We’re paying off mortgages faster than thought

TORONTO – A new report suggests that Canadian homeowners are paying down their mortgages faster than they’re being given credit for.

CIBC deputy chief economist Benjamin Tal says homeowners are taking advantage of record-low interest rates to accelerate their mortgage payments, and shorten their amortization periods.

The CIBC World Markets study says that homeowners are paying an additional $11 billion a year in principal that isn’t being officially recognized by the Bank of Canada.

It suggests that an estimated 30 to 40 per cent of households with mortgages are accelerating their payments. While 40 to 50 per cent of borrowers are estimated to have amortization periods of less than 20 years, rather than the standard 25 years.

Tal says that means the debt-service ratio in the Canadian mortgage market — what it costs to carry a mortgage as a share of disposable income — is 7.3 per cent, one point higher than the 6.3 per cent officially used in calculations by the Bank of Canada.

Tal adds that this makes the Canadian housing market much more stable than previously thought, if interest rates were to rise.

“Canadian households did not only resist the temptation of low rates, they used those low rates to pay down debt at a pace not seen before,” he said.

“Despite a lethargic labour market and an unemployment rate that is still too high for the Bank of Canada’s liking, debt service performance in Canada has almost never been better.”

by The Canadian Press
October 15th, 2014

Big Bank Predicts Rate Hike

The end of record-low rates is nigh, according to one major bank, which has taken a stance and predicted when the Bank of Canada will raise its long-standing overnight rate.

“Firming price pressures and strengthening labour markets are consistent with a gradual path to normalizing interest rates,” TD Bank’s quarterly economic forecast, released Thursday, states. “We see the Bank of Canada beginning to raise its overnight rate in mid-2015.”

The overnight rate has been held at one per cent since September 8, 2010.

“The Bank remains neutral with respect to the next change to the policy rate: its timing and direction will depend on how new information influences the outlook and assessment of risks,” the Bank of Canada said in its most recent statement about the overnight rate, released in early September.

TD Bank, however, predicts the short term rate will hit 2 per cent by the end of 2016. The bank believes even a slight increase will put a limit on household spending, as debt-to-income levels are still around 165 per cent.

Of course, it wouldn’t be an economic forecast if the bank didn’t mention the current state of the housing market, which it still holds a conservative stance on.

“In the near term, the housing market and household debt levels present an upside risk to the forecast,” the statement says. “Borrowing rates remain at record lows and housing momentum has stayed strong.

“Over the medium term, we still expect a cooling trend, consistent with a gradual increase in both trend inflation and interest rates.” 

by Jamie Henry | 26 Sep 2014

Eight Ways to Power-Save Your Way To a Down Payment

1. Move in with your parents or in-laws

Explain that you’re thinking strategically in moving back home. The

quickest way to get into the housing market is to maximize savings,

which is difficult to do when you’re paying the cost of rent in a big

city. You’ll pay your parents a token amount of rent, but most of

your savings will go directly into your house down payment fund.

Tell your parents to think of the grandchildren you’ll be raising in the

house you’re saving for.

2. Move down one level of rental

If you have a two-bedroom apartment, try going down to one bed-

room. Or, trying squeezing into a bachelor apartment. You could

also look at moving to a cheaper part of town, as long as it won’t

jack up your commuting costs. Get rid of stuff that won’t fit in your

new, smaller place, or store it in your parents’ basement. Don’t

spend money on a storage unit.

3. Sell your car and take the bus

You’ll be saving on fixed costs such as parking, insurance, gas,

maintenance and possibly car payments, and you’ll be protected

against the risk of financially catastrophic four-figure repair bills.

Rent a car or use a car-sharing service for those times when the

bus won’t cut it. A cheap bike will help you save on bus fare.

4. Stop buying lunch

A pain, but worth it. You’ll have to think ahead by either picking

up the right groceries to make your own lunch, or by scooping up

after-dinner leftovers. Healthier than your food-court lunch, which

you’re probably sick of anyway.

5. Dial down your vacations

New York is out. Maybe Buffalo. For West Coasters, maybe Seattle

instead of Hawaii. Use the likes of Airbnb (airbnb.ca) to find cheap

accommodations instead of staying in a pricey hotel. Or stay home

and use some of the money you saved on hotels to try some nice

restaurants in your town. This is good practice for when you own a

home and find that fancy vacations are unaffordable without going

into debt.

6. Put a $100 price limit on birthday presents

Extravagant presents are fun to both give and receive. But they’re a

luxury for people who are more financially settled than someone who is

 

madly saving for a house down payment.

 

 

7. Cut your cable, TV and landline

Almost like heat and hydro, an Internet connection is essential.

But a home phone is dispensable if you have a smartphone, and

cable TV can be replaced by Netflix, watching shows online and

using an HDTV antenna. Also, try buying up DVDs of movies

and TV show seasons at garage sales, or find stores that sell

used DVDs, CDs and videogames.

 

8. Halve your spending at Restaurants and Bars

Studies of Generation Y spending habits show that going out to

eat and drink is big. Hey, everyone needs a hobby. But this one

is too expensive for people who are set on buying a house. Aim

to eat out less often, and rather than pay marked-up restaurant

or bar tabs, grab a beer from the fridge.

And one more thought: Ask for a raise at work!

 

Stability for Spring Mortgage Rates

by Jamie Henry | 12 May 2014

Stable bond yields and a competitive spring market lead to status quo for fixed mortgage rates in the short term. Variable mortgage rates, however, aren't to change until 2016 as exports and inflation remain below the Bank of Canada's forecast.

Fixed Mortgage Rates: Unchanged: The busy spring buying season is in full swing, prompting lenders to stay competitive with their rates, as Canadian buyers snap up homes in droves. This is supported by stability among government bond yields, which have not fluctuated enough to warrant any pressure placed on fixed rates in the short term.

Variable Mortgage Rates: Unchanged: Central interest rates won't rise until 2016, according to the Bank of Canada's top man himself, Stephen Poloz. Lower-than-expected export activity and steep retail competition continue to depress inflation growth, the required driver behind a potential rate rise. Lowering rates isn't likely, as the Bank feels credit is cheap enough - household debt levels continue to grow amid such accessible borrowing costs.

 

4 Tips for a Stress-Free Summer Move

The majority of Canadians prefer to make their big move during the summer season.  There are a variety of reasons for choosing this time of year:  it is easier to transport boxes in good weather, no need to worry about your belongings freezing during transport, and children's lives are not disrupted by the transition since they are on summer holidays.  Minimize potential moving chaos by asking yourself the following questions:

Do you need to keep everything? Moving offers a good opportunity to reorganize your life by giving away, donating or recycling items that you no longer need.  You'll thank  yourself later when there is less to pack and to transport.

How well do you know your moving company?  The Office of Consumer Affairs drafted a Consumer Checklist for choosing a moving company and it reminds Canadians to request their moving estimate in advance and be mindful of seasonal rates (a summer move can be pricier).  Will your items be held in the transport vehicle overnight or a secure facility?  Consider purchasing Replacement Value Protection, which will ensure the company is liable if your possessions are damaged.

Do you have enough boxes and packing materials?  Start collecting boxes and newspapers in advance; ideally you should begin packing non-essential items a month in advance.  Pack and clearly label a couple boxes with important first day arrival items, such as toothbrushes, remote controls, medication, and pet food, which could otherwise become lost in the shuffle.

Once you step in the door, what are your top priorities?  After the bed is set up, most people are eager to get connected by hooking up their TV, internet and home phone.  Rogers introduced a free concierge service which makes this process easier by setting you up with a personal concierge agent.  The agent proactively connects with customers throughout the transition, reviews order details, answers billing questions, and can assist with any changes to your order if your moving date needs to shift.  Entering the next chapter of your life can be a thrilling time, but like any significant life change, the process can be quite overwhelming.  Control potential moving chaos by jotting down questions and tracking their completion on your personal checklist.

Source:  News Canada

Three Ways to Pay Off Your Mortgage Faster!

Stretching out your mortgage over as long a period as possible may keep your payments down and help your short-term cash flow. But it will also put off the day you’ll be able to use that money for something else – and may even cost you more in the long run. Here are some ways you can own your home sooner:

1. Pay more than the minimum

Let’s say your mortgage is $1,000 a month but you can comfortably afford to spend another $200. Doing so will reduce the amount of interest you pay and save you years of mortgage payments.  Pay what you are comfortable paying and not just make minimum payments.  Doing so will allow you to be debt-free more quickly.

With interest rates at low levels today, any increased mortgage payment will have a larger portion of the payment go towards the principal.

Renewing your mortgage at a lower interest rate? Don’t lower your mortgage payments. Keeping your payment the same amount or even raising it contributes significantly to the acceleration of your mortgage. You initially qualified at that amount so you can afford it.

2. Make a lump-sum payment every year

This could be your tax refund, your annual bonus or any windfall that falls into your lap. Even an increase to your mortgage payment of $25 to $30 will result in significant time taken off your mortgage repayments.

Most mortgages provide privileges that allow you to make additional payments per year, usually between 10% and 20%. Make sure to confirm these particulars before signing a new mortgage agreement. These prepayment options are important if you are committed to paying off your mortgage quickly.

Making lump-sum payments to the nearest thousand. Let’s say you have $195,320 left on your mortgage: You’d make a payment of $320 to bring it down to an even $195,000 which over the long term can reduce your amount of mortgage payments and interest.

3. Make accelerated biweekly payments

What’s better: paying $1,000 a month or $500 every two weeks? The latter strategy comes out ahead. For a truly accelerated program, divide your monthly mortgage payment in half and make that payment every two weeks. This means you’re ultimately making 26 half-payments in a year, the equivalent of one full additional monthly payment. The 13^th payment is the accelerant. It allows you to get that mortgage paid down faster.

Paying frequency may not seem like a big deal but check out this example: The Smiths have a $200,000 mortgage at 6% and are paying $1,280 in monthly payments. If the interest rate and their payments remain the same, their mortgage will be paid off in 25 years.

Compare this to the Browns, who have the same $200,000 mortgage and 6% interest rate. They chose to pay $640 in accelerated biweekly payments. If they keep this up, it will only take them 21 years (four years less than the Smiths) to pay off their mortgage. In the process, they will also save $35,000 in interest payments.

Whether you’re taking out your first mortgage or renewing an existing one, these strategies can help you kick your mortgage to the curb years sooner.


Original source: Three ways to pay off your mortgage faster by Deanne Gage for BrighterLife.ca.

Why the Bank of Canada likely won’t change its ‘neutral’ stance despite improving economy

Early signs of an economy moving toward full economic health probably won’t be enough to prompt Bank of Canada Governor Stephen Poloz to alter the stance of monetary policy Wednesday.

The target for overnight loans between commercial banks will remain 1% for a 29th meeting in a decision at 10 a.m. New York time, according to all 18 economists surveyed by Bloomberg News. Poloz will speak to reporters from Toronto 30 minutes later.

Poloz has said he’s “neutral” about the next policy move and last week highlighted the risks posed by persistently slow inflation. Wednesday’s statement will maintain that message, even after stronger-than-expected data and price gains exceeded the bank’s last quarterly forecast, said CIBC World Markets economist Peter Buchanan.

 

“Lowflation” has been the bank’s major concern, Buchanan said. “Too candid a recognition that deflation is less of a threat could see unwanted upward pressure on the currency,” he said, which could crimp export growth.

Poloz sets interest rates aiming inflation at the 2% midpoint of a 1% to 3% target band. The annual inflation rate slowed to 1.1% in February from 1.5% the month before, Statistics Canada reported March 21. Data for March are scheduled to be published April 17, with economists surveyed by Bloomberg forecasting a 1.4% rate.

 

While price increases have been stronger than 0.9% the central bank forecast in January, “it’s unlikely the Bank of Canada will fully back off their inflation concerns,” said Benjamin Reitzes, a senior economist at BMO Capital Markets in Toronto.

Other Improvements

Other economic indicators have shown improvement in the world’s 11th-largest economy. Canadian employment surged in March, climbing almost twice as fast as economists forecast with 42,900 new jobs, and gross domestic product rebounded with a 0.5% gain in January. Factory sales in February jumped 1.4%, to reach the highest level since 2008 before the last recession.

The consumer-price index in the U.S. rose 1.5% in March from a year earlier, a Labor Department report showed yesterday in Washington, which may alleviate concerns about too- low inflation among Federal Reserve policy markers.

The Canadian dollar declined 5.4% in the last six months through Wednesday, the second-weakest performance after South Africa’s rand among the 16 major currencies tracked by Bloomberg, as Poloz shifted to a neutral policy stance. The weaker dollar may help boost inflation by making imports more expensive, as well as boosting exports, three-quarters of which are bound for the U.S.

Growth Rotation

Policy makers have been counting on a rotation of growth to exports and business spending from indebted consumers. The International Monetary Fund said last week that shift hasn’t yet emerged and said monetary policy should remain stimulative.

Canada may still benefit from demand for exported commodities and the weaker currency according to some executives.

“The drop in the Canadian dollar relative to the U.S. dollar fundamentally helps our business,” Don Althoff, Chief Executive Officer of Calgary-based pipeline operator Veresen Inc., said in an April 11 telephone interview.
Bloomberg.com

 

Bidding Wars.....An Easy Fix?

Article written by Boris Bozic on the 28 Mar 2014 in Mortgage

I wonder if purchasers who went through the bidding process would do it over again?   We’ve all made bad business decisions, it happens.  But if the purchaser feels like they were played, well, that’s not good for any of us.  The integrity of the real estate sales process is sacrosanct.

I assumed that real estate bidding wars was specific to pockets in the Vancouver and Toronto market place.  You know? Big home values, big incomes – the bigger-better syndrome.  Alas, my assumptions were incorrect.  I made a stop in Winnipeg a few weeks ago to meet with some of our broker supporters, and I was surprised to hear how prevalent bidding wars are in the Winnipeg market place.  I guess I shouldn’t be surprised, given the Globe ran article recently about what to do if you find yourself in a bidding war.  People on the front lines are talking about it, and Canada’s self-proclaimed National newspaper is providing advice on what to do if you find yourself in real estate auction.  I’ll assume that real estate bidding wars are no longer a one off or the exclusive domain of larger urban centers.

Should we care? I think we should.
Some would describe real estate bidding wars as the free market economy at work- a willing seller and a willing buyer.  The flip side of the definition is; the manipulation of the real estate process, predicated on an unsuspecting and uniformed buyer.  An argument can be made for both definitions.  Here’s where I stand -

 

I think it’s an unseemly practice, and should be stopped or at the very least an attempt should be made to curtail it.  Here’s how it works, the real estate agent convinces the vendor to list their property for slightly less than market value.  The listing states that no offers will be entertained for a period of time, somewhere between five to seven days.  Enough time is given to view the property, and hope that perspective purchasers, especially those who are frustrated and disillusioned because they’ve done this a number of times and have no home to show for it, will submit an offer on the prescribed date.  The hope is the offer will be based on emotion, excuse me…market reality, and over pay.  And that’s what’s happening with greater frequency today.  I often wonder if purchasers who went through this process could do it over again, would they?  We’ve all made bad business decisions, it happens.  But if the purchaser feels like they were played, well, that’s not good for any of us.  The integrity of the real estate sales process is sacrosanct.

 

The best way to ensure that the integrity of the real estate sales process is not questioned is by way of transparency.  The Competition Bureau’s attempt to have CREA (Canadian Real Estate Association) publish the historical sale price for the listed property, is a step in the right direction.  CREA is fighting this because of “privacy” legislation. I find that interesting given that the information is already public, and one can find it if they have the time, and know where to look.  Finding historical sales data shouldn’t be laborious or treated as tradecraft.  We live in an age of instant information, and there’s no conceivable reason not provide this information to purchasers, and existing home owners.  If you want an example of how this can work, go to Zillow.com.  On this website is the listing of every property there is for sale in the U.S. It also provides estimated property evaluation, and historical sales activity for all properties.  It would be a valuable tool for anyone finding themselves in a bidding war.  If a realtor councils perspective purchasers to go in at “x” dollars, the council can be judged and validated as quickly as the purchaser can tap his/her tablet.  Transparency and information assists the purchaser to make a better decision.  A home is shelter, it’s also the biggest single investment decision that most people will make in their lifetime. 

There’s a self-serving reason why I would like to see theses bidding wars come to an end.  If the purchase price of the home is over market value, the appraisal is not going to come in.  That’s the point when everyone who was party to the over inflated purchase price runs for the hills, and start blaming those who are left to try and fix it, the mortgage broker and lender.  Rather unjust.

Oh yeah, my quick-fix solution is this, the mortgage amount is based on the purchase price or appraised value, whichever is lower.  We should add the listing to that as well.  That would pretty much end the gaming of perspective purchasers.

Condo Buyers Feel the Pinch!

Tightened lending guidelines are particularly affecting one type of homebuyer in major cities, according to one broker.

“In my marketplace … we are surrounded by so many condos, and a lot of our clients trying to purchase with bad credit are having a tough time,” Phil Edwards, a Toronto-based broker with MorCan Direct told MortgageBrokerNews.ca. “They put their deposit down four or five years ago and then they’re ready to register the unit and get a mortgage and they’re walking into tough times because over those four or five years something may have happened with their credit and they can’t now get approved for a CMHC insured mortgage.”

It’s an issue homebuyers – who may have been pre-approved in a less strict environment a few years ago – are having as they try to get their finances in order to officially move in upon completion.

According to Edwards, the problem can be avoided if clients approach a broker early on in the buying process, as opposed to merely getting pre-approved with the lender’s bank affiliate.

“If the client comes to us (beforehand) we let them know that obviously we can’t hold rates for that amount of time but if they can be pre-approved we usually tell them to keep their credit up because it’s obviously based on credit being in good standing,” he said. “Pay your bills on time; simple things like that will keep credit where it needs to be and for the most part they follow along with that.”

Issues arise, however, when clients are late in approaching brokers; though there are some creative workarounds Edwards has figured out to help clients secure financing.

“The problem is when a client hasn’t met us and their building comes up for registration,” Edwards said. “There are some lenders that will do a boost credit score with the insurer just because they have a little more relaxed guidelines, like a Bridgewater, for example. But it’s still pretty stringent on how bad the credit is.

“(In) most cases you’re still looking at first and second mortgages, trying to help them repair their credit and then afterwards trying to refinance them out of that mortgage because the property has appreciated in value so we may be able to finance at 80 per cent loan-to-value and get them out of that product.”

Though he admits it can be difficult and it requires a number of puzzle pieces to fall perfectly in place.

“It’s kind of tricky because they have to have certain things like other properties or equity in the property, appreciation in value on the existing property,” Edwards said. “So things have to kind of align in order for that to happen.”

Consumer debt swells to $1.4-trillion, but Canadians able to pay it!

LINDA NGUYEN

TORONTO — The Canadian Press

Published Monday, Feb. 10 2014, 4:42 AM EST

 

The love affair Canadians have with debt is still going strong, according to a new report by credit monitoring agency Equifax Canada.

 

Equifax said Monday that its figures show that consumer debt, excluding mortgages, rose to $518.3-billion through the end of November 2013. That was up 4.2 per cent from $497.4-billion a year earlier.

 

Despite the increase in debt, however, the overall delinquency rate — bills due past 90 days — declined to a record low of 1.12 per cent from 1.19 per cent in the same period of 2012.

 

“The real pattern that we’ve been observing is that Canadians are taking on more debt, but they can handle it well and are making those monthly payments,” said Regina Malina, director of analytics for Equifax.

 

Meanwhile, overall consumer debt, including mortgages, also continues to rise — up 9.1 per cent to $1.422-trillion from $1.303-trillion a year earlier.

 

Malina says the data shows that Canadians are willing to take on more debt — from car loans to credit card purchases — but are more aware of how important it is to keep their debt levels under control.

 

High debt levels are not a big concern in current conditions, which signal a stabilizing economy, improvement in the unemployment rate and an anticipated gradual increase in interest rates.

 

But Malina says if any or all of these conditions change, Canadians should reconsider how much debt they are piling on.

 

“That is the reason why we should remain vigilant,” she said. “It’s easy to get complacent. Even if the debt is up, and the delinquency is going down, it is no cause for alarm but as I said, we have to watch out for these other economic factors.”

 

Equifax uses data from 25 million files on consumer credit history, including national credit cards, loans and mortgages in compiling the report each quarter.

Buying a house? Here’s how to get a big tax refund!

The $25,000 Ottawa allows you take out of your retirement fund to buy your first home sure doesn’t go as far as it used to.

The Financial Post’s Melissa Leong explains why RRSPs are much like your beloved social media and as deserving of your attention.

Under the home buyers’ plan, Canadians can take $25,000 out of their registered retirement savings plan and pay it back over the next 15 years without incurring any penalty. For a couple that means $50,000.

But the dollar amount has been stuck at $25,000 since 1999 while house prices have continued to escalate. At $50,000, you’re barely making the  minimum downpayment if you are buying a home in Vancouver with a mortgage backed by the government.

The Canadian Real Estate Association says the average price of a home will climb to $391,000 next year, meaning that $50,000 is less than 13% and not enough to avoid costly mortgage default insurance.

“I don’t know how effective the plan is now, so I’m not sure what would happen, if you increase the amount,” says Don Lawby, chief executive of Century 21 Canada.

It’s not just the amount. The tax-free savings account is now just as an effective savings vehicle. As of 2014, Canadians were allowed to contribute $31,000 and the amount increases every year. You can also withdraw money from a TFSA and put it an equal amount back later.

“I think you almost need a combination of the two plans together to fund that kind of investment,” said Mr. Lawby, about buying a house. “It depends on where you live in Canada.”

The home buyers’ plan was launched with a $20,000 withdrawal limit and it jumped to $25,000 in 2009.

One of the arguments against increasing the limit is it will encourage young Canadians to rob their retirement savings to buy a first home. Paying the money back over 15 years — there are significant penalties if you don’t — means you might not have the money to make current contributions.

“Some people say the RRSP is not the most efficient way of saving for a house,” says Benjamin Tal, deputy chief economist with CIBC World Markets.

He says there hasn’t been an acceleration in the use of the home buyers’ plan because first-time buyers are being squeezed out of the market.

“Older people and people buying second properties don’t use their RRSPs to buy homes,” says Mr. Tal. “You would expect given rising prices there would be more use [of the plan.].”

This is the most popular time of the year to do it. They manipulate the system to deliver a tax return on the downpayment they will [already be] making on their purchase.

If you know you are buying your first home in the next 90 days, you make a $25,000 contribution or $50,000 for two people. That means a big refund in April. You then withdraw the $25,000 or $50,000 to pay for that initial home.

“Most people have the RRSP room. If you are buying a house by June and you have the downpayment in cash, you make the contribution to trigger the the refund,” said Mr. Gaetano, noting the $25,000 has to be in the plan for 90 days before you can take it out.

“You can garner $20,000 in refunds,” said Mr. Gaetano, pointing out it will depend on what your marginal tax rate is.

More from Garry Marr | @DustyWallet

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