SOME LIKE IT HOT!

More mortgage rules planned if housing market gets too hot
Garry Marr
Financial Post Jan 23, 2012

A new round of mortgage rules from Ottawa could include tough new measures for calculating how the self-employed qualify for loans and tighten regulations for condominium buyers, according to two separate sources.

Ottawa remains concerned about the possibility of an inflated housing market and wants to crack down on the practice where consumers self-disclose what they make when applying for a loan. In the case of the condominium buyer, the government continues to consider a proposal that would have 100% of condo fees count when assessing how much debt a consumer could afford.

“None of this is happening just yet. The housing market has slowed down and the government wants to see what will happen next,” said one source. “If the spring market picks up, then we will see more changes to the rules.”

Bank of Canada Governor Mark Carney said Sunday that some parts of the Canadian real estate market are “probably overvalued” and policymakers are monitoring to see if further steps are needed to cool it.

“We see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there. We’re watching it closely. We’re working with our partners, the federal government, the superintendent of financial institutions,” he said in an interview broadcast on Sunday on CTV.

” Measures have been taken. They’ve been effective. We’ll keep up that vigilance. If more needs to be done, I’m sure the appropriate authorities will take those measures.”

Stated-income products have become very popular during this housing boom, allowing more banks to get involved in loaning to the selfemployed.

“These are individuals that are self-employed, have great credit and won’t be able to validate their ability to pay if they are not showing their income on their notice of assessment,” said one source.

He says those people with stated income could have to make an even higher down payment than the normal 20% that exempts consumers from buying expensive mortgage default insurance.

The source said some self-employed are qualifying for loans based on the assumption they have a lot of write offs, like car payments and housing costs associated with home office costs.

“They get to include that based on the assumption that self-employed people have an advantage from a tax perspective,” said the source. “The government is trying to figure how they would present this.”

A source with one of the banks said the government is trying “zoom in” on marginal borrowers so it doesn’t get into a U.S. type of situation where they were not verifying income.

“What banks are doing usually when it comes with self-employment is not dealing with declared income because nobody believes it. What they do is look at their behaviour and put more weight on it,” said the source, referring to how those consumers handle their debt. “With an employer, you can call and verify their income.”

The labour market is roughly about 13% self-employed so new rules could have a major impact but the source indicated it does not mean those people would be shut out of the loan market. “It will be just more difficult for them. You are going to have to prove income in a more precise way,” he said.

The suggestion the government might crack down on condo buyers is not new, having been scrapped last year in favour of tougher new rules on amortization lengths and refinancings. Most people in the real estate sector now believe amortizations will be reduced to 25 years after having been as long as 40 just three years ago.

Brad Lamb, a Toronto real estate broker and condo developer, has heard the government is again considering including 100% of condo fees in calculating debt levels but doesn’t think it will happen.

“The 25 year amortization is a no brainer, they should do it,” said Mr. Lamb. “It’s not smart to have loose lending rules. But the condo market is hot because of investors not speculators. These investors are coming [from around the globe]. This silly [condo fee] change will do nothing. These people are buying with cash.”

Photo By: Todd Klassy

THEN THERE WERE TWO...BUT IN THE MEANTIME...

Home buying help for singles
By Helen Morris
National Post

Purchasing a home alone can be daunting but help is at hand to make the most of your single income.

"Get pre-approved -with a single income, many times people are looking at condominiums. The condo fees and taxes need to be included, and, of course, the mortgage payment," says Kevin Suddaby a mortgage broker with Invis in Calgary. "Make sure you've got a complete assessment of what you can afford. Get an interest rate held, so that you are protected while you are looking for a home."

The new mortgage rules effective March 18 need consideration.

"We don't have access to the 35-year amortization anymore. This is impacting singles more than couples who have dual incomes," Mr. Suddaby says. "You can qualify for less property now."

One option may be to ask a co-signer, such as a parent, to help you qualify for the mortgage.

"By co-signing or guaranteeing the debt the parent is obligated as much as their son or daughter with the payments," says Stan Falkowski, senior vice-president, Mortgage Intelligence in Toronto. Helping with the down payment may make more sense.

"We're looking at the baby boomers. Their kids are now buying homes. If parents can afford it and they have assets, it wouldn't be a bad time to gift a down payment," Mr. Falkowski says.

With only your income under consideration, putting together a healthy deposit is more important than ever.

"For those who are looking to buy in the next two or three years, it's a good point to max out on their RRSPs every year if they can," Mr. Falkowski says.

"They can in turn use those funds for the down payment."

If you meet the Canada Revenue Agency criteria as a first-time buyer, you can withdraw up to $25,000 from RRSPs to buy or build a qualifying home. Mr. Suddaby says you may also borrow funds to put into an RRSP and then withdraw those after 90 days to generate a down payment.

"The borrowed loan affects your total debt service," Mr. Suddaby says. "If you contributed to an RRSP earlier this year, there's a chance you would get a tax refund that can also be used as a down payment."

If you are receiving child or spousal support, these can count as income. Mr. Suddaby says many clients come to him too soon after they become single. The separation must be legally documented and the lender needs to see a clear record of payments. Mr. Suddaby says a home with a separate rental unit can generate more income, but it is critical to get good advice on all the expenses involved and work out if the additional time and effort is worth it. If you do not qualify now Mr. Falkowski says don't give up, have a plan.

"If they take a look at their financial situation: They can't get a gifted down payment; their RRSPs are a little low; it's never too late as long as they put a plan in action," Mr. Falkowski says. " 'With what I can put away, I can buy a place in two, three years or whatever.' In the time frame that they're actually starting to save they could meet someone and they could start saving together."

THE LOW DOWN ON LOW FEES

The common cents of strata fees
Keeping costs low may put future building maintenance, repairs at risk
By Tony Gioventu, The Province
June 19, 2011

Q: Our strata council is under a lot of pressure from our owners to keep our strata fees down, but it means we are going to have to reduce maintenance and services to our building.

We have been checking out strata fees in the Abbotsford area, and while we are a bit on the higher side, we do have some additional services that other apartment complexes do not.

Is there some way to compare our strata fee rates in a 61-unit woodframe building with other regions of the province? It would be helpful if there was some way of knowing whether our fees are in line or not.

We had a real estate agent at our AGM in May who recommended we keep our fees low and simply have special levies when we needed them for repairs, but that appears to us to be self-serving for the agents and not realistic for the strata corporations to be able to operate; and if we maintain strata fees at exactly the same rate as last year, we will likely be facing a

A: Comparing your fees to another strata corporation will only establish a comparison of the amount, but will not take into consideration any of the services, amenities, maintenance or operational functions, geographic variations, landscaping functions, or even the basic building construction and durability of each of the properties.

Strata fees are set by approving the annual budget. The annual budget is proposed by the strata council to the owners at the annual general meeting, and based upon the amount approved in the annual budget and the contribution to the contingency reserve fund, that amount is used to calculate the monthly contribution of each strata lot.

We did a research comparison in 2008 between two almost identical properties in Richmond and Nanaimo.

Both were approximately the same age, design, number of units, basic construction, and offered the same services. Both had central heating and hot water which were included in the monthly strata fees and had a comparable history of operations. The one main difference was that strata fees were almost 50-per-cent higher historically in the Nanaimo strata, and the main influence was an integrated maintenance and operations plan in their annual budget.

At the time, the Nanaimo strata was not facing any special levies for major repairs, while the Richmond strata was facing two levies for roofing and balconies.

The process of annual budgeting really has little benefit if a strata corporation has not created a maintenance and operations plan and simply agrees that last year's budget seemed to work because it balanced at year end.

What you should really assess is: "What did we leave out last year?" A basic inventory of your major building components and an understanding of the maintenance and inspection requirements each year will have an overwhelming benefit to your strata corporation if you provide enough funding to meet those obligations.

With an aging strata inventory, the grim reality of neglected maintenance and repairs is rapidly setting in. Much of that problem is caused by underfunded budgets and low strata fees, the genesis of which was often created by the development industry showing artificially low budgets to make new housing more affordable and attractive.

Consumers are now faced with rising special levies for the replacement and renewal of major building systems that have not served out their full life expectancy, often due to neglect; and that neglect is usually linked to lack of funding with no planned maintenance and operations plan.

In addition, rising energy costs are absorbing the desperately needed increases for maintenance and renewals.

If you show a simple graph of a building aging and the costs to operate, both lines should run on a rising parallel.

For every year a property increases in age, the life of the roof, windows, balconies, plumbing, elevators, proportionally decreases until they are renewed. The more important question ever yone should ask: " Are our strata fees high enough?"

Tony Gioventu is executive director of the Condominium Home Owners' Association.