October 23, 2019

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.

Women more likely to be first-time homebuyers, Canadian poll finds Read more: http://www.calgaryherald.com/business/Women+more+likely+first+time+homebuyers+Canadian+poll+finds/6616738/story.html#ixzz1us8zUVLc


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.

The case for locking in your mortgage

ROB CARRICK
The Globe and Mail
You can’t go wrong if you respond to this week’s mortgage rate increases by locking in for five or 10 years.

But at least consider the alternative: Variable-rate mortgages sound risky in today’s volatile interest rate environment, but they’re actually a quiet corner of the mortgage world right now.

We’ve had several rising-rate episodes in the past few years, but they’ve invariably fizzled. In each case, one of the many global economic trouble spots has gone critical and caused rates to retreat. Will this latest rate spike unwind itself, too? Can our low-rate utopia last indefinitely?

Smart borrowers today work on the assumption that the answer is no. The question, then, is how to best keep mortgage costs low today while also protecting against future increases.

Let’s consider the lock-in option, first. That’s where people with variable-rate mortgages convert at no cost into a fixed-rate mortgage, and new home buyers go with a five- or 10-year fixed rate mortgage. It happens to be an excellent time to lock in, even if some banks have boosted their special five-year fixed mortgages rates by 0.2 of a percentage point this week.

The banks were responding to a big run-up in the yield on the five-year Government of Canada bond, which sets the trend for five-year mortgages. But thanks to a highly competitive mortgage market, lower rates are still available. Kim Arnold, a broker with Dreyer Group Mortgages in Vancouver, said earlier this week that she was able to get a very competitive five-year rate of 2.89 per cent for clients.

“Rates are phenomenal, even with this latest increase,” she said. “It’s certainly not a bad time to lock in.”

David Larock of Integrated Mortgage Planners in Toronto sees zero urgency for locking in, mainly because of the potential for yet another global economic scare to send rates lower. Europe’s problems with high government debt levels and slow economic growth could do it. So could Japan’s rickety economic fundamentals, worry about weakening growth in China or uncertainty over the sturdiness of the U.S. economic recovery.

Low inflation is another constraint on rate increases, Mr. Larock said. “I think the Bank of Canada is probably more concerned about getting inflation to go up as opposed to going down.”

It’s this line of thinking that leads Mr. Larock to make a case for the variable-rate mortgage, where your rate rises and falls along your lender’s prime rate.

The prime, in turn, is guided by the Bank of Canada’s benchmark overnight rate of 1 per cent, which hasn’t moved since September, 2010, and is expected to remain steady until the latter half of next year.

“The prime rate moves when the Bank of Canada changes their rates, and they’re not going to jump around like the market does in terms of what happens with five-year Government of Canada bonds,” Mr. Larock said. “These bonds are subject to the vagaries of large institutional investors, and to the ebb and flow between the stock market and bonds.”

Another reason to look at variable-rate mortgages is that the discounts have improved recently. Mr. Larock said it’s now possible to get a variable-rate mortgage with a discount of as much as 0.5 of a point off prime in some provinces.

That means a rate of 2.50 per cent, which compares to a range of 2.72 to 3.29 per cent for discounted fixed-rate mortgages over five years, depending on which lender you deal with.

If you go with a variable-rate mortgage, you’re vulnerable to the short-term rate increases the Bank of Canada will eventually start using to keep economic growth under control.

Toronto-Dominion Bank’s economics department expects a half-point rise in the overnight rate in the fourth quarter of next year.

As for five-year fixed rates, they could retreat again in the weeks and months ahead if there’s another global economic scare. But TD chief economist Craig Alexander said the broader trend in the bond market is the start of a move toward more normal levels. Next year, he sees the five-year Canada bond yield at 1.85 per cent, up from 1.60. “I think bond yields are going to grind higher, but 1.85 per cent on a five-year Government of Canada bond is still incredibly low.”

The best strategy for most people today is to lock in quickly to today’s best five- or even 10-year rates (read my case for the 10-year mortgage online at tgam.ca/DqYG). As Ms. Arnold, the Vancouver mortgage broker, put it, “I don’t honestly think anyone can make a mistake by locking in.”

Worried about the housing market? Five strategies for peace of mind

ROB CARRICKhammock-entrepreneur
The Globe and Mail
Here are five strategies that can help you keep your peace of mind amid the uncertainty over the direction of the housing market.

1. Plan to live in your home for at least 10 years.

Housing forecasts range from a soft landing to a hard decline – and then there are the dreamers who believe prices won’t ever stop rising. What all these views have in common is that they target the near to medium term. If you’re planning to stay put in your current home for 10 years, you have a good chance seeing the market recover from any declines to come and begin the next up-leg. Warning: The Toronto market took a few more years than that to get back to its 1989 price peak. Then, however, it took off like a rocket.

2. Make lump-sum mortgage prepayments.

Money you use to pay down a mortgage goes directly against your outstanding balance, which means it increases your equity and lowers your total interest cost. Adding to your equity is an important benefit at a time when the market value of your home could decline.

Don’t feel discouraged if you lack the money for a big prepayment, say $1,000 or more. Most lenders allow “double-up payments,” which means you can add as much as a whole extra payment in any month you want. Some will lenders allow a payment as small as $100. Still considering what to do with your tax refund? Put it right into your mortgage.

3. Save for a 20-per-cent down payment.

Tough to do, no question. The average Toronto home cost $526,335 in April – a down payment of 5 per cent would run you $26,317, while 20 per cent would cost a massive $105,267. The average national price was $380,588 in April, so a 20-per-cent down payment would come to $76,118.

One benefit of the 20-per-cent down payment is that you start your home ownership experience with a serious chunk of equity. If you go in at 5 per cent, a few bad months for the real estate market could leave you owing more than the market value of your home. One more benefit of a down payment of 20 per cent or more is that you save the cost of mortgage default insurance. The insurance premium is generally added to the amount you borrow, which means you pay interest on it.

4. Take a 10-year mortgage.

It’s unlikely, though not impossible, that a 10-year mortgage at 3.69 per cent will turn out to be the lowest-cost option in terms of interest cost. Five year mortgages can be had for 2.79 per cent today, while a good one-year rate is 2.4 to 2.6 per cent. So why use a 10-year mortgage? To wall yourself off from the market for a full decade. If the economy surges and rates rise, you’re covered. Same goes if the housing market tanks and lenders get nervous about their mortgage portfolios.

I wrote about something called renewal risk in a recent column you can check out here. Basically, it refers to the risk that a lender stressed by falling house prices might want to requalify you at renewal time to ensure your income and debt levels are in balance with what you owe. If not, you might not get a tip-top mortgage rate discount, or in an absolute worst-case scenario, have your renewal declined. (Let’s be clear that you’re only at risk if you made a down payment of 20 per cent or more on your home, which means mortgage default insurance wasn’t required.)

Lenders now leave clients alone as long as they’re making their payments on time, and some say renewal risk is way overblown. But if you have any worries about losing your job or having your hours cut back, a 10-year mortgage buys you some privacy. You won’t have to talk to a lender until 2023.

5. Rent

Yes, it’s tough to find decent digs in big cities, where monthly rents are high and units are scarce. But in Toronto, at least, a projected decline in the condo market would be good news for renters.

A serene outlook on housing comes from being prepared for all outcomes, from a soft landing to a sharp decline. Prepare your mind, and your mortgage.

Loyalty doesn’t pay when it comes to mortgage renewals

A Bank of Canada study found that loyal bank customers don’t get best deal when they renew mortgage. People who switch and first-time buyers do.
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By: Adam Mayers Personal Finance Editor,

Everyone you deal with would like you to believe there are rewards for your loyalty.
They may offer a better price, a bundling discount, or less tangible things like superior customer service. Sometimes your loyalty is rewarded and sometimes it isn’t.
The best way to figure out which is which is to become better informed about your choices. Compare prices and features, read the fine print on contracts and keep an eye on developments in the news. In this respect, the Internet has been a great leveler. The products are all on display in the online shop window. You can poke around, ask questions, figure out where you want to spend your money and negotiate a price.
The biggest investment most of us make is in a home. So if you can shave just a little off the cost of a mortgage, you can save thousands in interest payments.
Here, you’d think that loyalty would work in your favour — the more services you have with a bank, the better the deal. But, that’s not true according to evidence in a Bank of Canada paper called Discounting in Mortgage Markets. The 2011 study by three economists looked at a sample of Canadian insured mortgages between 1999 and 2004 to figure out who got the best rates.
The economists found that people who switch banks get a better deal than existing customers, because new customers offer the banks an opportunity to sell more products. Existing customers assume they will automatically get a better deal because they’re loyal, but don’t. They don’t bother to shop around because they assume they’ll get the best rate so, lacking ammunition, the discount may not be much. Those least likely to shop around are affluent, possibly because they’re happy with the full service they get from a bank and are willing to accept higher rates in exchange.
The study also found that mortgage brokers find the best rates . Mortgage brokers are paid by the lender, not the customer, but aren’t confined to one lender’s products. Their business is very competitive, so the pressure to find the very best rates is high. The study noted that brokers “are a significant factor driving discounts,” reducing the cost of a mortgage on average by 17.5 basis points.
As a group, first-time buyers do well because they are more likely to have shopped around, have tight budgets and so fight for every basis point. They’re a higher risk group for a bank because they have so much debt, but over time the bank can sell them more services. So they get good deals.
“Lenders are more willing to offer discounts to younger borrowers in return for future expected profits,” the study says.
Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals, an industry group, isn’t surprised by the finding.
About a quarter of Canadian mortgages are done through a mortgage broker, but the portion of new buyers who use brokers is a much higher 40 per cent, he says. First-time buyers tend to be younger, more comfortable using the Internet and social media for research, and like shopping around, he says. They are also less loyal and happy to try new things — like a mortgage broker — if it gets them what they want.
“We don’t do as well with renewals,” Murphy says. “Your lender sends you something in the mail, you’ve paid off some principal, the new rate looks pretty good, so you say OK.
“But you should shop around. Just because a bank offers you a rate doesn’t mean it’s the best one.”
You remember when your mother said you should do your homework? She was right.

The pros and cons of using a mortgage broker

Mortgage shopping can be daunting. That’s why you should consider trying a mortgage broker
By: Ryan Starr

Christina Cleveland was feeling overwhelmed by the process of buying her first home.
“There’s so much to think about: the cost of the home, what can you afford, what kind of (interest) rate you can get,” says the Milton-based management consultant. “It can get completely confusing.”
A friend suggested she go with a mortgage broker, who facilitated things. She did.
“He has relationships with many banks and financial institutions, so he was able to provide me with a variety of options and rates,” Cleveland says. “And the rate I got from the broker was better than what I was able to find on my own.”
Mortgage shopping can be daunting for those who’ve never done it before. It’s tough to know you’re getting the best rate, or, if the terms and conditions of the mortgage are best suited to your specific circumstances. And haggling may not be one of your strong suits.
All of these are reasons to consider enlisting the services of a mortgage broker.
Related: Why GTA housing market will stay strong in 2013
“A broker has access to a variety of lenders and has the educational background and training to provide a consumer with choices that fit their needs,” says Raj Babber, a mortgage broker with CLN Mortgages and president of the Independent Mortgage Brokers Association of Ontario.
Brokers can be of valuable assistance to mortgage-seekers whose financial circumstances are not as straightforward as lenders may prefer. “In trickier situations, where individuals might be self-employed or their credit might be flawed, brokers have access to private funds and specialized institutions that could meet the needs of that particular client,” Babber explains.
Mortgage brokers are required to take courses, pass exams and undergo training and apprenticeships before they receive their licences. Qualified brokers carry the title of accredited mortgage professional, or AMP. (An online directory of licensed mortgage professionals can be found on the website of the Financial Services Commission of Ontario, the licensing body.)
Just because they’re licensed, though, doesn’t mean all brokers are equal. Consumers should properly vet any broker they’re considering working with. Do preliminary research and ask about a broker’s qualifications and years of experience.
You shouldn’t have to pay a fee to a mortgage broker, but understand that brokers receive a commission from the financial institution with whom they arrange your mortgage. “It’s usually a set fee based on the length of the (mortgage) term an individual is taking,” Babber says. “The longer you go, the more the compensation. But it’s a one-time payout.”
Still, it’s one reason why personal finance journalist Robb Engen tends to be wary of mortgage brokers.
Several years ago, he sparked a bit of controversy on his blog, boomerandecho.com, when he called out brokers for pushing five-year, fixed-rate mortgages in order to maximize the compensation that came with them. (At the time, a variable rate may well have been a better deal; since then, fixed and variable rates are almost even). “They pushed the five-year fixed rate, but maybe that’s not in the best interests of the customer,” Engen says.
He also has concerns about the preferential relationships brokers develop with lenders. “I see brokers who seem to work predominantly with one bank or financial institution,” he says. “So, are they really searching for all the best deals for you from all other institutions? And are they a preferred lender, because they give more money, or because they’re going to offer the best rates?”
Related: First time buyers like mortgage brokers
Babber points out that “dealing with a preferred lender can be good for a client because there’s already a rapport in place. And that benefits the consumer because the consumer is assured that, if the broker has a good rapport with a lender, then things happen in a timely manner.”
All the same, mortgage shoppers should educate themselves, Engen says. “Whether you (go with a broker) or not, you still need to understand what rates are out there and what you’re getting into.”
Consumers can check mortgage rates online, he notes, and use tools such as Rate Supermarket to compare rates offered by different financial institutions. And they should not be afraid to approach their bank to inquire about what kind of deals they’re offering.
“See what’s out there in the market,” Engen says. “Then, when your bank or your broker presents what your offer is, at least you know if you’re in the ballpark, rather than just taking their word at face value.”
If your bank can’t offer you a competitive rate, you can consider following Christina Cleveland’s example, and take your mortgage business elsewhere. “People might think they’re loyal to one particular institution, and that’s great. But if they’re not going to give you the best rate on the biggest debt you’ll have, why would you continue to work with them?” she asks.

Good debt, bad debt and everything in between: how to borrow smartly

– From home equity lines of credit to pre-authorized bill payments on your credit card, TD Canada Trust research prompts Borrowing 101 refresher for Canadians –

TORONTO, April 16, 2013 /CNW/ – Access to credit is an ongoing need for Canadians as they navigate through expenses that range from the unexpected to buying a house. In fact, a recent TD Canada Trust survey found the top three credit options used by most Canadians within the past five years are bank-issued credit cards (92%), department store cards (48%) and mortgages (42%).

TD Canada Trust’s Farhaneh Haque, Director of Mortgage Advice and Stephen Menon, Associate Vice President of Credit Cards have teamed up to outline the popular credit products available and provide Canadians with tips on how to borrow responsibly.

“Believe it or not, some debts can actually work for you,” said Haque. “Borrowing money to invest in something that will increase in value, like a home, could be considered good debt. In contrast, carrying a balance on your credit card to fund short-term lifestyle spending is not sustainable and should be paid off immediately.”

“Used responsibly, financial products like credit cards and lines of credit can help you finance major expenses cost effectively and manage your cash flow,” said Menon. “However, these benefits may be outweighed if you’re taking on too much debt. Credit products should not be used for perpetual borrowing, with no plan in place to repay the debt.”

Credit Cards

According to the survey, credit cards are the most widely used personal credit product. More Canadians applied for a credit card in the past year (29%) than any other personal credit product. Two-thirds of Canadians (66%) agree that setting up pre-authorized bill payments on a travel rewards credit card is a good way to maximize the travel rewards earned and manage your finances.

“When used correctly, credit cards can help manage and track your spending and build your credit history,” said Menon. “A credit card can also maximize your spending power if you choose a card that comes with travel or cash back rewards. But no matter which credit card you have, ensure you pay your credit card bills in full and on time each month to avoid interest charges on your purchases.”

Home Equity Line of Credit

Seven in ten Canadians (70%) say they have never used a home equity line of credit, even though 82% correctly believe that a home equity line of credit can be a lower-cost option than a personal loan for financing a home renovation.

“Many homeowners have the option to use the equity they’ve already built in their homes to finance upgrades which may improve their home’s resale value,” said Haque. “A Home Equity Line of Credit could allow you to use up to 65% of the lesser of the appraised value or purchase price of your home, with a lower interest rate than most alternative forms of unsecured credit.”

Mortgages

The majority of Canadians think a mortgage is ‘good’ debt (88%) and understand that weekly mortgage payments, versus monthly, will help reduce the mortgage amortization period (84%).

“Many borrowers want to pay down their mortgage ahead of schedule and be debt-free sooner, but they worry about not having the cash available if they need it in the future,” said Haque. “If you have paid down your mortgage ahead of schedule, and if you qualify, you may be able to use that prepaid amount to take a temporary ‘vacation’ from your scheduled payments at a later date. A payment vacation can be particularly useful if you’re starting a new family or find yourself temporarily unemployed.”

About the TD Canada Trust Borrowing 101 Poll

TD Bank Group commissioned Environics Research Group to conduct an online custom survey of 6,014 Canadians aged 18 and older. Responses were collected between January 10(th) and 25(th) , 2013.

Alberta first-time homebuyers expect to spend nearly $380,000

Third highest in Canada behind B.C., and Ontario

By Mario Toneguzzi, Calgary Herald

CALGARY — First-time buyers in Alberta expect to spend nearly $380,000 on a home, the third highest average in the country, according to a report released Tuesday by BMO.

The First-Time Home Buyer’s report said the average amount Canadians planning to buy their first home in the next five years plan to spend is approximately $300,000, with an average down payment amount of $48,000 (16 per cent).

The average spend is the highest in British Columbia at $529,922 followed by Ontario at $392,962 and Alberta at $378,685.

The report also found: on average, first-time home buyers expect to be mortgage free in 20 years, with 20 per cent estimating it will take between 10-19 years; those planning to enter the real estate market for the first time are twice as likely to choose a fixed rate over a variable rate mortgage (46 per cent versus 20 per cent); and first-timers who expect interest rates to stay the same or decrease over the next five years still prefer fixed rate over variable rate mortgages (39 per cent versus 23 per cent).

“Buying a home is one of the most important financial decisions one can make. It’s crucial that those planning to enter the market are well prepared — not only to manage their costs, but also to pay off their mortgage as soon as possible,” said Laura Parsons, Mortgage Expert, BMO Bank of Montreal. “Determining what your mortgage payments and overall costs of home ownership will look like, and then living in that financial reality for a year before entering the market, can be an effective strategy.”

According to the report, two-thirds of first-time buyers (66 per cent) say the latest changes to mortgage regulations — which included reducing the maximum amortization for government-insured mortgages to 25 years from 30 years — have not affected their buying timeline, while 19 per cent say they will have to wait longer before buying as a result.

The report also found: 63 per cent of first-time buyers have made cutbacks to their lifestyle to save for their first home, with 27 per cent expecting their parents or other family members to help them pay for their first home; 59 per cent have had to hold off buying their first home because of increasing housing prices; and 59 per cent wish they had bought their first home five years ago.

Time to sell my house and rent?

ROB CARRICK
The Globe and Mail
Baby boomers are a bunch of house huggers, but there are exceptions.

One is a guy we’ll call Joe. He e-mailed a short while ago to ask for some feedback on his idea of selling the family house and cottage, and renting his family’s next home.

A quick summary: Joe’s got a big house, a big mortgage and he’s worried about the housing market in the years ahead. His main question: “Would a move like this be considered radical, or could it become a trend?”

That’s a surprise because in a survey I wrote about recently, involving 1,500 homeowners aged 50-plus, half of the participants said they’d never thought about selling their homes to generate retirement income. Four in 10 people were unwilling to consider any one of five possible ways to exploit the equity in their homes.

Joe’s no house hugger, though. He’s calculated that he would have roughly $700,000 available to invest if he sold his four-bedroom house in a small town not far from Toronto, and a cottage that the family doesn’t visit much any more, partly because his three daughters are getting older. If he were to invest, he wonders what rate of return he could expect.

Joe was inspired by the story of a Vancouver woman I wrote about last year. Worried about what seemed at the time to be an overpriced housing market, she and her husband sold their house and moved into a rental. Almost a year later, that move looks brilliant as a result of falling home sales and prices in the city.

Nationally, we saw a 15.8-per-cent decline in sales and a 1-per-cent drop in prices in February. And this week, Royal Bank of Canada’s 20th-annual home ownership poll registered the biggest drop since the survey’s inception in the percentage of people who plan to buy in the next two years. The rate fell to 15 per cent from 27 per cent last year. “In general, the real estate market has softened,” Ms. Garbens said. “So I think [Joe] is probably right to be concerned that we might go into a prolonged downturn. It’s anybody’s guess.”

Joe’s had some experience with weak housing markets. He and his family bought a home in a nearby community in 1989 for $180,000 and sold it in 1999 for just $7,000 more than that. Ms. Garbens said there would be two benefits to him and his family if they got out of their current house and rented. First, they’d save money on monthly expenses by not paying for home maintenance and property taxes. Second, they’d have a very big chunk of money to invest.

How much of a return might they get on that money? Ms. Garbens said 5 per cent after fees is the maximum she’d feel comfortable using, but let’s say 4 per cent from a diversified portfolio. Over 15 years, that rate of return would turn $700,000 into $1.3-million. Add Canada Pension Plan and Old Age Security benefits for him and his wife, and there’s a solid base for retirement. “He’s going to be okay, as long as he’s not an extravagant spender,” Ms. Garbens said.

A benefit of staying in the home is the potential to capitalize on future price gains. Provided it’s a principal residence, a house can be sold tax-free. But Ms. Garbens said houses in smaller communities may not have the potential to appreciate like those in bigger cities. Joe said his house has risen about 2 per cent annually for the past five years, which is much less than in Toronto.

Renting a home will require a lifestyle adjustment that many people don’t want to make. But on the financial side of the question, Ms. Garbens said she has no issues. “I don’t have any negative feelings about selling and then renting. There’s a certain freedom when you don’t have to worry about repairing a place.”

Ms. Garbens said an alternative to renting would be to sell Joe’s current home and then buy a smaller house. He’d cut his monthly spending that way, have a house he and his wife could live in for years to come, and still end up with some money to invest.

Joe wants to know whether it could become a trend for boomers to sell their homes and rent, but it’s too soon to tell. Still, he’s asking good questions. “I think he’s right to consider this strategy,” Ms. Garbens said.