Friday, March 27, 2015
Jason Heath | March 24, 2015 |
It’s hard to scan a Canadian newspaper these days without coming across an article about the country’s lofty real estate prices. And it’s also hard for parents to tell their kids the “I used to walk to school barefoot” stories. Or is it? Is it really that much more expensive to own a home these days than it was 30 years ago?
Let’s focus on the particulars for the country’s largest city and one of the two crown jewels of the real estate market – Toronto (the other being Vancouver, of course).
In 1985, the average home price was $109,094 according to the Toronto Real Estate Board. Currently, the average home in Toronto will set you back by $566,696. Prices have therefore risen by 5.65% annualized over the past 30 years. During that time, prices rose quickly from 1985 to 1989, fell through 1996 and have since been on a near straight line upwards.
Back in 1985, the median Toronto family income was approximately $31,965. So a house cost 3.41 times the median family income. Currently, family income in Toronto is about $74,366, meaning the home value to income ratio currently stands at 7.62 times income – more than double the ratio from 30 years ago. Score one for the “prices are crazy right now” team.
This provides some perspective, but it doesn’t tell the whole story.
Homebuyers needed 25% down in 1985 compared to only 5% currently. Five-year fixed mortgage rates (posted) were 13.25% in 1985, versus 4.79% now.
This means a first-time homebuyer needed a downpayment that was five times larger and paid three times as much interest on every dollar borrowed. Maybe things weren’t so great back then after all.
Let’s try to compare apples to apples in 1985 Toronto versus today:
Obviously home prices have risen considerably more than incomes over the past 30 years. But it’s easier to buy a home now because you only need 5% down and not 25%. More lenient mortgage rules have, in part, fueled home prices.
Interest rate declines have been the only thing that has kept home affordability in line with 1985, given that monthly mortgage payments relative to family income have only creeped up a little bit in the past 30 years. Our numbers, however, assume a 25% downpayment to compare to the minimum downpayment required in 1985. This can be really hard to scrape together for young homebuyers today, who frequently put down much less.
Going forward, interest rates aren’t likely to increase in the short term in Canada. In fact, there is a possibility of further rate decreases. But when interest rates rise, housing affordability will be squeezed because more of a family’s income will go towards mortgage payments and other interest costs.
Will this cause home prices to fall? Maybe. But during the peak of the Toronto housing bubble in 1989, mortgage payments as a percentage of median family income were about 50%. We’ve got a ways to go yet if that’s the tipping point.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.
Friday, March 20, 2015
Great article with even greater advice!! “failing to at least consult a broker is borderline personal-finance negligence”. Great to see bank penalties being highlighted of late in the news more so than rate discounts.
Rob Carrick | The Globe and Mail |Mar. 18 2015
The big banks are masterly in how they attract attention to their mortgage rate cuts.
Don’t buy the hype. For the best mortgage deals as defined by low rates and favourable terms, see a mortgage broker. You may still end up doing business with your bank, but failing to at least consult a broker is borderline personal-finance negligence.
A sign of spring’s approach in Canada is a bank making what looks like bold mortgage moves to the uninformed. This week, Bank of Montreal and Toronto-Dominion Bank announced five-year fixed-rate mortgages at 2.79 per cent, while Canadian Imperial Bank of Commerce has been offering a special introductory rate of 1.99 per cent on the first nine months of some fixed-rate mortgages.
Mortgage broker David Larock says the vast majority of mortgages he’s arranged lately are five-year fixed, and the rates range from 2.54 per cent to 2.69 per cent. In addition to lower rates, they have comparatively light penalties if you have to break your mortgage before its maturity date. “The penalties are a fraction of what the major banks charge,” Mr. Larock said.
Besides rates and penalties, some of the key variables in choosing a mortgage are prepayment privileges, or how much of the mortgage principal you can pay down every year without incurring a cost, and the length of time the lender will hold a mortgage rate for you. Mr. Larock said the mortgages he’s set up lately all have rate holds of 90 to 120 days, and they mostly let clients prepay 20 per cent annually. These terms are similar to what the banks offer, so you’re not giving up anything in using a broker.
The Canadian Association of Accredited Mortgage Professionals says 30 per cent of outstanding mortgages were arranged by mortgage brokers in 2014, up from 23 per cent in 2009. Banks had a 55-per-cent share last year, with other lenders claiming the last 15 per cent. Bank dominance is slipping, but slowly. By creating an illusion of daring competitiveness, the banks keep customers coming back.
Here’s what’s really going on in bank mortgage lending today. According to Robert McLister, mortgage planner at intelliMortgage Inc. and founder of RateSpy.com, banks have for weeks been offering rates lower than 2.79 per cent for clients with good credit histories. “You’ll never see a bank advertising its lowest discretionary mortgage rate,” he said. “That’s not how they maximize profits.”
As a rough guideline, Mr. McLister says a rate in the 2.6-per-cent range should be doable if you’re a creditworthy bank customer. He says standard mortgages from the “monoline” mortgage lenders that brokers work with are in the 2.59- to 2.64-per-cent range, and that slightly lower rates can be had through no-frills mortgages with restrictive terms.
Mortgage prepayment penalties are where alternative lenders really crush the big banks. I wrote about this in a column a little more than a year ago (read it here online: The hidden trap of mortgage penalties at the big banks). In short, lenders calculate these penalties on fixed-rate mortgages as the greater of three months’ interest or what’s known as an interest rate differential, or IRD.
The idea behind the IRD is to compensate a lender for the interest lost when you pay out a mortgage early. Lenders have different ways of calculating the IRD, but you should expect penalties to be as much as three to four times higher at the banks than competing lenders.
Mr. Larock, the mortgage broker, says he’s seen figures suggesting about one-third of mortgage holders get out of their loan early. However, he thinks these numbers may be skewed by the large numbers of people who have broken mortgages to capitalize on falling mortgage rates in the past few years. Generally, he figures about 10 to 15 per cent of people break their mortgages and therefore incur penalties.
If you’re dead certain you’ll stay in a five-year mortgage for five years, maybe your bank’s best deal on rates will suffice. If you want to keep your options open and possibly get a better rate, check out a mortgage broker.
It’s worth noting that Mr. Larock does about 20 per cent of his business with banks, mainly in cases where clients want a mortgage and a home-equity line of credit. However, he warns these people that the prepayment penalties can box them in for the term of their mortgage. “I tell them, as you sign I want you in your mind to hear the sound of a giant iron gate slamming shut.”
Mortgage market survey
These are currently the best advertised rates for a full-featured five-year fixed mortgage with a 90+ day rate hold:
- Advertised at major banks: 2.79%
- Credit unions: 2.59% to 2.69% (e.g. Slovenia CU at 2.59%)
- Monoline (mortgage only) lenders: 2.74% (e.g. Canadiana Financial)
- Mortgage brokers: 2.59% to 2.69% (multiple reputable brokers)
Friday, March 13, 2015
By Natasha Baker | Reuters – Mon, 22 Sep, 2014
NEW YORK (Reuters) - Home owners and renters looking to redesign or renovate can turn to new apps to help simplify the process and get the job done sooner and more efficiently.
Last year Americans spent approximately $130 billion (79.58 billion pounds) on home remodelling projects, the highest amount since 2007, according the U.S. Census Bureau.
As home spending ramps up, apps aim to ease some of the pain and expense.
A free web app called Sweeten links homeowners to contractors, interior designers and architects to help create their dream house or apartment.
“Home renovation is a big ticket item that can almost be the same price as purchasing a home. It’s intimidating to a lot of people,” said Jean Brownhill Lauer, founder of New York-based Sweeten.
After a user posts the project through the app, Sweeten finds experts for projects that can range from simple bathrooms to housing developments.
“There are just so many options when it comes to contractors. You might get recommendations from friends, other people in your building, or search online," Lauer said. "But it’s challenging to understand which ones are better suited to your projects.”
The company monitors the projects and contractors and gets feedback from the home owners to ensure quality. Sweeten is available in New York City and is expanding throughout the United States.
Another app, LikeThat Décor, takes the guess work out of finding the right type of furniture and decorations. Users point their smartphones at a piece of furniture, or a particular pattern they like, to find complementary items that might match in the home.
“When you’re searching for a piece of furniture like a sofa, you’ll usually start by taking a look at what’s available in the market. Maybe you’ll go to different stores to see what’s new and trendy, or try out a site like Pinterest,” said Adi Pinhas, founder of the California-based company Superfish, which created the app.“But at the moment when you’re trying to find something similar, or trying to source where to buy an item you saw ... it gets challenging,” he added.
The free app for iPhone, iPad and the web, which is available in the United States, uses image recognition technology to search millions of products from more than 4,000 stores, including Zara Home, Gilt and Ikea. It also provides a link for users to purchase the items.
Home decoration app Houzz, free on iOS, Android and the web, lets people search for design ideas using search terms to describe the item and see how people have styled similar pieces. More than 2,000,000 design photos are available within the app.
Houzz also connects users to a community of local designers, architects and contractors, who are reviewed on the platform.
Wednesday, March 11, 2015
Think the banks are going to lower credit card rates along with their new lower prime rate? Think again!
Garry Marr | Financial Post |February 20, 2015
An interest rate of 21% sounds high but it will seem like a bargain to some Toronto-Dominion Bank credit card customers when it climbs to 24.99% at the end of next month.
Credit card debt has always been among the most expensive ways to borrow, largely because it is unsecured and traditionally comes with a much higher default ratio.
In the world of credit cards, being considered in arrears amounts to not meeting the minimum payment, which in most cases is 3% of the outstanding balance every month. Three months of not making payments puts you in arrears, according to credit agencies.
That type of non-payment will also put a bulls-eye on your head as TD will now charge the higher interest rate when the minimum payment is 30 days past due on its TD First Class Travel Visa Infinite card.
Customers are notified in their next statement that they have missed that minimum payment and must pay up or higher rates will be in effect on the next payment cycle – in other words, two missed payments in a row and the rate goes up. It climbs to 27.99% from 21% for missed payments on cash advances.
“We understand that price changes can be a sensitive issue and we encourage any of our customers with concerns or questions to talk to us,” said Alicia Johnston, a spokesperson for TD, in an emailed statement. “As all of the banks do, we review and occasionally make adjustments to pricing to reflect current market conditions, the cost of providing services and our competitive position.”
CIBC is following suit, increasing its Aerogold Visa interest rate to 24.99% on purchases; and to 27.99% on cash advances, if the cardholder does not pay the minimum balance in two consecutive payment cycles.
Regina Malina, senior director of decision insights for Equifax Canada, said her group’s present data just looks at arrears, meaning people who have made no payments over a three-month period. Overall, average credit card balances for Canadians have gone down over the last couple of quarters.
“We like to wait a couple of quarters before we start saying something is a pattern but it seems like after this time period from mid-2013 until early 2014, where there was more activity in balances, it seems to have slowed down. But we are watching it closely,” says Ms. Malina.
As for the percentage of delinquent credit cards, it was 3.5% at the end of the third quarter – much higher than other types of loans like mortgages, which were well under 1%. Credit card delinquencies peaked at almost 5% in 2008.
According to BMO’s 2015 Credit Card Report released Feb. 10, 30% of Canadian card holders do not pay their credit card bill off in full every month.
Laurie Campbell, executive director of Credit Canada, said the reality for most credit cards is if you can’t pay you are penalized even more. “You miss payments, and it’s different for each creditor,” said Ms. Campbell, adding usually you pay about five percentage points more when you miss a payment. “I think this is an American-style thing and started about three or four years ago.”
To illustrate the change, TD notes that, on an outstanding balance of $2,500, making the minimum payment results in a monthly charge of $44.59. That jumps to $53.06 at the 24.99% rate, when you miss your payments, starting March 31.
The real solution is to pay off your entire debt every month because, as Ms. Campbell notes, the average credit card interest rate is about 19.9%. “You think about 20% on a $5,000 balance over a year,” which comes to close to $1,200 in interest annually, she says.
“You keep paying that minimum and you are never going to get anywhere.”
Is there any evidence that jacking up interest rates would be a stronger incentive to keep the cash-strapped out of arrears. Ms. Malina says that’s unclear. “It’s not a bad thing to force people to pay that minimum obligation,” she says. “You need a couple of quarters to see [if increasing the interest costs] is having any sort of impact.”