BECAUSE KNOWLEDGE IS POWER

How to avoid home buyers’ regret
By: Julian Beltrame
Canadian Press, Aug 16, 2012

With Canadians entering the housing market in greater numbers than ever before, it wouldn’t be surprising to find that many suffer buyers’ regrets.

A recent survey commissioned by TD Canada Trust found the two biggest regrets — reported by 60 per cent of the 1,002 respondents — have to do with finances; not making a bigger down payment and not doing enough research into the costs of home ownership.

That’s not surprising, says Farhaneh Haque, director of mortgage advice with TD.

Even though buying a home is the biggest investment the vast majority of Canadians will ever make, many first time buyers still don’t do the necessary homework.

“It’s not the sticker price that shocks first-time home buyers. It’s the costs associated with the sticker,” she explains.

“We see so many home buyers that after the fact feel they could have used information, that they could have had more preparation going into home ownership.”

For instance, 29 per cent of those surveyed said they didn’t budget for ongoing costs, such as maintenance and utilities. One in eight said they overlooked some of the one-time fees associated with buying, such as inspection and legal fees, title insurance, and land transfer taxes, depending on the home price.

These are not minor omissions.

Paying the mortgage is just the most obvious cost of ownership, and not necessarily the biggest in today’s world of super-low interest rates. The combined cost for municipal taxes, fire and theft insurance, utilities, plus regular upkeep, could actually pinch household monthly budgets more.

“If you are renting, you pay that one shelter cost and that’s all you have to think about. But as a homeowner, there’s more,” says Haque, who tells clients to budget at least $500-$700 on average in additional monthly expenses.

Her advice to prospective buyers is get advice, which is easily available to them. Most first-timers know existing homeowners who have acquired wisdom through experience.

And financial institutions, real estate agencies and other market players regularly stage seminars with experts that can offer sage counsel.

Michele Rowe, a sales representative with Keller Willams VIP Realty in Ottawa, tries to arrange one seminar every month, and she typically invites an inspector and a mortgage broker for their input.

She tells attendees the first thing they should do is to get a buyer’s agent to steer them through the process.

“Most first-time buyers don’t know where to start and don’t know the importance of using their buyer agent,” she says.

The other key advice she gives them is that they need to get pre-approval for a mortgage, so buyers know how much they can spend on a home.

“They need to know how much of house they can afford, based on their income, their GDS (gross debt service) and TDS (total debt) ratios, because they might think they can afford $300,000 when they can’t,” she explained.

The ratios calculate monthly home costs, and other debt charges, as a percentage of household income to determine affordability. A ratio of 40 per cent on all commitments (TDS) is usually acceptable to mortgage lenders.

The survey, which was conducted in the spring, found that 54 per cent of first-time buyers want a single, detached home, but Rowe says that is often impractical. That’s because although interest rates may be low, house prices have been rising steadily — the average resale home in Canada now costs close to $370,000.

In Ottawa, most first-time buyers Rowe sees can only qualify for a home of about $250,000. That price range will most likely mean a condo or townhouse, she said.

Which comes to another key finding in the TD Canada Trust survey — Canadians don’t start saving up for a home soon enough.

Haque said it’s critical for Canadians thinking they will want to own a home one day to get informed about what is involved and how much money they will need. The bigger the down payment, the more flexible a household’s ongoing finances will be.

“A bigger down payment reduces monthly payments, but it also gives owner options for a mortgage that is more flexible,” she explains. “For instance, with more than 20 per cent down payment, an owner can obtain a mortgage with a 30 year amortization period, rather than 25 years, which further reduces monthly payment.”

Photo By: Alexandredrachmann

MORTGAGE INSURANCE NEWS

CMHC could be pulled out of mortgage insurance business, Flaherty says
By Garry Marr
Financial Post Apr 27, 2012

Finance Minister Jim Flaherty would consider taking Canada Mortgage Housing Corp. out of the mortgage default insurance business he told the National Post’s editorial board.

“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.”

He offered no timetable on when the government could get out of mortgage default insurance business, just offering it up as a possibility. “We have a list of Crowns, Crown agencies that are being reviewed,” said Mr. Flaherty.

In a wide-ranging discussion on the housing market, he said he has no plans to increase CMHC’s current $600-billion loan limit, ruled out any possibility of regulating foreign real estate investment and made it clear his focus is on the governance of Crown corp. which controls about 75% of the mortgage default insurance business in the country.

“For some time now I’ve had concerns about the large commercial role that CMHC now plays. CMHC has become a significant Canadian financial institution. As you know, historically it was created with a mandate post-war to advance housing in Canada. It’s become much more that.”

The finance minister moved this week to tighten control of CMHC, placing it under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions. Previously, it fell under the watch of the Department of Human Resources and Skills Development.

The shift comes with CMHC closing in on the $600-billion limit the government has for how much of its portfolio will be backstopped by the taxpayer. Three years ago it was $450-billion.

By law, consumers must buy mortgage default insurance if they have less than a 20% down payment on a home and are borrowing from a federally regulated financial institution.

But CMHC has not been insuring just those loans, it has agreed to step in and insure loans — with the premiums paid by financial institutions — for lower-ratio mortgages, or what is called “portfolio” or “bulk insurance.”

He said the head of OFSI will now have the power to look at the books of CMHC the way she looks at the books of other private financial institutions in Canada. Already, the government has placed the deputy minister of finance on the board of CMHC.

“We have quite a bit of information about what the banks do and don’t do. [Superintendent] Julie Dickson had to go to some of them in the last year and say ‘you must ensure that your board policies on residential lending mortgages are carried through,” he said. “She’s quite a strict supervisor which is good for our country.”

OSFI has already been looking into CMHC and established one of the key issues for the organization is governance. “OFSI are certainly of the view there are necessary governance improvements we can do,” said Mr. Flaherty.

He made it clear there are no plans to extend CMHC’s $600-billion limit. “For a while,” said Mr. Flaherty, about how long the Crown corporation would have to exist under that limit. It was at $541-billion at the end of the third quarter of last year but business has slowed as the agency culled its portfolio business.

Mr. Flaherty’s own opinion on the housing market is that has been fuelled by low interest rates which he says he does not control. “Cheap money,” he said, noting he did talk to the banks about being unhappy about their mortgage rate wars earlier this year which had reduced the rate on a five-year closed mortgage to below 3% — an all-time low.

As to whether the market has been in part fueled by foreign buyers, as many in the real estate industry have suggested, Mr. Flaherty said his government will not get involved in that aspect of the market. “No,” he said, pausing to emphasize the point. “I don’t think there is [a role]. They key in housing from my point of view is to get the best information on housing.”

TANKING CMHC RULES?

Think Tank: Time to leash the CMHC
John Greenwood 
FPPOSTED, January 31, 2011

The federal government should limit tax payer exposure to potential problems in the housing market by winding back the role of the Canada Mortgage and Housing Corp. in the provision of mortgage insurance, according to a new report by the CD Howe Institute.

The CMHC has a pervasive presence in the domestic mortgage market, potentially resulting in “unmanageably large risks in financial markets” that are ultimately borne by the Canadian public, says the report.

Under current rules, people who borrow more than 80% of the value of the home they want to buy must also take out insurance, and the CMHC is by far the most dominant player in that market.

According to the report by Finn Poschmann, vice president of research at the CD Howe Institute, the CMHC now backstops mortgages equivalent to more than 30% of Canada’s gross domestic product.

As a result, Canadians are exposed to “large, ill-defined risks,” says the report, which argues that Ottawa should crank back the CMHCs presence in mortgage insurance and allow more room for private sector insurers.

Originally conceived as a mechanism for executing public policy, the CHMC has expanded dramatically, especially in the wake of the financial crisis as the government encouraged banks to boost lending by allowing them to securitize more home loans.

But critics worry that the unintended consequence was that mortgages became too easy to get, pushing up real estate prices across much of the country to unsustainable levels.

The CD Howe report comes on the heels repeated warnings from the Bank of Canada that Canadians have become over leveraged and need to start paying down debt.

One of the main concerns about the CMHC is the lack of disclosure about the quality of its mortgages and details of the types of loans it insures. For instance, when the government announced earlier this month that home equity lines of credit, or HELOCs, would no longer qualify for CMHC insurance, many analysts expressed surprised that such loans were ever allowed to be part of the CMHC program in the first place.

MORTGAGE CONFUSION

New mortgage rules leave homebuyers confused
Insured buyers must show 'ability to pay'
James Pasternak, Financial Post
Published: Wednesday, March 17, 2010

Frank and Susan Williams bought a house near Hamilton, Ont., this month, they followed a time-honoured tradition of using leveraged financing.

With mortgage insurance they only had to put down 5% of the $270,000 purchase price. They went with a closed variable rate at 2.25% and amortized the loan over 35 years. The deal was initiated with a mortgage broker, with Bank of Nova Scotia providing the financing.

"It's a three-bedroom bungalow. That was attractive to us. We have a dog and we like to do things in the backyard. We did not have the type of money we thought we'd have to put into a house. We said let's just bite the bullet and get this over with," Ms. Williams says.

And getting it over with was probably a good idea. First, they were in a rent-to-own arrangement and had to exercise their option to buy before August 2010. And second, based on pending federal rules for government-backed insured mortgages that come into effect on April 19, the Williams (not their real name) would probably not have qualified for the variable-rate mortgage. In fact, as recent arrivals from the United States and its housing crisis, their credit history might not have passed any stress test.

"We really came from the United States with nothing. Everything we had disappeared with the housing crisis. In areas that had bad loans all the houses just hit bottom. We were expecting US$250,000 out of our house but we got nothing," Ms. Williams says. They walked away from the whole mess.

But while the Williams might have had good reasons for leveraging to get their dream home -- they are firsttime buyers in Canada -- the new federal rules governing mortgages have been widely misunderstood. In fact, the biggest fear among the young and house-less is fear itself.

"There are a lot of rules that changed. But they weren't communicated very well," says Robert McLister, the editor of Vancouver-based Canadian Mortgage Trends (www.CanadianMortgageTrends.com).

Margo Wynhofen, of Grimsby, Ont.-based Verico One Mortgage Corp. ( www.mymortgageadvisor.ca) and vice-president of the Independent Mortgage Brokers Association of Ontario, says she has had to spend considerable time explaining federal Finance Minister Jim Flaherty's statement of Feb. 16.

"I had a lot of people misunderstand the announcement. So I had a lot of clients call me for clarification. There was an overwhelming sigh of relief," Ms. Wynhofen says.

Under current mortgage-lending rules, buyers with a down payment of less than 20% of the purchase price must purchase mortgage insurance, with the most common source being Canadian Housing and Mortgage Corp. The new rules affect only customers that are required to purchase the insurance.

Under the new rules, all buyers requiring mortgage insurance will have to meet the "ability to pay" for a higher, more expensive five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate and a shorter term.

"It's not just first-time homebuyers who are affected. It's anyone who wants a variable mortgage rate now who doesn't have one already, they now have to qualify at a higher interest rate. Some of them won't qualify. And that's fine so they'll just take a fixed rate. It's not the end of the world," Ms. Wynhofen says.

Bernice Dunsby, director of home equity financing at the Royal Bank, says the new rules might even help save first-time buyers from themselves.

"We believe the new measures will have a small impact on mortgage growth, if any. First-time buyers should not be any more concerned about these changes. In fact, I believe the changes will actually help first-time homebuyers to ensure that not only can they afford their home today but in the future, especially if interest rates rise," says Ms. Dunsby.

In some cases, the rules might be outdated before they are fully implemented. A growing number of homebuyers are forgoing the conventional mortgage and using alternative financial products. Take the case of London, Ont., accountant and recent homebuyer Phil Parkinson. Three years ago, he bought his first home with a fully secured line of credit offered through Manulife Financial Corp.

The Manulife One product provides up to 80% of the appraised value of your home. It can be used to pay off the balance of your existing mortgage, personal lines of credit and any other outstanding debts you might have.

"These operate on a variable rate. It's just like one big bank account. You can have your money deposited into the account, you can pay your bills. [As you deposit] you can knock your account down and lower your interest calculation. Theoretically, you don't have to pay anything expect the interest," Mr. Parkinson says.

Other highlights of the rules don't directly affect firsttime buyers. For example, the maximum amount Canadians can withdraw in refinancing their mortgages has dropped to 90% from 95% of the value of their homes. rule has created a mini-stampede.

"There is a bit of urgency now to get [a refinancing] done before April 19. People are chronically refinancing. I have clients that refinance every two to three years to take the equity out of their home to pay off credit-card debt. The home has become an ATM machine," Ms. Wynhofen says.

A January 2007 Statistics Canada study of personal debt concluded that "increasing mortgage debt for refinancing purposes or taking out home-equity loans implies that homeowners in both [Canada and the United States] are using their homes as a source of cash to finance their spending rather than as an investment."

And in an effort to contain the risks of real-estate speculation, as of April 19 the minimum down payment for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation rises from 5% to 20%.

As for ex-patriot Americans Frank and Susan Williams, they're pretty relieved about their fresh start with a new house.

"It's very different to get a mortgage here. It's a lot less hassle than in the United States," Ms. Williams says.

And because the Williams are not particularly worried about the new mortgage rules, they are already thinking about their next purchase.

"We might be able to buy a little place that's larger when we can leverage this up a bit -- maybe get something cheaper than this with more room,' Ms. Williams says.

Photo by: Dom Dada