When renting is an appetizing option

I am always amazed when I read these types of articles.  More often than not, the couples they interview are in very good financial positions and have a number of options when considering to purchasing real estate.  Yet, every time advisors advise them to wait and buy later.  Save more money for 4-5 years and then consider buying once you have a LARGE savings built up, around 25%.

Why is this the only solution given?  Especially when dealing with a volatile product such as real estate? Waiting 4-5 years could do good, however, considering the market were in, buying in 1-3 years might be a better use of your money should prices drop and interest rates remain low.  By sticking with a 5-year buying plan, thousands of dollars in built up equity could be missed.  By not looking outside the 3-bedroom house dream and considering a smaller unit, say a condo, potential ownership could be postponed for longer than hoped.  What if prices don’t lower, interest rates get higher and mortgage rules change again.  I always believe there is some “extra” value in entering the market with a lower cost investment to start. Refinancing options can give opportunity to use the equity when you are ready to upgrade, while possibly keeping your first property as a rental.

I urge couples and individuals to take a serious look at your financials. Understand that timing is important, but to take advantage of it, you also need to be watching the market.  A plan that doesn’t involve watching and understanding what’s happening in the market and how interest rates are changing, is a plan that could potentially cost you.

Work with a financial planner and a mortgage professional so you have an expert working with your best interests in mind.  Consider filling out a mortgage application, even if you feel your not ready to buy now, it will get you an idea of what you can afford. Do it again in a year or year and half.  Review what has changed and learn how theses changes effect your buying power.   By doing that simple step, you will be able to identify when the time is right for you to purchase, taking into consideration your current income, down payment, expected mortgage approval, and the market prices.

…”Although their income will more than double once Carrie begins working, “we don’t feel we can buy into the Vancouver real estate market because the costs are still astronomical,” Jordan writes.

They are looking for a three-bedroom house because they are planning to start a family at some point.

“We’re dead set against moving to the fringes of the city just to afford a house,” Jordan writes. “We’d rather rent than give up our lifestyle.”

Their question is twofold: What should they do with the down payment money they have saved – proceeds from the sale of their previous house plus savings – until they can afford to buy; and how long must they wait before they take the plunge into the high-priced Vancouver real estate market?”…Read More.

More Mortgage Rules Clouding Over Canada

THE RULES If you would have asked me a month ago if the mortgage industry would be hit with another round of government regulations I would have said it’s possible, but HIGHLY unlikely.

After stating in April that he was not going to intervene in the housing market, Minister Flaherty suddenly thought different. On June 21st, Flaherty felt the need to make a drastic announcement implementing changes to the mortgage regulations to curb what could inevitably be the bust to a potential housing bubble.

We’ve seen a great example right before our eyes of what could happen to a thriving economy should the wrong pieces happen to fall into the right place. Our American friends have experience one of the greatest economic downturns in modern history. Greed mixed with poor regulation lead to a crippling effect to millions of US citizens, homeowners or not. Many other countries (Greece, France, Spain, Ireland, etc.) have or are experiencing similar downward spirals.

Minister Flaherty put some personal reasoning behind this government legislation, addressing comments and thoughts about his children now entering the market.

Out of fear of rising household debt, and the inability to increase mortgage rates to curtail borrowing, it was decided to protect all Canadian from themselves by implementing the following rules:

1. Changes effect insured mortgage loans starting July 9, 2012 2. Maximum Amortization reduced from 30 years to 25 years 3. Maximum refinancing now 80%, down from 85% loan-to-value 4. Maximum Gross Debt Service ratio of 39% from 44% 5. Mortgage Insurance will max out at a property value of $1 million

OSFI will be implementing their own changes late summer/fall, which include limiting the maximum loan-to-value on HELOCS to 65% (from 80%), having stricter rules on variable rate qualifications, increasing stated income proof and eliminating cash back mortgages.

Click here for a full listing of Q and A’s from the Department of Finance website.

THE CAUSE AND EFFECTOur TMG President, Mark Kerzner points out in his blog “More Change to mortgage rules,” that these recent changes are even more drastic than those we have experienced in the past. He provides this example:

Moving amortizations from 30 years to 25 years is NOT the same as when they were reduced from 35 to 30 years. For example:

A $250,000 loan amount for 5 years with fixed interest rate of 3.29% the monthly P&I payments are as follows:25 year amortization = $1,220.6330 year amortization = $1,090.44 (The monthly cash flow difference between 25 and 30 years is $130.19)35 year amortization = $999.86 (The monthly cash flow difference between 30 and 35 years is $90.58)

In this example the delta between the two is nearly 30% – a significant difference. In an economic report released this morning from CIBC it was estimated that “the direct impact of this move alone might cut the value of mortgage originations by close to 2%.”

Kerzner also notes that the unfortunate bystander in these changes is the first-time homebuyer. CIBC published a report showing habitual borrowers to be skewing the debt-to-income ratios and the over 45 year-olds nearing retirement, were a demographic with rising risk, two groups that won’t be as harshly effected with these changes.

First-time buyers looking to put less than 20% down will now need to put more money towards living expenses each month. They will save on interest costs and be out of mortgage debt faster, but it might come at a cost of less discretionary income or paying higher interest rates on other forms of debt such as credit cards or lines of credit.

CHANGE FOR THE GOOD We are definitely headed for change, but that’s nothing new, that seems to be standard with the housing industry. However, change doesn’t necessarily mean bad. Canada will hopefully come out stronger because of these new rules and perhaps if the market drops as it’s expected, first-time homebuyers will still have the opportunity to get into the market with a home that is priced sensibly while mortgage rates are still at all time lows.

BUYERS I still believe real estate is a great long-term investment. The changes will require buyers to take more time to understand their financial position and assess how they want to move forward. Meeting with a mortgage professional and a financial planner are great ways to start planning and preparing for purchasing real estate.

Interest rates are expected to remain low, coupled with the potential lowering house prices, buyers will likely have negotiating opportunities instead of bidding wars. Further more, homeowners maybe able to take advantage of upgrading their home at a savings to earlier prices. This could pay off well if you have the time to wait for the sale of your current property while having an offer on or looking for your second property.

SELLERS For those needing to sell, I recommend looking at the option of renting your property, that is, if it makes sense to do so. Projections are for rental rates to increase as rental availability decreases with fewer buyers in the market. If you look at the States today, its more expensive to rent than it is to buy in nearly every major city. However, most Americans are still not in a position to buy due to income, credit rating requirements or bank lending capabilities. I don’t think we will experience this extreme, but I think we will have a similar effect. Lenders are already getting much tighter with their mortgage lending.

If you have to sell, there can be ways to come out ahead. Search for other areas or type of properties that may have dropped more/similar in price to what you experience with your home. Look to buy unique properties (one in a million, not one of a million) that should sell more quickly if you needed to sell again in a down market. Doing a bit of personal research and spending time with your Realtor to understand what is happening in the market now can make a big difference to your return on investment.

CONCLUSION It was a shocking month to the housing industry, but in speaking with Mark Kernzer, I think he summed it up best with “It’s surprising, it’s unnecessary, but it’s not the end of the world.” We’ll make it through this bump in the road – just as we have every other time!

From my home to yours… -Irene

Ridiculous Regulation & Vancouver Affordability

Regulation Implications

Pressure was on the mortgage industry yet again this past month. There was great concern about OSFI’s (Office of the Superintendent of Financial Institutions Canada) proposal requiring owners to reapply at renewal. Immediate concern by banks, brokers and industry associations flooded the headlines describing the devastation that this regulation could do to the entire economy.

It made me wonder why such a change would be suggested. I have come to three conclusions:

1. Regulators are not familiar with the every day process that is involved with completing mortgage underwriting. 2. They wanted to show their authority and prove to lenders that they have the power to take major lending controls into their own hands. 3. They put it on the table, never thinking of implementing it, but to use as a tool to get the other changes accepted more easily.

If the reasoning were for anything other than point 3, I have my concerns for the decision makers at OSFI.

Did they truly think this through before announcing it? By requiring reapplication at renewal, the economic standards we have today would completely change. Homeownership would become even more of a lifestyle commitment, changing the way people live their life and the decisions they make for their careers.

If your mortgage was coming up for renewal and your income is no longer what it once was, for whatever reason, new job, starting a new business, staying at home to raise a family, there’s a chance that your renewal application would not support your current mortgage. Solutions may require special financing at a higher interest rates or placing people in position forced to sell. If your property value has dropped below the value of your mortgage, this also could put some borrowers in default or foreclosure risk. Would lenders be willing to lend on your mortgage value rather than the new lower property value?

Of course, this is a worse case scenario, but the point made by the professionals in the industry was, if the client has consistently made payments and the lender has no reason to believe that the client would default, why would the reapplication be necessary? It would be adding unnecessary paperwork and stress.

Leading me to the question, why put out such a threat, a seemingly ridiculous regulation that would transform our entire economy, especially at a time when Canada is one of the strongest economies around?

My hope is that they were just trying to get some other regulations passed more easily, if not, we may be dealing with a regulator body that doesn’t understand the daily operations of Canadian Mortgages…then, we might just have a bigger problem than Canadian debt levels.

As of June 6th, OSFI confirmed that they will not implement the re-application proposal, but did finalize some restrictions to HELOC (Home Equity Line of Credit) borrowing. Currently, borrowers are able to refinance up to 80% of their property value, the new maximum will be 65%. I’m not a fan of this new rule, but I understand the reasoning. I just hope, when the government doesn’t believe personal debt concerns aren’t so high, that Canadians will be granted access to the equity in their homes that is rightfully theirs… In the mean time, borrowers can consider mortgaging through a credit union, which are not regulated under OSFI.

When it comes to mortgages and the constant industry changes, the past two years being no exception, having a mortgage specialist on your team can help to sift through all the clutter. They can help to advise on the different types of lenders and guidelines to see what products are truly the best for your financing needs. It’s a big purchase; it’s worth getting some free advice from a pro!

Can we “afford” to live in Vancouver?

Toronto’s heated and Vancouver’s cooling markets have been big topics in the news with the affordability factor as an underlining theme.

Vancouver is well known for it’s high cost of living. RBC Economist reported that Vancouver’s combined costs of mortgage payments, utilities and property taxes requires 89.9% of pre-tax income to pay for a standard bungalow. A monster of a number, comparatively speaking, to Toronto’s 53.4% and Calgary’s 36.7%.

Prices are still trending up, but they’re not projected to last. Having experienced four consecutives months of slowing sales, many are questioning if Vancouver will experience the “pop” of the bubble…if there is even a bubble to speak of. “The bubble” is one of the great debates between economists now. For most, they believe that their will be a slow correction, for others, they believe we will experience upwards of a 25% drop in housing prices over the next 3 years.

So much speculation and so many unknowns; I believe it is good weight the pros and cons, but also believe it’s important to understand that you can’t control economical factors. You can, however, control how you manage your financial position within the economy.

I wouldn’t really say there is a wrong time to buy, but rather a wrong property to buy. The best real estate investment one can make is in a good Realtor. A Realtor that knows the market inside and out and is well aware of the “good” buildings and homes available on the market, should have an opinion on where “next hot spot” is and what plans the city has for growth projections. Don’t be sold on a property just because the Realtor is a good sales person or you feel pressured to buy. You should be buying because you found something that has value to you and that value can be passed onto future purchasers if  and when you plan to sell.

Vancouverites have to focus on whether they want to buy with long-term intentions (not having to sell in a down market) and what kind of life style they want to enjoy (willing to sacrifice space for accessibility). The Metro Vancouver area is beautiful. We are very fortunate for where we live and as such, have to pay a premium. If you want to own, be sure you are excited and would love to call that place home or would be willing to keep it as an investment property.

Vancouver will always be a national leader in the “unaffordable” bracket, and there are a number of reasons why. If you chose to buy it’s usually due, at least partially, to your belief that it’s one of the best cities in the world…and it’s worth the investment.

Lessons learned from Canada’s real estate trenches

Diane Nice from the Globe and Mail summarizes a 4-part series on Buyers Diaries.

Week 1: House hunters not impressed by what a hefty price tag gets Week 2: DIY mistakes a turn-off for house hunters Week 3: The dirty tricks sellers play to push up real estate prices Week 4: Lessons learned from Canada’s real estate trenches 

Buyers blogged from Toronto, Winnipeg, and Burnaby about their month long experience.  Interesting challenges emerged from each city, however, the common underlining theme was disappointment and discouragement.

Buying a home is supposed to be a pinnacle point in your life; The transition from renter to owner, family upgrade, rewarding oneself for personal achievements or going through a necessary life adjustment.

In all cases, you need support. Connect with experts that can make it the process the way you need and want.  Understandably, there are fears and insecurities to the transition and the costs associated with buying, but that’s why building a team can help you make the right decisions and improve the likelihood of an enjoyable experience.

Find a Realtor that you like and trust.   They are your personal shopper, so make sure you like what they are doing for you, if not, get a new one.  There are 18,000 Realtors in the lower mainland, only a few are really good at what they do.

Find a Mortgage professional to review your mortgage options and see if there are other considerations to explore.  If you provide the financial details, your mortgage professional should be able to provide you with a few alternatives that can work for you.

Lastly (which should actually precede all others), consider spending some time with a financial planner to create a plan.  A plan that fits with your life goals and determines a strategy for owning, investing and budgeting accordingly.

Mortgages: To 2.99% and below!

We won’t be going too much below 2.99%, but BMO has put the heat on again to get the consumers thinking and the competitors talking.

The BMO no-fills product will attract some clientele, however, even the BMO Mortgage Specialist are aware that this product isn’t for everyone. One of my clients, a BMO account holder for over a decade went to check it out in January when they launched the first ever 5-year fixed rate below 3%. The mortgage specialist honorably told her that this was not a product for her.

The product offers a limited 25-year amortization, 10% lump sum payment per year and/or 10% increase on monthly payments, no skip payment options, no additional access to products such as credit lines, and a fully locked product restricting any access to equity. This is not for those who are concerned with the changes that come with living life.

It has been mentioned that first-time homebuyers, rental property owners and owners of second homes may find this product suitable. However, even those in my opinion would be have to be very specific cases, with individuals in predictable futures to be able to determine what the next 5 years will bring.

For me, first-time homebuyers should not be included in this list. They are a vulnerable group, not due to foreclosure concerns, but that they will likely undergo changes involving their home prior to end of their 5-year term. Entering a fully closed, restricted mortgage can drastically impact their real estate investment strategy by eliminating a number of options (such as using equity for reinvestment or upgrading) and ability to seek other services.

Rental properties and second homes are potentially good options for this product. It would keep the payments consistent and at a low interest rate, however, the borrower would need ensure that they are fine with the invested equity being locked in for the next 5 years.

On average, households make changes to their mortgage every 3.6 years.  This means that only a small percentage actually complete a 5-year term.  Therefore, having flexibility with a mortgage, in most cases makes sense.

With the restricted use of this product, the consensus from many in the mortgage industry is that BMO is using this 2.99% product to bring clients into the bank, not to sell the 2.99% product, but to “up sell” or “cross-sell” them on a more appropriate and flexible product listed at a higher market price. A marketing approach to get consumers to react to the low rates, but then sold on a mortgage that is more aligned with their needs at a much greater cost.

As for my client, I’m not sure if the BMO specialist tried to sell her to another product, however, I know my client quickly realized the value of having flexible options and the level of service she was receiving from the Mortgage Professional (Broker) channel. Having over 40 lenders to choose from, there is always a product, service and lender that can be the right fit with competitive rates. Shortly after her visit to BMO we found her a full-frills 5-year product, with flexibility and options to suit her unknown future at a very comparable and competitive rate of 3.09%.