October 27, 2020

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 www.cmhc.ca 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: 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.

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

Mortgages from big banks consistently cost Canadians more, says rate comparison site

 Rajeshni Naidu-Ghelani

Mortgage rates from Canada’s big banks were consistently more expensive than those offered by smaller lenders last year, according to the latest findings from LowestRates.ca.

The financial product comparison website said the lowest rates offered by the “Big Six” — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Scotiabank, Canadian Imperial Bank of Commerce, and National Bank of Canada — were always more expensive than the lowest rates from smaller lenders.

Justin Thouin, CEO of LowestRates.ca, said the big banks never offer the lowest posted rates on the market, and Canadians are not spending enough time researching rates before signing their mortgages, which could be costing them thousands a year.

a red stop sign sitting in front of a building: CBC

“We compare prices when we do less costly things, like take a trip or buy a TV, but we don’t shop around for rates for homes — one of the most expensive purchases we’ll likely ever make — despite the fact that the money we can save on a vacation pales in comparison to what we can save on a mortgage,” Thouin said in a statement.

Using RBC’s announcement last month that it was decreasing its five-year fixed rate mortgage to 3.74 per cent as an example, the site said with the new bank rate, customers would pay $2,560 per month on a $500,000 mortgage, assuming that a down payment of at least 20 per cent was made to buy a home in order to avoid the CMHC insurance and a 25-year amortization period.

But, if customers in the same scenario got the best available five-year fixed rate mortgage from a smaller lender at 3.23 per cent, the monthly payment would be $2,426, according to LowestRates.ca. That’s a difference of $134 a month, and would add up to $40,200 in savings over the course of a 25-year mortgage.

“Brokers and smaller lenders often drop their rates first to be more competitive, and banks are slower to implement changes, because they know they own the market,” Thouin said. 

“This will only change when Canadians realize they’re being overcharged and begin to shift away from the banks, and that will only happen as we increase awareness about the alternative market.”

Banks account for nearly 60 per cent of all current home mortgages, according to a report from Mortgage Professionals Canada last month. Mortgage brokers took up almost 30 per cent of the market, while credit unions and others accounted for the rest.

CBC News contacted all of the big six banks for comment on LowestRates.ca’s findings.

A spokesperson for National Bank said that many factors are taken into account and assessed — including each client’s individual situation — before fixing a rate, and granting a loan.

TD said they offered “competitive rates,” and flexible mortgage options to meet their customers’ needs.

The remaining banks declined to comment.

Why your neighbour’s kid is getting a better mortgage rate than you

Ted Rechtshaffen: The government has effectively decided to support home buyers who do not necessarily have the funds to buy a house

I used to think paying down debt and having a good credit rating would reward me.

Then I went to renegotiate my mortgage and was told that my five-year fixed mortgage rate would be 3.84 per cent. I thought that was pretty good until the neighbour’s 27-year-old kid told me the rate on his mortgage was 3.39 per cent for the same term.

Wait. What?

How did that kid get such a great mortgage while I’m paying an extra 0.45 per cent a year?

The answer is that in 2018, he is a much better credit risk for the bank. This may not make sense on the surface, but let me explain how crazy our mortgage system has become. From the bank’s perspective, they would rather lend to someone who put down very little but had their loan guaranteed by the Canadian Mortgage and Housing Corporation (CMHC), than to someone borrowing $300,000 on a $1.5 million house with no insurance or guarantee on the payment of that mortgage.

Now, it is true that in order to qualify for the low mortgage rates you would have to pay a one-time insurance payment to CMHC or another Insurer. At the moment, this insurance cost is usually a little more than the mortgage rate benefit of getting a lower rate for a low down payment, although there have been times this year, when it was actually better to pay for the insurance and get a much cheaper mortgage.

To understand how we got here, let’s start with the concept of an insured mortgage, an insurable mortgage and an uninsurable mortgage. These terms are key in 2018 to understanding the mortgage-rate mayhem.

Today, an insured mortgage is one where the value of the home is under $1 million, the down payment is less than 20 per cent, the amortization period is at a maximum 25 years, and the home is not a rental property. A person in this scenario can get a rate as low as 3.39 per cent on a five-year fixed mortgage. The borrower pays the mortgage default insurance premium. Mortgage insurers in Canada are CMHC, Genworth and Canada Guaranty.

An insurable mortgage is one where the value of the home is under $1 million, the homeowner puts down more than 20 per cent of the purchase price and the amortization period must be a maximum of 25 years. This person can get a rate as low as 3.74 per cent on a five-year fixed mortgage. The rate is higher as most lenders are insuring these mortgages at the lender’s cost. In other words, the lender is paying the mortgage default insurance premium instead of the borrower.

An uninsurable mortgage covers everything else, but is often simply one where the value of the home is more than $1 million. It also includes refinancing an existing mortgage or equity takeouts (meaning borrowing more to take some cash out of your home), or an amortization period up to 30 years. This person can get a rate as low as 3.84 per cent on a five-year fixed mortgage. The rate is the highest of the three scenarios as the lender cannot acquire default insurance for these mortgages.

(The bank) would rather lend to someone who put down very little but had their loan guaranteed by CMHC

According to Walter Lee, director of business development at First Financial Inc., the person in better financial shape, and with an uninsurable mortgage is facing one more hurdle they didn’t expect.

“Not only are these types of clients facing higher rates, but the renewal rates they receive from their current lender are less competitive than before, because the lender knows that you will face a stress test if you go elsewhere,” said Lee.

By stress test, Lee is referring to the new rule whereby you must qualify for a mortgage based on a formula that assumes you are borrowing at a rate two per cent higher than the actual rate you have negotiated or the Bank of Canada Qualifying Rate — whichever is higher. These days the Bank of Canada Qualifying Rate is 5.34 per cent. While this stress test may not really affect those with high income and good credit, for many people it is restricting the funds available to them to buy a house. With less credit comes lower house prices.

Based on these rules, is it any surprise that more expensive homes are suffering the most in terms of price decreases?

According to Lee, “clients often are shocked at the rate difference. They say ‘You are telling me I can get a better rate to put down less?’” Not only that, but many first-time buyers say that they are not going to wait another year to save up more, when they think mortgage rates will be higher in a year. Essentially, the message to them is put down less and buy today.

Most people in the market for (a $1 million house) can’t purchase it without a mortgage. … with higher rates, they’re less likely to pay as much for it

On the other end of the spectrum, what about the person who has no mortgage but owns a house worth more than $1 million. Even without a mortgage, there is clearly a challenge for them. Most people that are in the market for that house can’t purchase it without a mortgage. Because they are now facing a higher rate on their borrowing cost, they are less likely to pay as much for that house. More importantly, because they can get less total credit from a lender, they are less likely to pay the asking price. The big crime is that this person owns a house worth over $1 million.

The current mortgage environment is a prime example of how politicians have decided to interfere with the natural market and the result is some very strange rules that make winners of the banks and put higher costs on those who should have the lowest costs in a free market system.

Whether it is right or wrong, the end result is a situation that is built in Ottawa and the provincial capitals. It is one that has become misaligned in terms of borrowing costs and borrower risk. In the lending world, that is almost never a good situation.

Ted Rechtshaffen is president and wealth advisor at TriDelta Financial, 

Mortgage renewals tougher

Mortgage changes reduce chance of owning a home

By Tom Kmiec

Tom Kmiec, Conservative MP for Calgary Shepard, is a member of Parliament’s standing committee on finance.

Despite espousing to be great champions of the middle class, the Ottawa Liberals don’t seem too concerned with one of the most significant cost-of-living issues currently facing Canadian families: their mortgages.

That is the message the Liberals sent to Canadians when they voted down, on two separate occasions, motions before Parliament’s finance committee that would have studied the effects of the most recent, and drastic, changes to federal mortgage rules.

On May 30, I forced debate on my motion to study recently implemented mortgage changes at the finance committee. Refusing to speak to my motion, every Liberal MP voted down the proposal to study a defining issue facing middle-class Canadians.

Not satisfied with the Liberals’ refusal to take seriously the concerns of Canadians struggling with their mortgages, I tabled a second motion on June 13 — this time, asking for a new subcommittee to be created that would study these new mortgage rules. Again, the Liberals said no, but at least debated the issue.

Dysfunction in the housing market has become the favourite justification for governments looking to change mortgage rules, but what happens when politicians meddle?

In January, the Liberals, through the office of the superintendent of financial institutions, introduced a set of new rules. Among other changes, these rules introduced a mandatory stress test for all qualifying mortgages, meaning that homeowners would have to demonstrate they could accommodate a two percentage point increase in the amount they pay.

Six months into 2018 and the harmful effects of these mortgage changes have already been realized. A recent CBC article reported that more than 100,000 Canadians would fail the stress test, and that 50,000 Canadians would be blocked from purchasing a home.

Imagine tens of thousands of Canadians having homeownership yanked from their grasp. That is the reality that these changes have created. Canadians in every region of the country are feeling the pinch.

Data provided by Mortgage Professionals Canada, the national housing lenders’ industry association, indicates that up to 20 per cent more mortgages are being denied by big banks since these changes were implemented, and this huge dip in economic activity has caused the Bank of Canada to post the lowest mortgage growth in Canada since 2001.

History books tell us of the danger that can arise when governments neglect to enforce sufficiently stringent lending rules on financial institutions. It was under the last Conservative government that Canadian banks — with strict oversight — weathered the 2009 financial crisis better than any other G7 country.

However, regulation for the sake of regulation — or worse, misplaced regulation — is not good public policy. Regardless of the intentions behind these new mortgage changes, the impact has been catastrophic. Outside of the decimated real estate market, the far-reaching impact of these changes is also having an economy-wide effect, with as many as 150,000 fewer jobs predicted, according to Mortgage Professionals Canada.

The refusal on the part of the Liberals to study this issue should not be surprising. Over the past three years, Canadians have seen this Liberal government take an Ottawa-knows-best approach to nearly every issue — with the housing market as no exception.

The Liberals have introduced more than a dozen regulatory changes to mortgage rules in three years, which evidently are not achieving much in terms of improving affordability or stability in the market.

Without the benefit of a comprehensive study, the true impact of these rule changes may never be known. However, when market indicators show home sales plummeting by as much as 20 per cent, and huge segments of the population being forced out of the housing market, logic would indicate that further study is warranted.

That’s precisely what I have asked for: an opportunity to study the effects of the mortgage rules on Canadian families. Sadly, the Liberals aren’t in favour of getting more evidence.