28 Apr

Over 40% of first-time home buyers in Canada can’t afford a house without their parents’ help


Posted by: Brad Lockey

There’s no shame in leaning on the “Bank of Parental Units”, but what happens if the bubble does burst?


TORONTO — A Bank of Montreal report suggests first-time home buyers are increasingly turning to the “Bank of Mom and Dad.”

Go figure — Canada’s overheated housing market is getting the biggest shot of juice from the efforts of a central bank thousands of miles away.

BMO’s 2015 Home Buying Report found that 42 per cent of first-time buyers told an online survey that they expected their parents or relatives to help pay for their first home.

That’s up 12 per cent from last year’s report.

The bank also said 40 per cent of the first-time buyers said they couldn’t afford a home without financial help from family.

The study found the first-timers were anticipating a downpayment of about $59,413 on average and had a budget of $312,700 for the purchase — slightly less than last year’s average price of $316,100.

The bank also found that 42 per cent of current home-owners surveyed said they were looking for family help with the purchase. Their average budget was $473,000 and their average downpayment was $123,214.

The BMO report is based on online interviews with a random sample of 2,007 people aged 18 years or more between Feb. 24 and March 5.

The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error as they are not a random sample and therefore are not necessarily representative of the whole population.

Prices in Canada have been rising since 2009, resisting regulators’ efforts to cool the market by restricting credit. In Toronto and Vancouver, values have surged as much as 56 per cent in six years. Now as the European Central Bank’s bond buying helps drive down rates to near-record lows in Canada, the housing market is poised to ascend even higher.

Re/Max, the country’s largest residential real estate agency, raised its forecast for home price growth to 3 per cent from 2.5 per cent last week because transactions and values were so high in the first three months of this year. In March, housing sales rallied 4.1 per cent, the most in 10 months.

Toronto home sales increased 11 per cent to more than 8,000 transactions in March over the prior year, according to the Canadian Real Estate Association. Prices in the country’s most populous city jumped 10 per cent to about $601,500.

In Vancouver, Canada’s most expensive home market, sales soared 53 per cent and the average cost to buy a home rose 11 per cent to $870,000.


22 Apr

It’s time to ‘double’ your TFSA knowledge


Posted by: Brad Lockey


With the federal government poised to let Canadians contribute twice as much to their tax-free savings accounts, it pays to bone up on how TFSAs work

When Finance Minister Joe Oliver tables the federal budget on Tuesday, he’s expected to double the annual contribution limit – currently $5,500 – for tax-free savings accounts.

This is great news for the nearly 11 million Canadians who have a TFSA – and provides an extra incentive for those who don’t.

Even though TFSAs has been around since 2009, people still have misconceptions about how they work and why they’re beneficial. With TFSAs poised to play an even bigger role in our financial lives, now is a great time to brush up on the details.

In this edition of Investor Clinic, I’ll answer some common TFSA questions.

Can I contribute existing investments to my TFSA?

Absolutely. Not everyone will have $11,000 of spare cash lying around, so making an “in-kind” TFSA contribution will be the only way some people can max out their annual TFSA limit. But be careful: If you transfer shares that have appreciated in value, you’ll have to pay capital gains tax just as if you’d sold the shares. Unfortunately, if you transfer shares that have dropped in value, you won’t be able to claim a capital loss. In the latter case, it may be more beneficial to sell the shares first and then contribute the cash, but you must wait at least 31 days before repurchasing the shares in your TFSA or the loss will be denied.

Which is better: A TFSA or an RRSP?

It depends. If you expect your marginal tax rate to be lower in retirement, RRSPs are more advantageous. If you expect your tax rate to be higher in retirement, TFSAs have the edge. If you expect your tax rate to remain the same, TFSAs and RRSPs will be equally beneficial. The key difference is that TFSAs contain after-tax dollars (income tax was already paid) and RRSPs contain pre-tax dollars (the income tax is paid on withdrawals). But why choose one or the other? If you have sufficient funds, take advantage of both.

What happens if I withdraw money from a TFSA?

The flexibility to make withdrawals is a big advantage of TFSAs. You won’t have to pay tax on the funds, as you would with an RRSP withdrawal. Also, because TFSA withdrawals aren’t added to your income, they won’t affect Old Age Security or other income-tested benefits and credits. What’s more, unlike with RRSPs, the amount of the TFSA withdrawal will be added back to your contribution room. Keep in mind, however, that your contribution room won’t be restored until Jan. 1 of the year following the TFSA withdrawal.

Are TFSAs an ideal place to park short-term cash?

Some people think so, but I don’t agree. The advantage of a TFSA is that all investment income and capital gains are completely tax-free. That makes TFSAs a great place for stocks, mutual funds and exchange-traded funds that will likely grow in value over the long run and pay dividends along the way. Think about it: If you’re using your limited TFSA room to park cash that earns, say, 1 per cent, how much tax are you actually saving? Answer: not much (On $5,000, you’ll save all of $20 annually, assuming a marginal rate of 40 per cent.) Even though interest is taxed at a higher rate than dividends or capital gains, the higher expected return of equities means you will potentially save far more tax by placing them in your TFSA instead. If you’ve got enough room in your TFSA for everything – stocks, funds, GICs, bonds, cash – then go for it.

Can I contribute directly to a spouse’s TFSA?

No, but you can give your spouse cash to contribute to his or her TFSA.

What if I don’t contribute in a particular year?

TFSA contribution room is cumulative, so if you miss a year (or fail to contribute the maximum) you can always make it up later. For example, if you were at least 18 in 2009 when the TFSA was introduced and you have not yet made a contribution, you could deposit up to $36,500 in 2015 ($5,000 for each of 2009, 2010, 2011 and 2012, and $5,500 each for 2013, 2014 and 2015).


15 Apr

Canada’s big banks rolling out higher fees on account holders


Posted by: Brad Lockey


TORONTO – The country’s big banks are increasing fees on a range of accounts and transaction types, moves that will help pad the hundreds of millions in annual revenue each bank generates from such charges, but lifting day-to-day banking costs for customers in the process.

On June 1, Royal Bank of Canada will introduce new or higher fees on a wide range of accounts and transactions, such as

debit purchases – even mortgage payments – increases that will lift costs on scores of account holders. The country’s largest bank will also move up its threshold for rebates provided to seniors on account fees from the current 60 to 65.

“I am surprised there has been very little chatter about it,” Mary MacPherson, a retiree who emailed Global News, said.

MacPherson has been an RBC client for 45 years, she said. “Over the years [I] have had chequing accounts, car loans, mortgage, Visa, lines of credit, RRSPs, and when my husband was living we had small business account and vehicle loans — all from RBC.”

Under the new fee structure, MacPherson says her monthly rebate will be cut by more than half, to $5, and if she pays her Visa or line of credit from her savings account, she’ll be billed a new charge, according to her. “This galls me!” she said in an email.

MacPherson has made an appointment at her local branch next week and hopes the manager can get some or all of the fees waived.

RBC spokesperson Andrew Block said, “We understand that any change in pricing or fees is a sensitive topic for clients and we work hard to keep costs down. On an annual basis, we review our products and services and sometimes adjust the pricing for some of them to reflect the cost of doing business.”

Across the board

How many customers will find themselves in a similar situation to MacPherson isn’t clear, but what is: Each of the country’s five biggest banks has recently introduced new account policies and higher fees, or is in the process of doing so.

Bank of Montreal plans to implement account changes May 1. Part of the changes includes increasing monthly plan fees by at least a dollar, while debit purchases will be increased to $1.25 from $1 per transaction (after an initial monthly allotment is exhausted).

Ralph Marranca, a BMO spokesperson, said the bank has been inviting customers to “sit down with us so that we can review their needs and suggest a number of strategies and plans that can help them lower and avoid fees altogether.”

TD Bank has already tweaked rates and terms as of April 1, a change that followed account alterations and fee increases at Scotiabank and CIBC. Together with RBC and BMO, TD, CIBC and Scotiabank comprise the country’s “Big Five” banks.

Not routine

Experts say the moves aren’t routine – banks don’t usually push through yearly increases like cable or phone companies typically do.

“This isn’t a very common event,” a stock analyst source who publishes research on Canadian banks said. “The banks don’t normally raise rates on an annual basis, there’s no set timeframe that they’d do something of this nature.”

Fees are nevertheless lucrative: RBC generated just under $1.5 billion in account service charges in 2014, an amount approaching 5 per cent of the bank’s total revenues. Many bank fees are considered “high margin” or highly profitable, experts say.

The fee changes come at a time when experts say banks face “headwinds” or pressure on high-growth areas of their businesses. Experts say lending for things like residential real estate and car financing is poised to slow as Canadian households curb borrowing and confront record amounts of personal debt.

Consumer impact

The net effect of the rate hikes on consumers (and affected small business accounts) will be negative, with day-to-day banking costs becoming suddenly more expensive. “These rates are really like interest rates – they’re a cost of money,” Don Mercer, vice president, federal affairs at the Consumers Council of Canada, said.

Mercer also questions the relatively lockstep nature of the hikes at each bank. “You can draw the conclusion that there’s a lack of competition in the market when they raise rates this way,” he said.





7 Apr

Don’t judge a bank’s mortgage by its hyped-up Rate …


Posted by: Brad Lockey


By Rob Carrick

Consult a broker to make sure you won’t sacrifice prepayment privileges and cheaper penalty fees for a lower interest price

The big banks are masterly in how they attract attention to their mortgage rate cuts.

Don’t buy the hype. For the best mortgage deals as defined by low rates and favourable terms, see a mortgage broker. You may still end up doing business with your bank, but failing to at least consult a broker is borderline personal-finance negligence.

A sign of spring’s approach in Canada is a bank making what looks like bold mortgage moves to the uninformed. This week, Bank of Montreal and Toronto-Dominion Bank announced five-year fixed-rate mortgages at 2.79 per cent, while Canadian Imperial Bank of Commerce has been offering a special introductory rate of 1.99 per cent on the first nine months of some fixed-rate mortgages.

Mortgage broker David Larock says the vast majority of mortgages he’s arranged lately are five-year fixed, and the rates range from 2.54 per cent to 2.69 per cent. In addition to lower rates, they have comparatively light penalties if you have to break your mortgage before its maturity date. “The penalties are a fraction of what the major banks charge,” Mr. Larock said.

Besides rates and penalties, some of the key variables in choosing a mortgage are prepayment privileges, or how much of the mortgage principal you can pay down every year without incurring a cost, and the length of time the lender will hold a mortgage rate for you. Mr. Larock said the mortgages he’s set up lately all have rate holds of 90 to 120 days, and they mostly let clients prepay 20 per cent annually. These terms are similar to what the banks offer, so you’re not giving up anything in using a broker.

The Canadian Association of Accredited Mortgage Professionals says 30 per cent of outstanding mortgages were arranged by mortgage brokers in 2014, up from 23 per cent in 2009. Banks had a 55-per-cent share last year, with other lenders claiming the last 15 per cent. Bank dominance is slipping, but slowly. By creating an illusion of daring competitiveness, the banks keep customers coming back.

Here’s what’s really going on in bank mortgage lending today. According to Robert McLister, mortgage planner at intelliMortgage Inc. and founder of RateSpy.com, banks have for weeks been offering rates lower than 2.79 per cent for clients with good credit histories. “You’ll never see a bank advertising its lowest discretionary mortgage rate,” he said. “That’s not how they maximize profits.”

As a rough guideline, Mr. McLister says a rate in the 2.6-per-cent range should be doable if you’re a creditworthy bank customer. He says standard mortgages from the “monoline” mortgage lenders that brokers work with are in the 2.59- to 2.64-per-cent range, and that slightly lower rates can be had through no-frills mortgages with restrictive terms.

Mortgage prepayment penalties are where alternative lenders really crush the big banks. I wrote about this in a

column a little more than a year ago (read it here online: The hidden trap of mortgage penalties at the big banks1). In short, lenders calculate these penalties on fixed-rate mortgages as the greater of three months’ interest or what’s known as an interest rate differential, or IRD.

The idea behind the IRD is to compensate a lender for the interest lost when you pay out a mortgage early. Lenders have different ways of calculating the IRD, but you should expect penalties to be as much as three to four times higher at the banks than competing lenders.

Mr. Larock, the mortgage broker, says he’s seen figures suggesting about one-third of mortgage holders get out of their loan early. However, he thinks these numbers may be skewed by the large numbers of people who have broken mortgages to capitalize on falling mortgage rates in the past few years. Generally, he figures about 10 to 15 per cent of people break their mortgages and therefore incur penalties.

If you’re dead certain you’ll stay in a five-year mortgage for five years, maybe your bank’s best deal on rates will suffice. If you want to keep your options open and possibly get a better rate, check out a mortgage broker.

It’s worth noting that Mr. Larock does about 20 per cent of his business with banks, mainly in cases where clients want a mortgage and a home-equity line of credit. However, he warns these people that the prepayment penalties can box them in for the term of their mortgage. “I tell them, as you sign I want you in your mind to hear the sound of a giant iron gate slamming shut.”

Mortgage market survey

These are currently the best advertised rates for a full-featured five-year fixed mortgage with a 90+ day rate hold:

Advertised at major banks: 2.79%
Credit unions: 2.59% to 2.69% (e.g. Slovenia CU at 2.59%) Monoline (mortgage only) lenders: 2.74% (e.g. Canadiana Financial) Mortgage brokers: 2.59% to 2.69% (multiple reputable brokers)

Note: Brokers and lenders may sell at lower rates on a discretionary basis. Shorter rate holds typically save you at least 0.1 of a percentage point.


2 Apr

The Dark Side of Collateral Charge Mortgages


Posted by: Brad Lockey

When you shop around for your mortgage, what comes to mind in the preferred features most Canadians desire?
Best interest rates, flexible repayment terms, and low payments are at the top of the pile.
However the mortgage market has changed dramatically over the last few years with the introduction of the banks using the collateral charge mortgage.

First a quick definition:

A collateral charge mortgage has as its primary security a promissory note or loan agreement and as a back up, a collateral security in a mortgage against your property.

This is in stark contrast to the traditional standard charge mortgage we have known over the last 30 years. The main difference is in what happens after you have signed the dotted line and the mortgage closes. Here are the differences and the dark side you need to be aware of when shopping:

With a standard (conventional) charge mortgage, there is little to no cost to the consumer when switching your mortgage from one financial institution to another when a better deal is to be found. Whereas a collateral charge mortgage is not generally accepted in transfer and requires the mortgage holder to pay discharge fees and additional fees to register a new mortgage with their new bank.

Another surprising factor is that all of your unsecured debt that you have with your bank has become interconnected with your mortgage under the collateral charge. This has far reaching implications and what most of us would coin as an abuse of power if you were victim of its circumstance. Your line of credit and your credit cards are now tied to your mortgage. For one reason or another you end up defaulting on your line of credit and the next thing you know, equity from your home has been taken to pay off the account and it is closed. This is well within the banks power under Canadian law with a collateral charge mortgage. Equally disturbing is under the same circumstances, in most cases the bank could start mortgage default proceedings. This means you could end up losing your house.

Under the standard charge mortgage, your other debts are kept separate and your mortgage is unaffected by life’s bumps along the way.

A great question every Canadian should ponder is…Who owns the equity in my home?
You, or the bank?
The answer to this question comes into sharp focus under the collateral charge mortgage.

Allow me to illustrate:

John and Mary Smith (ficticous names) were doing well for themselves in that they had prospered in their careers and the kids had just moved out of the house. They were considering purchasing a cottage from a friend and had approached their bank to see if they could extend their mortgage to access their equity making the transaction smooth. Their home was worth 650K and they only had a mortgage owing of 200K. Under their collateral charge mortgage, they also had access to 168K in a line of credit. John and Mary needed 235K to purchase the cottage with their equity; or an additional 67K.
The bank declined their request.

Next they came to me and in assessing the situation I was disappointed to inform them that they had become another victim of the collateral charge. What I told John and Mary was that the total amount they were looking to borrow of 435K was only 66.92% of their home’s value and under their existing mortgage contract, the bank was able to extend to them up to and including 75% of the value of their home so there was no reason they were unable outside of who has control of this family’s equity.
Unfortunately, to make this work, they would be forced to break their existing mortgage in order to secure new financing.

The bright side was that I, as their Pickering mortgage agent, was able to secure them more favourable financing than if the bank had even approved access to their equity. I secured a standard charge mortgage that saved them $350 per month or approximately $21,000 over the next 5 years.

Another major difference to note is that in a standard charge mortgage your interest rate cannot be increased during the term, even if you default or fall into arrears with your payments.

Sadly, with a collateral mortgage, if you go into arrears or default, the bank has the right to raise your interest rate by up to 10 percentage points. On a debt as large as your mortgage, this is not a small detail that should be overlooked.

Dig deeper past the generally asked questions of interest rate and the cost of the payment of your mortgage. Boldly ask your banker if this is a collateral charge mortgage and what the implications are down the road. You will find that after you sign the dotted line that your option to switch easily is gone, your loans have become interconnected with implications, you no longer have the final say on accessing your equity, and in a crisis situation, the bank can raise your interest rate.

As part of working with me, I love to do the homework on the tough questions so you have all of the answers in choosing the mortgage that is right for you.

Brad Lockey
Lic# M11002365
(P) 416-518-7476
(E) mortgages@bradlockey.ca

2 Apr

Amid fierce mortgage battle, some banks shifting focus from rates to features


Posted by: Brad Lockey

March 30, 2015


While several major banks have already rolled out new mortgage rate specials, Royal Bank of Canada and Bank of Nova Scotia are looking to turn the message away from rates

The race to offer the country’s lowest mortgage rate has some lenders looking beyond the numbers.

While several major banks have already rolled out new mortgage rate specials, at least two of the country’s biggest lenders are hoping to shift the focus instead.

With the critical spring housing market in full swing, Bank of Montreal, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce are all offering rate specials that are among the lowest ever advertised. Others, however, are looking to turn the message away from rates.

Royal Bank of Canada, the country’s largest mortgage lender, is launching a campaign this week that promises employee pricing on all of its mortgage products.

The spring promotion, which runs until July 3, takes a page out of the playbook of the auto industry, which has long lured consumers with the chance to buy a car for the same price as employees.

At 2.69 per cent, RBC’s current employee rate for a five-year fixed mortgage would make it the lowest among the rates advertised by any major bank. But the bank isn’t actually planning to advertise the particular number.

“The whole of the industry seems to focus on one thing and one thing only, which is the rate,” said Sean Amato-Gauci, RBC’s senior vice-president of home equity financing. “We all know there is so much more involved in the home-buying decision and taking on such a large debt. To keep the conversation focused on just the rate does a disservice to consumers.”

Rather than advertise a rate special, Bank of Nova Scotia is launching its spring mortgage campaign with a consumer poll showing that while 84 per cent of mortgage shoppers care about the rate they’re getting, a majority also care about other mortgage features, such as the ability to break their mortgage early or make extra payments.

Despite pressure from competitors, the bank has no plans to come out with an attractive new rate in time for the spring housing rush.

“Most people who have a rate special seem to have it on a particular term or a particular product,” said David Stafford, Scotiabank’s managing director of real estate secured lending. “We’ve found when we’ve done it in the past, it tends to cause a rush to a particular term. What we’re really trying to do is encourage our customers to have a fulsome discussion about what their needs are.”

The shift in strategy at the two banks reflects the new reality of the mortgage business.

With interest rates at record lows and banks increasingly battling with credit unions and other non-bank lenders for market share, lenders are having a difficult time standing out from the pack.

Bank of Montreal shocked the market and raised the ire of federal officials in 2012 when it came out with a 2.99-per-cent rate special. This year, many industry players complained that BMO’s 2.79-per-cent spring special reflected a rate that most lenders had been quietly offering for months.

Today, banks can offer specials that shave only a few basis points off a competitor’s product. Some are now turning their messages toward the other services that only banks can offer, such as attractive rates on deposit accounts and credit cards for consumers who also sign up for a mortgage.

“Money is on sale right now,” Mr. Stafford said. “Take a mortgage at 2.74 per cent and compare it to a mortgage at 2.69 per cent and you’re talking on average a savings of about $6-7 a month. So relatively speaking, the savings are already in the market.”

In the era of low rates and fierce competition among mortgage providers, banks are now finding diminishing returns from spending marketing budgets on campaigns aimed at offering the lowest rate.

“Last year, I recall one of our competitors launched a rate and literally the next day in the same newspaper another competitor launched a rate one basis point lower. The next day another competitor launched another basis point lower,” RBC’s Mr. Amato-Gauci said. “Is that truly differentiated advertising? Is it advertising that is going to drive more customers to you? In our experience, we’ve found that it doesn’t.”

(Editor’s note: A previous version of this story referred to David Stafford as Scotiabank’s vice-president of home financing solutions. He is Scotiabank’s managing director of real estate secured lending.)