Home ownership affordable

First-time buyers boosting resale housing market

First-time buyers are helping kick-start a sputtering resale real estate market, thanks to some contributing factors, say those in the know.

The low interest rates and other government incentives have helped first-time buyers get into home ownership, says Lai Sing Louie, senior market analyst with Canada Mortgage and Housing Corp.

"There are incentives for them to buy now. The first-time buyers can, for instance, take out $25,000 in RSP money (up from the previously $20,000 limit) without consequences, and if they bought after January 27, they are able to qualify for $750 in tax relief next year," says Lai Sing Louie.

"And mortgage rates are at a very good rate right now."

In fact, they're at record lows, so homeowners can get in and have payments that are much less than they were even a year ago, he says.

"People can get a five-year fixed rate for four per cent, whereas it was 6.6 per cent last year at this time," says Louie.

Combine that with the lower prices for condos in the market, and housing affordability is much improved, he says.

The average price of resale condominiums that sold through the Calgary Real Estate Board last month was $284,056 --down nine per cent from the same month last year when the average price was $312,620, but up from the average of $268,971 posted in February.

A total of 446 condos sold in March, compared to 565 in March 2008 and just 343 last month.

Taking the average March 2008 condo price ($312,620) with 10 per cent down, the mortgage amount would be $281,358. "At last year's interest rate of 6.6 per cent and amortization of 25 years, monthly payments would be around $1,917," says Louie.

Last month, that same condo would sell for an average of $284,056. "With interest rates at four per cent, the same 10 per cent down and 25-year amortization would mean monthly payments of $1,349. That's down $568 a month--much more affordable," says Louie.

"And that gives people a degree of certainty knowing what the mortgage will cost for the next five years."

The numbers are "encouraging," says Bonnie Wegerich, president of CREB and a realtor with Century 21 Castlewood Agencies. "Two years ago, young people couldn't afford to buy. Our statistics show that our most active sales by price category in condos was the $200,000 to $299,999 range."

In fact, of the 446 condo sales last month (compared to 565 in March 2008 and 343 in February), 263 units, or 59 per cent of sales, were in that range.

Listings are coming down as well, with fewer condos for sale compared to a year ago.

As of the end of March, 2,052 condos were in the inventory, compared to 2,781 last year for the same month. It now takes an average of 56 days to sell a condo, compared to 43 days in the same month the year before.

Property sales strengthen in current market cycle

The Metro Vancouver housing market experienced a movement away from volatility and toward stability to start the spring season.

Home sales in March 2009 returned to levels witnessed at the beginning of the decade, with 2,265 sales recorded across Metro Vancouver for the month, a 53 per cent increase over February but a 24.4 per cent decrease over March 2008, when 2,997 sales were recorded.

Since 1999, March sales have increased 31 per cent, on average, over the month of February. March 2009 marks the second consecutive month that sales have outperformed the ten-year average for this month-over-month comparison.

“There’s more confidence in the housing market today than we were seeing late last year. Sales activity is rising to more typical levels given the season, and the number of homes being listed for sale is levelling off,” said Scott Russell, president of the Real Estate Board of Greater Vancouver.

New residential listings on the MLS® declined 22 per cent in March 2009 to 4,385 compared to March 2008. This is the fifth month in a row that new listings have decreased year-over-year and the third consecutive month where those declines exceeded 20 per cent.

Despite these trends, total active listings at the end of March 2009 had still reached 14,579, a 19 per cent increase compared to the end of March 2008.

“REALTORS® are seeing an increasing level of interest from first-time buyers who are attracted to low interest rates, good supply of housing, greater affordability, and a considerably lower overall cost of servicing a mortgage compared to recent years,” Russell said.

Sales of detached properties in March 2009 declined 19.6 per cent to 897 from the 1,116 units sold during the same period in 2008. The benchmark price, as calculated by the MLSLink Housing Price Index®, for detached properties declined 15.1 per cent from March 2008 to $649,342.

Sales of apartment properties declined 28.8 per cent last month to 976, compared to the 1,370 sales in March 2008. The benchmark price of an apartment property declined 13.5 per cent from March 2008 to $337,099.

Attached property sales in March 2009 decreased 23.3 per cent to 392, compared with the 511 sales during the same month in 2008. The benchmark price of an attached unit declined 11.2 per cent between March 2008 and 2009 to $420,563.

Home buyers ignoring savings associated with mortgage rate guarantees: survey

Many only use a quarter of the time available, limiting chance to secure the best rates

Close to half of Canadian home buyers wait less than 30 days before their home’s closing date to secure a mortgage rate, according to a recent Angus Reid poll.

The poll, commissioned by ING Direct, found that 40% of Canadian mortgage holders waited only 30 days or less in advance of the home’s closing, while another 27% waited nearly two months.

According to ING Direct, this last minute behaviour indicates that many Canadians are not taking advantage of the savings inherent in securing rate guarantees which are available as early as 90 to 120 days before a home closes. Analysis shows that those who used the full rate guarantee period of 120 days, saved 0.18% on average or about a $1,800 over five years. These savings are based on a $200,000 mortgage with a 25 year amortization, five year fixed term at 6.96% (average posted five year fixed rate over last 10 years) and paid monthly.

According to Martin Beaudry, vice president of lending at ING Direct, not taking advantage of the full period available, is a missed opportunity. “Securing a rate guarantee, even before you start looking for a new home or your existing mortgage comes up for renewal, is a quick and simple way to save your money on mortgage interest payments over the long term. In fact, it’s the reason we’ve made guaranteeing an early rate at ING Direct that much easier via the rate hold, which essentially allows someone to hold a great rate without having to provide the information required during a more traditional pre-approval process.”

The rate hold, introduced by ING Direct this month, allows home buyers to quickly and simply hold a great rate for up to 120 days. For fixed rates this means protecting a low rate today against any increases that may occur over that time. For variable rates, it holds the best spread from ING Direct Prime, so if the spread changes and the rate increases as a result, Canadians are still protected. The service is the first of its kind in Canada, ING Direct says.

Taking full advantage of a rate guarantee period makes financial sense for both new home buyers and those with existing mortgages. In fact, those with existing mortgages are the ones who could benefit most from a rate hold.

The survey found that of the 64% of Canadians whose mortgages have come up for renewal, over one quarter (27%) indicated they let their mortgage automatically renew. Not negotiating a better rate than what is offered in a renewal letter by the current lender, or looking to alternate lenders for the best rate available in the market, means Canadians could be missing out on the opportunity to get a better rate

The survey found that Quebeckers were the worst offenders, being most likely to let their mortgages auto renew (36%) and apply for a mortgage 30 days or less before their home’s closing date (52%).

Insurance

June Jell will never forget the time she and her husband John sat down with their agent and turned mortgage insurance down flat. Six months later, he died suddenly of a heart attack at the age of 59, leaving her struggling to keep up with house payments.
While she got back on her feet eventually, it wasn't without sacrifices along the way --including the family home.
Now she tells everyone she knows, "If you can get it, take it. We thought mortgage insurance was expensive at the time, and because of our age we believed we could handle everything."
In retrospect, she realizes, "It really wouldn't have been that expensive after all. It would have been a blessing."
Insurance of any kind is one of those things people like to put on the back burner or do without. "A lot of homeowners don't want to add the cost of insurance to their mortgage payment," says Feisal Panjwani, a senior mortgage consultant with Invis Inc. in Surrey, B. C. "One of the biggest mistakes they make when they sign their mortgage is declining insurance, thinking they will research it on their own. Nine times out of 10, they don't get around to it. Then, when something goes wrong, it's too late."
It's not surprising that some homeowners balk at mortgage insurance, especially when they feel they are already stretching their monthly payments to the maximum.
Especially in these economic hard times, however, you can't afford to be without it, says Jennifer Hines, vice-president of creditor insurance for RBC Insurance in Mississauga, Ont. "Clients at all stages need to make sure their mortgage is protected. Some have life and disability insurance, but the family still could be left holding a debt on what tends to be a person's largest individual debt obligation."
The ideal time to look at options is when you do your mortgage application. The most common are insurance tied to the mortgage itself, or to the lender. Tying insurance to a mortgage balance is usually preferred since you can switch lenders and keep the same policy. This reduces the risk of facing higher premiums or finding out you are uninsurable when you reapply at another bank, Lorne D. Greenwood, a real estate lawyer based in Milton, Ont., advises.
"Getting insurance through an independent broker to cover the same amount means you won't have to re-qualify with each mortgage," Mr. Greenwood says. This is also a good choice when your mortgage balance decreases and you want to reduce your premiums. Mr. Panjwani notes that it's especially important for firsttime or younger buyers to get coverage because the mortgage balance is high, insurance premiums tend to be in their favour, and medicals are not generally required.
For those who think their disability and life insurance policies are enough if things go wrong, that may not be the case, Ms. Hines warns. "Typically, disability policies will only pay 60% to 70% of your monthly income, so there is still a gap. You still need coverage for other expenses. We tell people it doesn't have to be an either/or situation. We also suggest they consider whether they need to top up what they have, so they don't have to be concerned about mortgage payments in the event of a death or disability."
There are additional considerations homebuyers should be aware of regarding mortgage-related insurance. When it comes to high-ratio mortgages, according to the Bank Act anyone borrowing more than 80% of the value of the property must insure the mortgage to protect the lender against defaults.
The premium for this default insurance -- not to be confused with conventional mortgage/life insurance coverage -- is paid once at the time of the closing, at a rate that varies between 0.5% and 3.75% of the mortgage amount. Title insurance is also an increasingly important option for protection against title problems and fraud. "Just about every lawyer is recommending it," Mr. Greenwood says. "The premiums can range in price depending on the value of the home you are insuring."
Mr. Panjwani notes that buying mortgage insurance doesn't have to break the bank. "If you can't manage it all, cover what you can afford. For example, you can insure a percentage of a portion of the outstanding balance, or the life of one of the borrowers through a term life policy.
"There is no real right or wrong answer on what type of insurance you should take. Regardless of the choice, some coverage is better than none at all."

Tune up your credit score for more chance at a good mortgage

If you’re thinking of getting your first mortgage or you have to renew one, you may be looking forward to the all-time-low mortgage rates now available. But beware, those mortgages — and any mortgage — may be hard to get.

One thing you can do to avoid being left out in the mortgage-less cold is to check your credit score, and make it the best it can be.

Lenders have tightened up their requirements and the government has made it more difficult to get mortgage insurance, said Brian Peterson, president of the Mortgage Brokers Association of British Columbia.

Last summer, the federal government set new guidelines for which mortgages can receive government-backed insurance.

Under the new rules, set out in a Department of Finance backgrounder, the government will no longer insure 40-year mortgages. Also, while zero-down mortgages are still available, the government will only insure 95 per cent of those loans.

The government also set a credit score floor of 620 for potential borrowers, with a limited number of exceptions allowed. (Canada’s major credit-rating agencies use a scale from 300 to 900; the higher the number, the better your credit rating is.)

Peterson said the credit score floor has been reset at 600.

All mortgages in which the loan is more than 80 per cent of the property value require insurance. And lenders now sometimes choose to insure other mortgages at their own expense so they can sell them as part of an asset-backed security, Peterson said.

So while a borrower’s credit score is not the only criterion — lenders also want stable employment and a low debt load — it is an important one.

It’s a score people can improve.

There are two providers of credit scores in Canada, Equifax Canada and TransUnion.

Tom Reid, director of consumer solutions for TransUnion, has heard about cases where consumers who thought they had a good credit score are being declined for mortgages.

Reid recommends people aim to get their credit scores up to 750, and 47 per cent of Canadians are in that range.

Credit scores are based on reports lenders provide regarding loans they have made and their repayment. Lenders include credit card companies, retailers that have their own credit cards, and banks reporting lines of credit and auto loans.

For a good credit report, payments should be made on time, even if the payment required is small and almost not worth bothering, Reid said. And balances on credit cards should be kept below 50 per cent of the cards’ limit.

Keep applications for credit down to a minimum, except if you are shopping around for the best deal on a big purchase, Reid said. Potential lenders may think you are desperate for credit if you have a number of different companies checking your score at the same time.

Also have a mix of loans and credit cards to show you can manage debt, Reid said.

“It may be easier to manage [one loan] but it doesn’t show lenders that you have the ability to manage other types of credit with potentially higher payment obligations,” he said.

Also, before cancelling a credit card, think about whether keeping it could positively affect your score. If you’ve made the payments on time and have had the card for a while, you may be better off hanging on to it, and not using it. Once you’ve cancelled the card, you’ve also cancelled its positive credit history.

What hasn’t traditionally been included in credit reports is mortgages. But that’s changing with more financial institutions choosing to provide mortgage information, Reid said.

One problem some would-be borrowers may face is a lack of credit history. For them, Reid suggests starting with a credit card from a retailer as they are generally easier to get. Then make sure the payments are made on time.

The longer credit history you have, the better your score, so start early, Reid said.

The Financial Consumer Agency of Canada has helpful information about credit scores — how to read the reports and how to improve them — on its website here. Check out “For Consumers.”

Refinancing to save money

Now that the Canadian Lenders have followed the Bank of Canada’s lead and dropped their prime rate by .50% to 2.50% not only is the variable rate coming down but so are the fixed rates. Every day it makes more sense to take a look at your mortgage and see what re-financing would save you. I will do my best to break down the components to try and simplify this for you.

First of all, let’s take a few things for granted:

1) you are currently maintaining a good credit record

2) your job/income is stable and reliable

3) the value of your property is such that you currently owe less than the property is worth.

On a simple re-finance to get a better rate and save money on interest, you first need to determine what your pre-payment penalty is.

In just about every mortgage, the lender has the right to charge the greater of “Interest Rate Differential” or “three months interest”. “Interest Rate Differential” or IRD is calculated usually determined by most lenders by the difference between the posted rate at the time you took your mortgage and the current posted rate. You may have gotten a discount at that time. It doesn’t matter, they will probably use the posted rate.

So, for example, say in March, 2007 the posted rate at your lender was 6.79% and the posted rate today is 5.79%. The difference is 1.0%. If you took a 5-year mortgage, you would then have 3 years left. If your current balance is $200,000 then multiply that by 1.0% by the remaining 3 years of the term = approximately $6,000. Depending on the amortization chosen at that time will determine the decreasing balance and actual amount of the penalty.

For the sake of this exercise, let’s say it is $5,500. Now, the same mortgage, three months interest would be based on the rate you actually have on your mortgage. Let’s say it is 5.35%. Therefore, 3 months interest would be $200,000 multiplied by 5.35% (one year’s interest) = $10,700 divided by 4 = $2,675 (3 months interest). Again allowing for a decreasing balance and your penalty may be in the range of $2,550. That means the lender would have the right to charge the $5,500. I say “the right to charge” because you may be able to negotiate this penalty down with what you would offer in return for a re-financing package. And that may consist of the increase in mortgage dollars you are going to be borrowing.

Once you have determined your penalty, then you need to know what your current balance is, add any discharge fee (usually $75 – $150) and legal fees to register the new mortgage (&750-$1000). Now you know what your new mortgage will need to be.

Using an amortization table you can determine what your balance will be as you pay your new mortgage down. Now if you want to truly compare the savings, use the payment you have been making on your original mortgage. Same payment, lower interest not only means you are paying less interest but the amount being paid on the principal is more so you are ultimately paying your mortgage off much faster. Compare the amortization schedule from your original mortgage to the new mortgage to determine your savings.

You can also calculate in savings against future increases. Remember, your original mortgage term will have to be renewed in two or three years and the rates will be higher again. These lower rates won’t last forever. So your new mortgage at the lower rate will carry on for two or three years longer and the savings will be all the more.

Now, if you really want to save money and still pay for your home quicker, consider your personal debt. Any loans and credit cards you may be paying 12 – 18% or more on. Remember, thinking that you are safer by having less debt on your home only works if you don’t owe any personal debt. And if you owe money, you will have to pay it all back. The key is to pay less interest. Transferring $25,000 of personal debt at a rate of 15% to your mortgage can easily save you as much as $5,000 in only three years (11% difference on an average balance of $15,000). If you are paying $750/month on that debt you can simply add that to your mortgage and your personal debt will be paid off just as quickly as if you kept the personal debt separate from your mortgage. Using the examples I have suggested here savings can add up to as much as $15,000.

Now, these ideas above are for the individual who has equity in their property and has the cash flow to make their current payments. But what if you have had a cut in income or are concerned about a future cut in income and are just looking to cut down on your payments?

If you are like many who started out with a 25-year mortgage, say $150,000 @ 6.0%, your payments are probably at about $960/month plus property taxes. You may also have the same personal debt of approximately $25,000 @ 12 – 18% with payments of about $750/month. So you are obligated to pay about $1710/month on an income that isn’t so reliable. If you were to re-finance now with a $175,000 mortgage over 35-years @ 3.89% (5-year term) your payments are now $760/month. You free up cash of $950/month that you don’t have.

If your income improves you increase your payments &/or make lump sum payments of 15 – 20% (depending upon the lender) to the tune of at least the $950/month you have been saving. You are back to paying off your mortgage in even less than the 25 years you originally signed up for. Even if you don’t make the extra payments you still save the $5,000 on your personal debt. And it’s a win-win situation. The bank is glad to help you with a mortgage that fits your income better. They will have the confidence you can afford it.

The main point I am trying to make is that you have an opportunity to use the value of your home to manage your debt in a way that puts money where it belongs, in your hands.

How monetary policy influences mortgage decisions

Variable or fixed? It's the question homeowners and homebuyers ask most often and inevitably elicits an unsatisfying answer.

Whether it's worth paying the penalty to terminate a fixed-rate mortgage to obtain the lower rates available on variable-rate mortgages is a calculation that forces assumptions about future monetary policy even the Bank of Canada is hedging its bets on.

Over the past few years, the focus of monetary policy has been inflation control. What this has to do with mortgages is that the principal tool for controlling inflation is the interest rate lever. The bank has set an inflation target of two per cent and interest rates are raised or lowered to increase or reduce borrowing, which in turn stimulates or depresses demand. In this way, the bank ensures demand doesn't overwhelm the economy's capacity to satisfy it and inflation is held in check.

Since December 2007, as the economy has slid into recession, the central bank, in concert with other industrialized nations, has cut its overnight lending rate by 400 basis points to 0.5 per cent in an effort to bolster demand. Clearly, it can't go much lower.

The bank has also been trying to encourage lending by injecting liquidity into the financial system. There has been concern that this infusion of money will be inflationary, raising the threat of stagflation -- inflation with no economic growth.

However, the bank is not "printing money" to carry out this task. Rather, it is purchasing assets, such as commercial paper and bankers' acceptances, from financial institutions that have been unable to trade them because of tight credit markets and replacing them with cash or more liquid government securities.

These purchase and resale agreements are temporary and unwound after 28 days so they are, in effect, simply exchanges of assets with no increase in the monetary base.

Similarly, the federal government's infrastructure spending program should have no significant impact on inflation since government demand is replacing private sector demand. In other words, there is no increase in aggregate demand.

For inflation watchers, this should be good news. And it gets even better. In January, the bank said it expected inflation to return to the two-per-cent target in the first half of 2011 as the economy returns to its potential. It has since hinted that it might be later, sometime after mid-2011.

Variable rate mortgage rates are derived from the prime rate, which financial institutions usually, but not always, set in accordance with Bank of Canada interest rate adjustments. But negotiations on mortgage rates are getting tougher. Lenders are beginning to set variable rates at a premium over prime instead of the past practice of a discount to prime.

Fixed-rate mortgages are based on bond yields, which are market driven and largely independent of central bank moves. Higher yields increase funding costs for financial institutions which raise fixed mortgage rates in response.

As it happens, bond yields have been bumping record lows in a slumping economy, making fixed rate mortgages a better deal than they've been for decades.

So, variable or fixed? It's up to you.