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Mortgage Freedom on the Horizon for Some Canadians: Scotiabank Study – Ask a Vancouver Mortgage Broker

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Scotiabank Offers Advice on How to Become Mortgage-Free Faster

Ed Clark ‘supportive’ of Finance Minister Joe Oliver’s hands-off approach in mortgage wars

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Image Copyright- THE CANADIAN PRESS/Larry MacDougal; Arlen Redekop/Postmedia News
Toronto-Dominion Bank chief executive Ed Clark is throwing his support behind Finance Minister Joe Oliver’s decision not tell banks how to price their mortgages.

Dictating to lenders what to charge for home loans is “treacherous territory,” Mr. Clark told reporters on Thursday, following TD’s annual meeting in Calgary.

Mr. Clark said he is “supportive of” Mr. Oliver’s strategy — disclosed in comments to reporters last week — of letting the banks make their own decisions on how much to charge customers.

Economists and policymakers have been warning for the last several years about soaring household debt in Canada, especially when it comes to mortgages, by far the biggest chunk of that debt.

If the government is worried, “there are other ways” than dictating mortgage rates,  Mr. Clark said, referring to rule changes around things like the availability of Canada Mortgage and Housing Corp. default insurance and the kinds of loans that qualify for it.

“I think the focus has to be, are there other macro-prudencial things that you could do?” he said. “You know, [the government] changed the amortization rate, there’s lots of rules you could do that would slow down, take the pressure off the housing market but don’t change the price. I just think you come to the conclusion that governments fixing [mortgage rates] hasn’t been a success.”

This latest flare-up of the mortgage wars kicked off after Bank of Montreal announced late last month it was cutting its five-year mortgage rate to 2.99%, despite being reprimanded by then Finance Minister Jim Flaherty when it tried the same tactic last year.

Critics worry that the high personal debt levels have left the economy vulnerable and argue banks are partly to blame. For their part, the banks insist they are lending money only to customers who can afford to pay it back. And if they’re offering good rates, that’s because their own cost of funding is low as well.

There’s “healthy competition” among Canadian banks, Mr. Clark said. “You got a competitive industry so no one’s going to not match the other guy’s prices.”

Asked if he was concerned about the financial health of consumers, Bank of Montreal chief executive Bill Downe said earlier this week that his customers can meet their obligations. BMO is lowering its risk by focusing on “shorter amortizations,” in other words, loans that get paid down faster.

“I think the trick is to make sure that the underwriting standards are sufficiently conservative that the borrowers can pay the money back, and that’s really the issue,” he added.

Industry executives reject comparisons between Canada and the U.S. real estate meltdown that began in 2006, noting that standards in this country are much higher than they were south of the border, where players doled out tens of billions to people who were unable to make their payments when their mortgage rates jumped a few years later.

What happened in the U.S. was “colossal stupidity, but the regulator said it was okay,” so lenders just kept on lending, Mr. Clark said. In Canada, by contrast, there’s a different regulatory culture that focuses on principles rather than just meeting the requirements of complex rules.

The comments come the same day as Canadian Imperial Bank of Commerce economistBenjamin Tal warned there is a “mind-boggling” gap between the size and importance of Canada’s real estate market and the amount of good information about it.

Mr. Tal said in a report called “Flying Blind” that the lack of public data makes it difficult to judge whether Canada is experiencing a housing bubble.

A key unknown is the proportion of foreign buyers. Banks may know how many of their customers are from abroad, but they’re reluctant to share the information for competitive reasons.

Other missing data points include the distribution of home loans by credit score and the value of new mortgages in the most recent three-month period.

Leaving the city (and the big mortgage) behind – Ask a Vancouver Mortgage Broker

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Many couples, stunned by the value of their homes in Canadian urban centers like Toronto, Calgary and Vancouver, are pondering trading city life for opportunities to cut costs in the suburbs or beyond.

Slightly more than three years ago, I sat down with my wife after a lousy commute and discussed why we were still in Toronto.

Sure, she had a good job in the city, but I was freelance, and with two young children in elementary school, we pondered whether there were other options.

The positives were clear — if we left the city it would change our financial position dramatically. We could trade our Scarborough rebuild in an up-and-coming part of the city for a house in the best area of a city like London, Ont., where we both went to school.

And the best part? We could buy that house in London, with more room in a better area for about 60% of the value of our Scarborough home, which saw its price skyrocket in the seven years we owned it.

It wasn’t that tough a decision; in 2012 we sold our house, packed a moving truck and rolled down the 401 to London.

It is a scenario that is becoming increasingly common — couples, stunned by the value of their homes in Canadian urban centers like Toronto, Calgary and Vancouver, are pondering trading city life for opportunities to cut costs in the suburbs or beyond.

Freelance writer Peter Robinson and his wife Jody, an elementary teacher, faced this scenario in 2010. The couple, who owned a small house on Toronto’s west side, started considering how they’d move forward. With an expanding family, a bigger house was a necessity. But the price of a larger home was daunting and they started considering their options.

“I could work from anywhere and Jody was willing to make a commute to her school in Brampton,” says Mr. Robinson. “She decided she’d bite the bullet and spend an extra five hours a week commuting if we moved.”

Robinson says the couple wasn’t enjoying the benefits of Toronto in the way they were prior to having children, a common theme among young families considering a move from the city.

“Some people leave the city because they hate it,” says Mr. Robinson. “That wasn’t our case, though the traffic is always bad.”

The couple listed their 1,300 square foot home for $500,000, up $140,000 from when they purchased it a few years previous, and started looking in Barrie, about an hour’s drive north of Toronto. They were able to buy a house in Barrie for $385,000 and double their square footage within walking distance to a nearby school.

“We moved to the quintessential upper middle-class neighborhood,” says Mr. Robinson, who grew up in Barrie. “It takes a mental leap to move if you grew up here. But people in the city don’t realize how good life can be in the suburbs.”

Many moves are driven by the equity couples have in their homes. Anne Carbert, a career counselor, moved to Toronto in 1996. Ms. Carbert, along with her partner, Don, a radio broadcaster and writer, started considering leaving their Riverdale home largely based on the appreciation of its value.

“The goal was ‘let’s get out from under the city mortgage when we have the opportunity,’” she says. The couple moved to Stratford, Ont., and are currently renting while they consider real estate opportunities.

One thing is clear, they expect to be able to find exactly what they want for less than half the price of their $800,000 Toronto home.

Ryan Tracy, who taught at Durham College while living in Whitby, saw real estate prices as an opportunity to make a change in his career. Along with his wife and two small children, Mr. Tracy, 31, decided to pursue a job in Miramichi, N.B., as the general manager of a semi-private golf club.

“We were really sick of the rat race,” says Mr. Tracy, whose wife, Amanda-Lee Cassidy, has a job with Scotiabank. “We wanted to follow the opportunity and the notion of having a house outside of a city really appealed to us.”

The couple has been searching for property near Miramichi, a location in stark contrast to their current situation in the Toronto suburb of Whitby, where they have a 1,800 square foot home on a small lot.

“We can use our house as an asset, which you can’t always say,” says Mr. Tracy. “The notion of selling our home and buying a home and having no mortgage, that’s quite something. They say the majority of people in the city will still have a mortgage well past 60.”

Mr. Tracy and his family will spend some time in housing supplied by his workplace while they look to purchase their home.
“It is such a big difference than living in the GTA,” he says. “Most lots [in Miramichi] are an acre and you can get them for $200,000.”

Like many who have made the move out of one of Canada’s big cities, I don’t regret it. Yes, property taxes are higher here, something that shocks my Toronto friends. And I certainly make the drive into the city more frequently than I’d like, though I can try to find off-peak times to battle traffic.

But we also traded up in many ways, moving from a mid-price area of old Scarborough, full of post-WWII bungalows, to a cul-de-sac near a private golf course.

And many young families who leave large urban areas find cost savings in areas like daycare, which, for two children, cost more than our mortgage when we were in Toronto.

The biggest concern many have when leaving is how they’d ever afford to return if work necessitated it.

“I don’t know how we’d do it,” says Mr. Robinson.

Neither do I. And thankfully, for the foreseeable future at least, it isn’t something I need to consider.

More self-employed hitting mortgage wall because of recent rule changes – Ask a Vancouver Mortgage Broker

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For years, most of Marg Green’s self-employed clients could count on getting a mortgage on the strength of their credit score, and on their word that they were earning enough from their business to repay the loan.

These days, because of rules brought in almost two years ago by the regulator of the country’s chartered banks, borrowing money to buy a home has become harder for many of the country’s 2.75 million self-employed workers – a group that, according to Statistics Canada, has a higher median net worth than paid employees.

What bubble? Canadians have their mortgage covered, study shows – Consult with a Vancouver Mortgage Broker

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A new Conference Board of Canada study says there’s no housing bubble about to burst and maintains Canadian are having no trouble handling their debt even as it sits close to record levels.

The Ottawa-based group points out that mortgage arrears are actually going down in just about every market across the country — making a U.S.-style meltdown unlikely. The percentage of mortgages in arrears is well under 1% in Canada.

“A relatively low proportion of arrears is likely to persist, since national employment is growing, albeit slowly, and interest rates are not forecast to spike,” says the Conference Board in its report titled Bubble Fears Overblown.

The report says the market will cool but it will happen “gently” and cites mortgage costs, not just home prices, as the principal determining factor for the market for future buyers.

“We believe that the more prudent mortgage underwriting in Canada than in the United States, headlined by the very small number of subprime loans here, has prevented the stockpiling of high-risk mortgages by lenders,” states the report.

Others argue the Canadian market bears striking similarity to the U.S. market.

“It’s a lagging indicator,” says David Madani, an economist with Capital Economics, about mortgage arrears. He says the arrears come when the market starts to fail. “The first sign of trouble in the U.S. was declining home sales, then a year later prices fell and then people started missing payments.”

Much has been made of Canada’s tighter loan standards with none of the NINJA loans — no income, no job, no appraisal — that were found in the U.S.

Still, Canadians are holding onto records amount of debt. Statistics Canada said debt to disposal income went down slightly during the fourth quarter of 2013 but at 164% it remains very close to an all-time high.

“It’s an extraordinary level next to household income and interest rates don’t have to spike,” said Mr. Madani. “Even if they go up moderately, it can have big impact on affordability.”

With little demand from new buyers, prices would ultimately sink and leave people vulnerable as they try to renew mortgages.

The Conference Board notes that many U.S. states have non-recourse home loans, meaning banks cannot go after other assets from consumers who walk away from homes. That protection doesn’t exist in most Canadian markets.

Mr. Madani said that would be a non-factor for recent buyers who have few other assets and no reason to stay with a mortgage that is under water. “That’s what is called a strategic default,” says the economist, noting many consumers in that scenario would be willing to face the credit challenges that come post-bankruptcy if their home price collapses.

Vince Gaetano, a mortgage broker with monstermortgage.ca, says all the mortgage rule changes that have come from Ottawa for anyone buying a home with mortgage default insurance have made it tougher to buy in this market.

“There are not as many straight forward mortgage approvals,” says Mr. Gaetano, adding he can’t see arrears reaching U.S. levels because “we never had NINJA loans.”

Still, the tougher mortgage rules, which have included shrinking amortization lengths from as long as 40 years down to a maximum of 25 years, have had an impact on the consumer.

Benjamin Tal, deputy chief economist with Canadian Imperial Bank of Commerce, said all the mortgage changes amount to a 125 basis point increase in rates for first-time buyers. A shorter amortization payment means a higher monthly payment while decreasing size of a loan for consumers.

“The market will slow, the only question is how quickly,” says Mr. Tal, who expects prices to fall nationally 10% to 15%. But in his view that’s not a bubble bursting. “The debate about overshooting is over, the question is the magnitude. At 10% to 15% that’s a market finding its footing.”

Lucky address can add up to big gains in house sales – ask a Vancouver Mortgage Broker

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You don’t have to believe in superstition for it to hex your house, if the results of a forthcoming Canadian study are any indication.

Reporting in the journal Economic Inquiry, researchers uncover enormous costs associated with “magical thinking” in real estate transactions in neighbourhoods with a high concentration of Chinese residents. The good news, however, is that they also identify payoffs — on average, around five figures — when superstitions run in a seller’s favour.
“We do find premiums and penalties associated with numbers that are thought to be lucky or unlucky in the Chinese culture,” said lead author Nicole Fortin, a professor at the University of British Columbia’s Vancouver School of Economics. “And these are really sizable transactions.”

Analyzing nearly 117,000 home sales between 2000 and 2005, researchers discovered that in areas whose share of Chinese residents exceeded the metro average, houses with address numbers ending in ‘4’ were sold at a 2.2% discount while those with numbers ending in ‘8’ were sold at a 2.5% premium. Four is associated with death in Chinese culture, and eight with prosperity.
Given the average house price of $400,000 during the study period, Fortin said superstition ultimately meant the difference between an $8,000 loss or a $10,000 gain in comparison to houses with addresses ending with any other digit.
“Real estate agents are very aware of this, and they exploit it,” Fortin said.
In one Vancouver ad, for example, she found eight of 20 homes aimed at buyers from mainland China ended in ‘8,’ as did the asking price of 11 of the homes. Similarly, a 2012 analysis by Trulia.com found that in Asian-majority neighbourhoods, the last non-zero digit of an asking price ended with ‘8’ in 20% of listings — and 37% of those priced at a million or higher — versus just 4% for other areas.
Fortin cites important public policy repercussions, noting that some people will petition to change their addresses — often by subdividing or via another legal loophole — to make their properties “luckier.” One of her own neighbours, in fact, had the last number of his home altered from a four to a six.
“I wondered why he didn’t get an ‘8.’ He probably tried,” Fortin said. “But should municipalities allow people to change their address just because they don’t like the number?”
In Canada, where people of Chinese descent account for 5% of the population, Fortin said the implication is that something as seemingly innocuous as a home address could affect whether a property flourishes or is left to deteriorate.
To wit, study co-author Andrew Hill emphasized that disbelief in such superstitions doesn’t inoculate against them.
“If everyone knows that these belief premiums and penalties are going to persist — even if they don’t believe in (the same thing) — it can have an effect,” said Hill, assistant professor of economics at the University of South Carolina. “As a property investor, it just makes no sense to have a house number that could lose you money.”
Importantly, however, Edmonton real estate agent Taylor Hack said emotion can overcome reason in almost any purchase of a principal residence, regardless of cultural background.
“We have to take that into consideration when working with anyone,” said Hack, of Remax River City. “Everybody has their own level of superstition. If some people were aware that a traumatic incident happened in the home, they’d have trouble with it.”

Here’s why paying off your mortgage isn’t always the best idea – Consult with a Vancouver Mortgage Broke

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It amounts to financial heresy to some conservative investors but paying down your mortgage early just might not be the best plan.

The message of debt being out of control is directed at us continually. If it’s not the finance minister telling us to stay out of debt trouble, it’s some Bank of Canada official.

There is something to this message. The percentage of household debt to disposable income dropped a tad last quarter but it’s still at about 164% — close to an all-time high.

It’s not all that hard to see why. Interest rates continue to hover near record lows. The prime rate at most banks, which variable rate mortgages are tied to, is at 3% but ratesupermarket.ca says it’s more like 2.35% with discounting. Lock in for five years and you still get 2.94% for the term.

Pay that mortgage off? Why would you bother, especially if that money could be invested elsewhere at a higher rate?

Mortgage broker Calum Ross says there is an opportunity to invest in today’s market using the money you would otherwise earmark for your mortgage.

“If you don’t have a mortgage today and you are in the top tax bracket, you don’t understand the basic rules of personal finance,” says Mr. Ross.

You’ll need a little tolerance for risk to adopt his strategy but he says you might need that in order to avoid “flipping burgers” in your old age because you don’t have enough money for retirement.

For starters, you need to have some spare cash on hand. The key to his investment strategy is having some extra cash flow.

You have to make a clear distinction between your tax deductible investments and those not-tax deductible like the mortgage on your principle residence.

“If you’re borrowing for the purpose of investing, you can write off the interest,” says Mr. Ross, adding the key is not co-mingling your debt.

One thing you could do to create cash flow — and this involves actually paying down your mortgage — is sell some non-registered investments and use the cash to pay down your mortgage. You then borrow the same money back but as an investment loan.

“It’s called a debt swap. You’re taking non-tax deductible debt and making it tax deductible,” said Mr. Ross.

He says you have to be mindful of some rules the Canada Revenue Agency has on the timing of these transactions.

Mr. Ross has a simple formula for making sure the investment makes sense. Subtract your marginal tax percentage from one and multiply by the interest rate to borrow.

Say you borrow at 5% but have a marginal tax rate of 40%, the return you would need would be 3%. You get that by taking 1-.40 and multiplying by 5% for 3%.

“The average consumer does not conceptualize the difference between after-tax cost and and average tax rate of return. The advantage definitely goes to people in a higher income tax bracket,” says Mr. Ross.

He says it’s really not that hard to get a 3% return in the market and that’s based on 5% interest. It may look like a a strategy for high income earners but as Mr. Ross says “it doesn’t take long to get in the middle tax bracket in Canada.”

Real estate author Don Campbell wonders whether the strategy will work for some people from a discipline point of view. “They [get a loan and] put the money in the investment and when [the income return] starts coming back from the investment, do they pay the loan down? For some people they start thinking ‘maybe I should use the money for something else, go on a vacation’.”

You want to balance a healthy retirement with making sure you are not pinching yourself so you can’t make contributions

The rules change a bit as you hit retirement, when you want to get that mortgage paid so you don’t have it hanging over your head in your retirement.

Mr. Campbell also wouldn’t want any loans on his home that would leave him with less than 25% equity in the property. “I want a buffer in everything that I do,” he says.

There’s another issue to consider when it comes to paying off your mortgage and that’s not stretching yourself financially, says Michelle Snow, associate vice-president retail banking products and services at TD Canada Trust.

“You want to balance a healthy retirement with making sure you are not pinching yourself so you can’t make contributions,” said Ms. Snow, who still favours the concept of paying down that mortgage.

There are also contributions you might want to make to a Registered Education Savings Plan before paying off your mortgage. The government offers a grant of 20% for every dollar put into an RESP per child, up to $500 annually in grant money to a maximum of $7,400 lifetime.

There’s nothing to stop you from taking the big lump of cash you might have and pumping it into your RRSP, if you have unused room. Your tax refund could then be used to pay down your mortgage.

You also need a little cash to run your actual house and if paying down your mortgage hampers that, you need to reconsider.

“Owning a home has embedded expenses in it, be it property taxes, utilities etc.,” said Ms. Snow. “Consider all your financial obligations before making a decision.”

Illustration by Chloe Cushman, National Post

Analyzing BMO’s Go-Fixed Advice – ask a Vancouver Mortgage Broker

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Mortgage shopping? Two stars and four dogs from today’s market – Ask a Vancouver Mortgage Broker

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ROBERT MCLISTER–  Special to The Globe and Mail

A variable-rate mortgage entails a vulnerability to possible short-term rate increases by the Bank of Canada.
(RAFAL GERSZAK FOR THE GLOBE AND MAIL)

Eight months ago, some were proclaiming the end of 2.99-per-cent five-year mortgage rates, for years to come.

And now, low and behold, they’re back.

But you have to hunt much harder for 2.99 per cent than you did last spring. Some lenders, especially banks, are wary of advertising sub-3-per-cent rates. In a few cases, lenders are even preventing brokers from discounting below 3 per cent. Financial institutions are trying their best to protect margins, and Ottawa’s rate police might also be having an effect (more on that).

If you’re lucky enough to find a five-year fixed rate near 3 per cent, don’t feel pressured to lock in. Regulators, the Finance Minister and former Bank of Canada boss Mark Carney practically guarantee that higher rates are coming … eventually. But no one can define “eventually,” so it pays to consider some of the other factors behind the ideal mortgage term.

With that in mind, here’s a look at two stars and four dogs from today’s mortgage market.

The Stars

The five-year fixed
Over half of all Canadian homeowners choose five-year fixed terms. They’re the easiest mortgages for lenders to raise capital for, which creates fierce competition and aggressive discounting. If you know where to look (hint: online), you’ll find five-year rates just above 3 per cent. In some cases, even 2.99 per cent or less. That’s just over half of a percentage point above most variable rates.

These five-years rates may or may not be around for long, depending on what government bond yields do (rising yields lead to rising fixed mortgage rates). In terms of interest cost alone, today’s five-year is the safest bet if you expect average mortgage rates to jump 1.50 percentage points or more through 2017. Ask most economists and they’d imply you’re crazy to bet against that “small” of a rate hike.

But not all five-year terms are created equal. Be vigilant for adverse penalty calculations, limited prepayment options, restrictions on refinancing and/or porting ((porting is when you move your mortgage to a new property), short rate-hold periods and uncompetitive rate blend policies (a “blended rate” refers to the rate you get if you need to add money to your mortgage later). These considerations apply to all terms, but especially five-year mortgages that bind you to your lender for longer.

The three-year fixed
Many risk tolerant borrowers are trading in their five-year terms for a more agile three-year fixed. I say “agile” because three-year mortgages give you lots of options. For one thing, you can lock in your renewal rate in just 32 to 33 months. Why 32 to 33 months? Because you can get rate-holds 90-120 days in advance of your three-year maturity date.

A three-year also lets you refinance sooner without a penalty. That flexibility can help if you need to withdraw equity from your home or switch to a different type of mortgage (e.g., one with a line of credit). The shorter term also helps if you plan to move before five years is up, as 31 per cent of first-time buyers and 19 per cent of repeat buyers plan to do, according to the Canada Mortgage and Housing Corp.

Some lenders even let you blend and extend their three-year mortgages early, which is like locking in without a penalty – handy if you want to secure cheap borrowing costs before rates head higher.

At the moment, you can find three-year terms for 2.69 per cent or less. That’s at least 0.40 percentage points below most five-year fixed rates. The best way to compare a three-year mortgage to a five-year is to assume that you’ll renew into a two-year term (three years + two years = five years total). In that scenario, if two-year fixed rates jump more than 1.25 percentage points in 32 to 33 months, you would have been better off just taking a five-year fixed, based on interest costs alone.

The Dogs

The 10-year fixed
Lenders aren’t doing us any favours with 10-year pricing. Most decade-long mortgages are offered at 4.29 per cent or more. That’s a fat premium over a five-year fixed. Rates would have to jump almost three percentage points in five years for a 10-year to be less costly than a five-year, based on interest cost alone. That’s not impossible, it’s just improbable given the degree of inflation it would imply. (Inflation drives interest rates. The Bank of Canada along with our modestly growing mature economy have both been tempering inflation.)

The four-year fixed
Four-year terms are currently 2.99 per cent or thereabouts. That’s no match for one of the following: the markedly cheaper three-year fixed or a similarly priced five-year term with generous flexibility.

Six- and seven-year fixed rates
Perennially on the dogs list, suffice it to say, their rate premiums work against them. You’re protected from rising rates for an extra year or two but pay 0.60 to 0.80 percentage points more for that “insurance.” The math just doesn’t work out.

All of these comments above apply to well-qualified borrowers with provable income who plan to have a mortgage for five years or more. If that doesn’t sound like you, some personalized advice might serve you well.

Robert McLister is a mortgage planner at intelliMortgage Inc. and founder ofRateSpy.com. You can follow him on Twitter at @RateSpy and@CdnMortgageNews.

Mortgage Terms: Stars & Dogs – Consult with a Vancouver Mortgage Broker

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