Sun

Buying a home is an exciting prospect. But before you take that step, there are many things you need to know to make a wise choice. The Canadian Bankers Association advises that most importantly, you need to take your time and do your homework.

The first thing to keep in mind is that buying a home is never a simple proposition. Not only do you need to consider your budget, lifestyle and location, you need to look at the many housing and mortgage options. Do you want a new home or a resale property? A detached home, a condo, a townhouse or a mobile home? Is it freehold or leasehold land? What about your mortgage? Do you want it open or closed? Long or short-term? Fixed or variable? Special features like pre-payment options, portability or assumability? What about mortgage insurance? What should you expect from your real estate agent, lender, lawyer, notary, home inspector and builder?

You should also monitor the market to see if prices are rising or falling and watch interst rates. The more closely you watch market conditions, the better your chance of getting the best investment for your money.

If it sounds complicated, it is. But by doing your homework and carefully looking at all of your options, you can make an informed decision about home ownership. Whether you decide to buy now, later or not at all, the more research you do, the more certain you can be that you’ve made the right choice.

Remember that having the down payment is just the first step; you need to be sure that you can afford the “extras” and ongoing costs of owning a home.

Also consider whether buying is, in fact, the right choice for you. We’ve often heard that buying is always better than renting. From an investment point of view, this isn’t always the case. When comparing owning to renting, it’s a numbers game: you have to add up all of the figures, including the cost of your home, the size of the down payment you require, utilities, immediate repairs, interest rates and insurance, and compare them to how much you spend on rent. Visit www.cba.ca or the Canada Mortgage and Housing web site at www.cmhc.ca for helpful worksheets and tips.

© The Vancouver Sun 2008

The size of a down payment can vary. Depending on the type of mortgage, down payments generally range from zero per cent to twenty per cent of the purchase price.

Sun

To obtain a conventional mortgage, home buyers are required to put down at least 20 per cent of the purchase price or appraised value (whichever is less) as a down payment. If you don’t have the necessary time or resources to save a full 20 per cent down payment, you can choose a high-ratio mortgage and buy a home with no down payment. This option is called a high-ratio mortgage and it requires you to purchase default insurance.

Whether you choose a conventional or a high-ratio mortgage, one thing is almost always certain: the larger your down payment, the more you save in the long run. A larger down payment —

Reduces the amount of your monthly principal and interest payment

interest you pay over the life of your mortgage

Speak to a mortgage specialist to show you how much you could save, and show you many more money-saving strategies.

Ask about the RSP Home Buyers’ Plan

The RSP Home Buyers’ Plan (HBP) lets a first-time buyer withdraw up to $20,000 from RSPs for a home purchase. The withdrawn amount must be repaid within 15 years, subject to a minimum annual repayment that is 1/15 of the amount withdrawn. If the full $20,000 is withdrawn, the minimum annual repayment is $1,333. If less than the minimum is repaid in any particular year, the balance is added to the taxpayer’s income.

Want more information? Check the Canada Customs and Revenue Agency Publication

Insuring your high-ratio mortgage

CMHC or Genworth may insure a mortgage for up to 100 per cent of the lending value of the house. Therefore, purchasers do not need a down payment. Eligible borrowers include anyone who buys a home in Canada intending to occupy it as their principal residence.

Purchasers can use up to 32 per cent of their gross family income for payments of mortgage principal and interest, property taxes and heating. A buyer’s total debt load (including consumer loans, etc.) cannot exceed 40 per cent of the gross family income.

People who insure a mortgage loan with CMHC or Genworth pay a premium. The premium is based on the down payment and loan amount. Typical fees range from 1.00 per cent to 3.50 per cent of the principal amount of your mortgage.

© The Vancouver Sun 2008

Sun

Buying a home is one of the biggest decisions you’ll ever make. So when it comes time to signing on the dotted line, make sure you don’t make that decision alone.

To help you put together the right team of professionals, Canada Mortgage and Housing Corporation (CMHC) offers the following whose-who list of experts and what they should bring to the table:

Real estate agent. Among other services, your real estate agent will help you find a home, write an Offer of Purchase, negotiate a purchase on your behalf and save you a considerable amount of time, trouble and headaches. When choosing the agent you want to work with, don’t be afraid to ask questions or call your local real estate association for advice.

Lender or mortgage broker. Many different institutions lend money for mortgages, including banks, trust companies, credit unions, caisses populaires, pension funds, insurance companies and finance companies. It can be a good idea to shop around and speak with more than one lender before you make a choice. Many Canadians choose to work with a mortgage broker because mortgage brokers don’t work for any specific lending institution, they can often help you find a mortgage with terms and rates that will suit your needs.

Lawyer (or notary in Quebec). A lawyer can help protect your legal interests by ensuring the property is clear of liens, charges or clean-up orders and will review all contracts before you sign them and your Offer (or Agreement) to Purchase. Make sure your lawyer or notary is a licensed, full-time professional who understands the local laws and regulations, has reasonable fees and can explain things to you in plain language.

Home inspector. When considering purchasing a home, you should hire a knowledgeable and professional home inspector. He or she will be able to tell you if something in the home is not functioning properly, what repairs need to be done and whether there may have been any problems in the past.

Insurance broker. An insurance broker will help you with property and mortgage life insurance. Your lender can also help you with mortgage life insurance.

Appraiser. An appraiser will assess your property’s worth and help protect you from paying too much.

Land surveyor. You may need the services of a land surveyor if the seller does not have a current Survey or Certificate of Location.

For more information on putting together your homebuying team and on other factors associated with buying a home, visit www.cmhc.ca, and search Homebuying Step by Step or call CMHC at 1-800-668-2642. For more than 60 years, CMHC has been Canada‘s national housing agency and a source of objective, reliable housing expertise.

© The Vancouver Sun 2008

 

Financial crisis in the U.S. taking hold of market psychology, analyst says

Derrick Penner
Sun

Greater Vancouver closed March with its slowest first-quarter for sales since 2001, Canada Mortgage and Housing Corp. analyst Robyn Adamache said Wednesday in an interview.

Both the Greater Vancouver and Fraser Valley real estate boards reported Multiple Listing Service sales off 2007’s pace, with inventories also climbing, which Adamache said is consistent with her forecast for the market to moderate.

The ability of buyers to afford homes at Vancouver‘s high prices is still one of the factors constraining sales, but Adamache suspects that uncertainty sparked by news about the financial crisis in the United States is also taking hold of the market psychology.

Tsur Somerville, director of the centre for urban economics and real estate at the Sauder School of Business at the University of B.C., added that his sense is that the market psychology has shifted from “unmitigated optimism” to caution, given what has happened in the U.S.

“People are cognizant of risks to real estate in a way that, two years ago, they weren’t entertaining,” Somerville added.

However, in speaking to Greater Vancouver’s numbers, Adamache added that while supply and demand in the market are balancing out, the ratio of sales to new listings being added to the market still favours sellers by a significant margin.

Also, Adamache said, on average, homes are selling for 98 per cent of their list price, which is also consistent with a seller’s market.

“[Sales are] still very high by historical standards,” Adamache added. “The other reason, other than [low] mortgage rates is that we’re still expecting the two big fundamentals [of] job growth and population growth to continue strong this year.”

Adamache is still forecasting that price gains will slow into single digits as the year unfolds, though she doesn’t believe they will reverse into a correction this year or next year.

In Greater Vancouver, realtors saw 2,997 sales through the Multiple Listing Service in March, compared with 3,582 in March 2007. New listings added to the market in March were up four per cent to 5,674 compared with the same month a year ago.

Prices, however, remain elevated with the benchmark price of a so-called typical single-family home hitting $764,616 in March, 12 per cent more than March 2007.

In the Fraser Valley, property inventories hit a 10-year high in March, the Fraser Valley Real Estate Board reported, with total active listings up 27 per cent to 9,361 units compared with a year ago, although new listings in March were down from the same month a year ago. MLS sales in the Fraser Valley of 1,315 units represented a 25-per-cent decline from the same month a year ago.

The March average price for a single-family home was $550,259, which is up 8.1 per cent compared with the same month a year ago.

Kelvin Neufeld, president of the Fraser Valley Real Estate Board, said he doesn’t get the sense that his clients are any more nervous than they have been about buying.

He added that investors see the market slowing down, so they sense that now is a good time to sell, which is driving some of the listings. Buyers, Neufeld said, are still in the market, but are taking more time to make decisions.

Scott Russell, first vice-president of the Greater Vancouver board, added that the amount that central banks are cutting key interest rates, and the effect that will have on lowering mortgage rates, should help bring more buyers into the market.

© The Vancouver Sun 2008

 

 

Expensive, but more plentiful real estate

Wendy McLellan
Province

Prospective homebuyers are still facing high prices for Lower Mainland real estate, but at least they have more properties to choose from, according to new figures released yesterday.

In the Fraser Valley, the number of active residential listings in March reached 9,361, up 27 per cent compared to March 2007 and the highest number of properties available at one time since 1998.

In Greater Vancouver, the realestate board reported a total of 13,063 active listings at the end of last month, up from 11,137 for the same period last year.

Both the Fraser Valley and Greater Vancouver real-estate boards reported the number of sales declined last month compared to March 2007. In the Fraser Valley, properties stayed on the market a little longer last month.

“With a significant increase in product and properties taking longer to sell, we have a more competitive market for sellers in the Fraser Valley right now, yet enough demand to keep prices trending upwards,” said Kelvin Neufeld, president of the Fraser Valley board.

In Greater Vancouver, property sales declined 16.3 per cent last month compared to March 2007, with attached properties sales down 21 per cent. Prices increased for detached, attached and apartment properties last month with single-family home prices gaining the most at 112.1 per cent over the same month last year.

Fraser Valley sales were down 25 per cent compared to March 2007, but prices increased in all categories. Single-family homes sold for an average of 8.1 per cent more than last March, while townhouse prices increased by 8.6 per cent and apartments by 13.6 per cent.

Buyers with a floating rate better off 90.1% of time, survey finds

Keith Woolhouse
Sun

Nearly every decision when buying a new home hinges on money. The price of the property, the regularity of the payment, the mortgage term and the amortization period are all decisions dictated by money and being able to pay the mortgage on time.

There is one decision, however, that is influenced primarily by emotion and the tolerance for risk.

It’s the choice between a fixed rate and a variable rate.

In the fixed-rate camp are the security seekers, those who seek comfort in the knowledge that their repayment will be the same, month in and month out, regardless of the terms of the mortgage.

In the variable-rate camp are those who are prepared to gamble, never knowing from one payment to the next — although that paints it in its darkest terms — how much the next payment will be.

While money plays a part in making this decision, the greatest motivator is the risk factor. It’s the ultimate gamble and it’s not for everyone, which is why an estimated 70 per cent of Canadians opt for the fixed-rate mortgage believing that not only will they sleep better at nights, but that they are making the soundest decision in this, the biggest investment of their life, and it is the safest and most financially prudent course to follow.

They are wrong. Not all of the time because interest rates have fluctuated widely in the past, but they’re wrong nearly 85 to 90 per cent of the time. That makes their decision to opt for the more conservative fixed-rate option the wrong choice.

“A lot of Canadians like the psychology and the security that comes from a fixed-rate mortgage that is predictable and constant for the next five to 10 years,” says Moshe Milevsky, associate professor of finance at the Schulich School of Business at York University, Toronto, who has studied the fixed-rate versus variable-rate conundrum extensively.

“They like the comfort of knowing exactly what their salary is, exactly what their expenses are, exactly what their mortgage is. For those people the fixed rate is the way to go. But if you are willing to take a little bit of a chance, and you can tolerate the fluctuations, then the odds favour the open variable-rate mortgage.”

Advocating a variable rate mortgage is not based on a speculative or bearish bet on interest rates, he says.

“It should depend on a client’s tolerance for risk — the same concept used in traditional asset allocation — and their ability to withstand increases in mortgage payments.”

In the worst-case scenario, soaring interest rates could mean having to cough up an extra couple of hundred dollars a month. But this would be balanced by the fact that in previous months the mortgage expenditure was less.

In a subsequent study, covering the years between 1965 and 2007, Milevsky compared homeowners with outstanding balances of $100,000 and three five-year terms remaining. The study showed that those with a floating rate mortgage were better off 90.1 per cent of the time, regardless of when their mortgage began.

Those who chose a variable rate and made the same repayment, benefited by paying off their mortgage between eight and 19 months sooner, depending on the amortization period.

Despite the studies showing that those with a variable-rate mortgage come out ahead, Milevsky is reluctant to recommend one option over the other when it’s not his money at stake.

“This is a risk-versus-return decision that depends on a client’s personal tolerance for fluctuating mortgage payments and interest rates. There’s no one-size-fits-all-solution.”

With central banks now leaning toward lowering their lending rates, the choice in the near term favours variable rates. But no one can predict with accuracy where rates will be over the longer term.

Milevsky is sure of only one thing. He has an open variable-rate mortgage and has no intention of locking it in.

© The Vancouver Sun 2008

 

Darcy Keith
Sun

It’s a tempting proposition: after years of writing cheques to the bank to pay off your mortgage, the bank will write a nice big cheque for you.

That’s the allure of reverse mortgages, which allow anybody 60 or older to borrow money against the value already built up in their home. With the number of 60-year-olds in Canada expected to double in the next 25 years, demand for the product is expected to grow.

Seeing that as an opportunity, a new provider of reverse mortgages has arrived in Canada, providing some competition to the Vancouver-based Canadian Home Income Plan, which has become almost synonymous with the product over the past 20 years.

Seniors Money Ltd., based in Mississauga, Ont., started selling reverse mortgages in Ontario in 2007. By this past February, it had expanded into every other province except Quebec, a market it expects to enter later this year or in early 2009.

There are differences between the two competing reverse mortgage products, but the basics are the same. They allow a person or a couple to convert up to 45 per cent of a home’s equity into cash, providing extra money that can come in handy during the retirement years when there’s an absence of a regular income stream.

A homeowner will usually get a lump sum upon opening an account and will make no interest payments, although the products are offering options now to receive the funds in regular instalments and make some payments along the way. Home equity gradually decreases as the debt load goes up, but the products are designed to leave a homeowner with at least 50 per cent equity at the end of a reverse mortgage, and promise total charges will never be more than the value of the home. Reverse mortgages get repaid when a homeowner dies, the house is sold, or a pre-determined term ends, often set at 10 or 15 years.

Reverse mortgages are still a niche market; CHIP currently has 6,600 of them outstanding in Canada worth over $700 million. But they appear to be catching on with seniors, who are estimated by Statistics Canada to have 77 per cent of their net worth in their home equity. According to Greg Bandler, senior vice-president of sales and marketing for CHIP, the company’s business is now growing by more than 20 per cent a year.

Financial experts warn there are drawbacks. Reverse mortgages, for instance, charge interest rates that are usually two to three percentage points higher than a simpler home equity line of credit, which some financial planners suggest as a better alternative.

Seniors Money offers a variable rate calculated as the bank prime rate plus 1.25 per cent, while CHIP’s rate is prime rate plus 2.0 per cent. But Seniors Canada’s interest compounds monthly, while CHIP’s compounds semi-annually. Some customers also are eligible for discounts under the CHIP plan.

“This is a product for people who either can’t make any payments or don’t want to make any payments, and they are typically looking to free up cash flow,” says Nick DiRenzo, president and CEO of Seniors Money Canada.

Reverse mortgages help seniors to “squeeze a living out of their home, so they don’t just have to sit there on the old nest egg like their grandparents did,” adds PJ Wade, strategist and Toronto author of the reverse mortgage primer Have Your Home and Money Too.

The best candidate for a reverse mortgage is somebody who wants to stay in their existing home for the long haul, but has no major funds or employment income to draw on and doesn’t have other options to raise cash, such as taking in a border or reorganizing their finances, says Wade.

If a homeowner can be just as happy downsizing and moving somewhere else, then the reverse mortgage is not the right route, she says.

“There are a lot of situations where there may be better options,” agrees Philip Shead, a Certified Financial Planner with Investors Group in Winnipeg. A line of credit, for instance, where a person pays off the monthly interest charges right away, may be a better fit.

© The Vancouver Sun 2008

 

It’s easier for buyers to invest in a recreational home

Suzanne Beaubien
Sun

Taking on a second mortgage is not a step most homeowners take lightly. But with more people seeking out second properties where they can escape the city, the financing of recreational properties is a market that has expanded in recent years.

More options are opening up to people ready to purchase.

Mortgage brokers say traditionally, lenders have seen recreational properties as less desirable investments.

“In general, it’s a much more narrow niche,” explains Todd Fralic, Mortgage Intelligence’s assistant vice-president for the Prairies.

“At one point it was nearly impossible to get a recreational property with CMHC.”

Consequently, the requirements for financing a second home were more stringent, requiring larger down payments — as much as 25 per cent — and ensuring the home met certain specifications.

But Canadian mortgage insurers have become less conservative in their practices as competition increased and baby boomers sought out second homes. Now new products from the Canada Mortgage and Housing Corp. and Genworth make it easier for buyers to invest in a recreational property — provided they meet a few conditions.

Under CMHC’s Mortgage Loan Insurance, approved lenders can offer recreational property buyers up to 100 per cent financing if the second home is accessible year-round and has the proper facilities to house residents 24/7. But if the buyer plans on renting out the property, he or she is excluded from using CMHC’s second-home product, says John McWilliam, of CMHC. Nor are time-shares eligible.

McWilliam cautions buyers that not all recreational properties are covered under CMHC’s mortgage loan insurance; only those that qualify as true second homes will be covered.

Genworth, meanwhile, offers a similar product for secondary homes, which it classifies as Type A to a maximum of $700,000. Type B properties, meanwhile, need not be winterized or accessible year-round but are financed up to 90 per cent and to a maximum of $350,000.

Calgary mortgage broker Michael Boyle of the Mortgage Group says most of his clients still aren’t making use of these new products.

“These programs that help finance recreational properties haven’t been used a lot,” Boyle says. “Typically, people buying recreational homes have the money to put 25 per cent down.”

That’s what Jon Dick did when he and his wife bought their Timber Ridge cabin in Invermere seven years ago; they put $75,000 down on the $300,000 home. They loved the location, and could see back then the Columbia Valley would become the vacation destination it is today. They subsidized their mortgage by renting it out. Today, the property is worth $600,000.

“I’m glad we bought when we bought,” says Dick, vice-president for Pine Ridge Mountain Resort. “It’s way easier to do today. Obviously, you have to have the income to support what you do.

“But there’s different ways of buying recreational property today.”

At Pine Ridge, for example, buyers who intend to join the professionally managed rental pool can purchase a property with just five per cent down. Many other resorts offer similar incentives, often through a single lender.

By doing that, the owner offsets his debt-servicing costs and is still able to get into the recreational property market at today’s prices, Dick says.

But some lenders shy away from financing properties that will be part of a rental pool, Fralic says. And the products offered by CMHC and Genworth exclude such situations.

There are other options that may appeal to Canadians who have seen the value of their homes skyrocket over the past few years. Both Boyle and Fralic say most of their clients are taking equity out of their first homes and putting it into their second to defray the costs of buying a recreational property.

Then, buyers aren’t subject to the same restrictions on useability, which means a cabin that can only be accessed by boat isn’t out of the question.

It’s a common practice, even for buyers shopping for a second home abroad.

Calgary accountant Mesh Dayal says he found financing his condo in Puerto Penasco, Mexico, no harder than financing his primary residence.

“We had equity in other property, which gave us the ability to borrow at favourable rates and use the proceeds to purchase in Mexico,” says Dayal.

But he warns, “It takes a little bit longer to go through the legal process in Mexico than in Canada.”

McWilliam notes buying property in another province or country involves finding local realtors, mortgage brokers, lawyers and home inspectors.

Often, Boyle adds, buyers may find it easier to start the process by asking for recommendations from trusted sources.

© The Vancouver Sun 2008

 

Mortgage life coverage has some drawbacks

Darcy Keith
Sun

Just the thought of it may send shivers up your spine: What if your mortgage outlives you?

Few want to confront such a daunting prospect when signing a new housing loan, but it can happen.

If you want to make sure your family isn’t saddled with burdensome mortgage payments in the event of an untimely death, one option would be taking out mortgage life insurance. It’s something most bank representatives will offer at the time of a mortgage signing.

While such insurance could provide peace of mind, financial planners urge caution before agreeing to the monthly premiums. Many customers could be better served with personally owned term insurance, which can provide more flexibility and, in some cases, cost less.

“This is not an area where you want to be an impulse buyer, and the results of making the wrong decision can be catastrophic,” says Mark Halpern, a certified financial planner and founder of illnessPROTECTION.com Inc. in Toronto. “People need to sit down with a competent professional to see how this fits in with overall financial planning.”

Mortgage life insurance sold by creditors is not to be confused with mortgage loan insurance, which is typically required by lenders when homebuyers make a down payment of less than 20 per cent of the purchase price.

One of the drawbacks of mortgage life insurance is it’s not portable should you sell and purchase another home. You’ll have to reapply, and could be hit with higher premiums if your health has deteriorated or if you’re deemed a higher risk — say, if you started smoking.

Mortgage life insurance also maintains the same premiums even as you pay off your home. In effect, the more the outstanding balance drops, the less your family can collect should you pass away, and the more expensive each dollar of coverage will be.

Halpern contends that, when examining comparable products, term life insurance is often priced the same or better than mortgage insurance. To get an idea of what term life insurance will cost, check out www.getterm.cc, a website run by Compulife Software Inc. that life insurance brokers often use.

Suppose you’re 40 years old, in excellent health, a non-smoker and taking out a $200,000 mortgage. RBC’s Insurance HomeProtector plan would cost $40 a month for single coverage. By comparison, term life insurance premiums, according to that website, range from $21.51 to $40.80 based on a 10-year term, and $31.14 to $67.27 for a 20-year term.

It’s worth noting that banks now often throw in disability and critical illness insurance as part of mortgage life insurance packages, which could make them worth considering based on the extent of your coverage needs.

MaryAnn Kokan-Nyhof, a certified financial planner in Winnipeg, says she almost always recommends individual life insurance over mortgage insurance. “One of the main reasons is individual life insurance belongs to you. You own it. The beneficiary is whoever you name it to be. It isn’t the bank first in line for the money.”

Mortgage life insurance can be bought and cancelled at any time while carrying the mortgage loan, notes Halpern. But if you do decide to switch to term insurance, make sure you don’t cancel an existing policy before being approved. You could be in for a nasty surprise if a bank turns you down for a new policy.

“Do the application, do the medicals, pay for the first premium, and then go ahead and leave the mortgage insurance,” Halpern advises.

Mortgage life insurance also has been criticized for using “post-claim underwriting.” That means a detailed analysis of whether a person can collect is done only after a claim is filed.

But Matthew Cram, a spokesman for TD Bank in Toronto, says the “vast majority” of mortgage life insurance claims get paid. He advises consumers to carefully read through the questions on the application. “Then, as long as they answer appropriately, they should feel confident that they are protected.”

Cram notes that mortgage life insurance is a product that is easily accessible at bank branches everywhere.

“Many Canadians find it difficult gaining access to an insurance broker whose main priority is to focus on higher amount policies and sophisticated solutions for high net-worth individuals,” Cram contends.

He says while term insurance may make more sense for some people, for others the two products can work together. For instance, if you’re starting a family, you might want extra insurance to cover a mortgage liability for a particular time period, like when your children are still living at home.

Mortgage life insurance can also protect a family’s largest asset when their total insurance needs haven’t been mapped out yet, he says.

© The Vancouver Sun 2008