to the first day of the next month. This depends on what payment structure you have chosen (monthly, bi weekly, weekly, etc). That sum is due on your closing day or with your first payment, depending on the lender.
Prepaid bills
The seller may be entitled to a reimbursement, from you, if she has prepaid bills (water, gas or hydro) or property taxes.
Moving expenses
Whether you're hiring professional haulers or conscripting friends and family to lug boxes, you can expect an outlay of cash on moving day.
Service activation fees
Once you move into your new dwelling, you'll inevitably have to pay activation fees for utilities such as phone, cable, gas and electricity.
Forwarding your mail
You've made a point of apprising the important people in your life -- family, friends, employers, the bank, the utilities, your credit card company -- of your new address. But you're bound to forget someone. To ensure you don't miss any crucial mail, you should get Canada Post to forward mail sent to your old address to your new residence. You can sign up for the service online or at any post office. The cost is about $30 for six months, but peace of mind is priceless.
Appraisal
An appraisal may be required to determine the market value of the property you are buying. If you are putting more than 20% down the appraisal is at your cost and they generally start at $350 and go up depending on the appraisal company, the size of the property and its location. For example, properties over 1800 square feet have a higher cost as well as acreages depending on the amount of land and where they are located.
Deposit
Due upon the acceptance of your purchase offer, a deposit is essentially a gesture of good faith between the buyer and the seller. A minimum deposit is usually around $5000.00. This is something your realtor will help you with.
Mortgage loan insurance
This is a mandatory expense for buyers who make a down payment of less than 20%. Administered through one of the three insurers we have in Canada; the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial or AIG, the cost of this insurance depends on the amount of your down payment and also certain details of your application. The premium ranges from between 0.5% all the way up to around 6% if you are self employed and putting only 5% down. This premium is charged on the amount of the mortgage and can be added on to the mortgage.
Home inspection
Real estate agents normally counsel buyers to make an offer on a home conditional on the outcome of an independent home inspection. A home inspector looks for items that could affect the price and desirability of a home, such as outdated wiring, shabby roofing, an elderly furnace or cracks in the foundation. The fee depends on the home's size, age and the amount of time it takes to do a thorough inspection. Approximate cost $400-500.00.
House insurance
Canadian law states that a home owner must have fire insurance on his or her new property effective when he or she takes possession. If the home inspection turned up antiquated wiring or other problematic features, a potential insurer may refuse to cover you unless you get it fixed. Rule of thumb: Factor in all costs required to pacify the insurance company.
Legal fees
A lawyer is vital to any home deal. He or she is responsible for research, handling documents, mediating with the seller's attorney, transfer of land title and much more. Approximate cost $800-1300.00.
Title insurance
This protects you from any unpleasant revelations about your property's history that might crop up in the future. Unless you pay for a survey, it's difficult to ascertain a comprehensive history of your property. In order to deal with potential errors or omissions in the public registry or secret heirs to the land, most new homeowners buy title insurance. The fee depends on two factors. The first is whether the property is urban or rural; title insurance costs more out in the country because there's a greater chance that the property may contain an undisclosed structure, such as a well or a septic tank. The second factor depends on whether it's a single residence or a multiple-family dwelling (such as an apartment); the cost is more in the latter case. This is obtained through your lawyer and is approximately $200-250.00
Interest adjustment
Unless you take possession on the first of the month, you must prepay the amount of interest accrued up to the first day of the next month. This depends on what payment structure you have chosen (monthly, bi weekly, weekly, etc). That sum is due on your closing day or with your first payment, depending on the lender.
Prepaid bills
The seller may be entitled to a reimbursement, from you, if she has prepaid bills (water, gas or hydro) or property taxes.
Moving expenses
Whether you're hiring professional haulers or conscripting friends and family to lug boxes, you can expect an outlay of cash on moving day.
Service activation fees
Once you move into your new dwelling, you'll inevitably have to pay activation fees for utilities such as phone, cable, gas and electricity.
Forwarding your mail
You've made a point of apprising the important people in your life -- family, friends, employers, the bank, the utilities, your credit card company -- of your new address. But you're bound to forget someone. To ensure you don't miss any crucial mail, you should get Canada Post to forward mail sent to your old address to your new residence. You can sign up for the service online or at any post office. The cost is about $30 for six months, but peace of mind is priceless.
Appraisal
An appraisal may be required to determine the market value of the property you are buying. If you are putting more than 20% down the appraisal is at your cost and they generally start at $350 and go up depending on the appraisal company, the size of the property and its location. For example, properties over 1800 square feet have a higher cost as well as acreages depending on the amount of land and where they are located.
Wednesday, 16 May 2012
Yes, you can reestablish your credit rating
Canada’s delinquency rate is falling, according to one of the country’s credit agencies. Equifax Canada said the rate — defined as missing three or more consecutive payments on debt obligations— dropped by 7.6% from the previous year, according to the agency’s Q1, 2012 National Credit Trends Report.
The national delinquency rate is now 3.04% which means 738,526 Canadians are falling behind on their payments.
“Almost three-quarters of a million Canadians now have the opportunity to improve their creditworthiness as the economy improves,” says Nadim Abdo, vice-president of consulting and analytical services with Equifax Canada.
Equifax has outlined some steps to reestablish your credit rating.
• Start small. Try a credit card with a department stores or your local credit union.
• Ask for help. Get a family member or fried to co-sign for a loan.
• Consider a secured card. They are guaranteed by a deposit you make with the credit grantor but offer purchasing power of a major credit card.
• Use new accounts in moderation. Make payments for more than the minimum amount owed and make them on time. Keep a small balance on your new accounts so that your positive payment history will continue to show up on your credit report.
• Keep balances low. Avoid carrying a balance of more than 30% of your credit limit. Lenders may view this as excessive debt with which you may not be able to stay current.
• Reduce household spending. Review your household expenses and determine which ones you could do without. Consider creating a budget to track exactly where your money goes each month.
• Call lenders. Explain the situation. Some lenders will work out a plan for you to pay back what you owe.
• Contact a reputable credit counseling agency. But beware of agencies that offer a quick fix.
• Monitor your progress. Check to see if your rating has improved. This can be done for a fee on a regular basis or for free through the mail.
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