Garry Marr, National Post
Don’t tell anyone — it seems we’re not supposed to talk about it too loudly — but mortgage rates have come crashing down again.
Ratesupermarket.ca says the fixed rate on a five-year mortgage has dropped to 2.94%, below the 2.99% rate that caused a furor earlier this year with Finance Minister Jim Flaherty warning banks not to get too aggressive with pricing.
“The record-breaking rate, offered in Ontario, appeared July 24 and is expected to return as the precedent has been set,” says Kelvin Mangaroo, president of Ratesupermaket.ca, who says his own surveys show the push is back on for a five-year mortgage.
Even the 10-year fixed-rate mortgage is getting more enticing, with a guaranteed rate of 3.76% for the next decade.
Vince Gaetano, a principal at monstermortgage.ca, says a number of lenders have quietly dropped back to 2.99%.
“The banks are not publishing anything yet but there are a couple that in certain situations will go to 2.99% on a five-year,” Mr. Gaetano says.
The real question is why rates aren’t even lower. The Bank of Canada may want consumers to take a tougher stand against their debt, but the bond market, which affects mortgage pricing, continues to offer record-low yields.
The spread between the posted rate on a five-year mortgage of 5.24% and a government of Canada five-year bond is almost 400 basis points — the highest it’s been since the financial crisis in 2008.
“I truly believe [the real estate] market has softened and the banks want to make more margin,” Mr. Gaetano says. “The volume is just not going to give them their profits.”
Farhaneh Haque, director of mortgage advice at TD Canada Trust, says there is definitely discounting or as she calls it, “relationship pricing,” but adds the bank’s costs are not based solely on bond yields.
“The cost of funds is impacted by liquidity premiums,” she says. “You don’t see that necessarily in the bond yields.”
There is also an ongoing threat from Mr. Flaherty of even tougher rules if the banks get too aggressive in their pricing.
“We want to make sure, in light of all the guidelines we’ve had from the government, that we are not getting into the price wars that the banks were in in the earlier part of this year,” Ms. Haque says.
The problem is these rates continue to be tempting for consumers, although the slowdown in housing sales in some major markets over the past three months indicates the lure may not be having the same effect.
But how do you say no to these rates, especially if you have a mountain of debt? This may be the best time ever to consolidate debt, if you can tame your spending at the same time.
It’s not clear consumers are doing that. Mr. Gaetano reports a rush to refinance, with many consumers pushing their home-equity lines of credit to 80% of their home’s value ahead of new rules from the Office of the Superintendent of Financial Institutions that limit that percentage to 65% for HELOCs.
Craig Alexander, chief economist at Toronto-Dominion Bank, said the bond market reflects the increased fear over Europe and the global economy. He says it can’t last.
“The level of yields don’t make any sense,” Mr. Alexander says.
“Traditionally, five-year mortgage rates have a tight correlation with government bond yields. We are in an atypical environment, the level of bond yield is so exceptionally low it doesn’t appear to be sustainable. If you think about it, after you strip out inflation, investors are getting a negative return.”
Mr. Alexander says there is no question that while investors face challenges in today’s interest-rate environment, debtors have great opportunity. But he worries that people will use this opportunity to ratchet up their debt.
“What we don’t want is the level of rates to encourage people to take on new debt,” Mr. Alexander says. “Don’t abuse [this opportunity], take advantage of it.“
That’s the message Mr. Alexander says consumers should take away from the current situation. It’s unclear if everybody will interpret the message of low rates the same way.
Wednesday, 1 August 2012
Tuesday, 31 July 2012
10 Reasons to use a Real Estate Professional
Just like it is vital to seek the unbiased expert advice of a
mortgage professional who can shop the market through a number of different
lenders and best assess your personal needs, so too is it important to seek out
the professional advice of a licensed realtor when shopping for a new house or
to list your existing home for sale.
A real estate professional...
A real estate professional...
- Knows the market. They are local market experts. They can
provide you insights and detailed information about a specific
neighbourhood.
- Has the training and experience. A real estate professional
understands the process, opportunities and issues when it comes to buying and
selling homes.
- Offers price guidance. An agent will help guide clients to
list their homes at the best selling price.
- Offers professional networking. Real estate agents network
with other professionals, many of whom provide services that you will need to
buy or sell. Due to legal liability, many agents will hesitate to recommend a
certain individual or company over another; however, they can give you a list of
references with whom they have worked and provide background information to help
you make a wise selection.
- Markets your property to other real estate agents and the
public. Over 50 per cent of real estate sales are cooperative sales;
that is, a real estate agent other than yours brings in the buyer. Your agent
acts as the marketing coordinator, disbursing information about your property to
other real estate agents through a Multiple Listing Service or other cooperative
marketing networks, open houses for agents, etc.
- Knows when, where and how to advertise your property. When
a property is marketed with the help of your real estate professional, you do
not have to allow strangers into your home. Your agent will generally prescreen
and/or accompany qualified prospects through your property.
- Helps you negotiate. The purchase agreement usually
provides a period of time for you to complete appropriate inspections of the
property before you are bound to complete the purchase. Your agent can do more
than negotiate price; they can get you the best terms and conditions to protect
you. This can be advice about home inspections, who to contact with regard to
financing, information about home insurance and most aspects of home buying and
selling.
- Understands Market Conditions. Real estate agents can
disclose market conditions, which will govern your selling or buying process and
will offer you a Comparative Market Analysis.
- Guides you through the closing process.
- Answer questions after closing. Many questions can pop up after closing and agents are there to help answer them.
Monday, 30 July 2012
S&P cuts outlook on 7 Canadian banks
Tara Perkins - Financial Services Reporter, The Globe and Mail
Ratings agency Standard & Poor’s has revised its outlook downwards on seven Canadian financial institutions, citing high housing prices and consumer debt.
S&P affirmed the ratings for Bank of Nova Scotia, Central 1 Credit Union, Home Capital Group Inc., Laurentian Bank of Canada, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank, but in each case it cut its outlook from stable to negative.
“A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks,” the rating agency stated in its decision. “Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.”
The dimming prospects for the global economy added further impetus for the change, because Canada could see unemployment rise, further constraining income growth. That, in turn, could make it harder for Canadians to pay off their debts and amplify the country’s vulnerability to a housing market correction at some point in the future, the agency said.
The negative outlook recognizes that Canadian banks could see their financial performance and capital levels hurt by these factors, and could also suffer from stiffer competition among one another for loans as consumers try to tackle their debt loads.
House prices have roughly doubled over the past decade while, relative to GDP, consumer debt has risen from about 70 per cent to more than 90 per cent, S&P pointed out. And it suggested that Ottawa’s actions have not done enough to stem what could be a significant problem for the economy. “Successive government efforts since 2008 to counteract the stimulative effect of low interest rates on consumer borrowing and home prices have done less than we expected to counteract the growing level of consumer leverage and housing market risk in Canada,” S&P said. The agency is now watching to see if the most recent moves that the government has made will have better results.
Ratings agency Standard & Poor’s has revised its outlook downwards on seven Canadian financial institutions, citing high housing prices and consumer debt.
S&P affirmed the ratings for Bank of Nova Scotia, Central 1 Credit Union, Home Capital Group Inc., Laurentian Bank of Canada, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank, but in each case it cut its outlook from stable to negative.
“A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks,” the rating agency stated in its decision. “Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.”
The dimming prospects for the global economy added further impetus for the change, because Canada could see unemployment rise, further constraining income growth. That, in turn, could make it harder for Canadians to pay off their debts and amplify the country’s vulnerability to a housing market correction at some point in the future, the agency said.
The negative outlook recognizes that Canadian banks could see their financial performance and capital levels hurt by these factors, and could also suffer from stiffer competition among one another for loans as consumers try to tackle their debt loads.
House prices have roughly doubled over the past decade while, relative to GDP, consumer debt has risen from about 70 per cent to more than 90 per cent, S&P pointed out. And it suggested that Ottawa’s actions have not done enough to stem what could be a significant problem for the economy. “Successive government efforts since 2008 to counteract the stimulative effect of low interest rates on consumer borrowing and home prices have done less than we expected to counteract the growing level of consumer leverage and housing market risk in Canada,” S&P said. The agency is now watching to see if the most recent moves that the government has made will have better results.
Friday, 27 July 2012
Save on your mortgage
Paying off your mortgage faster has the excellent benefit of reducing the
amount of interest that you pay on your mortgage. How? By using privileges
provided by the lender.
There are two types of mortgages; open and closed mortgages.
With OPEN mortgages there are no limits as to how fast you can pay down your mortgage; however you do pay a higher interest rate for this privilege. Typically, this type of mortgage is used by real estate investors who know they are only going to hold the property for a short time. Their interest expense is also tax deductible.
CLOSED mortgages are the preferred choice for owner occupied properties and also offer privileges for paying down the mortgage faster with the ultimate benefit of reducing the interest you pay over the life of your mortgage. These programs differ from lender to lender; at the end of the day you would not choose a lender based solely on this.
Payment Privileges offer a Few Different Options:
If you were to make a lump sum payment of 2% each year on that same mortgage and just make regular payments, you would pay off the mortgage in 19.75 years and save $161,451 in interest expense...all for an investment of only $5,600 each year, and you would be mortgage free 15.25 years earlier!
There are two types of mortgages; open and closed mortgages.
With OPEN mortgages there are no limits as to how fast you can pay down your mortgage; however you do pay a higher interest rate for this privilege. Typically, this type of mortgage is used by real estate investors who know they are only going to hold the property for a short time. Their interest expense is also tax deductible.
CLOSED mortgages are the preferred choice for owner occupied properties and also offer privileges for paying down the mortgage faster with the ultimate benefit of reducing the interest you pay over the life of your mortgage. These programs differ from lender to lender; at the end of the day you would not choose a lender based solely on this.
Payment Privileges offer a Few Different Options:
- Annual or periodic lump sum payments: Payments of up to 15%, 20%, or even 25% of the original principal amount are allowed each year.
- Increase your payment: You may also increase your current payment by up to 15%, 20%, or even 100% each year.
- Double your payments: Some lenders also offer the option of doubling any and all payments.
- Accelerated or rapid payments: With each payment (weekly, bi-weekly, or semi-monthly) you apply a small incremental amount of money directly to the principal. This privilege is designed so that every 12 months you make the equivalent of 13 payments.
An example of how taking advantage of even one of these privileges can save
you thousands is easily illustrated with the Accelerated Payment Privilege.
On a $280,000 mortgage that is amortized for 35 years at 5.3%, the regular
bi-weekly payment would be $671.54. The accelerated bi-weekly payment would be
$728.36. This would allow you to pay your mortgage off in 28.4 years. Using a
constant interest rate, you would save $73,068 in interest expense. If you were to make a lump sum payment of 2% each year on that same mortgage and just make regular payments, you would pay off the mortgage in 19.75 years and save $161,451 in interest expense...all for an investment of only $5,600 each year, and you would be mortgage free 15.25 years earlier!
Why consumers are unprepared for the next financial crisis
Anil Giga, Special to Financial Post
Bank of Canada governor Mark Carney has been warning about the high level of consumer debt in Canada since 2011, and this advice has been largely ignored.
Canadian consumers’ debt levels today are by any measure higher than they have ever been. The irony is that we are on the cusp of the second phase of the financial crisis that began in 2008 and, this time, Canadians are more vulnerable than Americans or even the Europeans.
We knew the cause of this financial crisis when it arrived in 2008. The previous 20 years, consumers in the Western world had embarked on a spending binge financed by debt.
Consumers piled on unprecedented levels of debt to purchase their homes, investment properties, cars and anything else the banks and credit card companies would finance. Economic reality arrived in 2008, initially in the U.S., and the rest is history.
We do not need to be financial experts to understand that if we keep eating tomorrow’s lunch today, then when tomorrow arrives, there is no lunch. Consumers faced that moment in 2008. The world’s financial system almost went off the cliff. We know how we pulled back from the brink: The U.S. and other economies bailed out the banks and stimulated their economies with trillions of dollars of freshly created debt.
Of course, we never really solve a debt problem by creating more debt, although this is a good Band-Aid that kicks the can down the road. However, now, as we see in Europe (and soon in the U.S.), the governments have too much debt and are finding it difficult to borrow more without paying very high interest rates.
The question that needs to be asked is, who bails out the governments? After 19 economic summits in two years, Europe is still trying to figure this out.
‘It was debt that caused the crisis to begin with and, in Canada, we are happy to ignore the lessons’
And what of the Canadian consumer — what has he been doing while the euro Titanic struggles to stay afloat? China’s response during the economic crisis was to undertake a huge spending binge, building new cities, malls, office towers and condos. This lifted the commodity prices that had crashed and cushioned Canada’s downturn.
We should remember that oil prices had sunk to $40, and the other resources responded in a similar fashion. In a way, this has given Canadians a false sense of security. While house prices have been crashing in the U.S. and Europe, Canadians have gone on a borrowing binge, bidding up house prices to frothy levels completely oblivious of the reality.
Canadians look at the news that emerges daily from places such as Greece, Portugal and Spain as if these events are taking place in a far distant galaxy. Huge austerity measures and 25% unemployment rates in some of these countries have done little to temper the Canadian consumer’s appetite for debt.
It was debt that caused the crisis to begin with and, in Canada, we are happy to ignore the lessons. That is, of course, until the same movie arrives in Canada.
Canadian consumers should be aware that “GREECE R US” will probably arrive by 2014. This is not a prophecy, just economics.
Europe represents almost 25% of the world’s trade, and Europe is in a recession that is getting worse by the day. The U.K. is also in a recession, while the powerhouse economies of China, Brazil and India are decelerating so fast that we can see the skid marks.
Finally, look at the U.S. economy. We see it muddling through with the risks of a recession rising by the day. The International Monetary Fund has once again reduced its growth forecasts and issued the following statement: “Growth in most major economies has showed signs of slowing in recent months, partly due to Europe’s chronic debt crisis and economic malaise.”
This is stating the obvious. So what we have taking place right in front of our eyes is a synchronized global economic slowdown.
The fact this is happening at a time when interest rates are almost at zero in the U.S. and Europe, and that the Western governments are already burdened with too much debt, which limits what they can do, should be a warning sign to everyone, especially the Canadian consumer.
‘Canadians will be going into a very slow economic period, and maybe even a global recession, with unsustainable debt levels’
Here it is in plain English: Every economy we trade with is slowing down, and this will impact us more than most. Why? Because Canadians will be going into a very slow economic period, and maybe even a global recession, with unsustainable debt levels.
The high debt levels will have a magnified effect as unemployment increases during the slowdown, and house prices start to drop from their overinflated valuations.
Our federal government obviously doesn’t get it. In fact, besides tinkering with the mortgage amortization, it has done little to prepare Canadians. So Canadians would be wise to take proactive steps to anticipate and prepare for a crisis that is heading to Canada.
The best thing Canadians can do is go back to the basics of prudence and financial management. Recessions come and go; it is the weak hands that get into trouble.
Here is a checklist:
- Build up a safety nest of at least six month’s expenses.
- Don’t live within your means, live below your means. The bigger the margin, the more you save.
- Get rid of debt. If you have investment properties, consider selling them as soon as possible, as this winter may be too late.
- If you have a mortgage on your home with a floating rate, consider locking in the rate for between three to five years. Similarly, with lines of credit that you cannot pay off. Interest rates may jump without warning.
- Pay off your higher interest rate debt, such as credit cards, first.
- Look for a secondary source of income to increase your safety net, such as a part-time job or by renting out an eligible basement.
- Expect a lot of volatility in the stock markets. If you have money invested in the markets that you may need soon, you shouldn’t be in the market.
- We are entering an age of frugality, so be frugal, but not cheap.
- It would be wise to put off big-ticket purchases and make do with what you have.
- If you are considering selling your home to buy another, make sure yours is sold first or you risk being stuck with two homes and extra debt in an uncertain economy.
- Think twice about quitting your job.
- Reconsider whether you need all the cars you have. Each car has hidden costs.
Bank of Canada governor Mark Carney has been warning about the high level of consumer debt in Canada since 2011, and this advice has been largely ignored.
Canadian consumers’ debt levels today are by any measure higher than they have ever been. The irony is that we are on the cusp of the second phase of the financial crisis that began in 2008 and, this time, Canadians are more vulnerable than Americans or even the Europeans.
We knew the cause of this financial crisis when it arrived in 2008. The previous 20 years, consumers in the Western world had embarked on a spending binge financed by debt.
Consumers piled on unprecedented levels of debt to purchase their homes, investment properties, cars and anything else the banks and credit card companies would finance. Economic reality arrived in 2008, initially in the U.S., and the rest is history.
We do not need to be financial experts to understand that if we keep eating tomorrow’s lunch today, then when tomorrow arrives, there is no lunch. Consumers faced that moment in 2008. The world’s financial system almost went off the cliff. We know how we pulled back from the brink: The U.S. and other economies bailed out the banks and stimulated their economies with trillions of dollars of freshly created debt.
Of course, we never really solve a debt problem by creating more debt, although this is a good Band-Aid that kicks the can down the road. However, now, as we see in Europe (and soon in the U.S.), the governments have too much debt and are finding it difficult to borrow more without paying very high interest rates.
The question that needs to be asked is, who bails out the governments? After 19 economic summits in two years, Europe is still trying to figure this out.
‘It was debt that caused the crisis to begin with and, in Canada, we are happy to ignore the lessons’
And what of the Canadian consumer — what has he been doing while the euro Titanic struggles to stay afloat? China’s response during the economic crisis was to undertake a huge spending binge, building new cities, malls, office towers and condos. This lifted the commodity prices that had crashed and cushioned Canada’s downturn.
We should remember that oil prices had sunk to $40, and the other resources responded in a similar fashion. In a way, this has given Canadians a false sense of security. While house prices have been crashing in the U.S. and Europe, Canadians have gone on a borrowing binge, bidding up house prices to frothy levels completely oblivious of the reality.
Canadians look at the news that emerges daily from places such as Greece, Portugal and Spain as if these events are taking place in a far distant galaxy. Huge austerity measures and 25% unemployment rates in some of these countries have done little to temper the Canadian consumer’s appetite for debt.
It was debt that caused the crisis to begin with and, in Canada, we are happy to ignore the lessons. That is, of course, until the same movie arrives in Canada.
Canadian consumers should be aware that “GREECE R US” will probably arrive by 2014. This is not a prophecy, just economics.
Europe represents almost 25% of the world’s trade, and Europe is in a recession that is getting worse by the day. The U.K. is also in a recession, while the powerhouse economies of China, Brazil and India are decelerating so fast that we can see the skid marks.
Finally, look at the U.S. economy. We see it muddling through with the risks of a recession rising by the day. The International Monetary Fund has once again reduced its growth forecasts and issued the following statement: “Growth in most major economies has showed signs of slowing in recent months, partly due to Europe’s chronic debt crisis and economic malaise.”
This is stating the obvious. So what we have taking place right in front of our eyes is a synchronized global economic slowdown.
The fact this is happening at a time when interest rates are almost at zero in the U.S. and Europe, and that the Western governments are already burdened with too much debt, which limits what they can do, should be a warning sign to everyone, especially the Canadian consumer.
‘Canadians will be going into a very slow economic period, and maybe even a global recession, with unsustainable debt levels’
Here it is in plain English: Every economy we trade with is slowing down, and this will impact us more than most. Why? Because Canadians will be going into a very slow economic period, and maybe even a global recession, with unsustainable debt levels.
The high debt levels will have a magnified effect as unemployment increases during the slowdown, and house prices start to drop from their overinflated valuations.
Our federal government obviously doesn’t get it. In fact, besides tinkering with the mortgage amortization, it has done little to prepare Canadians. So Canadians would be wise to take proactive steps to anticipate and prepare for a crisis that is heading to Canada.
The best thing Canadians can do is go back to the basics of prudence and financial management. Recessions come and go; it is the weak hands that get into trouble.
Here is a checklist:
- Build up a safety nest of at least six month’s expenses.
- Don’t live within your means, live below your means. The bigger the margin, the more you save.
- Get rid of debt. If you have investment properties, consider selling them as soon as possible, as this winter may be too late.
- If you have a mortgage on your home with a floating rate, consider locking in the rate for between three to five years. Similarly, with lines of credit that you cannot pay off. Interest rates may jump without warning.
- Pay off your higher interest rate debt, such as credit cards, first.
- Look for a secondary source of income to increase your safety net, such as a part-time job or by renting out an eligible basement.
- Expect a lot of volatility in the stock markets. If you have money invested in the markets that you may need soon, you shouldn’t be in the market.
- We are entering an age of frugality, so be frugal, but not cheap.
- It would be wise to put off big-ticket purchases and make do with what you have.
- If you are considering selling your home to buy another, make sure yours is sold first or you risk being stuck with two homes and extra debt in an uncertain economy.
- Think twice about quitting your job.
- Reconsider whether you need all the cars you have. Each car has hidden costs.
Thursday, 26 July 2012
Canadian housing looks to be in soft landing, but actually heading for 25% crash: Capital Economics
John Shmuel
A day after RBC put out a report saying that Toronto’s condo market is not in a bubble, Capital Economics has come out with its own report saying that Canadian housing, including Toronto, is most certainly in a bubble.
David Madani, economist with Capital Economics, said on Wednesday that Canada’s housing market is currently experiencing what appears to be a soft landing, but is, in fact, a bubble in the process of bursting.
“There is always a stand-off period at the end of a housing bubble, when prospective buyers refuse to meet the price of sellers, who refuse to drop the asking price,” he said in a note. “Eventually it begins to dawn on sellers that the market has shifted and, as they become more desperate, they eventually agree to lower their asking price. But until that happens, any stagnation in prices can be misinterpreted as a successful soft landing.”
Mr. Madani said that he expects housing prices in Canada to crash 25% over the next couple of years. He originally made that forecast in June of 2011 and reaffirmed it Wednesday. His update follows a report from the Royal Bank of Canada, the country’s largest mortgage lender, that said that Toronto’s red hot real estate market is not a bubble.
In that report, RBC’s senior economist Robert Hogue said that demand in Toronto is in line with supply, dismissing claims that a condo bubble has emerged in the city.
A flurry of speculation has emerged about the fate of Canada’s housing market following changes to mortgage lending rules recently. Last month, Finance Minister Jim Flaherty changed the maximum amortization period for a mortgage from 30 years to 25 years. Those changes, combined with the prospect of looming interest rate hikes from the Bank of Canada, have raised questions over the effects they will have on Canada’s housing market.
Mr. Madani said that the changes will affect first-time home buyers the most, who make up 50% of new home sales and a quarter of resales.
Housing prices typically respond to changes in the market with a lag of five to nine months, according to Mr. Madani. He points out that home sales have already seen material declines, down 4% over the last two months. Vancouver in particular has been hard hit, with sales down 28% year-over-year.
“Overall, the willingness of buyers to pay these historically high house prices now looks to be proving fragile against the increasingly disappointing macroeconomic backdrop,” he said. “The housing bubble in Vancouver already appears to be deflating, with only Toronto defying the inevitable. Accordingly, we expect substantial declines in house prices over over the next year or two.”
A day after RBC put out a report saying that Toronto’s condo market is not in a bubble, Capital Economics has come out with its own report saying that Canadian housing, including Toronto, is most certainly in a bubble.
David Madani, economist with Capital Economics, said on Wednesday that Canada’s housing market is currently experiencing what appears to be a soft landing, but is, in fact, a bubble in the process of bursting.
“There is always a stand-off period at the end of a housing bubble, when prospective buyers refuse to meet the price of sellers, who refuse to drop the asking price,” he said in a note. “Eventually it begins to dawn on sellers that the market has shifted and, as they become more desperate, they eventually agree to lower their asking price. But until that happens, any stagnation in prices can be misinterpreted as a successful soft landing.”
Mr. Madani said that he expects housing prices in Canada to crash 25% over the next couple of years. He originally made that forecast in June of 2011 and reaffirmed it Wednesday. His update follows a report from the Royal Bank of Canada, the country’s largest mortgage lender, that said that Toronto’s red hot real estate market is not a bubble.
In that report, RBC’s senior economist Robert Hogue said that demand in Toronto is in line with supply, dismissing claims that a condo bubble has emerged in the city.
A flurry of speculation has emerged about the fate of Canada’s housing market following changes to mortgage lending rules recently. Last month, Finance Minister Jim Flaherty changed the maximum amortization period for a mortgage from 30 years to 25 years. Those changes, combined with the prospect of looming interest rate hikes from the Bank of Canada, have raised questions over the effects they will have on Canada’s housing market.
Mr. Madani said that the changes will affect first-time home buyers the most, who make up 50% of new home sales and a quarter of resales.
Housing prices typically respond to changes in the market with a lag of five to nine months, according to Mr. Madani. He points out that home sales have already seen material declines, down 4% over the last two months. Vancouver in particular has been hard hit, with sales down 28% year-over-year.
“Overall, the willingness of buyers to pay these historically high house prices now looks to be proving fragile against the increasingly disappointing macroeconomic backdrop,” he said. “The housing bubble in Vancouver already appears to be deflating, with only Toronto defying the inevitable. Accordingly, we expect substantial declines in house prices over over the next year or two.”
Wednesday, 25 July 2012
Meet the one-year fixed rate mortgage
Robert McLister
Over last few years, banks, economists, the mortgage industry and even Finance Minister Jim Flaherty have all been singing the same tune: That rates have nowhere to go but up.
Instead, mortgage rates have dropped even further. That hasn’t discouraged the mortgage establishment, which continues to push long-term fixed rates. And for some people, that’s good advice.
But with no sign of imminent rate hikes, borrowers are starting to question the professionals. Clearly, locking into a long-term fixed rate is not the no-brainer many are painting it to be. If variable rate discounts were as good as they once were, lenders would be selling a lot more of them than they are.
Unfortunately, the variable rate du jour is a stingy prime minus 0.25 per cent (2.75 per cent). That makes the interest savings of a floating-rate mortgage pale in comparison to the rate security of the more popular 3.09-per-cent five-year fixed.
Luckily, the mortgage world isn’t limited to two terms. There are a heap of options besides the five-year fixed and variable.
One term, in particular, gets overlooked: the one-year fixed. Only one in 16 mortgage shoppers opt for a one-year fixed, according to the Canadian Association of Accredited Mortgage Professionals.
Yet, despite its obscurity, the one-year is becoming the new variable rate. Why? Because one-year fixed mortgages sell for just 2.39 per cent at the moment. That’s the rate equivalent of prime minus 0.61 per cent, which is a decent variable rate historically.
Moreover, in a rising rate environment, one-year rates offer a bonus compared to variable rates: They reset more slowly. That means your rate increases less frequently, reducing your interest costs as rates climb. (The reverse is also true.)
Interestingly, one-year and variable rates happen to be close cousins. They have a 93 per cent correlation which, as you can see in the accompanying graph, indicates they generally move together.
Both the one-year and variable are highly dependent on what the Bank of Canada does with rates. On that note, it’s worth mentioning that bond market traders – who always put their money where their forecasts are – currently expect a greater chance of a rate cut in the next year than a rate hike. For those who give credence to the financial markets, this may make one-year terms slightly more attractive.
Looking further out, many believe Canada’s mature economy, a lacklustre U.S. economy and the Bank of Canada’s inflation vigilance will likely keep growth and inflation restrained for the foreseeable future. Add to that the European debt crisis, the pending U.S. fiscal cliff, and a slowdown in Asia, and the rate outlook starts looking benign.
If you end up taking a one-year for the reasons outlined above and you end up being right, you’ll enjoy a bit of savings. At current rates, a one-year term will save almost $700 of interest per $100,000 of mortgage in the first 12 months.
What’s more, you can lock in your renewal rate three to six months in advance, depending on the lender. Some one-year terms are even convertible, which means they give you the option of switching to a five-year fixed rate at any time without penalty. (The tradeoff: The rate you receive when converting will not be the best in the market.)
And speaking of penalties, one-year terms make it far easier to avoid them. If you need to change your mortgage or make a large lump-sum payment, you don’t have to wait long for renewal to avoid getting hit with those fees.
But one-year mortgages are not without shortcomings:
Greater rate risk: Your interest rate resets more often. If rates surge one per cent, your payments could jump roughly $50 a month for every $100,000 of mortgage.
Re-qualification risk: If your employment changes, your finances deteriorate, or mortgage rules change (again), you could find it hard to switch lenders or get re-approved at renewal. Most lenders offer renewals without re-qualifying you, but that is never guaranteed.
Upfront qualifications: It’s usually harder to qualify for a one-year fixed than a five-year fixed. With a one-year mortgage, lenders make you prove you can afford much higher payments in case rates go up by your renewal.
Frequent renegotiation: Some people just loathe haggling with a lender every 12 months.
Switching fees: If you need to switch lenders at renewal to get a better rate, the minimum you’ll pay is a discharge or assignment fee. Your new lender will rarely cover that cost. There may be additional fees as well, like legal and appraisal costs, depending on the lender you move to and your type of mortgage.
One-year rates are generally suited to financially sound risk-tolerant borrowers, or those needing a short-term mortgage. If more than a third of your income goes toward housing expenses and you have minimum savings or equity, a one-year term probably isn’t for you.
For others, a one-year mortgage makes for a fitting variable-rate substitute. And that will probably be the case for a while – at least until the variable discounts of old return.
Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at Mortgage Architects. You can also follow him on twitter at @CdnMortgageNews.
Vancouver — Special to The Globe and Mail
Instead, mortgage rates have dropped even further. That hasn’t discouraged the mortgage establishment, which continues to push long-term fixed rates. And for some people, that’s good advice.
But with no sign of imminent rate hikes, borrowers are starting to question the professionals. Clearly, locking into a long-term fixed rate is not the no-brainer many are painting it to be. If variable rate discounts were as good as they once were, lenders would be selling a lot more of them than they are.
Unfortunately, the variable rate du jour is a stingy prime minus 0.25 per cent (2.75 per cent). That makes the interest savings of a floating-rate mortgage pale in comparison to the rate security of the more popular 3.09-per-cent five-year fixed.
Luckily, the mortgage world isn’t limited to two terms. There are a heap of options besides the five-year fixed and variable.
One term, in particular, gets overlooked: the one-year fixed. Only one in 16 mortgage shoppers opt for a one-year fixed, according to the Canadian Association of Accredited Mortgage Professionals.
Yet, despite its obscurity, the one-year is becoming the new variable rate. Why? Because one-year fixed mortgages sell for just 2.39 per cent at the moment. That’s the rate equivalent of prime minus 0.61 per cent, which is a decent variable rate historically.
Moreover, in a rising rate environment, one-year rates offer a bonus compared to variable rates: They reset more slowly. That means your rate increases less frequently, reducing your interest costs as rates climb. (The reverse is also true.)
Interestingly, one-year and variable rates happen to be close cousins. They have a 93 per cent correlation which, as you can see in the accompanying graph, indicates they generally move together.
Both the one-year and variable are highly dependent on what the Bank of Canada does with rates. On that note, it’s worth mentioning that bond market traders – who always put their money where their forecasts are – currently expect a greater chance of a rate cut in the next year than a rate hike. For those who give credence to the financial markets, this may make one-year terms slightly more attractive.
Looking further out, many believe Canada’s mature economy, a lacklustre U.S. economy and the Bank of Canada’s inflation vigilance will likely keep growth and inflation restrained for the foreseeable future. Add to that the European debt crisis, the pending U.S. fiscal cliff, and a slowdown in Asia, and the rate outlook starts looking benign.
If you end up taking a one-year for the reasons outlined above and you end up being right, you’ll enjoy a bit of savings. At current rates, a one-year term will save almost $700 of interest per $100,000 of mortgage in the first 12 months.
What’s more, you can lock in your renewal rate three to six months in advance, depending on the lender. Some one-year terms are even convertible, which means they give you the option of switching to a five-year fixed rate at any time without penalty. (The tradeoff: The rate you receive when converting will not be the best in the market.)
And speaking of penalties, one-year terms make it far easier to avoid them. If you need to change your mortgage or make a large lump-sum payment, you don’t have to wait long for renewal to avoid getting hit with those fees.
But one-year mortgages are not without shortcomings:
Greater rate risk: Your interest rate resets more often. If rates surge one per cent, your payments could jump roughly $50 a month for every $100,000 of mortgage.
Re-qualification risk: If your employment changes, your finances deteriorate, or mortgage rules change (again), you could find it hard to switch lenders or get re-approved at renewal. Most lenders offer renewals without re-qualifying you, but that is never guaranteed.
Upfront qualifications: It’s usually harder to qualify for a one-year fixed than a five-year fixed. With a one-year mortgage, lenders make you prove you can afford much higher payments in case rates go up by your renewal.
Frequent renegotiation: Some people just loathe haggling with a lender every 12 months.
Switching fees: If you need to switch lenders at renewal to get a better rate, the minimum you’ll pay is a discharge or assignment fee. Your new lender will rarely cover that cost. There may be additional fees as well, like legal and appraisal costs, depending on the lender you move to and your type of mortgage.
One-year rates are generally suited to financially sound risk-tolerant borrowers, or those needing a short-term mortgage. If more than a third of your income goes toward housing expenses and you have minimum savings or equity, a one-year term probably isn’t for you.
For others, a one-year mortgage makes for a fitting variable-rate substitute. And that will probably be the case for a while – at least until the variable discounts of old return.
Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at Mortgage Architects. You can also follow him on twitter at @CdnMortgageNews.
Tuesday, 24 July 2012
Canadian Housing Bubble: Data is Not Art
Article written by Boris Bozic
“No Condo Bubble Here.
“No Condo Bubble Here.
Really? Everything I’ve been reading indicates that the condo market in Toronto and Vancouver was going to play a key role in the Canadian housing bust.”
Ever look a painting and say to yourself “it looks like something my six year old painted in art class”. That’s the thing about art – it’s all in the eye of the beholder. One person’s interpretation can be radically different than someone else’s. That’s perfectly acceptable when it comes to art. Art is about taste. We all know that data can be manipulated to make a point but it’s fascinating how simple raw data can paint completely different pictures. And is there any room for taste when analyzing data? I was stuck by a story in the Financial Post this morning, the headline read; ”Toronto not in condo bubble: RBC”
Really? Everything I’ve been reading indicates that the condo market in Toronto and Vancouver was going to play a key role in the Canadian housing bust. Surely this article is based off the same data that Robert Hogue, RBC’s senior economist, used for his most recent report. According to Mr. Hogue, “Toronto’s condo building frenzy over the last few years is mainly a response to the steep drop in new single-family homes being built. Efforts by the Ontario government to stem urban sprawl in the GTA is one of the reasons why developers are being forced to build laterally, said Mr. Hogue. To accommodate the 38,000 or so net new households it sees every year, the GTA must increasingly expand its housing stock ‘vertically’”.
Hang on a second, Mr. Hogue is the only economist to factor in that 38,000 new households are required to meet Toronto’s needs, and that the Ontario government is making it difficult for builders of single family homes outside of the GTA? Kudos to Mr. Hogue and RBC for discovering that super-secret bit of information. Let’s see what other nuggets Mr. Hogue came up with, like investors buying up condo’s with the sole purpose of flipping the property. “Their involvement has not inflated overall housing demand beyond household formation and may contribute only to a modest overshoot in the coming years if demographics weaken”. Well, what are we supposed to think now? I say that with tongue firmly planted in cheek.
For transparency purposes, Mr. Hogue did sound an alarm bell, “if investors overwhelmingly buy single-bedroom units, for instance, it could skew demand and result in a bubble.” Let’s also not forget that if aliens land and suck the brains out of every builder and then program them to build one bedroom units only, that too could contribute to a bubble. I think we have it all covered now. The fact is that facts are interpreted differently. One analysts’ “slight overshoot” is another’s “Armageddon”. For debating purposes that’s okay, for making public policy, not so much.
To read the full story in the National Post, please click here.
Monday, 23 July 2012
Questions to ask your lender before signing onto a mortgage.
Posted on Jul 19, 2012 in Mortgage Market Updates and News
It’s comments like these, “He also reduced the amount consumers can borrow against their house to 80 per cent, down from 85 per cent,” that have really confused many borrowers.
Since the new mortgage qualification guidelines were announced and came into effect July 9th, 2012, I’ve had many people call me and ask if they now need 20% down to purchase a home. I can see how this rule change could be misconstrued but to clarify, no, this is not the change that was made.
Although the wording of the rule change says ‘the amount a consumer can borrow against their home’ they’re not speaking about the initial purchase, and that’s where the confusion is coming in.
When purchasing a home, the initial mortgage can still go to 95% loan to value, and therefore a down payment of 5%, this hasn’t changed. What the rule change refers to is the amount you can re-mortgage to later on in your mortgage life.
You’ll still be able to renew with your current lender even if your equity is less than 20%, you simply won’t be able to pull any extra cash out of your home or change lenders until you get to that 20% mark. If you’re buying with 5% down (adding CMHC or Genworth Insurance to that as well), it will likely take you quite a while to get to 20% equity, starting at less than 5%.
So now more than ever, it’s important to begin your initial mortgage with a quality lender.
What makes a good lender? There are a few things to consider and Sharie Marie Francoeur, Mortgage Professional with TMG The Mortgage Group Canada Inc, can help you find the best lender for you. Consider this:
It’s comments like these, “He also reduced the amount consumers can borrow against their house to 80 per cent, down from 85 per cent,” that have really confused many borrowers.
Since the new mortgage qualification guidelines were announced and came into effect July 9th, 2012, I’ve had many people call me and ask if they now need 20% down to purchase a home. I can see how this rule change could be misconstrued but to clarify, no, this is not the change that was made.
Although the wording of the rule change says ‘the amount a consumer can borrow against their home’ they’re not speaking about the initial purchase, and that’s where the confusion is coming in.
When purchasing a home, the initial mortgage can still go to 95% loan to value, and therefore a down payment of 5%, this hasn’t changed. What the rule change refers to is the amount you can re-mortgage to later on in your mortgage life.
You’ll still be able to renew with your current lender even if your equity is less than 20%, you simply won’t be able to pull any extra cash out of your home or change lenders until you get to that 20% mark. If you’re buying with 5% down (adding CMHC or Genworth Insurance to that as well), it will likely take you quite a while to get to 20% equity, starting at less than 5%.
So now more than ever, it’s important to begin your initial mortgage with a quality lender.
What makes a good lender? There are a few things to consider and Sharie Marie Francoeur, Mortgage Professional with TMG The Mortgage Group Canada Inc, can help you find the best lender for you. Consider this:
- Initial rate – this one’s obvious, you want the best initial rate available when you sign on with a lender. It’s easy to see what rates are, look online every lender, bank, broker, etc displays their rates online. That being said, please do be aware that different rates have different requirements, and you may not always qualify for the best rate.
- Renewal rate – not all lenders offer their best rate at renewal. If you’re going to be unable to change lenders at renewal due to not having 20% equity in your home, you want to ensure you’re with a lender who will give you their best discounted rate, and or rate special upon renewal and not their posted rate. A lot of lenders unfortunately know that they have the client stuck and therefore don’t offer their best rates at renewal
- Prepayment privileges – most lenders offer something, but it’s important to understand what the terms of the prepayment rights are. Is there a certain day of the year you have to make your prepayments on or can you do it any time? Is there a minimum amount? Can you make multiple prepayments in a year? If you think about the likelihood of you actually making prepayments on your mortgage if you can do it any time, minimum $100 payment, and multiple times per year. Vs if you can make one payment per year, minimum $1000, and if you miss that date you have to wait until the next year. The easier it is to do, and the more flexible, the more likely you are to actually make prepayments.
- Early Payout Penalties – This is a huge one. Does your lender calculate prepayment penalties based on their POSTED RATE? Lenders that have high ‘posted rates’ and much lower discounted rates, have much higher penalties if you need to pay your mortgage out early. I recently had a client who was charged a penalty with her lender of $13,473 to pay out her mortgage 2 years into her 5 year term. If she had been with a lender who doesn’t use posted rates, Merix Financial for instance, her penalty on the exact same mortgage, would have been $2981. This is an insane difference. Now of course it’s best to not pay your mortgage out early, transfer it if you can, have someone assume it, etc. But sometimes you need to pay out your mortgage, and it’s best to know when you get into a mortgage if you could be stuck with a huge penalty or not. Ask your lender if they use posted rates and what their current posted rate is compared to their discounted rate. If it’s more than half a percent difference (sometimes up to 2%!!!), you’ll be looking at a much larger penalty with that lender.
Friday, 20 July 2012
The decision on debt: What's the right mortgage?
Variables at play with recent rule changes and coming hikes
For some weeks now, Bank of Canada governor Mark Carney, Finance Minister Jim Flaherty and most of the major Canadian banks have been warning that the record low interest rates of the past several years are over, and that a hike - perhaps even several - is on the horizon. At the same time, the banks have been offering truly incredible deals on longterm fixed rate mortgages, some of them barely higher than prime.
So all of this leaves the variable-rate mortgage holder with the inevitable question: Is it time to lock in from a variable to a fixed rate? Well, as it turns out, the answer is a indisputable, unequivocal - maybe.
For every expert who says that absolutely, you should lock in now while rates are still low, there's another who argues just as confidently that rates are likely to stay put at least till the end of the year, and only a fool would give up a great variable. Here's the essential case both in favour and against locking in; only you can decide which argument feels right to you.
THE CASE FOR LOCKING IN
Both Governor Carney and Finance Minister Flaherty have repeatedly expressed concern at the level of consumer debt Canadians have racked up over years of low interest rates, and rate hikes can be an effective way of cooling excessive credit spending and encouraging us to pay down what we owe. Mr. Flaherty recently made some adjustments to the mortgage rules, designed to soften the rate of mortgage debt Canadians are taking on, though some bankers are arguing the new rules are comparatively toothless. (We'll explore this in more detail in a later column.)
If you're willing to shop around, it's possible to get some real deals on fixed mortgages right now. As of this writing, you can get a five-year closed for as little as 3.09%. According to David Potter, an independent financial planner and the principal of Potter & Partners in Toronto, these deals won't be around forever, and it's unlikely that you'll lose in the long run if you grab one of them, especially if you're taking out a new mortgage or renewing.
Mr. Potter is making the case with many of his clients that they consider locking in to the low long-term fixed rates. The most pertinent issue to ask yourself, he says, is how much uncertainty you can handle - since perhaps the only thing the experts agree on is that no one really knows what the world economy will look like even a year from now. The reassurance of a consistent mortgage payment, no matter where interest rates go from here, takes some of the worry out of being a mortgagee; and if you lock in to one of these bargain rates, you'll be sitting pretty when rates eventually do start to go up.
THE CASE FOR STAYING VARIABLE
But before you go running to the bank, consider the other side of the coin. Kathryn Kotris, a mortgage broker with Mortgage Architects in Toronto, is recommending to at least some of her variable-rate clients that they resist the urge to panic. "Even though some indicators point to the possibility that rates are set to rise, I don't believe we will actually see a hike at least until the end of this year or early 2013," she says.
The principal reason for her skepticism, she says, has to do with the lacklustre state of the international economy; if we were to unilaterally raise our rates even slightly, the value of the Canadian dollar would automatically rise, hurting exports and possibly putting the brakes on the modest growth we've managed since the end of the recent recession. Add to that the simple fact that inflation, the prime target of Bank of Canada monetary policy, is virtually nonexistent at the moment, offering little pressure to move just yet.
If you have a variable rate at prime less a half-point or more, Ms. Kotris says, hang on to it; the banks are no longer offering these highly attractive rates. Current variables as of this week are at 2.79% to 4%. (For new or renewal mortgages, Ms. Kotris, like Mr. Potter, is recommending the long-term fixed rate products.)
Worried about your mortgage payment going up if there's a rate hike? Ms. Kotris has a simple answer. If you have prepayment privileges, and you can voluntarily raise your regular monthly payment by even a few dollars, go ahead and do it; the extra money will go directly toward the principal, and there's less shock to the budget if rates go up later. If you have a variable now and move to a fixed, you will be paying a higher monthly payment and that difference between the variable payment and fixed payment goes to the bank because of higher interest.
"If I needed help to sleep at night, I'd sleep a lot more soundly knowing those extra dollars were paying off my principal, rather than just enriching the bank," she says.
For some weeks now, Bank of Canada governor Mark Carney, Finance Minister Jim Flaherty and most of the major Canadian banks have been warning that the record low interest rates of the past several years are over, and that a hike - perhaps even several - is on the horizon. At the same time, the banks have been offering truly incredible deals on longterm fixed rate mortgages, some of them barely higher than prime.
So all of this leaves the variable-rate mortgage holder with the inevitable question: Is it time to lock in from a variable to a fixed rate? Well, as it turns out, the answer is a indisputable, unequivocal - maybe.
For every expert who says that absolutely, you should lock in now while rates are still low, there's another who argues just as confidently that rates are likely to stay put at least till the end of the year, and only a fool would give up a great variable. Here's the essential case both in favour and against locking in; only you can decide which argument feels right to you.
THE CASE FOR LOCKING IN
Both Governor Carney and Finance Minister Flaherty have repeatedly expressed concern at the level of consumer debt Canadians have racked up over years of low interest rates, and rate hikes can be an effective way of cooling excessive credit spending and encouraging us to pay down what we owe. Mr. Flaherty recently made some adjustments to the mortgage rules, designed to soften the rate of mortgage debt Canadians are taking on, though some bankers are arguing the new rules are comparatively toothless. (We'll explore this in more detail in a later column.)
If you're willing to shop around, it's possible to get some real deals on fixed mortgages right now. As of this writing, you can get a five-year closed for as little as 3.09%. According to David Potter, an independent financial planner and the principal of Potter & Partners in Toronto, these deals won't be around forever, and it's unlikely that you'll lose in the long run if you grab one of them, especially if you're taking out a new mortgage or renewing.
Mr. Potter is making the case with many of his clients that they consider locking in to the low long-term fixed rates. The most pertinent issue to ask yourself, he says, is how much uncertainty you can handle - since perhaps the only thing the experts agree on is that no one really knows what the world economy will look like even a year from now. The reassurance of a consistent mortgage payment, no matter where interest rates go from here, takes some of the worry out of being a mortgagee; and if you lock in to one of these bargain rates, you'll be sitting pretty when rates eventually do start to go up.
THE CASE FOR STAYING VARIABLE
But before you go running to the bank, consider the other side of the coin. Kathryn Kotris, a mortgage broker with Mortgage Architects in Toronto, is recommending to at least some of her variable-rate clients that they resist the urge to panic. "Even though some indicators point to the possibility that rates are set to rise, I don't believe we will actually see a hike at least until the end of this year or early 2013," she says.
The principal reason for her skepticism, she says, has to do with the lacklustre state of the international economy; if we were to unilaterally raise our rates even slightly, the value of the Canadian dollar would automatically rise, hurting exports and possibly putting the brakes on the modest growth we've managed since the end of the recent recession. Add to that the simple fact that inflation, the prime target of Bank of Canada monetary policy, is virtually nonexistent at the moment, offering little pressure to move just yet.
If you have a variable rate at prime less a half-point or more, Ms. Kotris says, hang on to it; the banks are no longer offering these highly attractive rates. Current variables as of this week are at 2.79% to 4%. (For new or renewal mortgages, Ms. Kotris, like Mr. Potter, is recommending the long-term fixed rate products.)
Worried about your mortgage payment going up if there's a rate hike? Ms. Kotris has a simple answer. If you have prepayment privileges, and you can voluntarily raise your regular monthly payment by even a few dollars, go ahead and do it; the extra money will go directly toward the principal, and there's less shock to the budget if rates go up later. If you have a variable now and move to a fixed, you will be paying a higher monthly payment and that difference between the variable payment and fixed payment goes to the bank because of higher interest.
"If I needed help to sleep at night, I'd sleep a lot more soundly knowing those extra dollars were paying off my principal, rather than just enriching the bank," she says.
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