As is always the case in the world of mortgages, rates are a very hot topic right now. Not just the ridiculously cheap current fixed and variable rates but also where they are headed in the future...something everyone wants to know. Unfortunately, nobody has a crystal ball to predict such things but as you'll see from the article below, the big banks pay out a lot of money to economists to try to predict the future of mortgage rates. What I take from it is that nobody can accurately predict where rates are going and that whatever you read should be taken with a grain of salt.
Reports generated by the big banks always predict huge increases in the very near future, regardless of when that near future is. These "scare" reports often get lots of press and put the fear into people that they need to lock into whatever they can right away and who wins in that scenario? The very people who commissioned those reports. Typically what follows is what we're seeing now, economists retracting their doomsday predictions but garnering less press.
I don't think I have a crystal ball nor do I think I'm smarter than the economists paid by the banks. However, what I typically tell my clients is that the rate market is built heavily upon economic stability. If our economy and the global economy aren't stable, then a rapidly rising rate market will only add to economic volatility...period. Of course the governments predict economic recovery and prosperity for all, that's what keeps them in office. But it's that rosy outlook that partly drives the economists' rate predictions. So if the economic prosperity doesn't work out the way Stephen or Dalton or whoever is doing the talking says it will, then economists have no choice but to pull back on their outlook.
Here is an article from Rob McLister of CMT, that provides great detail on the topic...
Over the past few months, major economists have backpeddled on their rate hike predictions.
Not long ago, the consensus of economists was projecting a July 19 increase. Now, those same analysts aren't looking for a rate bump until this fall...or later.
A slew of factors justify a deferral of rate increases, including:
• A parade of weak economic data from the U.S.—our key trading partner
• Core inflation that remains manageable
• Global economic risks
• Debt-laden consumers that are only cautiously spending
• A U.S. housing market that's double-dipping
• U.S. unemployment that may be structurally and permanently elevated
• A Canadian dollar that is still acting as a brake on our economy.
For reasons like these, TD Bank became the first major bank last week to predict the Bank of Canada would stand pat on rates through 2011. Depending on how the next rounds of economic data look, other banks may follow suit.
Then again, the rate picture can and does change.
BMO says: "...it is too soon to dismiss the possibility (of rate hikes in 2011)."
BoC chief Mark Carney recently said: "...The expectations, both in the medium term and sooner than the medium term, is that rates are not going to stay at these unusually low levels."
For now, here's what the Big 6 are projecting for rates through 2012:
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Latest Overnight Rate Forecast
The Bank of Canada's overnight target has a direct impact on variable mortgage rates.
Bank 2011 2012
BMO 1.50 2.75
CIBC 1.75 2.00
NBC 2.00 2.75
RBC 1.75 3.00
Scotia 1.50 2.25
TD 1.00 2.00
Year-end Avg 1.50 2.50
Chg vs Today +0.50 +1.50
(Figures above are year-end and rounded to the nearest 1/4 point increment.)
Latest 5-Year Government Bond Yield Forecast
Government bond yields drive 5-year fixed mortgage rates.
Bank 2011 2012
BMO 2.93 3.80
NBC 3.46 3.88
RBC 3.30 4.05
Scotia 2.85 3.35
TD 2.70 3.65
Year-end Avg 3.05 3.75
Chg vs Today +0.89 +1.59
(CIBC's 5-year bond forecast was not available.)
Caveats
The above projections should be qualified as follows:
1. With only four Bank of Canada policy meetings to go in 2011, some of the banks may soon defer or pare back on these rate increase estimates.
2. The Overnight index swap (OIS) market, which mirrors BoC rate expectations, tends to predict rate changes slightly better than economists. Currently, OIS prices are implying less than 50% probability of a rate hike this year. The next rate increase is not fully priced in until February 2012 (updated as of Friday's close)! Just a few months ago, the OIS market believed rates would increase on July 19.
3. Long-term rate outlooks have margins of error as big as 1.00% or more, so use them only as a rough guide (more on this below).
Variable-Rate Mortgage Forecast
Bank estimates, if accurate, imply a 4.50% prime rate by December 31, 2012. Prime rate is currently 3.00% and the 10-year average of prime is 4.33%.
Based on an 80-basis-point discount from prime, these forecasts suggest 5-year variable rates in the 3.70% range by year-end 2012. That's slightly higher than today's best 5-year fixed rates.
Fixed-Rate Mortgage Forecast
The banks predict that 5-year bond yields will rise to 3.75% in 18 months. That level would eclipse the 10-year average of 3.61%.
Assuming a typical 125 basis point spread above yields, these forecasts imply that deeply-discounted 5-year fixed rates could hit about 5.00% by year-end 2012.
************
Rate Forecasting In Perspective
The major banks spend millions to formulate accurate interest rate projections. Their economists utilize every data source, academic study, historical backtest, and analysis tool imaginable. Yet, try as they might, their forecasts are far from infallible.
Despite economists' notorious and continuous forecast revisions, long-term rate estimates still provide a useful reference point. Part of their value is in showing what might happen if the world unfolds without global crises and major economic disruptions.
With that reference point as a "base case," these forecasts can be useful for creating amortization models based on future rate assumptions. The key is to incorporate a reasonable margin of error in those models—one that's big enough to account for things like hyper-growth/inflation or the aforementioned economic disruptions.
Other Things to Note: Bank forecasts, like those above, are subject to frequent change. This data is therefore provided only for general interest. Always discuss your needs and risk tolerance with a mortgage professional before acting on any such information.
History has shown that it’s near impossible to accurately predict interest rates long-term, so use these figures at your own risk. That said, while economist projections are often wrong, they remain one of the better sources of educated opinion on interest rates.
“Chg” = the expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All estimates above are based on the respective year-end, except those of BMO. BMO forecasts the average rates for a given quarter, instead of the rate at the end of that quarter. Because of that, we have averaged BMO's Q4 and Q1 forecasts to estimate the year-end 2011 figure.
Bank estimates are taken from their latest forecasts published online. Overnight rate results are rounded to the nearest 1/4 point, in keeping with the Bank of Canada's standard rate setting increments.
Data Sources: BMO, CIBC, National Bank, RBC, Scotiabank, TD
Tuesday, June 21, 2011
Sunday, May 15, 2011
The Second Opinion...or Second Quote
Your Doctor diagnoses you with an illness, your mechanic tells you that your car needs $XX worth of work done to it...what do you get, a second opinion. A contractor tells you it’s going to cost $XX to finish your basement, a landscaper tells you it’s going to cost $XX for that beautiful new backyard...what do you get, a second quote.
There are so many situations or transactions that happen throughout our lives where we don’t just take what the first person tells us, we seek out the validation from someone else to confirm what the first person has told us. Why should that be any different with your mortgage? We’re in a world where prices are going up every day so we should be doing whatever we can to save ourselves money if possible. Most people wouldn’t take the first quote for a home renovation and say “looks good to me”. Who would pay the sticker price for a new car? So why would people do that with their mortgage.
I’ve written about this in the past but it baffles me that Canadians are so tied to their banks, believing that their best interests are always the top priority. They’re a business and their business is to make money from their customers, period. If your mortgage rate is X%, then they make less money than if your rate was X + 0.25% so what do you think they would rather charge you? I’ve been around the Financial Services industry long enough to know that people typically hold their banks in very high regard and that bond is definitely difficult to break so I’m not about to try to do that. Instead, I encourage people to talk to their banks about their mortgage, they’re probably going to anyways...BUT, let me give you a second opinion with no obligation. Unlike your bank, my compensation is the same whether your rate is X% or X + 0.25% so my top priority is making sure you’re getting the best deal because that creates a happy customer, which is what my business is based on. By getting a second opinion, you will either find out that you can get a better deal elsewhere and save yourself $$$ or you’ll find out your bank is treating you the way they should. Either way you make sure you’re not paying any more than you need to for your mortgage and you’re being given all the right options.
There are so many situations or transactions that happen throughout our lives where we don’t just take what the first person tells us, we seek out the validation from someone else to confirm what the first person has told us. Why should that be any different with your mortgage? We’re in a world where prices are going up every day so we should be doing whatever we can to save ourselves money if possible. Most people wouldn’t take the first quote for a home renovation and say “looks good to me”. Who would pay the sticker price for a new car? So why would people do that with their mortgage.
I’ve written about this in the past but it baffles me that Canadians are so tied to their banks, believing that their best interests are always the top priority. They’re a business and their business is to make money from their customers, period. If your mortgage rate is X%, then they make less money than if your rate was X + 0.25% so what do you think they would rather charge you? I’ve been around the Financial Services industry long enough to know that people typically hold their banks in very high regard and that bond is definitely difficult to break so I’m not about to try to do that. Instead, I encourage people to talk to their banks about their mortgage, they’re probably going to anyways...BUT, let me give you a second opinion with no obligation. Unlike your bank, my compensation is the same whether your rate is X% or X + 0.25% so my top priority is making sure you’re getting the best deal because that creates a happy customer, which is what my business is based on. By getting a second opinion, you will either find out that you can get a better deal elsewhere and save yourself $$$ or you’ll find out your bank is treating you the way they should. Either way you make sure you’re not paying any more than you need to for your mortgage and you’re being given all the right options.
Sunday, April 10, 2011
Why Use a Mortgage Agent?
• My services are free as the lender pays me a finder’s fee.
• Access to interest rates that banks don’t tell you are available saving you $$$$. Since Dominion Lending Centres sends lenders millions of dollars of new business each month, they always offer us the deepest discounts, which I pass that on to you IMMEDIATELY - whether you are purchasing, refinancing or renewing.
• I shop the market saving you time – calling me is like calling over 50 different lenders, including Banks, Credit Unions and Trust Companies – I have access to all of them so I can find you the best deal possible.
• I don’t work for any one lender, I work for you! When dealing with a bank they are looking after the company’s best interest first and yours second. My sole concern is your best interest and overall satisfaction.
• Isn’t it time the Banks compete for your mortgage business? I’ll provide you with some options so you can compare the two – what your bank is offering you and what I am able to offer you, then ultimately you decide which you feel most comfortable with. It never hurts to get a second opinion on the biggest financial obligation you will probable ever have.
• My application process is simple and quick I’ll take some information and then send it electronically to the lenders that I feel are the best fit for your situation; 24 hr turnaround is usual!
• Step By Step I’ll walk you through the process of getting a mortgage step by step, especially if you are a first time homebuyer – it can be daunting.
• I’m available on your terms - day, evening and weekends.
• Large range of products. Such as self-employed, credit challenged, no down payment, cottage/investment properties, line of credit, 2nd mortgages and more.
• I appreciate your business. I will go the extra mile to provide outstanding customer service so you have the best possible financing experience!
• I am a Licensed Expert. Deal with a mortgage expert specializing in mortgages from all lenders not just one.
• Rate Protection. If the rates drop before you close you automatically get the lower rate and if rates go up you have the lower rate locked in.
• Follow-up including Annual Mortgage Check-Ups and Variable Rate Updates – I’ll keep you up-to-date with what’s going on in the market to ensure your mortgage continues to meet your needs until you are mortage-free!
• Access to interest rates that banks don’t tell you are available saving you $$$$. Since Dominion Lending Centres sends lenders millions of dollars of new business each month, they always offer us the deepest discounts, which I pass that on to you IMMEDIATELY - whether you are purchasing, refinancing or renewing.
• I shop the market saving you time – calling me is like calling over 50 different lenders, including Banks, Credit Unions and Trust Companies – I have access to all of them so I can find you the best deal possible.
• I don’t work for any one lender, I work for you! When dealing with a bank they are looking after the company’s best interest first and yours second. My sole concern is your best interest and overall satisfaction.
• Isn’t it time the Banks compete for your mortgage business? I’ll provide you with some options so you can compare the two – what your bank is offering you and what I am able to offer you, then ultimately you decide which you feel most comfortable with. It never hurts to get a second opinion on the biggest financial obligation you will probable ever have.
• My application process is simple and quick I’ll take some information and then send it electronically to the lenders that I feel are the best fit for your situation; 24 hr turnaround is usual!
• Step By Step I’ll walk you through the process of getting a mortgage step by step, especially if you are a first time homebuyer – it can be daunting.
• I’m available on your terms - day, evening and weekends.
• Large range of products. Such as self-employed, credit challenged, no down payment, cottage/investment properties, line of credit, 2nd mortgages and more.
• I appreciate your business. I will go the extra mile to provide outstanding customer service so you have the best possible financing experience!
• I am a Licensed Expert. Deal with a mortgage expert specializing in mortgages from all lenders not just one.
• Rate Protection. If the rates drop before you close you automatically get the lower rate and if rates go up you have the lower rate locked in.
• Follow-up including Annual Mortgage Check-Ups and Variable Rate Updates – I’ll keep you up-to-date with what’s going on in the market to ensure your mortgage continues to meet your needs until you are mortage-free!
Monday, March 14, 2011
Countdown to Change
At the end of the week the mortgage regulation changes announced in January will go into effect. For those of you who haven’t yet heard about the changes, here they are in a nutshell:
1. A 30-year maximum amortization on insured mortgages over 80% LTV (loan-to-value), down from the current maximum of 35 years
2. An 85% LTV limit on insured refinances down from the current maximum of 90%
3. Elimination of government insurance on secured lines of credit (aka., HELOCs)
If you read my original blog post on the topic you’ll know I was a little heated with the changes when they were first announced. My opinion hasn’t changed but I’m a little less hot under the collar about it. Like everything else in life, it is what it is and stewing about it is not going to change anything.
It turns out that the overall sentiment over the changes was quite mixed. One side of the fence where I am, thinking they’re a little harsh and short-sighted. The other side applauding the government’s “proactive steps” in protecting us from ourselves and preventing a real estate market collapse. Whatever your opinion is, that’s fine, everyone’s entitled.
For now, lender underwriting departments are overloaded with applications from people who have listened to their mortgage planners and taken some action while they still have the flexibility to do so. What I don’t look forward to is a few months from now, just like what happened last year when the government took away options...I have a client in front of me who is looking for some financial relief and I have to explain there’s nothing I can do since the government felt it was better that they carry high interest debt instead of being able to access the equity in their homes without having to sell.
I can’t do anything about the changes but what I can do is give a little advice. Be prudent about how you spend your money. Understand what you’re signing when you get a retail store credit card or sign up for “don’t pay a cent” promotion. Seek out trusted advisors for your financial affairs both investment and borrowing, don’t blindly have faith in the person standing across the counter at the bank whose job it is to sell you as many products as possible at the highest rates and costs to you. Lastly, even more important than educating yourselves, educate your children. There is a severe lack of formal education surrounding personal finances in our country and the burden falls on parents to teach their kids. In doing so, don’t assume what works for you will work for them. They live in a different world than you do. “When I was a kid”, teenagers didn’t have credit cards, now they can easily get one with a $5000 limit. Like everything else, teach your kids how to respect and manage their finances and they will be much better off.
1. A 30-year maximum amortization on insured mortgages over 80% LTV (loan-to-value), down from the current maximum of 35 years
2. An 85% LTV limit on insured refinances down from the current maximum of 90%
3. Elimination of government insurance on secured lines of credit (aka., HELOCs)
If you read my original blog post on the topic you’ll know I was a little heated with the changes when they were first announced. My opinion hasn’t changed but I’m a little less hot under the collar about it. Like everything else in life, it is what it is and stewing about it is not going to change anything.
It turns out that the overall sentiment over the changes was quite mixed. One side of the fence where I am, thinking they’re a little harsh and short-sighted. The other side applauding the government’s “proactive steps” in protecting us from ourselves and preventing a real estate market collapse. Whatever your opinion is, that’s fine, everyone’s entitled.
For now, lender underwriting departments are overloaded with applications from people who have listened to their mortgage planners and taken some action while they still have the flexibility to do so. What I don’t look forward to is a few months from now, just like what happened last year when the government took away options...I have a client in front of me who is looking for some financial relief and I have to explain there’s nothing I can do since the government felt it was better that they carry high interest debt instead of being able to access the equity in their homes without having to sell.
I can’t do anything about the changes but what I can do is give a little advice. Be prudent about how you spend your money. Understand what you’re signing when you get a retail store credit card or sign up for “don’t pay a cent” promotion. Seek out trusted advisors for your financial affairs both investment and borrowing, don’t blindly have faith in the person standing across the counter at the bank whose job it is to sell you as many products as possible at the highest rates and costs to you. Lastly, even more important than educating yourselves, educate your children. There is a severe lack of formal education surrounding personal finances in our country and the burden falls on parents to teach their kids. In doing so, don’t assume what works for you will work for them. They live in a different world than you do. “When I was a kid”, teenagers didn’t have credit cards, now they can easily get one with a $5000 limit. Like everything else, teach your kids how to respect and manage their finances and they will be much better off.
Tuesday, February 22, 2011
10 Questions to Ask Your Home Inspector
The purchase of a home is likely the largest financial expenditure you’ll ever make. And getting your home inspected is an essential step in the home-buying process. No one wants to buy a money pit – and once you have signed on the dotted line, there is no turning back. There are enough shows on TV that tell the horrific stories of people who either didn’t get an inspection done by a reputable inspector or they didn’t get one done at all. Don’t let yourself become one of those stories.
The best way to ensure you use a professional home inspector is to seek referrals from your mortgage professional, real estate agent or friends. Since you want to be able to trust your home inspector’s judgement, you have to ensure they’re not part-time home inspectors just trying to make some extra cash on the side, or they aren’t only home inspecting so they can also offer to complete any work for you that you need done on the home. To ensure the job’s done right, after all, the home inspection must not be biased.
The purpose of a home inspection is for the inspector to be able to tell you everything you need to know about the home you’re going to purchase so that you can make an informed decision.
Following are 10 key questions you can ask your home inspector before they’re hired to ensure the inspection will be completed professionally and thoroughly:
1. Can I see your licence/professional credentials and proof of insurance?
2. How many years’ experience do you have as a home inspector? (Make sure they’re talking specifically about home inspection and not just how much experience they have in a single trade.)
3. How many inspections have you personally completed?
4. What qualifications and training do you have? Are you a member of a professional organization? What’s your background – construction, engineering, plumbing, etc?
5. Can I see some references? (Make sure you also check the references.)
6. What kind of report do you provide? Do you take pictures of the house and add them to your report?
7. What kind of tools do you use during your inspection?
8. Can you give me an idea of what kind of repairs the house may need? (Be wary if they offer to fix the issues themselves or can recommend someone else to complete the job cheap.)
9. When do you do the inspection? (Let’s hope they don’t have a day job, and can only do them at night when it’s too dark to see the roof. It’s best to stay away from part-time inspectors.)
10. How long do your inspections usually take?
A quality home inspection is not just a condition in a purchase agreement, it’s your last line of defence to ensure you’re getting what you’re paying for and your potential new home isn’t shiny on the outside and crumbling on the inside. Do yourself a favour and take your inspection very seriously. You’ll thank yourself for it in the long-run.
The best way to ensure you use a professional home inspector is to seek referrals from your mortgage professional, real estate agent or friends. Since you want to be able to trust your home inspector’s judgement, you have to ensure they’re not part-time home inspectors just trying to make some extra cash on the side, or they aren’t only home inspecting so they can also offer to complete any work for you that you need done on the home. To ensure the job’s done right, after all, the home inspection must not be biased.
The purpose of a home inspection is for the inspector to be able to tell you everything you need to know about the home you’re going to purchase so that you can make an informed decision.
Following are 10 key questions you can ask your home inspector before they’re hired to ensure the inspection will be completed professionally and thoroughly:
1. Can I see your licence/professional credentials and proof of insurance?
2. How many years’ experience do you have as a home inspector? (Make sure they’re talking specifically about home inspection and not just how much experience they have in a single trade.)
3. How many inspections have you personally completed?
4. What qualifications and training do you have? Are you a member of a professional organization? What’s your background – construction, engineering, plumbing, etc?
5. Can I see some references? (Make sure you also check the references.)
6. What kind of report do you provide? Do you take pictures of the house and add them to your report?
7. What kind of tools do you use during your inspection?
8. Can you give me an idea of what kind of repairs the house may need? (Be wary if they offer to fix the issues themselves or can recommend someone else to complete the job cheap.)
9. When do you do the inspection? (Let’s hope they don’t have a day job, and can only do them at night when it’s too dark to see the roof. It’s best to stay away from part-time inspectors.)
10. How long do your inspections usually take?
A quality home inspection is not just a condition in a purchase agreement, it’s your last line of defence to ensure you’re getting what you’re paying for and your potential new home isn’t shiny on the outside and crumbling on the inside. Do yourself a favour and take your inspection very seriously. You’ll thank yourself for it in the long-run.
Tuesday, February 8, 2011
Buying the Best Home for You
A few weeks ago I was having a conversation with my mother and she was asking me some questions about my work. The topic of mortgage size came up, and never one to shy away from giving her opinion, she let me know her two cents. Sometimes these types of conversations can be relatively frustrating but if I’m in the right kind of patient mood they can be kind of entertaining since in a lot of ways my mother still thinks it’s 1972. Usually I can get her to reconsider her opinion or at least fake like she is.
In a nutshell, her thinking is that people today are crazy for taking such big mortgages with large loan-to-values and long amortizations. “What’s the matter with buying a starter home and after a few years buying something bigger? That’s what we did.” So I explained to her how sometimes it doesn’t make sense to begin with a starter home since making a move into a larger home is going to trigger costs like realtor fees, land transfer taxes, legal fees and potentially fees to break their mortgage. In the end, the homeowner could be right where they started if not further behind with regards to equity than when they started. With all that in mind, a lot of buyers would prefer to jump at the bigger house to begin with rather than spin their wheels with a starter home. This was one of the conversations that didn’t end with my mother agreeing with me but at least she faked like she did...I think.
The reality is that some people don’t think they are getting into a starter home until they live in the house for a few years and their needs change or they realize in hindsight that they didn’t really think through what all their needs and wants might be. Let’s face it; buying a house can be an emotional and exciting experience so sometimes logic doesn’t show its face. For those people who think they’re buying their long-term home whether as a first-time homebuyer, here are some things to consider in order to ensure it’s a long-term home.
Before you begin searching for a home, it’s always helpful to think about your needs both now and in the future. And if you have any questions about the home-buying process or different types of real estate, you can always ask your mortgage professional or real estate agent for input.
Following are some things to consider when you’re deciding which type of home to buy:
• Location. Do you want to live in a city, town or in the countryside? How long will your work commute be? Where will your children attend school and how will they get there? Are you close to amenities?
• Size requirements. Do you need several bedrooms, more than one bathroom, space for a home office, a two-car garage?
• Special features. Do you want air conditioning, storage or hobby space, a fireplace, a swimming pool? Do you have family members with special needs? Do you want special features to save energy, enhance indoor air quality and reduce environmental impact?
• Lifestyles and stages. Do you plan to have children? Do you have teenagers who will be moving away soon? Are you close to retirement? Will you need a home that can accommodate different stages of life?
New Versus Resale Homes
When thinking about your ideal home, the first thing you should consider is whether you want a previously owned home (often called a resale) or a new home. Here are some characteristics that may help you decide:
New Home
• Modern design. A new home has an up-to-date design that takes into account the latest trends, materials and features.
• Personalized choices. You may be able to upgrade or choose certain items such as siding, flooring, cabinets, plumbing and electrical fixtures.
• Up-to-date with the latest codes/standards. The latest building codes, electrical and energy-efficiency standards will be applied.
• Maintenance costs. Maintenance costs will be lower because everything is new and many items are covered by a warranty. You should still set aside money every year for future maintenance costs.
• Builder warranty. This is a warranty that may be provided by the builder of the home. Be sure to check all the conditions of the warranty. A homebuilder’s warranty can be important if a major system such as plumbing or heating breaks down.
• Neighbourhood amenities. Schools, shopping malls and other services may not be complete for years.
• Extra costs. You may have to pay extra if you want to add a fireplace, plant trees and sod or pave your driveway. Make sure you know exactly what’s included in the price of your home.
Resale Home
• You can see what you are buying. Easy access to services. Probably established in a neighbourhood with schools, shopping malls and other services.
• Landscaping is usually complete and fencing already installed. Previously owned homes may have extras like fireplaces, finished basements or swimming pools.
• No HST. You don’t have to pay the HST unless the house has been substantially renovated, and then the taxes are applied as if it were a new house.
• Possible redecorating and renovations. You may need to redecorate, renovate or do major repairs such as replacing the roof, windows and doors.
Deciding Which Type of Home to Buy
There are many types of homes to choose from and each has its advantages and disadvantages. Think about your needs before making a decision, and don’t forget to look beyond the interior walls. The environment surrounding your home can be as important as the environment within.
Following are some different types of homes from which to choose:
Single-Family Detached – A home containing one dwelling unit that stands alone and sits on its own lot, thereby offering a greater degree of privacy.
Semi-Detached – A single-family home that is joined to another one by a common wall. It can offer many of the advantages of a single-family detached home and is usually less expensive to buy and maintain.
Row House or Townhouse – Many similar single-family homes, side-by-side, separated by common walls. They can be freehold, condominiums or rental units. They offer less privacy than a single-family detached home but still provide a separate outdoor space. These homes can cost less to buy and maintain – but they can also be large, luxury units.
Link or Carriage Home – Houses joined by garages or carports, which provide access to the front and back yards. Builders sometimes join basement walls so that link houses appear to be single-family homes on small lots. These houses can be less expensive than single-family detached homes.
Condominiums or Stratas – A condo or strata is a form of ownership, not a type of construction. They can be high-rise residential buildings, townhouse complexes, individual houses and low-rise residential buildings.
There’s no guarantee you’re going to be making the right decision when buying a home but taking all the possibilities into consideration will make it more likely. So, although you’re excited about moving into your dream home, take your time and weigh your options to increase your odds of making the right decision.
In a nutshell, her thinking is that people today are crazy for taking such big mortgages with large loan-to-values and long amortizations. “What’s the matter with buying a starter home and after a few years buying something bigger? That’s what we did.” So I explained to her how sometimes it doesn’t make sense to begin with a starter home since making a move into a larger home is going to trigger costs like realtor fees, land transfer taxes, legal fees and potentially fees to break their mortgage. In the end, the homeowner could be right where they started if not further behind with regards to equity than when they started. With all that in mind, a lot of buyers would prefer to jump at the bigger house to begin with rather than spin their wheels with a starter home. This was one of the conversations that didn’t end with my mother agreeing with me but at least she faked like she did...I think.
The reality is that some people don’t think they are getting into a starter home until they live in the house for a few years and their needs change or they realize in hindsight that they didn’t really think through what all their needs and wants might be. Let’s face it; buying a house can be an emotional and exciting experience so sometimes logic doesn’t show its face. For those people who think they’re buying their long-term home whether as a first-time homebuyer, here are some things to consider in order to ensure it’s a long-term home.
Before you begin searching for a home, it’s always helpful to think about your needs both now and in the future. And if you have any questions about the home-buying process or different types of real estate, you can always ask your mortgage professional or real estate agent for input.
Following are some things to consider when you’re deciding which type of home to buy:
• Location. Do you want to live in a city, town or in the countryside? How long will your work commute be? Where will your children attend school and how will they get there? Are you close to amenities?
• Size requirements. Do you need several bedrooms, more than one bathroom, space for a home office, a two-car garage?
• Special features. Do you want air conditioning, storage or hobby space, a fireplace, a swimming pool? Do you have family members with special needs? Do you want special features to save energy, enhance indoor air quality and reduce environmental impact?
• Lifestyles and stages. Do you plan to have children? Do you have teenagers who will be moving away soon? Are you close to retirement? Will you need a home that can accommodate different stages of life?
New Versus Resale Homes
When thinking about your ideal home, the first thing you should consider is whether you want a previously owned home (often called a resale) or a new home. Here are some characteristics that may help you decide:
New Home
• Modern design. A new home has an up-to-date design that takes into account the latest trends, materials and features.
• Personalized choices. You may be able to upgrade or choose certain items such as siding, flooring, cabinets, plumbing and electrical fixtures.
• Up-to-date with the latest codes/standards. The latest building codes, electrical and energy-efficiency standards will be applied.
• Maintenance costs. Maintenance costs will be lower because everything is new and many items are covered by a warranty. You should still set aside money every year for future maintenance costs.
• Builder warranty. This is a warranty that may be provided by the builder of the home. Be sure to check all the conditions of the warranty. A homebuilder’s warranty can be important if a major system such as plumbing or heating breaks down.
• Neighbourhood amenities. Schools, shopping malls and other services may not be complete for years.
• Extra costs. You may have to pay extra if you want to add a fireplace, plant trees and sod or pave your driveway. Make sure you know exactly what’s included in the price of your home.
Resale Home
• You can see what you are buying. Easy access to services. Probably established in a neighbourhood with schools, shopping malls and other services.
• Landscaping is usually complete and fencing already installed. Previously owned homes may have extras like fireplaces, finished basements or swimming pools.
• No HST. You don’t have to pay the HST unless the house has been substantially renovated, and then the taxes are applied as if it were a new house.
• Possible redecorating and renovations. You may need to redecorate, renovate or do major repairs such as replacing the roof, windows and doors.
Deciding Which Type of Home to Buy
There are many types of homes to choose from and each has its advantages and disadvantages. Think about your needs before making a decision, and don’t forget to look beyond the interior walls. The environment surrounding your home can be as important as the environment within.
Following are some different types of homes from which to choose:
Single-Family Detached – A home containing one dwelling unit that stands alone and sits on its own lot, thereby offering a greater degree of privacy.
Semi-Detached – A single-family home that is joined to another one by a common wall. It can offer many of the advantages of a single-family detached home and is usually less expensive to buy and maintain.
Row House or Townhouse – Many similar single-family homes, side-by-side, separated by common walls. They can be freehold, condominiums or rental units. They offer less privacy than a single-family detached home but still provide a separate outdoor space. These homes can cost less to buy and maintain – but they can also be large, luxury units.
Link or Carriage Home – Houses joined by garages or carports, which provide access to the front and back yards. Builders sometimes join basement walls so that link houses appear to be single-family homes on small lots. These houses can be less expensive than single-family detached homes.
Condominiums or Stratas – A condo or strata is a form of ownership, not a type of construction. They can be high-rise residential buildings, townhouse complexes, individual houses and low-rise residential buildings.
There’s no guarantee you’re going to be making the right decision when buying a home but taking all the possibilities into consideration will make it more likely. So, although you’re excited about moving into your dream home, take your time and weigh your options to increase your odds of making the right decision.
Wednesday, January 26, 2011
Here we go again....
Last week the Minister of Finance, Jim Flaherty, announced another round of regulations on the mortgage industry. These are in addition to regulations he announced last year around this time http://abbatangelogroup.blogspot.com/2010_02_01_archive.html. I figured I’d give it a few days for the changes to sink in a bit before I shared my comments. It turns out that even after a few days I still can’t wrap my head around the changes...I’ll probably just use a few less curse words to describe my opinion.
For those of you who haven’t yet heard about the changes, here they are in a nutshell:
1. A 30-year maximum amortization on insured mortgages over 80% LTV (loan-to-value), down from the current maximum of 35 years
2. An 85% LTV limit on insured refinances down from the current maximum of 90%
3. Elimination of government insurance on secured lines of credit (aka., HELOCs)
I could probably go on forever with my opinion on these changes but I’ll do my best not to. Changes one and three I don’t think carry a huge impact. The difference on the monthly payment for a $300,000 mortgage is about $100 when looking at a 30-year amortization compared to a 35-year amortization. If a borrower needs that extra $100 in order to qualify for the mortgage, maybe they shouldn’t be getting the mortgage anyways. The HELOC change remains to be seen what lenders will do with their products, if anything so my opinion on that is fairly neutral.
It’s the change to refinance maximums that I feel has the most negative impact. The changes last April lowered the refinance maximum from 95% LTV to 90% and now it’s being further lowered to 85%. I completely understand the Minister of Finance’s position on this...limit borrower’s ability to lower their equity position in their homes, creating a source of savings, rather than as he put it “an ATM machine”. However, I think what he overlooked is the greatest reason why people need to refinance their homes. He made reference to people removing the equity for their homes in order to buy boats and big-screen TVs. While that might be true in some cases, it definitely isn’t the norm in the cases I see. I’ve never had a client refinance their home in order to spend it on something other than home improvements or paying off other high-interest debt. Sure, that other high-interest debt may have been accumulated by purchasing boats and big-screen TVs but to me the issue isn’t what the client purchased, it was that a financial services company was more than willing to provide them with the credit facility to make the purchase in the first place and then carry the balance at a ridiculous rate. So once again the Minister announces changes to mortgage rules but does nothing about the practices of companies granting credit cards with ridiculous limits and unsecured Lines of Credit to anyone with a pulse. In my opinion, if he was to crack down on those predatory practices, there would be less need for people to refinance their homes. But hold on a second, who is it that the Minister looks to for guidance on these types of matters? Oh right, the CEOs of the big five Banks. I can’t imagine why they (the biggest issuers of credit cards and LOCs) would want to limit the ability of their Visa and Line of Credit customers paying 8-20% on their outstanding balances to refinance their mortgages paying less than 4%, especially when more and more of those mortgages are being refinanced with non-bank lenders (he said with a giant stench of sarcasm).
What this creates, in my opinion, is a market where people can obtain as many revolving credit lines as they want and have now been limited as to their options for relief from their debt. So, you can buy a house and leverage 95% of it but if you own a house and want to refinance it, you can only do so to 85%. Hmmm, so if I’m drowning in high-interest payments and don’t have enough equity in my house to dig myself out of it, I can probably sell my house to get the debt relief because the home I purchase can be leveraged 10% more. In the end, I end up worse off from an equity standpoint than I would have been if I had been able to refinance to 90%. Part of the reasoning behind the Minister’s changes was to further prevent our economy (which has shown NO signs of this happening) from having the same bursting housing bubble that the US had a few years ago. Except, once people start catching on that selling their homes could be the only way to get some debt relief, there will be a greater supply of homes on the market being sold by desperate sellers. That sounds to me like a recipe for falling house prices....do you hear that sound of a bursting bubble?
I’m not saying that the changes shouldn’t have been made, believe it or not. I’m saying that there are other ways the same desired outcome could have been achieved and it could have been in ways that would be more beneficial to the client. I’m also saying that the Government should be looking long and hard at all the elements that go into what they deem to be the problem and make more broad changes. It may also be a good idea to not have advisors who have a vested interest in one or more elements of the decision.
I know, I know, I said I would keep this short. However, this is short. I could go on about this for pages and pages! Let me know what you think and if you support the changes. I’d love to hear your opinion.
For those of you who haven’t yet heard about the changes, here they are in a nutshell:
1. A 30-year maximum amortization on insured mortgages over 80% LTV (loan-to-value), down from the current maximum of 35 years
2. An 85% LTV limit on insured refinances down from the current maximum of 90%
3. Elimination of government insurance on secured lines of credit (aka., HELOCs)
I could probably go on forever with my opinion on these changes but I’ll do my best not to. Changes one and three I don’t think carry a huge impact. The difference on the monthly payment for a $300,000 mortgage is about $100 when looking at a 30-year amortization compared to a 35-year amortization. If a borrower needs that extra $100 in order to qualify for the mortgage, maybe they shouldn’t be getting the mortgage anyways. The HELOC change remains to be seen what lenders will do with their products, if anything so my opinion on that is fairly neutral.
It’s the change to refinance maximums that I feel has the most negative impact. The changes last April lowered the refinance maximum from 95% LTV to 90% and now it’s being further lowered to 85%. I completely understand the Minister of Finance’s position on this...limit borrower’s ability to lower their equity position in their homes, creating a source of savings, rather than as he put it “an ATM machine”. However, I think what he overlooked is the greatest reason why people need to refinance their homes. He made reference to people removing the equity for their homes in order to buy boats and big-screen TVs. While that might be true in some cases, it definitely isn’t the norm in the cases I see. I’ve never had a client refinance their home in order to spend it on something other than home improvements or paying off other high-interest debt. Sure, that other high-interest debt may have been accumulated by purchasing boats and big-screen TVs but to me the issue isn’t what the client purchased, it was that a financial services company was more than willing to provide them with the credit facility to make the purchase in the first place and then carry the balance at a ridiculous rate. So once again the Minister announces changes to mortgage rules but does nothing about the practices of companies granting credit cards with ridiculous limits and unsecured Lines of Credit to anyone with a pulse. In my opinion, if he was to crack down on those predatory practices, there would be less need for people to refinance their homes. But hold on a second, who is it that the Minister looks to for guidance on these types of matters? Oh right, the CEOs of the big five Banks. I can’t imagine why they (the biggest issuers of credit cards and LOCs) would want to limit the ability of their Visa and Line of Credit customers paying 8-20% on their outstanding balances to refinance their mortgages paying less than 4%, especially when more and more of those mortgages are being refinanced with non-bank lenders (he said with a giant stench of sarcasm).
What this creates, in my opinion, is a market where people can obtain as many revolving credit lines as they want and have now been limited as to their options for relief from their debt. So, you can buy a house and leverage 95% of it but if you own a house and want to refinance it, you can only do so to 85%. Hmmm, so if I’m drowning in high-interest payments and don’t have enough equity in my house to dig myself out of it, I can probably sell my house to get the debt relief because the home I purchase can be leveraged 10% more. In the end, I end up worse off from an equity standpoint than I would have been if I had been able to refinance to 90%. Part of the reasoning behind the Minister’s changes was to further prevent our economy (which has shown NO signs of this happening) from having the same bursting housing bubble that the US had a few years ago. Except, once people start catching on that selling their homes could be the only way to get some debt relief, there will be a greater supply of homes on the market being sold by desperate sellers. That sounds to me like a recipe for falling house prices....do you hear that sound of a bursting bubble?
I’m not saying that the changes shouldn’t have been made, believe it or not. I’m saying that there are other ways the same desired outcome could have been achieved and it could have been in ways that would be more beneficial to the client. I’m also saying that the Government should be looking long and hard at all the elements that go into what they deem to be the problem and make more broad changes. It may also be a good idea to not have advisors who have a vested interest in one or more elements of the decision.
I know, I know, I said I would keep this short. However, this is short. I could go on about this for pages and pages! Let me know what you think and if you support the changes. I’d love to hear your opinion.
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