In January of this year, Jim Flaherty, Canada’s minister of finance, announced that new mortgage and HELOC restrictions were to come into effect in March, 2011. The purpose of the new restrictions was to help curb consumer debt, which was said to be rising at an alarming rate. Over three months later, the real estate market has been hot, but affordability levels have dropped – probably as a result of inflation and continuously rising levels of consumer debt. So have Flaherty’s restrictions brought the stability he sought, or are consumers only sinking deeper into debt?

The New Rules

In an effort to reduce interest payments and to help speed up the process of building equity, Flaherty reduced the maximum amortization from 35 to 30 years for high ratio mortgages. To encourage homeowners to save more and stop borrowing against their homes, he reduced the refinancing of mortgages from 90% to 85%. Finally, the government withdrew their backing of HELOCs. This, in effect, made the lending institution responsible for consumer debt, rather than the taxpayer. Flaherty was quoted as saying, “The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and futures.”

The overall impact

The Globe and Mail reported that CREA (the Canadian Real Estate Association) blamed the new rules for April’s reported slip in home sales (14%), when compared to last April’s sales. The association’s chief economist, Gregory Klump, said, “Changes to mortgage regulations that took effect in April, 2011, likely sidelined a number of first-time home buyers.” It should be noted, though, that the largest declines were found in the more expensive markets of Vancouver and Toronto.  Klump says that it’s difficult to gauge the impact of the new rules when comparing the two months. “[April 2010] included the impending tightening of mortgage rules, speculation about higher interest rates and the looming introduction of the HST in some provinces. This year, additional measures to tighten mortgage rules were implemented in March and the other transitory factors were absent,” he says.

Some brokers suggest that there has been little to no change for the average homebuyer. Overall, they seem relatively unaffected by the decrease in amortization – in fact, it’s mostly seen as a positive change that can save homeowners money. What the new regulations have done is to eliminate first time buyers whose ability to afford a new home was tenuous at best, and real estate investors who can no longer afford to put down 20%.

Should we blame mortgages for rising debt?

Canada has always had a history of stringent lending policies, which is perhaps one of the reasons why we have coasted through this economic crisis relatively unscathed. Our neighbours to the South, on the other hand, are experiencing the repercussions of more lax lending laws. In fact, the US housing market has just suffered another double dip in prices – they have now experienced the most significant price declines seen since the Great Depression.

Statistics Canada’s most recent financial report states, “Mortgage debt advanced, partly reflecting relatively stable borrowing costs as well as higher housing resale and renovation activities.” But it also reported that the “ratio of household credit market debt to net worth increased to 24.0%, reversing the decrease in the previous year.” Household credit market debt is attributed mostly to credit card and retail debt, not mortgage debt.

While interest rates on mortgages are relatively low, interest rates on credit cards average close to 20%, and reach as high as 29.9%. This type of credit is easier to get. Credit card debt is easier to accumulate, but much harder to pay off. According to a recent TransUnion report, an “analysis of Canadian credit trends found that total debt per consumer (excluding mortgage) for the nation increased 4.5 percent in the last year” – on average, Canadian’s report $25,597 in credit card and retail debt. This begs the question, should we be so worried about mortgage debt, when credit card and retail debt is really the problem in Canada? Perhaps we need to focus on educating Canadians on how to manage personal debt more than we need to worry about adjusting mortgage rules.

Melanie
Writer for RateSupermarket.ca

For me and most of my friends, mortgages represent the single large expense in our family budgets. We are staring at many long years of amortized mortgage payments on our homes. Yet, we are all still spending on vacations, cars and electronic goods. We spend even as we pay large sums of interest to service the biggest debt load of our lives.

Mortgages used to be treated with more respect. My grandparents led what we would consider to be austere lives until their mortgage was paid in full. They didn’t own a car or travel. Their single nod to consumerism was the purchase of a television set in the 1960s. Until their last payment was made to the bank, they didn’t even put aside money for retirement.

According to consumer advocate and financial expert Linda Leatherdale, our modern approach to spending is making us “house poor”.

“Your goal in life is to have a mortgage free house, especially by the time you retire,” she says. Money should be saved and applied to your mortgage, rather than spent on frivolities like trips.

Some financial experts make a strong case for paying off your mortgage before paying into an RRSP or buying equities. After all, it’s a guaranteed return and a safe bet. After seeing the value of my portfolio dribble away last year, it’s not difficult to convince me to invest in my mortgage first. But it will be challenging to curb the spending on holidays and other creature comforts.

“To be house rich, you need to be disciplined,” Ms. Leatherdale counsels. “There’s nothing better than paying your mortgage. You give money to yourself, not to the banks.”

She has some stern advice for those who want to own their home before they retire. First, don’t even consider buying a home unless you have 20 per cent of the purchase price. A down-payment less than that will result in the added expense of mortgage insurance.

Next, make mortgage payments on a bi-weekly, rather than a monthly, schedule. The heightened pace is comparable to making 13 monthly payments, which will lead to a faster payoff and lower overall interest costs. If you can, double up on mortgage payments as often as possible.

“There is nothing better in life than being mortgage free,” says Ms. Leatherdale.

I’ll have to keep her words in mind the next time I feel the urge for a holiday.

The Globe and Mail reported that Vancity’s online banking arm, Citizens Bank, will stop offering residential mortgages and focus solely on credit cards and foreign exchange services for non-retail members. This has resulted in Vancity selling the majority of its retail loans, including mortgages, personal loans and secured lines of credit, to TD Canada Trust. This follows on the news back in November when Citizens Bank announced they were retreating from the broker channel.

Vancity President and CEO, Tamara Vrooman , says it is a good business decision because it returns capital that can be reinvested to enhance member services at the credit union. It also focuses Citizens Bank on what it does best.

“We pioneered online banking in Canada, but it’s become a crowded marketplace,” says Vrooman. “Our members have told us repeatedly that they want us to focus on our core strengths. We’re local, we’re community-focused, and our offering is based on building relationships and providing service. In a national, online market, we were unable to achieve the scale necessary to succeed. Therefore, the bank’s business model wasn’t making full use of our strengths.”

The sale, which closed on August 5, 2009, means that:

None of Citizens Bank’s 30,000 members need to take any immediate action. Citizens Bank will work closely with each membr to minimize any inconvenience and provide the support they need to transfer their business over the coming months.

Canadian housing market

Canadian mortgages

Loans & personal lines of credit

They also included this table outlining the growth of various forms of Canadian household debt:

RBC Royal Bank has announced that they have dropped their residential mortgage rates by an average of 0.30% and the changes were effective on April 25, 2009.

The changes are as follows:

Special Offers(*)

In addition, the Royal Bank of Canada announced new mortgage rate specials as follows:

(*) The rates indicated are special discounted rates and are not the
posted rates of Royal Bank of Canada. To calculate a rate discount
compare the Special Offer rate against the posted rate for the
applicable term.

Special Offers may be changed, withdrawn or extended at any time,
without notice. Not available in combination with any other rate
discounts, offers or promotions.

You can compare RBC mortgage rates against the market now.

Well yes, the markets are still way down from where they were last year and Barack Obama hasn’t had time to fix all of George W. Bush’s mistakes just yet. True true, the Canadian Parliament is still on hiatus during these tough economic times, but regardless, that doesn’t mean you should still be hiding under the kitchen table. Here, take my hand … I gotcha. I promise things will get better, you just wait and see.

What’s that? You want to watch the news. Um, are you sure that’s a good idea, seeing as you’ve been crouched in that dark spot for five weeks now? Yeah, I think giving your eyes time to adjust to the light would be wise, so we’ll just leave the tube off for now. I think there’s a Sports Illustrated on the coffee table over there. That should help you ease back into news of the world.

But wait, oh no, don’t touch that newspaper …

And another once-brave soul is crippled with fear by the doomsdayers in the national media.

It’s true, the Canadian economy is in tough right now. There’s no sense sugar-coating it, or ignoring it – it just is what it is. Corporations are looking out for the best interests of their shareholders and taking jobs overseas where they pay their new staff a pittance. Then North America’s Big 3 automakers received a multi-billion dollar bailout from both the U.S. and Canadian governments to get them through the next few months, although it’s difficult to see how GM, Ford and Chrysler will suddenly begin making smaller, more fuel efficient vehicles in the next six months, saving the companies’ bacon, as well as the jobs of hundreds of thousands in Ontario alone.

Undoubtedly, times are tough. Jobs – especially in Ontario – are at a premium. People are saving their money because they could be next in the unemployment line.

Our governments don’t seem to have a plan, nor have we even had the chance to hear from our federal politicians since early-December when the Prime Minister asked for a proroguement of Parliament in order to buy his government time in the face of being overtaken by a coalition government.

In other words, things are a complete mess. We’re told that every time we turn on a television, open a newspaper or listen to the radio.

But us Canadians, for the most part, can always find the silver lining. What would that be? Well, we’re not the United States of America for one. We aren’t in full-blown recession, despite some saying we’re on the brink. We don’t have a skyrocketing unemployment rate (although it continues to climb in some parts of the country). We don’t have families foreclosing their homes at an alarming rate, destroying the one industry many thought was infallible – big banks. In fact, our banks are doing OK, although they’re being a bit more careful when distributing loans these days, which means they’ve learned from the mistakes of their American counterparts, and there’s nothing wrong with that.

In fact, Canada’s real estate market is holding up relatively well, considering the doom and gloom that we’ve been force-fed over the past six months, with some declines in house sales and starts in most parts of the country. People could have freaked out, listed their home for next to nothing just to get out from under what remained on their mortgage and moved into an apartment with cheap rent. But Canadians – for the most part, because there’s always an exception – haven’t flipped out or bought into the hype of “the next Great Depression” and other buzz words designed to make us tune in at 11 for more.

What has probably been created in the current economic slow-down is a return to ‘normal’ market prices in most Canadian centres. In Alberta and B.C., prices skyrocketed during the oil boom after the past five years. Now, oil prices have dropped to about $50 per barrel, and gas is about half the price at the pump as it was at its peak of this past summer. So as the oil and gas industry comes back down to earth, the real estate market should do the same.

The same goes in metropolitan areas like the Greater Toronto Area that have seen unprecedented growth and house price hikes in recent years. Now, prices are slowly creeping down to more acceptable levels, as people are in a ‘wait and see’ mode before buying during the current economic climate. What that does is create a more competitive sales environment and puts the buyer into the driver’s seat.

And here’s where the savvy – and gainfully and securely employed – have a chance to capitalize on a flooded market. People need to move homes, condos, and apartment buildings, in order to move onto the next stage of their lives. If people aren’t lining up to purchase their property, a potential buyer could be in a position to do some serious negotiating. So undercut. Offer them something they almost have to refuse, and then wait for the counter-offer. If they drop their price, definitely budge from your original offer, but keep that price low – lower than you even feel comfortable offering – to see just how far they’ll bend before telling you to take a hike.

Sure, there’s a chance you may lose a shot at buying your dream home, but there’s also a good chance there’s another dream home currently sitting on the market with an owner that may be more willing to dance. We’re not at the point where people are simply walking away from their homes, so people are still looking to make a profit, and should have plenty of wiggle-room, so take advantage of it.

And here’s the kicker – Canadian banks are still willing to be involved in the real estate market through low interest rate mortgages. In fact, some are even encouraging people to spend at a time when most would think they’d batten down the hatches and hope people don’t start foreclosing. Sure, you will be heavily scrutinized when applying for a mortgage – they’ll want proof your job is recession-proof, no doubt – but think of the opportunities for smart and savvy real estate investors who can smell a deal at a time when the market is in flux.

Chances are, if you’re visiting RateSupermarket.ca today, you’re thinking about buying a home, looking to compare mortgage rates or at the least, doing some research to find out what you can afford and what bank will make your dream come true. Well good for you. Don’t listen to the naysayers, doomsdayers, and those carrying umbrellas to protect themselves from falling skies. Don’t hide in a cave to await the return of a perfect economy, because the economy as we know it may never be the same, so if you’re secure in your job and comfortable getting into a mortgage and have the blessings (and monetary backing) of a good financial institution, go for it.

When everyone’s telling you this isn’t the time, you may find there’s no better.

Dwight@RateSupermarket.ca
RateSupermarket.ca staff writer

Questions or comments? Please send all your questions or comments to Dwight@RateSupermarket.ca.