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Cheap mortgage rates don’t justify home ownership

Cheap-mortgage-ratesby ROB CARRICK
The Globe and Mail.

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 .

My own contribution to the debate on affordability is the Real Life Ratio spreadsheet, which you can download here). 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 ownership.

Child Support or Alimony

b1Most Lenders use 1​​00% of Child Support and/or Alimony income provided that it does not exceed 30% of the total income being used to qualify. You must be able to provide copy of separation agreement and proof of receipt of funds by way of bank statements.

​If you’re paying Child Support or Alimony, you must include this payment as a monthly debt obligation​. Again, the lender will need to see a copy of your separation agreement or some proof that these payments are being made (ie. we’ve used cancelled cheques as proof of payment with a couple of lenders).

Interesting move from CMHC

Canada_Mortgage_and_Housing_Corporation.svgOver the past few years, I believe CMHC has been doing the right thing in trying to “cool” down the housing industry. Removing 100% financing, lowering amortization periods to 25 years for high ratio mortgages and reducing refinancing limits to 80% of the value of your property.

All of this from CMHC was to combat the low interest rate market and the ridiculous inflationary prices seen in most Canadian cities.

So why all of a sudden put in a guideline that will make it easier to qualify for a home?

Well first of all, not as many borrowers or homes will qualify for this anyway.

Here’s some criteria Rob McLister from has found out so far will be needed to qualify under this program;

The property must be owner-occupied.

The property being insured can have only two units (i.e., a duplex or a single home with a legal secondary suite).

Rental income cannot be used if the suite is “illegal/non-conforming” but “legal non-conforming” is okay. (Non-conforming means that the suite was grandfathered in before zoning/regulations restricted such units. You can check with the city to confirm if a suite is legal.)

The suite must be self-contained with its own entrance.

Property taxes and heat must be factored into the borrower’s debt ratios (which is currently not the case when using rent from legal secondary suites).
For existing units, there must be two-year history of rental income from the suite. The maximum rental income allowed for qualification is a two-year average of the unit’s rent.

For new units, a market rent appraisal can be accepted if an appropriate vacancy rate has been applied to the estimated rental income.
Mortgage applicants must “demonstrate a strong history of managing credit” with a minimum credit score of 680.

What this may do, is possibly stimulate the renovation market. People that were simply thinking about adding a basement apartment or an inlaw suite may just do so now. That being said, you must outweigh the cost vs reward.

Reward; you have a good, clean, quiet tenant that pays on time and you’ve increased the value of your home.

Cost; You’ll need to book an appointment with the Local Fire Department and Electrical Safety Authority to make sure your place is retrofitted. This will most definitely be the determining factor in most newer homes that are too new to be “legal non-conforming”. If you have to renovate to make it “legal”, renovation costs are not cheap. The amount of dollars you put into a renovation project do not always reflect the value you add to your home. Another area of concern is a non-cooperating tenant. Speak with a landlord before you decide to lift up a hammer or call the Fire Department to see if you qualify. Also, you must ask yourself, do you really want a tenant occupying the space where you and your family lives?

I don’t believe it’ll have a major boost to the Canadian Housing Industry. What I believe CMHC is doing is preparing for the future.

Here’s where I insert my devils advocate horns.


The future: Housing crash (or soft landing). Where do you think kids are going to go when they can’t afford their homes when interest rates rise or they simply can’t afford the costs of today’s housing environment? What about career stability? How many of your kids are still in the same job as they were 5 years ago? 10 years ago? When they lose their jobs or their career paths change, where are the going? One in two marriages end in divorce or separation – most people go back to their parents if they’re living in the same vicinity until things settle.

By stimulating this market and making it easier for people to qualify for homes of this nature, there’ll be more homes on the market for people to purchase as a family.

And its just not the kids coming home. Its the parents moving back in with their kids too. Parents may simply want to downsize. Parents may not be around and don’t want to look after a big property as they are out of the country 6 months of the year. Or what if one parent falls ill and they can’t take care of themselves. Alternative living is far too costly for their budget and they’ll need a place to stay.

I think CMHC and our government sees the writing on the wall. The housing industry in general will correct itself sooner than later, living expenses coupled with our debts levels are way too high and our population is getting older.

Interesting twist for sure… and as it always does, time will tell.

Closing Costs: What to Expect When Selling Your Home

p1 by Chris Penny.

Many people depend on the sale of a home to finance a newer home or other important expense. However, you need to keep in mind that just because your home sold for $450,000, it doesn’t mean that will be the amount in your bank account. There are several closing costs that will take a small but noticeable percentage of the sale price. Here are some other expenses that you as the seller should be prepared for.

Costs Associated With the Property

Depending on the type of property, you might have homeowner’s association costs, maintenance costs, property taxes, municipal assessments, and other bills associated with your home or condo. If so, these will need to be paid in full when you hand over the real estate. In addition, you must pay to remove any liens on your property if these exist.  

Mortgage Early Payment Costs

If you have not paid off your current home mortgage yet, there will likely be costs associated with this. If you have a closed mortgage, you will need to pay prepayment charges, which are determined by how much time and money is left owing. These can add up to the equivalent of several months’ worth of mortgage payments. In addition, there could be a discharge fee that can be as much as $270. However, these costs can be avoided if you are buying a new property of similar value. You can transfer your mortgage to the new property and pay only interest that has accrued since your last payment was made. Work with your bank or mortgage broker to get a better idea on how this will play out in your situation. 

Taxes and Miscellaneous Legal Fees

There are several legal fees and taxes associated with selling a home. While these are small compared to the other costs, they can add up to a significant amount of money. Most areas require you to pay sales tax on real estate. In addition, there can be lawyer fees, registration fees, and other disbursement costs. If you earn money from the sale of the home (like an investment property), you will be taxed on earnings. If this is an income property, there will also be additional capital gains taxes.

In Ontario, you also have to pay a land transfer tax that is calculated by the home’s sale price. You can find an estimate calculator for this online. Remember that this is an estimate; your total land transfer tax may be more or less.

Real Estate Agent Commission

If you used a real estate agent, then there is a commission that is several percent of the sale to be paid out. In addition, you might need to pay the commission of the buyer’s agent. Many people try to cut this cost by selling their home themselves without a listing agent, but this usually does not pay off. A listing agent can usually sell the house quicker and for a higher price. 

Percentage rates vary depending on the Realtor, but this should have been negotiated in your contract when you signed with them. That should also include any payments in regards to the buyer’s agent.

Moving Costs

So, once your home is sold, you’re going to need to move out. The costs of moving, while normally pretty small when compared to closing costs, can be significant if you haven’t prepared for them. You will need to buy boxes and pay for a moving company, if you choose to use one. Lost work is another factor, as packing, moving, and unpacking will take several days for most people. In addition, there are usually fees to disconnect and reconnect utilities such as water, electricity, heating and gas, cable, telephone, and more. 

Selling a home is very exciting, as it allows you to move on to a new home and a new future. However, there are many costs that come with selling a home which can leave people in a bad financial situation if they’re not prepared. Planning ahead and savings for this will make your closing a stress-free and exciting experience.


 What effect does the Bank Of Canada’s reduction to the Overnight Lending Rate have on my mortgage?
This will only affect your mortgage if you have a variable rate OR Home Equity Line of Credit attached to your home.  Prime has been reduced to 2.70% at most Financial Institutions (FIs).  Some FIs will change it immediately, some will wait until the beginning of August.

Bank of Canada slashes key rate

 by Greg Bonnell, Reporter, BNN.

Canada’s central banker isn’t using the R-word – recession — but Stephen Poloz is cutting the Bank of Canada’s key interest rate by 25 basis points to 0.5 percent as he forecasts two back-to-back quarters of economic decline amid the crash in crude prices.

With Canadians carrying record-high debt loads and cheap money fuelling hot housing markets in Toronto and Vancouver, the 25 basis point rate cut will be seen as a risky play in some quarters, adding more fuel to the debt fire.

The next shoe to drop for borrowing costs — Canada’s big banks and their prime rates. TD Bank was first out of the gate to cut its prime rate 10 basis points to 2.75 percent. Eager to protect net interest margins, the banks were slow to follow January’s surprise 25 basis point cut from the BOC, and when they did it was with a 15 basis point reduction in prime to 2.85 percent.

The Bank of Canada sees the economy contracting further. After contracting 0.6 percent in the first three months of the year, the Bank of Canada expects the economy to shrink 0.5 percent in the second quarter before growing 1.5 percent in the third quarter.

The downgrade to Canada’s economic prospects is forcing the bank to slash its full-year growth forecast to 1.1 percent, down from 1.9 percent. It sees 2.3 percent growth in 2016 and 2.6 percent in 2017.

“I’m not going to engage in the debate over what we call this,” Poloz told reporters in Ottawa. “No doubt, we have worked our way through a mild contraction.”

While the price of oil and the resulting plunge in energy patch business investment is the obvious culprit, the bank admits in its Monetary Policy Report that the extent of the weakness in non-energy exports is “puzzling.”

With Canada’s growth outlook “marked down considerably,” the bank says “additional monetary stimulus is required at this time to help return the economy to full capacity.”

The central bank is also pushing back its target date for the economy to return to its full potential and for inflation to land at 2 percent to the first half of 2017.

The resumption of economic growth in the third quarter, the bank says, will be driven by non-resource exports and “federal fiscal stimulus.” Does that mean the bank is anticipating economic stimulus from Ottawa in an election year? It doesn’t appear so. Rather, the bank says already announced payments to families with children will give households more disposable income, boosting consumption.

When Poloz surprised the markets with the January rate cut he said the bank was taking out “insurance” against the effects of low oil. And although he saw the fallout from crude hitting swift and hard in the first quarter, growth would resume in the April-May-June period to the tune of 1.8 percent.

Then April GDP came in negative, and May trade data further fuelled concerns that Canada wasn’t coming out from under the oil overhang as quickly as hoped.

That’s when the R-word, recession, entered the conversation as economists crunched the numbers and said it was likely Canada would see two back-to-back quarters of negative real GDP.

But with nearly 100,000 jobs added to the Canadian economy this year, hot housing markets, and auto sales on the upswing, some economists have a hard time using the R-word.

In short: the economic downturn just isn’t broad-based enough to meet the recession definition.

Scotiabank’s Derek Holt went as far as to call it the Great Canadian Non-Recession.

Still, there’s little doubt the pain is acute in the energy sector. In its report, the bank says about one-third of the income gains tied to commodity price increases since 2002 have been reversed. And business investment in the oil and gas sector is estimated to have contracted some 40 percent this year, deeper than the bank’s previous estimate of 30 percent.

The bank also says it’s anticipating “further job losses in oil and related industries.”

When it comes to the “puzzling” loss of momentum for non-energy exports, the bank says the “unexplained weakness” is likely temporary as foreign demand firms up – namely as the U.S. economy strengthens.

When it comes to the price of a barrel of crude, the bank says it’s assuming prices will remain near recent levels of $60 US for WTI, although a barrel has fallen significantly below that in recent days.

And it sees the Canadian dollar at 80 cents US.

And about those hot housing markets that some fear could become dangerously overvalued, and face a sharp correction, as Poloz cuts rates yet again – the bank says it still expects a “constructive evolution,” meaning the market will stabilize over the next two years.

Shadow mortgage lending on the rise as house prices soar

 By Andrea Hopkins, Thomson Reuters.

Canada’s housing boom is increasingly driving homebuyers to seek mortgages from private lenders, who demand rates that can be more than five times higher than those charged by the nation’s banks.

Canadian house prices have risen 36 per cent since June 2009, according to the Teranet-National Bank house price index. At the same time, Canadian banks have become more conservative and regulators are making it harder to lend, giving rise to an alternative market, including Canadians who refinance their own homes at low rates and then use the money to become mortgage lenders themselves.

Some analysts say a housing investment is increasingly risky because the pace of price increases has vastly outstripped wage growth, all amid a time of historically low interest rates and record debt levels. If and when interest rates rise, the concern is that consumers would have little ability to increase their payments, because they have so much debt.

“The risk arises if the unintended consequence of regulation is to push out the risk profile of the less regulated sector, and to encourage it to grow quickly at the same time,” said Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute.

“In dollar terms it is not a huge part of the economy (but) my concern is that we pay attention, because small problems sometimes get unexpectedly large, and quickly so.”

Mortgage broker Lou Perrotta said that in terms of volume, 20 per cent to 30 per cent of the mortgages he puts together are now privately financed, typically because borrowers are declined for a bank loan for reasons like a low credit rating or unsteady income. That represents about $4 million to $5 million of the $20 million of mortgage business he does annually, he said.

“Business is brisk, without question. (It has) probably tripled in the past three years,” said Perrotta, president of Domus Financial Corp in Toronto, where house prices have increased by 55 per cent in the last six years.

‘It’s not for the faint of heart’

Perrotta acts as a matchmaker between individuals who have money to lend – and who are seeking higher rates of return than can be had in stocks or bonds – and borrowers who are willing to pay a higher mortgage rate to get into the market.

He also invests his own money, lending between $25,000 and $250,000 each to “five or six” borrowers a year who offer a good balance between risk and return.

“It’s not for the faint of heart, and you need to understand the dynamics of real estate,” Perrotta said.

One private lender, who asked not to be named because she is close to the real estate market and fears hurting her business, took out a C$400,000 mortgage on her paid-off home at 2.49 per cent and then gave that money to a broker that lent it to a borrower at a higher rate, for a fee.

“Who the hell is going to give me 9 per cent return?” said the lender, who said she has recourse to the borrower’s assets if he defaults.

Shadow lending ‘growing very fast’

CIBC senior economist Benjamin Tal said the shadow lending market represents about 4 to 5 per cent of Canada’s overall mortgage market.

“This is something that is growing very fast, because many borrowers are not having access to banks because the banks are highly regulated,” said Tal.

In Ontario, Canada’s most populous province, private lending accounts for about 4 per cent of new mortgage originations, or $1.1 billion, or 2 per cent, of total mortgage lending by dollar value, according to Teranet.

While that’s a fraction of the sub-prime lending that got the U.S. housing market into trouble seven years ago, analysts are concerned that the market is growing rapidly and may be concentrated in hot housing markets such as Toronto and Vancouver where a sudden downturn could take hold.

Legal practice

The practice is legal, and can be done through a person-to-person loan, in which the lender is named as a lienholder on the mortgage, or through a Mortgage Investment Corp, in which investors can pool their money to lend to those who either don’t qualify for a traditional loan.

While major Canadian lenders offer five-year fixed mortgage rates at about 2.5 per cent to qualified borrowers, rates in the private market range between 7 per cent and 15 per cent, one mortgage broker said.

Traditional lenders also send business to alternative lenders, feeding the pipeline.

Royal Bank of Canada, the country’s biggest bank, said when a client does not qualify for a mortgage, the bank will recommend an alternate lender, which may include a trust company, a mortgage broker or a private mortgage corporation, an RBC spokesman said in a statement.

Canada’s financial system regulator, the Office of the Superintendent of Financial Institutions, said it monitors the alternative mortgage market but would not comment on its size, whether it was growing or whether OSFI had any concerns.

Anthony Croll, vice president of Individual Investment Corporation, a Montreal-based private lender that has been in business since 1958, said he’s seen a rise in the number of small private lenders over the last few years competing with the 10 per cent to 12 per cent interest his company would charge.

He also thinks inexperienced lenders may be underestimating the risks associated with non-payment of a loan.

“Occasionally an accountant or someone else has said – after hearing about our rates, or what the deal is – ‘I can do that myself,'” Croll said. “But you know everything is easy and fine to do until you have a problem.”

Low Mortgage Rate Trap

 The majority of Deeply Discounted Online Mortgage Rates (including this site) have one or more of the following restrictions:

  • Fully Closed Mortgage.
  • Minimum Mortgage threshold.
  • “Must close by certain date” offers.
  • Rates only offered in certain areas.
  • High Prepayment Penalties.
  • Low Prepayment Privileges.
  • Registered as Collateral Charge.
  • High Ratio Only.
  • Plus more.

Before you decide on one of these low mortgage rate products, chat with us first to see if it makes sense for your particular situation.

How much down payment do I need for a rental property?

 A minimum of 20% down payment is required at most Financial Institutions. Some Institutions will require more. Some will even require that you pay for the mortgage default insurance premium. Some banks will limit you on the # of rental properties you can own. Some will qualify based on a rental spreadsheet, where others will only use 50% rental income. Bottom line, rental property financing is complex. Feel free to leave a comment here on your particular question OR call your local HQ rep to discuss further.

Summer Budget

summerHappy Summer Holidays to all teachers, aids and admin staff! Tip of the day; it’s a long summer – don’t blow all your summer pay this weekend! 🙂

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