30 Mar

Home affordability uncertain for many with even small rate hike: report


Posted by: Mike Hattim

The Canadian Press
Globe and Mail

An interest rate hike of 2 per cent would leave four-in-10 Canadians unsure about whether they could afford their homes, according to a new study from the Bank of Montreal.

The survey, compiled for BMO (BMO-T59.27-0.03-0.05%) by Leger Marketing and released Wednesday, found 43 per cent believe an interest hike would either hamper their ability to pay or leave them on unsure footing.

One-in-five Canadians surveyed said a 2 per cent rise would hurt their ability to make mortgage payments, while 23 per cent said they were unsure if a rise would affect them.

The report also found 57 per cent of respondents believe they could still afford their home if interest rates spiked two per cent.

The survey findings come as some of Canada’s biggest banks begin raising variable mortgage rates, even though the Bank of Canada’s overnight interest rate remains unchanged.

That could signal the end of the era of cheap borrowing that has encouraged many Canadians to take on houses they may not have been able to otherwise afford.

BMO anticipates that the Bank of Canada will begin increasing interest rates from the current one per cent next year.

Many in the mortgage industry have recently advised homeowners to take on the previously less-popular variable mortgage rates as interest rates had remained low since the end of the recession, when the Bank of Canada pushed its overnight rate down to an emergency low 0.25 per cent.

But looking ahead, some industry watchers say now is the time to consider switching to lock in longer term rates with shortened amortization periods.

“Our interest rate outlook now projects that fixed mortgage rates will trump variable. While the decision ultimately depends on the individual, the low rate combined with a shorter 25-year amortization will significantly strengthen household financial stability,” said Doug Porter, deputy chief economist at BMO Capital Markets.

In a report issued last week, Mr. Porter and colleague Benjamin Reitzes argued that with the U.S. recovery gathering steam, central bankers on both sides of the border are becoming more comfortable with the economy and less so with historically depressed interest rates.

Already, financial markets have priced in a near 50 per cent chance that Bank of Canada governor Mark Carney will start hiking his one per cent policy setting before the year’s end, they noted.

Both Finance Minister Jim Flaherty and Carney have recently flagged the danger to the economy of Canadians becoming increasingly indebted, mostly through taking advantage of low rates to buy homes or take out home equity loans. Household debt to disposable annual income is above 150 per cent and likely to rise further toward the 160 per cent level that preceded the housing collapse in the U.S., say analysts.

28 Mar

Mortgage rates have nowhere to go but up


Posted by: Mike Hattim

Garry Marr 
Mar 27, 2012

The logic is pretty simple. You hit rock bottom and there is no where else to go but up.

Mortgage rates on terms of five years and 10 years have never been this low. You can go back 50 years and not find a rate of 2.99% from one of the major banks for a fixed-rate product for five years. The 10-year, an almost unheard of length for most Canadians to commit to, has touched down at below 4%.

Even sticking it out with a variable-rate product linked to the prime lending rate still looks pretty good with most major financial institutions offering some type of discount off their 3% floating rate.

Already there are signs rates could be on the increase. The bond market — which mortgage rates are based on — has been rising fast and the big banks say their most recent specials will come to an end this week. But even with a 50 basis point increase, a five-year fixed closed mortgage of 3.5% is almost unheard of historically.

“Everybody is looking at the bottom here and thinking, ‘When are rates going to go up?’” says Kelvin Mangaroo, president of RateSupermarket.ca which produces a monthly forecast from leaders in the mortgage industry.

Even among the experts, few foresaw this price war in the mortgage sector. “With the big banks getting very aggressive again, it took a lot of people by surprise,” said Mr. Mangaroo. “I think people were thinking the status quo would hold for a while.”

He says the last Bank of Canada announcement about the economy had people thinking at some point the overnight lending rate, which impacts the prime lending rate, would go up, but not this year.

“Now that people are thinking of early 2013, that has people talking but really that is just so far out says Mr. Mangaroo. “It’s really just an abstract concept at this point.”

Craig Alexander, chief economist with Toronto-Dominion Bank, says he can understand how there might be some fatigue from consumers hearing about rising rates.

“Unfortunately, we have been saying for years ‘that’s it, rates can’t go any lower than they are today’ and then they are [lower] 12 months later,” Mr. Alexander says.

But this time out, he says, it almost seems impossible that rates on a five-year closed mortgage could go lower than the current 3%. “Short of the Canadian economy going into a recession and causing the Bank of Canada to cut rates back to their all-time low, there really isn’t an environment that would lead to significantly lower mortgage rates,” Mr. Alexander says. “The downside here is extraordinarily limited.”

The real risk for the consumer might be not locking in right now. While no one is expecting the overnight rate to go up anytime soon — discounts off the prime lending rate might even improve if the economic uncertainty calms in some parts of the world — the 50-year-low rates today could become hard to find.

“If the economic forecasters are wrong about the outlook for growth and things turn out better than anticipated, then bond yield will rise, we’ll have a steeper yield curve and higher fixed mortgage rates,” Mr. Alexander says. “You won’t be able to get what is offered today in 12 months time. They could go up half a percentage point or higher.”

In the interim, Gregory Klump, chief economist with Canadian Real Estate Association, says in terms of profitability, there is room for the banks to go lower on rates, but margins for the banks are so thin he doesn’t expect it happen.

“We are not out of the woods yet in terms of a clear picture that growth is going to strengthen,” says Mr. Klump about the catalyst that could drive up bond rates, which would impact mortgage rates. “My own view is growth may well weaken.”

He predicts that any rise in rates will happen slowly, which the housing market would more easily absorb. “I do not expect it,” Mr. Klump says about the type of interest rate shock that could send housing sales tumbling.

Author Garth Turner, a noted pessimist on the fortunes of housing these days, thinks those who want to be in the market for a house should probably be grabbing on to long-term products.

He says the banks know the housing market is already shrinking and are scrambling for a larger share of the mortgage market, something that also allows them to cross-sell other products like RRSPs to consumers.

“The writing is already on the wall, prices will be declining,” Mr. Turner says. “The Bank of Canada will be raising rates.”

A Bank of Canada hike will make variable rates rise fast, and he agrees the present day rates could look very good in a few years. “If you want to be a homeowner, it is an appealing product. Three or fours years from now, these rates could look absurd. I have no problem with being in real estate as long as it’s not the bulk of your net worth. If you are getting into real estate now though and leveraging up, you are going to be unhappy about it,” says Mr. Turner, adding the raising rate environment will hurt sales and prices will follow quickly.

Don Lawby, chief executive of Century 21, says the rate wars going on right now combined with the unusually warm winter have already boosted housing sales, which could leave little demand left for the spring market.

“Interest rates are low and they probably can’t go any lower than they are,” says Mr. Lawby, who thinks there is not much room for housing prices to go higher. “I looked around and say if the local economy stays good, the market can stay good. But these low rates are very key.”

23 Mar

Flaherty criticizes banks’ desire for government mortgage changes


Posted by: Mike Hattim

Postmedia News  Mar 22, 2012
Financial Post

OTTAWA — Finance Minister Jim Flaherty saw irony Thursday in major banks seeking changes to mortgage rules from government, given the control the banks themselves have over the industry.

Flaherty said, however, the possibility of tightening the insured mortgage market — which has been done three times under the current Conservative government — is there. Those decisions, however, result from constant evaluation of the markets.

“I find it a bit odd that some of the bank executives are taking the position that the minister of finance or the government somehow should tell them how to run their business,” Flaherty said during an appearance in Stittsville, Ont., just west of Ottawa.

“We have bank executives in Canada going and saying ‘really, the rules on insured mortgages should be tightened up.’ They must forget that they are actually the ones that issue the mortgages. It’s their market. It’s not my market. They decide what they want to charge in interest rates.

“They’re the ones that make the profits out of this business, so I do find it a bit much when some of the bank executives turn to the government … and say ‘you ought to change the rules and make it tighter.’ It’s very interesting commentary from them.”

Ideally, the finance minister said, the mortgage market will be able to work out its own issues, for which he said he’s already seen positive signs.

“There’s a balance there. The new-housing market produces a lot of jobs in Canada, so there’s a balance that needs to be addressed,” he said. “I’d like the market to correct itself if it can. We’re seeing some evidence of that in the condo market, particularly in Toronto, where there is some softening of the market and that’s a good thing.”

Canada’s household debt-to-income ratio hit a record high of 151.9% last year, largely the result of mortgage borrowing. The ratio dipped slightly in the fourth quarter but at 150.6% was not far off the record.

Since 2008, Mr. Flaherty has lowered the maximum amortization period for new mortgages to 30 years from 40 years, raised minimum down payments required to qualify for government insurance, and required all borrowers to qualify for a five-year fixed-rate mortgage to get insurance.

Also on Thursday, Flaherty said the federal government remains on target to balance the budget in “the medium term” and touted the country’s economic resilience.

Speaking to a group of volunteer firefighters one week before the next federal budget comes down, Flaherty said the government is “on track” to balance the budget and gave some insight as to what the budget will centre on when it is tabled on March 29.

“We will have modest savings-reductions in order to stay on track to a balanced budget in the medium term,” Flaherty said. “More importantly — and this really is the focus of the budget — if you concentrate on the savings, you’re going to miss most of what the budget is about. (It’s) about long-term sustainability for jobs, growth and prosperity, looking at retirement income, making sure our social programs are sustainable in the long-term for Canada.

“We’re coming back down in our deficits — you’ll see the numbers next Thursday. We’ve done very well this year, we’ll do better next year. We keep reducing the deficit and we’ll get to balance in the medium term.”

Flaherty also defended the government’s Economic Action Plan by referring to a number of infrastructure projects across the country, as well as numerous tax credits, including child fitness credits and those linked to volunteer firefighters.

He said that initiative has help keep unemployment down across the country as well, saying that despite the economic downturn, Canada’s unemployment “never went into double digits.”

Flaherty was particularly critical about provincial spending in Ontario and said change is needed in that province to put it in a better fiscal situation.

“What we’ve basically seen in Ontario is eight, almost nine years of spending mismanagement,” he said. “They need to focus in Ontario, and for the good of the country … on the spending side of the ledger and get things under control. What we’ve seen so far from Ontario — and this is disappointing, but not surprising — is this ‘we’re in a lot of trouble … so we’re going to blame Alberta and other Canadian provinces.’

“Next week I suspect they’ll blame … the federal government, despite the fact our transfers to Ontario are up 77 per cent since we took government in 2006. This year, we’ll transfer $19.2 billion to the government of Ontario, so I forewarn you about that, that we’ll see this ‘blame everyone else, and don’t look in the mirror’ (attitude).”

21 Mar

How Canadians can boost home value through renovation


Posted by: Mike Hattim

By Gail Johnson | Insight

With the popularity of home-decorating shows like Trading Places soaring, suddenly everyone’s an interior designer. But from a real expert’s point of view, where are home-owners’ renovation dollars best spent?

“Kitchens and bathrooms are the best place to start,” says Toronto’s Howie Track, owner of Traxel Construction, which specializes in high-end residential and commercial renovation and construction. “Kitchens and bathrooms are the first places people look, and if a new buyer sees that the kitchens and bathrooms have been done, then there’s less for them to do.”

Figures from the Appraisal Institute of Canada support Track’s claim. According to the Ottawa-based property-valuation association, bathroom and kitchen renovations continue to be the most popular on the list of perennial home improvements, with a recovery rate of between 75 and 100 percent.

The organization defines “recovery rate” as the likely increase in a home’s resale value that could be attributed to a renovation. If a $10,000 renovation increases a home value by $6,000, for example, the recovery rate is 60 percent.

Landscaping vies for top spot too, according to Track. “If you can wow potential buyers with some curb appeal and the kitchen or bathrooms have also been done, then selling will be that much easier,” he says.

When it comes to renovating older homes, Track suggests updating wiring and plumbing. “Most knowledgeable home buyers will see this as a definite bonus. That said, many first-time homebuyers may not appreciate the work that has been done.”

Approximately 1.9 million households in 10 major Canadian centres did renovations in 2010, totalling almost $23 billion. The average cost of renos was nearly $13,000.

According to the AIC’s most recent data, energy-efficient upgrades are another popular focus for renovations, with an average recovery rate of 61 percent.

Other renovations that have higher recovery rates include the use of non-neutral interior paint colours (67 percent), the addition of a cooking island in the kitchen (65 percent), and the installation of a Jacuzzi-type bath separate from the shower stall (64 percent).

The biggest mistake people make when it comes to renovating is expecting Champagne-style results on a beer budget.

“Clients will say to me, ‘Get a few prices and we will go with the cheapest,'” Track explains. “In construction, you get what you pay for, and if you only consider price, then you are asking for trouble. It’s important not to overpay, but quality trades come at a cost. I always tell my subtrades that I want good work at a fair price.”

Above all, planning is crucial. It takes at least two to three months to plan for a simple kitchen renovation, Track notes, urging people to read magazines and clip pictures of everything from layouts to paint colours.

“People who don’t plan always run into problems,” Track says. “People need to hire a good architect and a good designer to help them make informed decisions on materials and design. So many times I have clients who don’t want to spend money on a good architect or designer, and inevitably this leads to problems. The better you plan, the less the chance of making mistakes and the better the chance of coming in on time and on budget.

“Try to make as many decisions as possible before you start,” he adds. “By planning, you’ll have a better idea of how long the job will take and how much it will cost. Also, make informed decisions about materials and do some research.”

Budgeting is another basic, as is asking contractors for references and asking for examples of past projects.

“If you set a realistic budget for a job, you have a better chance of not exceeding it,” Track says. “It’s common for contractors to low-bid a job so that they get it. Once the job is underway, the client has no alternative but to pay all additional costs that arise in order to get the job done. There’s a square-footage or unit price for almost everything in construction, so the only real difference between contractors should be the fee they charge.”

Renovations that add features to a home that others in the neighbourhood already have, such as a second bathroom, have higher recovery rates than features not shared by adjacent properties, according to the AIC.

Poorly done renovations may have no positive impact or could actually reduce the value of a home.

Recovery rates and resale value aside, the AIC can’t put a cost on professionally done renovations when it comes to home owners’ sense of satisfaction and enjoyment. That’s priceless.

20 Mar

Mortgage fees: Understand the fine print


Posted by: Mike Hattim

By Mark Weisleder

A mortgage is usually the largest financial commitment a person will make. The interest is far more than any other debt, yet it is troubling that many of the details involved in mortgage applications are poorly explained — if at all — to those applying for the loan.

Many people buying their first home do not have 20 per cent of the purchase price to use as the down payment and must take out an insured mortgage in order to get the loan. You can obtain this insurance through CMHC or Genworth Financial.

This will typically add 2 to 3 per cent to the loan. For example, if you qualify for a $300,000 loan, with a 10 per cent down payment and are not self-employed, the premium is 2 per cent or $6,000. So your mortgage will be increased to $306,000. However, you will not see this amount when you close the deal. The lender takes the $6,000 off the top, to pay for this insurance premium, while the borrower still has to pay the entire $306,000 back.

You must also pay PST on the insurance premium, which is usually not explained. In the above example, it is $780. This amount will be deducted on your closing, so instead of receiving $300,000, you receive $299,220.

There are more deductions that will come off your mortgage loan on closing that are typically not disclosed when you apply.

Mortgage processing fees

This is a subject that bothers many buyers. It is typically on closing that they learn the lender is deducting an additional amount, typically between $200 to $300, in order to pay for the “processing fee.” This is because the lender has outsourced this function to another company, including the preparation of the mortgage instructions that go to the buyer’s lawyer. This is not paid when the lender does the work themselves.

Interest adjustment date

If your loan is advanced in the middle of the month, the lender will deduct the amount of interest owing to the first day of your next month. This could amount to hundreds of dollars being held back on closing.

Who pays the taxes?

In most insured mortgages, the lender will insist that the borrower include an amount for property taxes in every mortgage payment, so the lender can pay this bill on your behalf. However, lenders will often deduct about half the year’s tax bill in advance, so they have enough of a reserve to always pay the taxes. Again, this amount will come off what you can expect to receive on closing.

Finally, more and more lenders are waiting until three to four days before closing to have buyers come in to sign the papers. This often results in mortgage instructions not getting to the buyer lawyer’s office until the day before closing. If there are errors, which often occur, it becomes stressful for buyers to arrange their actual down payment needed, get to their lawyer’s offices to sign the paperwork and complete their purchase on time. Buyers should insist their lenders schedule any appointment to sign loan papers at least two weeks before closing, so that everything can be completed on time, without stress.

Ask your lender or mortgage broker in advance to detail everything that will be deducted from your loan on closing. Being prepared for the mortgage lending process means you are not surprised with the total loan amount you will receive from your lender on closing, but also that your closing will be completed in a stress-free manner.

13 Mar

Housing Crisis to End in 2012 as Banks Loosen Credit Standards


Posted by: Mike Hattim

Capital Economics expects the housing crisis to end this year, according to a report released Tuesday. One of the reasons: loosening credit.

The analytics firm notes the average credit score required to attain a mortgage loan is 700. While this is higher than scores required prior to the crisis, it is constant with requirements one year ago.

Additionally, a Fed Senior Loan Officer Survey found credit requirements in the fourth quarter were consistent with the past three quarters.

However, other market indicators point not just to a stabilization of mortgage lending standards, but also a loosening of credit availability.

Banks are now lending amounts up to 3.5 times borrower earnings. This is up from a low during the crisis of 3.2 times borrower earnings.

Banks are also loosening loan-to-value ratios (LTV), which Capital Economics denotes “the clearest sign yet of an improvement in mortgage credit conditions.”

In contrast to a low of 74 percent reached in mid-2010, banks are now lending at 82 percent LTV.

While credit conditions may have loosened slightly, some potential homebuyers are still struggling with credit requirements. In fact, Capital Economics points out that in November 8 percent of contract cancellations were the result of a potential buyer not qualifying for a loan.

Additionally, Capital Economics says “any improvement in credit conditions won’t be significant enough to generate actual house price gains,” and potential ramifications from the euro-zone pose a threat to future credit availability.

9 Mar

Be ready for "what ifs" at home


Posted by: Mike Hattim

Globe and Mail

Keeping up with mortgage payments is an important part of home ownership, in addition to property taxes, insurance and maintenance. But what happens if your roof suddenly needs replacing, the foundation springs a big leak or the furnace gives out in the middle of a cold snap?

Your mortgage can be structured to deal with such unexpected home expenses. You can also borrow against the equity in your property or take out insurance to deal with mechanical failures.

“Planning for ‘what ifs’ is critical,” says David Cole, an RBC mortgage specialist in Burnaby, B.C. He adds that mortgages are an especially important area of financial planning, given that houses present significant expenses as well as assets, and much can go wrong with them. “The last thing you want is to have a home be an anchor for you.”

A roof collapse from an overload of snow or a toppled tree might be covered by homeowner’s insurance. However, anything that falls under the category of maintenance, however significant, is your responsibility to absorb.

Many homeowners faced with major repairs or improvements opt for a home equity line of credit, which allows them to borrow against the equity in their home. Such loans have no carrying costs or fees, are flexible in terms of what they can be used for and carry relatively low interest. The RBC Homeline Plan, for example, is set at prime plus half a per cent.

A home-secured loan is available only to those with at least a 20-per-cent down payment or 20 per cent equity in their property, meaning the total amount borrowed cannot rise above 80 per cent of its value.

If your home equity is less than 20 per cent you may need to refinance, which brings additional costs including setup and legal fees for re-registration and mortgage loan insurance. Borrowers also could apply for an unsecured loan or line of credit, at a higher interest rate.

Mark Kerzner, president of TMG The Mortgage Group Inc., a national mortgage brokerage, says that on average, one third of funds borrowed when mortgages are refinanced is spent on home repairs and renovations.

One reason people need to refinance is because they end up getting in over their heads, Mr. Kerzner says. The total debt-service ratio, a combination of the payments on your mortgage and all of your other debt, should not exceed 40 per cent of your gross income, he says.

If you have costly repairs, most mortgages allow you to skip a monthly payment once or twice in order to free up cash, although Mr. Kerzner notes that this adds to the principle outstanding.

You can also reamortize so that your payments are reduced. This can provide wiggle room when times are tight, Mr. Cole says, but will lengthen the term of the mortgage.

Home buyers can protect themselves against costly repairs with a thorough home inspection. “It’s key to know what’s coming down the pipe,” Mr. Cole explains. “Make sure you don’t have a sinkhole.”

If you think you may have extraordinary costs ahead, your mortgage adviser may help you work out a bigger loan, holding some funds in reserve in anticipation of extra costs.

Mark Salerno, a corporate representative for the Canada Mortgage and Housing Corp. , says that if you have a sense prior to closing that major repairs will be required, one option is a “CMHC Improvement” program. This allows lenders to offer greater financing choices to borrowers who plan to undertake small- or large-scale improvements that will ultimately increase the value of the property.

When the home inspection is performed, ensure that you’re in the home so you can “see it through the expert’s eyes,” he recommends. “It can be hard to know what the words on the page mean.”

Once you move in, keep up with general maintenance and ensure everything is in good working order, says Tim Bzowey, the vice-president of home and auto for RBC Insurance. Homeowner’s insurance will pay for unforeseen disasters, but there’s “a threshold of reasonableness and judgment involved,” he says. For example, a roof collapse preceded by leaking and water damage won’t be covered. “It’s about being prudent and using some common sense.”

Mortgagors insist that homeowners have the right insurance in place, covering all buildings, contents and liability, Mr. Bzowey says. Review your insurance coverage annually, keep a list of your home’s contents off-site and update values.

Mortgage insurance is available, although most policies are a form of life or disability coverage and apply only in the event of a death, job loss or critical illness. Some lenders or manufacturers may provide warranties or niche insurance products on specific mechanical equipment in the home. But these often require annual inspections and maintenance of the furnace or hot water tank in question, at a price, and can come with hefty premiums.

8 Mar

Home Ownership Becoming More Affordable


Posted by: Mike Hattim

Housing affordability is improving in Canada as home prices soften, while low interest rates through this year should continue to keep costs at bay.

A national measure shows housing became more affordable in the fourth quarter of last year, the second improvement in a row, Royal Bank of Canada’s quarterly release showed Wednesday. It found all housing categories became more affordable, led by the two-storey home category.

The measure comes amid a debate over whether some Canadians are overextending themselves by taking out mortgages they can’t afford – particularly in hot markets like Toronto and Vancouver. Canadian household debt burdens, meantime, remain a key concern to economists.

The quarterly improvement in affordability was modest, but still enough to “dial back the deterioration that impacted the market in spring last year,” said Craig Wright, RBC’s chief economist, in the report.

“Continued low interest rates in 2012 will help keep housing costs at bay in the near term.”

The erosion of affordability levels in the first half of last year stemmed mostly from dramatic increases in a single market – Vancouver. In the second half of the year, though, this market became more aligned with the rest of Canada.

Vancouver remains – by far – the least affordable large city in Canada to own a detached bungalow. Toronto is next, followed by Montreal.

At this point, housing in Canada is as affordable as it was a year ago, and “only slightly” less affordable on average than it has been over the long term, Mr. Wright noted.

The bank’s affordability measure tracks the proportion of pre-tax household income that would be needed to service the costs of owning a home at current market values.

It comes on the same week the Canadian Real Estate Association predicted average home prices will fall 1.1 per cent this year, to an average of $359,100, before rebounding 0.9 per cent in 2013.