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Canada may need tougher rules to slow overvalued housing market, IMF warns

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Canada may need tougher rules to slow gains in the housing market, the International Monetary Fund said.

Millennials lured by lengthy stretch of low rates spur Canada’s condo boom at their peril

Experts warn of danger ahead when these young people, who have no experience in interest rate shocks, face a spike in mortgage payments. Read on “High household debt and a still-overvalued housing market remain important domestic vulnerabilities,” the Washington- based group said Tuesday in its World Economic Outlook. Those risks “call for continued vigilance and may require additional macro-prudential measures.”

Housing market risks should continue to be closely monitored The report said that house prices are 10% above “fundamental values,” and “housing market risks should continue to be closely monitored.”

Finance Minister Joe Oliver said last week he doesn’t see a housing bubble in Canada, adding that past rule changes have been effective in curbing rapid price gains. While the IMF has called for the country to limit the use of government-backed mortgage insurance to limit taxpayer risk, Oliver said that any future steps he takes will be gradual.

Related IMF sees ‘solid’ Canadian growth, despite ‘uneven’ global recovery Toronto homes sales now on pace for potential record in 2014 Sizzling Vancouver home sales likely to fuel national bubble debate Canada’s real estate market has shown unexpected strength this year as mortgage rates declined to the lowest on record. Household credit-market debt, which includes mortgages, rose to 163.6% of disposable income in the second quarter, close to the record 164.1% in the third quarter of last year, the nation’s statistics agency reported.

Canadian building permits today were way, way lower than expected

Canada will have “more balanced growth” through 2015 as exports and business investment pick up, the IMF report said.

Gross domestic product will increase by 2.3% this year and 2.4% in 2015, the IMF forecast, roughly unchanged from its July outlook. Exports will be lifted by a weaker Canadian dollar and stronger U.S. demand, the IMF said. U.S. economic growth will quicken to 3.1% next year from 2.2% this year.

Benchmark Rate

Bank of Canada Governor Stephen Poloz has kept his benchmark interest rate at 1%, extending a pause that now exceeds four years. The IMF said “accommodative monetary policy remains appropriate” because of slack in the economy and modest inflation.

Inflation will match the central bank’s 2% target next year and the unemployment rate will fall to 6.9% from 7%, the IMF said. Canada’s jobless rate was as low as 5.9% in September 2007, before the last recession. Bloomberg.com

The newly rich: How your world changes when downsizing creates a windfall

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You may never have imagined yourself sitting on a financial windfall and wondering what to do with it but many older Canadians who have lived through the housing market’s finest hours are facing just that.

If the investment in your family home has paid off handsomely over your lifetime, there might come a time to lock in those gains. You could downsize and buy a cheaper home or condo — if you knew how long you might want to live in the property and if you don’t mind all the land transfer taxes and transaction costs.

Or you could give yourself the flexibility of renting an equally nice home or condo.

The question is – what do you do with it, and what do you need to think about, when that big cheque comes from the real estate lawyer?

Related First-time homebuyers are feeling the weight of Canada’s housing boom How to teach your kids about money Here are five things to think about:

What is your new annual budget going to look like? You will have major savings on annual house upkeep and repairs and no more realty taxes. You will have major new expenses with your monthly rent. Will this end up costing you $40,000 more a year or only $10,000 more or is it closer to a break even scenario? In order to cover off annual spending, how much, if any, do you need to draw each year from your non-registered investments? The key is not to think about how much income does this need to spin off, but rather cash flow. This income focus is a mistake that many people make, and it sometimes leads to higher risk investments and almost always in much higher taxes. Based on your current situation, what is the chance of you outliving your money? What is your likely estate value and lifetime tax bill? These important questions may require help from a financial planner, but if you don’t already have a strong handle on this, now is the time to get it. Aside from peace of mind, having this knowledge will drive a number of decisions around your spending habits, investment strategy, gifting habits (to family or charity), tax planning and estate planning. Your tax bill is getting very big, and you need to figure out how to make it smaller. In addition to being forced to draw 7.59% of your RRIF value (based on age 73), you are now suddenly taxed on income and realized capital gains on investments. If you earn 5% income (half Canadian dividends and half interest or U.S. dividends) on this portfolio, that works out to $35,000 of Canadian dividends and $35,000 of fully taxed interest and U.S. dividends. You could be facing over $20,000 in taxes that you weren’t facing before plus you could lose $6,700 in annual Old Age Security (OAS) payments. This is a little less painful if you are able to fully split income with your spouse, but can be very expensive if you are single. The good news on the investment front is that you can structure the portfolio to generate much less income, cut your tax bill, and possibly even keep your full Old Age Security payment in the process. Among the tools to help accomplish this would be:

Start with an investment portfolio that has limited exposure to interest income and U.S. dividend income in the taxable investment account. This will lower the amount of income that faces the highest tax rate. If you are paying for investment advice, try and ensure that the investment fees are tax deductible. This will lower your overall cost and also lower your taxable income and can help with OAS recovery. Consider Corporate Class funds that have low yields and can defer capital gains – or other income limiting investments. Look at other tax sheltering ideas such as shifting some funds to tax sheltered insurance or using flow through shares with investment certainty (a locked-in loss) that is more than offset by government tax credits. Look at gifting strategies as part of the overall plan – both giving to family and to charity. How do you use your wealth to make the most of your remaining years? This is touched upon above, but it is really about sitting down and saying ‘what do I want to do now? What goals do I have for myself?’ Not just the bucket list idea, but what kind of values and relationships do I want to leave with my kids and grandkids and friends? Do I want to try to make a bigger difference in other people’s lives – either financially or through other things that I can do? When you suddenly have more liquid wealth at your disposal, it is a good time to take a step back and think about what it can allow you to do? While the selling of your family home can trigger this type of review, it can happen in other situations as well. Often it is at a time of inheritance or in some cases when a retiree chooses to take the value of their pension as a lump sum. It can even be the much rarer scenario of a lottery win.

At all of these times of positive financial change, it is important to think about how it could change your lifestyle, how your tax situation changes, what type of advice you might require, and how it might allow you to positively impact others. These situations may never come up in your life, but if it does, it is often a once in a lifetime opportunity. Plan wisely.

Ted Rechtshaffen is president and wealth advisor at TriDelta Financial, a boutique wealth management firm focusing on investment counselling and estate planning. tedr@tridelta.ca

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Fixer-uppers not for the faint-of-heart – Ask a Vancouver Mortgage Broker

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When Eileen Muzzin and her partner, Dan Pedersen, were searching for a home in Vancouver, they knew they wouldn’t be buying a place with granite countertops or a peekaboo view. With a modest budget – by Vancouver standards – they ultimately decided on a fixer-upper on the city’s east side.

The couple got a 2,000-square-foot home with walls painted red and gold, a weak electrical system, various objects buried in the backyard and a kitchen that was last renovated in 1961.

“We were digging in our yard and found a rolled-up carpet two feet down,” Ms. Muzzin recalls. “There were really old bricks there too, which we ended up reusing between our garden beds.

“We basically bought the crappiest house in the neighbourhood we wanted to live in,” Ms. Muzzin says.

The two were smart to buy in a community they coveted. There’s truth behind the cliché “location, location, location.”

“You can fix a home but you can’t fix a neighbourhood,” says Vancouver real estate agent Kel Parry.

What the home also had was good bones. The trick to purchasing a fixer-upper without ending up with buyer’s remorse is distinguishing between a home that has “potential” and one that could turn out to be a disaster.

To do that, a home inspection is a must. But that’s just the starting point, says Mr. Parry, who himself bought a fixer-upper with his wife many years ago in North Vancouver.

Hire a contractor to give you estimates on fixing problems. “If you can, get two or three quotes. Once you start getting those numbers down, tack on another 30 per cent for contingency,” he says.

“The first thing I tell clients when they’re considering a fixer-upper is, whatever you’ve budgeted, make sure you have more than that,” he adds. “There are always hidden costs.”

Aside from using savings, credit cards or lines of credit for HGTV-style projects, buyers can secure financing at the time of purchase through mortgages such as the CMHC Improvement program or Genworth’s Purchase Plus Improvements program.

Fixer-uppers typically need expensive renovations of kitchens and washrooms. Other common and costly jobs include repairing or replacing the roof and windows as well as upgrading the electrical and plumbing systems.

Some repairs are deal-breakers, with structural and foundation problems typically falling in that category.

“If you’re looking at a property that will continue to cost you money in the long run, and will cost you a lot of money right out of the gate, you want to get a professional opinion on that,” Mr. Parry says, adding that it’s important to do a property-information search with the city or municipality. “Structural and foundation issues are big.”

An oil tank buried in the yard is another red flag, says Vancouver home inspector Tom Munro, founder of Munro Home Inspections.

“Oil tanks are the ultimate deal-breaker,” says Mr. Munro, who claims to be the only inspector in the Greater Vancouver area who scans for buried tanks using a magnetic sensor. “The tank needs to be disposed of properly. You need to get an oil-tank-removal certificate, and then you need an independent soil-sample analysis.”

Aside from the environmental impact, cleanup can be costly. One North Vancouver homeowner had to spend $85,000 on the removal of a tank and the ensuing decontamination of her property in 2012.

Mr. Munro has found other buried treasure during home inspections. He discovered a Volkswagen Beetle in one backyard where the swimming pool used to be. In the fixer-upper he bought himself recently, a previous owner had deposited all of the old appliances under a few feet of dirt.

Then there’s the accompanying stress of renovations. They can take a toll on relationships as well.

“If you anticipate a number of projects, you have to be prepared to live in that situation with dust, with tarps, with all the things that come with living in a construction zone,” Mr. Parry says. “It’s very disruptive, especially if you have young children. If you can get renos started before you move in or even stay with relatives or in a hotel for a short period, those are worth considering. Some people don’t mind it, but it’s not for everyone.”

Mr. Munro says with a laugh: “I’m a marriage counsellor as much as a home inspector.”

For Ms. Muzzin and her partner, living amid the mess has so far been worth it. They enjoy working on their home and going to salvage lots for unique finds.

They installed a beautiful claw-foot tub with polished chrome feet in the main bathroom they renovated themselves. They hired professionals to replace the roof and upgrade the electrical system. Next up is that 1961 kitchen, with its linoleum floors and teal-coloured everything.

“I love having my own home to work on,” Ms. Muzzin says. “But it’s not for the faint-hearted.”

Follow us on Twitter: @GlobeMoney

Applying for a fixed-rate mortgage? Why you need to do your homework

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Imagine you’ve applied for a five-year fixed-rate mortgage. Then, before you close, the lender drops its best five-year fixed interest rate. You’d expect that new lower rate, right?

Most people in this position would. But with some lenders, that’s not the way it works.

If you’re going mortgage shopping, take a minute to understand your lender’s rate-drop policy before you send in your application. Too many people don’t and it ends up costing them.

MORE RELATED TO THIS STORY

BOOK EXCERPT When it comes to home buying, smaller is better DECODING THE MORTGAGE MARKET Should you get pre-approved for a mortgage? Ten things to know Five-year mortgages holding firm, but just wait The government-backed Canada Mortgage and Housing Corp. is raising its prices for home mortgage insurance. CARRICK TALKS MONEY Video: Carrick Talks Money: Don’t get stuck in the mortgage penalty box Your Personal Investor Dale Jackson looks at the cost of longer amortization periods. VIDEO Video: If you choose lower mortgage payments now, you may regret it later Homeowners may be feeling nervous after the Bank of Canada’s recent talk of changes to interest rates. Canadian Press business reporter Romina Maurino looks at what this could mean for your mortgage. MONEY MONITOR Video: How would an interest-rate hike affect your mortgage? How rate drops normally work Typically, if you’ve been approved for a mortgage and the lender drops its rates before your closing date, the lender will lower your rate as well. Every lender has its own policies, though. For instance:

· Some lenders allow you only one rate drop. Others allow multiple. · Some lenders only permit rate reductions up to seven days before you close. Others give you their best rate right up until your closing date. · Some lenders automatically lower your rate. Others require your banker or mortgage broker to manually request the rate adjustment. In this latter case, you better have a reliable mortgage adviser or keep tabs on rates yourself.

The best-case scenarios are those lenders with “look-back” policies. This means they’ll look back and give you their lowest rate from the time you applied until the time you closed. Those lenders are few and far between but any good broker knows who they are.

How other lenders operate More and more lenders are adding “no-float-down” clauses to their fixed mortgage rates. This is particularly true with certain non-bank lenders.

“No float down” means your rate cannot be adjusted lower if that lender comes out with a better deal. Those lenders make those lower rates available for “new business only.”

Now, you may be thinking, “I’m a good client, why should a new customer get a better rate than me?” The answer, lenders say, is profitability. When you get a fixed mortgage, the company funding your mortgage generally “hedges” that rate, meaning it pays for an expensive form of rate insurance. This ensures the lender doesn’t lose big if rates jump and it has to honour the lower rate it promised you.

If rates fell and the lender didn’t have a “no float-down” clause, it would incur the cost of that rate hedge and have to give all of that rate savings back to you, the customer. But with mortgage competition so fierce and margins so tight, some lenders can’t afford to do that anymore.

When rate drops matter If fixed rates are rising or going sideways, “no-float-down” policies shouldn’t hurt you. If fixed rates are in a downtrend, however, it pays to have that rate-drop option, other things being equal.

I say “other things being equal” because float-down privileges are rarely the deciding factor when choosing a mortgage. A lower upfront rate or better mortgage features can often negate the disadvantage of no-float-down restrictions.

Moreover, the odds of rates dropping decline the closer you are to your closing date.

In case you’re curious, fixed mortgage rates drop from one month to the next about 38 per cent of the time. That’s been the case since 1951 at least, according to Bank of Canada data.

Historically when rates have dropped – versus the prior month – the average decrease has been 0.23 percentage points. Even if you ignore 1973 to 1993, a volatile period of surging and plunging rates, the average decrease was still 0.17 percentage points. On a $200,000 five-year mortgage, a 0.17 percentage point rate drop would save you about $2,500 in interest.

If your mortgage does come with a rate-drop feature, contact your mortgage adviser about 10 days before you’re scheduled to close. Don’t take it for granted that someone will notify you automatically if rates are lowered. Ask if your lender has offered cheaper rates since you applied for your specific term and rate hold period. (Those last three words are important because lenders generally don’t let you have their lowest 30-day “quick close” rate if you originally applied for a 60, 90 or 120-day rate.)

Make it a point to understand your lender’s rate-drop policy. Every tenth of a per cent matters and you never know when interest costs will dip.

There are 300-plus lenders to choose from in this country. If you pick one with a “no-float-down” policy, be sure the rest of the mortgage terms make up for it.

Robert McLister is a mortgage planner at intelliMortgage Inc. and founder of RateSpy.com.

Follow Robert McLister on Twitter: @RateSpy.com

First-time homebuyers are feeling the weight of Canada’s housing boom

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Many times over the last few years, John Norquay has been stricken with pangs of anxiety over not being a homeowner.

Should you rent or own your home?

Bank of CanadaPeople say that when you grow up, you buy a home. But owning doesn’t make sense for everyone and in some cases, it might be more financially beneficial to rent. Find out more They strike when he attends housewarming parties for friends. They hit when he hears that friends bought in the condo building where he is renting and the value of the unit has already shot up.

But the 35-year-old Toronto immigration and refugee lawyer graduated in 2005 with $75,000 in student debt and while he tackled his loans ahead of saving for a down payment, home prices have only climbed. “I decided to wait but I don’t know if I’ll end up regretting that,” he says. “It seems like every other month there’s an article about the condo market bubble bursting; I kind of gambled there and I think I lost.”

It used to be a rite of passage for young people, a way to announce your adulthood to the world by buying your first home. But fewer young people today are able to achieve this dream. A recent CIBC report showed that the home ownership rate among first-time homebuyers (25 to 35) fell from 55% in 2012 to the current 50%.

With the rise in housing costs, many first-timers are locked out of the market, unable to save the gargantuan down payment or qualify for a mortgage.

Related From $99,999 to $1-million plus: Here’s what Canadians can buy in Florida real estate Renewing your mortgage? Here’s why you should pick up the phone Outside of Toronto, Vancouver and Calgary, Canada’s housing market is ‘mediocre at best’ According to a BMO report released in March, first-time homebuyers plan to spend an average of $316,000 on their first home, up from $300,000 in 2013. (Those in Vancouver expect to spend $506,500 while those in Montreal plan to pay $237,900.) Respondents to the study expect to put an average down payment of 16% or $50,576.

Now, considering that the average home price in Canada was more than $416,000 in May, if you wanted to put 20% down, you’d need $83,200. That’s a daunting figure for anyone.

Six in 10 hopeful homeowners say their home-buying timeline has been delayed, with 39% citing rising real estate prices as the main reason for delay.

“You’ve been in the workforce for a few years and you don’t have a lot of assets; it can take several years to break into the financial market,” says Penelope Graham, an editor at Ratesupermarket.ca.

As tuition fees rise and students graduate with more debt, many find that they’re devoting funds to debt repayment versus saving for a down payment. (Mr. Norquay’s debt payments amount to $750 a month.)

And if graduates don’t find steady employment right away, accumulating a lump sum is even harder; more young people today compared to previous generations opt to return to school when they have trouble breaking into their fields.

The youth unemployment rate in 2012 was 2.4 times that of adults — marking the biggest gap since 1977, a Statistics Canada report said.

“If you look at youth unemployment and underemployment, that’s definitely another factor. The ability of young people to earn has been compromised,” says Benjamin Tal, deputy chief economist with Canadian Imperial Bank of Commerce.

He calls today’s young adults “the lost generation” — a group that is falling behind economically.

A new report by the Conference Board of Canada echoes his findings: the average disposable income of Canadians between the ages of 50 and 54 is now 64% higher than that of 25- to 29-year-olds. That’s up from 47% in the mid-1980s.

With young workers facing lower wages, rising home prices and tighter mortgage restrictions (reducing total amortization to 25 years, capping maximum debt ratios for households to qualify for a mortgage loan), the goal of home ownership moves further away for many.

So what are people doing instead? They’re spending more time living with mom and dad. They’re renting. Renting often suits a younger demographic who might appreciate mobility and fewer responsibilities. Plus, home buying comes with maintenance costs and upkeep and each time you buy a home, extra funds are needed to cover things such as lawyer fees, land-transfer taxes, and other transaction expenses that typically add 10% to the purchase price.

Some experts argue that investing one’s savings in assets with higher potential returns is a better option than sinking everything into the housing basket, especially if you might be planning to move anytime soon.

“The one compelling argument I have seen in support of renting is that if someone is wisely investing, it can be a bigger payout in the end,” Mr. Norquay says. “I am not at all the saver type, and those articles have only increased my desire to want to own. Basically it would be a way of forcing myself to invest.”

Why is he a bad saver? “I like to go out and have fun and I like to travel.” More than two-thirds of Gen X Canadians told a TD survey that they wanted enough flexibility to be able to afford things like travel after paying their monthly mortgage.

Mr. Norquay now rents a $1,950 two-bedroom condo unit with a roommate near his downtown legal aid clinic. Three years ago, he hoped to buy a home with a friend and got pre-approved for a joint mortgage; but they couldn’t find the right property.

Though some say people should take advantage of the record low mortgage rates and get into the housing market as soon as possible, Sadiq Adatia, chief investment officer at Sun Life Global Investments, suggests first-timers should continue to wait.

“First-time home buyers should wait to buy as the market is quite frothy at the moment and it is only a matter of time before we see a pullback,” Mr. Adatia says.

“Though rates will also go up at some point, our belief is that housing values will decline prior to that, giving buyers a great opportunity to take advantage of lower prices, but also lower rates. Those opportunities do not come often.”

As it stands today, houses are becoming less affordable, according to RBC’s most recent affordability index which measures the percentage of pre-tax household income that is needed to service the cost of owning a home (including mortgage payments, utilities and property taxes). In Vancouver, 82.4% of household median pre-tax income is needed to service the cost of owning a bungalow at current prices. That compares with 56.1% in Toronto and 34.5% in Calgary.

In places like Toronto and Vancouver, competition is steep so first-timers could face bidding wars which ratchet up prices and prompt some buyers to drop important conditions such as a home inspection.

“Without having a bit of help from friends and family or being able to sell something, it’s very difficult for a first-time homebuyer even on two incomes,” says Mike Bone, a 31-year-old account manager at a marketing consulting firm. He and his wife are looking to buy a home in Toronto for $550,000 to $700,000 but have found that bidding wars inflate all of the prices.

“We’re trying to balance getting in there and not making a stupid decision. It’s frustrating but we understand the high demand and the low supply of single-family homes. Lately, we’ve been looking at new builds and low-rise condos.”

Mr. Bone says he hopes that they’ll have some luck as the weather cools and in the interim, they’ll continue to build up their savings.

But how do you even start saving up that big chunk of money, especially if you’re doing it alone?

The majority (61%) of first-timers told a BMO survey that they’ve made cutbacks to their lifestyle in order to save for their first home. Meanwhile, 30% expect parents or family to assist in their purchase; this percentage rises to 40% in Montreal and Vancouver.

The minimum down payment for a home is usually 5%, says Jeff Cody, managing partner of Mortgage Brokers City Inc. in Ottawa. “But if you put less than 20% down, the mortgage has to be insured against default,” he adds. The more you put down, the lower your insurance premium, which start as high as 3.15%.

You need a strategy.

Mr. Norquay will finish paying off his student loans in October; then, he’ll start accumulating more for his future home. He also has savings in an registered retirement savings plan and wants to take advantage of the home buyers’ plan. Under the home buyers’ plan, Canadians can take $25,000 out of their RRSP and pay it back over the next 15 years without incurring any penalty.

Save as much as you can before taking the plunge, Ms. Graham says. “Aim to pay more than a 5% down payment,” she says. “No one wants to hear this but if you go into your first home purchase with more capital up front, it means you’re going to take out less of a mortgage and over the long run, you’re going to pay less interest and you’re going to build your equity faster.” • Email: mleong@nationalpost.com

CMHC could force banks to pay deductibles on mortgage insurance

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The Canada Mortgage and Housing Corp. is looking at a new formula to push some of its losses on to financial institutions, essentially forcing them to pay a deductible on mortgages insured with the Crown corporation before claims are paid, according to sources.

Thinking about a move-up buy? Forget it, new study says you can’t afford it

You’re likely stuck in your current home because of new tougher mortgage regulations and ever-rising prices in the Canadian real estate market The Financial Post has learned the Office of the Superintendent of Financial Institutions is involved in discussions with CMHC, which it oversees, while the Canadian Bankers Association is said to be against the measure.

“The CBA has ongoing discussions with CMHC about a variety of issues in the mortgage and housing markets,” said Maura Drew-Lytle, a spokesperson for the CBA, in an emailed statement. “The International Monetary Fund made a really vague reference to the notion of a mortgage insurance deductible in its Financial Sector Assessment report on Canada, but you would have to speak to CMHC about whether or not it is an idea that they are considering,”

A spokesman for CMHC would not comment. OSFI could not be reached.

“The idea is being floated around right now,” said a senior industry source, who asked not to be identified. “What they are trying to do is make sure lenders have some skin in the game.”

Any implementation might not happen for at least a couple of years while the amount of the deductible is still open to consideration. It’s likely to be in a range of 5% to 10% of a mortgage.

Canadians with less than a 20% down payment on a home must get mortgage default insurance when borrowing from a financial institution regulated by Ottawa. Those consumer loans, which are insured and ultimately backed by the federal government, are often securitized and then sold to investors.

The insurers guarantee the full and timely payment of principle and interest. If say a $100,000 loan in a securitized pool goes bad and, ultimately the bank can only recoup $70,000 of that loan, the insurer is responsible for the remaining $30,000.

Related CMHC sees amount of mortgages it insures shrinking this year amid tighter housing market rules CMHC cutting back on what it covers with mortgage default insurance How to invest in real estate — no matter what the market does “They are structured so the lender is compensated for missed principle and interest and any legal and settlement costs,” says Finn Poschmann, director of research of with C.D. Howe Institute, about the current situation. He says the average recovery rate on defaults is usually about 70% of the mortgage.

“The idea is you could design a mortgage insurance product that has a deductible in it,” said Mr. Poschmann.

CMHC, which controls a majority of the market, has been reviewing its operations since new chief executive Evan Siddall, a former investment banker, took over last year. The Crown corporation has been scaling back its in-force insurance while it no longer insures second homes.

Mr. Poschmann says like any other sort of insurance, a higher deductible could mean a lower premium. But mortgage insurance premiums on high-ratio loans in Canada are paid by the consumer.

“There is nothing in principle wrong with having a range of mortgage insurance options in the marketplace. We should be clear if a deductible were a standard feature of residential mortgage insurance, the terms will tighten from a lender’s point of view but there would be downward pressure on premiums,” he said.

Peter Routledge, an analyst with National Bank Financial, said any move to charge a mortgage deductible would fit in with the overall tone CMHC has taken in recent months.

What they are trying to do is make sure lenders have some skin in the game “It would be consistent with reducing the CMHC’s tail risk,” said Mr. Routledge, noting it would only be possible to implement with future policies.

He questioned whether consumers would see any reductions in premiums even though the banks would be paying a deductible.

All of the mortgage insurers, including private entities Canada Guaranty and Genworth Canada, raised fees May 1. For those consumers with a 95% loan to equity, the fee jumped from 2.75% to 3.15% of the value of a mortgage. CMHC said the increase reflected the need for it to reach higher capital targets.

Mr. Routledge said the changes would drive up the costs for the banks because they would have to keep more capital on hand and that could mean higher mortgage rates for consumers to cover the shortfall. “But it’s a very competitive marketplace, so it’s plausible the market could absorb that,” he says.

Rob McLister, editor of Canadian Mortgage Trends, wondered whether investors buying securitized paper with a deductible would demand higher rates.

“You have the risk of the lender going bad versus the government of Canada,” said Mr. McLister, noting CMHC is backed 100% by Ottawa while the deductible would have to be covered by a private bank.

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CMHC chief says housing agency considering passing on mortgage risk to banks

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The Canada Mortgage and Housing Corp. is looking at changes to mortgage default insurance that would include sharing risk with banks, the Crown corporation’s chief executive told a Montreal audience Friday.

Thinking about a move-up buy? Forget it, new study says you can’t afford it

You’re likely stuck in your current home because of new tougher mortgage regulations and ever-rising prices in the Canadian real estate market “In our role as an adviser to government, we are evaluating a range of ideas on future improvements to our housing finance system, including risk-sharing with lenders to further confront moral hazard, future sandbox changes if housing markets are to become less stable, and increased capital requirements,” Evan Siddall told the Saint James Club, according to notes posted on CMHC’s website.

The Financial Post reported this month CMHC was looking at a new formula to push some of its losses on to financial institutions, essentially forcing them to pay a deductible on mortgages insured with the Crown corporation before claims are paid.

Sources have said the Office of the Superintendent of Financial Institutions has been involved in discussions with CMHC, which it oversees, while the Canadian Bankers Association is said to be against the measure. The CBA said it has had a variety of discussions with CMHC about mortgage and housing issues.

Mr. Siddall said in his speech that while Canada weathered the 2008 financial crisis it needed to think about “the next economic storm” to ensure the housing finance system can adapt to it.

Related CMHC could force banks to pay deductibles on mortgage insurance CMHC sees amount of mortgages it insures shrinking this year amid tighter housing market rules CMHC cutting back on what it covers with mortgage default insurance “We are re-examining our role in the Canadian housing and financial markets and looking to be part of an even more resilient system,” he said. “As much as we never want to use taxpayer money to bail out banks, governments consistently want to help homeowners in the event of a generalized housing crisis.”

Since his appointment, CMHC has raised fees for mortgage insurance to boost capital requirements while reducing some housing that it covers, including second homes. It has also tightened the rules for insuring self-employed Canadians.

“As a government entity, we need to have a different approach to risk management. Implicitly, we are in the bail-out avoidance business. Lenders pay us a premium to back them up if things go wrong,” said Mr. Siddall. “So we have an explicit responsibility to manage tail risk and survive, since insolvency is a less obvious option for us.”

He noted the government has been compensated for its risk to the tune of $18-billion in profits from CMHC over the last decade.

As a government entity, we need to have a different approach to risk management CMHC is backing about $550-billion in mortgages while another $160-billion in mortgages, covered by private insurers, is ultimately also backed by Ottawa. The federal government backs 90% of mortgage loan insurance issued by private entities Genworth Canada and Canada Guaranty.

“Earlier this year, we measured our mortgage loan insurance programs against the yard stick of attending to Canadians’ housing needs – as opposed to wants, desires well-served by the private sector,” said Mr. Siddall. “As a result of these and other changes, our insurance-in-force has begun to decline.”

The chief executive also addressed the issue of a possible bubble in the housing sector.

“As a risk manager, let me tell you why we aren’t overly worried about a housing bubble at this point in time, based on what we know,” he said. “Our educated opinion is that growth in house prices in Canada will moderate. If we are wrong, and price growth remains strong or accelerates, we may need to look to macro-prudential counter-weights to avoid excesses. As I said, we are currently evaluating them.”

Joe Oliver says Canada won’t make major changes to CMHC, housing finance

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Canada won’t make any sudden changes to the country’s system of housing finance, even as the government looks at ways to reduce its role in the market, Finance Minister Joe Oliver said.

Canada’s finance minister is urging European countries to consider taking quick action to repair their flagging economies by following stimulus programs similar to the one that pulled this country out of recession. Read on Oliver said that while he’s studying proposals, such as the idea of the government passing on more risk to lenders, these are longer-term issues that don’t require immediate action. The government guarantees about $710 billion worth of Canadian mortgages through state-run Canada Mortgage & Housing Corp. and private mortgage insurers.

“We’re looking at things, but we’re not going to be doing anything dramatic,” Oliver said in an interview in Cairns, Australia, where he was attending a meeting of finance ministers and central bankers from the Group of 20 countries. “We don’t see the need for it.”

Related CMHC chief says housing agency considering passing on mortgage risk to banks CMHC could force banks to pay deductibles on mortgage insurance Canada’s housing market on course for soft landing, says CMHC Evan Siddall, chief executive of CMHC, said in a Sept. 19 speech his organization is looking at ways to better manage the government’s exposure to the housing market.

In the speech, Siddall outlined how his organization is “re-examining” its role to ensure the government isn’t distorting the housing market by assuming too much risk. Possible steps could include risk-sharing with banks, higher capital requirements or smaller regulatory measures to curb over-borrowing by some households, Siddall said.

Nothing Precipitous

“We certainly aren’t going to do anything precipitous,” Oliver said. “You don’t want to cause the very thing you are trying to prevent.”

On the risk-sharing proposal, Oliver said the government hasn’t made any decisions.

“Obviously it’s one of the things one looks at, but I don’t want to signal we’re doing anything,” he said.

Canadian housing has so far defied predictions of a correction with recent data showing an acceleration in resales, starts and prices. Policy makers have downplayed worries the market is at risk of a collapse, forecasting instead a soft landing. Oliver reiterated he doesn’t see a housing bubble.

In his speech, Siddall said that his organization’s research shows that even with some overvaluation, “there are no immediate problematic housing market conditions at the national level.” If prices don’t moderate as predicted though, Siddall said, it will strengthen the case for additional measures to cool the market.

Additional Measures

“Our educated opinion is that growth in house prices in Canada will moderate,” Siddall said. “If we are wrong, and price growth remains strong or accelerates, we may need to look to macro-prudential counter-weights to avoid excesses.”

Until now, the agency has been taking smaller measures to remove some of excesses from the market and reduce the amount of insurance it has in force, which is capped at C$600 billion. In June, it announced it would no longer insure financing for condominiums. In February, the agency said it will increase premiums on mortgage insurance by an average of 15 percent. In 2012, the government gave the country’s banking regulator new to oversee CMHC.

CMHC also is planning to increase its capital holdings to protect from insurance losses and has done stress testing that shows it would have survived a U.S.-style downturn in the housing market, Siddall said in the speech.

CMHC insures mortgages against default, and its insurance is fully backed by the federal government. By law, Canadian mortgages with less than a 20 percent downpayment must be insured.

Housing Vulnerability

Bank of Canada Governor Stephen Poloz said Sunday that while housing remains a “vulnerability” for Canada, “we don’t see the housing market as particularly hazardous and we certainly don’t consider it to be a bubble.”

‘We’re not overly concerned but monitoring it very carefully,’’ Poloz told reporters in Cairns. “Over the course of the summer there was no perceptible reduction in household imbalances, while during the first half of the year we had seen a modest constructive trend.”

While no major policy changes are planned, Oliver said there could be similar smaller steps that can be taken if warranted. “That doesn’t mean we’re not going to take further steps,” Oliver said. “A lot of things as you know that have happened, they call it the sandbox policies, we believe moderated the growth.”

In a conference call with reporters from Sydney Sunday, Oliver reiterated the government wants to gradually reduce its involvement in the mortgage market. “Anything that we might consider would be of a marginal nature, like some of the steps that have been taken,” he said.

Dramatic Exit

There have been calls for a more dramatic exit from the market by the government. In a June report, the Organization for Economic Cooperation and Development said Canada should consider lowering the amount of mortgage insurance CMHC can write, and eventually get out of the business completely to limit taxpayer risk.

“Right now, government takes practically all the risk,” OECD Secretary-General Angel Gurria said in a June 11 interview. “This is a contingent liability of the taxpayers of Canada. There has to be some risk borne by the intermediary institutions and the borrowers themselves.”

Tax Inversions

Oliver also told reporters on the conference call he spoke to U.S. Treasury Secretary Jacob J. Lew at the Cairns meeting about U.S. companies that seek to reduce taxes by relocating abroad, a practice known as inversion.

Lew said Saturday his department is finishing work on measures that would limit inversions.

Oliver said it’s not clear whether the changes will be retroactive, a move that might affect Burger King Worldwide Inc.’s takeover of Canadian coffee and doughnut retailer Tim Hortons Inc. “We don’t know just how far that might go, whether there would be an attempt at retroactivity,” Oliver said.

He said Canada hasn’t been targeting companies for potential inversions. “The reason that we have pursued a low- tax policy on the corporate side is to attract and retain capital, which results in economic growth and employment.”

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Mortgage Broker Practices Score Well on Regulator Suitability Report

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TORONTO, Sept. 8, 2014 /CNW/ – A report from the Mortgage Broker Regulators’ Council of Canada (MBRCC) should help bolster the confidence borrowers have in the services being provided by mortgage brokers in Canada. The report indicates that most mortgage brokers work to direct their residential clients toward suitable mortgages. However, the report also notes that there is still room for improvement in a number of areas.

Canada’s mortgage broker regulators have identified mortgage suitability as a priority and a concern that is shared across the provinces. “Unsuitable mortgages can have a devastating financial impact on borrowers and their families,” MBRCC Chair Kirk Bacon said. “We’ve also seen national economies around the world suffer when too many households are stuck with unsuitable mortgages.” The report confirms that mortgage brokers have an important role in ensuring that the mortgages Canadians receive are suitable.

The MBRCC met with a number of industry associations to map out the role and activities of mortgage brokers in new residential mortgage transactions. They gathered information to develop a benchmark understanding of the processes and practices mortgage brokers ought to employ to ensure the mortgage advice and options they provide are suitable for their clients.

The MBRCC then conducted a survey of mortgage brokers with regulators in Alberta, Newfoundland & Labrador andOntario reaching out to select brokers to participate. The survey was designed to determine how closely current practices align with the benchmark. Participants were questioned on a variety of topics, including assessing a client’s need and circumstances, developing product option(s) and disclosures. According to the report, the vast majority of the 1,113 brokers surveyed have adopted practices that are integral to providing suitable options and advice to mortgage consumers.

“We now have a much clearer picture of what mortgage brokers are doing to help ensure the suitability of new residential mortgages,” Bacon stated, noting that the report was viewed as the foundation for future collaborative efforts among the regulators. “The MBRCC plans to build out from it to further our work in protecting Canada’smortgage consumers and improving the marketplace.”

The report is one of a series of successful collaborative efforts for the country’s provincial mortgage broker regulators. Since its establishment in 2012, MBRCC members have worked together to identify common concerns, develop shared solutions and harmonize the regulatory landscape. Included in the efforts already completed by the MBRCC are standardized risk disclosure materials for consumers in all provinces, competency and curriculum requirements for all mortgage broker licensing courses and an online tool to assist brokers in identifying the possible licensing and registration rules for transactions that cross provincial borders. MBRCC members are also currently working together to develop national licensing education standards and a harmonized course accreditation process.

About MBRCC

The MBRCC is an inter-jurisdictional association of mortgage broker regulators that seeks to improve and promote harmonization of mortgage broker regulatory practices to serve the public interest. Its members work together and with stakeholders to identify trends and address common regulatory issues through national solutions that support consumer protection and an open and fair marketplace.

MBRCC members represent the nine provinces that currently have legislative and regulatory frameworks governing mortgage brokers or have an interest in developing one; British Columbia, Alberta, Saskatchewan, Manitoba, Ontario,Quebec, New Brunswick, Nova Scotia and Newfoundland & Labrador.

Learn More

Mortgage Brokering Product Suitability Review: Link

MBRCC Homepage: www.mbrcc.ca

MBRCC Newsletter: Link

SOURCE Mortgage Broker Regulators’ Council of Canada

For further information: English Contact: Martin Boyle, Mortgage Broker Regulators’ Council of Canada,Martin.Boyle@fsco.gov.on.ca, 416-590-7031; French Contact: Stéphanie Fournier, L’Organisme d’autoréglementation du courtage immobilier du Québec, sfournier@oaciq.com, 1-800-440-7170 ext. 8693

Renewing your mortgage? Here’s why you should pick up the phone

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Twitter Google+ LinkedIn Email Comments More It is mortgage renewal time in my house.

Freedom 58? How Canadians are shaving thousands off the cost of their mortgage

More than half of Canadians in a new survey are putting extra effort into repaying their mortgages — saving tens of thousands in interest payments. Find out more I am one of those debt loving people who believe I can do more with my money by carrying a big debt at 3%, than by paying off my house and using up all that cheap capital – but that financial idea is a story for another column.

So, even though my mortgage comes due in October, I decided to lock in a rate four months earlier at a different institution at 2.79% for 5 years fixed. I was thrilled to have another five years of cheap money.

Even though I had already locked in elsewhere, I was interested in what my current mortgage lender would provide. I waited and I waited. Just four weeks before it was due for renewal they sent me a mortgage renewal notice. They could have sent it to me two or three months before my mortgage came due, but they may prefer to leave consumers less time to shop around and more inclined to just renew.

Related CMHC could force banks to pay deductibles on mortgage insurance Thinking about a move-up buy? Forget it, new study says you can’t afford it ‘I felt really trapped’: Tiny houses big with U.S. consumers seeking economic freedom Here is where it gets interesting. “Please indicate which option you are accepting by signing your initials in the appropriate area indicated and return your signed agreement,” the letter stated.

I could just initial the 5-year fixed rate — for the princely rate of 4.79%.

Further on in the letter under a section called “Get the best rate,” it offered to extend to you our special interest rate hold guarantee provided if I signed by my renewal date. But all this says is that if the rate went down between now and about three weeks from now, I would get the lower rate.

This is a full 2% higher than what I am actually going to get somewhere else. If I had a $500,000 mortgage, this would cost me $47,600 more over 5 years by ‘just signing here’ vs. going to a mortgage broker three months in advance.

Just to be sure that I wasn’t missing something I called to make sure that I had the correct instructions and rate on my renewal. An interesting thing happened when I called. In about 30 seconds they said “I can actually get you a rate of 2.99% for 5 years.” I asked why my rate was 4.79%, and they said that this is the standard rate, but I can get this better special rate.

Doing the math, that phone call, using the same $500,000 example, would have saved me $42,800 over 5 years. That was a pretty valuable phone call.

I asked the kind sir on the phone how often people just sign the renewal form, and he said ‘quite a few.’

If a bank gets 5,000 people in the same $500,000 example to sign the renewal, that adds $42.8-million in profit to their bottom line each year.

Please do not automatically sign the friendly mortgage renewal form. At a minimum call to negotiate or call a mortgage broker to get the best deal for you. If you feel some sort of loyalty to your current mortgage provider, then be sure to see someone in person and ask for the very best rate that they give their very best customer. Your future net worth will be glad that you did.

Ted Rechtshaffen is president and wealth advisor at TriDelta Financial, a boutique wealth management firm focusing on investment counselling and estate planning. tedr@tridelta.ca