CMHC Released their annual report last week, Tuesday May 8^th.  The Canadian Mortgage and Housing Corporation continues to be an integral player in contributing to the stability of the Canadian marketplace.  In 2011, spending on housing accounted for a whopping 20 per cent of Canada’s GDP last year and CMHC provided $2 billion in support of housing programs. Here’s a summary of the report.

Economic Indicators and Forecasts

Economic growth slowed to 2.5 per cent in 2011 compared to 3.3 percent in 2010. The economy is expected to grow by 2.1 per cent in 2012

The Bank of Canada has indicated that the overnight lending rate is likely to remain consistent at 1 per cent for 2012.  Mortgage rates (both fixed and variable) are expected to remain at low levels and CMHC predicts that there will be no exciting movements to posted mortgage rates.  The posted 1 year fixed mortgage rate is estimated to be between the 3.3 per cent and 3.6 per cent range, whereas the posted 5 year fixed mortgage rate is expected to be between the 5.1 per cent to 5.4 per cent range

The unemployment rate declined from 8.0 per cent in 2010 to 7.5 per cent in 2011, while 2012 will see a rate of about 7.0 per cent

Housing starts were up just over 2 per cent from 2010.  Sales of existing homes are expected to increase slightly in 2012 along with the average price (estimated to be around $368,900 in 2012).

Mortgage Loan Insurance

Back in the beginning of February 2012, CMHC was front and center with their news that they were approaching their $600 billion cap for loan insurance which is set by the Federal Government.

In 2011, CMHC had planned to only increase their insurance in force by 3.7 per cent to $533-billion.  However, they actually increased it over 10.3 per cent to $567-billion and are quickly approaching their $600-billion limit.  As you can see, the largest contributor to this increase is from the multi-unit residential units.  CMHC is the only insurer of loans for large multi-unit rental properties, including nursing and retirement homes.  Increased life expectancy paired with the aging baby-boomer cohort translates to a heightened demand for nursing homes and retirement homes alike.

What the Average CMHC Customer Looks Like

The quality of borrower is the only saving grace to the increasing level of CMHC insurance issued.  The average equity in CMHC’s insured portfolio stands at 44 per cent meaning that the average person is financially stable and could withstand any potential adjustments to housing prices.  To put this into perspective the average home price in Canada is approximately $370,000 and would therefore have a mortgage balance of $207,200.

Thankfully, the average credit score of CMHC-insured high ratio loans is 724!  Since CMHC has sound underwriting practices the majority of homeowner loans are held by consumers with strong credit scores who demonstrate a prudent approach to managing their mortgages.

So you scrimped and saved to build up a down payment nest egg; got pre-approved for a mortgage; went to all those open houses and viewings; made some offers – probably lost out on some bidding wars; and, finally, bought a place. Congratulations. Now here’s a list of all the additional costs you’re about to face on top of the price you paid for the house.

Ownership is Taxing

Each province charges homebuyers a “land transfer tax” on their purchase. In Ontario, the rate is charged as follows:

• 0.5 per cent of the value of the consideration up to and including $55,000,
• 1.0 per cent of the value of the consideration which exceeds $55,000 up to and including $250,000, and
• 1.5 per cent of the value of the consideration which exceeds $250,000, and
• 2.0 per cent of the amount by which the value of the consideration exceeds $400,000.

On a $500,000 home, that works out to $6,475. And as much as the rest of the country loves to mock Toronto, homeowners there deserve some sympathy as they get dinged for a second, municipal land transfer tax that adds a graduated fee of 0.5% to 2% on the purchase price. On a $500,000 purchase – roughly the current average resale price in the city, that’s another $5,725, for a whopping $12,200 in land transfer taxes. (First-time homebuyers qualify for a rebate of up to $2,000 on the provincial portion and $3,725 for the Toronto bill.)

Those are just one-time fees. You can also look forward to a monthly property tax bill based on the assessed value of your home. Using Toronto as an example again, in 2011 the rate was 0.56 per cent.

Mortgage Insurance

Now about that down payment you scraped together; unless it was equal to at least 25 per cent of the purchase price, you’re going to need to buy mortgage loan insurance from the Canada Mortgage and Housing Corporation (CMHC). The fees range from 0.65 per cent on mortgages covering up to 75 per cent of the value, and 2.75 per cent if you only put 5 per cent down.

In other words, if you try to buy a $500,000 home with only $25,000 for the down payment, you’ll pay more than half that again ($13,750) in mortgage insurance fees. The upside is that this fee can be rolled into your mortgage amount. The downside is that that means slightly higher payments.

Lawyers’ Fees

Buying a house requires a lot of paperwork – and a hand cramp’s worth of signatures on all those documents. A real estate lawyer will charge you somewhere in the neighbourhood of $1,000 to walk you through all those signatures.

Moving Costs

If this is your first place, you might be able to get away with just the cost of renting a van and paying for pizza and beer for some buddies to help you out. But once you’ve started accumulating stuff in one home, you’re going to want to hire pros to move it to another. You can try your luck with one of the cheapie discount movers, but make sure you do your due diligence in background checks so you don’t fall prey to a scammer. (One common ploy is to call you on the morning of the move to say their truck broke down, but they can recommend another company – that charges double their rate.)

Hiring a reputable mover that belongs to an organization like the Canadian Association of Movers can buy you peace of mind, but even a simple cross-town move starts at about $1,000.

Utilities

All the pipes and wiring running into and out of your house are attached to a utility bill. Prior to moving in you’ll need to set up accounts for your electricity, heat, municipal water/sewer/trash collection, telephone/internet, and cable or satellite TV.

For most, you’ll be charged a new account set-up fee, and there may also be installation costs for things like putting in a satellite dish or adding phone jacks. Note too that some utility companies require a deposit (of as much as $300) for new account holders that they’ll reimburse you for after a year of paying your bills on time).

And even if you’re just moving down the block or across town, your utility companies are likely to charge you “administrative” fees for transferring your account.

First-time Homeowner Expenses

If you’re moving from an apartment or condo (or your parents’ basement) into your first house, there are a number of must-have items you’ll need to pick up. Depending on the season, you’ll need a garden hose, rake, lawnmower and other gardening tools to maintain your yard or a shovel and rock salt to deal with the snow and ice.

As soon as your budget allows, you’ll also want to get a set of patio furniture and a barbecue so you can properly enjoy your new yard.

As the saying goes, the only sure things in life are death and taxes. And, unfortunately, the former won’t allow you to escape the latter. If you’re self-employed, for example, and die still owing outstanding installment payments, the Canada Revenue Agency will come to collect from your estate if your family doesn’t take care of it first. But what happens to your other debts, like your mortgage and credit cards, when you die? Here’s an overview.

Note that various credit card companies and lending institutions may have unique policies in place so you should consult with your specific debt-holders to verify details. The best advice for planning for your eventual death – yes, we’ll all die sooner or (hopefully) later – is to have a legally registered will. Dying without a will can be a costly hassle for your surviving family members to sort out. See also “Protect Your Family” below for information on insurance policies.

Credit Card Debt

First, the good news: any debt you have on credit cards solely in your name will typically be written off as a loss by the lending company should you die. They’re considered unsecured creditors and would be at the back of the line of debt-holders trying to collect from your estate.

If, on the other hand, your credit cards are joint accounts with your partner or spouse, he or she will be responsible for continuing to make any payments owed. (After your death, one of the many things on your survivor’s to-do list will be updating any accounts to take your name off them to eliminate the risk of fraudulent activity being carried out in your name.)

Mortgage and Car Loan Debt

Mortgages and car loans, however, are considered secured loans and the lenders will come after your estate to ensure they’re paid in full. Odds are, these larger purchases were co-signed by you and your spouse anyway so the surviving person can continue to make the payments as before. But if they wouldn’t be able to do so without your income, you need to read the next section.

Protect Your Family

If you do have a substantial amount of debt that your spouse and family may end up being held accountable for, you should have a plan in place to pay for that. Your best bet is an insurance policy.

What You Might Not Know About Mortgage Insurance

Whenever you sign up for a mortgage, you’ll be offered a “mortgage insurance” policy. Decline it. Mortgage brokers like these policies because they pocket an extra commission, and they do make it sound enticing to have your mortgage instantly wiped out should one partner die. The catch is that while the payments may be fixed, the actual value of the payout declines as you pay off your mortgage. In other words, year after year you’re making the same payment for a continually decreasing amount of money should you need to collect the insurance.

Life Insurance is the Better Option

You’re better off with a standard term life insurance policy. The payout is non-taxable and your surviving spouse is free to use it however they see fit. They could, for example, use the funds to pay off any high-interest debts, and set aside a nest egg to cover the mortgage payments and other ongoing expenses while they adjust to their new life.

Likewise, credit card companies offer insurance plans tied to their cards that cover you in the event death, illness, or unemployment make it difficult for you or your partner to make your payments. Again, this probably isn’t the best path to take. The rates are based on your outstanding balance and if you’re already having a hard time keeping up with your payments, this is just another way to keep the debt spiral swirling. You’re better off contacting an insurance broker about a disability insurance plan that covers all your living expenses – not just a single credit card bill.

Canadian debt levels are at historic highs and this is largely due to people taking on bigger mortgages.

Mortgages make up 68 per cent of Canadian’s total debt, according to the CMHC’s Canadian Housing Observer 2011. That’s a total of $1.042 trillion we owe on our houses. CMHC insurance is required for anyone buying  a home with less than 20 per cent down.

CMHC insurance stretched to its limit

As a result the Canadian Mortgage and Housing Corporation (CMHC) has been insuring more mortgages to satisfy the appetite of Canadians wanting to buy bigger and more expensive homes.  With interest rates at historic lows, money is cheap and this makes real estate very attractive.

In addition, banks are moving to take risk of their books and looking for insurance on loans that have higher ratios. It’s not required by law, but what it does is it securitizes these loans,  gets them off the banks balance sheet and reduces their capital requirements. Banks are paying the insurance premiums to do this, but its worth it- for them.

The problem is it’s putting tax payers at risk, as more and more loans are backed by the federal government and the increase is reducing the room in the CMHC limit of $600-billion possibly making the insurance unavailable to those who really need it.

For more information on why the CMHC is approaching this limit now, check out my interview with George Hugh, President of Taurus Mortgage Capital.

New homeowners have the most to lose

In a worst case scenario, if there was a U.S style housing crisis in Canada, taxpayers would be on the hook for 100 per cent of the shortfall of all insured mortgages.

In a softer example, if the limit was reached and CMHC had a reduced amount of power to insure mortgages with less than 20 per cent down, many new homeowners and middle class families with low ratio mortgages would be unable to fulfill their dream of buying a home. This short-term affect would mean people would have to wait longer to save the hefty down payment needed to avoid CMHC mortgage insurance.

For the medium term there could also be a pull back in home prices as less people would be in the market shopping for a home. Less demand means less reason for home prices to rise. It’s simple economics.

In my opinion this would be the positive result of CMHC insurance limits being reached.   I suspect anyone looking for a home in a big centre like Toronto would agree that $450,000 is not the normal average price of a single family home.

What can CMHC do?

CMHC could go to parliament and ask for this limit to be raised. The last time that happened was 2008 when the limit was raised $150-billon to where it is right now. On average every 3-5 years as the mortgage market grows, CMHC has asked for, and received, approval from parliament to raise this limit.

But does that mean it should? If Canadians debt levels are the highest in history, mainly due to mortgages, should the government make exceptions for this to continue? As well should banks be allowed to insure loans with high ratios to reduce their own risk? In both cases I think no. The CMHC was created to help responsible Canadians get into a home with a lower ratio mortgage and they should stay with that ultimate goal.

Canadians continue to live beyond their means

This limit almost being reached is another example that Canadians are living a lifestyle that’s unaffordable. It clearly shows without historic low interest rates and security like mortgage insurance, it would be unattainable to live the way we do.  It may seem harsh, but anyone reading my weekly blogs on ratesupermarket.ca  will know that I strongly feel Canadians have become addicted to cheap money and are living a borrowed lifestyle that is unsustainable.

CMHC should not ask for it limits to be raised, it would be irresponsible. What it should do is stop insuring very low ratio mortgages and halt giving banks the freedoms to off load risk on higher ratio loans.

Finally, the CMHC limits being reached may be a concern to the banks  and economists. But to the average homeowner it’s a reminder that we cannot rely on the government to help us out with our home purchase and saving for our own future will make us more financially secure.

Let’s play a wonderful game called: “Who is CMHC, and what do they do?”

When you visit your lender to apply for a mortgage, one of the first questions they will ask is “How much do you have for a down payment?”.  If your answer is anything less than 20% of the purchase price, you are legally required by the Canadian government to obtain mortgage default insurance.  Why?  Because you have less skin in the game and are seen as a bigger risk than Mr. Moneybags who has 50% down – makes sense!  And yes, you pay for the insurance which protects the bank in the event that you default on your mortgage.

The Canada Mortgage and Housing Corporation (CMHC) is the largest provider of mortgage default insurance and is run by the government.

BREAKING NEWS FROM CMHC

Making headlines this week was CMHC’s announcement that they are approaching the $600-billion cap set by the federal government (I would guess so considering they were backing nearly $541-billion in mortgages by the end of 2011).  The main driver is an unexpected level of requests for portfolio insurance by lenders.  CMHC claims that their budget will only affect lenders as it inhibits how much bulk/portfolio insurance they can offer to them.  They claim that this will not affect the availability of insurance for qualified home buyers, nor will it affect the cost of buying a house.

Why is this happening?  Do more Canadians have high-ratio mortgages or something?

Interestingly enough after browsing through CMHC’s Quarterly Financial Report released June 30, 2011, I found that the average mortgage in CMHC’s portfolio had 45% equity (this is well over the 20% minimum required to avoid insurance) and only 28% of CMHC’s portfolio legally required the insurance.

This means lenders have gone to CMHC themselves and paid to insure the conventional mortgages they have outstanding.  Now why would they do such a thing?  Why would lenders spend money to insure what is deemed as a low-risk, conventional mortgage?

Simply put: money!

The answer, for dummies:

There is a fancy thing out there called a Mortgage Backed Security (MBS), which are formed through a fancy process called securitizing mortgages; but I’m going to try to describe it to you in layman’s terms and take a few procedural steps out of the process.

Let’s say you’re a lender and you have $1-billion that you have lent out in mortgages.  Until more money comes in you’re just sitting on this book collecting principal and interest payments from the mortgage holders; not a bad deal.  Not a bad deal at all.  In fact, it’s a pretty good deal!  Through that fancy securitizing process, you turn your book into an MBS, approach some investors and pitch the idea of investing in the MBS (essentially buying your book of mortgage business).

Your pitch highlights how they will now enjoy the stream of income in the form of mortgage payments from the mortgage holders, and they seem quite interested in that type of return.  Then you tell the investors that the risk from the high-ratio mortgages in the bundle has even been dealt with since they are guaranteed by a Crown Corporation called CMHC.  So, even if the mortgage holders are unable to make payments and default on their mortgage the investors will still receive their payment!  This is a great selling feature, but they still aren’t quite on board. They argue that just because a mortgage is deemed as conventional (20% or more in equity for purchases), doesn’t mean that someone can’t lose their job, for example and default on their mortgage.

You’ve got them on the line… now reel them in!

Ok ok ok, you can see their point.  So what are you going to do about it?  You’re going to go out and purchase that insurance separately from CMHC and pay for it out of your own pocket to ensure that the ENTIRE portfolio has that CMHC guaranteed stamp of approval on the back.  With that stamp, it’s a done deal and a win-win situation.  You just freed up some capital by selling off the book and received a premium for arranging the mortgage/being the middleman, while the investors are happy with their risk-free, guaranteed, no-default purchase!  Capiche?

Stay tuned for what the experts are predicting will happen next… will CMHC Raise the Roof?

RateSupermarket.ca Week in Review

Bond yields haven’t made any big moves over the past week, contributing to the lack of change in mortgage rates again this week.  Interested in hearing what our panel of experts have to say about rates this month?  Check out our Mortgage Rate Outlook Panel!

*This chart is based on changes over the last week to our Best Mortgage Rates Canada page. Mortgage Rates may vary depending on Province.

What rates are RateSupermarket.ca visitors searching for this week?  Once again, the 5 year fixed closed rates (49.4 per cent) and the 5 year variable closed rates (48.3 per cent).  The next leading searches were for 4 year fixed closed rates (0.7 per cent) and 3 year fixed closed (0.4%).

Yesterday, Melanie told you about some of her top issues with Canada.  Now, let’s show this country a little more love and celebrate the great things about Canada and its financial checks and balances.

While we might have an international reputation for being too gosh-darn polite, bordering on bland, this middle-of-the-roadness sure bodes well for us in the practical ins and outs of life.

Here’s a list of what’s awesome about Canada.

Our Banks

Yes, they make gobs of money and yes often they take advantage of us with high user fees and too many lines of credit. But overall our banks are a model of stability in this very unstable financial world. Unlike US banks, ours never got into the high-risk mortgage business. (Thanks to new rules, they’re even tougher about mortgages: goodbye 35-year loans!).

Meanwhile, we have just a handful of large lending institutions. Unlike in the US where there’s a different bank on every corner, and some of the little ones have been known to tank. You join a bank here, you know it’s not going anywhere.

Our Home-Buying Incentives

For those of us who want to buy a home for the first time, Canada is right behind you on it. You can get the $5,000 First-Time Home Buyers’ Tax Credit — a nice bonus the year you buy your first home. Tax rules also help you get there: under the Home Buyers’ Plan, you can borrow up to $25,000 on your RRSPs a year to finance a down payment. Then there’s the existence of the Canadian Mortgage and Housing Corporation.  This group provides both great info to homebuyers and, critically, offers affordable mortgage insurance for those with less than the 20 per cent down payment required to buy their first home.

Our Health Care System

Say what you like about private health care and having to wait for months for tests or surgeries. In the US, if you don’t have really great health coverage through an employer and you get a serious disease, it can lead to financial ruin for you and your family. Here, we get the odd story of people who are denied drug coverage and the meds they need, but generally speaking our system takes care of us no matter what challenges our bodies throw our way. As well, you can claim medical expense on your taxes to alleviate costs when you do have medical bills.

Our Credit Card Rules

Our government has a history of keeping tabs on loan scams and they’re constantly responding with new rules to limit them. In particular, they’ve been targeting the credit card industry and making sure you’re not getting ripped off by your card company. New rules introduced in 2010 mean credit card bills in Canada must be clearer, that new purchases get a 21-day interest grace period and your company can’t up your interest rate without telling you in advance.

Our Stability

The upshot of everything great about Canada is that financial life here changes little. Too dull for you? Better to be here than in Greece! Our dollar moves, but is essentially one amazingly stable currency. Our bank rates move cautiously. From one day to the next, we know our system is working and our economy, while not perfect, is still humming along.

This is a fine place to live, save and thrive.

When you have kids, there’s so much more to do. Of course, you have to take care of them, and that sure takes up a lot of time. But also, you need to get certain financial arrangements in order to ensure they’ll be taken care of properly for a long time.

First up is dealing with life insurance. I say it’s first, but in fact, most parents like me take a really long time to get this annoying task out of the way. My son just turned seven and we just got final approval on our policy a few weeks ago. Please tell me you’re not as disorganized as this!

Before the kids, especially when you’re young, you just don’t think about death, or worry about how others will survive once you go. Particularly if you’re a couple who both work, you just assume the survivor will get by. My husband and I relied entirely on mortgage insurance: if one of us died, the house would get paid off, and that’s really all we needed.

But mortgage insurance is associated with some problems: claims can be hard to make (there’s no medical exam before you apply and apparently many have been denied claims for lying — like not mentioning a casual doctors visit or a minor injury) and your premiums stay the same over the life of your mortgage but the value of the insurance goes down as you pay down the principal. As well, when you have kids, your mortgage is no longer your biggest cost. Childcare, clothes and food for wee ones takes up a big chunk of your budget and will be a huge issue of your die and leave your spouse to do it alone.

So, a more comprehensive product such as permanent or term life insurance is in order. Understanding life insurance is not a quick thing. Best to educate yourself on the types of insurance, figure out how much coverage you need using a calculator and compare insurance rates to get the best deal and the best product for you and your family.

The good news about life insurance is while, yes, someone does show up at your house and take blood. But the premiums, if you get them while you are still young and healthy, can be more affordable than mortgage insurance.

Also, you’d better get a will to make sure your assets go to the right person when you die. And get to them quickly: if you die without a will, your money can get frozen while things are sorted out, and your family may go without much needed money for months.

A will is also the place you stipulate who will raise the kids if you both should die. It’s not a pleasant business, and it’s easy to put this task off. But there are wills available online that make the task quick.

Also important is to look ahead to the more cheerful business of your kids’ education. Establishing registered education savings plans (RESPs) early on is an easy and effective way to save for college or university.

First of all, you need to apply for a social insurance number (SIN) for your child. Once that’s done, you can simply visit a bank or go through an investment advisor to set up a plan. Most organizations suggest you put a set amount in each month, and a good advisor will put your kid’s money in a plan geared towards his or her year of high school graduation to maximize gains now and minimize risk closer to when college or university should begin.

One great argument for putting money away in an RESP is free money. The federal and most provincial governments have grants that top up your contributions year after year.

Most financial experts warn against dumping a lot of money into RESPs when you have other obligations: it’s equally important to pay down your mortgage, invest in tax-beneficial registered retirement savings plans (RRSPs) and tax free savings accounts (TFSAs). Keep a smart balance between your family’s financial goals. Kids can work while they’re in school! Also, encourage grandparents to make donations in lieu of gifts and put in a small monthly or even end-of-year payment that’s in keeping with your budget.

Kids take up a lot of time and they do cost us money. But raising a family can also encourage us to get our finances in order — and that’s always a good thing.

Diane
Writer for RateSupermarket.ca

The costs of buying a home amount to much more than the number that appears on the Purchase Agreement. If you know what to expect ahead of time it can help you to prepare yourself financially. By familiarizing yourself with the list below, nothing will come as a surprise on closing day.

It’s a good idea to start saving for your down payment long before you begin the house-hunting process. Since the down payment goes toward the principal, the more you pay up front, the less you pay in interest later. Usually, it’s expected that you’ll put at least 5% down on the purchase price. On a $250,000 home you can expect to pay $12,500 towards the down payment.

More frugal buyers will try to cut costs by skipping the home inspection, but its fee is minimal in comparison to what you might have to pay later without one. Some lenders will actually require a professional inspection before issuing you a mortgage. Depending on the size of the house, expect to pay anywhere from $350-$600 for the home inspection.

Mortgage lenders require you to meet a number of expectations before they will lend you the money needed for your home. They will advance only a percentage of either the appraised market value of a home, or the home’s purchase price – often, the lesser of the two. The lender’s staff, or an outside professional can perform the appraisal. Either way, the appraisal fee, which costs somewhere between $300-$500, often comes out of your pocket. Although waived by most lenders, some will charge a financing fee, depending on your credit record. Their fees vary from one lender to another.

Your lender will also expect you to insure their investment. Property insurance, beginning on the day of closing, costs approximately $700-$900 for minimum coverage.

Some lenders may ask for an up-to-date survey prior to finalizing the mortgage. In many cases the seller will pay this cost in order to facilitate the sale. Land surveys cost somewhere between $1000-$2000.

If you are applying for a high-ratio mortgage (a mortgage where the borrower has less than a 20% deposit), you will be required to pay for mortgage insurance. This type of insurance protects the lender. Mortgage lenders will also require that you protect your home with fire and extended-coverage insurance. According to the Canadian Mortgage and Housing Corporation, rates are charged at 1.00% to 2.75% of your total mortgage.

Title Insurance protects you from such things as title defects, errors or omissions. This includes errors in the public registry and existing surveys. Title insurance also protects you from undisclosed heirs who may try to claim your property and/or fraudulently discharged mortgages. Although it depends on the property type (resale, new, condo) and its price, title insurance usually costs approximately $300. The cost is minimal and well worth the peace of mind. Ask your lawyer for more details.

New home warranties are mandatory in Ontario, British Columbia, and Quebec, and protect your investment. Its cost is a one-time fee of a few hundred dollars, depending on coverage and price of the house.

Expect to pay land transfer tax, which is only levied on properties that are changing owners. Unfortunately, it has to be paid by the buyer. The percentage ranges from 0.5% to 2%, depending on which province you live in. Most provinces use a multi-tiered system. In Ontario, if you buy a $250,000 home 0.5% is paid on the first $55,000 and 1% on the remaining $195,000. On a $250,000 home you’ll pay $275 + $1950, for a total of $2225 in taxes.

The Harmonized Sales Tax is not in effect in all provinces across Canada and each province has a different rate. In Ontario, HST is 13 per cent. It affects certain agreements, such as the purchase and sale agreements for new homes. It does not, however, apply to pre-owned residences for re-sale. HST has been added to such services as the real estate commission, lawyer’s fees, moving costs, home inspections and home staging.

Your lawyer will play a very important role in the final transaction. They will do a title search, register and prepare the mortgage and draw up the title deed. Your lender’s lawyer can do some of the work, however, more often than not your own lawyer does it. You can usually save money by having your own lawyer draw up the mortgage. Expect to pay anywhere from $500-$1000 in legal fees, depending on the services provided.

You may have to reimburse the previous owner for utilities or taxes if they were paid beyond the closing date. Referred to as adjustments, they include hydro, water and property taxes.

Moving costs vary, depending on your personal preferences. Although it can be stressful, you can save a lot of money if you take the do-it-yourself route. But don’t forget to include the cost of a rental truck, if necessary. Alternatively, you could hire a moving company to do the work for you. Again, costs vary, depending on whether or not you want them to pack for you, or simply move your belongings.

Additional Costs on a $250,000 Re-Sale Home

Melanie
Writer for RateSupermarket.ca

Congratulations – your new mortgage contract has been signed.

After the task of researching mortgage rates, speaking to a mortgage expert, weighing the options for fixed versus variable, length of term and payment schedules, gathering the appropriate documents and negotiating the details, you can now sit-back relax and forget about your debt for another 3-5 years.

Well, not exactly. Don’t start brushing your new mortgage under the rug just yet. There is one more very important piece to the mortgage puzzle that should not be forgotten – mortgage insurance.

After your mortgage has been approved, you should consider protecting yourself against the event that you are unable to make your payments. It’s natural not to want to think about this, but if something were to happen, you and your family will be glad you did.

To navigate the tricky world of mortgage insurance, we’re talking to Craig Ferguson, a licensed insurance broker with over 20 years of experience. He has a wealth of knowledge and hates to see Canadian consumers get taken advantage of by insurance agents selling unnecessary or overpriced products. We like his style.

RSM: Thanks for talking with us Craig. Why don’t you start off by telling us about the difference between default insurance and mortgage insurance?

Craig: When it comes to insurance, the terms alone can be confusing enough! Mortgage loan insurance or mortgage default insurance is typically required by lenders when you are buying a home or looking for mortgage refinancing and have less than a 20% down payment based on the property’s value. Mortgage insurance is typically offered by your bank or lender and it’s a form of mortgage protection if you are unable to pay your mortgage.

The bottom line is both products protect the lender, not the borrower’s family. There are other products out there, such as mortgage life insurance coverage that can better protect the borrower.

RSM: Can you tell us a bit more about the specific downfalls of mortgage insurance?

Craig: Well, I think there are 3 main points to cover here. Firstly, it’s expensive; second, you may need to re-qualify more often then you think; and finally, the application form leaves room for errors that could have serious consequences. Let’s look at each of theses issues in turn.

Mortgage insurance is expensive for a variety of reasons, one being the potential length of risk. If a plan covers 25 years versus say ten, the risk to the insurer is greater, and is reflected in a much higher cost. Given that the most common amortization period for a first time mortgage is 25 years, most people will take out a mortgage insurance plan that covers that period of time. It may seem great to have a 25 year plan, but reality does not match theory.

For the second point, the argument often made for mortgage insurance is that it will cover the outstanding mortgage balance for the duration of the mortgage. But this may not be the case.

In today’s economic climate, the odds of staying with one lender and/or one mortgage are unlikely. When a mortgage loan is paid off, renegotiated or refinanced, the mortgage insurance terminates at that point, and the borrower is faced with the challenge of re-qualifying for the coverage again. This is the case even if they were to stay with the same lender!

This presents the issue of increasing rates upon mortgage refinancing, and no protection if health issues make re-qualifying a problem.

And the final issue, since mortgage insurance is designed as an “easy application” product, it may only have six to ten very loaded health questions. Should the applicant answer “no” by mistake, when he/she should have answered “yes”, it could result in a claim being denied. And, this is why you hear of so many stories of mortgage insurance not paying out.

RSM: So what should consumers do in order to protect their mortgage?

Craig: A product that addresses all of the fallbacks of mortgage insurance is life insurance. This can be a cheaper alternative to mortgage insurance and offer additional benefits.

RSM: What are the benefits of life insurance?

Craig: The main benefit of life insurance is money when needed. It’s as simple as that. Other benefits include:

That’s just to name a few.

RSM: At what stage should someone look at protecting their mortgage? And how much coverage should they look to purchase?

Craig: This question is a good one, but shouldn’t it really be: at what stage should a person look to ensure protection of his or her family? It’s often a myth to assume a paid off mortgage results in easy street.

For example, let’s say we have a husband and wife, both working, and pulling in equal shares of income (not uncommon in today’s society). Let’s assume net after tax income is $5,000 per month.

Say their mortgage payment is $1000 per month, representing only 20% of the family’s net income. But usually, at the end of that month, there is little left over (again, not uncommon in today’s society). This would suggest that the loss of a loved one representing 50% of the family’s money each month would not be satisfied with the removal of only $1000 of total expenses. Where’s the other $1,500 coming from?

There’s a reason the banks operate on debt ratios – they understand that there are greater expenses than a mortgage that a family needs to consider. The banks and lenders act responsibly, but do we as borrowers think the same way?

You could look at covering the mortgage, or you could look at how much insurance is really needed. Most often, term insurance is a low cost way to not only save money over the cost of mortgage insurance through the lender, but the best bang for your buck to ensure your families lifestyle is protected.

And the time for this is really “yesterday”.

RSM: What is the difference between whole and term life insurance? And which option is best?

Craig: Whole Life insurance is designed to provide coverage for life, with, usually a guaranteed premium, but that is not always the case. Term insurance, provides coverage for set periods with a guaranteed premium (say for 10 or 20 years), and a guaranteed renewal premium at a higher rate. But, most term plans are flexible because they also allow for “conversion” to a whole life plan without providing a health check at that time. The rate will then be the rates for the age at conversion to the permanent (whole life) plan.

Which should you choose? It really boils down to need first, solution second.

For example, a doctor has at his disposal a prescription pad, and can order any drug he chooses for a given patient. Do all patients get prescribed the same drugs? Of course not.

The doctor should first assess the patient’s health, determine where it hurts, and look to provide a long-term goal to address the health issues.

Similarly, the insurance broker must assess the financial risk of the client. He must determine the amount of life insurance needed to cover off a good percentage of income over time (usually to retirement), and also consider pension fulfillment needs, which we should discuss more, perhaps in another session.

People without drug coverage need to pay out of their own pocket, and doctors usually make decisions on what to prescribe based on ability of the patient to pay the bill. The same consideration should be made for life insurance.

First, the amount of insurance to protect the client should be determined, and only then should the affordability of the plan type be addressed.

In my experience, based on need, clients that have mortgages, families and several years to retirement, should look at the lower cost, higher payout of term life insurance. And in most cases a ten year term is a good option.

RSM: So a ten year term policy is the best option?

Craig: It is important to understand that insurance needs change as life changes. For that reason, the average life insurance plan, whether bought as whole life or term tends to change every 5 to 7 years.

The extra premium paid to the insurer during that period (if the term was longer than what you held the plan for) would be lost. So the best option is to buy the plan that best represents the closest term before your needs change.

If you’ve had a whole life plan or say a 20 year term plan and have changed to another plan of insurance then you are a case in point. The additional premiums that you paid could have gone towards paying down your mortgage.

RSM: What health checks are required for life insurance coverage?

Craig: When you apply for a personal life insurance plan, the insurance company will ensure your health is good by conducting a form of checks and balances. They will often order a doctor’s report if there are any grey areas and also cross-reference the answers to the application. Depending on age and amount applied for, there will be a nurse called to perform other tests and ask questions related to health history. Additional health or avocation questionnaires will also be used to paint the proper picture. The process is relatively painless yet thorough in ensuring full disclosure.

The insurer is more likely to challenge the applicant up front for health conditions that may not even be known to the applicant, but in doing so, this ensures that at claim time there is little to be challenged. Often the insurer will suggest results are sent to the family doctor to be discussed and dealt with. A mini-physical is a complimentary byproduct for those that refuse to visit the doctor regularly.

Very important to the integrity of the process, there is less likelihood that the applicant’s answers alone will form the basis for the contract. That is the protection you want, trust me! I like to call it being put through the ringer for your own good. The technical term is called pre-claims underwriting.

Creditor/mortgage insurance is riskier because the process looks more closely at you only at claim time. The term is aptly named post-claims underwriting. It’s unfair to challenge insurability after the fact. Despite the fact that premiums have been paid in good faith, the coverage your family relies on may be at risk of not being there.

RSM: What types of questions do you recommend consumers ask an insurance agent before they make a purchase?

Craig: The first and most important is to ensure the agent can justify the reason for the amount of insurance suggested.

Second, did the agent take into account other insurance already in force, and make recommendations as to why they should be kept, or why they should be discontinued.

Third, and this is off topic but an important part of insurance planning, did the agent consider what would happen if you live? In other words, what if you were to become disabled? Is the agent concerned with ensuring your income will continue in all circumstances, disability or death?

If you’ve found a good insurance agent, you should expect to pull out all of your insurance documents including employee benefit books and pension statements.

Insurance selling should be in direct proportion to insurance planning.

RSM: Thanks for your insights Craig!

Next time, RateSupermarket.ca will talk to Craig about insurance requirements for the self employed.

Craig Ferguson Insurance Services has been providing Individual & Group Insurance solutions since 1991.

“The combination of sustained growth of household debt relative to income and a rising interest rate environment could increase the vulnerability of households to an adverse shock”, he said.

Low mortgage rates have enticed Canadian consumers to jump on the housing ban-wagon and take advantage of ‘cheap debt’. The government’s current monetary policy is to keep interest rates low until the middle of next year. This strategy was in part meant to stimulate consumer spending – the domestic market needed to offset the decrease in external demand due to a global recession.

And stimulate consumer spending it did. The Re/Max Housing Market Outlook Report confirmed that national residential housing sales are expected to top 465,000 units by year-end 2009, a 7% increase over last year; while housing values climb 5% to $318,000, up from $303,594 in 2008.

It’s hard to believe that all this activity took place during the worst recession since the Great Depression.

So is the government concerned that Canadians have overextended themselves? Is the housing bubble about to burst?

Personal bankruptcies in Canada rose 41% in the third quarter in comparison to the same period last year. Bankruptcy as a proportion of the population is at its highest level since 1991. Delinquency rates on loans have also increased, with the proportion of mortgages with payments in arrears three months or more up by 50% over the past year.

But despite these alarming numbers, Carney believes that the risks to the current Canadian housing sector are low. He warns consumers and financial institutions to be vigilante as we climb the latter to economic prosperity.

“It is the responsibility of households now to ensure that in the future, when the recovery takes hold and extraordinary measures are unwound, they can still service their debts. Similarly, lenders have responsibilities. Financial institutions should actively monitor risk stemming from households and not take false comfort derived from mortgage insurance and past performance of household credit.”

Only time will tell if the government’s attempt to stimulate consumer spending has gone too far. When interest rates begin their climb, and they will, many consumers will be wondering if they’ve bitten off more debt than they can chew.

Kelly
PR@RateSupermarket.ca