Credit reporting errors costing Canadians

Consumers face higher interest rates, credit card denials after mistakes made

By Alex Shprintsen and Annie Burns-Pieper, CBC News


Credit rating mistakes are costing unsuspecting consumers thousands of dollars in higher interest rates and preventing some from getting much needed loans, a CBC News investigation has found.

In the past few years, more than 500 complaints have been filed with provincial consumer affairs agencies across Canada about credit reporting agencies, many alleging errors by companies led to their poor credit scores.

"I feel like a guy who is made to pay for the sins of something I didn't do," said Mervin Smith. "It's like being wrongfully accused of something."

• How to check your credit report

Smith is one of many Canadians who told CBC News about how unknown errors on their credit rating reports caused them financial strife. In some cases, even after creditors and collection agencies admitted to a mistake, it took several months to restore a credit rating.

The Brampton, Ont., truck driver, spent months trying to get his credit rating fixed after an error appeared on his credit report.

When applying for a mortgage in late 2011, Smith learned that an unpaid Rogers bill for a “Marvin Smith” had been listed on his report since 2007.

Tips?

If you have any information on this story or any other story please contact us at investigations@cbc.ca.
 

He says his bank granted him the mortgage but denied him an overdraft, a credit card and a line of credit.

Smith sued debt collection agency iQor in small claims court over the name mix-up and won a $3,000 settlement in May of 2012.

Collection agency harassed debt-free Canadians

Despite that, his Equifax credit report still refers to him as "also known as: Marvin Smith."
"I just applied for another card and I got turned down again and I had perfect credit," said Smith.

Many Canadians affected

Dan Barnabic, a Toronto paralegal who has represented clients in credit disputes for the past seven years, said the impact of a false credit score can be devastating.

The impact of a false credit score can be "devastating" and it can take months to repair. (iStockphoto)

"You are what your credit is," said Barnabic. "And when you discover something that actually does not belong to you…, that will actually prevent you from getting credit, it's devastating. It turns into a horrific situation that people lose sleep over."

Few statistics are available about how many Canadians know about mistakes on their credit reports.
Consumer Protection BC, a non-profit that oversees provincial consumer laws, says that in the past three years it has received 341 calls from people complaining about inaccurate information on their credit reports.

But many provincial consumer protection agencies don't track how many complaints about credit ratings are about potential errors.

A national survey by the non-profit Public Interest Advocacy Centre published in 2005 found that 18 per cent of the people surveyed had discovered inaccuracies in their credit report. Ten per cent of those who discovered the issue believed they were denied access to financial services due to the errors.

Barnabic estimates the number could be much higher. The Toronto paralegal says about one-third of his approximately 3,000 clients have found inaccuracies in their credit reports.

"On a weekly, daily basis people would knock on my door and say, 'Dan, I have a problem. I have something on my report that does not belong to me,' " said Barnabic.

Unaware of charges

Under the credit reporting system, companies — such as phone service providers and banks — provide information about clients and their payment history to Canada's credit bureaus, such as Equifax Canada Inc. and TransUnion Canada.

Companies pay a fee for the bureaus to keep track of clients. In return, the credit bureau provides the companies with access to consumer credit reports, which is based on information gleaned from all its client companies.

When a bank is deciding whether to grant a mortgage, for example, the financial institution can access the individual's credit record via a request to the credit bureau.

Consumers can also request to see their credit rating but few do. A mistake can go unknown for months or even years, potentially leading to extra interest costs or other issues.

Joan Biseau, a hospital technician in Moncton, N.B., believes she is still paying thousands of dollars in extra interest on a vehicle she recently purchased after her credit rating was downgraded due to an error by Rogers Communication.

Biseau was unaware of an outstanding charge on her Rogers account until three years after the fact, when a debt collection agency began calling in February, 2011. Biseau promptly paid the bill when notified.

The telecom company had sent her last bill for about $200 to the wrong address and later admitted to the mistake.

Despite Rogers acknowledging its error, the black mark remained on her credit rating for more than a year.

Biseau says it forced her to get a high-interest loan on the 2007 Chevrolet Cobalt she bought in September of 2011, increasing the cost of her purchase by up to $10,000.

"It's terrible. I'm not a millionaire. And I need my car for work," says Biseau. "So I had to buy it … for $7,000. At the end of it, I’m going to be paying $17,000 for my car because of the high interest rates.”

The information about the owed debt was removed from the TransUnion and Equifax credit reports after CBC contacted Rogers and Equifax.

Calls for federal oversight

In a written statement, Rogers said that its policy is to investigate immediately when a customer contacts them. "If there is a mistake, we have the issue corrected with the collection agency and the credit bureau or bureaus and get confirmation from the collection agency that the correction has been made," the written statement said.

Paul Le Fevre, Equifax Canada's director of operations, says the agency depends on correct information from its member companies. Mistakes are rare, he said, but when they do happen, the company needs the creditors who supplied the information to sign off on it.

Toronto paralegal Dan Barnabic says the federal government should provide oversight of credit rating agencies. (CBC)

"What we rely on our members to do, though, is to remove that information or amend that information accordingly within the electronic media that they send to us," said Le Fevre.

TransUnion also responded in a written statement, stating that it aims to "maintain accurate information on every consumers' TransUnion credit report."

Consumers can report items believed to be inaccurate by phone or email and the company will investigate it, the statement said.

Under current provincial consumer protection legislation, companies can face fines, but Barnabic says the fines are rarely, if ever, used.

The Toronto paralegal says the federal government should oversee the credit rating industry rather than leaving regulation in the provinces’ domain.

"Our elected government so far has showed very little interest in improving the system and actually getting the consumer on equal footing with the financial sector," said Barnabic.

He suggests modeling it on the U.S. system, where credit bureaus must by law investigate consumer complaints about disputed information on their credit rating report within 30 days.

Barnabic says credit bureaus should be forced to either delete errors immediately or face a hefty fine.

If you have any information on this story or any other story please contact us at investigations@cbc.ca.

Canadian homes are getting more affordable

Sunny Freeman, Canadian Press

TORONTO — Royal Bank says the cost of home ownership became more affordable in the most recent quarter due to a modest decline in home prices and gains in Canadian household incomes.

RBC’s affordability index for a detached bungalow stood at 42% of income nationally in the second quarter.

That means an owner would need to spend 42% of pre-tax annual income to pay for mortgage payments, utilities and property taxes — one percentage point lower than in the third quarter of 2011.

The index fell even more for two-storey homes, by 1.2 percentage points to 47.8% and eased 0.6 percentage points to 28% for condos.

The bank, which publishes the index on a quarterly basis, says ultra low interest rates have been the key factor in keeping affordability levels from reaching dangerous levels in recent years.

Despite the recent improvement in affordability, RBC said the amount of income to service home ownership costs continues to be higher than long-term averages.

RBC notes that Canada’s housing market cooled further in the third quarter, partially because of the effects of a fourth round of rule changes to government-backed mortgage insurance.

The bank expects the negative effect of the changes on home sales will ease by the end of the year and that resale activity will stabilize next year.

The July-September quarter fully reversed the mild erosion in affordability that occurred during the first half of 2012, said RBC chief economist Craig Wright.

“The broad affordability picture has been somewhat stationary over the last two years, alternating between periods of improvement and deterioration, resulting in an affordability trend that is, on net, essentially flat,” Wright said.

Wright expects the Bank of Canada to begin raising its overnight lending rate for banks — which affects bank’s prime lending rates — from the current 1% in the second half of next year, assuming the euro crisis remains in check and U.S fiscal issues are addressed.

“This, along with the expected continued growth in household income, will lessen the risk of marked erosion in affordability,” he said.

Despite the recent improvement in affordability, RBC said the amount of income to service home ownership costs continues to be higher than long-term averages,

As is often the case, Vancouver’s extremely expensive real-estate skewed the national figures.

“The cost of owning a home took a smaller bite out of household pocketbooks in the third quarter as home prices fell — most notably in the Vancouver area, though it remains the least affordable market in Canada by a wide margin,” explained Wright.

The index in Vancouver stood at 83.2% of income, followed by Toronto at 52.4%, Montreal 40.2%, Ottawa at 38.7%, Calgary at 38.3% and Edmonton at 31.1%.

Calgary top real estate investment market in Canada

Mario Toneguzzi, Calgary Herald

CALGARY — Calgary has been ranked as the top real estate investment market in the country followed by Edmonton by the Real Estate Investment Network Ltd.

In its Top Alberta Investment Towns report, REIN said that Alberta’s economy has come out on top after a few years of economic turbulence.

The report identifies towns and regions poised to outperform other regions of the province over the next three to five years.

And none is better than Calgary.

“After a couple of roller-coaster years, Calgary is back on a roll. The return of jobs to the city, as well as greatly reduced office vacancy rates show us that the city’s short slump has come to an end,” said the report. “Recording a GDP growth of three per cent in 2011, and one of the lowest unemployment rates in the country, it’s no wonder Calgary is sitting as one of the top places in North America for property investors. When you combine the economic fundamentals, the population growth, and a burgeoning provincial economy, it is easy to see why so many businesses and people have come to call the city home.

“The market is hot. With the pressure on the resale housing market, there is similar pressure on the rental market. Inventory has dropped for rental accommodations while monthly rents have increased. Real estate investors and real estate agents are reporting that rental listings are being pounced on. Savvy investors purchasing units and advertising them for rent upon close are receiving calls from anxious tenants wanting to see the unit before the investor has possession and/or has done any improvements to the property. Rental sites are reporting difficulty in compiling statistics become some communities have nothing for rent.”

REIN said housing affordability will begin to be an issue in Calgary, with rents increasing and a high average sale price. But when you look at that price versus average income it shows that other cities in Canada have a much larger problem on their hands.

“Calgary has the long-term economics to support long-term market strength while other cities do not,” said REIN.

The Top Alberta Investment Towns ranked in order are: Calgary, Edmonton, Airdrie, Red Deer, St. Albert, Fort McMurray, Lethbridge, Grande Prairie, Okotoks, Leduc, Sylvan Lake and Lacombe.
The report said Airdrie has been one of the fastest growing communities in the province.

“Its proximity to the economic engine of Calgary and the growth of the surrounding economy will push the physical and economic growth limits of the city in the next decade,” said REIN.

“With increasingly easy access to many areas of Calgary via the ring road as well as the growth of job centres in and around the city, Airdrie property owners should continue to feel upward pressure on both rents as well as home prices. As affordable housing becomes a growing problem in Calgary, Airdrie will benefit from lower average house prices. As the office centre of the west, Calgary may offer employment opportunities that Airdrie does not, but much of the labour force will turn to Airdrie as a place to call home.”
 

REIN’s top Canadian investment cities ranked in order are: Calgary, Edmonton, Hamilton, Surrey, Maple Ridge and Pitt Meadows, Airdrie, Kitchener and Cambridge, Red Deer, St. Albert, Waterloo, Winnipeg, Saskatoon, and Halifax.

According to a research note by Scotia Economics, Alberta remains a key economic engine for Canada, with the highest provincial real GDP growth rate forecast for 2012 and 2013 at 3.4 per cent and 3.0 per cent respectively.

“The economy is growing strongly with contributions from consumer spending, business investment, particularly in the oilsands, and exports, which is encouraging given the strong Canadian dollar and soft global demand,” it said. “Provincial government spending also will continue to support growth, albeit at a slower pace than over the decade prior to the recession.”

In the second quarter of 2012, Alberta had a year-over-year population growth rate of 2.5 per cnet, the highest in the country.

“At this juncture, the federal government’s recent tightening of mortgage and home equity financing standards appears to have had a limited impact on Alberta’s housing market,” said Scotia Economics. “It continues to be supported by strong employment growth, significant wage gains and ongoing resource development.”

© Copyright (c) The Calgary Herald

Read more: http://www.calgaryherald.com/business/Calgary+real+estate+investment+market+Canada/7534574/story.html#ixzz2Cv3mvAJ9

Chinese sellers outnumber Chinese buyers in Vancouver

Vernon Clement Jones, Canadian Real Estate Wealth


The numbers – most notably, a 32.5 per cent slide in September sales compared to last year – already suggest interest on the part of foreign investors is waning, say analysts. They pointto buyers who have been credited, or blamed, for double-digit value gains over the two years.

But new analysis is identifying the reasons behind their about-face, at the same time it suggests they may be slow to come back to the market.

In fact, says one China economist, slowing GDP growth back at home means that many investors in Vancouver are now looking to sell up their properties rather than buy new ones. It’s the chief reason behind the growth in listings even as sales slow.

Currently, the Vancouver market has changed to the point where Chinese speculators, who used to trade high-end property, are primarily selling, but not buying, said Jamie MacDougal of Sotheby’s International Realty.

Quite simply, the Chinese economy is coming off its boom, with annualized growth to fall to 3 per cent gains next year, from the 7.5 per cent logged for 2012.

The pullback from Vancouver is expected to further ease prices in Canada’s priciest market, something local buyers welcome.

Brokers at par with banks on new mortgages - CAAMP.

Nestor Arellano, Mortgage Broker News


Broker gripes aside, the new mortgage rules may have helped them grow market share, with CAAMP’s latest report suggesting brokers are now even Stephen with banks in terms of new mortgage originations.

Of consumers who consulted mortgage professionals, 47 per cent of 2,000 respondents obtaining mortgages this year did so through a bank, while 47 per cent went with mortgage brokers, according to the CAAMP-commissioned online poll by Maritz Research.

Banks, however, enjoyed a substantial lead over brokers in renewals, cornering 70 per cent of the business as opposed to brokers’ 15 per cent and credit unions’ 12 per cent.

In the aggregate, for all current mortgages (regardless of when they were obtained), 58 per cent of respondents obtained their loans from a bank, with 25 per cent from a mortgage broker. That’s down from the 27 per cent overall share brokers enjoyed last fall.

Still this fall’s new originations represent real growth for brokers, growing from 32 per cent in fall 2011.

Nonetheless, many brokers have complained that lending guidelines and rule changes introduced by the Harper government have been overkill for a market already in slow-down mode.

“The government was putting out a fire that was already dying,” said Paul Sobieski, of The Mortgage Group in Vancouver in an earlier interview. “We were headed for a correction anyway.”
But there’s some indication they have also encouraged more consumers to turn to brokers for new originations, if not yet renewals and refis.

Canadian home sales higher or steady in most major cities in 2012: Re/Max

The Canadian Press, The Vancouver Sun


MISSISSAUGA, Ont. - The latest real estate outlook from ReMax says Canadian home sales increased or held steady in much of the country this year despite tighter financing and economic uncertainty abroad.

ReMax says the trend is expected to continue, with home-buying activity propped-up by low interest rates and an improved economic picture in 2013.

The report found that the number of homes sold is expected to match or exceed 2011 levels, led by strong activity in Calgary and other western centres.

Nationally, says ReMax, an estimated 454,000 homes will have changed hands in 2012, just one per cent short of the 2011 level of 456,749.

Canadian home sales in 2013 are expected to almost mirror this year's performance, holding steady at 454,000 units.

The average price of a Canadian home is expected to remain stable at $364,000 in 2012 — on par with the figure reported in 2011 — then appreciate nominally in 2013, rising one per cent to an average of $366,500.

”Despite all the negativity surrounding residential real estate, the sky is not falling,” said ReMax executive Gurinder Sandhu.

“Home sales have moderated, but remain within healthy levels.”


Read more: http://www.vancouversun.com/business/real-estate/Home+sales+higher+or+steady+in+most+major+cities+in+2012+says+Re/Max/7546151/story.html#ixzz2Cj0CWfmo

In face of rising realty fears, Genworth stays the course

Tara Perkins, The Globe and Mail


Finance Minister Jim Flaherty’s moves to tame the housing market are taking a bite out of Genworth MI Canada Inc.’s business, but the company is optimistic that mortgage delinquencies are ticking down and its business is sound.

Genworth Canada chief executive officer Brian Hurley hosted an investor day Wednesday to illustrate why he believes the mortgage insurer’s prospects are good, a message he’s been hammering as fears about the health of the real estate market have risen.

Indeed, a few housing bears have been telling investors that shorting Genworth’s shares (i.e., placing a financial bet that their price will fall) could be one of the best ways to gamble on the possibility that the market is poised for a dive.

It’s a risky bet. “Providing the fundamentals perform as expected (generally flat housing prices with no steady change in current delinquency rates as unemployment essentially remains steady), Genworth should continue to be a low-volatile stock with steady earnings,” BMO Nesbitt Burns analyst Tom MacKinnon wrote in a note to clients on Wednesday.

Mr. Hurley is contending with many challenges as he seeks to get his views across, not the least of which is that many Canadians don’t know what mortgage insurance is.

“I bet you that still one in two think it’s something that you buy in case of death, truthfully, which is unfortunate,” he said in a recent interview at the company’s Oakville, Ont., headquarters.

Unlike creditor insurance, which pays off a consumer’s debt if they lose their job or die, mortgage insurance pays the bank if the consumer defaults on their mortgage. The mortgage insurer, such as Genworth or its major competitor, Canada Mortgage and Housing Corp., recoups some money through the sale of the foreclosed home.

The claims that Genworth receives basically depend on two factors, unemployment and house prices.
“The company ran an interesting stress scenario with a 15-per-cent decline in housing prices and a 300-basis-points increase in unemployment, similar to what happened in the early 1990s,” Mr. MacKinnon noted. The drop in the housing market would increase Genworth’s loss ratio to 46 per cent from 35 per cent, but combined with a jump in unemployment to 11 per cent from 8 per cent, the claims frequency would double and the loss ratio rise to 92 per cent.

The scenario illustrates that unemployment is the biggest risk, Mr. MacKinnon said.

Genworth is ensuring that mortgage borrowers will be able to handle interest rate shocks, Mr. Hurley stressed, as policy makers have become increasingly concerned about consumer debt levels.

The company expects that the new mortgage insurance rules that Mr. Flaherty put in place in July to curb the growth of debt levels, including cutting the maximum length of an insured mortgage to 25 years, will cause a 15- to 20-per-cent drop in premiums on its core high loan-to-value business. (Insurance is mandatory for high loan-to-value mortgages, when the consumer is borrowing more than 80 per cent of the house’s value).

Mr. Hurley knows mortgage insurance as well as anybody. He worked his way up the ranks of General Electric, landing a senior job at NBC in the storied 30 Rock building.

“You work such long hours in New York and I spent about five years literally leaving at 6 a.m. getting home at 8 p.m.,” he said. “And I’m thinking ‘this is wacko.’ So I asked to move, I said I need to get somewhere where there’s a little more life and family balance. And literally when you take out the map and you see where GE is, I looked and said ‘how about North Carolina? I hear that’s nice.’ That’s how we picked it. And that’s where mortgage insurance is headquartered.”

Barely into his thirties, he became chief financial officer of GE’s mortgage insurance business. “A lot of my time was interfacing with Fannie and Freddie, who mandated the product back in the day,” he said.

From that role he led the company’s expansion into Canada. “This was when GE was pushing to go global and if you were in finance every year you had to go up there and interface with [then CEO Jack] Welch. And he’d always say ‘what are your plans to go global?’ And I was like ‘it’s mortgage insurance, come on.’ And he wouldn’t take no for an answer.”

In 1994, Genworth, then known as GE Capital Mortgage Insurance, struck a deal to take over the seriously ailing Canadian mortgage insurer MICC Investments Ltd. At that time the company was the only competitor to CMHC. There are now three players in the market (the third is Canada Guaranty), with other competitors having come and gone.

Genworth found itself at a disadvantage because Ottawa guarantees 100 per cent of CMHC’s insurance, but only 90 per cent of the amount held by the Crown corporation’s private sector competitors. The discrepancy became an issue when the financial crisis hit and banks decided they needed all the extra assurance they could get.

“This is what hurt us the last couple years, the concerns around the economy, the concerns around what if there really is going to be some trouble,” Mr. Hurley said.

Dunning: Mortgage Rules (Round 4) Were Overkill

Rob McLister, CMT, CanadianMortgageTrends.com

“...The changes to mortgage insurance criteria are unnecessarily jeopardizing the health of Canada’s housing markets and the broader economy.”

That’s the conclusion from economist Will Dunning inCAAMP’s just-released State of the Residential Mortgage Market report. (Link)

Dunning says his research suggests the Finance Department has created “a policy-induced housing market downturn” that could reinforce existing weakness.

He calculates that the most recent (July 2012)rule changes will knock 11% of potential high-ratio homebuyers out of the market—that is, until they can come up with more net income or a bigger down payment.

He lays out the following arguments:

Jobs underpin the market…

• “Job creation is the key driver of housing demand” writes Dunning.
• “The ‘housing wealth’ effect (the increased confidence, and willingness to spend and invest, that results from rising house prices) is the single most important driver of job creation”
• What’s more, in the prior five years, 18% of job creation in Canada has originated from housing and mortgage activity.
• If mortgage rule tightening drives down home prices, job creation will suffer and it could trigger a negative “feedback” loop between the housing market and the economy.

Price risk…

• Dunning writes: “Experience around the world has shown that once house prices start to fall, the outcome is unpredictable, and can turn into a downward spiral that wreaks substantial economic damage.”
• He adds: “It can happen that the loss of jobs affects housing demand, leading to further price drops and a vicious downward spiral.”
• There is growing evidence to suggest that the combined mortgage rule changes of the past four years may now be “significant enough to substantially reduce housing activity.”

What’s happened so far…

The government has handed down four sets ofinsured mortgage restrictions since July 2008. Dunning summarizes them in the list below:

 

4 Sets of Announcements – Criteria for Federally-Backed Mortgage Loan Insurance
 
July 2008
·         Reduce maximum amortization to 35 years from 40 years
·         Requirement for minimum 5% down payment
·         New loan documentation standards
·         Establishment of minimum credit scores
February 2010
·         Borrowers with variable rate mortgages or fixed rate mortgages with terms less than 5 years to be qualified based on posted rates for 5 year fixed rate mortgages
·         Reduce maximum insured refinancing to 90% from 95%
·         Require 20% down payment for small rental properties
January 2011
·         Reduce maximum amortization to 30 years from 35 years
·         Reduce maximum insured refinancing to 85% from 90%
·         Withdraw insurance for Home Equity Lines of Credit
June 2012
·         Reduce maximum insured refinancing to 80% from 85%
·         Elimination of insurance for homes priced over $1 million
·         Reduce maximum amortization to 25 years from 30 years
·         Minimum credit scores for 39% GDS and 44% TDS ratios

                                                           (Source: Will Dunning)

• He says the cumulative effect of these four sets of changes “have resulted in a massive contraction in credit availability.”
• From August to October, home sales were 7.8% lower than the prior year.
• Some analysts downplay the effects of past mortgage rule changes, pointing to the subsequent sales rebounds that took place.
• Dunning notes that those rebounds coincided with falling mortgage rates. “It appears that the movements of mortgage rates were more important than the changes in the mortgage insurance criteria,” he says.

The effects…

• “16.9% of high-ratio mortgages that were funded in 2010 could not have been funded under the revised criteria.”
• “…The final set of changes that was announced in June 2012 and took effect in July will have had the most significant consequences, accounting for about 65% of the impact (11.0% out of 16.9%).”

Time for young buyers to save up…

• “…Simulations indicate that on average (based on 2010 real mortgage data), the additional down payment required is about $25,000, 7% of the purchase price." That's what it takes to offset the mortgage rule effect.
• "If we assume that these households can devote 10% of their pre-tax incomes to enlarging their down payments, on average it will take 3.5 years to re-qualify – and this assumes that house prices and interest rates do not increase.
  
  (10% may be optimistic. Doug Porter recently estimated that the median family saves only 4%, or $2,800 a year.)

What happens next…

• 55% of buyers needhigh-ratio mortgages, according to Maritz. “If 16.9% of potential high ratio buyers are removed from the market, this would reduce total home sales by about 9%,” Dunning states.
• “…It will become more difficult for people who want to move-up in the market to sell their current home. In consequence, over time, we should expect to see reduced activity in upper segments of the market.”
• “…Declines in activity will be partly (and gradually) mitigated, as some of the affected potential buyers save additional down payments and can return to the housing market.”
• “…It now appears that the 2010 changes had a lasting negative effect (on home sales).”
• “…the negative effects on housing activity will be quite prolonged…the damage is not yet fully developed.”

Was it necessary?

• “The average resale house price in Canada had been essentially flat since early 2011,” Dunning says. On top of that we faced (and still face) material risks from the U.S., Europe and from domestic budget tightening.
• “There was no need to further cool the housing market,” he concludes.

*******

Stricter mortgage rules will be a drag on demand until the market has time to adjust. Let's just hope the new rules aren't coupled with an economic slowdown or a natural cyclical home price correction. In that case, the latest rule changes could prove to be very bad timing.

Of course, low rates could always save the day once again—or delay an inevitable correction if you want to look at it that way. We could also see buyers get off the sidelines and purchase on dips—i.e., buy if home prices drop 10% or so. Both of those factors could pad a fall, at least somewhat.

Retire Sans Mortgage

Rob McLister, CanadianMortgageTrends.com


We get a stream of emails from seniors with mortgages, some of whom are in financial hurt. It is those stories that inspired this week’s Globe column about mortgages in retirement.

This piece has more of a warning tone than most of our articles. That’s because senior debt is one area where there is legitimate danger on the horizon. The trend towards bigger mortgages in retirement is worrisome for the no less than 22% of Canadians who aren’t saving enough to fund normal consumption.

A remarkable 50% of Canadians homeowners in their 50s are still saddled with mortgages, some of them long-term mortgages. In some cases, they’ve bought so much house, or they spend so much on a monthly basis, that they can’t afford anything but minimum monthly mortgage payments.

Others are unable to shake a big mortgage due to a personal setback caused by divorce, illness, job loss, underemployment and so on.

The extreme cases are older mortgagors who rely solely on the government safety net (OAS, GIS, CPP). While we assume that few of these people have mortgages, we don’t know how many actually do. This is one area where more research is needed.

In any event, if you haven’t saved enough by 65, toting debt into retirement raises your insolvency risk. More and more, as boomers retire in droves, the media will report on folks who are over-indebted and need to sell their homes to make ends meet. It’s a trend that we need to get out in front of.

---

Sidebar: Not all mortgages in retirement are bad. Mortgages and HELOCs are occasionally held by retirees to fund certain income/cash-flow strategies.



Avoid Nightmare on Retirement Street - Pay off your mortgage


Just a few decades back, many thought it unthinkable to still be paying a mortgage during retirement. But a growing minority are now doing just that.

Whereas our parents paid off their mortgage in roughly 12 years on average, about one in four homeowners are now carrying a mortgage into retirement. In fact, retirees are accumulating debt at three times the average pace.

Aversion to debt has clearly waned. Almost one-quarter of baby boomers say paying off their mortgage by retirement is “not very important” or “not at all important.” And more than half of Canadians expect to carry a mortgage into their golden years.

“My philosophy is to not carry any debt into retirement,” says retirement expert Gordon Pape. “But people today have a very casual attitude about it.”

So, just how big of a problem are mortgages in retirement? After all, places like Switzerland – which rivals Canada for the world’s strongest banking system – have 100-year “generational” mortgages. (What a way to get back at your kids!) And in a number of other prosperous European countries, interest-only mortgages – with theoretically infinite amortizations – are commonplace.

The threat posed by having a mortgage in retirement depends, not surprisingly, on the borrower’s income, savings, debt and other living expenses.

Statistically speaking, if you’re a typical married couple over 65, the latest government figures show that you take home about $46,000 combined each year. The median retiree’s mortgage is about $87,000. That implies a $411 monthly payment on a standard five-year fixed rate mortgage. That’s about 11 per cent of the typical retiree’s after-tax income, something that is easily tolerable.

On average, mortgages in retirement aren’t sending people to the poor house. Where it could get dicey, Mr. Pape says, is when interest rates rise. For a sizable minority without financial breathing room, “There is potential for real trouble down the road.”

For many single or lower income seniors, carrying a mortgage can be like walking in a minefield. All it takes is one misstep or personal crisis to explode your budget and fall behind on debt payments.
A couple relying 100 per cent on Old Age Security, for example, will earn a maximum of $26,800 annually in Ontario. In this case, that “typical” $411 mortgage payment would account for 18 per cent of their income. While unlikely anytime soon, a three percentage point interest rate hike would bump that to 25 per cent. Then you have to add in the property taxes, maintenance and all the other home ownership costs.

It’s bad enough assuming they just have the average-sized retiree mortgage. If they’re closer to the average Canadian mortgage of $170,000 and their income is in the lower third of the population, then well over half of their income would be consumed by home ownership costs. That is simply unmanageable and unfortunately there is no data on how many people are in this boat.

Apart from the cost, it’s often tougher to get approved for a decent mortgage in retirement. If your earning power has waned and you’re carrying even an average debt load, your ability to tap home equity for cash could be limited. Qualification challenges could even reduce your options to switch lenders or port your mortgage to a different house.

Even the “mortgage of last resort,” a reverse mortgage, could be off the table if you’re not old enough and/or you have an existing mortgage that’s more than 25-40 per cent of your home value.
So that brings us to the next question: what solutions do seniors have?

One is to work longer. Our neighbourhood butcher is still employed at 89 and that may not be so unusual going forward. Many Canadians expect to work past 65. They’re working 3.5 years longer than a decade ago and only 30 per cent anticipate being fully retired at age 66.

“If you have to work a few years past your retirement target date, do it and get rid of debt,” says Mr. Pape.

Another option for mortgage-holders is to get a fixed rate with a five-year term or longer. That protects those on fixed incomes from payment hikes. If you’re facing an underfunded retirement and you have a mortgage, “I would lock in a low rate while you still can,” he recommends.

You could also extend your amortization to 30 years. That maximizes cash flow in retirement and lets you make extra payments when you’re able. Couple this strategy with a home equity line of credit (HELOC) and you’ll get an emergency source of cash for unforeseen events like medical expenses or income loss. A “readvanceable” HELOC also lets you re-borrow any extra pre-payments if absolutely necessary, which lessens the cash flow risk of making them.

Despite these tips, the goal isn’t to manage a mortgage in retirement. It’s to avoid a retirement mortgage altogether. And to do that, you’ll need to start young.

The chilling truth is that there are just over 9.3 million Canadians age 55 and over and 43 per cent of them say they haven’t saved enough for retirement. But by 55, time is running out. A Statistics Canada study in 2009 found that people in their 70s spend only five per cent less than they did in their 40s. It takes years of saving to replace that kind of income and dispose of a mortgage.

By now, you’ve probably sensed that being pro-active is key. But many people haven’t been. As many as one in three say they plan to live off the equity in their homes. That’s a gamble in any real estate market. But if you’re retiring in the next decade and relying on uncertain home price appreciation, it’s especially risky. You need diversified savings and you need that mortgage out of the way.

Robert McLister is the editor of CanadianMortgageTrends .com and a mortgage planner at Mortgage Architects. You can also follow him on twitter at @ CdnMortgageNews.

Are we placing too much failth in Banks' advice?

Rob Carrick,  The Globe and Mail


In the banks we trust.

A question to ponder for Financial Literacy Month is why this is so.

A Bank of Montreal survey to be released Friday shows people are more likely to turn to their bank with a financial question than anywhere else, including financial advisers, friends and family and the media. The younger people are, the more important banks become as a source of information.

BMO and all the banks in this country deserve kudos for the masterly way in which they market themselves not as what they really are, financial supermarkets, but as our partners in pursuit of financial success. Don’t be gullible. Banks are not the predators that their harshest critics say they are, but their primary accountability is to shareholders who are hungry for rising profits.

The BMO survey involved 1,000 people aged 18 and older and was conducted late last month by Pollara. Fifty-six per cent of participants said they’re most likely to turn to their bank with a financial question, compared with 47 per cent for a financial adviser and 39 per cent for friends and family. A mix of websites, blogs, print media and social media accounted for the rest.

People aged 65 and older were least likely to consult the bank – 44 per cent of this group ranked the banks as a source of help. At the other end of the scale, 63 per cent of people aged 18 to 29 indicated they relied on banks.

The banks know us well as customers – often they have a lifetime’s worth of financial information to consult, and they are concerned about customer retention.

Banks also sell the financial tools we all need, and they’re usually open to negotiating the cost or interest rates involved. The more business you have with a bank, the better the deal you should get.
On the other hand, there’s no onus on the banks to offer the products or advice that work best for your needs. Some of the people you deal with at bank branches may in part be paid through commissions or bonuses on products sold, or they may be under instructions to emphasize one product over another.

Either way, what’s best for the bank may not be ideal for you.

Banks may also withhold key information that would help you make informed choices. If you don’t know the intricacies of a product, you can’t count on them to wise you up.

In at least one sense, banks appear to be getting along better with others. It used to be commonplace for federal members of Parliament to lace into the banks over high credit card rates, service fees and such. Now, whether it’s because the banks are better behaved or simply that people have other concerns, hardly a word is said against the banks by MPs these days.

You get a different view when you look how the number of bank-related complaints flowing into the Ombudsman for Banking Services and Investments has risen to 448 from 240 in the past five years, or 87 per cent. OBSI hears from people only after they have exhausted every avenue within a bank to resolve a complaint.

The lower level of reliance on banks among people aged 65 and older suggests they’ve figured banks out. Younger Canadians, save yourself from learning the hard way. Make the banks part of your advice team, but only one voice among many.

Financial advisers are also worth consulting, especially those who charge fees for their services rather than getting paid through commissions embedded in products. Avoid advisers who respond to every point you raise with a product you should buy.

Whoever you speak to, be sure to get second, third and fourth opinions using the resources available from the likes of this newspaper, as well as blogs, financial websites and social media. Brief yourself before you talk to a banker or adviser by doing some online research, and then do some further checking after your conversation.

It’s never been more important to apply the principles of financial literacy to the way we deal with banks. More and more, the banks are moving beyond chequing accounts and mortgages into selling investments and financial planning. Have you noticed how more bank branches are opening on Saturday and Sunday? It’s all about helping you find time to come in for advice.

Go on in to talk, but remember that a key rule of financial literacy is to be careful about trusting the banks.

Where Canadians are seeking financial advice

Source	Canada	Age 18-29	30-39	40-49	50-64	65+	Men	Women
Financial websites	31%	39%	39%	37%	26%	13%	31%	32%
Friends and family	39%	61%	51%	38%	30%	14%	35%	43%
My bank	56%	63%	62%	54%	55%	44%	57%	56%
My financial adviser	47%	38%	40%	46%	52%	64%	47%	48%
Newspapers and magazines	16%	18%	17%	19%	11%	21%	16%	16%
Online news articles/blogs	24%	30%	34%	26%	18%	13%	23%	25%
Social media	6%	15%	8%	6%	2%	<1%	7%	5%