A mortgage can be painful but For the wealthy, it’s a money-making tool

Canadians typically consider mortgages as a burden, to be paid down as quickly as possible, or at least before retirement.

It may seem counter-intuitive, but for the wealthy, mortgages are a tool to make more money.

Carrying a mortgage when you don’t need one might seem like a head-scratcher. Why borrow when you’ve already got plenty of funds at hand?

But as F. Scott Fitzgerald purportedly once said, “The rich are different from you and me.”

Wealthy people take out mortgages against their real estate holdings and use the money to invest.

JGARERI/ISTOCKPHOTO

It sometimes makes sense for high-net-worth people to take on new debt, says James Robinson, mortgage agent at Dominion Lending Centres in Toronto.

“Using your real estate holdings to borrow money for investment purposes – either your principal residence or any other investment or personal-use property – falls under the ‘wealthy people become wealthy by using other people’s money’ category,’” Mr. Robinson says.

“If you can invest at a higher rate of return than you can borrow, you will increase your wealth and, therefore, your net worth.”

There are also tax advantages, though Mr. Robinson advises investors to seek professional advice about tax implications. In Canada, mortgage interest is not tax deductible; however, the interest paid on funds borrowed for investment is, so borrowing has to be structured carefully to avoid running afoul of the Canada Revenue Agency.

Remortgaging or taking a line of credit secured against property can also be advantageous for investors who are affluent but don’t quite reach the high-net-worth (HNW) category.

Financial institutions generally consider HNWs to be people with $1-million in liquid assets, while those with $100,000 to $1-million are considered “affluent” or “sub-HNW.”

One reason that HNW clients can consider taking on a mortgage is that “normally, they’re the ones who have access to assets for security [their houses and other properties] as well as the income required to service the debt,” says Paul Shelestowsky, senior wealth advisor at Meridian Credit Union in Niagara-on-the-Lake, Ont.

For those who are barely at the HNW threshold but want to boost their investable assets, “unless you can obtain a preferred rate from your lender, using secured debt is the only advisable way to borrow to invest,” Mr. Shelestowsky says.

Mr. Robinson cites several good ways to borrow to invest.

“The most common strategy used is to simply refinance your principal residence to access some of the equity you have built up over the years, and use the additional funds to purchase an investment property,” he says.

Wealthy borrowers who refinance in this way increase their asset base through leveraging, but this also is contingent on the value of real estate going up, Mr. Robinson adds.

“If you own $600,000 worth of real estate and prices rise by 5 per cent, you have increased your worth by $30,000. If you leverage and now own $1.2 million worth of real estate and prices rise by 5 per cent, you have increased your worth by $60,000.”

What could possibly go wrong? A few big things, the experts say.

For one, it’s never certain that the value of real estate will rise. There’s always the risk that you will be paying off a mortgage on a property whose value is drifting sideways, or even dropping. This could be happening, too, as your market investments are nosediving.

“Remember that when you leverage and asset values fall, the same multiplying effect occurs in the opposite direction. Don’t get caught in a get-poor-quick scheme,” Mr. Robinson says.

Real estate values do tend to go up over time, but it is not a straight line, he adds. In Ontario and other parts of Canada, the years from 1989 to 1996 were brutal for real estate values.

Debt-holders must be patient, says Andrea Thompson, senior financial planner with Coleman Wealth, part of Raymond James Ltd. in Toronto. “Investors must be able and willing to sit with a paper loss and continue to collect the monthly income, rather than panic and sell at a loss.”

Investors considering taking a mortgage should also be mindful of rising interest rates. The Bank of Canada is holding the line on rates for now, but it has hiked its key lending rate three times since last July, Ms. Thompson says.

High-net-worth borrowers also should consider the type of mortgage. “Looking at a variable rate or open mortgage might be preferable to some who want more flexibility, if they want to collapse or modify their strategy if and when interest rates rise,” Ms. Thompson says.

A different way to go, Mr. Robinson says, is to take what some lenders now offer as an “all in one” borrowing product, secured by real estate.

“This combines a mortgage with a home equity line of credit to allow you excellent flexibility in your borrowing as well as the ability to keep your borrowing segmented for interest calculation and tax deductability,” he explains.

Even the wealthy should be cautious in this volatile investment climate, Mr. Shelestowsky says.

“An overarching theme from the investment world is ‘lowered return expectations’ going forward,” he says. “Target expectations have been drastically reduced across all investor profiles.”

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Canada Not Alone in House Price Mania

The dramatic rise in Canadian house prices has been making headlines almost daily.

And for good reason: prices in and around the country’s hottest markets, Toronto (and until recently) Vancouver, have been posting double-digit annual gains. In May, prices in Toronto and Vancouver were up year-over-year 29% and 8.8% respectively.

But Canada isn’t the only country experiencing skyrocketing home prices.

Here’s a look at some of the gains over the last four years around the world (data compiled by The Economist):

  • 66% in Australia (+2.1% in the past year)
  • 30% in Britain (+6.3% in the past year)
  • 102% in Canada (+10.5% in the past year)
  • 44% in China (6.2% in the past year)
  • 61% in Israel (+9% in the past year)
  • 132% in New Zealand (+12.2% in the past year)
  • 115% in Sweden (+3.6% in the past year)
  • Even U.S. home prices have largely recovered to post-financial crisis highs. They’re up 10% from 2012, and up 4.8% over the past year.

But the two hottest housing markets are currently Iceland and Hong Kong, which posted annual price increases in Q1 of 17.8% and 14.4%, respectively, according to Knight Frank’s Global House Price Index.

Since 2015, prices in Hong Kong have risen a whopping 236%. If you think Toronto prices are bad, those desperate for a slice of the real estate market in Hong Kong are now paying upwards of US$500,000 for “micro apartments” that measure no more than 161 square feet—just barely large enough to contain a Tesla Model X, as reported by Bloomberg.

Following Iceland and Hong Kong in the 55-market house price index is New Zealand in third spot and Canada, currently ranked as the world’s fourth-hottest housing market.

Signs are also appearing that other European markets are starting to pick up steam as well. Research firm Global Property Guide reported that in 2016, 18 of the 23 European housing markets that it tracks posted price increases, with some of the strongest gains in Iceland, Ireland (+8%), Romania (+11%), Estonia (+7.4%), and Germany (+6.9%).

Increases Largely Isolated to Major Cities

Not surprisingly, the largest price gains—in Canada and around the world—are predominantly restricted to the largest cities.

Over the past four years, prices are up 47% in Vancouver, 54% in London, UK, and 75% in Auckland, New Zealand.

International Monetary Fund (IMF) data shows that in Canada, home prices at the national level are about 13% lower compared to the major cities. The difference is even more pronounced in the UK, U.S., New Zealand and particularly in China, where average national home prices are 55% cheaper than in the major cities.

The IMF tracks housing markets in 57 countries and reports its findings in its quarterly Global Housing Watch. The economies are divided into three categories:

“Gloom” – Those where house prices fell substantially during the financial crisis of 2008-09 and have yet to make a turnaround (Brazil, China, Russia, Spain);

“Bust and boom” – Countries that have seen their prices rebound after falling sharply during the financial crisis (Germany, Ireland, Japan, New Zealand, UK, U.S.); and

“Boom” – Countries that saw only a modest drop in home prices through the financial crisis, followed by a quick rebound (Australia, Austria, Mexico, Sweden, Switzerland).

Unsurprisingly, Canada finds itself among the 22 “boom” economies, and has been on the IMF’s radar as prices continue to soar higher.

IMF’s Eye on Canada

In a previous report from June 2016, the IMF commented specifically on Canada’s housing market and its level of risk at that time: “Macroprudential policy has been broadly effective in alleviating financial stability risks and reducing tax payer exposure to mortgage finance. Additional macroprudential measures may be needed if housing market vulnerabilities intensify.”

Fast-forward to October 2016 when the Department of Finance did just that and introduced its new mortgage rules, which expanded mortgage stress testing requirements and imposed new restrictions on mortgage insurance.

With home prices in the Greater Toronto Area and Greater Vancouver Areas continuing to rise through the early part of the year (more so in Toronto following Vancouver’s introduction of a 15% foreign buyer’s tax), a new IMF report in May sounded yet another warning:

“(Canada’s) $1.5 trillion mortgage market has been important in sustaining private consumption but households are highly indebted and housing affordability, particularly in Vancouver and Toronto, has become a social issue with many first-time buyers priced out of the markets,” read the IMF report. “Credit ratings of Canada’s six largest banks were lowered recently, reflecting concern that high household debt and the rapid appreciation of house prices could weaken asset quality in the future.”

And back in January the Organisation for Economic Co-operation and Development (OECD) had also commented on the growing risks associated with Canada’s rising home prices.

Catherine Mann, the OECD’s chief economist, said a “number of countries,” including Canada and Sweden, had “very high” commercial and residential property prices that were “not consistent with a stable real estate market.”

Stepping Back from the Doom and Gloom

Despite the rapid increases in global house price, at least one top economist says that in itself isn’t cause for automatic alarm about another global financial crisis.

“This is a time for vigilance, but not panic,” Prakash Loungani, a member of International Monetary Fund’s research department, wrote in a blog post.

He and colleague Hites Ahir argue that the dynamics are different from the housing boom of the 2000s for two reasons:

  1. The current rise in house prices is not synchronized across countries. “And within countries, the boom is often restricted to one or a few cities. In many cases, the booms are not being driven by strong credit growth: some house price increases, particularly at the city level, are due to supply constraints.”
  2. Governments are now more active in using “macroprudential policies to tame housing booms.”

In its own report on the Canadian housing market, Fitch Ratings, while acknowledging the increasing vulnerability to a steep price correction, said there are key “structural features” that would safeguard a housing crisis like that seen in the U.S.

“Canada is unlikely to mirror the declines and fallout experienced during the U.S. housing crisis due to major differences in the housing and mortgage finance systems,” said Fitch Director Kate Lin, noting that banks are subject to rigorous oversight and regulations that ensure prudent mortgage lending and underwriting standards.

“What’s more, credit quality for Canadian mortgage loans remains strong unlike the drift towards weak borrower and loan quality that we saw a decade ago in the U.S.,” she said.

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When Interest Rates Inevitably Rise…

In a new report on “household indebtedness and financial vulnerability,” the Parliamentary Budget Office (“PBO”) has provided calculations on how increased interest rates would affect debt service costs for Canadian consumers.

The PBO report assumes that the effective mortgage interest rate would rise from 2.9% as of Q1-2017 to 4.8% by the end of 2021 and the average rate on non-mortgage debt would rise from 5.4% to 7.6% over the same period.

In the PBO scenario, the overall debt service ratio of Canadian consumers would rise from 14.2% to 16.3% (expressed as a percentage of personal disposable income). This would be a severe increase in debt service costs (it would exceed the highest level that has been seen in the past 27 years, which was 14.9% for just one quarter in 2007).

If this scenario of a rise in interest rates (by about two percentage points) comes to pass and ifthere are no mitigating factors, this outcome would indeed be quite challenging to many consumers and it could very well impair the broader economy. Yet, these two ifs provide two important caveats for understanding the PBO report.

Just One of Many Possible Scenarios

The PBO report considers just one scenario, in which interest rates rise quite sharply. Since there is just one scenario, it looks like a forecast, which makes it tempting to see this as an event that is highly likely to occur. In reality, this is a “what-if” exploration, and not an event that is guaranteed to occur. There are many other possible scenarios that would yield different estimates of impacts.

I have two ways of looking at the PBO’s scenario for interest rates.

The first is that it looks a great deal like the interest rate forecasts that have been published by the major banks during the past decade: repeatedly, those forecasts have pointed to increases of about 1.5 to 2 points during the coming 1.5 to 2 years. Although they have been consistently wrong so far, their forecasts are still following that pattern.

The second is that the PBO has not produced a strong argument for its forecast: “the Government of Canada 10-year benchmark bond rate was projected to increase from 1.7% to its long-run level of 4.0% by the end of 2021.” They seem to be making a “reversion-to-the-mean” argument, which is a last-resort argument that some analysts make when they can’t come up with a real argument. In a different PBO report on the economic and fiscal outlook, there is commentary that “we have also revised upward our outlook for Canadian long-term interest rates, reflecting higher-than-anticipated U.S. long-term rates.” There is certainly no argument within the PBO reports that supports the large magnitude of the expected rise in interest rates.

As an alternative argument I propose:

  • The Canadian economy has been muddling-through since the recession.
  • Following an extended period of exceptionally low interest rates, there is no evidence of incipient pressures for reflation.
  • Economic indicators have strengthened during the past year, and there may now (or in the near future) be some room for moderate increases in interest rates, to forestall future inflation.
  • But, any sharp rise in interest rates, such as the PBO scenario, would dampen consumer spending and business investment, especially in relation to home buying as well as investment in new buildings (residential and non-residential), which would impair the broader economy.
  • It seems most likely to me that even if rates increased substantially, the increases could not persist, and thus a realistic scenario for sustained higher interest rates should be less severe than is assumed by the PBO.

Two Big Mitigating Factors

The data used by the PBO on debt service costs is “obligated” payments ¾ for mortgages, the payments required based on the contracted amortization periods, and for other debts, the minimum monthly payments.

But, we know that most mortgage borrowers pay more than they are required to: Mortgage Professionals Canada’s fall 2016 report on the residential mortgage market estimated that Canadians are making actual mortgage payments totalling $105 billion per year. By contrast the data used by CBO assumes that they are obligated to pay $76 billion. The difference of almost $30 billion is voluntary excess payments. This gives the mortgage borrowers a huge amount of room to make adjustments in the event that higher interest rates result in increased obligated payments. In fact, this $30-billion cushion is enough to accommodate the PBO scenario: even if required payments increased by the amount the PBO assumes, the current actual level of actual payments is sufficient (in aggregate) to meet those obligations.

The second mitigating factor is that at today’s low interest rates, mortgage principals are being repaid very rapidly. In the borrower’s first payment, more than one-half is principal repayment. During the first five-year term of a 25-year mortgage, about 15% of the principal will be repaid (if only the minimum required payments are made). In the event that a renewing borrower is unable to afford a higher interest rate, there should be room to reschedule payments, as an alternative to default.

To conclude, yes, it is true that interest rates may be higher in the future. Yet, it seems unlikely that the increases in interest rates will be anywhere near as large as is assumed by the PBO scenario of a 4.9% mortgage interest rate (as well as by the mortgage insurance stress test, at 4.64%). We don’t know what will happen to interest rates. But, we do know that there is a great deal of resilience within consumers’ financial situations.

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Did You Know About Rent To Own Home in Toronto And Its Benefits?

Rent to own home is a unique concept of making use of a property of your desire. It is the concept of leasing that binds rent to own homes. Rent to own home may seem very much like mortgage agreements, but they are different in principals from mortgage agreements. Rent to own home Toronto is the most suitable to people who are in need of a house with little finances compared to the purchase price of the property. In a rent to own home Toronto setting, you only have to pay a little percentage of the total cash price of the property you are about to lease. It is the down payment and is generally around 20% of the total cash price.

How A Rent To Own Home Toronto Deal Works

You sign an agreement with the owner of the property who is also called the Lessor. The agreement includes all the terms and conditions such as the term of the lease, the down payment, the periodical payment and the terms of non-payment or default of payment by the lessee. The lessee is the person who is opting for the rent to own home property. You can move into the property right after the agreement is signed between you and the lessor. The ownership of the house passes to you only at the payment of the last instalment, unlike in a mortgage.

The unique feature of the rent to own home Toronto contract is that you have the option of opting out of the deal. It means you can reside at the property for a tenure you wish to and can decide if you really want to purchase the house because there are many chances where you may first want to know if the property is suitable for you in various criteria.

A rent to own home Toronto offers you many benefits than other forms of purchasing properties. It involves less initial investment from your side. You are allowed to move into the house as soon as you enter into the deal. It has much lesser formalities than a mortgage transaction. It is a win-win for both the lessor and the lessee. Most importantly you are free from the market price fluctuations of the property as the cash price of the property is set in the initial terms of the rent to own home deal.

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Why Private Mortgages Are As Important As Other Mortgages?

Rent to own home is a unique concept of making use of a property of your desire. It is the concept of leasing that binds rent to own homes. Rent to own home may seem very much like mortgage agreements, but they are different in principals from mortgage agreements. Rent to own home Toronto is the most suitable to people who are in need of a house with little finances compared to the purchase price of the property. In a rent to own home Toronto setting, you only have to pay a little percentage of the total cash price of the property you are about to lease. It is the down payment and is generally around 20% of the total cash price.

How A Rent To Own Home Toronto Deal Works

You sign an agreement with the owner of the property who is also called the Lessor. The agreement includes all the terms and conditions such as the term of the lease, the down payment, the periodical payment and the terms of non-payment or default of payment by the lessee. The lessee is the person who is opting for the rent to own home property. You can move into the property right after the agreement is signed between you and the lessor. The ownership of the house passes to you only at the payment of the last instalment, unlike in a mortgage.

The unique feature of the rent to own home Toronto contract is that you have the option of opting out of the deal. It means you can reside at the property for a tenure you wish to and can decide if you really want to purchase the house because there are many chances where you may first want to know if the property is suitable for you in various criteria.

A rent to own home Toronto offers you many benefits than other forms of purchasing properties. It involves less initial investment from your side. You are allowed to move into the house as soon as you enter into the deal. It has much lesser formalities than a mortgage transaction. It is a win-win for both the lessor and the lessee. Most importantly you are free from the market price fluctuations of the property as the cash price of the property is set in the initial terms of the rent to own home deal.

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To Know About Mortgage Renewal Is As Important As To Know About A Primary Mortgage

Mortgage renewal, as it literally means, is the process through which one can renew their mortgage. It is a new agreement to either to continue to extend or to come to whole new terms with your mortgage provider. So, if your mortgage period has come to an end, and balance payable to your mortgage lender still remains, renewing your mortgage comes into play. And so, through a mortgage renewal, you can come to new terms with your mortgage lender depending on your financial position and other responsibilities. This process is very simple, as it only involves the approval of the renewal contract byyou. Mortgage renewal is similar to a car insurance, wherein you only receive the papers and there exists a continued process of payment, which is the premium in case of car insurance and loan installment in case of a mortgage.

 

We do provide some tips for the mortgage holders to follow, who plan for mortgage renewal

-Review your mortgage renewal options much ahead of your maturity period. It means start preparing for a new mortgage and check for what all options are available to you in case you opt for a mortgage renewal. Also, most of the lenders are ready to start your renewal process 4 months(120 days) before your mortgage’s maturity date.

-While you check your options, also assess your financial goals which you want to attain in the time to come. It means, throughout the period of your mortgage, a lot could change. So your original plans for which you had chosen the former mortgage plan could change by now. So you are advised to chose the renewed mortgage plan wisely by keeping in mind all your financial goals.

-Keep a check on the mortgage rates of the market. Law says that your current lender has to send you a mortgage renewal invitation at least 21 days before the maturity date. Most lenders do send the renewal slips sooner than when 30 days remain for your maturity. So you have additional time to assess the rates, policies, and maturity period of all the options available to you.

Opting for mortgage renewal with your current lender is better if there aren’t any groundbreaking differences in your choice and in the options given to you by your current lender.

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An overview on Rent to Own Home deals

Most of us aspire for own homes, but what percent of the population really owns a home? Won’t exceed 40%. Are you among the 40%? If not, you can be. The concept of rent own homes Brampton is there only so that people with lower finance availability can purchase a home, at the end of a certain pre-decided period. It is different from a mortgage because the sale does not take place at the beginning of the contract and there are added benefits in rent own home contracts like-  you don’t need a good credit score, like in mortgages, to qualify for a rent own homes Brampton agreement and you don’t need a lot of cash for down payment, instead a small percentage of the pre-decided purchase price is by default the down payment etc.

rent to own homes Brampton

The following are the important features of a rent to own homes Brampton contract:

1. The buyer gets to move into the house right away

2. The terms and conditions of the contract are decided in the beginning of a rent to own home contract and before ANY money changes hands. They include the period of rent, the rental, the down payment, the lease period etc.

3. The buyer is responsible for the maintenance of the home.

4. The down payment in a rent to own homes Brampton contract is also called ‘option money’ and is generally not refundable but is applied as down payment towards the same home for a mortgage.

5. The sale takes place once the rental period is over and your credit has improved. If needed, you can extend the term (subject to approval).

6. If you are not able to make your monthly payment, you have the option to sub-lease the property.

Rent to own home plans is good for buyers who are not able to get traditional bank financing. There is no risk of collateral as the property is in the name of the seller till the last payment. The buyers can also walk away from the ‘option’ contract i.e rent to own home contract if they find anything unusual or comfortable while residing at the time of rent. The rent to own home market is a little more complicated than the real estate market in order to find the best properties, terms of lease etc and hence a mortgage broker or an agent may be the best option at any point of time.

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Did you know you can Rent-to-Own a Condo?

What Is A Condo?

Condominiums, commonly known as condos, are properties that have individual housing units in a residential building or property. Each of the units is either separately owned or may be rented, and every condo has a common area like compound, parking, etc., that are jointly owned. It differs from an apartment style of living. Apartment buildings have a single owner while in a condo, there are different owners of each residential unit, an association with the Condominium properties exists as a society and not in an apartment residence, etc. 

Condos are built in different structures. They can be like regular apartments or stand-alone houses in a housing society or in the form of townhouse complexes. In any case, the Condo is managed by the association which binds all the condo units.

How Can You Rent To Own A Condo?

The sale of a condo unit is just like the sale of any other residential property which involves a selling deed between the owner and the buyer. Rent to own Condo is a type of sale offer to acquire a Condo. People with little or no finance and who are in need of a residence like Condo can opt for a Rent to own Brampton Condo deal. By signing such a deal, the buyer gets to move into the condo by neither purchasing the place nor on rent. In it, the buyer agrees to take the Condo unit on lease and make a monthly payment towards the owner. At the end of a certain period after making all the payments decided as per the terms and conditions, the buyer gets to own the condo property. To explain further, in a rent to own Brampton condo purchase, the ownership of the property is transferred to the buyer only at the last payment of the instalment.

It is similar to a mortgage in the context of the periodical fixed payment feature but is better because rent to own condo do not require a down payment at the beginning of the contract and are easier to avail than bank mortgages. Other than that, rent to own a condo also is beneficial in tax deductions, less maintenance and full control of the residential space. Lastly, it’s also useful to people who are willing to make an investment but are shy of cash.

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Why a Variable Rate Mortgage is better than Fixed

Updated as of Spring 2016

Ah yes. Spring is here. The snow is melting, flowers are starting to grow, but more importantly, it’s real estate season, and a realtor near you will soon be knocking on your door asking again if you’d like to buy or sell.

This is an important time for the banking industry, since a significant amount of their profits are traditionally made on the money they lend in mortgages.

Consumers are getting savvier. Rather than just going to their local bank branch, they’re increasingly shopping around for the best rate or going through a mortgage broker. This makes sense, considering comparison shopping can save a borrower thousands in the long run.

Deciding if you should go variable or fixed can be a tough decision to make. Both options have their advantages and drawbacks.

The Difference Between Variable And Fixed

Fixed Rate: This mortgage is set over a term of usually 1,3,5, or 10 years. During that term, the rate you first sign with will be the rate you pay throughout the term of the mortgage; in other words, there are no surprises. You have a permanent rate and payment that won’t change. This is great for peace of mind, especially when the future holds uncertainty.

The fixed rate is higher than the variable rate, with very few exceptions. Taking a fixed rate over a variable is almost like taking an insurance policy — because it’s predictable, you are taking on much less risk, which is why fixed rates are priced higher.

The fixed rate itself is driven by Canada Bond yields, which are driven by economic factors such as unemployment or inflation. Currently, these 5-year bond yields have flattened, paying less than 1% interest following decades of declines. These declines have driven fixed mortgage rates to some of the lowest rates ever.

The Canadian 5 Year Bond Yield VS Canadian Fixed Mortgage Rates

Variable Rate: Like the fixed rate, these are also set on a 1, 3, 5 or 10-year period, but are priced at a lower rate than the fixed rate mortgages. Why? Because if you go this route, you take on more risk.

Unlike fixed rates, variable rates might change over the term of your mortgage, and can increase or decrease. They too, are driven by economic factors, but your rate isn’t secured. Instead, variable rate mortgages are driven by the Prime Rate. Generally, the Bank of Canada will reduce rates when the economy needs some stimulus, and will raise them when the economy is doing well to control inflation.

The Canadian Prime Rate since 1970 according to the Bank of Canada

Because we don’t have a mortgage rate crystal ball and can’t know if variable rates will increase, decrease, or stay the same, you have to be prepared to take on some risk. Your rate may increase. If that happens, will you still be able to afford to pay it off every month? For one-third of Canadian families, an increase of as little as 1% could mean they will default on their mortgages.

While no one knows what the Bank of Canada will do with their rates, experts say it seems likely rates will remain relatively stable or increase. In addition to that, the Government has warned banks that dropping their rates any lower might spark a housing crisis.

Comparing the Two: Is Either Better?

While it’s possible to save money on a variable rate mortgage (assuming no major rate increases), the difference between fixed and variable rates is not significant as of spring 2016.

Fixed VS Variable Mortgage Rates in Canada since 2008

The Verdict For Spring 2016

As you can see, the savings difference on a monthly basis by going variable isn’t too significant at the moment. Given that variable rates are likely to increase over the 5-year term, it might be worth paying the extra $64 a month to have the peace of mind and stability that a fixed rate mortgage offers in this rate environment. This is a growing trend with nearly 66% of Canadians choosing fixed rates right now.

However, this might not apply to everyone, and there isn’t a one-size-fits-all solution. You do have to consider other factors, such as shorter terms or the flexibility you need built into your mortgage. For example, if you sign on to a 5-year fixed mortgage but decide to sell or refinance in 3 years, there could be some hefty fees associated with it.

If you do decide to go variable in hopes of saving some money, perhaps consider opening a high-interest savings account and put away the difference that you would be saving versus a fixed mortgage to mitigate some of the risk of rising rates. This way if rates do go up, you’ll have a cushion to help you pay it off. On the other hand, if rates decrease then you’ll be in a better position in the end.

Watch out for low-interest lenders who require CMHC insurance with 20% down. Some lenders would like to minimize the risk of default and they will require the CMHC insurance regardless of the size of the downpayment. The CMHC premium is a one-time percentage of a mortgage balance, so treat it as ‘hidden’ extra interest. Make sure you are comparing apples-to-apples when comparing interest rates as the advertised rate is only half the story.

A fixed rate looks really attractive at the moment and might be the way to go for many. But if you’re unsure of how to navigate all these possibilities and details, be sure to talk to a reputable professional about what might be best for you based on your situation.

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Canada Not Alone in House Price Mania

The dramatic rise in Canadian house prices has been making headlines almost daily.

And for good reason: prices in and around the country’s hottest markets, Toronto (and until recently) Vancouver, have been posting double-digit annual gains. In May, prices in Toronto and Vancouver were up year-over-year 29% and 8.8% respectively.

But Canada isn’t the only country experiencing skyrocketing home prices.

house price

Here’s a look at some of the gains over the last four years around the world (data compiled by The Economist):

  • 66% in Australia (+2.1% in the past year)
  • 30% in Britain (+6.3% in the past year)
  • 102% in Canada (+10.5% in the past year)
  • 44% in China (6.2% in the past year)
  • 61% in Israel (+9% in the past year)
  • 132% in New Zealand (+12.2% in the past year)
  • 115% in Sweden (+3.6% in the past year)
  • Even U.S. home prices have largely recovered to post-financial crisis highs. They’re up 10% from 2012, and up 4.8% over the past year.

But the two hottest housing markets are currently Iceland and Hong Kong, which posted annual price increases in Q1 of 17.8% and 14.4%, respectively, according to Knight Frank’s Global House Price Index.

home price

Since 2015, prices in Hong Kong have risen a whopping 236%. If you think Toronto prices are bad, those desperate for a slice of the real estate market in Hong Kong are now paying upwards of US$500,000 for “micro apartments” that measure no more than 161 square feet—just barely large enough to contain a Tesla Model X, as reported by Bloomberg.

Following Iceland and Hong Kong in the 55-market house price index is New Zealand in third spot and Canada, currently ranked as the world’s fourth-hottest housing market.

Signs are also appearing that other European markets are starting to pick up steam as well. Research firm Global Property Guide reported that in 2016, 18 of the 23 European housing markets that it tracks posted price increases, with some of the strongest gains in Iceland, Ireland (+8%), Romania (+11%), Estonia (+7.4%), and Germany (+6.9%).

Increases Largely Isolated to Major Cities

Not surprisingly, the largest price gains—in Canada and around the world—are predominantly restricted to the largest cities.

Over the past four years, prices are up 47% in Vancouver, 54% in London, UK, and 75% in Auckland, New Zealand.

International Monetary Fund (IMF) data shows that in Canada, home prices at the national level are about 13% lower compared to the major cities. The difference is even more pronounced in the UK, U.S., New Zealand and particularly in China, where average national home prices are 55% cheaper than in the major cities.

The IMF tracks housing markets in 57 countries and reports its findings in its quarterly Global Housing Watch. The economies are divided into three categories:

“Gloom” – Those where house prices fell substantially during the financial crisis of 2008-09 and have yet to make a turnaround (Brazil, China, Russia, Spain);

“Bust and boom” – Countries that have seen their prices rebound after falling sharply during the financial crisis (Germany, Ireland, Japan, New Zealand, UK, U.S.); and

“Boom” – Countries that saw only a modest drop in home prices through the financial crisis, followed by a quick rebound (Australia, Austria, Mexico, Sweden, Switzerland).

Unsurprisingly, Canada finds itself among the 22 “boom” economies, and has been on the IMF’s radar as prices continue to soar higher.

IMF’s Eye on Canada

In a previous report from June 2016, the IMF commented specifically on Canada’s housing market and its level of risk at that time: “Macroprudential policy has been broadly effective in alleviating financial stability risks and reducing tax payer exposure to mortgage finance. Additional macroprudential measures may be needed if housing market vulnerabilities intensify.”

Fast-forward to October 2016 when the Department of Finance did just that and introduced its new mortgage rules, which expanded mortgage stress testing requirements and imposed new restrictions on mortgage insurance.

With home prices in the Greater Toronto Area and Greater Vancouver Areas continuing to rise through the early part of the year (more so in Toronto following Vancouver’s introduction of a 15% foreign buyer’s tax), a new IMF report in May sounded yet another warning:

“(Canada’s) $1.5 trillion mortgage market has been important in sustaining private consumption but households are highly indebted and housing affordability, particularly in Vancouver and Toronto, has become a social issue with many first-time buyers priced out of the markets,” read the IMF report. “Credit ratings of Canada’s six largest banks were lowered recently, reflecting concern that high household debt and the rapid appreciation of house prices could weaken asset quality in the future.”

And back in January the Organisation for Economic Co-operation and Development (OECD) had also commented on the growing risks associated with Canada’s rising home prices.

Catherine Mann, the OECD’s chief economist, said a “number of countries,” including Canada and Sweden, had “very high” commercial and residential property prices that were “not consistent with a stable real estate market.”

Stepping Back from the Doom and Gloom

Despite the rapid increases in global house price, at least one top economist says that in itself isn’t cause for automatic alarm about another global financial crisis.

“This is a time for vigilance, but not panic,” Prakash Loungani, a member of International Monetary Fund’s research department, wrote in a blog post.

He and colleague Hites Ahir argue that the dynamics are different from the housing boom of the 2000s for two reasons:

  1. The current rise in house prices is not synchronized across countries. “And within countries, the boom is often restricted to one or a few cities. In many cases, the booms are not being driven by strong credit growth: some house price increases, particularly at the city level, are due to supply constraints.”
  2. Governments are now more active in using “macroprudential policies to tame housing booms.”

In its own report on the Canadian housing market, Fitch Ratings, while acknowledging the increasing vulnerability to a steep price correction, said there are key “structural features” that would safeguard a housing crisis like that seen in the U.S.

“Canada is unlikely to mirror the declines and fallout experienced during the U.S. housing crisis due to major differences in the housing and mortgage finance systems,” said Fitch Director Kate Lin, noting that banks are subject to rigorous oversight and regulations that ensure prudent mortgage lending and underwriting standards.

“What’s more, credit quality for Canadian mortgage loans remains strong unlike the drift towards weak borrower and loan quality that we saw a decade ago in the U.S.,” she said.

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