ROB CARRICK
Taken from the Globe and Mail
Published Friday, Nov. 26, 2010 3:47PM EST
The 5-per-cent return on safe investments is back.
It happened last week when major banks increased their posted mortgage rates. If you were lending money out for mortgages like a bank, you could get the same return.
Here’s how: Just use the money in your registered retirement savings plan to finance your mortgage.
Mortgage negotiations Investing your RRSP dollars in your mortgage is a fringe strategy – let’s get that straight. Several financial institutions offer it, but not with much enthusiasm. It’s costly and time consuming to set up, and it locks you into returns that could be lower than what a diversified investment portfolio could earn over the long term. If your entire RRSP is invested in your mortgage, then there’s also a lack of diversification to worry about.
And yet, there’s a steady level of interest in this strategy. Mike Wise, a Calgary investment adviser, said most of the inquiries he gets are from people who want to use RRSP money as a source of funds to buy investment real estate. These people are often stretched financially and may not qualify for traditional mortgages.
The other group interested in the mortgage-RRSP strategy is made up of conservative investors who see their mortgage as a potential replacement for the low-yielding bonds and term deposits they own.
“That kind of person would be a jewel for this strategy,” said Mr. Wise, who 11 years ago put his own mortgage in his RRSP and wrote about it for Canadian MoneySaver magazine (read it here).
Charley Tsai, vice-president of wealth planning support at TD Waterhouse, offers this guideline on deciding whether it makes sense to hold your mortgage in your RRSP: “It’s worthwhile if the mortgage interest rate, net of expenses, would be greater than the investment return you would generate from your RRSP.”
Let’s deal with the “net of expenses” side of things first. Prepare yourself for a fee-for-all if you set up what banks call a non-arm’s length mortgage.
Start with the mortgage set-up fee and annual mortgage administration fee, which at TD are $250 and $225, respectively. Next, there are legal fees that can cost, in one mortgage broker’s estimation, anywhere from $500 to $1,000, depending on the specifics.
Now add mortgage insurance fees that will apply regardless of how much equity you have in your home. Genworth Financial, a private provider of mortgage insurance in Canada, says the insurance premium on mortgage amounts ranging as high as 65 per cent of the value of a home will be 0.5 per cent of the amount borrowed. Premiums rise as high as 2.75 per cent for mortgages that are up to 95 per cent of a home’s value.
You could face still another fee if you break an existing mortgage so you can move it into your RRSP. For that reason, the best time to adopt this strategy is when your mortgage comes up for renewal.
Negotiating the mortgage
When negotiating a typical mortgage, your goal should be to hammer the rate down as far as it will go. Just the opposite applies with an RRSP mortgage, because you are essentially paying interest to yourself, not the bank.
“If you’re doing this, you want to try and have as high an interest rate as possible,” Mr. Tsai said.
TD rules say you have to go with the posted mortgage rate for a non-arm’s length mortgage, but there’s still some manoeuvring room to bump up your rate high enough to make it an attractive investment for your RRSP.
Mr. Tsai said TD will allow you to select mortgage terms of one through 10 years. A five-year fixed rate would have put you at 5.44 per cent as of late this week; extending to six years put you at 5.7 per cent, seven years was at 6.09 per cent and 10 years was pegged at 6.4 per cent.
TD also allows a six-month convertible mortgage, which presents an interesting possibility if you see rates moving higher. You’d get a 4.45-per-cent rate for half a year, with an opportunity to benefit from any rate increases that happen between now and then.
But is it a wise investment?
Now to the question of whether it makes sense to put your mortgage in your RRSP from an investment point of view. If we take all the startup fees mentioned above, we end up with a cost of roughly $1,000 to $2,000 in the first year, assuming a $100,000 mortgage. Essentially, you could have a first-year fee of up to 2 per cent if you decide to pay your mortgage insurance upfront.
The cost looks more attractive in subsequent years, when the $225 annual admin fee works out to a fee of just 0.23 per cent.
These fees tell us that conservative investors earning 2 to 3 per cent in their retirement savings should not find it hard to get a better return from the mortgage-RRSP strategy.
“If you have fixed income in your RRSP and if it’s generating a very low yield, then this may be something worth looking at,” Mr. Tsai said. “The greater the difference, the more economic sense it might make to do this.”
Mr. Wise, the Calgary investment adviser, said the mortgage-RRSP strategy works best if you use the mortgage to replace the bonds and GICs in your portfolio while leaving your holdings in the stock market.
If putting your mortgage in your RRSP leaves you light on equities, take the mortgage payments flowing into your retirement plan and invest them in stocks, funds and so forth. In fact, investing each successive mortgage payment gives you a nice little dollar-cost averaging program.
Making mortgage payments into your retirement plan does not affect your RRSP contribution room. So you can further diversify your retirement savings using the money you annually add to your RRSP, separate from your mortgage.
One of the challenges in putting your mortgage in your RRSP is to find a trustee for the plan. In addition to TD Waterhouse, the online brokerages CIBC Investor’s Edge, RBC Direct Investing, Scotia iTrade and ScotiaMcLeod Direct Investing all allow this. Bank of Montreal says it no longer offers this program. If you have an investment adviser, he or she should be able to find a trust company to hold your mortgage RRSP.
Don’t forget the usual strategizing if you’re putting your mortgage into your RRSP – amortization period, biweekly versus monthly payments and so on. An interesting question arises here: Do you put the priority here on getting your mortgage paid off as quickly as possible, or on building your RRSP?
“If I can get a fixed income investment in my RRSP that will give me 5 per cent, I think I’d want to keep that as long as possible,” Mr. Wise said.
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HOW TO DO IT
Investing your registered retirement savings plan in the mortgage on your home is not for everyone, but it can generate steady returns that beat what bonds and term deposits offer.
Step One
Find a bank, investment dealer, trust company that offers this service; some investment advisers may also be able to help you set this up.
Step Two
Tally up fees – expect to pay a set-up fee, an annual mortgage administration fee, legal fees to set up the RRSP mortgage, mortgage insurance fees and possibly discharge fees if you're breaking your current mortgage.
Step Three
Pick mortgage terms. Expect rules guiding the rate you can use, the mortgage terms available and so forth.
Step Four
Use the money you're paying into your RRSP to diversify your RRSP investments, possibly by making regular purchases of stocks or equity funds and ETFs
WHAT YOU SHOULD KNOW
Four things to keep in mind about investing your retirement savings in your mortgage:
1. You can invest RRIF money in your mortgage, but you must have enough cash on hand to fund the required minimum annual RRIF withdrawal.
2. Some banks will allow you to use RRSP money to buy a residential investment property, while others allow this only for an owner-occupied residence.
3. It may be possible to invest in a mortgage on someone else's property.
4. You'll need mortgage default insurance even though you're lending to yourself and even if you have a lot of equity in your home.
Monday, November 29, 2010
Tuesday, November 23, 2010
New buyers are admirably wise, survey suggests
Many first-time home buyers understand the power of the big down payment
By Peter Simpson, Vancouver Sun November 20, 2010 Although Generations X and Y are vastly different (I have daughters from both demographic cohorts so, believe me, I know all too well), when it comes to listing the impediments preventing them from buying their first homes, the members of these two generations are as similar as the Sedin twins.
A survey conducted at the 16th annual seminar for first-time homebuyers -organized by the Greater Vancouver Home Builders' Association and presented by the Homeowner Protection Office, branch of B.C. Housing -revealed that high prices and insufficient down payments were the culprits, no different than the responses gleaned from the survey conducted at, say, the fourth annual seminar in 1997.
Alas, the high cost of developable land, exacerbated by an ever-increasing array of taxes, fees, levies and development charges imposed on new homes by all four levels of government, seems to be a constant challenge throughout what is arguably the most popular geographic region in the country.
That aside, what are the needs and expectations of today's typical first-time homebuyer? I will run through the survey responses and compare them with responses from last year, when the new-homes market was mired in a 10-year low, and from 2007, when the market was riding a 14-year high.
The survey results, tabulated by Canada Mortgage and Housing Corp., reveal that most potential first-time buyers are between the age of 25 and 34 and rent accommodation away from parents. They plan to purchase a home within a year and will be buying with a spouse/ partner. They prefer a two-bedroom apartment or townhouse between 800 and 1,199 square feet. Their target price range is $300,000 to $399,000 and most have down payments of at least 10 per cent of the purchase price. They value highly the benefits of warranty protection. Half the respondents indicated they will apply RRSPs towards their down payments, and more than half believe the HST will make it difficult for them to buy a new home, although if they buy a new home priced below $525,000, the HST has little impact. And, of course, there is no HST on the purchase of a resale home.
Following are the survey findings, rounded to the nearest percentage. In parentheses are the percentages from last year, then from 2007. There were 230 first-time buyers participating.
- 63 per cent (63; 77) of respondents cited high housing costs as the major obstacle preventing them from buying their first home; 30 per cent (32; 36) said an insufficient down payment was a stumbling block, while 22 per cent (22; 20) indicated they can't seem to find the home they want.
- 55 per cent (65; 62) of respondents currently rent accommodation, while 23 per cent (23; 25) live with parents. The remainder indicated various living arrangements -relatives, friends, co-op housing.
- 58 per cent (68; 59) will be purchasing their first home with a spouse/partner; 27 per cent (23; 33) said they will be buying their first home alone; 9 per cent (5; 6) said they will be buying a home with another family member, such as a brother or sister. Friends pooling resources is another scenario.
- 29 per cent (32; 28) said they plan to buy within six months, while 36 per cent (44; 40) indicated they would buy within one year; 17 per cent (14; 21) said their timeline is the next two to three years.
- 26 per cent (29; 30) said they plan to purchase a town house, 25 per cent (30; 27) a single-detached home, 24 per cent (24; 20) a low-rise condominium apartment and 19 per cent (19; 18) a highrise condominium apartment. Yes, there are many affordably priced single-detached homes available today, satisfying the need of many buyers for a patch of land they can call their own. Others appreciate the lock-it-and-leave-it lifestyle offered by maintenance-free townhouses and apartments.
- As similarly documented in previous years, there was no clear preference for location, although municipalities mentioned most were Burnaby, New Westminster, Surrey, Langley and Vancouver.
- 7 per cent of the respondents indicated their maximum price is under $250,000 (12 per cent last year; no comparables for 2007); 11 per cent (18) said $250,000-$299,000; 20 per cent (22) said $300,000-$349,000; 17 per cent (14) said $350,000-$399,000; 9 per cent (9) said $400,000 to $449,000; 8 per cent (10) said $450,000 to $499,000; and 22 per cent (13) said they will pay more than $500,000.
- 2 per cent (4; 11) said they have less than 5 per cent of the purchase price to use as a down payment; 20 per cent (20; 17) said they have 5 per cent down; 21 per cent (23; 31) said they have 10 per cent down; 12 per cent (15; 7) said they have 15 per cent down; 24 per cent (19; 12) have 20 per cent down; and 17 per cent (19; 21) have 25 per cent or more of the purchase price for a down payment. Buyers are advised to ask their lender, mortgage broker or realtor for advice on mortgage-qualifying rules.
- 10 per cent (7; 11) said they intend to buy a home smaller than 800 sq. ft; 19 per cent (19; 20) said 800-999 sq. ft; 18 per cent (20; 20) said 1,000-1,199 sq. ft; 12 per cent (18; 16) said 1,200 to 1,499 sq. ft; 10 per cent (9; 13) said 1,500 to 1,799 sq. ft; 10 per cent (12; 7) said 1,800 to 2,000 sq. ft; and 13 per cent (11; 9) said more than 2,000 sq. ft
- 15 per cent (9; 15) said they need only one bedroom in their first home; 44 per cent (48; 53) said two bedrooms; 28 per cent (33; 23) said three bedrooms; 7 per cent (7; 4) said four bedrooms; and 3 per cent (1; 3) said more than four bedrooms.
- 93 per cent (94; 93) said it was important their new home is protected by warranty insurance. Less than 2 per cent said it wasn't important. How can a solid home warranty not be important?
- 9 per cent (11; 11) of seminar respondents were under the age of 25; 49 per cent (49; 49) were between the ages of 25-34; 10 per cent (23; 22) were 35-44; 19 per cent (19; 8) were 45-54; 7 per cent (5; 6) were over 55. Some of the older respondents were starting over after marital breakups.
When it comes to choosing a realtor, first-timers will rely heavily on referrals from family or friends. Other information sources aren't even close. Asked how they will find a realtor, 63 per cent (71; 66) of the respondents indicated a referral from family or friends; 11 per cent (10; 8) said they will choose a realtor with whom they are somewhat familiar; 7 per cent (2; 5) said they will work with a well-known real estate firm; 4 per cent (6; 5) said Internet research and 4 per cent (3; 3) indicated a realtor's advertising presence would influence their choice of a realtor to help them search for a first home.
Seminar attendees were asked to indicate their most desirable features. The list was provided for them but respondents were free to add items to the list. Features deemed most desirable, in order, were energy efficiency, healthy indoor-air quality, finished basement, home office, in-house secondary suite, flex/adaptable features, earthquake-resistant design, green building and laneway housing unit.
During the next month, I intend to contact a few of the folks who attended the seminar this year, last year and in 2007 to find out if they bought homes and, if so, how their lives have evolved since they lost their property virginity. In a future column, I will share what I learned from the first-timers.
Peter Simpson is president and chief executive officer of the Greater Vancouver Home Builders' Association. E-mail peter@gvhba.org.
By Peter Simpson, Vancouver Sun November 20, 2010 Although Generations X and Y are vastly different (I have daughters from both demographic cohorts so, believe me, I know all too well), when it comes to listing the impediments preventing them from buying their first homes, the members of these two generations are as similar as the Sedin twins.
A survey conducted at the 16th annual seminar for first-time homebuyers -organized by the Greater Vancouver Home Builders' Association and presented by the Homeowner Protection Office, branch of B.C. Housing -revealed that high prices and insufficient down payments were the culprits, no different than the responses gleaned from the survey conducted at, say, the fourth annual seminar in 1997.
Alas, the high cost of developable land, exacerbated by an ever-increasing array of taxes, fees, levies and development charges imposed on new homes by all four levels of government, seems to be a constant challenge throughout what is arguably the most popular geographic region in the country.
That aside, what are the needs and expectations of today's typical first-time homebuyer? I will run through the survey responses and compare them with responses from last year, when the new-homes market was mired in a 10-year low, and from 2007, when the market was riding a 14-year high.
The survey results, tabulated by Canada Mortgage and Housing Corp., reveal that most potential first-time buyers are between the age of 25 and 34 and rent accommodation away from parents. They plan to purchase a home within a year and will be buying with a spouse/ partner. They prefer a two-bedroom apartment or townhouse between 800 and 1,199 square feet. Their target price range is $300,000 to $399,000 and most have down payments of at least 10 per cent of the purchase price. They value highly the benefits of warranty protection. Half the respondents indicated they will apply RRSPs towards their down payments, and more than half believe the HST will make it difficult for them to buy a new home, although if they buy a new home priced below $525,000, the HST has little impact. And, of course, there is no HST on the purchase of a resale home.
Following are the survey findings, rounded to the nearest percentage. In parentheses are the percentages from last year, then from 2007. There were 230 first-time buyers participating.
- 63 per cent (63; 77) of respondents cited high housing costs as the major obstacle preventing them from buying their first home; 30 per cent (32; 36) said an insufficient down payment was a stumbling block, while 22 per cent (22; 20) indicated they can't seem to find the home they want.
- 55 per cent (65; 62) of respondents currently rent accommodation, while 23 per cent (23; 25) live with parents. The remainder indicated various living arrangements -relatives, friends, co-op housing.
- 58 per cent (68; 59) will be purchasing their first home with a spouse/partner; 27 per cent (23; 33) said they will be buying their first home alone; 9 per cent (5; 6) said they will be buying a home with another family member, such as a brother or sister. Friends pooling resources is another scenario.
- 29 per cent (32; 28) said they plan to buy within six months, while 36 per cent (44; 40) indicated they would buy within one year; 17 per cent (14; 21) said their timeline is the next two to three years.
- 26 per cent (29; 30) said they plan to purchase a town house, 25 per cent (30; 27) a single-detached home, 24 per cent (24; 20) a low-rise condominium apartment and 19 per cent (19; 18) a highrise condominium apartment. Yes, there are many affordably priced single-detached homes available today, satisfying the need of many buyers for a patch of land they can call their own. Others appreciate the lock-it-and-leave-it lifestyle offered by maintenance-free townhouses and apartments.
- As similarly documented in previous years, there was no clear preference for location, although municipalities mentioned most were Burnaby, New Westminster, Surrey, Langley and Vancouver.
- 7 per cent of the respondents indicated their maximum price is under $250,000 (12 per cent last year; no comparables for 2007); 11 per cent (18) said $250,000-$299,000; 20 per cent (22) said $300,000-$349,000; 17 per cent (14) said $350,000-$399,000; 9 per cent (9) said $400,000 to $449,000; 8 per cent (10) said $450,000 to $499,000; and 22 per cent (13) said they will pay more than $500,000.
- 2 per cent (4; 11) said they have less than 5 per cent of the purchase price to use as a down payment; 20 per cent (20; 17) said they have 5 per cent down; 21 per cent (23; 31) said they have 10 per cent down; 12 per cent (15; 7) said they have 15 per cent down; 24 per cent (19; 12) have 20 per cent down; and 17 per cent (19; 21) have 25 per cent or more of the purchase price for a down payment. Buyers are advised to ask their lender, mortgage broker or realtor for advice on mortgage-qualifying rules.
- 10 per cent (7; 11) said they intend to buy a home smaller than 800 sq. ft; 19 per cent (19; 20) said 800-999 sq. ft; 18 per cent (20; 20) said 1,000-1,199 sq. ft; 12 per cent (18; 16) said 1,200 to 1,499 sq. ft; 10 per cent (9; 13) said 1,500 to 1,799 sq. ft; 10 per cent (12; 7) said 1,800 to 2,000 sq. ft; and 13 per cent (11; 9) said more than 2,000 sq. ft
- 15 per cent (9; 15) said they need only one bedroom in their first home; 44 per cent (48; 53) said two bedrooms; 28 per cent (33; 23) said three bedrooms; 7 per cent (7; 4) said four bedrooms; and 3 per cent (1; 3) said more than four bedrooms.
- 93 per cent (94; 93) said it was important their new home is protected by warranty insurance. Less than 2 per cent said it wasn't important. How can a solid home warranty not be important?
- 9 per cent (11; 11) of seminar respondents were under the age of 25; 49 per cent (49; 49) were between the ages of 25-34; 10 per cent (23; 22) were 35-44; 19 per cent (19; 8) were 45-54; 7 per cent (5; 6) were over 55. Some of the older respondents were starting over after marital breakups.
When it comes to choosing a realtor, first-timers will rely heavily on referrals from family or friends. Other information sources aren't even close. Asked how they will find a realtor, 63 per cent (71; 66) of the respondents indicated a referral from family or friends; 11 per cent (10; 8) said they will choose a realtor with whom they are somewhat familiar; 7 per cent (2; 5) said they will work with a well-known real estate firm; 4 per cent (6; 5) said Internet research and 4 per cent (3; 3) indicated a realtor's advertising presence would influence their choice of a realtor to help them search for a first home.
Seminar attendees were asked to indicate their most desirable features. The list was provided for them but respondents were free to add items to the list. Features deemed most desirable, in order, were energy efficiency, healthy indoor-air quality, finished basement, home office, in-house secondary suite, flex/adaptable features, earthquake-resistant design, green building and laneway housing unit.
During the next month, I intend to contact a few of the folks who attended the seminar this year, last year and in 2007 to find out if they bought homes and, if so, how their lives have evolved since they lost their property virginity. In a future column, I will share what I learned from the first-timers.
Peter Simpson is president and chief executive officer of the Greater Vancouver Home Builders' Association. E-mail peter@gvhba.org.
Monday, November 15, 2010
Homeowners unfazed by long amortization
'People will always decide what's easiest for them'
By Garry Marr, Financial Post November 10, 2010
Canadians plan to take longer to pay off their mortgages but they don't expect it to affect their retirement plans. Something just doesn't add up.
A new study from the Canadian Association of Accredited Mortgage Professionals shows consumers are taking advantage of longer amortization lengths at previously unheard of levels. Statistics released this week show 42% of new mortgages in the last year went for an amortization period of more than 25 years.
It's a huge jump when you consider that just five years ago, you couldn't even get an insured mortgage backed by the government that was amortized for more than 25 years.
The reason for the longer amortization periods is simple -- you can qualify for more mortgage when your monthly payment is lower because it is spread out over 35 years instead of 25 years.
Within the same survey by CAAMP, consumers were asked about their retirement expectations. Those with extended amortizations plan to retire on average at 61.9 years. Those amortizing their mortgage for less than 25 years plan to retire on average at 61.5 years.
"This data on expectations does not prove that actual retirement will be unaffected by recent trends in housing and mortgage markets," says CAAMP in its study. no kidding.
"But it does suggest that consumers' evaluations of their life-cycle options have not been materially altered."
Are consumers being entirely realistic about their future?
Will Dunning, chief economist with CAAMP, says the percentage of Canadians retiring with a mortgage is small enough that it is difficult to track.
"We find a lot of people taking [longer amortizations] are making additional payments," says Mr. Dunning, adding previous studies have shown people "aggressively" try to repay their mortgages.
Victor Fiume, president of the Canadian Home Builders' Association, says Canada is just catching up to a trend that has taken place in other jurisdictions.
"In many, many countries across the world, paying off a home is a multi-generational kind of thing. It doesn't happen in this generation. A lot of the stuff that goes on in England is multi-generational because the houses are so expensive," says Mr. Fiume.
There is no arguing the increased flexibility a longer amortization mortgage gives you, but increasingly some consumers do find themselves getting into financial trouble because they have bitten off too much mortgage, says Patricia White, executive director of Credit Counselling Canada.
"People will always decide what is easiest for them," she says. "But you have to plan in advance to make accelerated payments. You need to make some conscious decisions about how to get rid of that mortgage debt faster."
Canadians always do better when they have direct withdrawals from their bank accounts and less discretionary power about paying down debt, adds Ms. White.
Vince Gaetano, a principal broker and owner at Monster Mortgage, agrees people who choose the longer amortization and the lower payment rarely take advantage of that extra cash flow to make additional payments later on. "It's a very small group of people who do that," he says.
He thinks consumers going for the longer amortization are banking on their homes rising in value faster than any gains they get paying their mortgage off earlier.
"Real estate over time will appreciate at more than 2% to 4% per year," says Mr. Gaetano.
"People are saying, 'It won't affect my retirement because I plan to retire with a home that will appreciate in value in addition to the amount I pay it down.' It's not a bad strategy if you are in a market that gives you consistent appreciation, but you are not going to get that in every market in Canada."
But there is no getting around the fact the people who take a longer amortization will take longer to repay their loan.
The CAAMP study found consumers going longer than 25 years, were done with their mortgage at age 53 on average, compared with an average of 47 years for those going less than 25 years.
If you are going for a longer amortization, you better hope your home goes up in value because you are going to have fewer mortgage-free years in which to save. It's hard to believe that won't affect retirement plans.
gmarr@nationalpost.com
By Garry Marr, Financial Post November 10, 2010
Canadians plan to take longer to pay off their mortgages but they don't expect it to affect their retirement plans. Something just doesn't add up.
A new study from the Canadian Association of Accredited Mortgage Professionals shows consumers are taking advantage of longer amortization lengths at previously unheard of levels. Statistics released this week show 42% of new mortgages in the last year went for an amortization period of more than 25 years.
It's a huge jump when you consider that just five years ago, you couldn't even get an insured mortgage backed by the government that was amortized for more than 25 years.
The reason for the longer amortization periods is simple -- you can qualify for more mortgage when your monthly payment is lower because it is spread out over 35 years instead of 25 years.
Within the same survey by CAAMP, consumers were asked about their retirement expectations. Those with extended amortizations plan to retire on average at 61.9 years. Those amortizing their mortgage for less than 25 years plan to retire on average at 61.5 years.
"This data on expectations does not prove that actual retirement will be unaffected by recent trends in housing and mortgage markets," says CAAMP in its study. no kidding.
"But it does suggest that consumers' evaluations of their life-cycle options have not been materially altered."
Are consumers being entirely realistic about their future?
Will Dunning, chief economist with CAAMP, says the percentage of Canadians retiring with a mortgage is small enough that it is difficult to track.
"We find a lot of people taking [longer amortizations] are making additional payments," says Mr. Dunning, adding previous studies have shown people "aggressively" try to repay their mortgages.
Victor Fiume, president of the Canadian Home Builders' Association, says Canada is just catching up to a trend that has taken place in other jurisdictions.
"In many, many countries across the world, paying off a home is a multi-generational kind of thing. It doesn't happen in this generation. A lot of the stuff that goes on in England is multi-generational because the houses are so expensive," says Mr. Fiume.
There is no arguing the increased flexibility a longer amortization mortgage gives you, but increasingly some consumers do find themselves getting into financial trouble because they have bitten off too much mortgage, says Patricia White, executive director of Credit Counselling Canada.
"People will always decide what is easiest for them," she says. "But you have to plan in advance to make accelerated payments. You need to make some conscious decisions about how to get rid of that mortgage debt faster."
Canadians always do better when they have direct withdrawals from their bank accounts and less discretionary power about paying down debt, adds Ms. White.
Vince Gaetano, a principal broker and owner at Monster Mortgage, agrees people who choose the longer amortization and the lower payment rarely take advantage of that extra cash flow to make additional payments later on. "It's a very small group of people who do that," he says.
He thinks consumers going for the longer amortization are banking on their homes rising in value faster than any gains they get paying their mortgage off earlier.
"Real estate over time will appreciate at more than 2% to 4% per year," says Mr. Gaetano.
"People are saying, 'It won't affect my retirement because I plan to retire with a home that will appreciate in value in addition to the amount I pay it down.' It's not a bad strategy if you are in a market that gives you consistent appreciation, but you are not going to get that in every market in Canada."
But there is no getting around the fact the people who take a longer amortization will take longer to repay their loan.
The CAAMP study found consumers going longer than 25 years, were done with their mortgage at age 53 on average, compared with an average of 47 years for those going less than 25 years.
If you are going for a longer amortization, you better hope your home goes up in value because you are going to have fewer mortgage-free years in which to save. It's hard to believe that won't affect retirement plans.
gmarr@nationalpost.com
Friday, November 12, 2010
Market for homes close to balanced
By JAY BRYAN, The Montreal Gazette November 9, 2010
Mortgage debt in Canada climbed by 7.6 per cent in the past year to exceed $1 trillion -a figure that's sure to spark new worries about a housing bubble in Canada.
But a look below the surface of this number is far more reassuring.
First, the sheer amount of mortgage debt sounds daunting, but what's really important is how fast it's growing. It turns out that this growth has slowed a good deal from a trend rate of 10.7 per cent in recent years, an encouraging sign. The forecast is for a further downshift.
As well, it's hard to find signs of bubble behaviour or of a financial squeeze on homeowners.
Few Canadian homeowners are speculating on housing and most have a fat equity cushion in their properties. Better yet, most could afford monthly payments of at least $300 above their current ones, according to a new survey.
This information is courtesy of an outfit that represents many of Canada's mortgage brokers and insurers, the Canadian Association of Accredited Mortgage Professionals, which has just published a wealth of housing-market intelligence in its annual report.
Bottom line, CAAMP president Jim Murphy says in a statement accompanying the report: "Canadians are being smart and responsible with their mortgages. They are building equity in their homes and making informed, long-term mortgage decisions."
This sounds like one of those motherhood statements that you expect from sales-oriented organizations like your local real-estate board, but the interest of mortgage lenders is quite different, giving Murphy's optimism a bit more credibility.
His members would suffer big losses if there were a big deterioration in people's ability to pay off mortgage debt - a crucial factor that drove the 30-per-cent collapse in U.S. home values over the past several years.
And it's not just CAAMP that's unconvinced about any bubble. At BMO Capital Markets, senior economist Sal Guatieri has just taken another look at Canadian home valuations and concluded that the average price across the country is too high, but not by a lot.
At the peak of the home-buying frenzy late last year, Canadian prices were overvalued by maybe 18 per cent, he estimates, but this has diminished to about 11 per cent as the market cooled and incomes edged up. (His calculation is based on the long-term relationship between prices and personal incomes.)
With prices still richer than incomes would normally support, there's some pressure for further cooling in prices, Guatieri believes, but he doesn't see a drop of more than five per cent.
That's partly because incomes continue to rise, helping to narrow the gap. It's important to remember that Canada's very low mortgage interest rates can support prices above the average level for quite a while, providing time for the slow advance of incomes to do most of the rebalancing.
Will Dunning, the chief economist at CAAMP, has a similar outlook. As demand for housing cools, he expects to see a sharp drop in new housing construction (a forecast that looked exactly right when we saw yesterday's news of a nine-per-cent drop in housing starts last month), but little pressure on resale prices.
Dunning predicts that the average Canadian home price for 2011 will be a modest 3.9 per cent lower than in 2010, simply because of price declines that have already affected some markets.
But this annual average represents past price movements. He thinks the trend in 2011 and 2012 will be one of small price gains, just enough to offset inflation.
That's because the balance between homeowners listing properties for sale and people looking for homes to buy has shifted back toward buyers, but not nearly far enough to kneecap prices. In Dunning's view, the market these days is just about balanced.
Mortgage debt in Canada climbed by 7.6 per cent in the past year to exceed $1 trillion -a figure that's sure to spark new worries about a housing bubble in Canada.
But a look below the surface of this number is far more reassuring.
First, the sheer amount of mortgage debt sounds daunting, but what's really important is how fast it's growing. It turns out that this growth has slowed a good deal from a trend rate of 10.7 per cent in recent years, an encouraging sign. The forecast is for a further downshift.
As well, it's hard to find signs of bubble behaviour or of a financial squeeze on homeowners.
Few Canadian homeowners are speculating on housing and most have a fat equity cushion in their properties. Better yet, most could afford monthly payments of at least $300 above their current ones, according to a new survey.
This information is courtesy of an outfit that represents many of Canada's mortgage brokers and insurers, the Canadian Association of Accredited Mortgage Professionals, which has just published a wealth of housing-market intelligence in its annual report.
Bottom line, CAAMP president Jim Murphy says in a statement accompanying the report: "Canadians are being smart and responsible with their mortgages. They are building equity in their homes and making informed, long-term mortgage decisions."
This sounds like one of those motherhood statements that you expect from sales-oriented organizations like your local real-estate board, but the interest of mortgage lenders is quite different, giving Murphy's optimism a bit more credibility.
His members would suffer big losses if there were a big deterioration in people's ability to pay off mortgage debt - a crucial factor that drove the 30-per-cent collapse in U.S. home values over the past several years.
And it's not just CAAMP that's unconvinced about any bubble. At BMO Capital Markets, senior economist Sal Guatieri has just taken another look at Canadian home valuations and concluded that the average price across the country is too high, but not by a lot.
At the peak of the home-buying frenzy late last year, Canadian prices were overvalued by maybe 18 per cent, he estimates, but this has diminished to about 11 per cent as the market cooled and incomes edged up. (His calculation is based on the long-term relationship between prices and personal incomes.)
With prices still richer than incomes would normally support, there's some pressure for further cooling in prices, Guatieri believes, but he doesn't see a drop of more than five per cent.
That's partly because incomes continue to rise, helping to narrow the gap. It's important to remember that Canada's very low mortgage interest rates can support prices above the average level for quite a while, providing time for the slow advance of incomes to do most of the rebalancing.
Will Dunning, the chief economist at CAAMP, has a similar outlook. As demand for housing cools, he expects to see a sharp drop in new housing construction (a forecast that looked exactly right when we saw yesterday's news of a nine-per-cent drop in housing starts last month), but little pressure on resale prices.
Dunning predicts that the average Canadian home price for 2011 will be a modest 3.9 per cent lower than in 2010, simply because of price declines that have already affected some markets.
But this annual average represents past price movements. He thinks the trend in 2011 and 2012 will be one of small price gains, just enough to offset inflation.
That's because the balance between homeowners listing properties for sale and people looking for homes to buy has shifted back toward buyers, but not nearly far enough to kneecap prices. In Dunning's view, the market these days is just about balanced.
Monday, November 1, 2010
Should buyers beware?
Deciding whether to rent or buy should be based on a lot more than just the asking price - Taken from Maclean's Magazine Online
by Jason Kirby on Monday, October 25, 2010 5:20pm - 27 Comments
Mary Altaffer/AP/ DARRYL DYCK/CP
In mid-November, Vancouver’s condo king, Bob Rennie, will take a very public mulligan. That’s when he plans to relaunch sales at the troubled Millennium Water development, the site where Olympic athletes bunked during the Winter Games. For all the praise designers and visitors from around the globe have heaped on the project’s cutting-edge, ultra-green features, the $1-billion Millennium Water sorely lacks one crucial component—buyers. Two-thirds of the 740 units in the complex sit empty. Hence Rennie’s plan to jump-start sales by way of discounts, an HST tax holiday, and a break on property taxes and maintenance fees—initiatives that could knock 14 per cent off the initial price tag of some units.
Vancouver taxpayers, who are ultimately on the hook for any losses, aren’t the only ones eager to know if the gambit pays off. In the eyes of prospective buyers in the city, and across the country for that matter, the high-profile project has become a touchstone for whether the real estate market is about to tank. And for first-time buyers sitting on the fence, the prospect of a sharp correction on the horizon is just one of the factors they must consider before taking the plunge.
The debate over whether to rent or buy has become a permanent fixture of the real estate world. And with roughly 70 per cent of households now owning their own home—a rate even higher than in the U.S., where the cult of home ownership first took root—it’s clear the buy crowd is in the lead. But the economic upheaval of the past three years has brought the issue into focus. On the one hand, those who valued stocks and bonds as a better way to build wealth while renting have likely seen their portfolios decimated. Major indexes plunged to levels not seen in a decade, though they have staged a rebound since. At the same time, the carnage in the U.S. has exposed the risks inherent in bubbly housing markets. “Real estate has been seen as a very good place to put your money during the past decade, but I think sentiment is starting to change,” says Benjamin Tal, an economist at CIBC World Markets. “After the subprime crash, people have realized prices can go down quite substantially, even in Canada.” Not surprisingly, predictions of a crash abound. David Rosenberg, the chief economist at Gluskin Sheff + Associates and a noted bear, believes house prices in Canada are overvalued by 20 per cent.
Such dire warnings have been made before about Canada’s frothiest markets, particularly Vancouver and Toronto. And so far they’ve been off the mark. Just last week it was revealed Canadian home sales in September crept up another three per cent from August, albeit down sharply from the year before.
Which means, for now, a big part of the rent or buy decision comes down to affordability. In the short term, says Vancouver financial planner Doug Macdonald, renting wins on that front. “There is no doubt about it that renting right now is a bargain,” he says.
Patrick Doyle, a Toronto software developer who writes the personal finance blog A Loonie Saved, has crunched the numbers for himself and believes it just doesn’t make sense to buy at today’s prices. Especially after factoring in all the extra costs that come with owning a home, like property taxes, insurance, utilities and general upkeep, which can quickly add up. “I choose to rent because I already have a day job, I don’t want to be a property manager, I don’t want to be a real estate speculator, I don’t want to be a highly leveraged investor and I don’t want to be responsible for repairs and maintenance. I just want a place to live,” says Doyle. “If I were to consider giving up these advantages to buy a house, it would have to save me substantial money. Instead, it costs more. For me, that makes the decision a no-brainer.”
Aside from the question of affordability, there are plenty of other reasons people choose to rent rather than buy, say experts. The most obvious is the flexibility that comes with being free to uproot and move easily. Renters also have more choice when it comes to location, since coveted neighbourhoods are typically out of reach for first-time buyers.
More strategically, it might not make sense for some people to buy a home if it means there’s no money left for saving elsewhere. That’s the concern held by Moshe Milevsky, an associate professor of finance at York University’s Schulich School of Business. “Real estate can be a good investment, but it’s very undiversified,” he says. “If I could buy property so that my kitchen is in Toronto, my bedroom in Vancouver and my bathroom in California, I’d be fine, but instead I have to buy it in one place. It’s like putting your entire portfolio into one stock.”
In fact, some renters simply believe that, over the long run, they can do more to grow their net worth if they avoid home ownership and put their money into stocks. But wait, aren’t stock markets dead? Not really. Over the last two decades the S&P/TSX Composite Index and its predecessor generated an average annual return of around six per cent, after adjusting for inflation. And yes, that includes the heart-stopping plunge of 2008. Over the same period, Canadian residential real estate as a whole has lagged behind. National house prices appreciated at an annual average rate of 1.9 per cent, though it’s long-term historical average is slightly higher at 2.5 per cent. But many rightly point out the benefits of owning a place of your own add up to far more than just price appreciation. “I don’t like looking at housing as a rate of return, because clearly you’re getting a service out of the house as a place to live,” says Adrienne Warren, economist at Scotia Economics.
For one thing, even with interest payments to the bank, owners are ultimately paying themselves to live in their homes, rather than shovelling money into their landlord’s pocket.
Owning a home is also an effective hedge against inflation over the long term. That’s because hard assets like homes generally keep pace with inflation. And when owners sell their principal property, they don’t incur any capital gains tax—though homeowners face their own set of taxes and penalties in the form of land transfer taxes and realtor fees, which can add up into the tens of thousands.
A compelling argument for buying right now, regardless of high prices in most major cities, is record-low interest rates. While the variable rate has been climbing steadily as the Bank of Canada tightens interest rates, mortgage lenders have been slashing fixed rates. A five-year fixed rate can be had for as little as 3.9 per cent, while 10-year rates can be found for less than six per cent. Given that the prime interest rate over the last three decades averages out at 8.1 per cent, according to CanEquity.com, it’s no wonder so many house hunters find today’s rates irresistible.
There are dangers that come when debt is so cheap, of course. Bank of Canada governor Mark Carney has repeatedly warned Canadians not to expect low rates to persist forever. But given the mortgage rate environment and the slowdown in the housing market, it’s a far better time to buy than it was just a year ago, say realtors. Back then, Canada’s housing market was in the midst of a surprise rebound and bidding wars were the norm. “We’ve gone through a market where there’s been a lot of multiple offers and it’s been difficult for buyers because there’s so much emotion involved,” says Monte Hannah, a Vancouver realtor. “Right now it’s very balanced.”
Above all, most proponents of home ownership argue that buying a place of your own is an ideal form of forced savings. Canadians clearly aren’t up to the task on their own. In a typical year, fewer than one-third of Canadians make use of their registered retirement savings plans, and even fewer make use of tax free savings accounts, first made available to much fanfare in 2009—though the reason for that could be because so much of their income goes toward mortgages and renovations. Those onerous monthly payments not only help build up equity over time, it keeps one from wasting money.
Still, some advisers worry too much emphasis gets placed on this argument. That’s because a home is not a liquid asset, and if all your savings have to go to paying for it, you’ll be left with empty pockets down the road. “Your house can’t put food and bread on the table,” says Bruce McDougall, a financial planner in Burlington, Ont. “You need cash for a retirement that lasts a lot longer than it did a couple of decades ago, and your house isn’t necessarily going to provide it.” Ideally, shrewd homebuyers should settle for properties they can afford that allow them to also invest in a more diversified portfolio of stocks and bonds. Easier said than done.
Everything depends on where you are in life, of course. But the staggering rise of house prices in the last few years means it’s probably good to keep renting for a while. And if you’re leaning toward buying a house because you think the stock market is a dead end, well, think again. At the same time, if you’re leaning toward buying because otherwise you won’t save anything—and you aren’t buying merely to flip the property in another two years—then go ahead. Either way, observers like Milevsky at Schulich believe the debate between renting and buying has gotten sidetracked in recent years by talk of investments, returns and portfolio allocation. “This debate has become so financial,” he says. “It’s lost the qualitative lifestyle aspect that should drive the decision. When a 22-year-old kid comes out of college and immediately asks, ‘Should I buy or should I rent?’ the question should be, ‘What do you want to do with your life—do you want to start a family, explore the world, build your career?’ That’s more important than the few hundred you may or may not save each month by doing one versus the other.”
by Jason Kirby on Monday, October 25, 2010 5:20pm - 27 Comments
Mary Altaffer/AP/ DARRYL DYCK/CP
In mid-November, Vancouver’s condo king, Bob Rennie, will take a very public mulligan. That’s when he plans to relaunch sales at the troubled Millennium Water development, the site where Olympic athletes bunked during the Winter Games. For all the praise designers and visitors from around the globe have heaped on the project’s cutting-edge, ultra-green features, the $1-billion Millennium Water sorely lacks one crucial component—buyers. Two-thirds of the 740 units in the complex sit empty. Hence Rennie’s plan to jump-start sales by way of discounts, an HST tax holiday, and a break on property taxes and maintenance fees—initiatives that could knock 14 per cent off the initial price tag of some units.
Vancouver taxpayers, who are ultimately on the hook for any losses, aren’t the only ones eager to know if the gambit pays off. In the eyes of prospective buyers in the city, and across the country for that matter, the high-profile project has become a touchstone for whether the real estate market is about to tank. And for first-time buyers sitting on the fence, the prospect of a sharp correction on the horizon is just one of the factors they must consider before taking the plunge.
The debate over whether to rent or buy has become a permanent fixture of the real estate world. And with roughly 70 per cent of households now owning their own home—a rate even higher than in the U.S., where the cult of home ownership first took root—it’s clear the buy crowd is in the lead. But the economic upheaval of the past three years has brought the issue into focus. On the one hand, those who valued stocks and bonds as a better way to build wealth while renting have likely seen their portfolios decimated. Major indexes plunged to levels not seen in a decade, though they have staged a rebound since. At the same time, the carnage in the U.S. has exposed the risks inherent in bubbly housing markets. “Real estate has been seen as a very good place to put your money during the past decade, but I think sentiment is starting to change,” says Benjamin Tal, an economist at CIBC World Markets. “After the subprime crash, people have realized prices can go down quite substantially, even in Canada.” Not surprisingly, predictions of a crash abound. David Rosenberg, the chief economist at Gluskin Sheff + Associates and a noted bear, believes house prices in Canada are overvalued by 20 per cent.
Such dire warnings have been made before about Canada’s frothiest markets, particularly Vancouver and Toronto. And so far they’ve been off the mark. Just last week it was revealed Canadian home sales in September crept up another three per cent from August, albeit down sharply from the year before.
Which means, for now, a big part of the rent or buy decision comes down to affordability. In the short term, says Vancouver financial planner Doug Macdonald, renting wins on that front. “There is no doubt about it that renting right now is a bargain,” he says.
Patrick Doyle, a Toronto software developer who writes the personal finance blog A Loonie Saved, has crunched the numbers for himself and believes it just doesn’t make sense to buy at today’s prices. Especially after factoring in all the extra costs that come with owning a home, like property taxes, insurance, utilities and general upkeep, which can quickly add up. “I choose to rent because I already have a day job, I don’t want to be a property manager, I don’t want to be a real estate speculator, I don’t want to be a highly leveraged investor and I don’t want to be responsible for repairs and maintenance. I just want a place to live,” says Doyle. “If I were to consider giving up these advantages to buy a house, it would have to save me substantial money. Instead, it costs more. For me, that makes the decision a no-brainer.”
Aside from the question of affordability, there are plenty of other reasons people choose to rent rather than buy, say experts. The most obvious is the flexibility that comes with being free to uproot and move easily. Renters also have more choice when it comes to location, since coveted neighbourhoods are typically out of reach for first-time buyers.
More strategically, it might not make sense for some people to buy a home if it means there’s no money left for saving elsewhere. That’s the concern held by Moshe Milevsky, an associate professor of finance at York University’s Schulich School of Business. “Real estate can be a good investment, but it’s very undiversified,” he says. “If I could buy property so that my kitchen is in Toronto, my bedroom in Vancouver and my bathroom in California, I’d be fine, but instead I have to buy it in one place. It’s like putting your entire portfolio into one stock.”
In fact, some renters simply believe that, over the long run, they can do more to grow their net worth if they avoid home ownership and put their money into stocks. But wait, aren’t stock markets dead? Not really. Over the last two decades the S&P/TSX Composite Index and its predecessor generated an average annual return of around six per cent, after adjusting for inflation. And yes, that includes the heart-stopping plunge of 2008. Over the same period, Canadian residential real estate as a whole has lagged behind. National house prices appreciated at an annual average rate of 1.9 per cent, though it’s long-term historical average is slightly higher at 2.5 per cent. But many rightly point out the benefits of owning a place of your own add up to far more than just price appreciation. “I don’t like looking at housing as a rate of return, because clearly you’re getting a service out of the house as a place to live,” says Adrienne Warren, economist at Scotia Economics.
For one thing, even with interest payments to the bank, owners are ultimately paying themselves to live in their homes, rather than shovelling money into their landlord’s pocket.
Owning a home is also an effective hedge against inflation over the long term. That’s because hard assets like homes generally keep pace with inflation. And when owners sell their principal property, they don’t incur any capital gains tax—though homeowners face their own set of taxes and penalties in the form of land transfer taxes and realtor fees, which can add up into the tens of thousands.
A compelling argument for buying right now, regardless of high prices in most major cities, is record-low interest rates. While the variable rate has been climbing steadily as the Bank of Canada tightens interest rates, mortgage lenders have been slashing fixed rates. A five-year fixed rate can be had for as little as 3.9 per cent, while 10-year rates can be found for less than six per cent. Given that the prime interest rate over the last three decades averages out at 8.1 per cent, according to CanEquity.com, it’s no wonder so many house hunters find today’s rates irresistible.
There are dangers that come when debt is so cheap, of course. Bank of Canada governor Mark Carney has repeatedly warned Canadians not to expect low rates to persist forever. But given the mortgage rate environment and the slowdown in the housing market, it’s a far better time to buy than it was just a year ago, say realtors. Back then, Canada’s housing market was in the midst of a surprise rebound and bidding wars were the norm. “We’ve gone through a market where there’s been a lot of multiple offers and it’s been difficult for buyers because there’s so much emotion involved,” says Monte Hannah, a Vancouver realtor. “Right now it’s very balanced.”
Above all, most proponents of home ownership argue that buying a place of your own is an ideal form of forced savings. Canadians clearly aren’t up to the task on their own. In a typical year, fewer than one-third of Canadians make use of their registered retirement savings plans, and even fewer make use of tax free savings accounts, first made available to much fanfare in 2009—though the reason for that could be because so much of their income goes toward mortgages and renovations. Those onerous monthly payments not only help build up equity over time, it keeps one from wasting money.
Still, some advisers worry too much emphasis gets placed on this argument. That’s because a home is not a liquid asset, and if all your savings have to go to paying for it, you’ll be left with empty pockets down the road. “Your house can’t put food and bread on the table,” says Bruce McDougall, a financial planner in Burlington, Ont. “You need cash for a retirement that lasts a lot longer than it did a couple of decades ago, and your house isn’t necessarily going to provide it.” Ideally, shrewd homebuyers should settle for properties they can afford that allow them to also invest in a more diversified portfolio of stocks and bonds. Easier said than done.
Everything depends on where you are in life, of course. But the staggering rise of house prices in the last few years means it’s probably good to keep renting for a while. And if you’re leaning toward buying a house because you think the stock market is a dead end, well, think again. At the same time, if you’re leaning toward buying because otherwise you won’t save anything—and you aren’t buying merely to flip the property in another two years—then go ahead. Either way, observers like Milevsky at Schulich believe the debate between renting and buying has gotten sidetracked in recent years by talk of investments, returns and portfolio allocation. “This debate has become so financial,” he says. “It’s lost the qualitative lifestyle aspect that should drive the decision. When a 22-year-old kid comes out of college and immediately asks, ‘Should I buy or should I rent?’ the question should be, ‘What do you want to do with your life—do you want to start a family, explore the world, build your career?’ That’s more important than the few hundred you may or may not save each month by doing one versus the other.”
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