borrowers - Toronto Real Estate Blog | Toronto Real Estate Blog

Tag Archives: borrowers

Canadians getting the message on debt load, Carney says

May 8, 2012 Miscellaneous, Mortgages and Financial Information

Jeremy Torobin – Globe and Mail

Canadian house prices are now almost five times higher than incomes, the latest illustration of why policy makers are worried about parts of the housing market.

Comment: Yes, the monthly mortgage cost on an $800,000 house is $2,800 – the same as a $200,000 mortgage at 21.5% interest in 1981. But that is $7,100 in 2012 dollars! Forget price to income, monthly costs have dropped by 2/3rds in the past 30 years, even as prices have risen four-fold.

The average price is roughly 4.75 times the average income, Bank of Canada Governor Mark Carney said Tuesday, noting that the historical norm is closer to 3.5.

Speaking to the House of Commons finance committee, he said “valuations are firm” in some cities and segments of housing, such as Toronto’s condo market, posing “more downside risk than upside risk.”

While “extremely attractive” mortgage rates linked to exceptionally low overall borrowing costs are a key reason, he said, borrowers need to make sure they’ll be able to afford any loans once interest rates start rising.

Comment: But we have been hearing about rising rates for years now. I remember 3–4 years ago, when rates dropped below 5% – and everyone screamed and wailed about rising rates. Now the best 5-year rates sit at 3.29%. Even with a 2% jump (an increase of almost 61%) we are only back where we were in 2008. Not really something to be scared of…

Prices in the biggest housing markets, Toronto and Vancouver, are moving in opposite directions of late, something economists say could keep the overall sector from overheating and, therefore, prevent a nasty drop in prices that ripples across the country. Still, Mr. Carney has indicated he is thinking about when to start raising interest rates, and higher rates will likely mean a housing correction as buying a home becomes less affordable.

Mr. Carney warned again last week that the use of home-equity lines of credit to finance consumption exploded over the past decade as prices rose, suggesting that if valuations were to drop sharply, millions of families would lose the confidence and capacity to keep spending.

On Tuesday, he said Canadians are absorbing his “message of prudence and caution.”

The annual growth of household debt – now 153 per cent of disposable income – has slowed in the past two years to around 4 per cent from almost 10 per cent, he told lawmakers. Also, more and more borrowers are taking on fixed-rate mortgages instead of variable-rate loans, leaving them less exposed to fluctuations in interest rates.

Comment: So we are paying down our debt, just like Carney asked. Is that not a good thing? We are taking steps, as a nation, to minimize that risk.

Still, he repeated that household debt is the No. 1 domestic risk to the recovery, and reiterated that if the economy continues to improve it “may become appropriate” to lift his benchmark interest rate from 1 per cent, where is has been since September, 2010.

The delicate challenge facing Mr. Carney and other policy makers, however, is to wean Canadians from debt-fuelled purchases without erasing the consumer spending that is being counted on for more than half of economic growth both this year and next, or causing a jarring correction in housing.

“There has to be an element of prudence in balancing the pace of slowing of this phenomena, with the underlying growth of the economy,” Mr. Carney told the panel, noting that measures to tighten eligibility requirements for mortgages, and greater scrutiny of applicants for home-equity lines of credit, are helping.

“The combination of measures that have been taken and a clear-eyed perspective of Canadians, which I think they have … will do much to manage the issue.”

Still, it’s clear the central bank is crunching numbers and assessing just how much any number of scenarios could slow the housing market, consumer spending, or the economy as a whole.

When Liberal MP Scott Brison asked whether the central bank – which has been prolific over the past year in its studies and reports on housing – has explored how overvalued house prices may be, Mr. Carney simply smiled and said, “Not publicly.”

—————————————————————————————————–
Contact the Jeffrey Team for more information – 416−388−1960

Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
—————————————————————————————————–

Incoming search terms

disposable income toronto

Banks in spotlight amid rising housing debt

February 2, 2011 Buying Real Estate, General Real Estate, Mortgages and Financial Information

John Greenwood, Financial Post

Amid rising uncertainty around the Canadian economy many analysts are quietly expressing concern about the banks and their exposure to ballooning consumer debt.

One statistic that gets bandied about is the value of outstanding mortgages which recently passed the $1-trillion mark.

What happens if employment starts to deteriorate and a lot of borrowers suddenly find themselves unable to make their payments? How would such an event impact real estate prices?

The good news for investors is that a major chunk of the riskiest home loans is guaranteed by the CMHC (read taxpayers). That’s great because mortgages represent the lion’s share of consumer debt.

But what kinds of other consumer debt do the banks hold and how much risk does that expose them to?

In the old days the answer would have been a simple ‘not much,’ but in recent years lenders have had huge success with so-called HELOCs, probably the second biggest category of debt after mortgages.

We say “probably” because there is limited public information. Apart from TD which provides good transparency (a total of about $58-billion of HELOCs outstanding) and to some extent Royal, the Canadian banks reveal very little about their HELOC portfolios even when they represent a significant chunk of total assets.

HELOC stands for home equity line of credit, or loan secured by your house. The key to their appeal is the flexibility of not having to make regular principal payments.

Earlier this month the federal government announced plans to stop allowing banks to get CMHC insurance for HELOCs, which came as something of a surprise to the market as it was not generally known that such loans were ever eligible for government guarantees.

Leaving aside the question of why CMHC insures HELOCs in the first place, the obvious question is how many of those outstanding are backstopped by taxpayer?

If, as with mortgages, the majority of risky loans are insured, investors can stop fretting. If, on the other hand, there’s only limited protection maybe it’s time for lenders to shed more light on the issue.

But the answer to that question is not easy to find. The CMHC, hardly a paragon of transparency at the best of times, does not disclose the information. Nor do the banks.

———————————————————————————————————————
Contact the Jeffrey Team for more information – 416−388−1960

Incoming search terms

line of credit in place of mortgage toronto

Why one mortgage broker backs the crackdown on debt

January 23, 2011 Buying Real Estate, First Time Buyers, General Real Estate, Mortgages and Financial Information

Rob Carrick – Globe and Mail

Thanks, Jim Flaherty, we needed that.

It’s surprising to find positive reviews from mortgage brokers for the federal Finance Minister’s efforts to curb growth in household debt, given that home sales are bound to suffer. But brokers have a close-up view of borrowing patterns and what they’ve been seeing suggests we do, in fact, have a debt problem that requires action.

Ottawa’s three-pronged announcement Monday will effectively eliminate 35-year mortgages for home buyers who need mortgage insurance, lower the maximum amount that people can borrow in refinancing their mortgage and put an onus on lenders to be more careful about which customers get home equity lines of credit.

“It’s a tough little set of measures that will pull back the excess availability of credit,” said John Cocomile, a broker with GreedyMortgage.com in Toronto. “I think it’s fantastic. It’s too bad the Americans didn’t do this three or four years ago, or the mess they’re dealing with wouldn’t be nearly as bad.”

The Bank of Canada is worried about how indebted Canadians are, big bank executives have spoken up on the subject and now the federal government has shown how concerned it is as well. Borrowers, as Mr. Cocomile tells it, have been oblivious. As a result, they need to be saved from themselves.

At Mr. Cocomile’s office, nine of 10 new home buyers have been choosing to pay off their mortgage over 35 years. Starting March 18, 30 years will be the new ceiling for people with down payments of less than 20%.

The extra interest charges resulting from an amortization period of 35 years as compared with 30 years can amount to tens of thousands of dollars. Mr. Cocomile said clients who are informed of this typically say they intend to start paying down their mortgage at the earliest opportunity. Does that actually happen?

“No,” Mr. Cocomile said. “I’ll follow up with them and say, ‘Why don’t we ramp up payments?’ They say, ‘Oh, we have a car loan now, or we spent some money on renovations, or we’re trying to get rid of credit card debt.’ Credit’s so easy – everyone’s using it.”

Requiring people to pay off their mortgages over a shorter period means they must either pay more per month, or buy a cheaper house. So it’s hard not to see home sales suffering as a result of the new measures in pricey cities like Toronto, where David Larock is building up his new mortgage planning business.

“None of these measures will be popular with mortgage brokers and realtors, but Canadian debt levels were climbing to alarmingly high levels,” said Mr. Larock, a onetime employee in a big bank’s mortgage department. “I don’t like it, but for the long-term health of our market I think it’s short-term pain for long-term gain.”

Mr. Flaherty said his prime concern is that people are borrowing to the maximum at a time of low interest rates. Rising rates will make the debt load less manageable, but people haven’t shown any inclination to alter their behaviour in the housing market and in other forms of borrowing.

That’s why the government is lowering the maximum people can borrow through a refinancing of their mortgages to 85% of the value of their home, down from 90%. Mr. Cocomile said he’s seen strong demand for refinancings from people who have run up other debts and want to consolidate them in their mortgage.

Whereas you can get a five-year mortgage at 3.85%, a typical credit card would charge about 19%. But refinancing to the maximum drastically reduces your home equity and leaves your house vulnerable if you can’t keep up with your mortgage when interest rates rise.

Home equity lines of credit have become one of hottest borrowing tools around, but they’re getting the lightest treatment from Ottawa. Instead of targeting borrowers directly, the government is putting the onus on banks to lend responsibly. Starting April 18, government-backed insurance will no longer be available to banks to cover losses from customers with lines of credit.

Interest rates on new home equity credit lines could rise as a result, or it could become tougher to qualify for one. Call this another example of how protecting Canadians from themselves comes at a cost that even people who make their living in the housing market think is worthwhile.

“You can totally realize why the Finance Minister is imposing these rules,” Mr. Cocomile said. “As interest rates nudge up, people won’t be as pressed as they might have been.”

Changing Mortgage Rules

Starting March 18, people buying a home with a down payment of less than 20% will be able to take no more than 30 years to repay the loan, down from the current maximum of 35 years. Here are two ways the changes will affect people.

1.) The maximum affordable house price falls

Example: A couple with household income of $120,000 and a 10% down payment.
Maximum house price with a 35-year amortization: $620,000
Maximum house price with a 30-year amortization: $560,000

2.) Monthly payments rise (but the amount of interest paid over the long term falls)

Example: A $300,000 mortgage at 4%
Monthly payments over 35 years:    $1,322
Monthly payments over 30 years:    $1,427
Additional monthly cost:                       $105
Total interest savings:                             $41,850

———————————————————————————————————————
Contact the Jeffrey Team for more information – 416-388-1960

SEARCH THE SITE

TORONTO REAL ESTATE BLOG

Laurin and Natalie Jeffrey are Toronto real estate agents. We would be happy to help you find your new Toronto home — be it house or condo or loft. We would also be more than pleased to help you sell your current Toronto property.

Century 21 Regal Realty Inc. Brokerage
1332 Queen Street West
Toronto Ontario M6K 1L4
Office Phone: 416−849−5360
Office Fax: 416−849−8987

Laurin Cell: 416−388−1960
Laurin Email: laurin@jeffreyteam.com

Natalie Cell: 416−318−7917
Natalie Email: natalie@jeffreyteam.com

The vast majority of content on this blog is not written by Laurin or Natalie Jeffery. It is written by many different authors, for many different publications and websites.

We re-print these articles here as a collection of Toronto real estate news and information. We aim for this blog to be a one-stop shop for people looking for information on Toronto real estate.

We do not claim any of the information we did not write as our own. We do not work for any publication, nor any builder. We are Registered Real Estate Sales People working for Century 21 Regal Realty Inc. Brokerage.