September 24, 2020

Archives for July 2019

So you are bankrupt, does that mean you can’t buy a house?

 | March 15, 2014 7:00 AM ET


Why no Canadian is safe from interest rate increases

Jason Heath
Whether you’re a high-net-worth investor or a heavily indebted young family, the commentary issued by the Bank of Canada and its highlights are noteworthy.

The bi-annual Financial System Review reflects “widespread doubts” about the capacity and resolve of European policymakers to address unsustainable fiscal situations. If these issues are not dealt with in an orderly way, the bank said the effects on global financial conditions could be “significant.”

One-third of Canadians are vulnerable to interest rate increases on their mortgages
As Bank of Canada governor Mark Carney and many other political and economic leaders have repeatedly pointed out, the debt-to-income ratio of Canadians is cause for concern, currently at an all-time high of 153%.

So why does the Bank of Canada keep warning us about debt levels?

For one, the Canadian Association of Accredited Mortgage Professionals (CAAMP) found in a recent survey that approximately 31% of Canadian mortgages were at a variable rate, meaning one-third of Canadians are vulnerable to interest rate increases on their mortgages.

On the other side of the same coin, the other two-thirds of Canadians are also vulnerable to interest rate increases when their current low rate fixed mortgages come up for renewal in coming years. No borrower is immune from the eventuality of higher rates.

The prime rate might be just 3% right now, but it was less than five years ago when prime was 6.25%.

While it may be worrisome that debt levels are increasing at a time when our population is also increasing, it’s interesting to note that the major increase in mean debt by age group has occurred in the 31 to 45 category in the last 10 years. This group could be particularly at risk over the next 10 years as they enter their prime retirement planning years. Higher interest rates will act like a tax on their incomes, as they have less cash flow left to dedicate to the pursuit of financial independence.

Buying a home with CMHC-insured financing


For many people, the hardest part of buying a home – especially their first home – is saving the necessary down payment. Canada Mortgage and Housing Corporation’s (CMHC) Mortgage Loan Insurance can help homebuyers meet their housing needs by enabling qualified buyers to finance up to 95 per cent of the purchase price of a home.

How does mortgage loan insurance work?

Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20 per cent of the purchase price. The Bank of Canada Act prohibits most federally regulated lending institutions from providing mortgages without mortgage loan insurance for amounts that exceed 80 per cent of the value of the home. Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a minimum down payment of 5 per cent – with interest rates comparable to those with a 20 per cent down payment.

To obtain mortgage loan insurance – which is available from CMHC or a private company – lenders pay an insurance premium. Usually, your lender will pass this cost on to you. The premium payable is based on a percentage of the home’s purchase price that is financed by a mortgage. The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.

Mortgage loan insurance should not be confused with mortgage life insurance which guarantees that your remaining mortgage at the time of your death will not be a burden to your estate.

For CMHC-insured mortgage loans, the home must be located in Canada and the maximum purchase price or as-improved property value must be below $1,000,000.

CMHC’s Mortgage Loan Insurance can be applied to many different types of housing and is available everywhere in Canada.

Financing options

A range of products and financing options are available through your lender. For example, borrowers can port CMHC Mortgage Loan Insurance from an existing home to a new home and may be able to save money by reducing or eliminating the premium on the financing of the new home.

Newcomers to Canada with permanent resident status are eligible under all CMHC Mortgage Loan Insurance products – regardless of how long they have been in Canada. As needed, CMHC will consider sources other than a traditional credit history.

Borrowers may be eligible for a 10 per cent mortgage insurance premium refund from CMHC for the purchase of an energy-efficient home or to make energy-efficient improvements to an existing home.

As products available from individual lenders may vary and are subject to the lender’s eligibility rules, it is important for you to discuss your financial situation with your mortgage professional.

To learn more about mortgage loan insurance, visit for a full list of requirements, calculators and worksheets, along with information on all aspects of planning and managing your mortgage.

Women more likely to be first-time homebuyers, Canadian poll finds Read more:

Down payment a top concern among women

By Mario Toneguzzi, Calgary Herald

Women are more likely than men to be first-time homebuyers among Canadians who plan to buy a home within the next two years, according to the 19th Annual RBC Homeownership Poll released Monday.

The poll said 49 per cent of women and 35 per cent of men plan to be first-time homebuyers.

“We are seeing more single women entering into the housing market, as income levels, changing demographics and lifestyle patterns shift purchasing habits,” said Marcia Moffat, head of home equity financing, RBC. “But women are being more cautious than men, weighing cost, affordability and job security before buying a home.”

Of the Canadians who have recently become first-time homebuyers, men and women were tied (47 per cent) in saying affordability was the biggest concern that prevented them from purchasing a home earlier.

Other reasons that caused people to delay their first home purchase were: not interested/ready for home ownership, 25 per cent women, 14 per cent men; unsure of job security, 23 per cent women, 15 per cent men; and saving for a large down payment, 22 per cent women, 14 per cent men.

The survey also showed Canadian women (16 per cent), regardless of whether it was their first home or not, were less likely to take on a variable mortgage compared with men (25 per cent). Both sexes were similarly comfortable with the prospect of taking on a fixed-rate mortgage (women, 40 per cent; men, 44 per cent), which largely reflects the current trend where Canadians are now looking to lock in at historically low interest rates, said RBC.

Canadians’ debt no reason for rate hike – bank

OTTAWA | Wed May 9, 2012

May 9 (Reuters) – One of the key reasons for the Bank of Canada to raise interest rates – rapid growth in household credit – has disappeared, with household credit now rising at the slowest pace since 2002, a Canadian bank economist said in a report on Wednesday.

“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” said Benjamin Tal, senior economist at CIBC.

Tal suggests the housing market is starting to cool and predicts a 10 percent drop in prices over the next year or two. His analysis comes a day after data showing a surge in April housing starts fueled concerns about a possible housing bubble.

Tal said household credit is now rising by just over 5 percent year-on-year, the slowest rate since 2002, and by only 0.4 percent month-over month when looked at as a six-month moving average.

The central bank has repeatedly flagged household debt as the single biggest domestic risk to the economy. It has frozen its overnight target rate at an ultra-low 1 percent since September 2010 but since mid-April has been more hawkish, saying it may become appropriate to withdraw some stimulus.

Canada’s primary dealers, polled by Reuters on April 17, expected the next rate hike to be in the first quarter of 2013. Markets are pricing in a chance of an increase toward the end of this year.

Tal said consumer credit is also rising at the slowest monthly pace since the early 1990s, mainly because Canadians are using their credit cards less or transferring card balances to lines of credit, which often have lower interest rates.

“Households should get credit not only for notably slowing the pace at which they accumulate debt in an environment of historically low interest rates, but also for managing their debt in the most optimal way on record,” said Tal.

Growth in mortgages is also showing signs of slowing, with mortgages outstanding as of March up 6.3 percent from a year earlier, well below the average 7.3 percent rate of the past two years. The mortgage arrears rate is just under 0.4 percent, still above pre-recession levels but down from the near 0.5 percent rate during the recession.

“As for the housing market, there is no debate about the fact that the market is overshooting. The only question is what will be the nature of the adjustment,” he said.

Cheap mortgage rates don’t justify home ownership


The question of whether it’s better to buy a home or rent needs some fresh thinking.

Rents have been rising and mortgage rates are so low they almost look fictional. Have the economics of housing turned against renting?

Far from it, actually. But we do need to start recognizing that rising rental costs are a factor in the debate over housing affordability. If nothing else, we may see more millennials having to move homes because neither renting nor owning work.

Owning still represents a leap in costs over renting, though. The difference between the national average monthly rent on a two-bedroom apartment and the monthly cost of carrying the average-priced resale home is $1,525, on average. And that’s with discounted five-year mortgage rates at their lowest point since the global financial crisis flared up seven years ago . Unless our economy falls into a grinding recession, these may be the best mortgage rates we’ll see in our lifetime.

To understand the differences in living costs between renting and owning, let’s start with Canada Mortgage and Housing Corp.’s latest data on the average rent for a two-bedroom apartment in nine Canadian cities. In an effort to zero in on better quality properties in more desirable locations, we’ll mark up the average rents by 10 per cent.

For housing costs, we’ll use average June resale prices from the Canadian Real Estate Association and assume a 10-per-cent down payment plus a five-year fixed rate mortgage at 2.59 per cent. Monthly carrying costs are the total of mortgage payments and one-twelfth of property taxes and maintenance/upkeep costs pegged at an annual 1 per cent of the home price.

In each of the nine cities, average monthly rent was cheaper than the mortgage payment on the average-priced home, and that’s without property taxes and maintenance included. Winnipeg is the city where renting and mortgage costs are the closest. The average rent for a two-bedroom apartment (with the 10-per-cent markup) was $1,136, which is just $37 below the monthly mortgage payment for the average Winnipeg house in July.

Edmonton, Halifax and, to a lesser extent, Ottawa, are the other cities where the gap between renting and making a mortgage payment is within a few hundred dollars. Now, let’s start thinking in real-world terms by comparing renting against a broader range of home ownership costs.

Winnipeg is still the affordability champion for renters, but the gap between renting and owning grows to $571 per month. The gap in Halifax is $618 and in Edmonton it’s $816. That’s the good news, renters of the nation. In Victoria, Montreal and Calgary, the ownership cost premium is more than $1,000 per month. In Toronto, the premium tops $2,000; in Vancouver, it’s not far from $3,500.

The cost of home ownership for first-time buyers can be analyzed in about a dozen different ways. Let’s be clear that we’re talking about month-to-month affordability, not whether owning is better for wealth-building than renting .

Another angle is to compare the cost of renting with the cost of owning on a monthly basis. Don’t be swayed here by arguments that the cost of financing a mortgage is so low. The real estate brokerage Royal LePage made this point in a recent analysis that said the cost of home ownership is still more or less a bargain . It’s true – mortgage interest costs have plunged in recent years. But thanks to soaring house prices in some cities, total mortgage payments can be hard to handle.

High house prices are turning people into long-term renters, and this could drive rental costs higher. CMHC pegged the year-over-year rate of increase this spring at a reasonable 2.3 per cent on average for two-bedroom apartments in larger cities. But I recently featured a Vancouver Sun article in my Personal Finance Reader e-mail newsletter that was about an expected rent increase “tsunami” in Vancouver . Prepare for higher rents in cities with expensive housing markets.

Without better economic conditions that improve their job prospects, millennials are going to struggle with rising rents. Cheap mortgage rates don’t argue for buying, though. There’s no refuge from the cost of rent to be found in housing ownershipRent-Own Comparison