Robert McLister, The Globe and Mail
There are thousands of 20- and 30-somethings out there who are tired of renting. They’re itching to buy a house but they have one big problem: they don’t have enough of a down payment.
Undeterred, some may fish a few toonies from between the couch cushions and scrape together the 5 per cent minimum down payment required by law.
Many of these folks will then lock in a bargain-basement 10-year mortgage at 3.89 per cent, find a hip property for about $300,000 and move in. For these new happy home owners, life couldn’t be better.
But what if, seemingly overnight, the unexpected happened and home prices dove 15 per cent?
The mortgage balance of these young buyers would suddenly be more than their house is worth. If forced to sell now, they wouldn’t be able to break their mortgage unless they made up this shortfall from their own pocket.
Their only choice is to ride out the real estate cycle - and hope it’s not a long ride.
If the above scenario sounds like a long shot, think again. Home prices are a two-way street. We’ve almost forgotten what selloffs look like but, believe you me, they happen.
When prices finish dropping, they sometimes rebound - or they can stay flat…for years.
If the latter happens and you’ve saddled yourself with a big fat mortgage, you could wind up a prisoner in the home you used to love, a home which is now too far from your new job, too small for your growing family or too expensive with your spouse out of work.
This is the very real risk facing people who leap into a red-hot housing market with a dream, a 5 per cent down payment and very little savings.
While not a prediction, a 15 per cent-plus correction in markets like Toronto and Vancouver is a definite possibility. And that means fringe buyers who put down the minimum - and stretch their amortization to the maximum - are taking a Vegas-style gamble.
This hypothetical chart below shows what might happen if you bought a $300,000 house with 5 per cent down and a 30-year amortization. (The average purchase price for a first-time buyer is about $295,000, according to national figures from mortgage insurer Genworth Financial Canada.)
This chart assumes a 15 per cent drop in home value over three years and flat prices for another six or more years. (It also assumes you make no mortgage prepayments, pay a 2.95 per cent default insurance premium - as required by law, and incur roughly 6.5 per cent in liquidation costs, which include realtor fees, legal fees and disbursements, mortgage discharge fees and penalties, repairs and staging, etc.)
In this hypothetical scenario, if you wanted to sell your house after five years you’d owe at least $16,500 more on your mortgage than you could get from the sale.
So here’s the simple point: If you have to stretch yourself financially to buy a new home, you’re probably not ready to trade in your landlord for a lender.
If you do press forward with just 5 per cent down, be prepared to stay in your home a while - potentially a long while.
Here’s what some people with experience say about 5 per cent down mortgages:
• “5 per cent-down mortgages are geared to someone that’s more than a few years into their career, with path for advancement and income increases; someone who has a savings plan; and someone who’s demonstrated that they’re handling credit responsibility and are well below normal debt ratio limits. If a borrower’s house was worth less than their mortgage debt, things like job loss, pay cuts and overspending would only exacerbate the risks and further limit their options.” — Mortgage specialist Marc Ffrench, Royal Bank of Canada
• “The clients putting five per cent down on a $600,000 house with a high debt ratio are the ones you especially worry about. These are properties where you need two parties with six-figure incomes.” — Mortgage planner Geoff Willis, Dominion Lending Centres Origin
• “A five per cent mortgage really isn’t suited to a lot of people. If you absolutely have to put down 5 per cent, aim to make additional payments every year to amortize the mortgage faster.” — Financial adviser Adrian Mastracci, KCM Wealth Management
• “You should also have some kind of emergency fund - at least three months of living expenses. Put it at an institution that has not lent you any money because they can sometimes use money in savings to offset (delinquent debts).” — Mr. Mastracci
And by all means, if you can’t make a healthy down payment, be sure you’re financially stable and love your house. There’s a chance you could be in it a lot longer than you think.
Robert McLister is the editor ofCanadianMortgageTrends.com and a mortgage planner atMortgage Architects.
Friday, 14 September 2012
Thursday, 13 September 2012
Is household debt a threat to our economy?
By TMG, The Mortgage Group, blog
Here are the facts:
Household debt has been increasing steadily over that past 30 years as interest rates continue to decline but, for the most part, Canadians gear their borrowing to what they can afford. Jobs are holding steady and business is confident about future prospects. So, lower interest rates mean less money goes to servicing debts.
In accumulating debt, Canadians also have a large asset, namely their homes. And although some in the financial community are concerned about the massive debt, Eric Lascelles, chief economist at RBC Global Asset Management recently said that assets outweigh debt by a factor of five.
It’s true that high household debt does put homeowners at risk but a closer look at the stats tells a better story. Overall Canadians exercise fairly good judgment when it comes to borrowing. The more vulnerable – seniors and low-income earners -- carry lower debt loads. It’s also true that the housing market carries a big part of household debt, however the percentage of income earmarked for mortgage payments is not burdensome.
The new mortgage rules will certainly have an impact on the housing industry as will declining house prices; and interest rates will rise. Perhaps this will lead to some weakening of the economy. Delinquencies might increase a bit but the risk of the economy going into a recession is low. High-ratio mortgages are insured and our sub-prime market is small.
As for the weaker growth, Flaherty has said that the government could increase its deficit to shore up the economy. “If we ran into a serious world economic crisis arising out of the European situation, or something else, “he said, “Then of course we’d be responsive if we had to be to protect the Canadian economy and protect Canadian jobs as we have done in the past.”
Here are the facts:
- Canadian household debt is indeed equal to 154% of disposable income
- The housing market is softening and prices are going down in many areas of the country
- Canadians will be impacted by higher interest rates
Household debt has been increasing steadily over that past 30 years as interest rates continue to decline but, for the most part, Canadians gear their borrowing to what they can afford. Jobs are holding steady and business is confident about future prospects. So, lower interest rates mean less money goes to servicing debts.
In accumulating debt, Canadians also have a large asset, namely their homes. And although some in the financial community are concerned about the massive debt, Eric Lascelles, chief economist at RBC Global Asset Management recently said that assets outweigh debt by a factor of five.
It’s true that high household debt does put homeowners at risk but a closer look at the stats tells a better story. Overall Canadians exercise fairly good judgment when it comes to borrowing. The more vulnerable – seniors and low-income earners -- carry lower debt loads. It’s also true that the housing market carries a big part of household debt, however the percentage of income earmarked for mortgage payments is not burdensome.
The new mortgage rules will certainly have an impact on the housing industry as will declining house prices; and interest rates will rise. Perhaps this will lead to some weakening of the economy. Delinquencies might increase a bit but the risk of the economy going into a recession is low. High-ratio mortgages are insured and our sub-prime market is small.
As for the weaker growth, Flaherty has said that the government could increase its deficit to shore up the economy. “If we ran into a serious world economic crisis arising out of the European situation, or something else, “he said, “Then of course we’d be responsive if we had to be to protect the Canadian economy and protect Canadian jobs as we have done in the past.”
Wednesday, 12 September 2012
Cashbacks here to stay...
By Nestor Arellano, Mortgage Broker News
The clock may be ticking on bank-offered cashback, but the largest credit union in Ontario is now committing to offering 100 per cent financing until its regulator says otherwise.
“We believe that the five per cent cashback down payment is a great product for the right consumer,” said Rick Arnds, senior manager for emerging markets at Meridian Credit Union. “We will continue to offer 100 per cent financing until directed not to do so by DICO (Deposit Insurance Corporation of Ontario).”
The announcement comes as federally regulated lenders begin to announce that they will stop offering cashback mortgage product in compliance with new OSFI guidelines. Many banks have been slowly winding down their cashback offerings, although the first of the official deadline starts October 31.
This week, Scotiabank was the latest to announce it will drop its Free Down Payment program on September 15.
Credit unions have not yet received any directive on the matter from DICO, but the general consensus is that the provincial regulating body will follow its federal counterpart eventually, Arnds told MortgageBrokerNews.ca. “We think, it is only a question of when,” he said.
“Our product is best suited for people who just can’t put together that 5 per cent down because their money may be tied up in RRSPs or what we call good debts such as an outstanding student loan,” he said.
The clock may be ticking on bank-offered cashback, but the largest credit union in Ontario is now committing to offering 100 per cent financing until its regulator says otherwise.
“We believe that the five per cent cashback down payment is a great product for the right consumer,” said Rick Arnds, senior manager for emerging markets at Meridian Credit Union. “We will continue to offer 100 per cent financing until directed not to do so by DICO (Deposit Insurance Corporation of Ontario).”
The announcement comes as federally regulated lenders begin to announce that they will stop offering cashback mortgage product in compliance with new OSFI guidelines. Many banks have been slowly winding down their cashback offerings, although the first of the official deadline starts October 31.
This week, Scotiabank was the latest to announce it will drop its Free Down Payment program on September 15.
Credit unions have not yet received any directive on the matter from DICO, but the general consensus is that the provincial regulating body will follow its federal counterpart eventually, Arnds told MortgageBrokerNews.ca. “We think, it is only a question of when,” he said.
“Our product is best suited for people who just can’t put together that 5 per cent down because their money may be tied up in RRSPs or what we call good debts such as an outstanding student loan,” he said.
Tuesday, 11 September 2012
When moving up means moving out
Garry Marr
Even record debt levels — household debt-to-income ratio in Canada is now at 152% — seem to have done little to get Canadians to move for a chance to get ahead
Just pick up and move. Who wouldn’t, if it meant making more money or even just living in a city where the cost of living is lower or the tax burden smaller?
The answer is most Canadians.
Even though it’s probably one of the biggest personal financial decisions you can make — and often a sure-fire way to increase your net worth — we seem to have a degree of inertia other countries don’t share.
You can’t discount the personal attachment people have to their existing addresses tied up in connections to family and friends and familiarity.
Americans consider mobility an essential ingredient to a better life
But none of this seems to stop Americans from moving around their country to look for a better paying job or for a better tax rate. A study from the World Bank found a little over 3% of workers move annually within the 50 states, which compares with just under 1% of Canadian workers moving within the 10 provinces.
“This higher level of mobility partly reflects the culture of a country built through immigration,” said the report. “Americans consider mobility an essential ingredient to a better life.”
Craig Alexander, chief economist with Toronto-Dominion Bank, said labour mobility has always been higher in the U.S.
“The U.S. is an exception because it has the highest labour mobility rate of any country in the world,” he says. “Look at Europe — and they have an economic union — and you don’t get nearly as much labour mobility as the U.S.”
He said the trend of workers to move from the northeast to warmer climates is also hard to replicate in Canada.
“Our north-south is a little different.”
Even record debt levels — household debt-to-income ratio in Canada is now at 152% — seem to have done little to get Canadians to move for a chance to get ahead.
A new government in Quebec — even one that supports separatism and potentially raising taxes in what is already the highest taxed jurisdiction in the country for most income classes — is unlikely to have a major impact on interprovincial migration.
A study released in February by Montreal’s HEC business school suggested the province was already on the way to becoming the country’s poorest province. Quebec’s cheaper cost of living is eroding while the gap in income levels between it and other provinces is widening.
But is personal wealth or lack of it enough to convince people in Quebec — or any province for that matter — to move. “It will be a factor but it’s hard to quantify,” says Martin Coiteux, an economist who wrote the study for the HEC’s Centre for Productivity and Prosperity.
Alberta may have the jobs and the lowest unemployment rate in the country, not to mention no sales tax, but it did little to encourage Quebecers to move there. Statistics Canada says between July 1, 2009 and June 30, 2010 slightly less than 4,000 of them made that move. Much smaller Nova Scotia had 4,233 people make the decision to pack and go West.
Mr. Alexander points out that governments in Canada sometimes make it difficult to move because professional designations are not always recognized in other locales. “Some of the provinces are getting better at recognizing professional accreditation but it’s still not seamless across the country,” he says. “That’s one the biggest barriers [to moving].”
At what point does it make sense to move? That decision depends on the cost of living, which includes such things as the tax rate and housing, but also how much more income you can pull in by pulling up stakes.
“It’s complicated during your working life because the cost of living can be offset by higher wages and salaries,” says Mr. Alexander, adding that moving back home to the East Coast on retirement with its cheaper cost of living has created a windfall for some Atlantic Canadians.
Housing is more expensive in Alberta, for instance, but income levels are higher too. Consider median income for all families in Nova Scotia was $64,100 in 2010, according to Statistics Canada. The figure jumps to $85,380 for the same period in Alberta. Head out to British Columbia, where detached homes in Vancouver average out to nearly $1-million, and you’ve got median family income of $66,970.
You can get some tax savings moving around the country and that will drove your costs down. Punch $60,000 in to Ernst and Young’s online tax calculator for 2012 and you find a B.C. resident would be left with $48,345 in after tax income — the highest among the provinces at that tax level. At $44,619, Quebec would leave you with the lowest after tax income.
I think we are more focused and grounded here on what is important and that’s family and friends
Jamie Golombek, managing director of tax & estate planning with CIBC Private Wealth Management, says Canadians don’t usually move for tax reasons alone but he wonders whether Ontario’s new surtax on people making more than $500,000 will have a direct impact.
“Ontario will ultimately have the highest rate,” says Mr. Golombek. “You have to have a very dramatic tax difference [to move]. I don’t think people will move from Quebec to Ontario for 2%.”
Mr. Golombek’s own theory on why people are unwilling move is more related to tradition than taxes. He says Americans are used to moving out of their home and leaving town for school.
“Once you are away for school it becomes easier to take a job anywhere in the U.S. In Canada, for the most part, people go to school closer to where they live,” he says.
Financial education Talbot Stevens says lifestyle seems as important to Canadians as their personal income statement.
“I think we are more focused and grounded here on what is important and that’s family and friends,” says Mr. Stevens. “The American dream is to get rich and have all the money you need even though it might cost you two or three marriages. You can see that attitude right across the country.”
But there is a point where people will move for the money and it usually starts with the fact you can’t get a job where you live.
“People leave the East Coast because they have to,” says Mr. Stevens. “Income opportunities dominate the discussion more than the tax environment. The lifestyle argument doesn’t work if you don’t have a job.
“Inertia will keep you where you live unless there is an external force that causes you to move.”
Even record debt levels — household debt-to-income ratio in Canada is now at 152% — seem to have done little to get Canadians to move for a chance to get ahead
Just pick up and move. Who wouldn’t, if it meant making more money or even just living in a city where the cost of living is lower or the tax burden smaller?
The answer is most Canadians.
Even though it’s probably one of the biggest personal financial decisions you can make — and often a sure-fire way to increase your net worth — we seem to have a degree of inertia other countries don’t share.
You can’t discount the personal attachment people have to their existing addresses tied up in connections to family and friends and familiarity.
Americans consider mobility an essential ingredient to a better life
But none of this seems to stop Americans from moving around their country to look for a better paying job or for a better tax rate. A study from the World Bank found a little over 3% of workers move annually within the 50 states, which compares with just under 1% of Canadian workers moving within the 10 provinces.
“This higher level of mobility partly reflects the culture of a country built through immigration,” said the report. “Americans consider mobility an essential ingredient to a better life.”
Craig Alexander, chief economist with Toronto-Dominion Bank, said labour mobility has always been higher in the U.S.
“The U.S. is an exception because it has the highest labour mobility rate of any country in the world,” he says. “Look at Europe — and they have an economic union — and you don’t get nearly as much labour mobility as the U.S.”
He said the trend of workers to move from the northeast to warmer climates is also hard to replicate in Canada.
“Our north-south is a little different.”
Even record debt levels — household debt-to-income ratio in Canada is now at 152% — seem to have done little to get Canadians to move for a chance to get ahead.
A new government in Quebec — even one that supports separatism and potentially raising taxes in what is already the highest taxed jurisdiction in the country for most income classes — is unlikely to have a major impact on interprovincial migration.
A study released in February by Montreal’s HEC business school suggested the province was already on the way to becoming the country’s poorest province. Quebec’s cheaper cost of living is eroding while the gap in income levels between it and other provinces is widening.
But is personal wealth or lack of it enough to convince people in Quebec — or any province for that matter — to move. “It will be a factor but it’s hard to quantify,” says Martin Coiteux, an economist who wrote the study for the HEC’s Centre for Productivity and Prosperity.
Alberta may have the jobs and the lowest unemployment rate in the country, not to mention no sales tax, but it did little to encourage Quebecers to move there. Statistics Canada says between July 1, 2009 and June 30, 2010 slightly less than 4,000 of them made that move. Much smaller Nova Scotia had 4,233 people make the decision to pack and go West.
Mr. Alexander points out that governments in Canada sometimes make it difficult to move because professional designations are not always recognized in other locales. “Some of the provinces are getting better at recognizing professional accreditation but it’s still not seamless across the country,” he says. “That’s one the biggest barriers [to moving].”
At what point does it make sense to move? That decision depends on the cost of living, which includes such things as the tax rate and housing, but also how much more income you can pull in by pulling up stakes.
“It’s complicated during your working life because the cost of living can be offset by higher wages and salaries,” says Mr. Alexander, adding that moving back home to the East Coast on retirement with its cheaper cost of living has created a windfall for some Atlantic Canadians.
Housing is more expensive in Alberta, for instance, but income levels are higher too. Consider median income for all families in Nova Scotia was $64,100 in 2010, according to Statistics Canada. The figure jumps to $85,380 for the same period in Alberta. Head out to British Columbia, where detached homes in Vancouver average out to nearly $1-million, and you’ve got median family income of $66,970.
You can get some tax savings moving around the country and that will drove your costs down. Punch $60,000 in to Ernst and Young’s online tax calculator for 2012 and you find a B.C. resident would be left with $48,345 in after tax income — the highest among the provinces at that tax level. At $44,619, Quebec would leave you with the lowest after tax income.
I think we are more focused and grounded here on what is important and that’s family and friends
Jamie Golombek, managing director of tax & estate planning with CIBC Private Wealth Management, says Canadians don’t usually move for tax reasons alone but he wonders whether Ontario’s new surtax on people making more than $500,000 will have a direct impact.
“Ontario will ultimately have the highest rate,” says Mr. Golombek. “You have to have a very dramatic tax difference [to move]. I don’t think people will move from Quebec to Ontario for 2%.”
Mr. Golombek’s own theory on why people are unwilling move is more related to tradition than taxes. He says Americans are used to moving out of their home and leaving town for school.
“Once you are away for school it becomes easier to take a job anywhere in the U.S. In Canada, for the most part, people go to school closer to where they live,” he says.
Financial education Talbot Stevens says lifestyle seems as important to Canadians as their personal income statement.
“I think we are more focused and grounded here on what is important and that’s family and friends,” says Mr. Stevens. “The American dream is to get rich and have all the money you need even though it might cost you two or three marriages. You can see that attitude right across the country.”
But there is a point where people will move for the money and it usually starts with the fact you can’t get a job where you live.
“People leave the East Coast because they have to,” says Mr. Stevens. “Income opportunities dominate the discussion more than the tax environment. The lifestyle argument doesn’t work if you don’t have a job.
“Inertia will keep you where you live unless there is an external force that causes you to move.”
Monday, 10 September 2012
Pros and cons of faster mortgage repayment
By Robb Engen, The Toronto Star
Being mortgage free is a top priority for many Canadians. According to a recent poll conducted by CIBC, current mortgage holders believe they’ll be mortgage free by the time they’re 55, which leaves a short window of opportunity to ramp up their savings before retirement.
To reach mortgage freedom faster, you can capitalize on today’s low interest rates by accelerating your mortgage with extra monthly contributions or lump-sum payments. But homeowners should look at the pros and cons of paying down their mortgage debt quickly versus taking a slower approach and using the excess cash for other investments. Here’s why:
With recent changes to mortgage rules and record low interest rates, now might be the right time to carry long-term mortgage debt while you concentrate on building up your investments.
The expected return on stocks has historically been around eight to 10 per cent. While paying off your mortgage is a guaranteed, risk-free return, the low cost of borrowing means there’s potential to earn higher returns by investing in a balanced portfolio.
If you can earn two or three per cent more by investing instead of paying off debt, the compounded returns over a few decades can really add up.
We also need to diversify our investments. Real estate makes up the largest chunk of our net worth, but most of us have nothing else to show for it. By sinking every available dollar into our mortgage in order to pay it off five or 10 years early, we’re neglecting our investments for far too long.
Rather than putting all your money into one asset - your home - take a balanced approach to build up your savings and other investments.
To pay it off, or not to pay it off?
“This is something homeowners should ask themselves every few years as their financial situation changes,” says Bob Stammers, Director of Investor Education at the CFA Institute.
The answer is different for everyone. If you have consumer debt or more pressing financial needs, you need to take care of that first. Some people are risk averse and will always be better off paying their house off faster. Others have a higher risk tolerance and feel more comfortable with investing.
I’m taking a balanced approach by putting an extra $800 a month on top of our regular monthly mortgage payments, saving $800 a month in our tax free savings accounts and investing $400 a month in my RRSP.
Being mortgage free is a top priority for many Canadians. According to a recent poll conducted by CIBC, current mortgage holders believe they’ll be mortgage free by the time they’re 55, which leaves a short window of opportunity to ramp up their savings before retirement.
To reach mortgage freedom faster, you can capitalize on today’s low interest rates by accelerating your mortgage with extra monthly contributions or lump-sum payments. But homeowners should look at the pros and cons of paying down their mortgage debt quickly versus taking a slower approach and using the excess cash for other investments. Here’s why:
With recent changes to mortgage rules and record low interest rates, now might be the right time to carry long-term mortgage debt while you concentrate on building up your investments.
The expected return on stocks has historically been around eight to 10 per cent. While paying off your mortgage is a guaranteed, risk-free return, the low cost of borrowing means there’s potential to earn higher returns by investing in a balanced portfolio.
If you can earn two or three per cent more by investing instead of paying off debt, the compounded returns over a few decades can really add up.
We also need to diversify our investments. Real estate makes up the largest chunk of our net worth, but most of us have nothing else to show for it. By sinking every available dollar into our mortgage in order to pay it off five or 10 years early, we’re neglecting our investments for far too long.
Rather than putting all your money into one asset - your home - take a balanced approach to build up your savings and other investments.
To pay it off, or not to pay it off?
“This is something homeowners should ask themselves every few years as their financial situation changes,” says Bob Stammers, Director of Investor Education at the CFA Institute.
The answer is different for everyone. If you have consumer debt or more pressing financial needs, you need to take care of that first. Some people are risk averse and will always be better off paying their house off faster. Others have a higher risk tolerance and feel more comfortable with investing.
I’m taking a balanced approach by putting an extra $800 a month on top of our regular monthly mortgage payments, saving $800 a month in our tax free savings accounts and investing $400 a month in my RRSP.
What does CMHC insured actually mean?
When you got your mortgage, did your broker or bank tell you it had to be 'CMHC insured' while you just smiled and nodded, not actually knowing what that really meant? Or worse, did you assume when they said insured, it meant your mortgage was life insured, and would be paid off if something were to happen to you? Well, today I'm writing about what CMHC insured actually means, and when you'll come accross it.
CMHC (or Genworth or Canada Guarantee), are the mortgage DEFAULT insurers in Canada currently. A mortgage must be insured by one of these 3 (legally), if the amount of the mortgage, is more than 80% of the value of the home. So if you're purchasing with less than 20% down, then you have no option, your mortgage must be 'CMHC insured`.
Yes, there is a cost to this insurance, premiums range from 1.5% of the total value of your mortgage up to 4.5%, which can be a huge cost depending on the size of your loan. CMHC insurance is typically included in your mortgage, so it`s not a cost you actually pay upfront, but it is amortized over the life of your mortgage.
So, what does CMHC insurance do for you? Well, unfortunately many people would answer this by saying... nothing. When people say CMHC does nothing for you, they're referring to the fact that it's DEFAULT insurance, not life insurance. So in the case that you default on your mortgage (stop paying it, and have your home potentially foreclosed), the loss, will be covered. BUT, here's where many people get confused, the loss is covered yes, but not to you, CMHC insurance covers any loss incurred by the lender if you default. So the lender will be paid back, but that doesn't mean you're free to default without consequenses. You're not covered. CMHC will likely still come after you, and the default will still go against you. But the lender is covered. You're paying to have less risk to the lender.
So why would I disagree with the people saying CMHC does nothing for you? Well, I see CMHC not as something that protects us, but as giving us a priveledge. If CMHC insurance wasn't around, we'd all be waiting until we could save up 20% down payments, to purchase homes. Think about how long it took you, especially first time home buyers, to save that 5% down payment, 20% is simply out of reach for many people. So although CMHC is a large cost, it saves us the time, and money we'll spend along the way renting, of waiting until we save 20% to purchase a home. Thus enabling more people to get into the housing market, and helping keep the market strong with many buyers.
Some misconceptions I've heard about CMHC:
-It's life insurance: If my mortgage is CMHC insured, and I pass away, my mortgage will be paid off. CMHC is not life insurance, it's default insurance. So it is important to still look into getting your mortgage insured in some way, whether that be through mortgage life insurance, or a term or permanent product.
-It's house insurance: I don't need home insurance because my mortgage is CMHC insured. CMHC is not home insurance and doesn't protect your house or it's contents. It's important to still insure your home and contents againts fire, theft, etc.
I hope this has clarified CMHC insurance for people.
CMHC (or Genworth or Canada Guarantee), are the mortgage DEFAULT insurers in Canada currently. A mortgage must be insured by one of these 3 (legally), if the amount of the mortgage, is more than 80% of the value of the home. So if you're purchasing with less than 20% down, then you have no option, your mortgage must be 'CMHC insured`.
Yes, there is a cost to this insurance, premiums range from 1.5% of the total value of your mortgage up to 4.5%, which can be a huge cost depending on the size of your loan. CMHC insurance is typically included in your mortgage, so it`s not a cost you actually pay upfront, but it is amortized over the life of your mortgage.
So, what does CMHC insurance do for you? Well, unfortunately many people would answer this by saying... nothing. When people say CMHC does nothing for you, they're referring to the fact that it's DEFAULT insurance, not life insurance. So in the case that you default on your mortgage (stop paying it, and have your home potentially foreclosed), the loss, will be covered. BUT, here's where many people get confused, the loss is covered yes, but not to you, CMHC insurance covers any loss incurred by the lender if you default. So the lender will be paid back, but that doesn't mean you're free to default without consequenses. You're not covered. CMHC will likely still come after you, and the default will still go against you. But the lender is covered. You're paying to have less risk to the lender.
So why would I disagree with the people saying CMHC does nothing for you? Well, I see CMHC not as something that protects us, but as giving us a priveledge. If CMHC insurance wasn't around, we'd all be waiting until we could save up 20% down payments, to purchase homes. Think about how long it took you, especially first time home buyers, to save that 5% down payment, 20% is simply out of reach for many people. So although CMHC is a large cost, it saves us the time, and money we'll spend along the way renting, of waiting until we save 20% to purchase a home. Thus enabling more people to get into the housing market, and helping keep the market strong with many buyers.
Some misconceptions I've heard about CMHC:
-It's life insurance: If my mortgage is CMHC insured, and I pass away, my mortgage will be paid off. CMHC is not life insurance, it's default insurance. So it is important to still look into getting your mortgage insured in some way, whether that be through mortgage life insurance, or a term or permanent product.
-It's house insurance: I don't need home insurance because my mortgage is CMHC insured. CMHC is not home insurance and doesn't protect your house or it's contents. It's important to still insure your home and contents againts fire, theft, etc.
I hope this has clarified CMHC insurance for people.
Thursday, 6 September 2012
Five Tips For Negotiating a Mortgage
Leigh Doyle, Toronto Star
When you’re buying your first house, negotiating for the mortgage can seem like the least fun and most complicated part of the process. But having no experience making one of life’s biggest purchases doesn’t mean you’re destined to pay the bank’s listed rate. Follow these five expert-approved tips to make you a better negotiator.
Know your long-term goals
Farhaneh Haque, director of Mortgage Advice for TD Canada Trust in Toronto says most first-time home buyers don’t realize the average person owns their first home for only three years. It’s important to think about where you might be in the next three to five years, she says. “Ask yourself: How long do you anticipate living in this property? Will your life change dramatically in the next few years? How stable is your income?” For example, if you know your employer wants to transfer you sometime in the next 18-months, a five-year, fixed-term mortgage isn’t the right fit for you. This step helps you identify what needs you might have so you know the characteristics to look for in a mortgage product.
Know your credit score
Before you walk into your bank, check your credit score. It’s a critical factor in determining your mortgage amount. If it’s good, work to maintain that high level. “You want to demonstrate to the bank that you are a good customer,” says Haque. If it’s not so good, talk to your bank about strategies to improve the score, such as making regular on-time payments on your credit cards or paying down existing debt.
[Be aware that the more times your credit score is pulled, your score will actually take a hit! Every bank you go to will pull your score, so be careful. If you use the services of a mortgage broker, however, your score is only pulled once, and your mortgage broker can use that when looking at multiple lenders, including banks.]
Be prepared
Once you have thought about your individual needs, do research before you go talk to your bank (or your mortgage broker), says Christopher Molder, a mortgage blogger with SonofaBroker.com in Toronto. “Find out what the posted interest rate is and look up mortgage options at your bank,” he says. You want to be prepared so you can have a discussion about options and what the ideal mortgage is for you. If you know the rate your bank and the competitors are offering, you’ll be able to tell whether or not you’re getting a good deal. Haque recommends using online tools and calculators to get an idea of what you can afford.
Don’t focus on interest rates
Of course you want to score the lowest interest rate when negotiating, but Haque says focusing on the percentage is the biggest mistake first-time buyers make. “People often don’t know what else to look for,” she says. Remember, mortgages are a product and the interest rate is only one feature. Discuss the other features of the mortgage, such as the payback terms, if you can make lump-sum payments or pre-pay the mortgage and what the penalties are for breaking the terms.
“Having the lowest rate can come with certain costs, like a lack of flexibility,” says Molder, so make sure the mortgage you want matches your needs. It might cost you a little more, but could save you thousands in the long run by avoiding penalties or being able to make extra payments.
Shop around
Before you sign any papers, talk to other mortgage specialists and banks, says Molder. “A bank can only offer you the products they have, which might not be a fit for you,” he says. A broker can shop your mortgage around for you instead of you having to visit five banks individually.
When you’re buying your first house, negotiating for the mortgage can seem like the least fun and most complicated part of the process. But having no experience making one of life’s biggest purchases doesn’t mean you’re destined to pay the bank’s listed rate. Follow these five expert-approved tips to make you a better negotiator.
Know your long-term goals
Farhaneh Haque, director of Mortgage Advice for TD Canada Trust in Toronto says most first-time home buyers don’t realize the average person owns their first home for only three years. It’s important to think about where you might be in the next three to five years, she says. “Ask yourself: How long do you anticipate living in this property? Will your life change dramatically in the next few years? How stable is your income?” For example, if you know your employer wants to transfer you sometime in the next 18-months, a five-year, fixed-term mortgage isn’t the right fit for you. This step helps you identify what needs you might have so you know the characteristics to look for in a mortgage product.
Know your credit score
Before you walk into your bank, check your credit score. It’s a critical factor in determining your mortgage amount. If it’s good, work to maintain that high level. “You want to demonstrate to the bank that you are a good customer,” says Haque. If it’s not so good, talk to your bank about strategies to improve the score, such as making regular on-time payments on your credit cards or paying down existing debt.
[Be aware that the more times your credit score is pulled, your score will actually take a hit! Every bank you go to will pull your score, so be careful. If you use the services of a mortgage broker, however, your score is only pulled once, and your mortgage broker can use that when looking at multiple lenders, including banks.]
Be prepared
Once you have thought about your individual needs, do research before you go talk to your bank (or your mortgage broker), says Christopher Molder, a mortgage blogger with SonofaBroker.com in Toronto. “Find out what the posted interest rate is and look up mortgage options at your bank,” he says. You want to be prepared so you can have a discussion about options and what the ideal mortgage is for you. If you know the rate your bank and the competitors are offering, you’ll be able to tell whether or not you’re getting a good deal. Haque recommends using online tools and calculators to get an idea of what you can afford.
Don’t focus on interest rates
Of course you want to score the lowest interest rate when negotiating, but Haque says focusing on the percentage is the biggest mistake first-time buyers make. “People often don’t know what else to look for,” she says. Remember, mortgages are a product and the interest rate is only one feature. Discuss the other features of the mortgage, such as the payback terms, if you can make lump-sum payments or pre-pay the mortgage and what the penalties are for breaking the terms.
“Having the lowest rate can come with certain costs, like a lack of flexibility,” says Molder, so make sure the mortgage you want matches your needs. It might cost you a little more, but could save you thousands in the long run by avoiding penalties or being able to make extra payments.
Shop around
Before you sign any papers, talk to other mortgage specialists and banks, says Molder. “A bank can only offer you the products they have, which might not be a fit for you,” he says. A broker can shop your mortgage around for you instead of you having to visit five banks individually.
Wednesday, 5 September 2012
Canada's future prospects are good
Despite the continuing crisis in the Eurozone and the still sluggish US economy, there is still good news for the Canadian economy. Although growth has slowed and inflation is clearly in check at 1.3%, Canadians are optimistic about job security; the real estate market is balancing itself out; and consumer debt is under control. The real estate market in the country's three major cities - Vancouver, Toronto and Montreal have softened somewhat, but mainly in the condo market. While most parts of the country have seen a slowdown in sales activity, there is probably no need to be concerned for the future given the changing demographics.
A study by the Bank of Montreal (BMO) found nearly two-thirds, or 64% of respondents, are optimistic about their job security. And 41% believe their company will be growing and hiring in the future. This optimism exists despite job losses in July, which are likely due to seasonal adjustments, and relatively high unemployment at 7.3%, but still below historic norms.
Wages will rise modestly in the next twelve months, led by non-union employers and will stay ahead of inflation according to BMO economist Sal Guatieri, which will support household purchasing power.
With Finance Minister Jim Flaherty calling on Canadian businesses to use its cash reserves to invest in the economy and the Bank of Canada Governor Mark Carney telling Canadian companies with substantial cash assets to give back to shareholders, it's likely employee optimism is justified.
On the home front, a report by CIBC examined the changing demographics and found that the housing market will stay strong over the next 10 years. House prices may decrease but will stabilize. The vast majority of first time home buyers are between the ages of 25 and 34. The number of Canadians in this age group will grow and housing demand will see an annual growth of 9%, which is roughly the same growth as we have seen in the last ten years.
So what's going on right now?
The real estate market has slowed somewhat but people are still purchasing in most areas of the country. Prices are coming down for single residential dwellings. Mortgage interest rates are historically low and we are starting to see some discounting again of variable rates. The pace of growth in the economy has slowed but there are still jobs available. Inflation is in check, consumers are still shopping, and managing their debt loads. Overall, it's business as usual for consumers.
A study by the Bank of Montreal (BMO) found nearly two-thirds, or 64% of respondents, are optimistic about their job security. And 41% believe their company will be growing and hiring in the future. This optimism exists despite job losses in July, which are likely due to seasonal adjustments, and relatively high unemployment at 7.3%, but still below historic norms.
Wages will rise modestly in the next twelve months, led by non-union employers and will stay ahead of inflation according to BMO economist Sal Guatieri, which will support household purchasing power.
With Finance Minister Jim Flaherty calling on Canadian businesses to use its cash reserves to invest in the economy and the Bank of Canada Governor Mark Carney telling Canadian companies with substantial cash assets to give back to shareholders, it's likely employee optimism is justified.
On the home front, a report by CIBC examined the changing demographics and found that the housing market will stay strong over the next 10 years. House prices may decrease but will stabilize. The vast majority of first time home buyers are between the ages of 25 and 34. The number of Canadians in this age group will grow and housing demand will see an annual growth of 9%, which is roughly the same growth as we have seen in the last ten years.
So what's going on right now?
The real estate market has slowed somewhat but people are still purchasing in most areas of the country. Prices are coming down for single residential dwellings. Mortgage interest rates are historically low and we are starting to see some discounting again of variable rates. The pace of growth in the economy has slowed but there are still jobs available. Inflation is in check, consumers are still shopping, and managing their debt loads. Overall, it's business as usual for consumers.
Tuesday, 4 September 2012
Renovations you may regret
Rob Carrick, The Globe and Mail
You might think wall-to-wall carpet, fancy wallpaper or a sauna are dandy additions to your home, but chances are good that prospective buyers won’t. Here’s a list of the renovations least likely to add value to your home. This website might help you get started on the right track for home renos. It’s called Houzz and it offers tens of thousands of photos of state of the art bathrooms, kitchens, bedrooms and more.
By Martha Uniacke Breen (http://www.styleathome.com)
Find out which home upgrades are least likely to return their full investment when you sell your home.
Wall-to-wall broadloom
Once considered a selling feature, this is now a liability in many buyers’ eyes. Broadloom is incompatible with pets and people with allergies, and is perceived as hard to clean. If you have hardwood floors, have them refinished or consider installing them if you don’t.
Whirlpool baths, saunas and indoor hot tubs
Once considered chic, these are now often seen as just expensive, energy-guzzling extras. Kathy says she once saw a home with a hot tub installed in the living room!
Expensive built-in sound systems and home theatres
Some buyers will be attracted to this, but not everyone is an audio/cinephile, nor will they pay a premium for a house with this feature.
Colourful bath fixtures
These went out with poodle skirts. Chances are the buyer will just see them as a renovation to-do and will plan to get rid of them after the purchase.
Ornate chandeliers, wallpaper and paint treatments
Taste is very individual and idiosyncratic decorating can turn buyers off; stick with neutral, simple decor.
You might think wall-to-wall carpet, fancy wallpaper or a sauna are dandy additions to your home, but chances are good that prospective buyers won’t. Here’s a list of the renovations least likely to add value to your home. This website might help you get started on the right track for home renos. It’s called Houzz and it offers tens of thousands of photos of state of the art bathrooms, kitchens, bedrooms and more.
10 worst home upgrades for
resale
By Martha Uniacke Breen (http://www.styleathome.com)
Find out which home upgrades are least likely to return their full investment when you sell your home.
Some renovation upgrades, such as
kitchens and bathrooms, are usually fairly reliable for adding to a home’s
resale value. But there are others (and if you’ve gone househunting in the last
few years, perhaps you’ve seen a few) that are just plain bone-headed. What’s
worth the cost and what isn’t?
Kathy Monahan, an agent with Forest Hill Real Estate Inc. in Toronto, has seen some real eye-rollers in her time. We asked her which home upgrades are least likely to return their full investment (or close to it) when you sell, or can even turn buyers off. Some of her answers might surprise you.
Kathy Monahan, an agent with Forest Hill Real Estate Inc. in Toronto, has seen some real eye-rollers in her time. We asked her which home upgrades are least likely to return their full investment (or close to it) when you sell, or can even turn buyers off. Some of her answers might surprise you.
Wall-to-wall broadloom
Once considered a selling feature, this is now a liability in many buyers’ eyes. Broadloom is incompatible with pets and people with allergies, and is perceived as hard to clean. If you have hardwood floors, have them refinished or consider installing them if you don’t.
Whirlpool baths, saunas and indoor hot tubs
Once considered chic, these are now often seen as just expensive, energy-guzzling extras. Kathy says she once saw a home with a hot tub installed in the living room!
Expensive built-in sound systems and home theatres
Some buyers will be attracted to this, but not everyone is an audio/cinephile, nor will they pay a premium for a house with this feature.
Colourful bath fixtures
These went out with poodle skirts. Chances are the buyer will just see them as a renovation to-do and will plan to get rid of them after the purchase.
Ornate chandeliers, wallpaper and paint treatments
Taste is very individual and idiosyncratic decorating can turn buyers off; stick with neutral, simple decor.
Monday, 3 September 2012
Building a Cash Cache
Robert McLister, Special to The Globe and Mail
For years, financial experts have advised home buyers to sock away emergency savings. Most advisers view contingency funds as a prerequisite to getting a mortgage.
You might be surprised then, at how many Canadians mortgage holders don’t have them. We were. (Although we probably shouldn't have been.)
This week’s Globe column looks at emergency savings funds and their alternatives. It turns out that cash in the bank isn’t the optimal backup plan for everyone.
The Perils of Home Buying without a Rainy Day Fund
Few people would walk even a 10-foot-high tightrope without a net. Even with a reward, the fall wouldn’t be worth it if something went wrong.
Yet people who buy homes without access to emergency funds are walking a figurative tightrope every day.
When you get a mortgage with no savings, the unforeseen is your enemy. Things such as a job loss, drop in income, home expense, divorce or medical problem can come out of nowhere. No one expects misfortune but it pays to be prepared with at least three months of living expenses set aside.
But not everyone heeds this advice: A recent CIBC survey on contingency funds found that 40 per cent of Canadians with mortgages have no emergency savings.
For tapped-out homeowners with no savings or borrowing power, an unexpected $5,000 to $10,000 expense can quickly put them at risk of missing a mortgage payment. Luckily, the number of people in that precarious boat is nowhere near 40 per cent of mortgage holders. But it’s not an immaterial number either.
Either way, the thought of being escorted off one’s property by a court officer makes people go to amazing lengths to avoid foreclosure. When times get tough, folks with no savings will beg, steal or most likely borrow to make their mortgage payments. They take cash advances from their credit card, hit up friends or family, sell assets, borrow from a line of credit, or scramble to get a second job.
As far as credit card cash advances go, that’s not a backup plan. If 20-per-cent interest credit cards are a homeowner’s only source of liquidity, they’re better off renting. Climbing out of a high-interest debt hole takes way too long and costs far too much.
Borrowing from others is also a poor contingency plan. For one thing, it’s unreliable. For another, it can add considerable stress to personal relationships.
Selling assets to raise cash is another option, depending on your holdings. Though it’s often a question of how fast you can liquidate the asset, as well as any tax or retirement ramifications.
The most popular failsafe for Canadians who can’t make a mortgage payment and don’t have savings is the home equity line of credit (HELOC). Thirty-four per cent of mortgage holders have a HELOC, according to the Canadian Association of Accredited Mortgage Professionals.
“Over the last decade, lines of credit have replaced emergency funds in the Canadian economy,” says John Parker, a president of Tudor Mortgage Corporation.
Mr. Parker, a 32-year mortgage industry veteran, says most people with credit lines would rather use their personal savings to pay down the principal of their mortgage than earn a skimpy 1 to 2 per cent in interest.
For thousands of homeowners, this makes perfect sense. Mortgage prepayments provide a better after-tax return than virtually any savings account, and low rates make emergency borrowing from a HELOC less costly. Funneling savings into your mortgage is even more appealing if your mortgage has a built-in (a.k.a. readvanceable) credit line that lets you reborrow those funds in urgent situations.
The growth in HELOCs – up roughly 170 per cent since 2001 – is the chief reason why so many mortgage holders don’t have emergency funds. But HELOCs don’t work for everyone. You need a down payment of 20 per cent or more to get one, and one out of five homeowners don’t have that kind of equity. (An unsecured credit line may be an alternative for some people.) You also need the fiscal discipline not to blow your credit line on impulse purchases.
If you don’t have 20-per-cent-plus equity, options become more limited. Conventional wisdom holds that someone with minimal equity and no emergency funds should save at least three to four months of living expenses before going shopping for a home.
On the other hand, a large war chest of savings is somewhat less critical for qualified borrowers with strong stable jobs, low debt-to-income, and/or mortgage payments that are comparable to what they’d pay in rent.
In the end, the decision to buy now or save more depends on your circumstances, as it always does.
If your finances do need reinforcing, don’t lament about being stuck on the real estate sidelines while you accumulate cash. In most parts of Canada, there is no urgency to buy.
“The risk of being priced out of the market is less than it’s been in a long time,” Mr. Parker says. “In most places, prices are unlikely to increase by any significant number for the next few years.”
That’s a realistic prediction that virtually every housing analyst on Bay Street would agree with.
Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at Mortgage Architects. You can also follow him on twitter at @CdnMortgageNews.
For years, financial experts have advised home buyers to sock away emergency savings. Most advisers view contingency funds as a prerequisite to getting a mortgage.
You might be surprised then, at how many Canadians mortgage holders don’t have them. We were. (Although we probably shouldn't have been.)
This week’s Globe column looks at emergency savings funds and their alternatives. It turns out that cash in the bank isn’t the optimal backup plan for everyone.
The Perils of Home Buying without a Rainy Day Fund
Few people would walk even a 10-foot-high tightrope without a net. Even with a reward, the fall wouldn’t be worth it if something went wrong.
Yet people who buy homes without access to emergency funds are walking a figurative tightrope every day.
When you get a mortgage with no savings, the unforeseen is your enemy. Things such as a job loss, drop in income, home expense, divorce or medical problem can come out of nowhere. No one expects misfortune but it pays to be prepared with at least three months of living expenses set aside.
But not everyone heeds this advice: A recent CIBC survey on contingency funds found that 40 per cent of Canadians with mortgages have no emergency savings.
For tapped-out homeowners with no savings or borrowing power, an unexpected $5,000 to $10,000 expense can quickly put them at risk of missing a mortgage payment. Luckily, the number of people in that precarious boat is nowhere near 40 per cent of mortgage holders. But it’s not an immaterial number either.
Either way, the thought of being escorted off one’s property by a court officer makes people go to amazing lengths to avoid foreclosure. When times get tough, folks with no savings will beg, steal or most likely borrow to make their mortgage payments. They take cash advances from their credit card, hit up friends or family, sell assets, borrow from a line of credit, or scramble to get a second job.
As far as credit card cash advances go, that’s not a backup plan. If 20-per-cent interest credit cards are a homeowner’s only source of liquidity, they’re better off renting. Climbing out of a high-interest debt hole takes way too long and costs far too much.
Borrowing from others is also a poor contingency plan. For one thing, it’s unreliable. For another, it can add considerable stress to personal relationships.
Selling assets to raise cash is another option, depending on your holdings. Though it’s often a question of how fast you can liquidate the asset, as well as any tax or retirement ramifications.
The most popular failsafe for Canadians who can’t make a mortgage payment and don’t have savings is the home equity line of credit (HELOC). Thirty-four per cent of mortgage holders have a HELOC, according to the Canadian Association of Accredited Mortgage Professionals.
“Over the last decade, lines of credit have replaced emergency funds in the Canadian economy,” says John Parker, a president of Tudor Mortgage Corporation.
Mr. Parker, a 32-year mortgage industry veteran, says most people with credit lines would rather use their personal savings to pay down the principal of their mortgage than earn a skimpy 1 to 2 per cent in interest.
For thousands of homeowners, this makes perfect sense. Mortgage prepayments provide a better after-tax return than virtually any savings account, and low rates make emergency borrowing from a HELOC less costly. Funneling savings into your mortgage is even more appealing if your mortgage has a built-in (a.k.a. readvanceable) credit line that lets you reborrow those funds in urgent situations.
The growth in HELOCs – up roughly 170 per cent since 2001 – is the chief reason why so many mortgage holders don’t have emergency funds. But HELOCs don’t work for everyone. You need a down payment of 20 per cent or more to get one, and one out of five homeowners don’t have that kind of equity. (An unsecured credit line may be an alternative for some people.) You also need the fiscal discipline not to blow your credit line on impulse purchases.
If you don’t have 20-per-cent-plus equity, options become more limited. Conventional wisdom holds that someone with minimal equity and no emergency funds should save at least three to four months of living expenses before going shopping for a home.
On the other hand, a large war chest of savings is somewhat less critical for qualified borrowers with strong stable jobs, low debt-to-income, and/or mortgage payments that are comparable to what they’d pay in rent.
In the end, the decision to buy now or save more depends on your circumstances, as it always does.
If your finances do need reinforcing, don’t lament about being stuck on the real estate sidelines while you accumulate cash. In most parts of Canada, there is no urgency to buy.
“The risk of being priced out of the market is less than it’s been in a long time,” Mr. Parker says. “In most places, prices are unlikely to increase by any significant number for the next few years.”
That’s a realistic prediction that virtually every housing analyst on Bay Street would agree with.
Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at Mortgage Architects. You can also follow him on twitter at @CdnMortgageNews.
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