Mortgage Market Updates

Regulator eyes tighter mortgage rules

2013-09-03T07:44:00.002-07:00

TARA PERKINS - REAL ESTATE REPORTER

The Globe and Mail

Canada’s banking regulator has been gathering detailed mortgage information from financial institutions, in what could be a precursor to changes in the rules for home loans.

The Office of the Superintendent of Financial Institutions (OSFI) has spent months considering a tightening of mortgage rules for lenders, a decision that’s being weighed as the housing market begins to pick up after a year-long slump. That slide began when Finance Minister Jim Flaherty tightened the rules for mortgage insurance in July, 2012.

Policy-makers in Ottawa, including OSFI head Julie Dickson, have been concerned consumers are taking on too much debt and that house prices have risen too much. Toronto-Dominion Bank economists estimate that home prices are 8 per cent above what they’re actually worth, nationally. The average selling price of existing homes in July was 8.4 per cent higher than a year earlier, driven by a resurgence in the pricier markets of Vancouver and Toronto.

Years of ultra-low interest rates have spurred consumers to take on more mortgage debt than they might have otherwise. To rein the market in, Ottawa has tightened the rules around mortgage insurance four times since 2008 – Mr. Flaherty’s latest move cut the maximum amortization period for an insured home loan to 25 years from 30. Insurance is mandatory for home buyers who have less than 20 per cent of the purchase price of a house as a down payment.

But banks have continued to sell uninsured 30-year mortgages to consumers who have a down payment of at least 20 per cent. The continued resilience of the housing market has economists wondering if Mr. Flaherty has sufficient ammunition left to cool the market again.

OSFI’s ability to directly regulate bank lending practices is a tool that has not been used to a great degree. The regulator could, for example, tighten the uninsured portion of the mortgage market, a move that The Globe and Mail reported in May it was considering.

Sources within the financial sector say that both the finance department and OSFI have been asking banks a variety of questions in recent months, in an effort to get a handle on the impact of last year’s rule changes. A spokesperson for OSFI said the regulator has not yet reached any decisions about whether it will be altering rules for lenders.

Any changes would come in the form of revisions to OSFI’s guideline B-20, a set of mortgage underwriting principles that the regulator first issued last year. The principles outline, among other things, how much due diligence banks must conduct on potential borrowers, when they should conduct appraisals and what paperwork they should have. It also places limits on the size of home-equity lines of credit.

Ms. Dickson said earlier this year that the regulator welcomed the slowdown in the growth of household credit that ensued after the guidelines were issued and the mortgage insurance rules were tightened.

The Canadian Association of Accredited Mortgage Professionals estimates that mortgage credit growth is now about 5 per cent, having peaked at about 13 per cent at the start of 2008. The association estimates that it will fall to between 2.5 and 3 per cent next year. Still, the group expects the total amount of residential mortgage credit to grow to between $1.24-trillion and $1.25-trillion by the end of 2014, having more than doubled in 10 years.

Mortgage rates, which sank to new lows over the past two years, have been slowly rising this summer, which could restrain the market without the need for further regulatory intervention. As of May, the average mortgage rate that homeowners were paying was 3.52 per cent, but posted rates have increased by more than 60 basis points since then.

For now, sales of existing homes are edging back toward the levels they were at before Mr. Flaherty tightened the mortgage insurance rules last summer, driven by rebounding markets in Vancouver and Toronto. Vancouver saw a 40.4-per-cent year-over-year gain in sales of existing homes over the Multiple Listing Service in July, while Toronto posted a 16 per cent increase.

“That deafening silence you hear is the sound of the Canadian housing bears gone quiet,” Bank of Montreal economist Robert Kavcic wrote in a research note Friday. “Not only has the resale market absorbed last year’s round of mortgage rule tightening, but the supposedly at-risk banks have just recorded a unanimously better-than-expected earnings season, with a handful of dividend increases to boot.”

Getting ready to turn a new financial leaf

2013-09-02T15:18:00.001-07:00

Melissa Leong
Financial Post, Personal Finance

When Scott Plaskett sits down with his clients in September, he begins with a simple: “What’s new?”
Usually, a lot. After Labour Day, people have stories, the certified financial planner says. These stories lead to financial conversations.

“January 1 isn’t really the beginning of the year for most families. It tends to be Labour Day because everything starts fresh again,” he says. “September seems to be the reset button for most families. The summer is over. They’ve had time off and now everything gets back to the normal routines.”

September is one of her busiest seasons, says Lise Andreana, a certified financial planner in Burlington, Ont., and author of No More Mac ‘n’ Cheese: The Real World Guide to Managing Your Money for 20-Somethings.

“After a full summer of binging on BBQ, beer and Canada’s Wonderland, it’s time for them to weigh in,” she says. “Their expenditures and wants have exceeded their needs. They recognize that they may have gone overboard. Even if they haven’t, it’s a time of sobering up for clients in September.”

After the summer, the most frequent calls that Ms. Andreana fields are about RESPs and concerns regarding investment returns.

“The summer returns are typically lower than the fall to spring. There’s even a saying, ‘sell in May and go away’,” she says. “They’ll see that their statements are not as productive. They’re going to be calling us about their statement that they’ve received in July. This opens the doors for the conversation that we want to have about looking at their asset allocation, how much risk they’re taking versus the return and is that suitable to that particular client.”

The Post spoke to financial planners about people’s biggest money concerns in September and how to start anew with finances.

How am I going to get myself organized?

The vacation is over. You’ve spread out your bank statements, your investment reports and a financial spreadsheet and unless you’re an accountant or Russell Crowe’s numerically inclined character in A Beautiful Mind — it might be intimidating. And if you’re parents to young kids, you’re being tugged in so many different directions (literally and figuratively): Should the money go to RESPs, RRSPs, mortgage payments, credit card debt, child care, new clothes for school, etc.

“There are only two ways of getting out of the mindset [of being overwhelmed]. One is ignoring it and hoping that la-dee-dah things will be fine. For a lot of people, they just muddle through,” Sandi Martin, a fee-only financial planner, says. “Then there’s the other kind of person who does a lot of homework. They feel like they have it under control.”

Take control by figuring out where you stand. “Go through your bank statements with a fine-tooth comb. Just see where your money has been going and ask how far off am I?” Ms. Andreana says.

Did you put the trip to Disneyland on your credit card? If so, you have to get your consumer debt down. “The debt on my card shouldn’t last any longer than the consumable product,” she says. “A coffee shouldn’t go on a credit card ever.”

Create a budget for the month or year. How much can you spend on back-to-school items, for example? Those with children in Kindergarten to Grade 12 in the U.S. anticipate spending an average of $428 on back-to-school items, according to a Deloitte survey.

TIP: Figure out what your clothing budget is (in an average Canadian household, 6.5% of all household spending was on clothing). Consider portioning out a chunk and giving it to the kids to shop. “It was a tool to teach them how to spend their money wisely: ‘This is it. It’s up to you to budget’,” Ms. Andreana says. “It also helps parents because it stops them from giving in to every request for something new.”

How am I going to pay for my kid’s post-secondary education?

Your little ones may just be returning to grade school. But in the future, you could be standing on the lawn, waving at your son as he leaves for university with tears in your eyes. Let those tears be from joy, rather than from stress at being financially pinched.
To figure out how much you’ll need to save, ask yourself, what are your goals?

“Do they want to pay for 100% of the child’s post-secondary education?” Mr. Plaskett says. “Do they want to pay for half? Do they want to have 100% but not let the child know that so the child can work and contribute?”

The best plan to start with is the RESP, he adds.

The government will give you a Canada Education Savings Grant equal to 20% of the first $2,500 you contribute annually to an RESP to save for your child’s post-secondary education, up to a maximum of $7,200.

“The money accumulates on a tax sheltered basis and it gets topped up. When the child goes to school and the money is pulled out, any of the growth is taxed in the child’s hand … and chances are, their tax bracket is quite low,” Mr. Plaskett says.

“The con would be if your child doesn’t go to a qualified post-secondary school. If they decide to become an entrepreneur and skip the schooling process, then they would have to pay back the grant money on … their redemption.”

If a family contributes $50 a month from the time the child is born to when she’s ready to attend university, they will have almost $24,000 with the government’s savings grant and assuming a 5% rate of return, Ms. Andreana says.

TIP: Take the monthly $100 from your Universal Child Care Benefit (for each child under 6) and put it into your RESP. “Take government money to earn some more government money,” Ms. Martin says.

Am I prepared for the unexpected?

Fifty-one per cent of Canadians have three-months worth of expenses set aside for unforeseen costs such as car repairs and job loss, says a recent BMO report. But setting it aside doesn’t mean hiding it under the mattress or leaving it in a savings account.

“I make a clear distinction between having access and having that liquid sitting in a savings account,” says Al Nagy, a certified financial planner and regional director at Investors Group. “I hate money sitting there doing nothing. People deserve to have their money working for them by investing it…I often recommend establishing a line of credit.”

Over the summer, clients have often spent time with friends and family and may be thinking of better caring for their own dependents or they’ve experienced loved ones becoming ill, Mr. Plaskett says.

“It gives us an opportunity to revisit that part of their financial plan: Let’s have a conversation about what would happen to you?” he says. “It’s not a great conversation to have; but it’s one that has to be had.”

You might want to consider death insurance benefits (life insurance) to care for your loved ones and living insurance benefits (disability, critical illness and long-term care) to protect yourself and the family if you cannot work.

TIP: “[People] say, ‘I’ve got coverage through my employer.’ Have you looked at the booklet to see what type? It’s typically not enough. Let’s determine if you might want to top it up,” Mr. Nagy says. “Ask about the definition of disability in your work policy, the limitations and exclusions, and the waiting period before your benefits kick in.”

Will I have enough to retire on?

There’s no magic number to retire on. It will vary depending on your lifestyle. Do you think you’re going to be spending your time reading on the porch and bike riding into town for groceries in retirement? Or will you be traveling the world and sailing on a yacht in the Mediterranean?

“People ask, ‘Is there an actual number that I should be shooting for?’ That number is about how much you’ll spend,” Ms. Martin says. “The only way to rationalize what you will spend in retirement is to look at what you spend now. How much of it is absolute necessary living expenses? Is your mortgage going to be paid off? Are your kids going to be out of your house? Are you going to downsize your home?”

Remember to take into account how long you think you’ll live. Also, will you be getting income from other sources such as an employee’s pension plan or the Canada Pension Plan and Old Age Security?

TIP: Don’t wait. Start early. Time is a huge advantage. If you begin saving at 25, putting $2,000 away a year ($166 a month) until you’re 65, you’ll have $560,000, assuming an 8% annual rate of return, according to Bankrate.com.

Financial Post • Email: mleong@nationalpost.com

No ugly downturn for condo market, even in Toronto: report

2013-09-02T15:15:00.001-07:00

TARA PERKINS - REAL ESTATE REPORTER

The Globe and Mail

A new report from the Conference Board of Canada predicts that the much-watched condo sector will avoid an ugly downturn, even in Toronto.

Economists and policy-makers are keeping a close eye on condos, especially in the country’s most populous city, where cranes dot the sky. A number of economists say that too many units are being built, a development that would put pressure on prices. The Bank of Canada has highlighted the risks that this market could pose to the economy.

Condo sales plunged in most Canadian cities last year, and are expected to be down again this year.
But Wednesday’s report, which was done for mortgage insurer Genworth Canada, argues that the market will not sink too low, and will be propped up in part by population growth and modest employment gains.

While the report does say that higher mortgage rates could cool things off later this year or early next year, it adds that “a flood of foreclosures, and subsequent sharp supply increases, is simply not in the cards.”

Homeowners are taking advantage of low interest rates to pay down their mortgages, offering a cushion when it comes time for them to renew, it says.

“Markets in Toronto and Montreal are cooling, but we think they will avoid major downturns, partly because, on the demand side, demographic requirements remain decent,” the report says. “Also, the banks will continue to require builders to have healthy pre-sale levels before advancing construction financing, keeping supply somewhat in check.”

Vancouver’s condo market, it notes, is already well into a slowdown.

“While regional markets clearly vary in strength, all will benefit from an expanding population and a rising share of condominium-loving empty-nesters aged 55 or more,” the report adds.

It also says that “weak pricing will help affordability.” It predicts that principal and interest payments will drop in at least five major cities this year, led by a 2.5 per cent decline in Victoria.

While payments are expected to rise in Alberta, the report says that Calgary and Edmonton are still the most affordable condo markets when local incomes are taken into account, with mortgage payments taking only about 9 per cent of household income. “By contrast, we expect payments to eat up roughly 20 per cent of Vancouver incomes,” it says.

The report forecasts a 0.5 per cent drop in Vancouver resale condo prices this year, to $364,593. Victoria and Montreal are also expected to record price declines, with Montreal’s average resale price dropping 0.7 per cent to $265,344. Toronto is forecast to see its average price remain flat this year, at $305,239.

The report predicts that all cities will see some price growth, ranging from 1.4 to 3.6 per cent, in 2014.

The Longevity Conundrum: Could Your Retirement Savings Last You to 120?

2013-09-02T15:13:00.002-07:00

WalletPop Editor
http://www.walletpop.ca/blog/bloggers/walletpop-editor/
By Matt Brownell

Medical science hasn't conquered death, but it's making some progress.

The number of centenarians has increased by 66 percent in the last 30 years. The Census Bureau projects that 400,000 Americans will be over the age of 100 by 2050. And advances in medical science mean that lifespans of 120 -- and beyond -- are within reach.

But not everyone is thrilled with our increased longevity. A recent survey by Pew Research found that 83 percent of Americans put their "ideal lifespan" at 100 years or less, and just 4 percent said they'd actually want to live to 120. It's possible to live longer and longer, but so far, the vast majority of Americans just aren't that interested in sticking around more than a century.

While much of that has to do with concerns over the quality of life beyond 100, there are also real financial concerns at play: No one wants to outlive their money, and living forever loses its luster when you realize that you're going to be spending the last years of your life struggling to make ends meet.

"Parents have a real desire to leave a nest egg to their children when they pass," says Christopher Hickey, a financial planner for Merrill Lynch. "But if I live to 100, someone's taking me in."

In other words, the difference between living to 85 and living to 105 may be the difference between leaving your kids a nice inheritance and becoming a burden on them. So as medical advances extend the human lifespan ever longer, we have to ask: How do you plan for a retirement that could last as long or longer than you spent working?

Less Saving, More Living

It's a question that many financial planners are taking seriously.

A recent ad campaign by Prudential looked at some of the challenges posed by longer lifespans, with one billboard that read, "The first person to live to 150 is alive today." And concerns over longer lifespans are compounded by the fact that we have less retirement savings to rely upon.

"Look at what's going on with the traditional three-legged stool -- Social Security, pension plans and personal savings," says Prudential vice president Robert Fishbein. Social Security, he says, is due for adjustments that will likely decrease benefits to retirees.

Personal savings rates aren't what they used to be. And far fewer people have pensions these days, as companies have moved from defined benefit plans to 401(k)s.

"And then you throw in the fact we're living longer, and you see why this is the central dilemma," he adds.

Michael Tucker, a professor of finance at Fairfield University who has studied optimal retirement strategies, says that living into your 100s simply requires more retirement savings than most people have.

"If you're going to retire at 65 and live to 120, you need a lot of money," he says. "It's really not feasible to live in retirement for 50 years unless you have $5 million."

Changing Strategies

So if you don't have $5 million at retirement, how can you prepare for an extended lifespan? There are a few solutions, but fair warning: None of them are particularly good.

One is to simply put off retirement. It stands to reason that if we're able to live longer, we'll also be able to work longer. That probably doesn't mean working full time into your 80s, but it might mean working part time or doing consultant work to supplement your retirement income.

Another strategy is one that might give pause to older Americans, considering that it runs counter to the decades-old accepted wisdom -- continuing to grow your nest egg by staying heavily invested in the stock market even into your golden years.

That's a controversial notion. It's generally accepted that you want to transition your portfolio away from equities as you approach retirement age. The idea is that the closer you are to retirement, the less time you have to recover from a market downturn. Most advisers will suggest that you get less into stocks and more into bonds at that point. But that simple calculus goes out the window if you think there's a real possibility of outliving your money.

"You have to take higher risks," says Tucker. "60/40 is the rule, typically -- 60 percent stocks, 40 percent bonds. But if you're going to live that much longer, you'll run out of money." He suggest a portfolio closer to 80/20 or even 90/10.

Of course, there isn't a one-size-fits-all approach when it comes to determining your asset allocation, and leaving 80 percent of your nest egg in the stock market during retirement is something that most advisers will counsel you to avoid at all costs.

"An individual's pension and Social Security benefit will definitely affect what portions of their monies get allocated to equities," says Hickey. "When I'm planning for someone, I want to make sure we have all the bare necessities covered by a guaranteed income."

(Hickey also worries about how stressful it would be to have so much of your money in the stock market when you're retired. "Grandma doesn't get any sleep and dies of a heart attack because she watches CNBC," he quips. "Nobody wants that.")

Indeed, maintaining a riskier portfolio is far from a perfect solution: If you have a 40-year-long retirement, it's inevitable that you'll see your portfolio get burned by at least one downturn. But if living past 100 becomes the norm, you might not have a choice.

So here's the plan for beating the longevity curse: Save more. Spend less. Retire later. Plan for the worst. And most of all, accept that you have to take risks with your retirement money if you want it to last.

But that's not a foolproof strategy, and it's one that a lot of retirees won't follow, anyway. So in the not-so-distant future, we could see a lot of centenarians bemoaning their "good luck" as they watch their retirement savings dwindle with each passing year.

Tucker makes a blunt prediction: "Suicide will be very popular."

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.

Bridge financing can ease closing day stress

2013-08-29T18:05:00.001-07:00

Mark Weisleder

Special to the Star
www.thestar.com

Bridge financing could have saved the day last month when a series of disasters on closing day caused three related real estate deals to fall apart.

Bridge financing could have saved the day last month when a series of disasters on closing day caused three related real estate deals to fall apart.

When a bank pulled the financing from one buyer at the last minute, it caused all the deals to fall apart because each one was contingent on the previous seller getting the money to close their own sale. This is what real estate lawyers refer to as a train wreck.

If bridge financing had been used, it is likely that this could have all been avoided. In a typical bridge situation, the buyer closes their purchase a few days before their sale. They go to their bank and ask for a loan, to pay for the entire purchase, with the understanding they will repay the loan as soon as their sale closes. The interest is usually prime plus 3 or 4 per cent per day. By closing a few days early, the interest cost is typically $100 to $200.

One of the benefits of closing a few days early is that you can slowly move into your new home. I have heard plenty of stories where buyers are moving out and moving in on the same day and while they are packed up at 1 p.m., they cannot get into the new home until after 6 p.m., resulting in additional moving costs, since you typically pay by the hour.

In my client’s situation, we were fortunate to be able to extend their purchase agreement because our seller did not need the money on closing to buy another property. Still, the sellers could have cancelled the contract and sued for the deposit and any losses that they may have incurred in any resale of the home. In order to extend the closing, my clients had to pay interest on the money owed to the seller during the period of the extension. They also had to pay extra moving and storage costs because their furniture had already been picked up from their home when they found out that the deals could not close.

You might wonder how a lender can cancel a loan at the last minute. You would be surprised how often this happens. When a buyer is pre-approved for financing, or even given a commitment from a lender on a specific purchase, it is still conditional on the buyer satisfying all of the lender’s conditions before the closing. This could include providing proof of income, employment letters, as well as proof that they have the entire down payment from their own resources, and are not receiving it from third parties. If there is any suspicion on the part of the lender that their conditions have not been properly satisfied, they have the right to cancel the loan, even at the last minute.

If you are considering selling and buying on the same day, first ask your seller whether they need the money to buy another property. Ask the same question of the person buying your home. If the answer to either question is yes, consider closing your purchase a few days earlier and obtaining bridge financing so that you do not become involved in your own train wreck.

Buying and selling on the same day is normally a stressful experience even if it all works out, but by taking extra precaution, you can avoid unwelcome surprises later, provided that everyone is properly prepared in advance.

More columns by Mark Weisleder

Mark Weisleder is a Toronto real estate lawyer. Contact him at mark@markweisleder.com .

RBC hikes special and posted residential mortgage rates

2013-08-29T18:03:00.002-07:00

Canadian Press
Financial Post

TORONTO — The Royal Bank is increasing several of its residential mortgage rates, including fix posted rates as well as special offer rates.

Royal Bank’s announcement Wednesday came a day after the Bank of Montreal raised some of its mortgage rates.

For the most part, Royal Bank is increasing the rates by 20 basis points, with its fixed five-year closed mortgage rising to 5.34% and its five-year special rate to 3.89%.

The rate changes are effective Thursday.
Other rates rising 0.2 percentage points include the bank’s posted three- and four-year closed rates to 3.95% and 4.74% respectively.

Royal’s special offer four-year closed rate also goes up 20 basis points to 3.59%, its seven-year special offer closed rate by 20 basis points to 4.19% and its 10-year special offer closed rate to by 30 basis points to 4.59%.

On Tuesday, Bank of Montreal boosted two of its rates by 20 basis points.

The five-year fixed closed rate and the five-year special fixed closed rate are now both 3.79%.

Laurentian Bank followed suit on Wednesday, announcing 20-basis point boosts to its three-year, four-year and five-year fixed rates.

The rates are now 3.95%, 4.74% and 5.34%, respectively.

No more tightening needed after measures averted housing bubble: Flaherty

2013-08-29T18:01:00.001-07:00

Greg Quinn and Theophilos Argitis, Bloomberg News
Financial Post

Finance Minister Jim Flaherty said he isn’t planning new measures to restrain the country’s housing market because his past four rounds of action have already worked to avoid a bubble.

“So far, I’m satisfied that we have a balance in the real estate sector,” Flaherty told reporters in Wakefield, Quebec, at the start of a policy retreat with business leaders. “There are some bumps along the road in Toronto and Vancouver, in particular in the condo markets, but overall, I’m satisfied,”

Flaherty has warned consumers to avoid mortgages that could become unaffordable when borrowing costs rise, after Canadians took on record household debts relative to disposable income.

Flaherty said that “we have been watching the condo market and the housing market very closely for at least five years.” He also said that he does have “contingency plans” he can use if the need arises.

The Bank of Canada has identified household finances as the biggest risk to the domestic economy, while Governor Stephen Poloz has said there are recent signs of a “constructive evolution” in that area.

Flaherty today also reiterated his own commitment to pare the federal budget deficit and spoke out against the extraordinary monetary stimulus seen in the U.S. and Europe.

“We are going to balance the budget without doubt in 2015,” Flaherty said, adding that this will “put Canada in a position of strength” to react to any future global weakness.

Not Fans

“We in Canada haven’t been fans of quantitative easing, unlike the United States and elsewhere,” Flaherty said. “The danger in the longer term to me as a finance minister is inflation.” He said the policy may be discussed at the next meeting of Group of 20 officials.

Canada has been a destination for global bond investors because of the country’s top credit ratings, deficit reduction and stable economy, Flaherty said.

“We can sell anything we produce in Canada around the world, whether it’s in Canadian dollars, U.S. dollars or euros,” Flaherty said in reference to sales of his government’s bonds.

He attributed the record $19-billion divestment of Canadian bonds by foreign investors in June to “some weakness in the Canadian dollar,” without elaborating.

Canada’s dollar depreciated by 1.4% against the U.S. dollar in June following a May decline of 3%. Investors and economists attributed the bond sale to concerns that interest rates will rise as the U.S. Federal Reserve scales back its bond purchases and signs of faster growth in the U.S. and Europe.

As rates rise, brace for mortgage renewal time

2013-08-29T17:52:00.001-07:00

ROB CARRICK

The Globe and Mail

The era of pleasant surprises for people renewing their mortgages is over.

After five years of trending lower, mortgage rates have reversed course and started to rise. Aspiring first-time home buyers are being priced out of the market by these increases, but at least they’ve avoided a costly mortgage entanglement. Existing homeowners may simply have to pay more.

Current fixed rates are still lower than they were five years ago, but it’s a different story with the once-popular variable rate mortgage. Veteran mortgage broker Vince Gaetano of MonsterMortgage.ca says he has clients coming in with maturing variable-rate mortgages at 2.1 or 2.2 per cent, an all-time great deal. “They know their cash flow is going to get crunched,” he said.

A variable-rate mortgage goes for 2.6 per cent with a good discount these days, while a fully discounted five-year fixed rate mortgage rate has risen to 3.49 per cent from 2.89 per cent a few months back. Over the decades you own a house, you’ll win some at mortgage renewal time and you’ll lose some. We’ve had quite the winning streak in recent years for people renewing at lower rates, but now it’s coming to an end.

In the years ahead, the biggest financial mistake you make just might be failing to think well in advance about a mortgage coming up for renewal. You have options: Your lender may let you renew early (within 90 days) into a new five-year term, or you may be able to do a “blend and extend.” That’s where you convert the remains of your existing fixed-rate mortgage into a new loan with a blended interest rate. We’ll look at a more aggressive strategy suggested by Mr. Gaetano in a minute.

But first, there’s the question of how people will afford higher mortgage payments. We’ve been assured by people in the mortgage industry that homeowners can absorb higher mortgage payments. A 2011 report from the Canadian Association of Accredited Mortgage Professionals said there is “very substantial room” for households to pay higher mortgage rates. Will Dunning, CAAMP’s chief economist, said Monday that he stands by that view.

But the issue is not whether you can afford higher mortgage payments. Rather, it’s what you’ll have to sacrifice to make them. Mr. Dunning’s take: “Discretionary spending disappears. A lot of that is in the service sector – people going to coffee shops and restaurants.”

With the need for future sacrifices in mind, let’s look at a strategy suggested by Mr. Gaetano for lessening the impact of renewing a big mortgage at a higher rate. The plan: Break your existing mortgage a few months before the renewal date and refinance at current rates so you avoid higher costs in the future.

Let’s say your mortgage is coming up for renewal in six months, which leaves plenty of time for more rate increases. Start by getting a commitment from your lender to hold today’s best discounted five-year fixed mortgage rate for 120 days. Then, wait until two to three months before renewal to break the mortgage.

Yes, there will be penalties. But by waiting until just a few months before the renewal date, you’ll minimize them. It’s also important to understand that rising rates may actually reduce your penalty.

Penalties on fixed-rate mortgages are usually equivalent to the higher of three months’ worth of interest (Mr. Gaetano said two months’ interest would be charged if you had only two months to go) or a calculation called the interest rate differential, or IRD. Among the factors that go into the IRD are the rate on your existing mortgage and the rate the lender can get today. If rates are rising, then your IRD should decline.

Mr. Gaetano said an additional $1,000 or so in legal fees would apply if you broke your mortgage and took it to another lender. Even so, he thinks borrowers will end up saving money if the balance on their mortgage is more than $200,000 to $250,000 and the difference between the rate on hold for them and market rates is roughly 0.4 of a percentage point or more.

In some cases, it can pay to break a mortgage with even a year to go. Mr. Gaetano said he has clients who owed $980,000 on a mortgage maturing next June 1, with an interest rate of 3.79 per cent. Earlier this summer, he secured a 120-day hold on a 2.89 per cent mortgage. With five-year fixed rates now at 3.49 per cent, the strategy plays out as: Total costs of $8,428 or so in penalties and legal fees versus interest cost savings of $27,766. Net benefit to the clients: Savings of more than $19,300.

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

What’s happening with interest rates?

2013-08-26T07:39:00.003-07:00

TMG The Mortgage Group
blogger@mortgagegroup.com

Interest rates are on the rise. The Big banks have been inching up their rates since May, but have now moved quickly to 5-year fixed rates ranging from 3.79% or 3.89%, which is a 60 basis point hike from what they were six months ago. The 5 year bond yields have themselves increased by 80+ basis points since the Spring.

However, variable mortgage rates and the prime lending rates are not increasing – yet. So, if you have a line of credit, your rates are staying the same. If you have a variable mortgage rate or an adjusted rate mortgage (ARM), you’re safe for now.Only fixed mortgage rates are increasing. If you are renewing a mortgage, this is where you’ll likely feel the impact.

If you opted for a variable rate mortgage, today’s variable rates are, on average, around 2.65% compared to 2.1% five years ago. However, 5-yr. fixed posted rates were hovering around six per cent in 2008, but a mortgage professional could get a discounted rate from 4.2% to 4.9%. As fixed rates rise and the Prime rate stays put, now may be a good time to speak with a mortgage professional about the benefits of going variable.

But if banks follow RBC’s lead, then it will be tougher to qualify for a variable rate. The Royal Bank not only increased its fixed rates but also its benchmark rate for qualifying borrowers for variable rates and for fixed rate terms less than five years. The increase is a 20 basis points jump, from 5.14% to 5.34%, which means a household will need approximately $1,100 more income to get a variable-rate mortgage on a $300,000 house with 5% down.

This is also not a good time to wait it out, thinking that rates will come down as they have in the past. It may not be the case this time. Consumers have been getting the message about curbing household debt and have become better money managers.The housing market is showing signs of life and house prices are stabilizing. The economy is moving forward and low rates are just not sustainable anymore.

Fixed rates rely of bond markets. Bond yields are climbing higher so fixed rates climb right along with them. In June, the 5-year yield was up as much as 20+ basis points in less than 48 hours, driven by optimistic economic comments from the U.S. Fed. In CIBC’s Weekly Market Insight for July 12, 2013, chief economist Avery Shenfeld said, “As we move into 2014, better growth will see the Fed accepting a further climb in long rates.”

Stephen Poloz, the new Governor of the Bank of Canada said he would be holding the prime rate at 1 per cent. This is the number banks use to determine their lending rates for lines of credit and variable-rate mortgages. Poloz also added, “Over time, as the normalization of these conditions unfolds [growing economy], a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2-per-cent inflation target.”

That’s a nice way to say that rates will be going up. When is hard to predict, but all indications are for early-to mid 2014.

Housing market breathes again

2013-08-22T17:27:00.003-07:00

TMG The Mortgage Group
blogger@mortgagegroup.com

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

Minister Jim Flaherty tightened mortgage rules for a fourth time last year, concerned that an overbuilding of condos could lead to sharp price declines. Former Bank of Canada Governor Mark Carney identified record household debt as the biggest domestic risk to the economy.

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

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

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

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

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

Discount mortgages dry up as Canadian borrowers face tough test

2013-08-22T17:25:00.001-07:00

TIM SHUFELT - INVESTMENT REPORTER

The Globe and Mail (includes clarification)

The discount mortgages that stoked the Canadian housing boom are disappearing, increasing the likelihood of a correction in home values.

On Thursday, Royal Bank of Canada will hike its five-year fixed-rate mortgage to 3.89 per cent, one day after the Bank of Montreal raised its rate to 3.79 per cent. The other major lenders are all moving in the same direction.

The increases mean the cost of a new fixed-rate mortgage has climbed by more than a third in five months, signalling what could be the beginning of the end of ultra-cheap credit in Canada – and the start of fiscal pain for consumers who have overburdened themselves with debt.

“I think this is the real thing,” said Benjamin Tal, deputy chief economist at CIBC World Markets. “This is the end of extremely low interest rates. They’re simply unsustainable.”

So far, interest rates on other kinds of consumer debt are not on the rise, since they are often tied to the Bank of Canada’s benchmark rate, still sitting near a record low. Even so, the rise in mortgage rates will strain the ability of borrowers to juggle their debts.

“This is the beginning of a test for the mortgage market,” Mr. Tal said. “It’s a test of how Canadians are able to tolerate higher interest rates.”

And it is a test that came on swiftly and unexpectedly. Just five months ago, Finance Minister Jim Flaherty publicly scolded both BMO and Manulife Financial for offering mortgages he deemed irresponsibly cheap, advising against a “race to the bottom,” as mortgage rates sank as low as 2.89 per cent.

While the inevitable climb of mortgage rates has had false starts over the past couple of years, the recent hikes could be the first phase of a long-term trend.

“They’re going up every time we turn around,” said Paula Roberts, a Toronto mortgage broker. “It’s a shock to clients. Everybody just thinks they’re always going to stay low.”

As developing economies such as China falter, the United States has re-emerged as the likely engine of global economic growth. The improving U.S. outlook is already pushing up some lending rates, and should eventually reduce the need for central banks in the United States and Canada to hold down short-term interest rates to spur the economy. As long as the United States is making progress, mortgages here will probably continue to get more expensive.

The Canadian housing market is also still recoiling from regulatory changes Mr. Flaherty imposed in recent years in a deliberate attempt to engineer a “soft landing” for overpriced residential real estate. Last year, he reduced the maximum amortization period for a government-insured mortgage to 25 years from 30 years.

Speaking with reporters Wednesday outside a policy retreat in Wakefield, Que., Mr. Flaherty indicated that he sees no need at the moment for further intervention. “There are some bumps along the road in Toronto and Vancouver, in particular in the condo markets, but overall, I’m satisfied that the measures we’ve taken over the last several years have adequately calmed the markets.”

With multiple forces colluding on raising Canadian mortgage rates, the stubbornly strong housing market could finally relent. “Buying the same house will be more expensive this fall than this spring,” said Peter Routledge, an analyst at National Bank Financial.

An expected rise in rates could spur some to buy homes immediately to avoid the increased costs. Other prospective buyers will find they can no longer afford home ownership. “It’s going to limit the people that can buy,” Ms. Roberts said. “And it’s going to take longer for people to get into the market.”

Demand for homes could fall as a result. After that, the magnitude of the market’s reaction is difficult to anticipate. “Housing markets are prone to overreaction in both ways, the upside and the downside,” Mr. Routledge said. “The possibility that you get a vicious cycle goes up as rates go up.”
With a report from Bill Curry

Clarification: An earlier version of this story said the improving U.S. outlook has removed the need for central banks in the United States and Canada to hold down interest rates to spur the economy. In fact, the improving U.S. outlook is pushing up some lending rates, and should eventually reduce the need for central banks in the United States and Canada to hold down short-term interest rates.

Top 6 real estate scams – and how to avoid them

2013-08-20T16:27:00.002-07:00

Christopher Myrick

Special to The Globe and Mail

The following article is from Canadian Real Estate Wealth Magazine.

Fraud and investment scams abound at all levels of the real estate market – whether it be a contractor who charges hundreds of dollars for work not done to an “investment agent” who embezzles hundreds of millions – protecting yourself can require a measure of vigilance and legwork, but it can also come down to exercising skepticism and common sense.

1. Title fraud.

Although relatively rare, one of the most devastating frauds for property owners is title fraud. This type of fraud starts with identity theft. The scammer will use false documents to pose as the property owner, registers forged documents transferring a property to his or her name, and then gets a new mortgage against the property. After securing a mortgage or line of credit, the criminal takes the cash and leaves the owner on the hook for future payments.

While an identity thief may get a forced discharge of an existing mortgage, it is generally held that fraudsters are more likely to go after homes that are free and clear of mortgages: these have fewer complications and they tend to be held by older people who may be less aware about how to guard against identity theft. Criminal Services Intelligence Canada notes that homeowners who rent out their homes or who have no existing mortgages on high-value properties are more vulnerable to being targeted in title-fraud schemes as a large mortgage can be secured with the property.

Sale of a fraudulently held property may also occur, but it is much rarer as potential buyers are unlikely to consider a purchase without inspecting a property.

“Title insurance” is the best protection against this type of fraud. As well as protecting against title fraud, it also guards a new owner from against existing liens against a property’s title (such as unpaid debts from utilities, mortgages and unpaid property taxes), encroachment issues (a structure on a property needs to be removed because it is on your neighbour’s property) and errors in surveys and public records.

The other key to prevent being a victim is to engage in protection of personal data (see box). Taking precautions can also mitigate against more common types of identity theft –related losses (such as credit card fraud. As well as protecting their own information, investors and homeowners should ensure that trusted parties are taking proper security measures.

Canada’s Office of the Privacy Commissioner of Canada (OPC) launched a probe in 2009 after mortgage brokerages reported 14 data breaches in the space of a few months. Among the OPC’s findings: some brokers stacked files containing personal information on the floor or on desks within accessible offices; brokers lacked shredders capable of securely destroying documents; credit reports were sometimes obtained prior to consent from a client being recorded and there was no ability for clients to opt out of secondary uses of their personal information, such as marketing; there was a lack of training about privacy responsibilities.

In addition to title fraud by strangers, there have been cases where fraud has been perpetrated by spouses and business partners. For instance, one spouse may mortgage a property for their own benefit by using an accomplice to impersonate their spouse. Fraud can also occur through breach of an undertaking, where the lawyer or notary fails to pay off and obtain a discharge of a mortgage, instead absconding with the funds that had been intended to be used to pay an existing mortgage.

2. Foreclosure and home-equity fraud.

Criminals and criminal enterprises can take advantage of property owners who find themselves in a cash crunch, being short on funds for liabilities such as mortgage payments or other purposes. Two common scams that exploit a victim’s need for cash are foreclosure fraud and home-equity fraud.

The Financial Consumer Agency of Canada (FCAC) warns that foreclosure fraud occurs when a property owner who is having difficulty making mortgage payments is approached by a criminal offering a loan to cover expenses and consolidate loans, in exchange for upfront fees and an agreement to transfer the property title. However, in contrast to real debt consolidation programs, the FCAC says, the criminal will keep all the payments made by the owner and ignore bills and taxes. The criminal then remortgages the property and absconds with the money, leaving the former property owner without the home but still in debt.

Cash-crunched property owners or investors seeking can be vulnerable to other scams or unscrupulous behaviour to tap equity. There is always risk when leveraging properties, but a legitimate bank, broker or private lender should be forthright when explaining risks. However, those looking to borrow on equity should be alert for less scrupulous lenders, such as those who invite owners to embellish their application by exaggerating income, down payment or property assessment value sources in order to secure a larger loan.

CSIC has noted that organized crime groups often pretend they are buying or selling properties that are much larger, newer or more recently renovated than other homes in the area. These properties receive fraudulently inflated values through illicit property flipping from which a large mortgage is obtained. When the criminals deliberately default on the mortgage, financial institutions and end buyers are left with an overvalued mortgage (or worse, former property owners are without holdings, in debt and possibly implicated in the fraud).

Criminal activity can also be in the form of money laundering, a process where dirty money from criminal activity is transformed into “clean” assets. Financial Transactions and Reports Analysis Centre of Canada (FINTRACT), the agency responsible for tracking money laundering, warns that criminal or terrorist groups will purchase big-ticket items such as real estate for laundering purposes. FINTRACT requires that real estate brokers, Realtors, developers and others involved in suspicious transactions (such as large all-cash purchases or “buyer unseen” transactions).

3. Online rental/sale scams.

In these scams, rental property is advertised (usually at low costs) on online classified sites like Craigslist or Kijiji. The ads use information and photos describing the property that has been “scraped” from legitimate ads, such as those on the MLS. A scammer will impersonate the landlord, property manager or estate agent and will respond to emails and calls from prospective tenants. The scammer indicates he or she is unable to meet a prospective renter at the property, and instead proposes a meeting off site to exchange keys, sign a tenancy agreement and collect rental deposits. Victims may only learn they’ve been duped when they show up at a property to discover that it is already occupied.

Provincial and regional Realtor and real estate associations have warned members to be alert for this type of fraud, which has been common in major markets, but there is little a property owner can do to prevent image or data scraping. Property owners can search for the addresses of their units on search engines and they can use services like Google Image Search to help discover if a scraped picture from MLS or another online source is being used illicitly. Property owners should also digitally watermark any photos they use in rental ads, including business contact details and website.

While rental scams are common, online classified advertising and social media have also been used for investment scams and property fraud. Things to be alert for in such listings include claims of urgency, such as “must sell now,” promises of high returns or “low-cost/no-cost” financing. These sort of claims are usually too good to be true, and they also can be prevalent in off-line scams.

4. Property investment seminars and courses.

Educating yourself about property investment can be essential for success, but prospective investors should be alert and do their research on seminar providers. There are legitimate speakers and seminars that provide beneficial information, others exist primarily to take money from the credulous … and there are some that are in between.

Prospective investors should be cautious when it comes to seminars or courses that offer investor education. The value of the information provided can vary wildly, as can the costs. Some may be free, with sponsorship by a company or association, others will charge money, ranging from nominal amounts to upwards of tens of thousands of dollars. Still, even if someone pays for a course that provides basic information that could be found through a simple Internet search, it does not mean that the seminar was a scam. A rip-off may charge excessive prices but be completely illegal, but a scam typically involves legal wrongdoing, misrepresentation or fraud.

One common type of seminar is designed to hook buyers into “sure-fire” investments that are promoted by the seminar hosts. Potential investors may be invited to these seminars through an ad in a newspaper or magazine, a phone call, an email or other method. These seminars may include a motivational speaker, an “investment expert” or a “self-made millionaire.”

Some seminars may make money by charging attendance fees, selling highly priced reports or books and selling property and investments through high-pressure sales tactics. Real estate investment companies holding the seminars may suggest attendees follow high-risk investment strategies, such as borrowing huge sums of money, to buy into an investment offered by the seminar hosts.

Some companies have been known to fly prospective investors to view real estate developments. This could be a tactic to pressure commitment to a deal without time to obtain independent information or advice. Investors sometimes end up having to pay for their travel and accommodation if no investment is made.

The relatively booming market in Alberta has been a hotspot for these scams, and the Alberta Security Commission has issued a list of “red flags” to look out for when approaching a property investment seminar (see box). The basic advice, be skeptical of claims and do your due diligence before committing any money to an expensive course or investment.

5.Home Improvement scams.

As well as being cautious about big investments, property owners should be alert to smaller-level scams. The Canadian Council of Better Business Bureaus listed “rogue door-to-door contractors” as among their top 10 scams of 2013.

These operators may come with unsolicited offers and deals that are too good to be true. Typical approaches include: offers to seal or repave a driveway, or a roofer who can work cheaply using leftover material from a previous job. BBB warns that fraudulent “contractors” will use high pressure sales tactics and offers of a one-time deal to entice consumers.

The BBB advises that property owners take the time to do due diligence. Property owners should get the company, name, address and ensure that all verbal promises are backed by a written contract. A scammer may ask for pay in cash or via a cheque and offer to come back at another time to finish the job. After cash changes hands, the BBB says, “you will probably never see them or your money again.”

Generally, for the hiring of any contractor, it is advisable for a property owner to check references and ensure that the company or person has a reputation for fair dealing and quality work. This can be good sense when dealing with legitimate contractors, ensuring that you are likely to receive such as on-time and on-budget estimates.

“It could never happen to me”

Perhaps the biggest mistake people make when it comes to scams is to think “it could never happen to me.” It’s a common perception that investment scams are fly-by-night operations that prey on the gullible and operate in dark, unmonitored corners of the economy. That may be often true, but some of the most outrageous scams have operated openly, under regulatory supervision and have swindled the best and brightest.

Bernard L. Madoff Investment Securities, for instance, ran a Ponzi scheme that was regulated by the U.S. Securities and Exchange Commission and swindled corporate luminaries such as DreamWorks’ CEO Jeffrey Katzenberg, New York property developer Larry Silverstein, director Stephen Spielberg as well as global banks and hedge funds. This was a high-profile entity, watched by regulators (though poorly watched) and many of the investors were highly successful and brilliant people.

Closer to home, in 2011-12 there have been more than 20 Alberta-focused property investment firms that have folded or been shuttered resulting in shareholder losses of up to C$20-billion. Many of these firms advertised openly, were licensed by regulators such as the Alberta Securities Commission (ASC) and they offered RRSP-eligible investments. Dozens of lawsuits have been filed against and shareholder groups have formed to seek compensation. It’s up to the courts and regulators to decide on the finer details of each case: some were high-risk ventures that went bust, while others may have used misleading practices, and the ASC has fined others for outright fraud.

What to do if scammed

Federal and provincial law can provide some recourse to Canadians who are victims of a fraud or scam, although losses are almost never made whole and the recovery process can be long and burdensome. For scams involving out-of-country or overseas investments, the recovery of losses may be impossible… and the perpetrators may not be prosecuted.

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

An alternative to a rainy-day fund? The home equity line of credit

2013-08-20T16:21:00.001-07:00

ROBERT McLISTER

Special to The Globe and Mail

Playing down the odds of a financial crisis is like tempting fate. Financial adversity can strike when we least expect it. If it does, and you can’t make ends meet, having a backup fund can keep you afloat.

Common wisdom suggests squirrelling away three months of living expenses in an emergency fund, like a tax-free savings account. The problem is, safety and liquidity come with a price – dismal returns.

Today’s insured savings accounts pay just 1.9 per cent or less. That sort of gain doesn’t thrill many people. So, many folks use home equity lines of credit (HELOCs) as emergency fund substitutes.

HELOCs are available to homeowners with at least 20 per cent equity and good qualifications (provable steady income, a reasonable debt ratio, a solid credit score, a marketable property, and so on).

If you qualify, you can find HELOCs today at 3.50 per cent interest. (You don’t pay interest unless you borrow from them, of course.)

HELOCs offer one potential benefit versus a plain-Jane contingency fund. They provide a backup funding source if times go bad. That lets you invest your TFSA money in higher returning (and presumably higher risk) assets. Instead of a 2-per-cent return in “high-interest” savings (a paltry yield that barely keeps pace with inflation), it may be possible to earn 5 per cent or more in diversified dividend-paying mutual funds.

Currently, only 17 per cent of Canadian households have a HELOC, suggest data from the Canadian Association of Accredited Mortgage Professionals. This number could eventually rise if more people start using HELOCs as backups and move their languishing cash to higher-yielding investments.

But turning a HELOC into a safety net doesn’t make sense for everyone.

When to use a HELOC rather than an emergency fund:

You’re risk tolerant and have a long time horizon until retirement, and/or
You want to funnel all available cash toward paying off higher-interest debt, and/or
You want to use your cash to make a mortgage repayment (assuming the rate is sufficiently higher than your TFSA), and
You have a stable job and other investments that you can tap in a worst-case scenario.

When not to use a HELOC in place of an emergency fund:

You’re an undisciplined saver and prone to overspending with credit, and/or
The odds of your having an “emergency” are high, and/or
You don’t have perfect credit, or
You don’t have a stable job, or
You’d likely hold the balance for an extended period, or
You’d likely have trouble making the minimum HELOC payment.

In this latter case, missed HELOC payments could lead to foreclosure and put you out on the street. Albeit, you might be able to borrow from the HELOC to make your HELOC payments (a bad situation made worse).

There’s also another risk with a HELOC. If a lender cuts back on your credit line, your emergency resource could disappear. A lender might do that, for example, if you’ve racked up credit and keep making only minimum repayments, or if a lender determines that your home value has plunged.

Many of these risks are low probability events. But if you truly want 100 per cent assurance in an emergency, “rely on your cash, not a HELOC,” says money manager Adrian Mastracci of KCM Wealth Management. “To me, it’s more important to take care of emergencies, not the investing.”

That said, Mr. Mastracci offers an alternative for long-term investors who are financially stable, risk-tolerant and creditworthy: Get a risk-free TFSA for emergencies, and borrow from a HELOC (or mortgage if preferable) to invest in unregistered investments yielding 5 per cent or more. This strategy assumes the loan interest is tax deductible.

If you do sign up for a new HELOC, try to find a lender that waives the setup (legal and appraisal) cost. They’re out there. Just keep in mind you’ll often pay those fees if you later switch your HELOC to another lender, whereas you typically don’t when transferring a regular mortgage.

When all is said and done, certain people simply prefer a cash rainy-day fund to a HELOC. It makes them feel more financially sound. And that’s perfectly fine when we’re talking about the equivalent of just three months of expenses. Sometimes financial decisions are about more than risk and return.

Robert McLister is the editor of CanadianMortgageTrends.com

Is that house really affordable? A reality check for first-time buyers

2013-08-20T16:19:00.000-07:00

Rob Carrick

The Globe and Mail

A year in the life of Canadian households:

Spending on water and sewer bills up 2.7 per cent.
Spending on natural gas for home heating up 3.9 per cent.
Spending on electricity up 4.8 per cent.
Spending on cellphone services up 10.7 per cent.

First-time homebuyers, study these numbers because they’re your future. When you own a home, your costs move ever higher over the years. That’s why you have to consider not only affordability today, but also in the year ahead.

When you buy a first home, you know the cost of your mortgage and property taxes before you move in. But the broader range of costs is unknown by most buyers, and so is the likely rate of increase on these costs from year to year. I created a Google spreadsheet to show the basic costs of owning – you’ll find a link to it in this column from back in May. Now, let’s look at how these costs might increase from year to year.

One way to estimate how much more you’ll spend is to look at the inflation rate, which was most recently pegged at 1.2 per cent on a year-over-year basis. Another is to look at how much more actual people are paying to run their homes and live their lives. A source of this data is Statistics Canada’s survey of household spending, which looks at expenditures both major (food and home maintenance) and minor (pet food and spending on movies). The freshest numbers were issued earlier this year and they cover 2010 and 2011.

To set the stage, average hourly wage increases have been running at about 2 per cent lately on a year-over-year basis. You’re ahead of the official inflation rate at that level, but what about the specific costs of owning a home?

Total household expenditures were up 3.1 per cent in 2011, but spending didn’t rise in all areas. For example, households spent 1.8 per cent less on food purchased at grocery stores, 2.7 per cent less on clothing and 2.2 per cent less on household cleaning supplies. In any given year, you will get some spending breaks as a homeowner.

More often, costs will rise from year to year. In 2011, Canadian households paid more for most utilities, notably cellphone service and Internet. Spending on property taxes rose 2.7 per cent, while home maintenance and repair spending jumped almost 7 per cent and home insurance spending rose 5 per cent. After the flooding this summer in Alberta and Toronto, you can count on more big home insurance premium hikes in the year ahead.

The survey of household spending represents the experience of just one year compared with another, but as a long-time homeowner I can tell you it’s on the money. So don’t hesitate to use the 3-per-cent overall increase in total household spending from 2010 to 2011 as a guide on what to expect from here on. Note: Financial planners often use 3 per cent as a long-term estimate of inflation. No savvy planner would use the latest 1.2 per cent rate because it reflects the unusual financial conditions of the past few years.

The most unpredictable factor in household spending is unfortunately the most important – mortgage costs. Check out what’s happened as a result of the half-a-percentage-point increase in five-year fixed mortgage rates earlier this summer. On a house with a mortgage balance of $350,000, the rise in rates would have bumped up the cost of monthly payments by 5.5 per cent, if you assume a 5-per-cent down payment and a rise in mortgage rates to 3.39 per cent from 2.89 per cent.

The average posted five-year mortgage rate over the past decade was about 6 per cent. You can cut that down to 4.25 to 4.5 per cent to factor in today’s rate discounting trends, but you’re still looking at a major cost increase over today’s rates. On that $350,000 mortgage, the jump from 3.39 to 4.25 per cent would increase payments by 9.4 per cent.

Recent trends in pay increases suggest you shouldn’t count on big pay increases to soak up the cost of higher mortgage rates and household costs down the road. This makes it imperative to buy less house than you can afford now, ideally much less. Cut yourself some slack.

For more personal finance coverage, follow Rob Carrick on Twitter (@rcarrick)

Rising rates creating increasing dilemma for homeowners

2013-08-19T16:49:00.003-07:00

Garry Marr
Financial Post

The interest rate dilemma has arrived again for homeowners.

What once was a no-brainer decision, locking in your mortgage rate for five years or even 10 years, now has a question mark attached to it.
Blame the U.S. federal reserve for easing up on its bond buying program. Bond rates have climbed fast and mortgage rates are just following.

Variable rate mortgages, which track prime and are vulnerable to Bank of Canada decisions, are still being offered at about 2.6% for five years. But instead of competing with a 3% fixed rate five-year close mortgage, the competition is a 3.5% product.

It may be just 90 basis points but on a $500,000 mortgage, that’s not small change. Based on a 25-year amortization and $500,000 mortgage, the 2.6% variable would mean monthly payments of $2268.35 and about $60,000 in interest on a five-year term.

The 3.5% product means a monthly payment of $2496.36 and about $81,000 in interest over the term.

Once again it’s the first-time buyer, who is on the edge of being able to crack this market, squeezed out.

“It’s hurting them but also benefiting the rental market,” said Benjamin Tal, deputy chief economist with CIBC Markets.

Mr. Tal said the surge in the housing market we are seeing happens every time there is a fear of rising rates — consumers try to get into the market before it’s too late.

“I’m hearing a lot about people trying to blend and extend,” said Mr. Tal. Under that scenario, consumers contact their bank before their mortgage is due, hoping to extend their current loan at today’s still historically low rates.

If anything, the gap might widen between rates for short-term and long-term mortgages, after being historically low. “It means sensitivity to interest rates will rise because people will go to what is affordable,” said Mr. Tal.

None of this will likely make Jim Flaherty, the finance minister, happy. His government has gone to great lengths to slow the market and wants people locked into long-term mortgages so they don’t face the shock of suddenly rising rates.

What has gone on is the discounting has shrunk. It’s absolutely sneaky and it’s done on purpose

One of Ottawa’s subtle rules changes was to allow consumers to qualify for a loan based on the rate on their contract as long as they agreed to lock in for five years or longer. If you go with a variable rate, you must qualify for a loan based on the much higher 5.14% posted rate for a five-year fixed closed mortgage.

The Canadian Association of Accredited Mortgage Professionals found that in 2012, 79% of new mortgages were for a locked-in product, 10% for variable and 11% a combination of the two. Ottawa’s rule changes had an impact on those numbers but so did the deal of a lifetime on a five-year mortgage.

Jim Murphy, chief executive of CAAMP, wonders about what the impact of higher rates will be for new buyers when stacked on top of tougher rules.

His groups pointed out this month that sales for homes under $400,000 in the greater Toronto area were down 18% in May from a year ago. For homes priced above that level, sales were down just 5%.

“All of these changes have impacted the first-time buyer,” said Mr. Murphy. “Now we are seeing rising rates and that will have an impact too.”

Vince Gaetano, a principal at monstermortgage.ca, said the gap has become wide enough to convince him to go variable now.

Strangely enough, banks have not moved quickly to change their 5.14% posted rate — the percentage nobody actually accepts but which everybody qualifies based on.

“What has gone on is the discounting has shrunk. It’s absolutely sneaky and it’s done on purpose because they don’t want to move people away from not qualifying at all,” said Mr. Gaetano.

Another reason the banks don’t want to change the posted rate is it’s used to calculate any penalty on your mortgage. A higher posted rate would shrink your penalty, said Mr. Gaetano.

“It’s a very cleaver way for the banks to keep the handcuffs on people,” he says. “I still see people just break their mortgages outright. Variable is attractive too because of all the games banks play with breaking mortgages and penalties. With a variable mortgage, it’s three-months straight and simple.”

Canada’s housing market: The one that no one can predict

2013-08-18T19:51:00.000-07:00

Garry Marr
More from Garry Marr

Another month of housing data is guaranteed to produce one thing: more arguments about where the market is going.

Statistics from the Ottawa-based Canadian Real Estate Association show actual July sales were up 9.4% from a year ago while average sale price nationwide rose 8.4% to $382,373 during the same period.

Given the housing market seemed to be sliding just a few months ago, the question is where is it headed next? At stake is further federal government intervention, something Ottawa seemed to do this month as Canada Mortgage and Housing Corp. tightened some mortgage lending rules.

On one side of the divide you’ve got the real estate community with people like Phil Soper, chief executive of Royal LePage Real Estate Services, saying improved results for sales and prices in July are not all that dramatic by historical standards.

Their opponents are the housing naysayers like David Madani of Capital Economics who has been calling for a housing pullback since February 2011 and portrays the recent bump in sales as a last gasp before the market cools for the rest of 2013.

Mr. Soper said people have been predicting the market was going to fall going back to 2008. “It is as believable as the prediction from Capital Economics that home prices are going to fall by 25%. They just keep rolling out the same forecast year after year,” he said. “They try desperately to come up with a new reason [for the market to fail] — and now it’s because interest rates are going up.”

The real estate executive says July sales statistics from a historical standard were “tepid” and adds the numbers gets “the big headline” because the comparison is to a period when housing sales were slumping badly.

As for the idea that consumers rushed into the market to beat rising mortgage rates, Mr. Soper says consumers have been hearing that rates are going up for too long and are now immune to the chatter. A five-year fixed rate closed mortgage had dipped as low as 2.99% this year but that same product is around 3.59% today.

For his part, Mr. Madani says even a minor move in mortgage rates can have dramatic impact on the market because marginal home buyers are sensitive to even moderate changes in monthly payments. He adds new home sales have been slumping because consumers want to get into their property right away so they can secure immediate financing and not wait up to a year for a low rise home to be completed.

“[The market] has only pulled forward sales that would have happened later in the year,” said Mr. Madani.

He adds people who claim his call on the market is wrong will have to be patient. “Yeah, we’ve pushed the timeline out a bit,” said Mr. Madani, acknowledging his original call was made about 30 months ago. “We are dealing with something involving irrational exuberance, beyond the scope of any economic forecasting model.”

We are dealing with something involving irrational exuberance

While other economists are not as bearish, they do see a moderating market. Sonya Gulati, senior economist at Toronto-Dominion Bank, says higher rates will limit sales increases but she still sees gains for 2014.

“Price growth ought to see some weakness in 2014, as the supply of new and resale homes creep up,” she said. She notes the industry’s aggregate MLS home price measure, which is less distorted by the composition of sales for a given month, shows July prices were up only 2.7% year over year.

Robert Hogue, senior economist at Royal Bank of Canada, struck a similar tone. “Fairly brisk July resale activity — matching the 10-year average — effectively confirmed that the recent months’ strengthening trend was no fluke and that last year’s slowing was not the prelude to a major correction,” said Mr. Hogue, who nevertheless sees a small decline in sales for 2014.

Meanwhile, CREA says the latest data just shows the market is leveling off a bit and sales activity is really just average at this point.

“Canadian home sales have staged a bit of a recovery in recent months after having declined in the wake of tightened mortgage rules and lending guidelines last year,” said Gregory Klump, chief economist with CREA, who expects August results will also look strong as they are compared to a weak 2012.

Strong home sales in Vancouver, Toronto suggest market stabilizing

2013-08-18T19:48:00.004-07:00

Julian Beltrame, Canadian Press
More from Canadian Press

OTTAWA — Homes were selling at a brisk pace in Vancouver and Toronto last month, while the national average price continued to rise, suggesting Canada’s real estate industry has returned to “average levels” after a decline that began last summer.

The Canadian Real Estate Association’s report on activity for July showed resales edging up 0.2% from June on a seasonally adjusted basis and up 9.4% from July 2012, when tighter rules put the brakes on lenders and buyers.

Despite the recent uptick, the total of 284,865 homes that traded hands in the first seven months of 2013, is 4.6% fewer than the corresponding period last year.

“Canadian home sales have staged a bit of a recovery in recent months after having declined in the wake of tightened mortgage rules and lending guidelines last year, but the numbers for July suggest that national activity is levelling off at what might best be described as average levels,” said Gregory Klump, the real estate association’s chief economist.

The national average home price was $382,373, 8.4% higher than a year ago, although Klump said that was mostly because sales were concentrated in expensive major markets.

Excluding sales in Toronto and Vancouver, the national average price would have gone up only half as much and sales volume would have been down from June, the CREA report notes.

Vancouver had a 12% increase in sales in July relative to June and a 39.9% increase from the same month last year, while Toronto’s sales were up 4.8% month-month and up 12.9% year-year.

Bank of Montreal chief economist Doug Porter added that the numbers may also have been inflated by the fact there were five Mondays and Tuesdays during July, traditionally two big days for closing real estate deals.

“The big picture is that the market has proven to be reasonably resilient, but I don’t think it is taking off again in a meaningful way,” Porter said.

He said the July numbers may have been boosted by fence-sitters jumping into the market after mortgage rates rose in June.

“So it’s debatable whether the strength will persist.”

David Madani of Capital Economics — who has previously warned he expects a major contraction at some time in the future — believes many Canadians have pulled forward their home purchases in expectations mortgage rates will rise in future months.

While many economists and industry watchers have said the Canadian housing market was likely to cool for a time after several years of heated sales and above-average price increases, relatively few have predicted a severe decline.

“Higher mortgage rates of late have led to some erosion in affordability … (and) this should keep a lid on sales growth in the second half of the year,” agreed senior economist Sonya Gulati of TD Bank in a note to clients. “But positive annual sales gains are slated for 2014.”

Canada Mortgage and Housing Corp. reported separately Thursday that the western provinces are helping stabilize construction activity and momentum will build into next year.

However, CMHC has lowered its previous estimate for 2014 to about 186,600 units, down 2,300 units from the June estimate of 188,900.

The Ottawa-based government agency is now estimating that between 177,100 and 188,500 housing units will be started this year.

That’s about 182,800 units at the mid-point, down from 214,827 housing starts last year but about the same as in the previous forecast issued in June.

“As fundamentals, including employment, economic growth and net migration, are expected to gain momentum later in 2013 and in 2014, housing starts will trend slightly higher next year,” according to the CMHC report.

“CMHC expects single-detached units and housing units built in the western provinces to account for a higher share of total housing starts over the forecast horizon,” said Mathieu Laberge, CMHC’s deputy chief economist.

Bank of Canada Governor Stephen Poloz has said the country must shift from growth driven by record consumer debt and homebuilding to business investment and exports. Housing continues to show strength, leading CMHC to say Aug. 6 it would ration mortgage-backed security guarantees after demand approached its $85-billion cap.

With a file from Bloomberg

Popular financial advice that might be best to ignore

2013-08-16T09:00:00.000-07:00

Linda Stern
The Globe and Mail

Some financial advice is so oft-repeated that everyone takes it for granted: You shouldn’t bring debt into retirement. Debit cards are safer than credit cards. Older folks should invest more conservatively. As they used to say on Seinfeld: yadda, yadda, yadda.

The problem is a lot of that is bad advice. At best, it fit a bygone era; at worst, it was never right and is dangerous.

Here is a list of my least favourite financial chestnuts.

“Don’t take a mortgage into retirement with you.”

That may have made sense when interest rates were high but, even after recent hikes, mortgage rates are still close to their historic lows. Anyone who refinanced in recent years is probably paying less for that money than they will on any other loan they could get now or ever again in the future.

Instead of making extra payments to burn the mortgage early, stash those extra dollars in a retirement investment account. Invested prudently, it’s hard to believe that money wouldn’t earn you more than the 3 or 4 per cent you’re paying in mortgage interest.

Having the cash on hand, instead of the paid-up mortgage, could help with retirement expenses down the road when you’re not ready to sell your house but have unexpected expenses. If you think you want to stay in your house through your dotage, paying off a low-rate mortgage slowly while you bank money is a much better solution than paying it off now and finding you need a costly reverse mortgage in the future.

“The older you get, the less you should have invested in the stock market.”

Sixty may not be the new 30, but it isn’t the old 60 either. If you thought you had to withdraw all of your money on the day you retired, you’d have to keep it safe and invested in guaranteed instruments like bank certificates of deposit (issued in the U.S.). If those CDs were paying 11 per cent a year in interest, as they were in the early 1980s, there would be no need to invest in anything else.

Now, depositors are lucky when they don’t have to pay the bank to hold their money. Bond yields are near historic lows and also present the risk that investors will lose value if interest rates rise while they are holding bonds. Furthermore, the average 60-year-old is told to prepare for a retirement that will last 25 or 30 years, so she has some time to invest for the long term. Even if you’re 90, if you plan to leave money to heirs, you aren’t investing for the short term.

With that long a time horizon, you need to keep money invested in stocks, which, over time, still outperform other investments. Large company stocks returned just a shade under 10 per cent a year between 1970 and 2012, a period that covers several market meltdowns.

The old rule of thumb – 100 (or 120) minus your age is the percentage you should keep in stocks – is too conservative for this era.

“A debit card is safer than a credit card.”

That’s only true if “safer” is code for “will protect you from yourself if you’re profligate.” If you have the discipline to charge only what you can afford to pay off, you can’t beat a credit card. You’ll get incentives like cash rewards. If the number gets stolen, your issuer will make you whole. If you lose control of your debit card, your bank is probably going to make you whole, too, but your checking account could be a mess for a while. And you aren’t going to hit overdraft fees with a credit card.

“Be practical about your college major.”

The latest thinking on college is that you shouldn’t spend a lot of money to go get a degree in communications or social work. Maybe that’s true. But don’t change your major to engineering if you really want to be a dancer or a kindergarten teacher. Some of the most successful business professionals studied philosophy (famed Fidelity fund manager Peter Lynch, financier George Soros and ex-TimeWarner head Gerald Levin) or English (Mitt Romney, former Disney head Michael Eisner and National Cancer Institute head Harold Varmus).

Spend less by going to a less expensive college, and follow your bliss.

Six renovations that don’t add value to your home

2013-08-14T07:27:00.001-07:00

Investopedia.com
The Globe and Mail

Every homeowner must pay for routine home maintenance, such as replacing worn-out plumbing components or staining the deck, but some choose to make improvements with the intention of increasing the home's value. Certain projects, such as adding a well thought-out family room - or other functional space - can be a wise investment, as they do add to the value of the home. Other projects, however, allow little opportunity to recover the costs when it's time to sell.

Even though the current homeowner may greatly appreciate the improvement, a buyer could be unimpressed and unwilling to factor the upgrade into the purchase price. Homeowners, therefore, need to be careful with how they choose to spend their money if they are expecting the investment to pay off. Here are six things you think add value to your home, but really don't.

1. Swimming Pools

Swimming pools are one of those things that may be nice to enjoy at your friend's or neighbour's house, but that can be a hassle to have at your own home. Many potential home buyers view swimming pools as dangerous, expensive to maintain and a lawsuit waiting to happen. Families with young children in particular may turn down an otherwise perfect house because of the pool (and the fear of a child going in the pool unsupervised). In fact, a would-be buyer's offer may be contingent on the home seller dismantling an above-ground pool or filling in an in-ground pool.

An in-ground pool costs anywhere from $10,000 to more than $100,000, and additional yearly maintenance expenses need to be considered. That's a significant amount of money that might never be recouped if and when the house is sold.

2. Overbuilding for the Neighborhood

Homeowners may, in an attempt to increase the value of a home, make improvements to the property that unintentionally make the home fall outside of the norm for the neighbourhood. While a large, expensive remodel, such as adding a second story with two bedrooms and a full bath, might make the home more appealing, it will not add significantly to the resale value if the house is in the midst of a neighbourhood of small, one-story homes.

In general, home buyers do not want to pay $250,000 for a house that sits in a neighbourhood with an average sales price of $150,000; the house will seem overpriced even if it is more desirable than the surrounding properties. The buyer will instead look to spend the $250,000 in a $250,000 neighbourhood. The house might be beautiful, but any money spent on overbuilding might be difficult to recover unless the other homes in the neighbourhood follow suit.

3. Extensive Landscaping

Home buyers may appreciate well-maintained or mature landscaping, but don't expect the home's value to increase because of it. A beautiful yard may encourage potential buyers to take a closer look at the property, but will probably not add to the selling price. If a buyer is unable or unwilling to put in the effort to maintain a garden, it will quickly become an eyesore, or the new homeowner might need to pay a qualified gardener to take charge. Either way, many buyers view elaborate landscaping as a burden (even though it might be attractive) and, as a result, are not likely to consider it when placing value on the home.

4. High-End Upgrades

Putting stainless steel appliances in your kitchen or imported tiles in your entryway may do little to increase the value of your home if the bathrooms are still vinyl-floored and the shag carpeting in the bedrooms is leftover from the '60s. Upgrades should be consistent to maintain a similar style and quality throughout the home. A home that has a beautifully remodelled and modern kitchen can be viewed as a work in project if the bathrooms remain functionally obsolete. The remodel, therefore, might not fetch as high a return as if the rest of the home were brought up to the same level. High-quality upgrades generally increase the value of high-end homes, but not necessarily mid-range houses where the upgrade may be inconsistent with the rest of the home.

In addition, specific high-end features such as media rooms with specialized audio, visual or gaming equipment may be appealing to a few prospective buyers, but many potential home buyers would not consider paying more for the home simply because of this additional feature. Chances are that the room would be re-tasked to a more generic living space.

5. Wall-to-Wall Carpeting

While real estate listings may still boast "new carpeting throughout" as a selling point, potential home buyers today may cringe at the idea of having wall-to-wall carpeting. Carpeting is expensive to purchase and install. In addition, there is growing concern over the healthfulness of carpeting due to the amount of chemicals used in its processing and the potential for allergens (a serious concern for families with children). Add to that the probability that the carpet style and colour that you thought was absolutely perfect might not be what someone else had in mind.

Because of these hurdles, wall-to-wall carpet is something on which it's difficult to recoup the costs. Removing carpeting and restoring wood floors is usually a more profitable investment.

6. Invisible Improvements

Invisible improvements are those costly projects that you know make your house a better place to live in, but that nobody else would notice - or likely care about. A new plumbing system or HVAC unit (heating, venting and air conditioning) might be necessary, but don't expect it to recover these costs when it comes time to sell. Many home buyers simply expect these systems to be in good working order and will not pay extra just because you recently installed a new heater. It may be better to think of these improvements in terms of regular maintenance, and not an investment in your home's value.

The Bottom Line

It is difficult to imagine spending thousands of dollars on a home-improvement project that will not be reflected in the home's value when it comes time to sell. There is no simple equation for determining which projects will garner the highest return, or the most bang for your buck. Some of this depends on the local market and even the age and style of the house. Homeowners frequently must choose between an improvement that they would really love to have (the in-ground swimming pool) and one that would prove to be a better investment. A bit of research, or the advice of a qualified real estate professional, can help homeowners avoid costly projects that don't really add value to a home.

Canada's housing market still running hot

2013-08-13T18:28:00.003-07:00

TARA PERKINS - REAL ESTATE REPORTER

The Globe and Mail

The surprising resilience of the country’s housing market is renewing concerns that it could be overshooting.

Housing starts, sales and prices are once again defying expectations, one year after Finance Minister Jim Flaherty shocked the market with tighter mortgage insurance rules. The sector is showing such strength this summer that some economists are wondering whether Mr. Flaherty will go further in a bid to stem rising house prices and consumer debt levels.

“There may be some dusting off of potential measures to cool housing,” Bank of Montreal economist Douglas Porter wrote in a research note. He thinks the market could be on the verge of running away again.

Both Mr. Flaherty and economists will have a better sense of where things stand on Thursday, when the Canadian Real Estate Association releases July’s sales figures. Mr. Porter thinks the data will show that the number of existing homes changing hands is 10 per cent higher than this time last year, which would mean that they are “within striking distance of the record highs hit in 2007.”

July data from some local real estate boards appear to back that assumption. Vancouver, for instance, saw a whopping 40.4-per-cent year-over-year increase in sales of existing homes over the Multiple Listing Service, while Toronto posted a still-impressive 16-per-cent gain. Calgary’s sales were up 17 per cent from last year. (Not all markets are showing gains. Ottawa and Montreal each saw sales fall by about 2 per cent year over year).

Toronto-Dominion Bank economist Diana Petramala says sales have now recovered from the changes that Mr. Flaherty made to the mortgage insurance rules. “In Vancouver, sales have recovered to their highest level since 2010,” she notes.

In addition to the changes that Ottawa made to the rules for consumers, such as cutting the maximum length of an insured mortgage to 25 years and doing away with mortgage insurance for homes worth more than $1-million, Mr. Flaherty has been taking steps to curtail the degree to which Canada Housing and Mortgage Corp., and therefore taxpayers, backstop the banks’ activities. He has been worried that ultralow mortgage rates are adding too much fuel to the housing fire.

It’s possible that the market’s current strength is temporary.

Real estate associations and some economists wonder whether the strong sales in June and July were spurred by mortgage rates ticking up, prompting consumers to jump into the market before they rise further. The special five-year closed rate has risen 60 basis points since mid-June, and “home buyers with a preapproved mortgage are likely jumping into the market to take advantage of record-low interest rates,“ Ms. Petramala wrote in a research note. (A basis point is 1/100th of a percentage point.)

One part of the market that isn’t rebounding yet is newly constructed homes. Sales of new condos in Toronto were down 18 per cent from a year ago in the second-quarter, Urbanation, which tracks the Toronto condo market, said last week. And the amount of residential land that developers bought to build houses and condos fell 51 per cent in Toronto, 30 per cent in Vancouver, and 52 per cent in Calgary during the first half of this year, according to RealNet Canada Inc. Developers continue to build an abundance of new houses and condos, even though TD economist Dina Ignjatovic believes there is an oversupply of 250,000 new homes, roughly one year’s worth, that will hit the market in the next two years.

For now, house prices are on an upward trajectory that could reignite talk of a bubble. “After flirting with outright declines for much of 2012 and earlier this year, average home prices were up almost 5 per cent year over year in June, and we suspect the gain was closer to 6 per cent for July, the fastest pace in almost two years,” Mr. Porter wrote.

Why CMHC’s Latest Move is Good for Variable-Rate Borrowers

2013-08-12T18:17:00.003-07:00

by Dave Larock

Last week our federal government made another regulatory change as part of its continuing effort to cool real estate markets across the country. This latest tweak caps the amount of mortgage volume that CMHC will guarantee for each lender under its National Housing Act Mortgage-Backed Securities (NHA MBS) program.

First, a little about the NHA MBS program, a somewhat complicated but hugely important securitization vehicle, which has given large Canadian lenders a viable alternative when they exceed their Canada Mortgage Bond (CMB) program allocations.

The NHA MBS program is important because lending is a spread business, meaning that lenders derive their profit from the difference, or spread, between the rate they have to pay investors for the use of their money and the rate of interest they charge borrowers when they lend that same money out as mortgages. The cheaper a lender’s cost of capital, the more flexibility they have either to book higher profits or to pass on lower rates to borrowers.

Mortgages that are sold into the NHA MBS program are secured against default by the full faith and credit of our federal government, making them pretty much bullet proof. As such, investors are willing to accept yields that are lower than they would be without this guarantee.

Back to the most recent change. The federal government (through CMHC) announced that it is now limiting the dollar amount of new NHA MBS guarantees that it will offer to each lender to $350 million this month. More importantly, it has also made it clear that it will continue to enforce limits on these guarantees in future.

Many lenders can fund their entire mortgage portfolio under their Canada Mortgage Bond (CMB) program allocation, a preferable alternative because using the CMB is cheaper than funding mortgages through the NHA MBS program. But larger lenders regularly exceed their CMB limits and since 2001, they have mostly relied on the NHA MBS program when they run out of CMB room. As such, this change will primarily impact Canada’s largest lenders who will now have to incur higher funding costs when their NHA MBS allocations run out. Since any alternative funding mechanisms will be more expensive, by an estimated 0.20% to 0.30%, those costs may well be passed on to end-consumers in the form of slightly higher mortgage rates.

Although higher rates are never happy news in my business, I support this move. The Bank of Canada (BoC) has long identified our rising household debt levels as the greatest domestic threat to our economy and the federal government has been trying to moderate our residential real estate markets for years. Our choice is to either continue applying the liquidity brakes until we engineer a controlled slowdown in real estate price appreciation, or to ignore all warning signs and charge full steam ahead while hoping for the best. We saw what ignorant bliss caused in the US and I believe that our regulator is acting intelligently and responsibly under our current market conditions.

When you think about it, the NHA MBS program essentially gives large lenders a form of government stimulus by lowering their cost of capital and increasing their liquidity and it’s hard to argue that our real estate markets need any more stimulus at this point. The NHA MBS program has already doubled in size since the start of the financial crisis in 2007, so it’s not as though our real estate markets haven’t benefitted from this program. No long-term good could result from allowing this program to continue growing exponentially. As I have written many times before when supporting the federal government’s somewhat unpopular regulatory changes, it is better to suffer some short-term pain to avoid a longer-term crisis.

Two final thoughts about my support for this change. First, since guarantees by the federal government are ultimately backstopped by all Canadian taxpayers, the NHA MBS was really assigning a risk to all Canadians in order to create a benefit (cheaper mortgage rates) for only a subset of Canadians (home owners). Second, if lenders are allowed to rely indefinitely on ironclad government protection against credit losses, it’s easy to imagine that lenders might unduly increase their tolerance for risk when they are placing an increasing proportion of their bets with someone else’s money. This phenomenon is commonly referred to as “moral hazard”. In that light, limiting the future growth of the NHA MBS program seems to be an entirely reasonable decision.
Now for some good news.

The BoC has consistently warned that it would raise its overnight rate, on which variable-rate mortgages are priced, to slow the rise in household borrowing levels. I have long argued that this was an empty threat because it would inflict too much collateral damage on other areas of our still fragile economy. Instead, I predicted that our federal government would continue to apply increased regulations.

This latest change provides further confirmation that the BoC is unlikely to raise its overnight rate for any reason other than that our economic fundamentals demand it. For example, when we have 2%+ GDP growth, 2%+ inflation, consistent and healthy job creation, etc.

Given the current state of our economy, that day still appears to be a long way off and that is very good news for variable-rate mortgage borrowers.

GoC five-year bond yields rose one basis point last week, closing at 1.76% on Friday. The range of available five-year fixed rates tightened a little as well, with most offerings now between 3.29% and 3.39%. The federal government’s decision to limit the growth of its NHA MBS in future will create higher costs for some, but not all lenders. Given that, working with an independent mortgage planner who has access to a wide range of lenders will help you find the lenders who are least affected in the here and now by this change.

Five-year variable-rate discounts shrank a little last week, with the best available discount dropping from prime minus 0.60% to prime minus 0.55% (which works out to 2.45% using today’s prime rate). Despite this, I still believe that the variable rate is a compelling option in today’s interest-rate environment, and on the flipside, my best available five-year variable rate now comes with more favourable terms and conditions (which you can read about in my latest Deal of the Week).

The Bottom Line: The federal government’s decision to limit the growth of its NHA MBS program will create slightly higher costs for some lenders but nonetheless, is a prudent change designed to protect the long-term stability of our real estate markets. This latest change also confirms that our federal government believes that regulatory changes, not tighter monetary policy by the BoC, are the best way to counteract the housing-bubble risk, and as such, further reduces the risk that variable rates will rise for the foreseeable future.

David Larock is an independent full-time mortgage planner and industry insider. Dave

Top 6 real estate scams – and how to avoid them

2013-08-09T18:00:00.001-07:00

Christopher Myrick

Special to The Globe and Mail

Fraud and investment scams abound at all levels of the real estate market – whether it be a contractor who charges hundreds of dollars for work not done to an “investment agent” who embezzles hundreds of millions – protecting yourself can require a measure of vigilance and legwork, but it can also come down to exercising skepticism and common sense.

1. Title fraud.

Although relatively rare, one of the most devastating frauds for property owners is title fraud. This type of fraud starts with identity theft. The scammer will use false documents to pose as the property owner, registers forged documents transferring a property to his or her name, and then gets a new mortgage against the property. After securing a mortgage or line of credit, the criminal takes the cash and leaves the owner on the hook for future payments.

While an identity thief may get a forced discharge of an existing mortgage, it is generally held that fraudsters are more likely to go after homes that are free and clear of mortgages: these have fewer complications and they tend to be held by older people who may be less aware about how to guard against identity theft. Criminal Services Intelligence Canada notes that homeowners who rent out their homes or who have no existing mortgages on high-value properties are more vulnerable to being targeted in title-fraud schemes as a large mortgage can be secured with the property.

Sale of a fraudulently held property may also occur, but it is much rarer as potential buyers are unlikely to consider a purchase without inspecting a property.

“Title insurance” is the best protection against this type of fraud. As well as protecting against title fraud, it also guards a new owner from against existing liens against a property’s title (such as unpaid debts from utilities, mortgages and unpaid property taxes), encroachment issues (a structure on a property needs to be removed because it is on your neighbour’s property) and errors in surveys and public records.

The other key to prevent being a victim is to engage in protection of personal data (see box). Taking precautions can also mitigate against more common types of identity theft –related losses (such as credit card fraud. As well as protecting their own information, investors and homeowners should ensure that trusted parties are taking proper security measures.

Canada’s Office of the Privacy Commissioner of Canada (OPC) launched a probe in 2009 after mortgage brokerages reported 14 data breaches in the space of a few months. Among the OPC’s findings: some brokers stacked files containing personal information on the floor or on desks within accessible offices; brokers lacked shredders capable of securely destroying documents; credit reports were sometimes obtained prior to consent from a client being recorded and there was no ability for clients to opt out of secondary uses of their personal information, such as marketing; there was a lack of training about privacy responsibilities.

In addition to title fraud by strangers, there have been cases where fraud has been perpetrated by spouses and business partners. For instance, one spouse may mortgage a property for their own benefit by using an accomplice to impersonate their spouse. Fraud can also occur through breach of an undertaking, where the lawyer or notary fails to pay off and obtain a discharge of a mortgage, instead absconding with the funds that had been intended to be used to pay an existing mortgage.

2. Foreclosure and home-equity fraud.

Criminals and criminal enterprises can take advantage of property owners who find themselves in a cash crunch, being short on funds for liabilities such as mortgage payments or other purposes. Two common scams that exploit a victim’s need for cash are foreclosure fraud and home-equity fraud.

The Financial Consumer Agency of Canada (FCAC) warns that foreclosure fraud occurs when a property owner who is having difficulty making mortgage payments is approached by a criminal offering a loan to cover expenses and consolidate loans, in exchange for upfront fees and an agreement to transfer the property title. However, in contrast to real debt consolidation programs, the FCAC says, the criminal will keep all the payments made by the owner and ignore bills and taxes. The criminal then remortgages the property and absconds with the money, leaving the former property owner without the home but still in debt.

Cash-crunched property owners or investors seeking can be vulnerable to other scams or unscrupulous behaviour to tap equity. There is always risk when leveraging properties, but a legitimate bank, broker or private lender should be forthright when explaining risks. However, those looking to borrow on equity should be alert for less scrupulous lenders, such as those who invite owners to embellish their application by exaggerating income, down payment or property assessment value sources in order to secure a larger loan.

CSIC has noted that organized crime groups often pretend they are buying or selling properties that are much larger, newer or more recently renovated than other homes in the area. These properties receive fraudulently inflated values through illicit property flipping from which a large mortgage is obtained. When the criminals deliberately default on the mortgage, financial institutions and end buyers are left with an overvalued mortgage (or worse, former property owners are without holdings, in debt and possibly implicated in the fraud).

Criminal activity can also be in the form of money laundering, a process where dirty money from criminal activity is transformed into “clean” assets. Financial Transactions and Reports Analysis Centre of Canada (FINTRACT), the agency responsible for tracking money laundering, warns that criminal or terrorist groups will purchase big-ticket items such as real estate for laundering purposes. FINTRACT requires that real estate brokers, Realtors, developers and others involved in suspicious transactions (such as large all-cash purchases or “buyer unseen” transactions).

3. Online rental/sale scams.

In these scams, rental property is advertised (usually at low costs) on online classified sites like Craigslist or Kijiji. The ads use information and photos describing the property that has been “scraped” from legitimate ads, such as those on the MLS. A scammer will impersonate the landlord, property manager or estate agent and will respond to emails and calls from prospective tenants. The scammer indicates he or she is unable to meet a prospective renter at the property, and instead proposes a meeting off site to exchange keys, sign a tenancy agreement and collect rental deposits. Victims may only learn they’ve been duped when they show up at a property to discover that it is already occupied.

Provincial and regional Realtor and real estate associations have warned members to be alert for this type of fraud, which has been common in major markets, but there is little a property owner can do to prevent image or data scraping. Property owners can search for the addresses of their units on search engines and they can use services like Google Image Search to help discover if a scraped picture from MLS or another online source is being used illicitly. Property owners should also digitally watermark any photos they use in rental ads, including business contact details and website.

While rental scams are common, online classified advertising and social media have also been used for investment scams and property fraud. Things to be alert for in such listings include claims of urgency, such as “must sell now,” promises of high returns or “low-cost/no-cost” financing. These sort of claims are usually too good to be true, and they also can be prevalent in off-line scams.

4. Property investment seminars and courses.

Educating yourself about property investment can be essential for success, but prospective investors should be alert and do their research on seminar providers. There are legitimate speakers and seminars that provide beneficial information, others exist primarily to take money from the credulous … and there are some that are in between.

Prospective investors should be cautious when it comes to seminars or courses that offer investor education. The value of the information provided can vary wildly, as can the costs. Some may be free, with sponsorship by a company or association, others will charge money, ranging from nominal amounts to upwards of tens of thousands of dollars. Still, even if someone pays for a course that provides basic information that could be found through a simple Internet search, it does not mean that the seminar was a scam. A rip-off may charge excessive prices but be completely illegal, but a scam typically involves legal wrongdoing, misrepresentation or fraud.

One common type of seminar is designed to hook buyers into “sure-fire” investments that are promoted by the seminar hosts. Potential investors may be invited to these seminars through an ad in a newspaper or magazine, a phone call, an email or other method. These seminars may include a motivational speaker, an “investment expert” or a “self-made millionaire.”

Some seminars may make money by charging attendance fees, selling highly priced reports or books and selling property and investments through high-pressure sales tactics. Real estate investment companies holding the seminars may suggest attendees follow high-risk investment strategies, such as borrowing huge sums of money, to buy into an investment offered by the seminar hosts.

Some companies have been known to fly prospective investors to view real estate developments. This could be a tactic to pressure commitment to a deal without time to obtain independent information or advice. Investors sometimes end up having to pay for their travel and accommodation if no investment is made.

The relatively booming market in Alberta has been a hotspot for these scams, and the Alberta Security Commission has issued a list of “red flags” to look out for when approaching a property investment seminar (see box). The basic advice, be skeptical of claims and do your due diligence before committing any money to an expensive course or investment.

5.Home Improvement scams.

As well as being cautious about big investments, property owners should be alert to smaller-level scams. The Canadian Council of Better Business Bureaus listed “rogue door-to-door contractors” as among their top 10 scams of 2013.

These operators may come with unsolicited offers and deals that are too good to be true. Typical approaches include: offers to seal or repave a driveway, or a roofer who can work cheaply using leftover material from a previous job. BBB warns that fraudulent “contractors” will use high pressure sales tactics and offers of a one-time deal to entice consumers.

The BBB advises that property owners take the time to do due diligence. Property owners should get the company, name, address and ensure that all verbal promises are backed by a written contract. A scammer may ask for pay in cash or via a cheque and offer to come back at another time to finish the job. After cash changes hands, the BBB says, “you will probably never see them or your money again.”

Generally, for the hiring of any contractor, it is advisable for a property owner to check references and ensure that the company or person has a reputation for fair dealing and quality work. This can be good sense when dealing with legitimate contractors, ensuring that you are likely to receive such as on-time and on-budget estimates.

“It could never happen to me”

Perhaps the biggest mistake people make when it comes to scams is to think “it could never happen to me.” It’s a common perception that investment scams are fly-by-night operations that prey on the gullible and operate in dark, unmonitored corners of the economy. That may be often true, but some of the most outrageous scams have operated openly, under regulatory supervision and have swindled the best and brightest.

Bernard L. Madoff Investment Securities, for instance, ran a Ponzi scheme that was regulated by the U.S. Securities and Exchange Commission and swindled corporate luminaries such as DreamWorks’ CEO Jeffrey Katzenberg, New York property developer Larry Silverstein, director Stephen Spielberg as well as global banks and hedge funds. This was a high-profile entity, watched by regulators (though poorly watched) and many of the investors were highly successful and brilliant people.

Closer to home, in 2011-12 there have been more than 20 Alberta-focused property investment firms that have folded or been shuttered resulting in shareholder losses of up to C$20-billion. Many of these firms advertised openly, were licensed by regulators such as the Alberta Securities Commission (ASC) and they offered RRSP-eligible investments. Dozens of lawsuits have been filed against and shareholder groups have formed to seek compensation. It’s up to the courts and regulators to decide on the finer details of each case: some were high-risk ventures that went bust, while others may have used misleading practices, and the ASC has fined others for outright fraud.

What to do if scammed

Federal and provincial law can provide some recourse to Canadians who are victims of a fraud or scam, although losses are almost never made whole and the recovery process can be long and burdensome. For scams involving out-of-country or overseas investments, the recovery of losses may be impossible… and the perpetrators may not be prosecuted.

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

Criteria for Purchasing Rental Property

2013-08-09T17:53:00.002-07:00

Written by FrugalTrader

Any real estate investors out there? I started in the whole real estate game when I graduated from University in 2003. My wife and I bought our current primary residence in the summer of 2003, and our first rental property not long after.

Let me just tell you that being a landlord is like having a second job, and not always fun at that! I’ve had to deal with all kinds of tenants – from very good to insanely bad. The type of tenant that you pick to live in your investment will make a world of a difference. Point being – be picky over your tenants.

Anyways, back to the point of the post, my criteria for purchasing rental property. I have some set rules that have to met before I purchase an investment property.

These rules include:

1. The property must be cash flow positive.

Find out what the market rent is for the area, you can typically find this through real estate agents, other real estate investors, or simply by viewing the rental listings in your newspaper.
Subtract this by the expected expenses with the rental property. Some expenses include: Mortgage, property/water tax, insurance, maintenance, vacancy, and property management costs.
Your CASH FLOW must be positive from day one.
If you live in a very expensive housing market and rents don’t cover the mortgage, then I would suggest not becoming a landlord. It simply doesn’t make sense to purchase a property in the “hope” of appreciation. It will only be a matter of time before the property will suck the life out of your own cash flow.

2. Nice neighborhood with low vacancy rates relative to the rest of the city.

From my experience, it is ideal if you own a house in a nicer neighborhood because you can charge higher rents with lower vacancy rates. I have also found that nice houses attract nice tenants.

3. I prefer houses that are in good shape and move in condition.

I’m personally not the handiest of people (getting better), so I would prefer houses that don’t need a lot of work. I don’t mind buying home that need minor cosmetic changes (paint, cleaning etc), but no major work.

4. I prefer to buy houses that are under market value.

You all know that I’m frugal, so I always look for a deal whenever I buy ANYTHING. Housing is no exception.
Ways to find houses under market value – landlords who are sick of being a landlord, houses that need cosmetic work, pre-foreclosures, foreclosures, and listed houses that have been on the market for a while. I could go on and on about this topic, but that is beyond the scope of this article.

For you real estate investors out there, what is your criteria for purchasing investment property?

Read more at http://www.milliondollarjourney.com/criteria-for-purchasing-rental-property.htm#VH10eyh25gYAk5vX.99

House Buyers – Is 20% Down Payment Always Better?

2013-08-08T17:44:00.001-07:00

by Mike Holman
Money Smarts
www.moneysmartsblog.com

In Canada, if you buy a house and have less than a 20% down payment, you have to pay a CMHC (Canada Mortgage and Housing Corporation) fee to insure the mortgage. It should be the goal of all home buyers to have a larger down payment, but it’s not always possible.

One scenario is where someone has enough money to make a 20% down payment and is wondering if they should use all the money for the down payment or put down a smaller down payment and use the extra cash for other things. Another scenario is where a buyer is close to reaching 20% down payment and only has to borrow a small amount of money to reach 20%. Should they do it?

I can think of three examples where a person bought a house with a smaller down payment, even though they had enough money or means (via borrowing) to reach the 20% necessary in order to avoid the CMHC fee. One blogger shall remain nameless, the other person was me (12 years ago) and the third person is a blogger at Moneyville, which is owned by the Toronto Star. I’m going to use Madhavi (the Moneyville blogger) as my example, only because she is the most recent.

Madhavi and her family owned a condo, which they sold and bought a family house. They netted $115,000 from the condo sale and bought a house for $560,000. 20% of $560,000 is $112,000, which means she could have put down a 20% down payment and avoided the CMHC fee.

Instead she decided to use roughly half of the money to pay down debts ( a worthy use ) and only put down a 10% down payment.

The problem with only paying a 10% down payment is that you have to pay the CMHC fee. Does that mean she paid a big fee just to consolidate some unsecured debts?

She mentioned in the article that the CMHC fee was $12,000 including tax. Had she put down $115,000 down, the CMHC fee would have been zero since mortgages with a 20% down payment or higher do not require insurance.

By using a smaller down payment, Madhavi was able to reduce the interest rate on $59,000 of debt. If we’re going to analyze the wisdom of paying a $12,000 fee, we have to include the interest cost benefits as well.

The average interest rate of the unsecured debt that was paid down was not mentioned, but she did say that $45,000 of it had interest rates from 6% to 10%. For argument sake, let’s assume that the average interest rate of all the $59,000 debt she paid off was 4% higher than her mortgage rate.

In other words, she paid $12,000 to decrease the interest rate of $59,000 of debt by 4%.

As to whether this was a good move or not – we have to consider how long she would have taken to pay off the $59,000 of unsecured debt, had she not used part of her down payment money to pay it off.

4% interest on $59,000 for one year is $2,360. If she doesn’t pay the principal down at all – it will take five years for the interest saved to equal the CMCH fee. After that, she will have saved money by using a smaller down payment.

If she would have paid down the $59,000 quick enough to keep the total excess interest (4%) cost below $12,000, then she would have been better using 20% down and avoiding the CMHC fee.

Of course, it’s impossible to know what the future holds, but I would suggest that in Madhavi’s case, it’s likely that paying a smaller down payment and paying the CMCH will have a neutral or positive outcome.

The reason I say that is because if you buy a house when you have a lot of unsecured debt (at least $59,000 in Madhavi’s case) and it appears that the house cost itself is a stretch – I don’t think it’s likely that they would be in a position to pay off extra debt very quickly.

Had they put 20% down and saved the CMHC fee, they would have had higher monthly payments, probably would have taken quite a while to pay down the unsecured debt and would have paid more in extra interest than the CMCH fee cost.

What if I don’t have any or much unsecured debt and have to borrow to reach 20%?

Madhavi bought a house with a huge amount of unsecured debt. I suspect it is more common for people to buy houses who have little or no debt (other than an existing mortgage). For this scenario, the numbers change quite a bit and it is a lot more likely that if you can borrow enough money at a reasonable rate to make the 20% down payment, you will come out ahead.

What if I have the 20% down payment, no debt, but need some money for other things?

If you have the cash for 20% down payment already and little or no debts – it’s a no brainer. You must use the cash for the down payment and then just borrow any money you need for closing costs, furniture etc.

Rising rates creating increasing dilemma for homeowners

2013-08-06T21:24:00.001-07:00

Garry Marr
Financial Post

The interest rate dilemma has arrived again for homeowners.

What once was a no-brainer decision, locking in your mortgage rate for five years or even 10 years, now has a question mark attached to it.

Blame the U.S. federal reserve for easing up on its bond buying program. Bond rates have climbed fast and mortgage rates are just following.

Variable rate mortgages, which track prime and are vulnerable to Bank of Canada decisions, are still being offered at about 2.6% for five years. But instead of competing with a 3% fixed rate five-year close mortgage, the competition is a 3.5% product.

It may be just 90 basis points but on a $500,000 mortgage, that’s not small change. Based on a 25-year amortization and $500,000 mortgage, the 2.6% variable would mean monthly payments of $2268.35 and about $60,000 in interest on a five-year term.

The 3.5% product means a monthly payment of $2496.36 and about $81,000 in interest over the term.
Once again it’s the first-time buyer, who is on the edge of being able to crack this market, squeezed out.

“It’s hurting them but also benefiting the rental market,” said Benjamin Tal, deputy chief economist with CIBC Markets.

Mr. Tal said the surge in the housing market we are seeing happens every time there is a fear of rising rates — consumers try to get into the market before it’s too late.

“I’m hearing a lot about people trying to blend and extend,” said Mr. Tal. Under that scenario, consumers contact their bank before their mortgage is due, hoping to extend their current loan at today’s still historically low rates.

If anything, the gap might widen between rates for short-term and long-term mortgages, after being historically low. “It means sensitivity to interest rates will rise because people will go to what is affordable,” said Mr. Tal.

None of this will likely make Jim Flaherty, the finance minister, happy. His government has gone to great lengths to slow the market and wants people locked into long-term mortgages so they don’t face the shock of suddenly rising rates.

What has gone on is the discounting has shrunk. It’s absolutely sneaky and it’s done on purpose