There is a small loophole in the new federal mortgage rules that could make it easier for the banks to lend out money to first-time buyers.
The federal government announced last month new requirements for anyone borrowing money for a house and needing mortgage insurance. If you have less than a 20% down payment and are borrowing from a financial institution covered by the Bank Act, you have to take out mortgage default insurance, which ensures the banks are covered for any losses resulting from payment defaults.
For principal residences, the new rules force consumers to qualify for a loan based on being able to make payments on a five-year fixed-rate mortgage, which has a much higher interest rate than variable mortgages, now as low 1.85%.
Clearly, Ottawa’s view was toward rising rates. And this week, two of the major banks raised their posted rate on five-year fixed mortgages to 5.85%.
But one lingering question is how the five-year rate would be calculated in terms of qualifying a customer. In other words, it would obviously be a lot tougher to qualify for a mortgage under the new rules when using the posted rate of 5.85%. But if using the actual rate consumers get -- these days as low as 3.75% -- that’s a lot less income you’ll need to buy your first home.
Officials in Ottawa have been mum on what numbers should be used.
But an internal document distributed by Canada Mortgage and Housing Corp. to mortgage brokers, obtained by the Financial Post, shows consumers will be able to use their actual rate to qualify for a mortgage if they go for a term five years or longer.
If buyers want a variable-rate mortgage, they will have to qualify based on “the benchmark rate,” which is essentially the posted rate.
So, if you want to go short, you had better be able to make payments based on an interest rate as high as 5.85%, which is where the benchmark rate will likely sit by next week.
“Probably 10% of the overall mortgage population is going to be affected by this rule in the sense they are no longer going to be able to qualify for a variable-rate mortgage or a one- to four-year term,” says Robert McLister, editor of Canadian Mortgage Trends. “The qualifying rate is going to affect the debt ratios of those people.”
The end result may see more people forced to lock in their rate, which is hardly fair given variable-rate mortgages have been a better deal than fixed-rate rate mortgages about 88% of the time over the past 50 years, before the recent credit crisis.
“This will help people become accustomed to making payments based on where mortgage payments are likely to be going,” said Peter Vukanovich, chief executive of Genworth Financial Canada, the mortgage insurer.
He doesn’t think the changes are a major deal, given that most of the major banks have been qualifying consumers based on their four- and five-year rates. His company was already only insuring products based on rates as high as 4%.
“It’s a good rule change when you are situation right now where we are increasing interest rates,” says Jim Smith, vice-president of Scotia Mortgage Authority. “Most lenders, ourselves included, have qualified based on at least the three-year posted rate.”
The discrepancy is, the three-year posted rate at most banks is actually higher than the five-year discounted rate.
And that means it is actually going to get easier to get a mortgage -- as long as you do what the government tells you to do and lock in your rate.
Monday, April 5, 2010
Friday, April 2, 2010
Mortgage-rate rise means borrowers' party is almost over
Increase creates a dilemma for prospective homebuyers
Without announcing last call, Canadian banks have taken the punch bowl away from the mortgage party that millions have enjoyed, and hangovers are looming.
Last summer, the Bank of Canada and Federal Reserve in the United States said their overnight lending interest rates would remain near zero until at least the middle of this year. The reaction by Canadians was to buy houses with rates at historic lows, and party on.
But as economies in North America began rebounding, central banks hinted rate increases could occur fairly soon, especially in Canada.
Bond rates rose in anticipation and that was the catalyst for banks to lift five-year mortgage interest rates, generally by 0.6 per cent -- the greatest single-day hike since 1994 -- to 5.85 per cent. That's an increase of $88 in monthly payments on a $250,000 mortgage for 25 years.
And they've only just begun. The C.D. Howe Institute think-tank suggests the Bank of Canada should raise its overnight rate by 1.75 per cent in the next year, likely lifting five-year mortgage rates to 7.0 per cent, while other economists envision a five-year rate as high as 8.25 per cent in two years.
That presents a dilemma for prospective homebuyers. Should they join an anticipated rush to purchase homes now and lock in at low rates, although housing prices could climb immediately with a blip in buyers during this period? Or should they wait for the frenzy to die down, expecting house prices to be lower in 12 months than they will be in three, even though mortgage rates will be higher a year down the line?
A major consideration should be whether you think you can handle lower mortgage rates now in this recovering economy better or worse than you would be able to handle higher payments a year from now when the economy, we hope, has improved and the employment situation has stabilized somewhat.
The Conference Board of Canada released a report saying one-fifth of Canadians already cannot afford both good-quality housing and either nutritious food or healthy recreational activity.
And the Bank of Canada reported that if mortgage and consumer credit interest rates went up one per cent, a record-high 9.6 per cent of households would be deemed financially vulnerable.
The question is whether we will pass the tipping point from people being unable to get into the housing market to the state where existing homeowners are unable to keep the roofs over their heads. You don't need long memories to recall how prolonged low interest rates after the 2001 terrorist attacks in the United States eventually led to massive foreclosures there when homeowners couldn't afford payments once rates rose.
Finance Prof. Moshe Milevsky with York University in Toronto says that instead of just considering financial savings in whether to have a short-term variable or long-term fixed mortgage, a person should also consider debating whether going with a short-term mortgage will leave a person unable to qualify for renewal, say if they lose their job, at variable and short-term rates.
Adrian Mastracci, with KCM Wealth Management in Vancouver, says: "If you can stand the inevitability of higher payments, a variable rate can still make sense.
"But those that have no wiggle room on increased payments should look at a five-year rate."
He also suggests paying down lines of credit aggressively before rates climb, investigating the penalty to refinance your mortgage at a lower rate if possible, considering a mortgage that is partly fixed and partly variable, and shopping around and negotiating for the best rates.
With rates so low, financial institutions had little wiggle room to offer valued clients lower-than-posted mortgage rates, but that expands as posted rates go up.
And that segues into one of the three mortgage changes the federal government brings into force later this month. In the past, borrowers had to make enough family income to pay the three-year fixed mortgage rate to qualify for a mortgage, and the new rules mean you will have to earn enough family income to handle the five-year fixed rate. TD Bank said a person wanting a mortgage on a $337,000 home would need to make another $9,200 in household income to qualify. It will be more than that with the higher five-year rates.
But one question has been whether the qualifying standard would be based on the posted five-year-fixed rate, or on an actual reduced rate a borrower might get. A document by the Canada Mortgage and Housing Corp. suggests the lower actual rate would be used.
Even so, it is suggested some people wanting to lock in long-term may no longer qualify for a variable-rate mortgage or a term of less than five years.
On the positive side of rising interest charges, a widening spread between borrowing and lending rates means bank shares should do well and they may be able to increase dividends.
And for investors who turned to safety amid the volatility of equity markets in recent years, rising rates should start to improve returns on vehicles like guaranteed investment certificates and money market funds and high-interest bank accounts.
For borrowers, the party's almost over, but for many lenders it's only just begun.
Without announcing last call, Canadian banks have taken the punch bowl away from the mortgage party that millions have enjoyed, and hangovers are looming.
Last summer, the Bank of Canada and Federal Reserve in the United States said their overnight lending interest rates would remain near zero until at least the middle of this year. The reaction by Canadians was to buy houses with rates at historic lows, and party on.
But as economies in North America began rebounding, central banks hinted rate increases could occur fairly soon, especially in Canada.
Bond rates rose in anticipation and that was the catalyst for banks to lift five-year mortgage interest rates, generally by 0.6 per cent -- the greatest single-day hike since 1994 -- to 5.85 per cent. That's an increase of $88 in monthly payments on a $250,000 mortgage for 25 years.
And they've only just begun. The C.D. Howe Institute think-tank suggests the Bank of Canada should raise its overnight rate by 1.75 per cent in the next year, likely lifting five-year mortgage rates to 7.0 per cent, while other economists envision a five-year rate as high as 8.25 per cent in two years.
That presents a dilemma for prospective homebuyers. Should they join an anticipated rush to purchase homes now and lock in at low rates, although housing prices could climb immediately with a blip in buyers during this period? Or should they wait for the frenzy to die down, expecting house prices to be lower in 12 months than they will be in three, even though mortgage rates will be higher a year down the line?
A major consideration should be whether you think you can handle lower mortgage rates now in this recovering economy better or worse than you would be able to handle higher payments a year from now when the economy, we hope, has improved and the employment situation has stabilized somewhat.
The Conference Board of Canada released a report saying one-fifth of Canadians already cannot afford both good-quality housing and either nutritious food or healthy recreational activity.
And the Bank of Canada reported that if mortgage and consumer credit interest rates went up one per cent, a record-high 9.6 per cent of households would be deemed financially vulnerable.
The question is whether we will pass the tipping point from people being unable to get into the housing market to the state where existing homeowners are unable to keep the roofs over their heads. You don't need long memories to recall how prolonged low interest rates after the 2001 terrorist attacks in the United States eventually led to massive foreclosures there when homeowners couldn't afford payments once rates rose.
Finance Prof. Moshe Milevsky with York University in Toronto says that instead of just considering financial savings in whether to have a short-term variable or long-term fixed mortgage, a person should also consider debating whether going with a short-term mortgage will leave a person unable to qualify for renewal, say if they lose their job, at variable and short-term rates.
Adrian Mastracci, with KCM Wealth Management in Vancouver, says: "If you can stand the inevitability of higher payments, a variable rate can still make sense.
"But those that have no wiggle room on increased payments should look at a five-year rate."
He also suggests paying down lines of credit aggressively before rates climb, investigating the penalty to refinance your mortgage at a lower rate if possible, considering a mortgage that is partly fixed and partly variable, and shopping around and negotiating for the best rates.
With rates so low, financial institutions had little wiggle room to offer valued clients lower-than-posted mortgage rates, but that expands as posted rates go up.
And that segues into one of the three mortgage changes the federal government brings into force later this month. In the past, borrowers had to make enough family income to pay the three-year fixed mortgage rate to qualify for a mortgage, and the new rules mean you will have to earn enough family income to handle the five-year fixed rate. TD Bank said a person wanting a mortgage on a $337,000 home would need to make another $9,200 in household income to qualify. It will be more than that with the higher five-year rates.
But one question has been whether the qualifying standard would be based on the posted five-year-fixed rate, or on an actual reduced rate a borrower might get. A document by the Canada Mortgage and Housing Corp. suggests the lower actual rate would be used.
Even so, it is suggested some people wanting to lock in long-term may no longer qualify for a variable-rate mortgage or a term of less than five years.
On the positive side of rising interest charges, a widening spread between borrowing and lending rates means bank shares should do well and they may be able to increase dividends.
And for investors who turned to safety amid the volatility of equity markets in recent years, rising rates should start to improve returns on vehicles like guaranteed investment certificates and money market funds and high-interest bank accounts.
For borrowers, the party's almost over, but for many lenders it's only just begun.
Tuesday, February 16, 2010
Flaherty tightens mortgage taps
Finance Minister Jim Flaherty announced new rules Tuesday aimed at preventing homebuyers from getting into financial difficulty when mortgage rates rise.
After consulting with major Canadian lenders, Flaherty outlined the latest weapons at Ottawa's disposal aimed at removing some of the speculative froth in the housing market.
Finance Minister Jim Flaherty has announced new rules aimed at preventing homebuyers from getting in over their heads with mortgage debt.Finance Minister Jim Flaherty has announced new rules aimed at preventing homebuyers from getting in over their heads with mortgage debt. (Fred Chartrand/Canadian Press)
"There is no evidence of a housing bubble, but we're taking prudent steps today to prevent one," he said at a news conference in Ottawa. "If some lenders aren't willing to act themselves, we will act."
Broadly speaking, the plan unveiled has three components.
First, Ottawa will require that all borrowers meet the standards for a five-year fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term.
"This will guard against higher rates in the future," Flaherty said.
Second, the rules would lower the maximum Canadians can withdraw when refinancing their mortgages to 90 per cent of the value of their home, from 95 per cent.
And finally, Ottawa will now require a minimum 20 per cent down payment to qualify for CMHC insurance for non-owner-occupied properties purchased as an investment.
The last rule is aimed at reining in would-be real estate speculators who own multiple properties beyond their primary residence.
"We want to discourage the tendency some people have to use a home as an ATM, or buy three or four condos on speculation," Flaherty said.
Minimum down payment unchanged
There had been speculation the Department of Finance might implement legislation raising the minimum down payment from five to 10 per cent of a home's value, or reduce the maximum amortization period from 35 years to 30 years.
Those measures were not part of Flaherty's announcement Tuesday, but all options are still on the table should circumstances change, Flaherty said.
The adjustments to the mortgage insurance guarantee framework, to be implemented as of April 19, 2010, are not likely to revolutionize the industry. Indeed, current policies at some large Canadian lenders are similar to the first peg of Flaherty's plan.
After Tuesday's announcement, the Bank of Montreal noted that it already requires its high-ratio borrowers to be able to qualify using the five-year rate. And all banks currently test all mortgage applicants on a three-year fixed-rate mortgage rule, Toronto-Dominion bank says.
People walk past new homes that are for sale in Oakville, Ont., in April. Finance Minister Jim Flaherty introduced new rules designed to rein in the real estate market Tuesday.People walk past new homes that are for sale in Oakville, Ont., in April. Finance Minister Jim Flaherty introduced new rules designed to rein in the real estate market Tuesday. (Nathan Denette/Canadian Press)
"While we do not believe that Canada faces a housing bubble, we fully support the minister's actions," Bank of Montreal said in a release. "Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent."
"This is a little bit late in telling Canadians we need to be more cautious in taking out a mortgage," Royal Bank chief economist Patricia Croft said in reaction to Flaherty's announcement.
Though she stopped short of calling Canadian real estate in bubble territory already, she said the April 19 date for implementation is actually likely to cause more short-term stimulation of the market, as people scramble to get in under the deadline.
"If you wanted to buy a house, wouldn't you now do it before April?" Croft asked. "It's even more evidence that house prices are going to cool down later this year."
For its part, the Canadian Association of Accredited Mortgage Professionals says it supports the amendments, calling them preventative measures against possible future risk.
Read more: http://www.cbc.ca/politics/story/2010/02/16/mortgage-flaherty.html#ixzz0fjTBVjlb
www.vancouvermortgagefinder.ca
After consulting with major Canadian lenders, Flaherty outlined the latest weapons at Ottawa's disposal aimed at removing some of the speculative froth in the housing market.
Finance Minister Jim Flaherty has announced new rules aimed at preventing homebuyers from getting in over their heads with mortgage debt.Finance Minister Jim Flaherty has announced new rules aimed at preventing homebuyers from getting in over their heads with mortgage debt. (Fred Chartrand/Canadian Press)
"There is no evidence of a housing bubble, but we're taking prudent steps today to prevent one," he said at a news conference in Ottawa. "If some lenders aren't willing to act themselves, we will act."
Broadly speaking, the plan unveiled has three components.
First, Ottawa will require that all borrowers meet the standards for a five-year fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term.
"This will guard against higher rates in the future," Flaherty said.
Second, the rules would lower the maximum Canadians can withdraw when refinancing their mortgages to 90 per cent of the value of their home, from 95 per cent.
And finally, Ottawa will now require a minimum 20 per cent down payment to qualify for CMHC insurance for non-owner-occupied properties purchased as an investment.
The last rule is aimed at reining in would-be real estate speculators who own multiple properties beyond their primary residence.
"We want to discourage the tendency some people have to use a home as an ATM, or buy three or four condos on speculation," Flaherty said.
Minimum down payment unchanged
There had been speculation the Department of Finance might implement legislation raising the minimum down payment from five to 10 per cent of a home's value, or reduce the maximum amortization period from 35 years to 30 years.
Those measures were not part of Flaherty's announcement Tuesday, but all options are still on the table should circumstances change, Flaherty said.
The adjustments to the mortgage insurance guarantee framework, to be implemented as of April 19, 2010, are not likely to revolutionize the industry. Indeed, current policies at some large Canadian lenders are similar to the first peg of Flaherty's plan.
After Tuesday's announcement, the Bank of Montreal noted that it already requires its high-ratio borrowers to be able to qualify using the five-year rate. And all banks currently test all mortgage applicants on a three-year fixed-rate mortgage rule, Toronto-Dominion bank says.
People walk past new homes that are for sale in Oakville, Ont., in April. Finance Minister Jim Flaherty introduced new rules designed to rein in the real estate market Tuesday.People walk past new homes that are for sale in Oakville, Ont., in April. Finance Minister Jim Flaherty introduced new rules designed to rein in the real estate market Tuesday. (Nathan Denette/Canadian Press)
"While we do not believe that Canada faces a housing bubble, we fully support the minister's actions," Bank of Montreal said in a release. "Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent."
"This is a little bit late in telling Canadians we need to be more cautious in taking out a mortgage," Royal Bank chief economist Patricia Croft said in reaction to Flaherty's announcement.
Though she stopped short of calling Canadian real estate in bubble territory already, she said the April 19 date for implementation is actually likely to cause more short-term stimulation of the market, as people scramble to get in under the deadline.
"If you wanted to buy a house, wouldn't you now do it before April?" Croft asked. "It's even more evidence that house prices are going to cool down later this year."
For its part, the Canadian Association of Accredited Mortgage Professionals says it supports the amendments, calling them preventative measures against possible future risk.
Read more: http://www.cbc.ca/politics/story/2010/02/16/mortgage-flaherty.html#ixzz0fjTBVjlb
www.vancouvermortgagefinder.ca
Monday, February 8, 2010
CREA forecasts record home sales in 2010
The Canadian Real Estate Association now says 2010 will be a record year for home sales.
The Ottawa-based group, which represents about 100 boards across the country, said sales this year will climb 13.3% from 2009. The market will also surpass the 2007 peak by 1.2%.
"Low interest rates are expected to boost housing demand in the first half of the year, resulting in strong annual sales growth in nearly all provinces in 2010, led by British Columbia and Ontario," said CREA in a release.
Part of the reason for the surge in activity in the first half of 2010 is being attributed to the harmonization sales tax that comes into effect in Ontario and British Columbia on July 1. Consumers are expected to try and beat that deadline.
However, by 2011, rising interest rates are forecast to put a dent in the housing market. CREA sales will drop by 7.1% in 2011.
"Although interest rates are expected to rise, they will still be low enough to keep affordability within reach for many homebuyers requiring mortgage financing, and support overall housing demand," said Dale Ripplinger, president of CREA.
Prices will rise by 5.4% in 2010, bringing the average price to $337,500. The national average price continues to be skewed by strong markets in B.C. and Ontario which has the two most expensive cities in the country to live in. By 2011, the national average price will drop by 1.5%.
"Improved financial market stability and recovering global economic growth mean that home sales activity in 2010 is unlikely to repeat the dive it experienced in late 2008 and early 2009," said Gregory Klump. chief economist at CREA. "A downward trend in national sales activity combined with an increase in listings will result in a more balanced market. Although builders are understandably more upbeat than they were during the depth of the recession, speculative building will likely continue to be held in check. As a result, while the real estate market will become more balanced, Canada will continue to avoid the massive realignment in housing supply and demand experienced in the U.S."
www.vancouvermortgagefinder.ca
The Ottawa-based group, which represents about 100 boards across the country, said sales this year will climb 13.3% from 2009. The market will also surpass the 2007 peak by 1.2%.
"Low interest rates are expected to boost housing demand in the first half of the year, resulting in strong annual sales growth in nearly all provinces in 2010, led by British Columbia and Ontario," said CREA in a release.
Part of the reason for the surge in activity in the first half of 2010 is being attributed to the harmonization sales tax that comes into effect in Ontario and British Columbia on July 1. Consumers are expected to try and beat that deadline.
However, by 2011, rising interest rates are forecast to put a dent in the housing market. CREA sales will drop by 7.1% in 2011.
"Although interest rates are expected to rise, they will still be low enough to keep affordability within reach for many homebuyers requiring mortgage financing, and support overall housing demand," said Dale Ripplinger, president of CREA.
Prices will rise by 5.4% in 2010, bringing the average price to $337,500. The national average price continues to be skewed by strong markets in B.C. and Ontario which has the two most expensive cities in the country to live in. By 2011, the national average price will drop by 1.5%.
"Improved financial market stability and recovering global economic growth mean that home sales activity in 2010 is unlikely to repeat the dive it experienced in late 2008 and early 2009," said Gregory Klump. chief economist at CREA. "A downward trend in national sales activity combined with an increase in listings will result in a more balanced market. Although builders are understandably more upbeat than they were during the depth of the recession, speculative building will likely continue to be held in check. As a result, while the real estate market will become more balanced, Canada will continue to avoid the massive realignment in housing supply and demand experienced in the U.S."
www.vancouvermortgagefinder.ca
Monday, February 1, 2010
Consumer debt loads are the new concern
The optimism that consumers felt heading into this year was short-lived, and has been overcome by nagging concerns over their debt loads.
The economy is recovering its footing, thanks to consumers who provided it with a shoulder to lean on by taking advantage of exceptionally low interest rates to buy homes and other big-ticket items.
But the tables are set to turn. Policy makers are hoping that new strength in the economy will give consumers the support they need to straighten out their finances, even as interest rates inevitably begin to rise.
It's an untested hypothesis. This is the first recession in which real credit, the amount of debt that people are taking on adjusted for inflation, has risen.
And growing anxiety about paying down debt suggests that the central bank's ability to fuel the economy with ultra-low rates could lose steam if consumers retract from their borrowing binge.
New figures that were released by the Bank of Canada on Friday show that the amount of consumer credit held by the country's chartered banks rose to $335.6-billion in December, up from $333.6-billion in November and from $291.7-billion in December of 2008.
The turn of a new year, coupled with a greater belief that interest rates will rise in the next six months, appears to have prompted more contemplation about debt levels.
And, as they evaluate their household finances, the majority of Canadians are worried.
Fifty-eight per cent of consumers are concerned about their debt loads, according to the January RBC Canadian consumer outlook index, which comes out today. It's the first time that that question has been added to the survey, but it's a fairly safe assumption that concern has risen.
“Canadians are clearly worried about their current level of debt,” said David McKay, the head of Canadian banking at Royal Bank of Canada.
“We know that the anxiety about a couple of other things has gone up,” added Marcia Moffat, who runs Royal Bank's mortgage business. “We saw people delaying major purchases, so they did some belt tightening. They're a little less positive about the Canadian economic outlook, and they're more concerned about jobs.”
Sixty-eight per cent of Canadians expect interest rates to rise in the next six months, up from 57 per cent in the prior month.
Higher rates will mean higher monthly payments on many debts, an inevitability that is spurring concern.
“We've been squeezing the consumer pretty hard as a means of offsetting the decline in external demand,” said Stewart Hall, an economist at HSBC Securities. While U.S. consumers are de-leveraging, Canadians continue to rack up debt. “We've ridden through this recession largely on the back of domestic consumer demand,” Mr. Hall noted.
To transition on to a sustainable economic growth path, demand from the private sector must bounce back, along with exports. “We need to see the consumer hand off some of the responsibility for growth,” Mr. Hall said.
With a little luck, the recovery will help boost disposable incomes, allowing debt-to-income levels, which are currently at an all-time high, to recover.
But some consumers are tapped out and won't be able to cope with rising rates. “Consumer bankruptcies have risen significantly over the past year, and they will continue to rise,” said Canadian Imperial Bank of Commerce chief economist Benjamin Tal. “Clearly, some people are in over their heads, and more will get into trouble when interest rates rise.”
The problem does not threaten to derail the recovery, but it will pose challenges, he suggested.
“We are stealing or borrowing activity from the future,” Mr. Tal said, especially in the housing market where many consumers have felt that if they didn't act now they'd miss the boat. “It means that borrowing and real estate activity will not be as strong in 2011, and that's the price we pay for today's activity.”
In evaluating the extent of the problem, Mr. Tal believes there has been too much focus on ballooning debt-to-income ratios, and too little focus on debt-to-asset ratios, which have remained relatively steady.
In fact, assets have been rising faster than liabilities since the second quarter of 2009, meaning that the net worth of individuals' is on the upswing. However, that's largely a result of surprising increases in stock markets and home prices, which gave consumer balance sheets a lift.
Matthew Le Roy
RBC Mortgage Specialist
www.vancouvermortgagefinder.ca
The economy is recovering its footing, thanks to consumers who provided it with a shoulder to lean on by taking advantage of exceptionally low interest rates to buy homes and other big-ticket items.
But the tables are set to turn. Policy makers are hoping that new strength in the economy will give consumers the support they need to straighten out their finances, even as interest rates inevitably begin to rise.
It's an untested hypothesis. This is the first recession in which real credit, the amount of debt that people are taking on adjusted for inflation, has risen.
And growing anxiety about paying down debt suggests that the central bank's ability to fuel the economy with ultra-low rates could lose steam if consumers retract from their borrowing binge.
New figures that were released by the Bank of Canada on Friday show that the amount of consumer credit held by the country's chartered banks rose to $335.6-billion in December, up from $333.6-billion in November and from $291.7-billion in December of 2008.
The turn of a new year, coupled with a greater belief that interest rates will rise in the next six months, appears to have prompted more contemplation about debt levels.
And, as they evaluate their household finances, the majority of Canadians are worried.
Fifty-eight per cent of consumers are concerned about their debt loads, according to the January RBC Canadian consumer outlook index, which comes out today. It's the first time that that question has been added to the survey, but it's a fairly safe assumption that concern has risen.
“Canadians are clearly worried about their current level of debt,” said David McKay, the head of Canadian banking at Royal Bank of Canada.
“We know that the anxiety about a couple of other things has gone up,” added Marcia Moffat, who runs Royal Bank's mortgage business. “We saw people delaying major purchases, so they did some belt tightening. They're a little less positive about the Canadian economic outlook, and they're more concerned about jobs.”
Sixty-eight per cent of Canadians expect interest rates to rise in the next six months, up from 57 per cent in the prior month.
Higher rates will mean higher monthly payments on many debts, an inevitability that is spurring concern.
“We've been squeezing the consumer pretty hard as a means of offsetting the decline in external demand,” said Stewart Hall, an economist at HSBC Securities. While U.S. consumers are de-leveraging, Canadians continue to rack up debt. “We've ridden through this recession largely on the back of domestic consumer demand,” Mr. Hall noted.
To transition on to a sustainable economic growth path, demand from the private sector must bounce back, along with exports. “We need to see the consumer hand off some of the responsibility for growth,” Mr. Hall said.
With a little luck, the recovery will help boost disposable incomes, allowing debt-to-income levels, which are currently at an all-time high, to recover.
But some consumers are tapped out and won't be able to cope with rising rates. “Consumer bankruptcies have risen significantly over the past year, and they will continue to rise,” said Canadian Imperial Bank of Commerce chief economist Benjamin Tal. “Clearly, some people are in over their heads, and more will get into trouble when interest rates rise.”
The problem does not threaten to derail the recovery, but it will pose challenges, he suggested.
“We are stealing or borrowing activity from the future,” Mr. Tal said, especially in the housing market where many consumers have felt that if they didn't act now they'd miss the boat. “It means that borrowing and real estate activity will not be as strong in 2011, and that's the price we pay for today's activity.”
In evaluating the extent of the problem, Mr. Tal believes there has been too much focus on ballooning debt-to-income ratios, and too little focus on debt-to-asset ratios, which have remained relatively steady.
In fact, assets have been rising faster than liabilities since the second quarter of 2009, meaning that the net worth of individuals' is on the upswing. However, that's largely a result of surprising increases in stock markets and home prices, which gave consumer balance sheets a lift.
Matthew Le Roy
RBC Mortgage Specialist
www.vancouvermortgagefinder.ca
Thursday, January 28, 2010
World Housing Report Pegs Vancouver As Least Affordable
http://www.demographia.com/dhi.pdf
http://ca.news.yahoo.com/s/capress/100125/national/affordable_housing
Matthew Le Roy
RBC Mortgage Specialist
www.vancouvermortgagefinder.ca
http://ca.news.yahoo.com/s/capress/100125/national/affordable_housing
Matthew Le Roy
RBC Mortgage Specialist
www.vancouvermortgagefinder.ca
Sunday, January 24, 2010
Don’t bite off more mortgage than you can chew
How much money do you really need to buy a house?
Based on the average sale price of $320,333 last year, the federal government says you must come up with about $16,000 before you can consider getting a mortgage to buy the rest of that home.
Current rules require mortgage insurance for anyone borrowing more than 80% of the value of their home from financial institutions covered by the Bank Act. Under the rules, consumers must have at least 5% down and cannot amortize their payments over a period of more than 35 years.
Those stipulations came after Ottawa’s supposed crackdown on the housing sector which had allowed zero down mortgages and 40-year amortizations.
Now, with the housing market red-hot again, there is talk about increasing the down payment requirement and shortening the amortization length back to 25 years. Jim Flaherty, the Finance Minister, has said he is keeping a close eye on the sector, which has been boosted by interest rates that have new mortgages being offered as low as 2.25%.
It shouldn’t come as any surprise that the real estate community is fighting against changes that would make it harder to buy a home. This month, the Canadian Association of Accredited Mortgage Professionals (CAAMP) produced a study it says shows an overwhelming percentage of Canadians are shielded from potential interest rate hikes because they opted for fixed-rate products.
But that study also showed a huge portion of those consumers would be in big trouble if they had to come up with a larger down payment. Will Dunning, chief economist for CAAMP, said 65% had down payments that were worth 10% or less of the value of the home being bought.
“Absolutely,” says Mr. Dunning, about whether a change would take some consumers out of the market. “The change in the 40-year amortization just worsened the downturn in the market. In a fragile housing market you don’t want to impose too many restraints.”
Ben Myers, executive vice-president of Urbanation Inc., which tracks Toronto’s condominium market, has little doubt about what would happen if consumers were forced to come up with more cash up front.
“A large percentage of the market is investors and first-time buyers and they are very sensitive to the down payment they need and the amortization because it affects their monthly payment,” says Mr. Myers.
From an industry standpoint, the status quo is easy to defend. The delinquency rate — defined as loans more than 90 days behind — is only 0.45% of the market. That’s well below the 0.70% high reached in the last recession.
Derek Holt, an economist with Bank of Nova Scotia, wonders whether the industry is borrowing customers from tomorrow to fuel today’s market.
“We are overheating at the expense of bringing forward future buyers. The risk here is you wind up a year or two down the round with a demand vacuum,” says Mr. Holt. “Sure, if you tighten the rules you cool demand, but you distribute demand more evenly.”
Basically, people would save a little longer or perhaps buy a little less house.
Taking a more conservative approach to buying is not the worst thing that can happen, says Julie Jaggernath, director of education at the Vancouver-based Credit Counselling Society. More than one person has walked into her agency with credit problems caused by taking on too much house.
“They might buy a home with a smallish down payment but then they furnish it on their credit card,” said Ms. Jaggernath. “It is not unusual to see people spending 60% of their net income on housing costs.”
She suggests looking at your current housing and then doing the math on what your housing costs would be for what you want to buy. “Set the difference aside for six months and see if you can make that budget,” says Ms. Jaggernath.
Her group is anticipating a larger client base when interest rates rise because many consumers are now biting off more mortgage than they can chew.
“Some people want to travel to Mexico three times a year but they can’t. Some people should never buy a home,” says Ms. Jaggernath.
It’s too bad we can’t go on vacation with 5% down and pay for it over the next 35 years. There would be a lot of Canadians lying on a Mexican beach right now.
Dusty wallet Watch those credit card statements closely. DW paid his Visa on time last month with an online transaction. The due date was Jan. 2, but the bank didn’t put it through until Jan. 5. Guess what? The three-day delay by Visa resulted in almost $60 in interest charges — since reversed by the financial institution in question.
www.vancouvermortgagefinder.ca
Based on the average sale price of $320,333 last year, the federal government says you must come up with about $16,000 before you can consider getting a mortgage to buy the rest of that home.
Current rules require mortgage insurance for anyone borrowing more than 80% of the value of their home from financial institutions covered by the Bank Act. Under the rules, consumers must have at least 5% down and cannot amortize their payments over a period of more than 35 years.
Those stipulations came after Ottawa’s supposed crackdown on the housing sector which had allowed zero down mortgages and 40-year amortizations.
Now, with the housing market red-hot again, there is talk about increasing the down payment requirement and shortening the amortization length back to 25 years. Jim Flaherty, the Finance Minister, has said he is keeping a close eye on the sector, which has been boosted by interest rates that have new mortgages being offered as low as 2.25%.
It shouldn’t come as any surprise that the real estate community is fighting against changes that would make it harder to buy a home. This month, the Canadian Association of Accredited Mortgage Professionals (CAAMP) produced a study it says shows an overwhelming percentage of Canadians are shielded from potential interest rate hikes because they opted for fixed-rate products.
But that study also showed a huge portion of those consumers would be in big trouble if they had to come up with a larger down payment. Will Dunning, chief economist for CAAMP, said 65% had down payments that were worth 10% or less of the value of the home being bought.
“Absolutely,” says Mr. Dunning, about whether a change would take some consumers out of the market. “The change in the 40-year amortization just worsened the downturn in the market. In a fragile housing market you don’t want to impose too many restraints.”
Ben Myers, executive vice-president of Urbanation Inc., which tracks Toronto’s condominium market, has little doubt about what would happen if consumers were forced to come up with more cash up front.
“A large percentage of the market is investors and first-time buyers and they are very sensitive to the down payment they need and the amortization because it affects their monthly payment,” says Mr. Myers.
From an industry standpoint, the status quo is easy to defend. The delinquency rate — defined as loans more than 90 days behind — is only 0.45% of the market. That’s well below the 0.70% high reached in the last recession.
Derek Holt, an economist with Bank of Nova Scotia, wonders whether the industry is borrowing customers from tomorrow to fuel today’s market.
“We are overheating at the expense of bringing forward future buyers. The risk here is you wind up a year or two down the round with a demand vacuum,” says Mr. Holt. “Sure, if you tighten the rules you cool demand, but you distribute demand more evenly.”
Basically, people would save a little longer or perhaps buy a little less house.
Taking a more conservative approach to buying is not the worst thing that can happen, says Julie Jaggernath, director of education at the Vancouver-based Credit Counselling Society. More than one person has walked into her agency with credit problems caused by taking on too much house.
“They might buy a home with a smallish down payment but then they furnish it on their credit card,” said Ms. Jaggernath. “It is not unusual to see people spending 60% of their net income on housing costs.”
She suggests looking at your current housing and then doing the math on what your housing costs would be for what you want to buy. “Set the difference aside for six months and see if you can make that budget,” says Ms. Jaggernath.
Her group is anticipating a larger client base when interest rates rise because many consumers are now biting off more mortgage than they can chew.
“Some people want to travel to Mexico three times a year but they can’t. Some people should never buy a home,” says Ms. Jaggernath.
It’s too bad we can’t go on vacation with 5% down and pay for it over the next 35 years. There would be a lot of Canadians lying on a Mexican beach right now.
Dusty wallet Watch those credit card statements closely. DW paid his Visa on time last month with an online transaction. The due date was Jan. 2, but the bank didn’t put it through until Jan. 5. Guess what? The three-day delay by Visa resulted in almost $60 in interest charges — since reversed by the financial institution in question.
www.vancouvermortgagefinder.ca
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