Should mortgage shoppers choose the 1 or 5-year fixed rate?

Robert McLister

Special to The Globe and Mail

 

 

Mortgage rate predictions are as often wrong as they are right. Yet, many mortgage shoppers believe that these forecasts give them an edge.

Unfortunately, rate expectations sometimes prevent people from picking the lowest-cost mortgage. For instance, those who believe rates can only rise could ignore shorter terms.

It doesn't help that those who sell mortgages often have an economic incentive to push standard five-year fixed terms. (Read more about that here.) And economist rate predictions play right into that, with today’s average bank economist forecasting that rates will rise in the spring of 2014.

But economists have been pushing back their rate hike forecasts for more than three years now. And, with many expecting subdued economic growth and low-inflation , it wouldn’t be shocking if they pushed them back again, to 2015 or beyond.

It is noteworthy that at the moment not one major economist, as tracked by Bloomberg, is predicting lower rates. Given Canada’s tentative economy, global uncertainties and sheer random probability, you’d think that at least one economist out of dozens would break from the herd and forecast lower rates.

Research also shows that many economists exhibit an upwards bias to their rate predictions. Three years ago, for example, not one economist tracked by Bloomberg predicted that 10-year bond yields would fall below four per cent. Today, 10-year yields are less than half that.

It’s likely that few economists now want to go on record predicting lower rates while the Bank of Canada is trying to convince us that rates are headed higher. But the central bank itself is not immune to forecasting error.

The only purely objective rate analyst is the bond market – which directly influences fixed mortgage rates. The bond market isn’t swayed by talking heads. Instead, it methodically sets rates based on inflation expectations and demand for “safe” government investments.

As a rule of thumb, the best five-year fixed mortgage rates are generally 1.50 percentage points higher than the five-year bond yield. As of when I was writing this column, that yield was 1.29 per cent. This puts us near 2.79 per cent today for an ultra-competitive five-year fixed.

But a lot of countries have five-year bond yields below one per cent. And some of those countries are arguably less desirable credit risks than AAA-rated Canada. That’s why some believe that Canadian bonds are undervalued. If they are, it’s not unthinkable that greater bond demand could boost bond prices, lower yields and reduce mortgage rates.

You may wonder if Finance Minister Jim Flaherty would let rates drop without a fight, given his criticism of BMO and Manulife for promoting sub-3 per cent mortgages. But Ottawa has little power over unadvertised rates, or those of non-bank lenders who are not federally regulated.

For that reason, if bond yields drop to 1 per cent, it’s a safe bet we’ll see 2.49 per cent five-year fixed rates. (Conversely, if five-year yields shoot above 1.60 per cent, we can wave goodbye to 2.99 per cent five-year rates, at least for a while.)

So how do you as a home owner use this information to pick the best mortgage? Like many, you may be torn between a five-year fixed and a shorter term or variable rate. Your mortgage adviser may rightly tell you that rates only need to rise three-quarters of one per cent in mid-2014, and stay there, for a five-year fixed to save you money versus a variable or short term. (That assumes you don’t need to break your mortgage , for which you’d potentially face a higher penalty in a five-year fixed.)

But what if rates stay the same – or even drop? In that scenario, today’s best one-year fixed rates would save you roughly $500 in the first 12 months when compared to a five-year fixed, for every $100,000 of mortgage.

A one-year borrower would then have the option of rolling into a second one-year term–saving at least $1,000 over two years if rates stay the same. Again, that’s $1,000 for every $100,000 of mortgage.

The question is, does this potential savings make it worth betting against higher rates? For people with tight cash flow, limited savings, high consumer debt, job instability, credit issues, minimal equity and/or a long remaining amortization, the answer is usually no.

For others, it pays to weigh the risk versus reward. You can start by comparing your term options. If you want a mortgage that’s five years or less, you can take a:

• Five-year fixed and be done with it
• One-year fixed and renew into a four-year fixed
• One-year fixed and renew into multiple one-year terms
• Two-, three-, or four-year term (These terms are currently most suited to those with a two-, three– or four-year holding time-frame. That’s because their rates aren’t compelling enough versus one-year and five-year terms, given the increased risk of higher renewal rates in two to four years.)
• Variable-rate mortgage, which won’t be a compelling value (versus a 1-year fixed) until variable discounts improve.

If you pick a one-year fixed, the risk is potentially higher rates when you renew in 12 months. Rates could pop one-half per cent or more if economic growth heats up.

If rates rose one-half percentage point before you renewed, you’d have a choice to make. You could renew into another one-year fixed, in which case you’d still be ahead if rates didn’t go up further. Or you could renew into a four-year fixed, which would lock in your total five-year interest cost at roughly $700 more than you would have paid on a five-year fixed, per $100,000 of mortgage.

Of course, rates could jump over one-half per cent in 12 months. So a one-year fixed borrower would want to be sure he/she can afford the risk of 10-20 per cent higher payments. But rates can fall as well, in which case you’d be renewing into an even cheaper mortgage.

Fortunately, it’s now possible to lock in a renewal rate up to six months in advance. The makes one-year fixed terms very nimble by reducing the time you’re exposed to rising rates by half (i.e., to only the first six months of your term).

And if you happen to live in Manitoba, credit unions offer renewable six-month terms as low as 2.14 per cent, a fantastic deal that gives you more flexibility for locking in a great rate. Hopefully we’ll some day see lenders outside of Manitoba offer six-month rates this low.

So the question is, is the guaranteed upfront savings of a one-year fixed worth the potential downside? You’ll need to be the judge. There are exceptions to the above guidelines so get personalized advice.

One thing we know is that despite all the jawboning about rate increases, no one can tell you with any degree of certainty where rates are headed. There is at least a 50 per cent theoretical chance that rates will move sideways or drop in the next year. Trading in a long-term mortgage for a one-year fixed can therefore be a sound play for certain financially secure borrowers.

Robert McLister is the editor of CanadianMortgageTrends.com

RBC raises mortgage rates, other lenders expected to follow suit

TARA PERKINS - REAL ESTATE REPORTER

The Globe and Mail

 

 

Royal Bank of Canada, the country’s largest mortgage lender, is raising its rates and analysts say other banks are likely to follow suit, leaving the threat of a mortgage rate war firmly in the past.

The special rate on RBC’s four-year closed mortgages will now rise 10 basis points, to 3.09 per cent, while its five-year special rate will rise 20 basis points to 3.29 per cent. (A basis point is 1/100th of a percentage point.)

The posted rate on a one-year mortgage is going up fourteen basis points to 3.14 per cent, while the posted rates on two- and three-year mortgages are each rising by 10 basis points, to 3.14 and 3.65 per cent respectively. The new prices take effect June 10.

Mortgage rates became a major point of contention earlier this year when some lenders ratcheted theirs down to all-time lows, and received a scolding for doing so from Finance Minister Jim Flaherty, who has been trying to cool off the housing market. When Manulife Bank cut its posted rate on five-year fixed-rate mortgages to 2.89 per cent in March it received an angry phone call from Mr. Flaherty’s office and quickly pumped its rate back up to 3.09 per cent. Bank of Montreal allowed a special rate of 2.99 per cent to expire amid the controversy.

At an event in Halifax on Thursday Mr. Flaherty said the banks are now being very "prudent in not reducing their rates."

But with the spring selling season coming to a close, it’s looking more likely that long-term interest rates are going up. Royal Bank, which often changes its mortgage rates before the other banks do, said Friday its rates will rise.

Long-term interest rates, specifically the movements of five-year Government of Canada bonds, are one of the factors that determine how much the banks have to pay for the money that they lend out to mortgage borrowers. The yield on five-year bonds was 1.44 per cent Thursday, compared to 1.30 at the end of March.

“Royal Bank typically sets the market, they’re sort of the price leader,” said National Bank of Canada analyst Peter Routledge. “So it would not surprise me at all if their competitors followed. In fact, it would surprise me if they didn’t.”

He noted that the ultra-low rates that some banks were promoting in March occurred at a pivotal time in the year for the banks, which have been seeing slower growth in their massive mortgage portfolios since home sales entered a slump last summer. “Those promotions were done before the spring market to lock in customers during the spring market,” Mr. Routledge said. “The spring market is nearing a close, so now here we go.”

Indeed, bond rates have been rising for more than a month now and some observers expected mortgage rates to follow suit sooner.

But, while it seems the mortgage rate race-to-the-bottom that worried Mr. Flaherty has been called off, some observers say that Royal Bank’s competitors might hold off matching the rate increase for a little while yet.

“We are not surprised RBC raised their mortgage rates on the heels of a recent spike in bond yields – this follows the historical trend,” said Alyssa Richard, the CEO and founder of Ratehub.ca. “We cannot be sure all other lenders will follow, given that overall mortgage volumes are slowing in Canada. Some lenders may choose to sacrifice [profit] margin for volume.”

Why a Mortgage Broker is so important

PLAN - Planned Lifetime Advocacy Network
By David Pasko


With mortgage rules changing more often than one changes their socks, it is important to know how these changes will affect your decision making process and how quickly you may want to act.

Here are a few reasons why utilizing the services of a mortgage broker should be considered:

1. Who does the “Mortgage Specialist” at your financial institution work for?

It was not so long ago that it was possible to walk into your dentist or doctor’s office and know that their number one concern was you! Now, if unprepared, you will walk out with medications or dental products that you may not have needed. Similarly, the number one duty of many Mortgage Specialists at a lot of financial institutions is to their company, not to you. This poses a concern when you are looking for your best option.

It is important to discuss your situation with someone who understands your options and how your choices may affect you in the short and long term.

2. “To Buy” or “Not to Buy”… that is the question!

As we anticipate more changes coming in the mortgage industry that will see amortizations reduced from 35 years to 25 years, it is important to assess your situation. A 10 year reduction may make it impossible to accomplish your goals. Other recent changes in mortgages are preventing many first time home owners from entering the market. The shortening amortization will further prevent people from purchasing and thus keep them stuck in the rental market. Although many financial institutions have already set the limit at 25 years, there are still other large lenders offering 35 years. If you are sitting on the fence wondering if/when you should become active in the real estate market, it might be worthwhile to not wait too long to consider your options and next steps.

3. Flexibility.

A few years ago it was nearly impossible to qualify for a mortgage if you were self-employed, but as more and more people are taking this route some lenders are changing to accommodate this sector. Mortgage brokers are in a unique place to facilitate those discussions with lenders for all sectors, including the personalized needs and desires of people with a “disability”. Different lenders are now seeing people with disabilities as highly potential home-owners and adjusting criteria to make this possible. As you look at your mortgage desires or dilemmas it is important to know that there are many options that can be potentially tailored to your situation, such as: PWD being used as an acceptable income source when applying for a mortgage.

Don’t get stuck thinking it will never happen. You may be pleasantly surprised!

David Pasko

Taxpayer-free housing finance change coming to Canada

Finn Poschmann, Special to Financial Post

The Bank of Nova Scotia, a few days ago, received permission from the Securities and Exchange Commission to market to U.S. retail investors what are known as covered bonds. In pursuing SEC approval for market access, Scotia was following a trail blazed by the Royal Bank of Canada; market rumour has it that the Bank of Montreal is on the same path.

There is no madness to the approach; there is method. Change is underway in Canada’s housing finance system. More of it will be done without the taxpayer backing, or insurance, that common financing channels currently enjoy, by way of the Canada Mortgage and Housing Corporation. RBC’s covered bonds are backed by uninsured residential mortgages – so too will be Scotia’s, in future, and so will others. Lenders, mostly banks, who have not already developed the financial instruments and skills to diversify their funding sources will do so, because they must. This is all to the good.

Background. CMHC, a Second World War era Crown agency intended to help returning vets find homes to live in, until recently grew in leaps and bounds.

CMHC became a source of systemic risk because its mortgage insurance products, which insulate lenders from loss when the loans they make go bad, for years backstopped easy loans, mortgages with long amortizations, and cheap home equity lines of credit that Canadian consumers took up in droves.

Scotiabank, RBC to lead the way with covered bond issues

As consumer debt rose, and housing investment bubbled, so did Canadian house prices, over the past decade, well outstripping income growth. Low interest rates helped, but so too did easy credit terms – with few incentives, owing to CMHC insurance, for lenders to hold back on extending them.

Shrinking CMHCs oversized role in the mortgage market, and taxpayer exposure, became overdue, and Ottawa has gently reined in CMHC and ease of access to its insurance products. Consumer debt growth has slowed, and housing markets have tapered – to this point, gently so.

Alongside, the covered bond market has become important to housing finance. Covered bonds are prized by some investors, because normally they are backed by highly rated assets – like good quality residential mortgages – as well as the security of the fully bank-backed, bankruptcy-remote special investment vehicle that sponsors create to fund them. Their dual cover enables the bonds to attract high ratings and go to market at low spreads, sometimes as low as 10 to 20 basis points over similar term government bonds, perhaps 50 basis points in the U.S. market today – and that means cheap financing all round.

However, Canadian banks’ bonds have long have been shut out of some markets. Many European institutional investors, for instance, are forbidden from buying covered bonds sponsored by issuers who do not operate within a legislated covered bond framework that specifies creditor priority in the event of a bankruptcy.

Changing the Canadian legislation to accommodate market needs was a minor matter, and the government did so in Finance Minister Jim Flaherty’s 2012 budget. Also helpful was establishing CMHC as a bond registrar.

The changes, however, came with a quid pro quo attached. Canadian covered bond issuers would get the legislative framework they coveted, but under conditions: no insured mortgages, whether insured by CMHC or others, would be allowed into the pool of assets backing the bonds, and no writing of contractual covered bonds outside of the legislated framework.

RBC was primed to take advantage of the new rules – their covered bond pools, unlike those of all other issuers, already contained no insured mortgages. And, owing to the 2012 legislative changes, that allowed them to be quick out of the gate in acquiring SEC registration and, with it, access to U.S. buyers who seek index-eligible bonds, better price transparency and higher disclosure standards. For other issuers, the route has been and will be longer and more complex.

And there will be bumps. Covered bonds are not for all issuers; the regulatory and legal hurdles are big, and profitability in the market depends on scale. Smaller market issuers of commercial paper backed by insured mortgage assets will likewise be pinched by the prohibition on taxpayer-backed mortgages in their securities. That means less access to funding and bigger spreads for them.

And Canadian banks eventually will bump into the regulatory policy cap on covered bonds: they may not exceed 4% of bank assets, and the mortgage market is many times bigger than that. A move to expand the cap will encounter headwinds from the Superintendent of Financial Institutions. And from deposit insurers, who will worry that the bigger the share of assets that are bankruptcy remote – and therefore remote from depositors’ claims on them in a bankruptcy – the more costly will be deposit insurance for everyone else.

There is a broader challenge, too, surrounding another alternative, developing a residential mortgage-backed securities (RMBS) market that operates without CMHC guarantees – there isn’t one in Canada, and it will take time to develop both the product and investors’ comfort with it.

Which means there is work to do, and policy and legislative change to come in due course. But a path to a housing finance market that is less dependent on government backing is surely the right one, and taxpayers should rest easier when we are safely on it.

Slowdown? Nearly half of Canadian homeowners eager to buy property

Roma Luciw

The Globe and Mail

 

 

Undeterred by record-high housing prices and bolstered by low borrowing costs, nearly half of Canadian home owners plan to buy a property in the next five years, although intentions vary sharply from city to city, a poll released Wednesday has found.

According to a Bank of Montreal survey, 45 per cent of Canadian homeowners surveyed this spring are looking to buy a place in the next five years, a level that did not change from the fall of 2012. The percentage of homeowners planning to buy in the next year also remained stable, edging 1 per cent higher to 7 per cent.

Canadians in Calgary were least eager to buy, with intentions there dropping by 13 points from the fall of 2012 while those in Atlantic Canada were the most eager, with buying intentions rising 15 points. Intent to buy among homeowners in Vancouver climbed by 5 points and in Toronto by 2 points.

Bank of Montreal economist Sal Guatieri attributed the perception of improved affordability to rising incomes. “Job growth has been decent in the last year, so income has been rising,” he said in an interview. In addition, he noted that the runup in house prices is slowing.

“In Calgary, house prices have picked up... because people are moving to that city and taking advantage of the oil sands,” he said. “Valuation is pretty good in Calgary,” he added, where house prices have gone through a correction after peaking in 2007.

However, Mr. Guatieri said that in the detached home markets in Vancouver and Toronto, affordability remains an issue and high prices are forcing buyers into the condo market. Prices in Vancouver have dipped recently, he said, but for most people it is still “very pricey” to buy something in that city.

House prices hit an average national record high of $380,588 in April, according to the latest data from the Canadian Real Estate Association.

Despite fears of a major slowdown similar to the one that triggered a recession in the United States, there are signs that Canada’s housing market is headed for a soft landing. Sales this spring are forecast to edge higher, putting an end to years of frenetic activity and huge price gains.

“The housing market in most regions is still very affordable, because of low interest rates – that is why people are still buying,” Mr. Guatieri said. “Going forward, we expect prices to stabilize. And of course cities that are richly priced, they are vulnerable to price corrections.”

John Andrew, a real estate professor at Queen’s University in Kingston, Ont., said the high cost of real estate transactions make it unlikely that nearly half of all Canadian homeowners will make a move in the next five years.

“A lot of people do not realize how high the fixed costs of moving really are,” he said. Once you factor in real estate commission fees, lawyer costs, land transfer taxes as well as the cost of the actual move, it adds up to a “staggering number.”

And although interest rates are still low, they might not be five years from now, Prof. Andrew added.

The online interviews of 1,008 Canadian home owners conducted by Pollara for BMO in February asked them about intentions to do with buying or selling their primary or secondary properties, price expectations, and mortgage affordability.

Here are some of the findings: 16 per cent of those polled plan to buy a larger home as their primary residence while 21 per cent plan to buy a smaller home; 15 per cent plan to move within their current neighbourhood while 12 per cent intend to move to a more expensive one and 7 per cent to a less expensive one; 10 per cent plan to buy a recreation property like a cottage; 10 per cent plan to buy an income property to rent to tenants and 6 per cent intend to buy an investment property to flip.

Lastly, 10 per cent of homeowners plan to sell their home and move to a rental property, retirement community or in with family, according to the poll.

Among those surveyed, 7 per cent expect house prices will fall over the next year, 32 per cent said they will stay the same and 53 per cent said they expect them to rise. The remainder said they did not know.

The BMO survey also asked homeowners if they have cut back their spending or dipped into their savings to make their monthly mortgage payments. It found that the number of people who needed to do so has fallen 10 points from last fall to 45 per cent this spring.

Worried about the housing market? Five strategies for peace of mind

ROB CARRICK

The Globe and Mail

 

 

Here are five strategies that can help you keep your peace of mind amid the uncertainty over the direction of the housing market.

1. Plan to live in your home for at least 10 years.

Housing forecasts range from a soft landing to a hard decline – and then there are the dreamers who believe prices won’t ever stop rising. What all these views have in common is that they target the near to medium term. If you’re planning to stay put in your current home for 10 years, you have a good chance seeing the market recover from any declines to come and begin the next up-leg. Warning: The Toronto market took a few more years than that to get back to its 1989 price peak. Then, however, it took off like a rocket.

Here’s another good reason to live in a house for at least a decade. No matter what happens in housing, it’s unlikely that prices will rise as they did in the past 10 years. You’ll have to build equity the old fashioned way – by living in your house and paying your mortgage.

2. Make lump-sum mortgage prepayments.

Money you use to pay down a mortgage goes directly against your outstanding balance, which means it increases your equity and lowers your total interest cost. Adding to your equity is an important benefit at a time when the market value of your home could decline.

Don’t feel discouraged if you lack the money for a big prepayment, say $1,000 or more. Most lenders allow “double-up payments,” which means you can add as much as a whole extra payment in any month you want. Some will lenders allow a payment as small as $100. Still considering what to do with your tax refund? Put it right into your mortgage.

3. Save for a 20-per-cent down payment.

Tough to do, no question. The average Toronto home cost $526,335 in April – a down payment of 5 per cent would run you $26,317, while 20 per cent would cost a massive $105,267. The average national price was $380,588 in April, so a 20-per-cent down payment would come to $76,118.

One benefit of the 20-per-cent down payment is that you start your home ownership experience with a serious chunk of equity. If you go in at 5 per cent, a few bad months for the real estate market could leave you owing more than the market value of your home. One more benefit of a down payment of 20 per cent or more is that you save the cost of mortgage default insurance. The insurance premium is generally added to the amount you borrow, which means you pay interest on it.

4. Take a 10-year mortgage.

It’s unlikely, though not impossible, that a 10-year mortgage at 3.69 per cent will turn out to be the lowest-cost option in terms of interest cost. Five year mortgages can be had for 2.79 per cent today, while a good one-year rate is 2.4 to 2.6 per cent. So why use a 10-year mortgage? To wall yourself off from the market for a full decade. If the economy surges and rates rise, you’re covered. Same goes if the housing market tanks and lenders get nervous about their mortgage portfolios.

I wrote about something called renewal risk in a recent column you can check out here. Basically, it refers to the risk that a lender stressed by falling house prices might want to requalify you at renewal time to ensure your income and debt levels are in balance with what you owe. If not, you might not get a tip-top mortgage rate discount, or in an absolute worst-case scenario, have your renewal declined. (Let’s be clear that you’re only at risk if you made a down payment of 20 per cent or more on your home, which means mortgage default insurance wasn’t required.)

Lenders now leave clients alone as long as they’re making their payments on time, and some say renewal risk is way overblown. But if you have any worries about losing your job or having your hours cut back, a 10-year mortgage buys you some privacy. You won’t have to talk to a lender until 2023.

5. Rent

Yes, it’s tough to find decent digs in big cities, where monthly rents are high and units are scarce. But in Toronto, at least, a projected decline in the condo market would be good news for renters.

A serene outlook on housing comes from being prepared for all outcomes, from a soft landing to a sharp decline. Prepare your mind, and your mortgage.

For more personal finance coverage, follow Rob Carrick on Twitter (@rcarrick) and Facebook (robcarrickfinance).

Home sales expected to stabilize amid steady job growth

Although Vancouver’s prices have declined moderately, steadier prices are expected in the year head: BMO report
The Vancouver Sun

The Canadian housing market is calming rather than crashing, as the impact of tougher mortgage rules and cooling credit is partly offset by the supportive influence of low interest rates and continued income growth, according to a new report from BMO Economics.

“House prices have hit record highs in most regions across Canada, though the rate of appreciation has slowed,” said Sal Guatieri, Senior Economist, BMO Capital Markets.

Resale markets are largely balanced, though buyers have gained leverage in some provinces, including Quebec and British Columbia.

Steadier prices are expected in the year ahead amid decent job growth. A benign outlook for rates and income should support affordability this year, weighing towards relatively steady sales and prices in most regions.

Canadian Housing Market Balanced Mr. Guatieri noted Toronto house prices, though slowing, hit a record high in April; gains in the detached market more than offset slightly lower condo values. Alberta enjoyed decent price gains, while Vancouver’s prices have declined moderately.

“Nationwide, housing starts have adjusted to the reduced demand, returning to household formation rates,” Mr. Guatieri added. “Meantime, Toronto continues to build up rather than out to meet supportive demographic demand.”

BMO Housing Confidence Report found that nearly half of Canadian homeowners (48 per cent) intend to buy a property in the next five years — mostly unchanged from fall 2012 — signalling a high level of confidence in Canada’s housing market is continuing into 2013.

Laura Parsons, Mortgage Expert, BMO Bank of Montreal, noted that it is essential for both buyers and sellers to be aware of any changing conditions on the local level. “If planning to buy or sell a property, consider working with an expert who can help you make decisions that are appropriate to the health of your local market, and more importantly, that responsibly fit within your particular financial situation.”

The full report from BMO Economics can be downloaded at www.bmocm.com/economics


Read more: http://www.vancouversun.com/business/Home+sales+expected+stabilize+amid+steady+growth/8446887/story.html#ixzz2VUVqwgFN

Evidence mounts of soft landing for Canada’s housing market

Theophilos Argitis and Greg Quinn, Bloomberg News

You’d have to see rates move dramatically higher for a major correction

Canada’s housing market is showing signs of a soft landing amid evidence of robust demand and buoyant new construction plans.

Home prices in Toronto, Canada’s most-populous city, rose 5.4% in May from a year ago, the biggest increase in five months, the Toronto Real Estate Board reported Wednesday. Statistics Canada said the value of April municipal building permits posted a 10.5% gain.

Housing-market data are showing few signs of a sharp correction even amid warnings from analysts and policy makers that a bubble may have been forming. Finance Minister Jim Flaherty tightened mortgage rules for a fourth time last year on concern that an overbuilding of condos could lead to sharp price declines. Former Bank of Canada Governor Mark Carney identified record household debt as the biggest domestic risk to the economy.

“The base case scenario is a soft landing,” said David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities in Toronto. “You’d have to see rates move dramatically higher” for a major correction, he said.

Driven by historically low interest rates, Canadian banks have been increasing dependence on real estate lending to drive earnings, with residential and non-residential mortgage assets totalling $955 billion at the end of March, or 26% of total assets, according to OSFI data. That’s up from $521 billion five years earlier, which represented 20% of assets at the time.

Fading Impact

The impact of Flaherty’s policy changes are beginning to fade, Toronto Real Estate Board President Ann Hannah said in Wednesday’s release.

“A growing number of households who put their decision to purchase on hold as a result of stricter lending guidelines are starting to become active again in the ownership market,” Hannah said.

The average sale price rose to $542,174, from $514,567 a year ago, while a composite home benchmark price index for the city was up 2.8%, the Toronto Real Estate Board reported. Unit sales dropped 3.4% from a year earlier to 10,182, the board said in an e-mailed statement Wednesday.

The decline in Toronto sales was led by condominiums and townhouses, while purchases of detached homes rose in May. Prices were up in all categories of homes.

On a year-to-date basis, Toronto sales are down 9.6%.

‘Weaker Volumes’

“The story continues to be one of weaker volumes,” Derek Holt, vice-president of economics at Toronto-based Scotiabank, said in a note to investors. “The question is how that will carry over into construction and prices.”

Residential building permits rose 21% to $4.35 billion in April, Statistics Canada said today, led by a 51.9% jump in condominium construction intentions.

Vancouver made one of the largest contributions to the national increase among 34 cities, Statistics Canada said, with permits rising 50.7% led by multifamily dwellings. Calgary permits also rose 40.6% to $773 million on commercial buildings.

Vancouver’s real estate board said Tuesday that home sales rose 1% in May from a year ago, with composite prices down 4.3%.

Falling home construction, which helped lift Canada’s economy out of recession, has been a drag on growth over the past year, shrinking at an annualized pace of 4.7% in the first quarter, according to GDP data released last week.

How to get value out of your house without selling

Garry Marr
The Financial Post


Here’s a way to get some value from your house without selling. Just be prepared to stay put and be ready for some headaches.

Renovating can make your home bigger and more valuable but without any of the enormous transaction costs that can easily top 10%, depending on where you live in the country.

The federal government might have made it more difficult with its tighter and tighter regulations over the last three years to extract cash out of your home to pay for renovations.

Whereas once you could refinance your home for up to 90% of the value, it’s now only 80%.

If you bought a $500,000 home with 5% down, it has to rise in value past $600,000 before you would be able to extract some equity for a renovation. With home price increases shrinking — they are not falling in most parts of the country despite the general negativity — that hasn’t left much opportunity for a major project.

But guess what? Canadians have other ideas. A new poll shows they are actually saving for major projects based on the results that reveal a majority of Canadians are paying for a renovation with cash.

A Bank of Nova Scotia study found 44% of Canadian homeowners plan to do a major renovation in the next two years. Among that group, 62% will fund the transaction with cash.

“The renovation market is quite large in Canada and quite consistent, people are reinvesting in their homes,” says David Stafford, director of real estate secured lending with Scotiabank.

People are reinvesting in their homes

The amount of money spent on renovations in Canada is still dwarfed by the money people spend on buying homes but it’s not small potatoes either. The latest annual data from Canada Mortgage and Housing Corp. put the market at $20.9-billion in 2011 across 10 major markets.

Full disclosure here. My money is with those people. I’m planning my own renovation — having come to the conclusion that the transaction costs associated with any move into an upgraded house almost gives me “free” money to play with in my current home.

Okay, it’s not free. I have to fork over the cash. Refinance. Get a line a credit. Take it out of my TFSA. Whatever. But the bottom line is moving would have cost me enormous fees.

Unfortunately for me and the other 2.6 million people in Toronto, we live in a jurisdiction with two land transfer taxes. You have to pay both the city and province which amounts to $16,200 on a $600,000 purchase or about 2.7% of the value. The only other city with an equivalent tariff is Montreal with its so-called welcome tax.

Consider some of the other costs associated with moving. Realtors can begin emailing me now but the realty is you are looking at 4% to 5% commission on the sale of your home. Add in legal fees, moving costs and some of the soft costs like painting and minor repairs that come with any selling and buying transaction and it’s not hard to get to 10%.

“I wouldn’t say renovation is just a financial decision,” says Mr. Stafford. “People are looking to improve the quality of their environment. The financing and financial requirement are just part of that decision.”

It’s a good point. We’ve come to think of our houses as an investment because they can easily top 50% of our net worth but they are as much about consumption as anything.

Let’s say you do that $50,000 kitchen project. Is your house really going to be worth that much when it comes time to sell? Probably not but in the interim you get to enjoy all those years of cooking and eating in your fabulous kitchen.

“The reality is that very few renovations return a dollar for dollar,” said Mr. Stafford, adding one of the other reasons people choose to improve their existing home are qualitative. “They like the neighbourhood they are in.”

There’s no question not all renovations go as planned. One of the great perils of renovation is doing the whole thing in cash, to avoid HST, and without permits to avoid costly fees.

“It’s cheaper in the short run but maybe not the long run,” says Raymond Leclair vice-president of public affairs with the Lawyers’ Professional Indemnity Company.

The tax is ultimately something that your contractor is required to pay and there’s nothing technically illegal with a verbal contract. But when things go wrong, what do you do without a paper trail?

“It becomes a ‘he said, she said’ situation and you get into court before a judge and say ‘he painted it blue and it’s supposed to be green’. The other said says the opposite,” says Mr. Leclair.

And when it comes to permits, think twice about not doing it by the book. When you sell, the buyer may ask if that addition you built is up to code. The city can ultimately order any project done without proper permits to be taken down, says Mr. Leclair.

Doing a renovation on the books is going to cost you more money. For sure. But when you start by saving up to 10%, it’s worth it.

Save at renewal time by using a mortgage broker

TMG The Mortgage Group
www.blogger.mortgagegroup.com


Consumers are becoming much more informed about mortgages and mortgage products before taking the plunge into home ownership. According to the Canadian Mortgage and Housing Corporation’s (CMHC) 2013 Consumer Survey, 70% of buyers researched terms and conditions, 60% discussed the pros and cons of various mortgage products with professionals and 59% compared interest rates.

Because consumers are highly engaged, they are more confident about their mortgage decisions, according to the survey. Still, with all that research, more than half contacted a mortgage broker to get further clarification. This is a good move, considering how much the mortgage rules have changed over the past few years.
The survey also found 81% of buyers were totally satisfied with the experience with their brokers and would most likely use that broker again. An overwhelming 75% would highly recommend their broker to family and friends.
A study recently released by RBC Economics found that low mortgage rates have helped make owning a house largely affordable in the first quarter of 2013, with low risk that rates will move up sharply. It’s likely that this low interest rate environment will go on for the next two years.

The year 2008 was one of the biggest years for mortgage originations in Canada. That means a large percentage of those mortgages are now maturing. Discounted variable rates were popular and those discounts no longer exist, so those mortgage holders will be facing increased mortgage costs. For most homeowners, their biggest monthly expense is a mortgage payment. Yet the CMHC survey found that 39% of households automatically renew their mortgages when the term is up instead of trying to find a better deal.

When you’ve done your homework prior to purchasing a home, it only makes sense to do as much research at renewal time. Quite often the renewal rate offered to you by your lender is higher than the market average.
There may also be material changes in your household. Perhaps you’ve started a family, or one of you has been promoted. This is another good time to contact a mortgage broker to review your financial situation and see what makes sense for you to do.

Here are some tips to make sure you’re getting the best mortgage product for you:

• Get going early. Contact your mortgage broker four to six months ahead of renewal time. Most lenders will guarantee a discounted rate for four months but your renewal agreement is usually sent only 30 days ahead of your maturity date.
• Do your homework. Let your mortgage broker shop the rates for you and get you the best deal, tailored to your particular situation. If you decide to switch lenders, there are no penalties at renewal time.
• It’s not always about interest rate. Don’t fixate on rate. There are other options that may appeal to you such as changes to amortizations or changes to the rate type.
• Let a broker negotiate on your behalf. If you don’t like negotiating and don’t have the time to do the research, your mortgage broker will do the legwork for you. Homeowners who use a broker at renewal time usually pay less than those who don’t use one.