30 Jun

Many Canadians would struggle if mortgage payments grew slightly: poll


Posted by: Brad Lockey

A survey by Manulife Bank of Canada says nearly half of Canadian homeowners are taking steps to whittle down their mortgage debt, but many would be in trouble if their monthly payments grew even slightly.

Manulife says 18 per cent of homeowners made extra lump-sum payments towards their mortgages in the past year, while 17 per cent increased their regular payments. Another 5 per cent of respondents did both.

In total, 40 per cent of the homeowners polled made extra mortgage payments during the past year, while 60 per cent did not.

The average amount of additional mortgage payments was $6,300.

Manulife Bank of Canada’s president and CEO Rick Lunny said it’s encouraging that many homeowners are taking steps to reduce their mortgage debt.

However, the survey also found that more than a third of homeowners polled would face financial hardship if their mortgage payments increased by just 10 per cent.

“Having your payments go up 10 per cent sounds like a lot, but if you have a $200,000 mortgage and interest rates go up one per cent, that’s a 10 per cent increase in your mortgage payments,” Lunny said. “So there’s not much room here for those people.”

Meanwhile, another 15 per cent of homeowners said they couldn’t handle any increases at all in their mortgage payments.

“It’s inevitable that interest rates will go up, because they’re at historical lows and have been for some time,” Lunny said.

However, Lunny noted that 79 per cent of those polled said they would be willing to cut back on discretionary spending, such as eating out, in order to get out of debt – an indication that there is more wiggle room in their budgets than they may realize.

“These people probably, better than they think, would have the ability to make their mortgage payments, but it would have an impact on their lifestyle,” Lunny said.

Manulife polled 2,372 Canadian homeowners in all provinces between Feb. 10 and 27. Respondents were all between the ages of 20 and 59 and had a minimum household income of $50,000.

The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error because they do not randomly sample the population.

The Manulife survey found that Canadian homeowners are carrying an average of $190,000 in mortgage debt, with Albertans carrying the heaviest debt load – an average of $242,300.

That’s followed by $217,300 in British Columbia, $196,900 in Manitoba and Saskatchewan and $193,000 in Ontario.

Atlantic Canada has the lowest average mortgage debt, at $127,300.



24 Jun

New Mortgage Prepayment Stats


Posted by: Brad Lockey

June 20, 2015   Robert McLister

Manulife released new data this week on homeowners’ tendency to prepay their mortgages, as well as their ability to withstand interest rate hikes. Here’s what those numbers revealed.

Prepayment Trends

Mortgages with big prepayment allowances save a small fraction of the population a lot of interest. There’s no disputing that. But for most, they are one of the more over-rated mortgage features. Manulife’s Homeowner Debt Survey supports that assertion.

The report found that while 40% of mortgage holders paid extra on their mortgage last year, those payments totalled only 3.3% of the average Canadian’s mortgage balance (which is $190,000). Moreover:

Fewer than 1 in 15 mortgagors pre-paid more than $10,000.
Only 1 in 50 prepaid more than $25,000 (i.e., more than 13% of the average Canadian mortgage balance).
This chart from Manulife helps explain why 6 in 10 mortgagors are passing up prepayments.

Extra Payments - Why Not?

Borrower Stability

It’s encouraging that 56% of homeowners said they reduced their debt in the past year. That’s up from 51% a year ago.

Clearly, the majority of borrowers have household debt under control. But Manulife’s survey revealed some sobering statistics on the minority, like the fact that 40% of homeowners claim they’d struggle to make their mortgage payments within three months of being out of work.

In the event that the primary income-earner lost his/her job:

– One in six homeowners said they’d struggle to make their regular mortgage payment within just one month.
– Over a quarter (27%) would struggle to do so after three months.

And then there are interest rate hikes to consider:

– More than a third of homeowners surveyed would encounter “financial difficulty” if their mortgage payment increased by just 10%.
– 15% of mortgagors said they could not absorb any increase in their payment.

Now, mind you, surveys have a funny way of drawing out biased responses. And this may be one of those cases.

CAAMP economist Will Dunning told Amanda Lang his research suggests that many people have paid more than they’re paying now. Yet those same people say they can’t afford higher payments.

“Probably, they’re not telling us what they can afford,” he said. “They just don’t want to see their payment rise…”

Whatever the case may be, it appears there is still ample room for financial improvement before a sizable minority of homeowners achieve a good night’s sleep.

The Survey: The Manulife Bank of Canada poll surveyed 2,372 Canadian homeowners between ages 20 to 59 with household income of $50,000 or more. The survey was conducted online by Research House between February 10 and 27, 2015. National results were weighted by province, income and age.



16 Jun

Home buyers will get protection from bidding war strategies


Posted by: Brad Lockey

Buyers can finally confirm how many offers were registered against a home for sale:

Home buyers caught in a bidding war will soon get a lot more protection against the use of phantom bids—fake or false offers used to initiate a bidding war or to drive up the sale price of a home.

Starting July 1, real estate agents can no longer indicate if there is an offer on a property unless a signed, written offer has been formally submitted to the listing brokerage office. Prior to these legislative changes, some realtors would notify home buyers of potential bids—bids that weren’t always forthcoming. (For more on tricks realtors use to sell homes go here.)

“The changes are intended to ensure the offer process is transparent,” states a March 2015 Real Estate Council of Ontario (RECO) bulletin.

Key to these changes is the ability to now request how many bids were actually registered against a property for sale. According to the RECO bulletin the regulatory council “will aim to determine the number of written offers as quickly as possible.” This could take up to two weeks but really depends on how quickly brokerages fall in line with this new process and how many requests are received for this type of information.

Under the new rules, brokerages will be required to implement new rules when it comes to handling offers. These new processes and policies will need to adhere to the following:

→ All offers must be signed in order to be valid;
→ The brokerage must keep a copy of all written offers it receives (or an equivalent summary
document for each offer);
→ The written offers (or summary documents) must be kept on file for at least one year from the day it was received;
→ All changes (through negotiations or amendments) must also be kept on file by the brokerage;
→ For unsuccessful offers, the brokerage may retain a summary document instead of retaining the original offer. (The Ontario Real Estate Association (OREA) expects to have a summary form in place by July 1, 2015, for this purpose.);
→ Buyers can now request (either on their own or through their real estate agent) from RECO how many written offers a brokerage responsible for listing a house for sale received for that particular property;
→ A brokerage must provide evidence of all written offers on a property.

This is will be welcome oversight for a home buying process that has become steeped in bidding wars and bully bids in recent years. This new regulatory process will ensure that the few bad apples that use unscrupulous selling techniques don’t hurt the overall image and reputation of the vast majority of realtors who conduct business in a fair and transparent manner.

For more on the changes to Bill 55, the Stronger Protection for Ontario Consumers Act, 2013 and to review relevant changes go here.




10 Jun

Ten obstacles to getting the best mortgage rate


Posted by: Brad Lockey

Anyone with a mortgage wants the lowest possible rate. But there’s an array of requirements for snagging the best all-around deal, and some of them are counter-intuitive.

Once people have chosen the term and rate type for their mortgage, they often find that rates for that same term can vary by a percentage point or more. Countless factors can keep borrowers from getting a rock-star deal. Here are 10 of them:

1. Rates vary by province

Ontario usually has the most competitive rates in Canada, partly because it has the greatest number of competitors. People living in the Prairies or the East Coast, for example, often pay one-tenth to two-tenths of a percentage point more than folks in Ontario. Other examples: Home owners in Alberta sometimes have to put down more equity to get the lowest available rates (thanks to larger default risks in that province); borrowers in Manitoba have the cheapest six-month rates; borrowers in Quebec have some of the best 10-year rates.

2. A long rate hold

The further into the future your closing date, the longer the rate guarantee you’ll need. In turn, the higher a lender’s rate hedging costs and the higher your interest rate. The cheapest rates in the market are generally for “quick closes.” That typically means you must complete the mortgage in 30 to 45 days from applying. Applying one month from closing can shave off one-tenth to two-tenths of a percentage point from your rate, but the risk is that rates jump even more while you’re waiting.

3. You’re refinancing

Lenders love to finance purchases. So mortgages for new buyers sometimes have lower rates than mortgages for refinances. What’s more, refinances, which essentially require a whole new mortgage, often have lower rates than mortgage transfers, where you’re switching lenders but the key mortgage terms stay the same.

4. You’ve got an apartment condo or atypical property

Some lenders charge more for high-rise condos, especially in cities where condo markets are arguably overextended. The same goes for cottages, co-ops, hotel condos, former grow-ops, larger multiunit residences and other non-standard structures, which lenders view as higher risk.

5. The property isn’t your full-time dwelling

The cheapest rates in the country rarely apply to income-generating properties that the owner doesn’t live in. These deals are statistically a higher risk for lenders and investors, so expect a higher interest rate.

6. Your credit score isn’t high enough

The magic number is 680. That’s the most common minimum credit score to qualify for the best rates, especially if you have a higher debt ratio or a smaller down payment. But one number isn’t everything. To qualify for the best pricing you also need a two-year track record of managing your credit with no serious delinquencies.

7. You want flexibility

Some of the nation’s lowest rates come with strings attached, such as below-average prepayment privileges. This limits your ability to save interest by making lump-sum extra payments. Instead of prepaying 15 per cent to 30 per cent annually (which few people do anyway) a “no frills” rate might limit you to prepaying 5 per cent or 10 per cent. Restricted mortgages can also impose painful penalties, prohibit you from refinancing elsewhere before your term is up and prevent you from increasing your mortgage without penalty – useful if you buy a new house.

8. Your mortgage is not insured

In many cases, people with smaller down payments – less than 20 per cent – get better rates. That’s because their mortgage must generally be insured. Lenders like insured mortgages because someone else shares the risk of the borrower defaulting.

9. Your mortgage is too big

For lenders, bigger mortgages mean potentially bigger losses on default. This added risk results in rate premiums and stricter lending limits, especially on million-dollar mortgages without at least 25-per-cent to 35-per-cent down payments.

10. Your income is too low

If you’ve just become self-employed, are on probation or you can’t prove one to two years’ worth of stable salaried income, it can cost you. You may also need a bigger down payment. Lenders want less than 40 per cent to 44 per cent of your provable income to go toward debt.

In looking at this list, you may surmise you’ll get the best deal if you have pristine credit, don’t care about mortgage restrictions and are buying a detached urban home in Ontario that’s closing in 30 days.

That all helps, but there’s plenty more that governs mortgage pricing. Step one is knowing how well qualified you are. The stronger you are as a borrower, the more likely you’ll find exceptions to the rate “rules” above.


2 Jun

Restricted Mortgages. The Rate Sells.


Posted by: Brad Lockey

One basis point (“bps”) equals one one-hundredth of a percentage point (0.01%). On a $300,000 mortgage, a rate that is one bps higher boosts the payment by a scant $1.49 a month. From the way some folks select a mortgage, however, it might as well be $149 a month.

Many consumers simply have the blinders on to anything other than the interest rate. That’s leading more and more lenders and brokers to undercut each other by as little as one bps. This is often all it takes to get their phones to ring.

According to this author’s mortgage comparison website data, the lowest rate for a given term garners about 39% of visitor clicks. Meanwhile, the second-lowest rate attracts only 15% of clicks.1 That’s despite the second best rate being only 1-2 bps higher on average. It is this type of rate sensitivity that’s driving the growth of restricted mortgage products.

Restricted mortgages are those that cut prepayment privileges and/or make it expensive or more difficult to discharge the mortgage before maturity. Those limitations reduce a lender’s costs, making it possible to shave precious basis points off the interest rate. A growing number of lenders are now selling such mortgages, including BMO, Merix, MCAP, RMG, Industrial Alliance and Canadiana Financial, among others.

“These products are really for a high-ratio client who’s going to stick with it for 5 years,” says Suzanna Stefanec, VP, National Sales & Products at Radius Financial. “You can’t refinance over 80% loan-to-value anyway.”

“You’re seeing all these lenders coming out with restricted mortgages so there’s obviously demand,” she adds. “These low-frills products are almost the wave of the future.”

Stefanec’s company launched its own lower-frills variable-rate mortgage this spring (details below). “Our fixed RateWise has been a success for us. So with consumer demand for variables coming back, it was a no brainer to create a version for ARMs (adjustable rate mortgages).”

But not everyone’s cut out for a restricted product. “The wrong person for this mortgage is a young couple with ample disposable income who’s just starting out and thinking of a family,” says Stefanec. “They may get a starter home knowing that in a few years they’ll likely have kids and need a larger house…If they have that income, they’ll want to make that move,” in which case, choosing a restricted mortgage that charges a penalty to increase the loan amount isn’t so smart.

“It’s also not for someone who can prepay more than 10% of their mortgage, or who may need to pull equity out of their home for renovations, a cottage purchase, etc…Those people will want additional flexibility and be willing to pay for it.”

Keep in mind, less than 1 in 5 Canadians even made a lump-sum prepayment on their mortgage last year, according to CAAMP data. For that reason, 10% annual prepayments are more than enough for most homeowners. It’s the refinance limitations that you’ll really want to weigh carefully.

The RateWise ARM:

Here’s a quick look at Radius Financial’s recently launched RateWise ARM…

Current Rate: Prime – 0.70% (if high ratio; add 5 bps if conventional)
Rate Hold: 90 days
Maximum Loan: $2 million (There’s no sliding scale but loans over $1.2 million must be insured)
Prepayment Options: 10% lump-sum (on the anniversary date) and 10% payment increase annually
Penalty: 3 months’ interest
Early Payout: Only allowed with a bona fide sale
Port Gap: 30 days
Blend & Increase: No. A penalty applies if increasing the mortgage amount before maturity
Other: The property must be owner-occupied. Switches are OK. This mortgage can be converted anytime to a 5-year fixed RateWise mortgage

The three-month interest penalty is a key benefit of the RateWise ARM, relative to some competitors’ restricted products. Some competing products entail penalties as high as 2.75% to 3.00% of the mortgage balance.