Monday, May 30, 2016
Four out of 10 homeowners (almost half!) caught short without enough money to meet their expenses, new survey finds
Garry Marr | May 24, 2016
Manulife Bank poll paints a dim picture of Canadians with rising debt who could be sitting on a potential land mine if interest rates start rising.
About four in 10 Canadian homeowners says they were “caught short” in the past year without enough money to meet their expenses, according to a survey out Tuesday.
Manulife Bank paints a dim picture of Canadians with rising debt who could be sitting on a potential land mine if interest rates start rising, a situation the financial institution says is not just confined to regions of the country with expensive housing that has forced Canadians into larger and larger mortgages.
“With the ever increasing size of people’s mortgages and their ability to service that mortgage, many people are stretched,” said Rick Lunny, president and chief executive of Manulife Bank of Canada, which polled 2,373 Canadian homeowners in all provinces between the ages of 20 and 59 with household income of $50,000 or more. The survey was conducted online by Environics Research between Feb. 3 and Feb 20.
The survey found the average mortgage debt was $181,000 — up from $175,000, reported in the fall — and Lunny worries about what will happen to Canadians if mortgage rates begin to raise. Five-year fixed rate closed mortgages are now below 2.5 per cent, near an all-time low.
“If there is an event of some kind they don’t anticipate, then they are short and that’s not a favourable situation to be in,” he said.
The survey found four per cent of respondents didn’t have enough money in their bank account to cover expenses almost every month. Another 10 per cent were caught short a few times a year and 23 per cent said it happened one or twice in the last year. The remaining 63 per cent said they never fell into that squeeze, almost the exact percentage that said so during the fall.
Manulife did look at the numbers regionally, but even in hot real estate markets like Vancouver and Toronto there was no meaningful difference in the percentage of respondents who found themselves outspending their income. Nevertheless, Vancouver homeowners had the highest average mortgage debt, at $259,000, which compares with $217,000 in Calgary and Edmonton, and $194,000 in Toronto.
When they do find themselves short, Manulife says homeowners usually turn to other, more expensive forms of debt to meet their monthly needs.
Just as worrisome might be what the effect of a tight monthly budget might have on homeowners’ savings and plans for retirement. Only 40 per cent of respondents have high confidence they’ll be able to maintain their lifestyle in retirement — 44 per cent have moderate confidence while 14 per cent having low confidence. The remaining two per cent don’t know.
Lunny says the first step Canadians need to do to get a hold of their finances is figure out where they are spending their money. “It’s incredible how buying a $4 latte everyday will impact their expenses,” he adds.
For a significant number of Canadians, the plan seems to be dip into their home equity to fund retirement. About 25 per cent of homeowners in their 50s expect home equity will make up 80 per cent of their wealth at retirement. That mentality might find itself at cross purposes with another finding of the survey, which indicated 70 per cent of respondents prefer to own and live in their current home for the first few years of retirement.
There are ways to access equity in your home without selling, such as borrowing against the equity or getting a reverse mortgage, but it’s not a financial strategy every Canadian will embrace.
“There may be some communities where you’ve built up equity in your home because of an inflationary real estate market but there’s many that haven’t done that,” said Lunny, adding it’s not sound financial planning to count on your home to finance your retirement.
Scott Hannah, chief executive of the Vancouver-based Credit Counselling Society, said the survey results surprised him because the debt picture is a lot uglier. He thinks at least half of Canadians get into trouble every month and it’s a lot worse for people in the 20- to 45-year-old segment of society.
“We just see how close people live up to ends of their paycheque and beyond,” Hannah said. “What happens is they extend themselves out further with the hopes they’ll get ahead of this at one point in time. We see so many people who get help from families because they can’t just stay ahead. Some of them have to go to part-time jobs or businesses to make ends meet.”
Tuesday, May 24, 2016
By Jamie Wiebe
The financial side of home buying can sometimes feel like a nightmare in which you’re stuck in a calculus final that never ends—and you’ve forgotten the meaning of everything.
PITI (or principal, interest, taxes, insurance)? Prepayment penalties? Contingencies? “Confusing” is an understatement. We’re the first to admit that looking for a house is lots of fun—but paying for one? Not so much.
But if you have a solid mortgage broker to help tutor you through the process, you’re guaranteed to bring your A-game to the home-buying table. In addition to helping you find the best deal, a mortgage broker is also an invaluable resource for newbie buyers trying to understand how this complex, and often tortuous, undertaking works.
Here’s what your mortgage broker wishes you knew from the start:
1. Your broker should be the first one you call
When it comes to financial matters, your mortgage broker should be your first call—and you’re probably going to want to keep him on speed dial. He’s not there just to find you a loan; alongside your Realtor, he’s eager to guide you through the home-buying process.
“I want buyers to utilize me as their go-to person on all aspects of the transaction,” says mortgage consultant Joe Petrowsky of Manchester, CT.
When you’re navigating the murky, turbulent waters of homeownership (especially if it’s your first go-round), your mortgage broker will be able to provide personalized advice geared toward getting you to shore—safely, happily, and without leaking cash.
2. Have a team in place
Part of preparing to purchase a home is “putting a team together so when [buyers] start the process, they’re already locked and loaded,” Petrowsky says.
So who do you need on your side? A Realtor®, of course, but also a home inspector and attorney, all of which will be handy once closing time rolls around. When you’re already panicked about your budget, rising expenses, and just plain moving, not having to worry about finding a reputable attorney or home inspector gives you some peace of mind.
“Wouldn’t it be better to already know who you’re going to use?” Petrowsky asks. “People without a clear plan tend to have buyer’s remorse—they panic, they’re nervous versus ‘I’ve got my team in place.’”
3. Understand the rules about down payments
You can’t borrow money from a friend, and underwriters will review any large deposits to ensure they’re gifts—not loans.
A mortgage broker can help you figure out the best legal way to fund your down payment, but when it comes to financial regulations, things have to stay fully above-board.
“First-time home buyers short of cash think they can take money from their friend and use it and pay their friend back,” says Shashank Shekhar, the founder and CEO of Arcus Lending in San Jose, CA. Let’s be crystal-clear on this: “You can’t borrow a down payment—it’s just not allowed.” (In Canada some lenders allow borrowed down payments if the payments are factored into the TDS)
If you’re using gift money to cover any part of your deposit, make sure it’s thoroughly documented.
4. Keep your mortgage broker in the loop
Speaking of documentation: Have a lot of it, and share it all with your mortgage broker.
“My favorite clients are the ones who ask me before they do anything,” Shekhar says. “Even if they think something is right, it might turn out not to be.”
Your broker will be intimately familiar with the financial regulations involved in buying a home, and thus will be better able to liaise between you and the underwriter when issues arise.
That goes for credit problems, too. If you’re having difficulty getting approved for a bank loan, try working with a mortgage broker first—and have all your papers in order.
“I don’t mind these kinds of challenges,” says Petrowsky. “I see it as an opportunity to prepare to be a homeowner. I go through every single item on a credit report and address what needs to be done.”
5. Don’t make any sudden changes
Once you’ve started the loan process, don’t make any major changes or purchases without speaking to your mortgage maven. And chances are good he’ll advise you to wait.
Any large expenditure or financial upheaval can delay your closing—or even result in a decline from the bank. Want to buy a new car? Dying for a spiffy new boat? Or maybe some fancy furniture for your new digs? Buying any of these big-ticket items could put your home loan at risk.
“Be sure your closing has gone through, and only then can you go ahead and make any major new purchases,” Shekhar says.
The same applies to new jobs: Even if you get an offer with a significant pay increase, you still shouldn’t start a new job during closing. Or even accept it. Try to put it off until after the close.
Many lenders require recent pay stubs (from the past 30 days), so taking on a new role during the home-buying process will mean pushing back the closing date, according to Shekhar.
Think you can hide this stuff from your bank? Many lenders do a verbal employment confirmation before funding your loan, and if they find any discrepancies, it can wreak havoc on your loan.
“Don’t change anything from the time you check with your [lender],” Shekhar says. “Don’t make any changes to your employment. Don’t even put in notice to your current employer.”