Many first time home buyers stay away from buyer’s agents because
they think it will cost them money. Well, the opposite is really true; a
buyer’s agent will likely save you money. How, you ask? Well, most
often the buyer doesn’t pay the agent, and the buyer gets the benefits
of an agent’s knowledge, expertise, and negotiating skills. See our post
about the benefits of a buyers agent for more info on how they can help.
So, how does the buyer’s agent get paid? With the typical sale, a
seller pays an agent to list the property for sale. Within the listing
contract this listing broker says they will offer a specified percentage
of their commission to a buyer’s agent, if there is one. So, the seller
is paying a commission to the listing broker, and the listing broker is
paying a commission to the buyer’s agent. This is the way most deals
work.
Where the buyer needs to be careful is with FSBO’s (For Sale by
Owner) and lower commission MLS deals. It’s becoming more and more
common that FSBO sellers are willing to pay a buyer’s agent, but it
needs to be written into the purchase contract. Also, many buyer
agencies contracts will say that the buyer’s agent gets paid a
percentage of the purchase price or the MLS offer of compensation (what
the listing agent is offering), “whichever is greater”. When you sign a
buyer’s agency agreement, make your agent cross out the “whichever is
greater” portion. If you sign an agreement to pay the greatest of 3% or
the MLS offer of compensation and the listing agent is only offering
2.5%, you as a buyer could be on the hook for the extra 0.5%. These
instances are rare, but you need to be aware of them. We’ve actually
never had a buyer pay us any portion of our commission out of their
pocket.
As a buyer, having an agent work for you through a transaction rather than for the seller, at no cost to you, is a no brainer.
A couple weeks ago, I wrote about the home buying process and picking a Real Estate Agent.
Although, I never really explained why you should have a buyer’s agent.
There are tons of benefits to using a buyers agent! They will:
Talk through your financials and recommend a mortgage lender who will work well for your needs.
Analyze your wants and needs to help determine your requirements for a home and location.
Guide you to homes that fit your criteria. Ask your agent to set up a
search that will notify you every time there is a new listing or price
change meeting your criteria.
Educate you about the current market and help you make a wise decision on which home to choose.
Look at comparable sales to determine a reasonable purchase price on the home you choose.
Walk you through an offer contract and help you determine all the terms required in the contract to meet your needs.
Negotiate on your behalf. Real estate professionals are trained negotiators and can often get a better price then a consumer can on their own.
Keep you on track to meet all the dates and requirements outlined in your contract.
Recommend inspectors and testers who will provide you knowledgeable input on the condition of your future home.
Coordinate with the lender, inspector, title company, and listing agent to get everything ready for closing.
Solve any problems that may arise related to the contract, financing, inspection, title, etc.
Get the deal closed so you can start moving into your new home!
….and best of all…
In most cases you don’t have to pay a penny for the buyer’s agent, they’ll split the commission paid by the seller with the listing agent.
Don’t believe the lie that you get a better deal without a buyer agent.
Housing starts in Canada were trending at
214,680 units in November, according to Canada Mortgage and Housing
Corporation (CMHC). The trend is a six-month moving average of the
monthly seasonally adjusted annual rates (SAAR)1 of housing starts. The standalone monthly SAAR was 196,125 units in November, down from 203,487 in October.
“As expected, housing starts remained below their recent trend and
continued to fall for a third straight month. This decrease was mainly
attributable to declines in single-detached and multi-unit housing
construction in Ontario and British Columbia, resulting in part from a
decline in the pace of pre-sales relative to that in late 2010 and early
2011,” said Mathieu Laberge, Deputy Chief Economist at CMHC. “The drop
in starts in Atlantic Canada was primarily due to a decrease in
multi-unit housing construction in Halifax, following higher than normal
activity in October,” added Laberge.
CMHC uses the trend measure as a complement to the monthly SAAR of
housing starts to account for considerable swings in monthly estimates
and obtain a more complete picture of the state of the housing market.
In some situations, analyzing only SAAR data can be misleading in some
markets, as they are largely driven by the multiples segment of the
markets, which can be quite volatile from one month to the next. The seasonally adjusted annual rate of urban starts decreased by
4.0 per cent to 174,323 units in November. Urban single starts declined
by 5.4 per cent to 58,606 units, while urban multiple starts fell by
3.2 per cent to 115,717 units.
November’s seasonally adjusted annual rates of urban starts fell in
Ontario (-14.3 per cent), British Columbia (-16.5 per cent) and Atlantic
Canada (-45.6 per cent). Urban starts rose in Quebec (+15.4 per cent)
and the Prairies (+16.1 per cent).
Rural starts2 were estimated at a seasonally adjusted annual rate of 21,802 units in November.
Preliminary Housing Starts data is also available in English and French at the following link: Preliminary Housing Starts Tables
As Canada's national housing agency, CMHC draws on more than 65 years
of experience to help Canadians access a variety of high quality,
environmentally sustainable and affordable housing solutions. CMHC also
provides reliable, impartial and up-to-date housing market reports,
analysis and knowledge to support and assist consumers and the housing
industry in making informed decisions.
Today’s Bank of Canada
rate announcement was another yawner. No one expected rates to rise.
Analysts merely wanted to see if the Bank would drop hints on its future rate-setting plans.
It did, but the new clues weren’t much different from its previous guidance.
For mortgage watchers, the long and short of it was this:
short-term mortgage rates (which the BoC controls) are unlikely to jump near-term.
The Bank’s outlook can largely be summarized in these snippets from today’s announcement:
The global economy remains “vulnerable to major shocks from the U.S. or Europe.”
In Canada, “…Underlying (economic) momentum appears slightly softer than previously anticipated…”
Our economy has a “small degree of slack”
“…The pace of economic growth is expected to pick up through 2013.”
"Over time, some modest withdrawal of monetary policy stimulus will likely be required..."
“It is too early…to determine whether the moderation in housing activity and credit growth will be sustained.”
That
last sentence is noteworthy. The Bank carefully crafts every last
syllable in its rate statements. In this case, it is clearly reinforcing
recent warnings that rate hikes are possible if housing-driven debt
growth doesn’t taper off.
That said, ‘possible’ and ‘likely’ are two different concepts. With
inflation undershooting forecasts and with future price expectations
“well-anchored” (the BoC’s words), it seems unlikely that debt
accumulation will move interest rates—at least not before the spring
housing market gets underway.
The 5-year government bond yield (which influences long-term mortgage rates) was little changed by the Bank’s decision.
The next BoC
rate meeting is in 50 days on January 23, 2013. By that time, we’ll
know how one major economic risk factor plays out, the U.S. Fiscal Cliff. Written by: Rob McLister, CMT
Governor Mark Carney leaving - what now for Canada?
Governor Mark Carney
Mark Carney
is leaving the helm of the Bank of Canada (BoC) in July of 2013 and
heading to the Bank of England. The governor of the BoC is widely
respected and is considered to be the one responsible for steering the Canadian economy through the global financial crisis. Under Carney's
leadership, Canada has become the envy of other world powers - banks didn't fail and the economy has grown.
Carney is seen as a strong central banker and financial regulator and his approach to monetary policy has triumphed. It
started in March 2008, when he decided to cut the bank's overnight rate
by 50 basis-points, which was totally opposite to what other countries
were doing. His instincts have proven to be correct.
Then in April, 2009 he
introduced a nonstandard monetary tool - the conditional commitment, a
monetary stimulus that held the policy rate for at least a year to boost domestic credit conditions and to improve market confidence. The
Canadian economy started to improve and started its amazing growth
shortly after that. Carney studied economics at both Harvard and Oxford and worked as an analyst for
Goldman-Sachs in London, England. He is unique in that he is a PhD
economist with real-life experience as an investment banker and as a
senior deputy minister at the Finance Department.
He emerged as a
thought leader at the Group of 20 and last year was appointed to head up the Financial Stability Board, which is leading an overhaul of global
banking standards.
By moving to England
he inherits a world in flux, not only at the Bank of England (BoE), but
also the surrounding European nations. His role at the BoE is more
challenging than at the BoC and is much more political. The U.K has
become a stagnant economy and on the verge of another recession.
Inflation is high and no one knows where future growth will come from.
Carney's new job is a daunting one. Again, if his performance in Canada
is any indicator, he will make their economy hum once again.
It will be important to see who will take Carney's place. It
is rumoured that Tiff Macklem, the senior deputy governor who worked
closely with Carney and who shares Carney's approach will be his
replacement. With Macklem, we can expect the status quo. Anyone else
would be an unknown.
Bank of England (BoE)
Tiff Macklem
Carney's successor,
however, will not be without challenges. The economy has slowed, and
government rule changes to mortgage lending, which has already impacted
the housing market may trickle down to other parts of the economy. There
are still challenges with world economies and our trading partners,
which is having an effect on our markets as well.
It's been a great
ride with Carney at the helm. If anyone can turn around the UK economy,
he can. We wish him great success as we turn a new chapter here in
Canada.
In a slowing market, it is that much more effective. It was a prudent move....
The real estate industry has ramped up its attack on rules making it
harder to borrow but its challenges face one big obstacle — mortgage
restrictions are working exactly the way the federal government wants
them to. In the past week the Canadian Association of Accredited Mortgage
Professionals weighed in with complaints that Ottawa’s restrictions were
killing consumer confidence and even raised the stakes further by
suggesting the entire Canadian economy was at stake.
Toronto builders joined the fray, calling out the federal government
for rules it maintains have a lot to do with the cooling market in the
city that saw sales in October dip 14% below their long-term average. But Finance Minister Jim Flaherty has given no indication he is ready
to reverse course on his tightened restrictions. There’s also the
argument that it wasn’t the rules that have sabotaged the market, but
rather an overall fatigue from consumers when it comes to real estate.
“I think the government is not responsible, remember the housing
market was slowing already when the government introduced these [latest]
measures,” said Benjamin Tal, deputy chief economist at CIBC World
Markets. “In a slowing market, it is that much more effective. It was a
prudent move.”
Among the changes instituted by the government was a lowering of
allowable amortization from 30 years to 25 years for consumers borrowing
with mortgage default insurance which is backed by the federal
government. A longer amortization allows consumers to lower their
monthly payment and qualify for a larger loan at the expense of paying
more interest over their mortgage period.
Mr. Tal said there is something to be said for a “natural slowing” of
the market which was probably accelerated by the latest changes. “It
might mean a little bit of over shooting but that’s the risk that you
took,” he said, adding the real question is what happens when interest
rates rise or other factors impact the market.
All
of this will probably do very little to satisfy the critics who
maintain Ottawa stepped in at the wrong time. CAAMP, among others,
suggests the latest rule modifications have squeezed the first-time
buyer out of the market. CAAMP said 17% of the high-ratio mortgages
funded in 2010 would not qualify today, including 11% of prospective
high-ratio homebuyers who wouldn’t qualify under the new 25-year
amortization rule.
“The government in general is walking a tightrope here. On the one
hand they are concerned about household debt and all these insured
mortgages. But on the other side, housing is an important contributor to
the overall economy,” said Jim Murphy, chief executive of CAAMP, which
noted in a previous report that 18% of all jobs in Canada created
between 2006 and 2011 were related directly or indirectly to housing. It’s not impossible the government could switch gears and stimulate the
market. It’s hardly unprecedented. In the past, Ottawa allowed
amortization lengths to stretch to 40 years and, significantly, it
lowered the minimum down payment needed by consumers to avoid costly
mortgage default insurance from 25% to 20% — something that remains in
effect. And, to this day, consumers still only need 5% down to qualify
for a mortgage if they buy such insurance.
We were due for a slowdown. The timing was unfortunate but it’s not a major event
Some, like CIBC’s Mr. Tal, suggest maybe it’s time the economy stopped being so dependent on the housing market for growth. One executive who says he’s changed his tune on the government’s
crackdown is Phil Soper, chief executive of Royal LePage Real Estate
services. When the latest regulations came out in July, he was one of
the first to suggest the time was wrong, but he’s gone full circle since
then. “At the time, I thought it didn’t make sense,” said Mr. Soper. “I’m
being a contrarian again. I think the impact of mortgage regulation is
being blamed far too often these days in what is clearly just a natural
cyclical slowdown in the market driven by overpriced homes. We were due
for a slowdown. The timing was unfortunate but it’s not a major event. I
think chances of it being reversed are close to zero.”
While most of us already have felt the immediate changes of the 30 year amortization to 25 year, and the Home Equity Line of Credit change from 80% Loan to Value to 65% Loan to Value, some of you may not know some of the other changes as well for Underwriting Guidelines and there fore your immediate mortgage approval.
For Example financial institutions will be raising the Qualifying Rate on Variable, 1, 2, 3, and 4 year fixed terms to the Bank of Canada's current Benchmark rate (Currently at 5.24%). This comes into to play regardless of Loan to Value. Where as in the past with 3 years or under we could use the 3 year Qualifying Rate or sometimes best rate.
Also the heat component of the property (which does make a difference in qualifying for your mortgage), which with more financial institutions use to be based on the Insurer (CMHC or GE) and sometimes the lenders preference, will change as well. Going from what was zero to $100/month. To this, depending on size of the property:
• < 2,000 sq ft = $1,020 annually ($85/month)
• 2000 sq ft to 3,500 sq ft = $1,140 annually ($95/month)
• >3,500 sq ft = $1,380 annually ($115/month)
Currently HELOCs are to 65% Loan to Value, however some Credit Unions, who are not governed under the same rules as the banks, still have their Loan to Values for HELOCs to 80% ltv. As well as Cash Back, while still being available, is no longer available to be used towards down payment.
Just to RECAP B-20 I have an article from Canadian Mortgage Trends.com which is a great read.. please see below...
Today is B-20 Day- November 1, 2012
No, B-20 Day is not some obscure holiday. It’s the day that banking regulator OSFI required most federally-regulated lenders to comply with its B-20 mortgage guidelines.
The effects of these guidelines are visible already. A host of
lenders have announced stricter rules on things like conventional
mortgage qualification, self-employed income verification, borrowed down
payments and cash-back mortgages. Albeit, some implemented these
changes well ahead of today.
In essence, it is now tougher for many borrowers to get mortgage financing.
The twist here is that OSFI regulates banks and trusts. Yet, even non-banks are impacted by all this.
One prime example is First National, Canada’s biggest non-bank lender. It has adopted OSFI’s low-ratio
qualification policy on variable and 1- to 4-year fixed mortgages with
20% or more equity. That requires it to analyze a borrower’s debt ratios using the Bank of Canada’s5-year posted rate (which is usually a much higher rate than the actual contract rate).
(This is generally a sound guideline. It helps protect unsuspecting
borrowers from the risk of higher rates. In the past, many lenders used
rates like their 3-year discounted rate to qualify conventional
mortgages with variable, 1-, 2-, 3- or 4-year terms.)
Like most non-bank lenders, First National relies in part on
OSFI-regulated institutions to fund its mortgages. Those institutions
now require compliance with B-20, and First National has little
practical choice but to go with the flow.
And it’s not alone. Most monoline lenders are in the same boat.
We spoke with a treasury executive at one lender earlier today. He told us:
“My view is that all non-bank lenders other than credit unions will be subject to B-20, it’s just a matter of time.”
“All other lenders are selling loans to
federally regulated financial institutions (FFRIs), either on the FI’s
balance sheet or through the Canada Mortgage Bond (CMB) program. Those
lenders would all be subject to B-20.”
(He added that “every one of them” will eventually use the 5-year
Bank of Canada benchmark rate to qualify variable and 1- to 4-year
conventional mortgages.)
In short, OSFI guidelines will rule the day for any bank, trust or lender that gets funding from a bank or trust. As you read above, however, credit unions (CU) are not federally regulated (see OSFI Rules Spell Opportunity for Some Credit Unions). That means CUs have more flexibility when approving a mortgage. That flexibility will continue as long as:
(a) provincial regulators don’t impose new OSFI-style guidelines (b) a CU doesn’t accept funding from an OSFI-regulated source, and (C) a CU doesn’t apply for a federal charter.
Due to B-20, CUs have now become the last bastion of common sense
lending in the prime mortgage market. Take Meridian Credit Union, for
example, one of Canada’s biggest credit unions. Meridian still uses the
actual mortgage rate to qualify 1-4 year conventional mortgages. And
there are various other CUs that do the same.
In most cases, we would never advise a borrower to not
assume higher rates in the future. But in limited circumstances, that
extra borrowing power is appropriate for a well-qualified borrower with
good equity, good employment, good credit and either a short holding
period or higher near-term income expectations.
Instead of conforming to a rigid box, Meridian and many other credit
unions use old-fashioned good judgment. This allows for flexibility
where needed, without taking unnecessary risks. Meridian says there are
no plans to change its qualification rate on conventional mortgages. By
contrast, most lenders under OSFI rules will be more black or white:
You’re either in their credit box, or you’re not. Exceptions to these
rules will be more limited than ever before. Sidebar: Here’s a partial list of other OSFI-inspired changes occurring across the mortgage market:
Tighter debt ratios on uninsured non-prime mortgages (some "B" Lenders have never even published debt ratio guidelines before today)
Stricter proof of income for self-employed borrowers with more than
20% down (i.e., more evidence that an applicant’s business can afford to
pay the salary being stated by that borrower—business and personal bank statements, for example.)
Stricter guidelines for calculating a borrower’s minimum monthly
payment on unsecured debt (This payment affects a borrower’s debt
ratios. Three per cent of the outstanding balance has long been a
standard, but several lenders used more flexible guidelines.)
Stricter policies for estimating heating cost, which is also used in debt ratio calculations
The end of cash-back down payment mortgages (at all lenders except credit unions)
The end of borrowed down payments (at some lenders).
Many of these changes are sound, but all of them (combined) will
curtail housing demand and/or affordability for some period of time.
That means medium-term housing pain for the hope of long-term economic
gain. Rob McLister, CMT
Wondering if you should continue renting or take the plunge into home
ownership? To help you clarify this debate, we've compiled a list of
questions from various professionals associated with a real estate
transaction. Answering the right questions about the early stages of the
home ownership process will likely help you sit confidently with your
decision to stay put, or leap with eyes wide open into the market.
Why do you want to buy a house?
This is an important question for first-time buyers, according to
Sarah Wilson, a Calgary-based Certified Financial Planner and consultant
with
T.E. Wealth.
First-time buyers have to ask themselves if they want a home because
their friends are buying and they think it's the next step or because it
actually fits into their long-term life plan and will be a smart
financial move. Ms. Wilson adds that we should have an overall financial
plan that takes into account our short and long-term life goals, to
ensure that such a significant investment makes sense. If you don't have
a financial plan, then locating a
certified financial planner for a discussion would be a smart step.
What values will I honour by buying or renting?
Christie Mann, a Toronto
based leadership coach and consultant, asks clients how buying or
renting will align with their life vision and specifically their
five-year plan. Travel plans, entrepreneurial pursuits and timelines for
starting a family are all examples of things to consider in your
five-year plan.
If you are thinking of starting a family in the next five years, for
example, will the home you are considering accommodate such a life
change? If not, you should think about the financial implications of
selling a few short years after buying.
Why take a five-year view? According to Ms. Wilson, we have to
realize that when we're buying a home, we're buying into a market, and
if we are going to buy, we need to be in our home for at least five
years. If we sell our homes prior to the five-year mark, there's a
higher risk we won't get our money back due to the fees associated with
the transaction, compared to the increase in the home's value.
Are you ready for home ownership?
Owning may match up with your values and fit neatly into your
financial plan, but that might not mean you're ready for ownership. When
you own, you see the property in a different light, according to David
Fleming, founder of
TorontoRealtyBlog.com.
"You look at your floors and think about replacing and upgrading
them. You get down on your hands and knees and plant flowers. You paint.
You decorate. You want bigger and better for your house," Mr. Fleming
says.
However, he adds that people should be ready to "rake leaves, shovel
snow, take out garbage, and deal with racoons, damp basements, and leaky
roofs." If a problem arises, you can't just call the landlord and be
done with it. You're now on the financial hook for the repairs and the
upkeep. You inherit the good and the not-so-good elements of home
ownership when you're handed your keys.
Do you have a steady job and income?
It's harder and harder to be approved for a mortgage if your provable
earnings are not steady. A steady income and a reliable job make a very
big difference these days, according to Mike Averbach, president of
Averbach Mortgages in
Vancouver. He adds that going through a full analysis of credit and
income is an important first step for house-hunters because it provides
an accurate feel for the amount of house you can afford and will address
any possible issues before you begin your search.
A credit check can be done free of charge with a broker, or you can
receive your score and a detailed credit report for around $20 at either
Equifax or Trans Union. The best lending rates are usually reserved for
those with a score of 750 or higher. A higher score could translate
into thousands saved over the life of a loan. When you get your report,
scan it for any discrepancies - they happen more often than you think -
and correct them right away. It's best to know you're in good standing
prior to applying for any type of loan.
Do you have any money saved for a down payment? What about for the closing costs?
You can purchase a home with less than 20 per cent down, but if you do, you'll be required to pay
mortgage insurance.
If you're purchasing a home later in life, and with a partner, 20 per
cent isn't entirely unrealistic. However, it's still very difficult.
You'll also need to consider closing costs, which can add thousands to your total bill.
Click here
for a list of costs to consider, such as moving expenses and legal
fees. If you're not prepared for the closing costs, you could be left
shocked and scrambling at the eleventh hour to find the necessary funds.
It's also important to consider how much your monthly mortgage
payment will increase if rates rise (if you choose a variable rate
mortgage) or when your mortgage comes due at the end of the first term,
Mr. Averbach says. It is quite easy to calculate the outstanding balance
due at the end of a mortgage term and worth the exercise to see how
much an increase in interest rate will affect the monthly payment, he
says. Then, it's back to your five-year plan. Will you be in a position
to manage an increased debt load, or do you plan to be living on one
salary with two children at home?
How much are you spending now for rent v. your expected mortgage payment?
Speaking with a mortgage specialist or plugging numbers into an
online comparison calculator
will help you get a rough idea of the financial implications of each
scenario. It's often a good idea to pretend you're making the increased
monthly payments for at least a few months. If you're paying $1100 in
rent, for example, and your mortgage broker tells you your housing costs
would double, try socking away $2200 a month to see how it feels, how
it affects your lifestyle and if it's doable. You might be in a better
position a few months from now if you socked away more money and worked
toward the goal of homeownership in the future.
If you're new to the mortgage process, there are a number of great sites, like
Ratehub.ca, to help simplify the mortgage process and provide a wealth of important information to consider.
I've been to housewarming parties where the homeowners are
ridiculously happy, full of pride showing off their new space, and
clearly ready for the financial commitments. I've also spoken to
friends, months after their purchase, who feel house poor, overwhelmed
and unprepared. You don't want to end up like the latter, so it's key to
consider all aspects -- financial realities, goals and values -- before
you make any move.
The debt threat facing this country begins at home.
Mortgages are by far the biggest component of a national debt load
that has recently prompted warnings from the Governor of the Bank of
Canada and one of the country's largest banks.
Their concerns raise questions about the way in which financial
institutions ensure people can afford the mortgages they need to buy a
home. Raising a family and maintaining a home require finesse and
constant financial manoeuvring. And yet, the housing affordability
measures used by bankers are strikingly simplistic.
In essence, they provide a snapshot of a home buyer's ability to meet
his or her basic housing costs and other debts based on gross monthly
income. Bankers say these calculations serve them well, but others
question how effectively they size up someone's ability to carry the
cost of the house through real life's ups and downs.
It's a critical question because these affordability measures are the
margin of safety on which the housing market depends at a time when
people are paying near-record prices and facing higher mortgage rates
ahead.
Look to the United States to see what happens when people suddenly
can't afford the home they own. "In the back of our minds, we all worry
about the U.S. scenario, where we have large groups of people in society
who cannot afford to make the payments on their house," said Moshe
Milevsky, a finance professor at York University's Schulich School of
Business. "They're under water, they're stuck, and that can lead to
larger problems."
1. Evaluating Affordability: How It's Done
The average Canadian two-storey house costs $360,000, so a huge mortgage is inevitable for most buyers.
Two simple, time-tested measures are used by lenders to ensure this debt load is affordable.
The first is called the gross debt service ratio, or GDS. The rule is
that monthly housing costs, usually defined as mortgage payments
(combined principal and interest) plus property taxes and heating,
should not exceed 32 per cent of monthly household income before taxes.
The second measure is called the total debt service ratio, or TDS,
and it compares monthly income to housing costs plus payments on lines
of credit, credit cards and other debt. Housing costs plus debt payments
shouldn't exceed 40 per cent of income.
"I'm 23 years in the business and we haven't really adjusted the debt
ratios," said John Turner, national director of specialized lending at
Bank of Montreal. "They're tried-and-true guidelines that are proven to
work for us in the industry."
The 32-per-cent GDS limit and 40-per-cent TDS limits are definitive
enough that Canada Mortgage and Housing Corp., a federal government
agency, uses them on its website to help home buyers see if they're
financially ready to buy a home. But there are some variations.
Mr. Turner said some lenders will factor 50 per cent of condo fees
into the calculation for the GDS, while solid borrowers might be allowed
to take their TDS as high as 42 per cent. Lenders use "five Cs" in analyzing someone's ability to afford a
mortgage: capacity to repay, which refers to income; collateral, or the
value of the home; character, which factors in things like your record
in repaying previous debts and how long you've been at your job;
conditions, which refers to economic conditions; and, capital, or the
down payment. Mr. Turner said that if someone is weak on capacity but
strong everywhere else, a higher ratio may be allowed.
Debt service ratios serve the needs of lenders and are not meant to
assure borrowers that their debt loads are manageable, said Jeff
Schwartz, executive director of the non-profit Consolidated Credit
Counselling Services of Canada. Homeowners may in fact struggle to cover
their various monthly expenses, even if they're comfortably onside with
the two debt service ratios.
Lenders accept this potential risk because they know people will pay
their mortgage while letting other debts slide, Mr. Schwartz said. "The mortgage is the first thing that gets paid," he said. "People
will pay for their shelter first because they're fearful of ending up on
the street."
2. Flaws in the System
Assuming you don't eat, have kids or drive a car, the calculations
that decide whether you can afford a mortgage should fit you perfectly.
Everyday expenses are not considered when lenders size you up for a
mortgage. All they look at is whether payments on an applicant's
mortgage and other debts plus property taxes and heat will account for
more than 40 per cent of gross household income.
"I have a big problem with the idea that you can spend 35 to 40 per
cent of your income on housing and debt because the numbers don't take
into account all the other expenses we incur," said Schulich's Prof.
Milevsky. Like income taxes and contributions to registered retirement savings
plans, for example. "If we're supposed to save for retirement and if
we're paying average taxes of about 23 to 25 per cent, there isn't much
left for housing," Prof. Milevsky said.
And yet, there are many more fixed expenses to juggle. Groceries,
transportation costs and daycare are among the ones listed by Laurie
Campbell, executive director of the credit counselling agency Credit
Canada. On top of that, consider the sudden, staggering expenses that
homeowners must inevitably cope with. "People get themselves so bogged
down," Ms. Campbell said. "They get into their home and their roof needs
repairing three years after they move in. There's $3,000 to $4,000
right there." A typical way of managing sudden expenses is to tap into a home
equity line of credit, where people borrow against the value in their
homes. But credit lines represent added debt that can push people
offside on the debt measurements that lenders use when setting up
mortgages.
Rising interest rates put even more pressure on affordability.
Mortgage rates are still close to all-time lows as a result of the
financial crisis, but sooner or later they will rise back to normal
levels. It's just a matter of time until mortgage holders are affected -
variable-rate mortgages get more expensive gradually, while people with
fixed rates pay more at renewal time.
The Bank of Canada has estimated that 6.1 per cent of households were
already spending 40 per cent of their personal income to carry debt in
2009. The bank figures that this number will rise to 7.5 per cent in
mid-2012 if mortgage rates rise to pre-recession levels.
A wave of defaults is the worst case if rates surge and people can't
afford the high-priced homes they bought in recent years. But economist
Benjamin Tal of CIBC World Markets doesn't see this happening.
"You will have defaults rising - they'll be higher than they are now -
but not in a very significant way," he said. "Remember, interest rates
rise for a reason - the economy is improving." How to Protect Yourself
Protect yourself against buying more house than you can afford and
you help prevent the kind of national housing catastrophe that is into
its fourth year in the United States.
Mortgage lenders measure your debt load in relation to your income to
assess how much you can borrow to buy a home. Tempted to buy as much as
they'll lend you?
So were a lot of the home buyers who later ended up coming into the
Toronto offices of Mr. Schwartz's credit counselling agency. "That's a
trend we've seen among our client base for a while now," he said. His preferred solution is to take a completely different tack than
lenders do in assessing how much mortgage you can handle. Start by
putting together a budget that sets out the percentage of your net
income that will go to all housing costs, including mortgage, property
taxes and home insurance. "By and large, we tell people you should probably only spend about 25
per cent on housing," Mr. Schwartz said, before acknowledging that
people living in high-cost cities like Vancouver or Toronto may have to
go as high as 30 or 35 per cent.
Vancouver mortgage planner Robert McLister said he starts his
evaluation of how much a home buyer can afford with the standard
measures used by all lenders, the gross debt service and total debt
service ratios. He then asks clients whether they have savings that they
could depend on if they lost their job, and how much money they have
left over at the end of the month.
"If someone tells me, 'I have $50 left after all my debts are paid
each month and I want to buy a $500,000 house,' then that's a warning
sign."
If at some point your mortgage debt becomes unmanageable, you can
ease the load by taking longer to pay off the loan. This is called
extending the amortization period and Mr. McLister said it can be done
through a routine refinancing of your mortgage (expect to pay a few
hundred dollars for this transaction).
The longer your amortization period, the smaller your payments. The
tradeoff is that you'll pay more interest and take longer to be
mortgage-free.
"You do what you have to do," Mr. McLister said. "But even if the
amortization is 25 or 35 years, that doesn't lock you in for life. When
you're up for renewal, you can reduce the amortization period if times
are better."
The
Canadian Association of Accredited Mortgage Professionals says since
new rules went into effect in July, 2012, resale housing activity is 8%
lower between August and October than a year earlier.
Reuters
New borrowing rules have hit homeowners so hard
that it could undermine any economic recovery in Canada, says a new
study from the country’s mortgage brokers.
The Canadian
Association of Accredited Mortgage Professionals says since new rules
went into effect in July, 2012, resale housing activity is 8% lower
between August and October than a year earlier.
Among the changes
instituted by the government was a lowering of allowable amortization
from 30 years to 25 years for consumers borrowing with mortgage default
insurance which is backed by the federal government. A longer
amortization allows consumers to lower their monthly payment and qualify
for a larger loan at the expense of paying more interest over their
mortgage period.
My concern is that a
policy-induced housing market downturn creates unnecessary risk that
directly affects not just housing but job creation and the economy as a
whole
CAAMP says 17% of the high ratio mortgages funded in
2010 would not qualify today, including 11% of prospective high ratio
homebuyers who wouldn’t qualify under the new 25-year amortization rule.
“This
smaller number of first time buyers is already impacting the resale
market, which in turn threatens to dampen economic activity more
broadly,” said the group, in a release.
Jim Murphy, chief
executive of CAAMP said his group’s survey of 2,000 Canadians shows the
“vast majority” of mortgage holders are acting responsibly with their
debt. “Our concern today is the number of growing first time buyers who
are now unable to get a mortgage. We worry that this is having a
dampening effect on what was an already cooling market and we hope
policy makers will give some thought to addressing the needs of this key
sector of the market,” he said.
Will Dunning, chief economist
for the group, said the downturn in the resale market could be an
indicator of what’s next for the market. “Since the government tightened
mortgage accessibility for the fourth time this past July we’ve seen a
drop in resale activity that I think foreshadows an overall decline in
the housing market. My concern is that a policy-induced housing market
downturn creates unnecessary risk that directly affects not just housing
but job creation and the economy as a whole,” he said.
CAAMP
said the impact of first-time buyers can be felt throughout the market
as move-up activity is curtailed because those potential buyers find it
more difficult to sell their entry level homes.
The survey found
it doesn’t matter whether consumers take a 20, 30 or 40-year
amortization — something available until three years ago — they end up
paying off their mortgage in two-thirds of the time originally intended.
Other findings show one-third of borrowers made additional or
accelerated payments on their mortgage while 87% of homeowners have at
least 25% equity in their homes.
Lower rates have been good for
Canadians too. Of the respondents who renewed in the last year, 61% saw a
reduction in their interest rate.
From October 23, 2012, The Bank left its policy rate unchanged, which means that prime rate should exit 2012 at the same level it’s been for 25 months, 3.00%.
Carney
& co. said that, “Over time, some modest withdrawal of monetary
policy stimulus will likely be required.” That’s vaguer than prior
projections but still a signal that the next rate move should be up.
Here’s more from the Bank’s statement from Oct 23, 2012:
“Core inflation has been lower than expected in recent months…”
“Total CPI inflation has fallen noticeably below the 2 per cent
target…and is projected to return to target by the end of 2013, somewhat
later than previously anticipated.”
“Housing activity is expected to decline from historically high
levels, while the household debt burden is expected to rise further
before stabilizing by the end of the projection horizon.”
“The timing and degree of any such withdrawal (in rate stimulus)
will be weighed carefully against global and domestic developments,
including the evolution of imbalances in the household sector.”
That last line is new. The Bank’s recent statements haven’t suggested
such a close link between household debt and rate increases. But it’s
an implied warning that does little to convince anyone that rate hikes
are looming.
The next BoC rate meeting is December 4, 2012.
Taken from Rob McLister - Canadian Mortgage Trends.com
I got this from Canadian Mortgage Trends.com - Rob McLister ... it is a great article! In regards to payments etc, and I do like the thought, of since mortgage rates are low, why not make your payments like it is a normal rate, you will make life mortgage free quicker :) Just some food for thought. I am kinda giggling as well, since BMO were the ones to really get this 2.99% rate going, the potential long term results are what really is being surveyed. ... read below and enjoy for Monday Morning!
October 28, 2012
The “Significance” of Rising Payments
BMO published a survey last Tuesday that got a ton of media play. It stated that 72% of households:
“would feel a significant strain if they were to experience a modest increase in monthly mortgage payments...”
Yet, despite the fact that Canadians are highly leveraged, this finding seemed suspicious. So, we investigated.
It turns out that mortgage payment sensitivity is not as dire as last week’s headlines implied.
BMO’s survey asked people to indicate what things they’d cut back on
if their monthly mortgage payment increased by 5%, 10%, 15% or 20%.*
The actual results found that the 72% of respondents said a 5%
increase would “have an impact - of some kind - on their household
budget,” said BMO spokesperson Laurie Grant.
“Some kind” — but how much impact was not specified.
Obviously, personal budgets are finite so if you have to pay $100
more to the bank, you keep $100 less for yourself. Hence, virtually
everyone’s budget is impacted somehow by payment increases.
But some writers played up the fear factor, declaring:
Here’s the thing. A 5% payment increase on the average mortgage is $51 a month, according to CAAMP data. That’s less than 1% of the median family’s after-tax income of ~$5,600 per month. Incidentally, it would take the equivalent of two Bank of Canada rate hikes (50 basis points
total) to boost payments by 5% for the typical borrower. And, it would
take a 225 bps rate increase for payments to rise 20%. (For what it’s
worth, economists project anywhere from 2-6 quarter-point rate hikes
within 24 months.)
So, would a modest 5% mortgage payment increase have a “significant”
impact on the typical borrower’s finances? Grant says no. “The word
‘significant’ should be applied to the high percentage of people
(affected), not the impact on household spending habits,” she explained.
We can get a further sense of borrower vulnerability by looking at
the number of homeowners forced to dip into their savings to pay their
mortgage. In the past year, 17% of those polled had to withdraw from
savings to make one or more mortgage payments. But a 5% payment increase
would raise this 17% by only one percentage point, says BMO.
Oddly, a 10% payment increase would cause fewer people (16%) to reach into their savings, according to the poll.
And one last point: Canadian lenders and insurers have no desire to
loan out hundreds of thousands of dollars without knowing the client’s
future payment tolerance. Therefore, lenders routinely qualify borrowers
at rates which are higher than the contract rate.
The message of this post is to look behind the headlines. Banks love
to feed the press with housing surveys. But dramatic poll-related
headlines always warrant a second look.
********
Here are other findings from BMO’s survey… On the Effect of New Mortgage Rules
22% of those polled say they’re less likely to buy a home in the next five years because of the rule changes
29% who plan to buy in the next five years say they’ll likely spend less on a home because of the changes
43% of homeowners were not familiar with the new mortgage regulations introduced this year
On Mortgage Affordability
92% of respondents agree that debt is a serious national issue but only 19% say it’s a problem for them
16% say a 10% rise in mortgage payments would leave them at risk of not being able to afford their home (Although, this doesn’t mean the majority would default on their mortgage.)
1 in 4 homeowners have reduced the amount they’re saving over the past year to make their mortgage payments
On Moving intentions:
Within five years:
18% plan to downsize to a smaller home
18% plan to upsize to a larger home
10% plan to sell and either rent, move into a retirement community or move in with family
21% plan to purchase an additional property for income, investment, or recreation
* This question was asked to the 55% of homeowners in BMO’s poll who
said they had a mortgage (562 people). They were given a list of
“impacts” on their household budget to choose from such as eating out,
vacation spending, renovations and so on.
The BMO Housing Confidence Report was conducted by Pollara via online interviews with a random sample of 1,011 Canadian homeowners, 18 years of age and over. Rob McLister, CMT
Tuesday, October 23, 2012
Cash Back for Down Payment to go the way of the DODO Bird
OSFI has decreed that “Cashback should not be considered part of the
down payment.” Most Federally regulated lenders must therefore eliminate
these offerings no later than October 31, 2012.
Cashback mortgages - essentially 100% financing - are a niche product
that are seldom appropriate for owner-occupied purchases (sometimes
they make sense for rentals). There are exceptions, but most of the
folks who want them are simply a bit too eager to buy.
The Canadian Association of Accredited Mortgage Professionals (CAAMP) supports OSFI’s call to end cash back products in lieu of 5% down payments. “Borrowers should have ‘skin in the game’,” it says.
There aren’t many federally-regulated lenders with 5% cashback down
payment mortgages left, Scotiabank stopped there's September 15th, 2012 for example. Last checked; National Bank & B2B Bank
were two of the banks still doing them (BMO as well I believe) & the Credit Unions ATB & Servus (but mostly at the branch level & peppered with rules & regulations). Also the Trust Company, Resmor Trust, now known as RMG Mortgages, with
their smaller Cash Back options of 2% or 3% towards down payment, will
also disappear as of Oct 31, 2012 Those options likely won’t be
around for long. For a RMG mortgage it means you have to have a approval by October 31, 2012 or the program will not be available & you still have to qualify under the lenders rules as well as the new 25 year amortization.
Despite the above, banks (including Scotiabank) will continue selling
cashback mortgages so long as the funds aren’t being used as equity, more like the current First National model.
Buyers sometimes use cash back for things like land transfer tax,
lawyer's fees, moving costs, closing costs, furnishings, landscaping,
renovations, and so on; but the original min 5% down has to be shown in funds up front.
cash backs are also used for refinances to 85% loan to value (the official refinance limit without cash back is 80% loan to value on insured mortgages).
There's a chance that a small number of provincially regulated lenders - Credit Unions, as they are not governed under OSFI, will continue offering cash back down payment mortgages : however in the past the Credit Unions have been tougher on approvals.
If you are looking for a Cash Back Mortgage, you need to have your approval on or before Oct 31, 2012... as I do not think this will be resurrected anytime in the near future.
*information taken from Canadian Mortgage Trends Rob McLister, CMT*
The Bank of Canada is leaving its key lending rate unchanged at one per cent.
The
announcement came Tuesday morning, in a statement that notes the U.S.
economy is expanding at a "gradual pace," indicators point to a
"continued contraction" in Europe, and growth has slowed "more than
expected" in China and other emerging economies. For
Canada, the statement paints a modestly optimistic outlook that singles
out the rising price of commodities produced here, including oil, in
recent months. The statement notes that exports remain weak, however, and housing activity is expected to pull back from historic highs. While
the performance of the global economy has also constrained Canadian
economic activity, the Bank nevertheless projects a "moderate
expansion." "Following the recent period of
below-potential growth, the economy is expected to pick up and return to
full capacity by the end of 2013," the BoC said, pointing to
consumption and business investment as key drivers. "After taking into
account revisions to the National Accounts, the Bank projects that the
economy will grow by 2.2 per cent in 2012, 2.3 per cent in 2013 and 2.4
per cent in 2014." That's a very slight revision from
the Bank's July statement, in which it projected the Canadian economy
would grow by 2.1 per cent this year, 2.3 per cent next year and 2.5 per
cent in 2014. "Over time, some modest withdrawal of
monetary policy stimulus will likely be required, consistent with
achieving the 2 per cent inflation target," the latest statement said. The
Bank also makes explicit reference to Canadians' growing credit
obligations, projecting that "the household debt burden is expected to
rise further before stabilizing by the end of the projection horizon." In
that light, the statement released Tuesday makes clear, for the first
time, that the central bank will consider the state of Canadians'
household finances before increasing its trendsetting interest rate. "The
timing and degree of any such withdrawal will be weighed carefully
against global and domestic developments, including the evolution of
imbalances in the household sector." In recent years,
the Bank's consistently low overnight lending rate has meant Canadians
have enjoyed relatively cheap access to cash. While that's stimulated
the weak economy, it has also contributed to record levels of household
debt across the country. In a recent revision of
economic date, Statistics Canada pegged household credit-market debt at
163 per cent of income -- a level similar to that of the U.S. ahead of
the 2007-08 housing market crash.
Canadian household debt is indeed equal to 154% of disposable income
The housing market is softening and prices are going down in many areas of the country
Canadians will be impacted by higher interest rates
Even given these facts; it’s unlikely that Canada will experience a financial crisis.
Household debt has been increasing steadily over that past 30 years
as interest rates continue to decline but, for the most part, Canadians
gear their borrowing to what they can afford. Jobs are holding steady
and business is confident about future prospects. So, lower interest
rates mean less money goes to servicing debts.
In accumulating debt, Canadians also have a large asset, namely
their homes. And although some in the financial community are concerned
about the massive debt, Eric Lascelles, chief economist at RBC Global
Asset Management recently said that assets outweigh debt by a factor of
five.
It’s true that high household debt does put homeowners at risk but a
closer look at the stats tells a better story. Overall Canadians
exercise fairly good judgment when it comes to borrowing. The more
vulnerable – seniors and low-income earners -- carry lower debt loads.
It’s also true that the housing market carries a big part of household
debt, however the percentage of income earmarked for mortgage payments
is not burdensome.
The new mortgage rules will certainly have an impact on the housing
industry as will declining house prices; and interest rates will rise.
Perhaps this will lead to some weakening of the economy. Delinquencies
might increase a bit but the risk of the economy going into a recession
is low. High-ratio mortgages are insured and our sub-prime market is
small.
As for the weaker growth, Flaherty has said that the government
could increase its deficit to shore up the economy. “If we ran into a
serious world economic crisis arising out of the European situation, or
something else, “he said, “Then of course we’d be responsive if we had
to be to protect the Canadian economy and protect Canadian jobs as we
have done in the past.”
Once again we have mixed messages in the media about the affordability
of Canadian housing. In March of this year, the Globe and Mail reported
that housing affordability is improving in Canada due to house prices
softening and low interest rates.
The Royal Bank of Canada’s (RBC) quarterly release found all housing
categories became more affordable. This came at a time when there was
considerable debate over whether some Canadians are overextending
themselves by taking out mortgages they can’t afford – particularly in
hot markets like Toronto and Vancouver.
At this point, housing in Canada was as affordable as it was a year
prior. Then just last month RBC released its housing trend report and
determined that increases in housing prices and mortgage rates have
slightly eroded housing affordability in the second quarter of 2012. The
report was released in the same week the Canadian Real Estate
Association (CREA) 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.
So what happened? Did prices go up or did they fall?
The RBC report found that affordability deteriorated in two of three
housing categories – detached bungalows and two-storey homes – while
condominiums were flat. The erosion of affordability levels in the first
quarter of this year stemmed mostly from dramatic increases in a single
market – Vancouver. The Toronto-area market also deteriorated.
Strong activity worsened affordability in Saskatchewan and Manitoba, and
Atlantic Canada suffered a modest deterioration. Montreal and Alberta
bucked the national trend by showing some improvements in affordability.
When we take a look at the resale market versus new home sales and
especially the condo market, we get a much clearer picture of what’s
been going on. At the national level, the resale housing market, on the
whole, appears balanced. The ratio of listings to sales stood at 6.1
months this past July and has shown little variation in almost two
years. This stability, however, is hiding the recent softening in the
Toronto and Montreal condo market and the entire resale market in
Vancouver.
The softening in these three major metropolitan areas
is also coinciding with a high number of homes under construction. In
Toronto, for example, the number of condos unsold, which includes those
that are pending construction, has surpassed the previous peak reached
at the end of 2008. Clearly developers would like to see some of the
supply sold before launching new projects. It’s the reluctance of these
developers to move forward that will contribute to a decline in the
overall construction of new dwellings across the country.
The unfortunate part is that these reports look at what has already
happened, rather than at what is happening right now. Mortgage brokers
and Realtors across the country are reporting different levels of
activity in different areas of the country following the overall pattern
of activity already described. For example Atlantic Canada has slowed
somewhat, yet centres like Halifax have increased activity. Part of
Ontario has slowed but other areas have seen increases in sales
activity. The one thing that has not happened is the market has not
stopped.
We have not yet heard of massive foreclosures, which mean that
households continue to pay their mortgages and their debts. House prices
are coming down, interest rates are still relatively low and while it’s
true that recent changes to the length of amortizations and the amount
of equity a homeowner can take out of his or her home has had somewhat
of an impact, as long as the economy keeps moving forward, it’s just a
matter of playing the waiting game. It’s not the worst of times.
Build Rates
5 Year Fixed 3.99% (9 Months) 4.24% (12 Months)
5 Year Variable Prime (9 Months) Prime (12 Months)
Still have the 2.99% 5 year fixed rate (insured). Mortgage must close withing 45 days, not available for pre approvals.
3.19% for 120 day rate hold, 5 year term!
2.49% 1 Year Rate 2.59% 2 Year Rate 2.69% 3 Year Rate 3.09% 4 Year Rate 3.69% 7 Year Rate 3.89% 10 Year Rate * this rate is fully portable, and with full pre payment options!
This is a great rate for those that are looking long term
for their mortgage options*
Still have CASH BACK mortgages as well! Please call for details!
POSTED is still 5.24% and the Bank of Canada Rate announcement is due Sept 5th, 2012
What can we make of the low interest rate environment we are now seeing?
Fixed rates are dropping and one lender has dropped its variable rate.
Will more lenders follow suit?
When the five-year fixed rate fell to under 3% earlier this year,
Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney
cautioned consumers and warned lenders to be careful with debt loads.
Clearly it didn’t slow the robust housing market – purchases and
refinances continued at a pace not seen since 2007.
Then Flaherty announced some changes to the mortgage rules to slow
down the pace of rising debts. So what happened? We had a couple of
weeks of quiet as the summer was also upon us.
It appears both lenders and investors are not comfortable with a
lull. They have been taking advantage of lower bond yields, which
accounts for lowered fixed rates. Even the seven and 10-year rates are
looking very good. At the time of this writing a seven-year rate can be
had for 3.69%. The spread between the posted rate on a five-year
mortgage of 5.24% and a government of Canada five-year bond is almost
400 basis points — the highest it’s been since the financial crisis in
2008.
Also, a few monoline lenders – lenders who specialize in mortgage
lending only -- are now offering their variable rate under prime
--something we have not seen consistently since last Fall. Clearly,
these lenders have an appetite for funding right now. It will be
interesting to see if this initiates a mini-price war in the variable
rate market. But there is always the threat that the government will
step in and introduce even tougher rules.
These rates continue to tempt consumers. This may be the best time
to consolidate even if it’s only to 80% of the value of your property.
On the other hand, the challenge is the increasing debt loads that a low
interest rate environment can create.
Craig Alexander, chief economist at Toronto-Dominion Bank suggested
in a recent news article that consumers should not abuse this
opportunity by taking on new debt but should take advantage of it.
The Canadian Real Estate Association had previously forecast housing
sales in 2012 and 2013 that were roughly on par with the 10-year
average for annual activity. The updated forecast now predicts activity
slightly above the long term average. The national average price is also
forecast to rise modestly in 2013, edging up two per cent to $378,200.
It’s hard to heed the warnings from government when the economy, the job market and the housing market seem to be doing so well.
