Buying a house doesn’t have to be stressful

Buying a house should be an exciting time but it can get pretty stressful, according to the Bank of Montreal’s Psychology of House Hunting report released on Thursday, May 2. The biggest worry is finding problems after moving in. The next worry is that prices will drop and the house won’t be worth the original purchase price.

The house buying process can be overwhelming for first time home buyers but also for move-up buyers as well. It doesn’t have to be if you put together a team of experts who will guide you through the entire process.

It starts with a mortgage professional who will take a look at your finances, including your credit score, to qualify you for a mortgage. A lot of information about you and your credit management abilities come up during this process. Having derogatory items on your credit report doesn’t mean you can’t qualify for a mortgage. Everyone’s situation is different and a mortgage broker is familiar with most situations and can offer options.

Once armed with a pre-approval, you can confidently work with a Realtor to find the right house for you. According to the report, on average, home buyer spend five months house-hunting and visit 10 locations before deciding to buy. It’s certainly a good idea to take your time to make sure to get the house that’s right for you. Interestingly, the report found that 33% of home buyers felt rushed into making a purchase and increased to 39% for first timers. Sixty-eight per cent were prepared to settle for a home that was less than perfect. Four-fifths of prospective buyers said they know a home is right for them as soon as they step inside.

Once the Offer to Purchase is made, working with a trusted lawyer is the best way to make sure there are no surprises at closing. The bottom line is to take your time, work with professionals and do some research.

Here are the top five mistakes new homebuyers make:

1. Not getting pre-approved. Without a pre-approval you’re actually going in to the home-buying process blind. You won’t know what you can afford or if you even qualify for a mortgage. 
2. No Home Inspection. This is a must, especially in older homes.
3. Not budgeting for the increased costs. Home ownership comes with additional costs that you don’t have when renting. In addition to mortgage payments, you will have property taxes, higher utility bills, home insurance and extra costs for maintenance and repairs.
4.  Not knowing the closing costs. A lot of buyers forget about the closing costs, which includes land transfer tax, title fees, the lawyer’s fee, etc. Don’t get caught short.
5. Forgetting about future needs. If the home you’re purchasing is a starter, then perhaps a two-bedroom will work for you. However, if you plan to start a family, you might want to look at a three bedroom. Or if you there any other possible living arrangement changes, make sure to factor those in.

When will the housing market rebound?

This has been a week of reports – all confirming a cooler housing market. On Tuesday April 9, the Canada Mortgage and Housing Corporation (CMHC) reported housing starts were weaker than expected, although edging higher in March. A Statistics Canada report showed the value of Canadian building permits rose a weaker-than-expected 1.7% in February.

BMO Capital Markets senior economist Robert Kavcic sees the housing starts report as a “soft landing” he said in a Globe and Mail interview, noting that, “starts have receded to just above levels seen two years ago.”

In a Royal Bank poll, 15% of those surveyed say they’re likely to buy in the next two years, a drop from 27% from the previous year. Analysts suggest the reason for the delay is that Canadians are paying down other non-mortgage debts. This was proven correct in yet another report, this time from CIBC, that found homeowners are tackling other debts and don’t think they’ll be mortgage-free until they’re 57, which is two years longer than what they expected last year.

A year ago Canada was in the midst of a hot real estate market. Now the Canadian Real Estate Association (CREA) is reporting that actual activity has declined as much as 15.8% below last year’s levels.
We’re also seeing a wide variation in housing prices across Canada. A report by Royal LePage found that prices were up year-over-year nationally, with the exception of Vancouver, Victoria and Saint John, N.B., which had year-over-year price declines.

The once booming real estate sector has turned into a deep housing slump. Even the Spring market has not rebounded as expected. The International Monetary Fund still believes the market is somewhat overvalued, as do many economists. The new mortgage-insurance rules have indeed impacted the market, especially for the first time home buyers. Many analysts suggest the market was correcting itself,that the government’s rule changes were perhaps unnecessary, and may have been the tipping point.

There is no arguing that the market has cooled down. Any hopes of a big rebound this year seems unlikely. So the big question is how long this slowdown will last. For that answer we need to look at both the Canadian and U.S. economies.

Both countries are showing signs of weakness in job creation. Consumer confidence is down; manufacturing is weak. Both economies are expected to grow a sluggish pace of under 2% this year. The Canadian government and the Bank of Canada have consistently lowered their growth prediction as reports are released. The trade gap in Canada has widened and will likely get worse, given the weaker U.S economy – Canada’s major trading partner. There is, however, a bright light –new home construction in the U.S.is increasing -- which is good for our exports.

According to Benjamin Tal, Deputy Chief Economist with CIBC in a weekly Market Insight Report, the economy will remain sluggish until the end of 2013. Given that, like a big ship trying to turn in the middle of the ocean, we think it’s safe to say that it will take until well into 2014 for the economy and the housing market to come alive again.

Should we privatize CMHC?

Canada Mortgage and Housing Corporation (CMHC) is in the news again after Minister of Finance Jim Flaherty released the 2013 budget on Thursday March 21. New changes are coming that will, once again, limit the use of portfolio insurance by mortgage lenders.

Portfolio insurance, also known as bulk insurance, is a product which caused CMHC to eat up most of its $600-billion limit on the mortgages it insures. Anyone with less than a 20% down payment and borrowing from a financial institution regulated by the Bank Act, must purchase mortgage default insurance. Those with more than 20% do not have to buy that insurance but lenders have been purchasing it on behalf of these clients because the loans were more easily securitized with federal government backing.

CMHC, which controls about three quarters of the mortgage insurance market, is 100% backed by the federal government. The two private insurers, Canada Guaranty and Genworth Financial, control the rest of the market and are 90% backed by Ottawa. Their limit is $350-billion each.

The new rules introduced by Flaherty will gradually limit the sale of insurance on a conventional mortgage -- those with more than a 20% down payment -- which may cause lenders to, once again, tighten-up their mortgage approvals.

Perhaps it’s time to revisit the role of CMHC and consider privatizing the crown corporation.

For years, lenders have known that Canada Mortgage and Housing Corporation (CMHC) has had an advantage over private mortgage insurers since its policies are backed 100% by the feds, unlike the 90% guarantee given to private insurers.

In a report written in 2011 by  Jane Londerville , Associate professor and Interim Chair of the Department of Marketing and Consumer Studies at the University of Guelph, who also teaches real estate finance and appraisal, has recommended privatizing  the CMHC to level the playing the playing field.

“I’m not saying it’s the right answer,” Londerville said in an interview. “But if we want mortgage insurance that benefits the consumer, then we have to look at ways to make the insurance market more competitive. This would likely lead to lower mortgage insurance fees.”

Lawrence Smith, Professor Emeritus at the University of Toronto co-authored a Federal Task Force  Report in 1979 that discussed the role of CMHC and if there was a case for privatizing it then.  At the time, it was a radical idea, but an idea whose day may be finally coming.

“We clearly needed CMHC 60 years ago,” he said. “However, times have changed and the reasons it was created in the first place no longer exist.”

CMHC was created in 1946, and then known  as Central Mortgage and Housing Corp.  The mandate of CMHC was to administer the National Housing Act and the Home Improvement Loans Guarantee Act.  Essentially it was created to help soldiers returning home from the war access affordable mortgages.

By the 1950s, CMHC was in the affordable public housing business. The agency’s social policy portfolio expanded, with assisted housing and assisted home-ownership programs, on-reserve housing, and green energy and conservation programs. CMHC also grew its mortgage loan insurance program by requiring those with low down payments to purchase mortgage insurance.

Finn Poschmann, vice-president of Research at the C.D. Howe Institute wrote in the Globe and Mail recently that CMHC may be doing too much – that’s its role has expanded into territories where it may not belong. He asks these questions:  Why does the Crown Corporation do all of the things it does? Why aren’t social housing and related social programs part of a division of Human Resources and Skills Development Canada, where similar social programs reside? Why aren’t housing market data functions handled and financed by Statistics Canada? Why aren’t green energy programs parts of Natural Resources Canada?
With regard to mortgage insurance, Poschmann wrote, “This usually is a profitable business – people must buy the product, and to do so at the price CMHC sets. But why does the federal government hustle mortgage insurance, and not auto insurance?

Taxpayers have often raised concerns that backing mortgage insurers is risky business and can end up costing them as it did in 1979 when CMHC didn’t have enough in reserve to cover claims and needed government assistance. Since then, CMHC increased premiums and have been more cautious about maintaining its reserves.

“Having a competitive market for mortgage insurance greatly benefits homebuyers and would likely lower insurance fees,” said Londerville.

To foster a more competitive environment she recommends that CMHC be repositioned as an affiliated non-Crown public entity and ensure the government backing for this new company is equal to those terms available to private insurers. She also recommends the federal government set lending criteria.
Londerville, Smith and Poschmann all agree that CMHC should not be wound down but its role should change.

Statscan could take took over housing market data, and energy-conservation programs can migrate to other federal departments said Poschmann. CMHC’s financial market functions are already overseen by Finance and the Office of the Superintendent of Financial Institutions, which also inspects private insurers.
The mortgage insurance program, meanwhile, would be an attractive investment for a well-capitalized domestic financial institution, such as a pension fund -- the Ontario Teachers’ Pension Plan already owns half of one of the private insurers, Poschammn added.

Smith said the government should consider establishing CMHC as a reinsurer rather than a primary insurer as it is now. Reinsurance is the most common risk-transfer tool used by insurers to manage risk. Private mortgage insurers use it, as does Export Development Canada, a federal Crown corporation with a significant export credit insurance business.

Reinsurance is risk-sharing between the direct insurer and the reinsurer who agree to fulfill certain obligations under certain conditions, like any legal contract. In the case of mortgage insurance, it could be agreed that if there is default up to a certain amount the reinsurer will pay the difference, thereby sharing the risk.

“There are still many questions to answer about CMHC,” said Smith. “We may not need it as it exists today -- its role must be redefined.”

Many Canadians think getting a mortgage is complicated

A new survey commissioned by ING DIRECT found that 67% of Canadians who have had or currently have a mortgage felt the process was either complicated, confusing , or hard to figure out. Thirty-eight per cent of current or former mortgage holders say getting a mortgage is time consuming while one in five describes the process as annoying.

By comparison, a mere 7% of respondents feel the process is stress-free. 

The most stressful aspects of the mortgage process was negotiating for a rate, deciding on the right term and payment schedule and getting customer service help from the lender. Haggling for a rate was one of the more stressful parts of the process. Interestingly, over half of the respondents agreed that researching and comparing offers made the process more difficult.

There is no question the mortgage process can be complex and daunting but is doesn’t need to be stressful.  A mortgage broker can help by researching and filtering through numerous loans and a variety of products with a number of mortgage lenders. Brokers will review the best options with you, assist you with key decisions, answer all your questions at your convenience and in the comfort of your own home, if you prefer, and support you through the application and closing process.

According to the survey 20% of mortgage consumers feel the ability to get a mortgage from home would make the process easier. Mortgage brokers like to make it as easy as possible for you.
Here are some other findings of the study:

* Simplified language in mortgage contracts would make the process easier
* 16% of respondents felt that  getting a mortgage would be easier if they had access to more education about mortgages

Let a mortgage broker sweat the details for you so that all you  have to worry about is moving in. 

The competitive mortgage market- it’s not all about rate

The recent announcement that BMO has lowered its 5-year fixed rate from 3.09% to 2.99% has caused a flurry of speculation from market analysts and warnings from the federal government.

For the past year the Bank of Canada has been warning that high household debt levels, the bulk of which come from mortgages, are the largest risk facing the country’s economy. BMO’s recent rate cut prompted Finance Minister Jim Flaherty to issue a warning to the country’s banks that he expects prudent lending practices – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.

It’s clear that in our current market where homes sales have slowed and the spring buying market is kicking into gear, that competition is strong among lenders. Mortgage lending is a large part of their bottom lines.  Gord Nixon, CEO of Royal Bank of Canada, the country’s largest mortgage lender said in a conference recently, “There is no question that the Canadian banking industry is facing slightly slower growth as a result of slower mortgage demand.”

Lower rates could interest more buyers this spring, and might encourage some buyers to take out larger mortgages than they otherwise would. So, despite the government’s rule changes this past year, and despite its urgings to lenders, growing market share triumphs.

According to Canaccord Genuity analyst Mario Mendonca, BMO has been seeking to bolster its mortgage sales since it stopped using mortgage brokers about four years ago. It still has the lowest mortgage market share among the five largest banks.

The interesting part of all this is that some lenders’ fixed rates are actually lower than what BMO has advertised – the difference is that BMO actually announced it. For the past month or so mortgage brokers have had access to rates trending down from 3.04% to 2.89% for 5-year fixed to 2.69% for 3-year rates.

Mortgage consumers should also look at BMO’s product and read the fine lines because there are restrictions, which, of course, are not advertised. They include the following:

1.  You only get 10%/10% prepayment privileges. many other lenders give homeowners the option to increase their monthly payments by 20% or more each year, as well as make lump-sum payments on the original mortgage in that same percentage range.
2.  You can’t skip a payment or access a mortgage cash account. Skipping a payment, should you need to, is not an option.
3.  You can’t transfer your mortgage to another lender until your term is up. Throughout your 5-year term, the only way you can refinance, transfer or payoff the balance of your mortgage, is if you stay with BMO while doing so, or sell your home. It’s not uncommon for homeowners to break their mortgages early.

While 2.99% offer may seem attractive at first, the product may not be the best one for your situation. Mortgage brokers can offer consumers similar and even lower rates, in a mortgage product that best serves the client.

Recession or stability for Canada

Throughout the Global Financial Crisis, when the world economies slowed down, Canada held onto economic growth. This was due, in large part, to the approach taken by the Bank of Canada and the Government.

It has been a long, slow process for other countries to catch up. While we are starting to see signs of life in our largest trading partner, the U.S., other parts of the world, especially Europe continues to struggle.  Now, however, Canada is feeling the effects of the economic slowdown. It’s true that some sectors, in particular housing, as been impacted by the government rule changes to mortgages and home equity lines of credit. Other sectors such as manufacturing and exports for example, arefeeling the fallout from countries which normally bought goods deal with their own struggling economies

For an economy to function, money needs to keep moving. A quick look at the stats shows an economy growing at its slowest pace since pre-recession 2007. The use of consumer credit has dropped to levels not seen since the 1990s. The pace of retail sales is mediocre at best. Already, it has dropped 1.2 percentage points below the long-term average. Fewer people are accessing their lines of credit. Personal loans remain stable, however, largely due to the demand for auto loans.

We still hear about the rising debt-to-incomes ratios. Yet it is rising at the slowest pace we’ve seen in more than a decade. Interest payments on consumer debt are the lowest since 2009.

Consumers seem to have slowed their spending, for now. It could be the media’s emphasis on household debt, on gaps in retirement savings, on gaps on overall savings, or on the amount of credit card debt. It could be news of lost jobs,or maybe people are just tired of hearing the news.

Credit card growth is soft but maybe that’s a good thing. Insolvencies are falling, slowly, yet falling nonetheless. A sharp rise in the unemployment rate can lead to an increase in insolvencies but that’s not happening either. Yes, there have been job losses but employment increased by 1.6% or 286,000, all in full-time work, year-over-year in 2012.  Over the same period, the total number of hours worked rose 1.7%. In January, employment declined in Ontario and British Columbia. At the same time, there were increases in Alberta, Saskatchewan and New Brunswick.

In economics, a recession is a business cycle contraction, a general slowdown in economic activity. Economic indicators such as GDP, employment, investment spending, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. While we are living in a slow down, we are not seeing high job losses or increases in bankruptcies.

Economic stability refers to an economy that experiences constant growth and low inflation. Our inflation rate is the lowest it’s been in three years. And while the pace of economic growth has slowed, there is still growth.

Recession or stability? We believe stability.

Mixed messages from media – it’s the norm

Once again, we are getting mixed messages from the media. Headlines warn that house prices are easing, yet on further reading, we find that only a few major centres are feeling the pinch. In local markets, prices have stabilized and even increased slightly.

For example, in Vancouver, prices fell 0.81 per cent in January from December, and were down 2.54 per cent from a year earlier. Prices in Calgary slipped 0.1 per cent on the month, but rose 4.29 per cent on the year. And Toronto saw prices dip 0.37 per cent between December and January, but register a gain of 5.31 per cent from a year earlier.

While prices may be stabilizing, sales are lower than a year earlier. Information from The Canadian Real Estate Association (CREA) showed the number of sales had not changed much month-to-month since September, 2012. That just changed with CREA’s latest report released on February 15 stating that national home sales activity edged up on a month-over-month basis in January 2013.

Yes, the housing market has cooled since January 2012 but signs point to a fairly healthy spring market.
Despite recent media attention to a slowing housing market as well as reporting on job losses, and an underperforming economy, as usual, things are not as bad as they seem.  Really! Let’s first take a look at what’s happening in the U.S.

That country’s export market expanded in the fourth quarter of 2012, which means that factories are increasing their output and products are being sold. This is a good omen for the manufacturing sector there and it points to an increase in trade with other countries.

There are positive signs in the retail sector and in the consumer credit market – people are starting to spend more, albeit it’s slow, but still a good sign. 

While average home prices in the U.S. are still about 30 per cent lower than their 2005 peak, the long road to recovery has begun. Real home prices in the third quarter of 2012 were 5% higher than a year ago.
In Canada, we need to accept the market for what it is – balanced – which, actually means normal. A hot real estate market is not the norm, yet people think that anything less than boom times is doom and gloom.  Hot markets can’t be sustained. It’s great when we’re in it – all sectors benefit – but eventually, the market returns to normal.

According to a report by Benjamin Tal, Deputy Chief Economist for CIBC, the Canadian economy is making sense again. Both the labour market and housing starts, although weaker than what we’ve been experiencing, he says, are in line with what we should be seeing at this point.

The big picture is that the Canadian economy will probably grow by 1.7%-2.0% in 2013 and that’s normal.