Genworth Takes its Own Tack on Debt Ratio Policies

Rob McLister, CMT
www.canadianMortgageTrends.com


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

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

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

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

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

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

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

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Rob McLister, CMT

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

By Alison Griffiths, Metro Canada

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Stricter Debt Ratio Standards on the Way

Rob McLister, CMT
CanadianMortgageTrends.com


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

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

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

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

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

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

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

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

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

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

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

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

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

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

Negotiating your first mortgage? Check out these tips

Derek Raymaker

Special to The Globe and Mail

 

 

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

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

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

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

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

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

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

Start early and be prepared

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

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

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

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

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

Think about what will work best for you

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

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

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

Approach it like you’re searching for a financial planner

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

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

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

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

Remember you have more leverage than you think

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

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

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

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

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

Young homebuyers learn from experience

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Ora Morison

The Financial Post

 

 

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Home that Adapts to Your Life

TMG The Mortgage Group

FlexHousing™: A Home that Adapts to Your Life

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

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

Adaptability

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

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

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

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

Accessibility

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

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

Also think about

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

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

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

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

Housing market breathes again

TMG The Mortgage Group

After months of somewhat depressing news for the housing industry, Canada's housing market is showing signs of life. The buzz now is about a soft landing rather than a bubble bursting. Demand has increased in most parts of the country and new construction activity is increasing. Home prices are rising as well. Despite warnings from analysts about a housing bubble, housing-market data are showing few signs of a sharp correction. A housing bubble is a type of economic bubble that occurs periodically in real estate markets, characterized by rapid increases in valuations of housing until they reach unsustainable levels and then decline.

Jim Flaherty tightened mortgage rules for a fourth time last year, concerned 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.

However, our low interest rate environment has kept any bubbles or sharp corrections in check.  Now, the impact of Flaherty's changes seems to be fading.

Households that put their purchase decisions on hold because of the stricter deadlines are now becoming more active. The latest data from Statistics Canada show that the number of homes changing hands is relatively steady, after a period of steep year-over-year sales declines. Even condo developers, who scaled back their activity, seem to be jumping back in.

Even the Canadian Real Estate Association (CREA) has updated its forecast for home sales activity. May's sales were up 3.6 percent from April, a sign of momentum and the largest month-over-month increase in almost two and a half years. However, affordability may continue to be an issue as home prices tick upwards.

Benjamin Tal, deputy chief economist with CIBC predicts that prices will go down in the next year or two, but not by much. "Prices have held up so far because, as demand has fallen, so has the number of homeowners listing their properties for sale, Tal said in an interview with the Globe be and Mail. "I do not see smoke. I see a boring, slow process over five to seven years that will take fundamentals and prices back in line."

All the signs point a recovery in the housing market and consumers are deciding to move forward with their purchase intentions. It's a great time to discuss options with your mortgage professional who can help you navigate the waters of interest rates and mortgage products to find something that fits your financial goals.

Canada’s housing market defies doomsayers

Andrea Hopkins, Reuters

The Financial Post

 

 

TORONTO — Daniel DiManno sold his Toronto house for less than he had hoped and wanted to see if prices would cool before he bought a new one. But Canadian mortgage rates are rising again and that’s spurring DiManno and others to jump back into the market, cutting short an already brief housing downturn.

 

“I saw that they are going to increase rates, so I called my bank last Friday and locked in 2.5% for 120 days,” said the 31-year-old accountant, starting the clock on a four-month search for a new home before borrowing gets more expensive.

 

After nearly a year of cooling sales and plenty of concern that Canada could head for a U.S.-style housing crash, demand has roared back in key markets. What’s still unclear, however, is whether the recent surge is a reinflation of a real estate bubble, a final rush of buyers before rising rates choke off demand, or just a sign of market resilience.

 

The rise in mortgage rates comes after North American bond yields jumped on fears that an improving U.S. economy will cause the Federal Reserve wind down its monetary stimulus program, known as quantitative easing, more quickly than expected.

 

After a long cold spring that dampened house hunting, May sales of existing homes rose 3.6%, the biggest monthly gain in almost 2-1/2 years, returning the market almost to where it was before Canada’s Conservative government tightened lending rules in mid-2012 to stave off a housing bubble.

 

Housing starts also jumped much more than expected in the month, adding to evidence that late-spring buyers have breathed life back into a market that some had forecast was heading over a cliff.

 

Toronto real estate agent Steven Fudge said he was starting to believe the market was back in balance after a cool-down. But the specter of higher rates has brought buyers back, marking either a new phase of a bubble or the last kick of a dying mule, he doesn’t know which.

 

“In the last couple of weeks, there’s been a real strong murmur … anticipating a bump in rates,” said Fudge, a sales representative at Bosley Real Estate Brokerage, which operates the Toronto property website urbaneer.com. “It’s like fuel on the market. There’s now a whole bunch of buyers locking in 60- to 90-day mortgage pre-approval.”

 

One of his clients lost a 17-player bidding war this week for a downtown Toronto house. The home, listed at C$499,000 ($476,500), sold for more than 25% over asking.

 

“I’ve been counseling buyers to be cautious,” he said. “It really feels like almost anything can happen.”

 

IS IT A BUBBLE?

 

The question of whether the late-spring surge marks a reinflation of a real estate bubble is hanging over the industry.

 

The federal housing agency, the Canada Mortgage and Housing Corp, this week revised up its outlook for sales, construction, and price increases in 2013 and 2014, effectively declaring the downturn over.

 

“The market was moderating in the second half of 2012. Then we’ve had an inflection point, and went into a moderate positive trend since the beginning of 2013,” said Mathieu Laberge, deputy chief economist at CMHC. “We should see this type of trend for housing starts going forward.”

 

The agency, which insures the majority of mortgages Canadian banks issue, expects average national prices to rise 1.6% in 2013 and 2.1% in 2014, which would be the “soft-landing” policymakers want and a long way from dire predictions of a 10% to 25% price crash.

 

“I’d say we feel good. I mean, we’re not out of the woods yet, but we feel good,” said Brian Hurley, chief executive of Genworth Canada, a unit of Genworth MI Canada Inc and the largest private residential mortgage insurer in Canada.

 

Hurley acknowledges he was feeling afraid last year when sales dropped and analysts worried that tighter mortgage rules had squeezed too many buyers out of the market.

 

Prices fell in Vancouver, which had been Canada’s hottest market, but national prices gains never slowed below an annual 2%.

 

To be sure, some say it is too soon to celebrate the end of the mild downturn, and a spring bounce is not a measure of strength. If buyers want to get into the market before rates rise, won’t that just steal demand from the future?

 

Mortgage rates have begun to inch higher as global bond yields climb. Canadian mortgage rates are typically priced off the government’s five-year bond, which now yields 1.80%, up from a 60-year low of 1.076% in June last year.

 

But others believe the spring surge may reflect demand that was held back by the tighter rules, and the housing market’s failure to really cool means a bubble is starting to inflate again. Official Canadian interest rates are not expected to rise until late 2014, so mortgage rates won’t rise fast or furiously.

 

“A lot of forecasters like myself are expecting a relatively flat market, but there’s a significant upside risk that if rates remain at current levels indefinitely, you’re going to start to heat the housing market back up,” said Craig Alexander, chief economist at Toronto-Dominion Bank, Canada’s second-largest lender.

 

© Thomson Reuters 2013

Do you have what it takes to be a landlord?

Chris Seepe

Special to The Globe and Mail

 

 

The following article is from Canadian Real Estate Wealth Magazine.

Despite the long list of potential hazards, the possible rewards of being a landlord often outweigh the downsides. Here are the top 10 reasons why you should become a landlord.

1.) You use tenants’ money to pay your mortgage and build your equity. You can raise the rent each year (with restrictions) and adjust for current market rent rates when a property becomes vacant. Long-term investors buy real estate that generates positive cash flow, and either hold it until the tenants have paid off the mortgage or until there’s a compelling reason to dispose of the income stream in return for a lump sum; for example, to buy something bigger/better or to create a retirement annuity income stream.

2.) Real estate assets can be leveraged to bargain for additional real estate investments. Unlike stocks, mutual funds, term deposits, etc., you do not have to pay for the whole real estate investment yourself. Lenders will give you the extra money you need (mortgage) in exchange for receiving interest and the property as collateral if you default on the scheduled payments. When the property’s value has increased enough, some lenders will let you borrow against that value (your equity), which you can use as down payment to buy another property.

3.) Real estate is tangible and more easily collateralized than most other types of investments. Ask ex-shareholders of Northern Telecom, Enron, Bre-X, and other “blue chip” failures. Lenders generally offer a higher ratio of loan amount versus the value of a real estate property than they would offer on a portfolio of stocks, for example. The building and/or land will still exist if the worst should happen. Mainstream lenders also love the low-risk appeal of rental housing properties insured by the Canada Mortgage and Housing Corporation, and offer very attractive interest rates.

4.) A modest increase in rental income and/or decrease in operational costs can have a significant positive impact on property value. For example, increasing net operating income (by reducing costs and/or increasing rent) by $1,000 per year and applying a 6 per cent capitalization rate (better-than-average in today’s southern Ontario market) can add about $16,650 to the value of a property, using the Income Approach. This does not include appreciation for other reasons such as high demand for, and low supply of, rental space, improvement in the neighbourhood, etc.

5.) Several current tax policies (RCCA, capital gain, etc.) discourage long-term owners from selling their rental housing properties because the proceeds of a sale may only equal the cash flow they would receive from keeping the property for a few years. Combine this with the discouraging rent control policies which make investors/ developers unwilling to tie up their money in building a rental property. They may have to wait a decade or more for a return on their investment, when they can build a condominium and get their money back– often with a huge profit–in just a few years. So what’s good about that? Rental housing inventory is shrinking, resulting in high investor demand and high sale prices for existing inventory (seller’s market), and increases in average rent rates (low vacancy).

6.) A well-maintained and fully occupied rental property rarely depreciates. Unless they have been damaged by stigmatism or an eroding neighbourhood (e.g.. increase in crime), values have traditionally increased over the long term.

7.) If the very worst should happen, you still have a low (or no)-cost place to live.

8.) Legitimate and reasonable expenses reduce your taxable income. Tax deductions include mortgage and credit card interest, depreciation, a reasonable salary with employment deductions, a percentage of your local travel expenses, relevant long-distance travel (e.g.. trade show), portion of home office and workshop costs, etc.

9.) Despite the perceived stereotype, many landlords enjoy the satisfaction of helping to provide good-quality housing to self-sufficient people in need.

10.) Multi-residential investments are arguably the most stable, depression/recession-resistant, and relatively secure type of real estate investment you can make. Everyone needs a place to live; not everyone needs a place to work. Buying a place to live is not possible for many young people and remains elusive for many adults too. Some adults choose the apartment living lifestyle for its freedom from housing related issues.

Treat your investment like a business, and your tenants like valued customers; know your rights and those of your tenants; maintain tight control on your cash flow; act promptly in everything you do; surround yourself with high-quality industry professionals, and you’ll experience the success you’ve dreamed was possible, especially if you can expand your holdings.

From Canadian Real Estate Wealth Magazine, a monthly publication focused on building value through property investment, covering topics such as values and trends, mortgages, investment strategies, surveys of regional markets and general tips for buyers and sellers.

My condo fees are crazy! What’s a reasonable rate?

Ricky Chadha

Special to The Globe and Mail

 

 

Question: I'm looking at buying a downtown condo, but man, those fees are crazy! What do you consider a reasonable rate per square foot?

Answer:
Various factors can contribute to condo maintenance fees – building amenities, utilities, location, age of building. But the definition of what‘s “reasonable” is always very subjective.

So I will give you my subjective opinion: The amount we pay for condo maintenance fees is generally way too much these days, especially in downtown Toronto.

Just a few years ago, 50 to 65 cents per square foot (psf) was acceptable for the average condo situation. More recently, we’re seeing price of between 70 and 80 cents psf for many buildings.

Condo fees in older buildings at the Queens Quay waterfront and elsewhere in downtown Toronto run anywhere from $700 to $800 per month for units that are just over 1,000 square feet. That averages to about 75 cents psf.

Building age becomes a factor in condo fees. Older buildings require more repairs in general, along with modernization of common-area décor such as hallway carpets and lobby areas. These costs ultimately gets passed on to condo owners in fee increases of course.

But newer buildings can have their own issues. The rise in condo fees in some new builds is attributed to sub-par building materials and construction (we’ve all seen the widely reported stories of glass falling from balconies, some of which have led to class-action lawsuits from condominium residents and others affected).

When you purchase a condo, the fees may be perfectly reasonable in your view. But that doesn’t mean they won’t increase at a very unreasonable rate in future years.

So how do you avoid getting hosed on condo fees?

A lawyer’s review of a condominium status certificate will come in very handy. This certificate is a snapshot into the overall financial health of a condominium. Your lawyer will be able to review the information in the document and give you an opinion of the financial health of the condo.

In my opinion, the two most important pieces to look at within a status certificate are the Reserve Fund (and study) and any Special Assessments.

The Reserve Fund refers to the amount of money the condo corporation has in the bank to deal with both regular and unforeseen maintenance and repairs. The actual amount that should be in the Reserve Fund is largely dependant on the size of the building (i.e. number of units) and the age of the building. The older the building, the more money they should have.

Complementary to the Reserve Fund is the Reserve Fund Study. These are projections of how the Reserve Fund will look in future years. If the study doesn’t indicate appropriate planned increases to the fund in future, that’s a red flag.

Any Special Assessments to a building can be a cause of concern. Such assessments are additional payments or a levies that a condominium board has to impose on residents when shortfalls or unexpected expenditures occur, and there isn’t enough money in the Reserve Fund to cover for it.

These are particularly of concern for smaller condominiums or lofts, where the burden is spread across fewer owners. I once had a client who had a beautiful authentic hard loft conversion. Because the building was a old former factory, there were issues with the roof and a Special Assessment was issued because of shortcomings in the Reserve Fund.

Since there were only 28 units in the building, each owner had to ante up almost $10,000!

While there are no guarantees with the future health of any building, some due diligence can save you a lot of headaches down the road. Under no circumstances would I proceed with purchasing a condo without a lawyer’s review of the status certificate.

Finally, consider that a condo fee of $475 per month is equivalent to about $100,000 in purchasing power with today’s mortgage products. You can buy a lot more house if you don’t have condo fees to worry about.

Ricky Chadha is a broker with Royal LePage Estate Realty in Toronto, and specializes in applying social media and other digital tools to the business of real estate.

The content provided in The Globe and Mail’s Ask a Real Estate Expert is for information purposes only and is neither intended to be relied upon nor to be a substitute for professional real estate advice.