September 21, 2017

Housing Boom Can’t Last

Housing-BubbleEveryone is asking “when will this crazy market end!”  House prices in Toronto are up 15%+ over the past year.  The head of the Bank of Canada says that Toronto homebuyers should not expect the frantic pace and blistering prices of the housing market to continue.

“Prospective homebuyers and their lenders should not extrapolate recent real estate performance into the future when contemplating a transaction,” Stephen Poloz said Thursday with the release of the bank’s semi-annual financial system review.

It was a caution to consumers not to get caught up in the frenzied market conditions that see many GTA homebuyers bidding tens, sometimes hundreds of thousands of dollars, over list prices as demand continues to outstrip the supply of housing, particularly detached and semi-detached homes.

The caution came a day after Finance Minister Bill Morneau said Ottawa was conducting an in-depth examination of the country’s real estate markets to determine whether further safeguards are needed to ensure Canadians can still afford housing in the event of an interest rate rise or other economic changes.

There’s a growing risk of a sharp correction in Vancouver and Toronto, while many households are facing other financial stresses, including climbing debt, said the central bank’s report.

Morneau didn’t specify the kinds of measures the government might consider to cool down over-heated markets like Toronto and he didn’t say when Ottawa might act. But he promised a “deep dive” into those areas to determine whether steps such as more changes to the mortgage and amortization rules are warranted.

The most recent change in February raised the minimum down payment on homes over $500,000 from 5 per cent to 10 per cent on new mortgages for a CMHC-insured loan. But that had little impact on rising prices.

Before that the government cut amortization rates on insured mortgages twice: from 35 years to 30 in 2011 and then from 30 to 25 in 2012.

The last set of changes didn’t tamp down prices because many of the affected buyers were move-up homeowners in the $500,000 to $1 million range, said BMO senior economist Robert Kavcic. Most had equity from a previous home.

“Even then, if somebody was forced to add a few percentage points to their down payment, in a lot of cases, it wasn’t too hard to find alternate sources of financing just to jump that hurdle,” he said.

In the end, it’s the monthly housing payment that influences buying decisions so there was a more significant impact when the government cut amortization periods for uninsured mortgages, said Kavcic.

“If they were to remove that 30-year (amortization) altogether that’s something that would probably have a bigger impact than that small change in down payment rules,” he said.

The Toronto Real Estate Board has suggested that the Toronto land transfer tax has discouraged some homeowners from listing their properties for sale. But the provincial growth targets that have discouraged new home building in the GTA is probably a bigger factor, said Kavcic.

“We’ve seen next to no new single detached construction. It’s all been condos. Last year we saw the smallest number of single, detached (home) completions in 20 or 30 years.”

Colleen Saunders is a 20 year veteran in the mortgage industry, serving Mississauga, Burlington, Oakville and Toronto and offering all mortgage related services such as 2nd mortgages, private mortgages and more.

To contact Colleen, please fill out the form on  www.mortgagesbycolleen.ca  or call 416-459-2406

To read further info:  https://www.thestar.com/business/2016/06/09/bank-of-canada-warns-of-sharp-correction-in-toronto-vancouver-real-estate.html

Rising House Prices, What About Probate Tax?

ProbateI read this article and it had some great tips on how to reduce, postpone or avoid probate taxes.

The soaring values of GTA-area homes has made it an increasingly expensive proposition to die while owning real estate.  Huge probate taxes, officially known as estate administration fees and a result of astronomical prices in the overheated market, must be paid by the deceased person’s estate.

The average $1-million Toronto home, with a mortgage of, say, $450,000, would attract a probate tax of $9,250. Without a mortgage, the estate would be dinged $14,500. These taxes are calculated at the rate of $5 per thousand on the first $50,000 of estate value, and $15 per thousand on the rest.  Fortunately, with some careful pre-planning and a lawyer who understands this area of law, there are answers out there.

One way to avoid payment of probate tax by the estate is to transfer assets — such as bank accounts and real estate — into the joint names of the owner and the intended beneficiaries, typically the children of the owners of the property. However, this technique is very risky to the parents and should only be used after very careful planning and thorough legal advice.

One popular method is to designate one or more named beneficiaries on life insurance policies and registered plans. This device must be used with care because, in some circumstances, the designation will trigger income tax which becomes payable by the estate and not the named beneficiary.

For people with significant assets in the shares of a privately owned corporation, the use of multiple wills can avoid the probate tax grab on a significant portion of the estate.

A secondary or excluded-properties will is not probated and is used to deal with assets like the private company shares, which do not need probate to transfer. A primary, or general will, is probated and deals with everything else. Using multiple wills avoids the tax on the assets in the secondary will, even though the beneficiaries may be the same in both wills.

Another legitimate way of avoiding the payment of the estate tax on real estate is for a property owner to sign a deed for the land and deliver it to the recipient or a lawyer for registration after death. Handled properly with sophisticated legal advice, unconditional advance delivery of a signed deed can be an effective estate-planning tool to reduce the estate administration tax otherwise payable.

Gifting assets during the lifetime of the owner takes the value of the asset out of the estate, but may have unintended tax consequences. As well, the gift results in the complete loss of control and potentially the use of the asset.  Assets transferred to a trust will not be part of the estate of the owner, and there will be no probate fees payable on death. The transfer, however, may trigger a large capital gain, so it must be used with caution.

This just confirms it is time to re-do your will or maybe have a couple of wills prepared.

Colleen Saunders is a 20 year veteran in the mortgage industry, serving Mississauga, Burlington, Oakville and Toronto and offering all mortgage related services such as 2nd mortgages, private mortgages and more.

To contact Colleen, please fill out the form on  www.mortgagesbycolleen.ca  or call 416-459-2406

Reference:  https://www.thestar.com/life/homes/2016/06/04/tips-to-reduce-postpone-or-avoid-probate-taxes.html

Banks Lending Alternatives

Banks Lending AlternativesDid you know that if your Bank is unable to process your Mortgage application due to poor credit, insufficient income or not enough equity in the property, that they will refer you to one of their alternative financing lending institutions.

According to a recent article in The Globe and Mail, this raises questions like the procedures banks use when sending a mortgage applicant to another lender.  At the Royal Bank, for example, mortgage reps route applicants that don’t meet normal guidelines to their Alternate Mortgage Solutions (AMS) team.  RBC’s AMS employees then farm those customers out to other lenders and the bank’s mortgage rep gets paid when the mortgages close.  Normally this requires a brokering license but because banks are federally regulated, they aren’t bound by tough provincial rules that make it an offence to broker without a license.

Consumer protections differ in bank and broker circles.  In Ontario, for example, provincial penalties apply whenever a broker:

  1. Suggests an unsuitable lender or mortgage – Ontario requires brokers to ‘take reasonable steps’ to ensure that any mortgage presented to a borrower is suitable and minimize the borrower’s borrowing costs and provide the right mortgage flexibility given the customer’s needs.  Banks do not need to do this
  2. Sells a higher mortgage rate to get paid more – Brokers must disclose this conflict of interest.  Federal disclosure rules don’t hold banks to the same standard, even though many bank reps get paid sales incentives and earn more for selling a higher interest rate

This means it is up to a bank to set and enforce its own specific competency, suitability and market conduct policies within general federal guidelines.  In many ways, this makes banks their own overseer.  “Banks are kind of like a mortgage shop” says Ms. Gale, a former mortgage regulator with B.C.’s Financial Institutions Commission, “and when they pass you off to another lender, and you don’t know who you’re dealing with and why, that’s a consumer risk.”  “Some banks refer customers that they can’t service to lenders or brokerages that the bank has a monetary interest with.  They’re not necessarily working for you to get you the best deal.”

Should you be in the position that your bank cannot help you and they refer you to an alternative lender, just be aware that this may not be the best financing package available to you.  Do your research to protect your interests and make sure the financing package is not too expensive.

Colleen Saunders is a 20 year veteran in the mortgage industry, serving Mississauga, Burlington, Oakville and Toronto and offering all mortgage related services such as 2nd mortgages, private mortgages and more.

To contact Colleen, please fill out the form on  www.mortgagesbycolleen.ca  or call 416-459-2406

Reference:  Article Your Bank Mortgage:  Is it fair and does it suit your needs? The Globe and Mail

Which Debt Should You Eliminate First!

RRSP-debt-repaymentIt has always been a dilemma of whether you should use any excess cash to contribute to your RRSP or pay down your mortgage.  The current economic equation has recently tilted in favor of paying down debts vs. building up assets but only for those people with a low tolerance for any investment risk.  The current interest earned from GICs, term deposits and government bonds remains pathetically low.  At current deposit rates of around 1%, it takes 72 years to double your retirement nest egg if you only earn 1% per annum.

Here is how to think about the trade off between paying down your mortgage versus saving in your RRSP.  Every dollar you don’t contribute to your investment portfolio will earn the mortgage rate you are paying on that dollar.  If your mortgage is costing you 3%, then every dollar you don’t invest but instead use the money to pay-down debt will earn the said 3%.  If you are paying 10-23% like on many credit cards, the argument to eliminate the debt is even stronger.

Of course, if your investments are invested aggressively under the expectation that they will earn more than the mortgage rate you are paying, then you can justify not paying down your mortgage.  After all, borrowing at 3% makes sense if you expect to earn much more.

To quote the Review of Financial Studies “Households with high interest debt have a reduced benefit to equity participation and in many cases should not own any stocks…repayment of outstanding debt almost always yields a higher rate of return than many of the safe (investment) assets.”

As our mortgage interest is not tax deductible, it means that your Canadian debt is costing you even more compared to the U.S. consumer.  The i.e. 3% you are paying on your mortgage is 3% after taxes.  Many Canadians might be better off forgoing the tax deduction from the RRSP, which will eventually have to be paid back, instead paying down their high interest debt.

Look at both sides of your balance sheet at the same time.  Add up all your debts and compare the interest cost of all your liabilities against the interest you will be earning on your retirement investments.  If the former is greater than the latter, it is time to pay down some debt and forgo the investment plan contribution.  Oddly enough, not contributing to your RRSP might make you wealthier in the long run.

Colleen Saunders is a 25 year veteran in the mortgage industry, serving Mississauga, Burlington, Oakville and Toronto and offering all mortgage related services such as 2nd mortgages, private mortgages and more.

To contact Colleen, please fill out the form on  www.mortgagesbycolleen.ca  or call 416-459-2406

Income Inequality

incomeIncome inequality is the great domestic crisis facing Western society.  There is a huge gap between rich and poor and the strains on our middle class.  The weakening of the 1950s-70s social contract between employer and employee, by which workers were rewarded with decent pay and benefits for their dedication and loyalty is so prevalent today.

This crisis also derives from the financial illiteracy among individual Canadians today.  Fortunately, this is a shortcoming each of us can address.  Many Canadians work 2 jobs just to make ends meet.  How can we help ourselves?  We need to adjust our lifestyles and rethink our outsized materialism.  The average Canadian spends approximately $1.71 for every $1 that is earned.  Does the “starter home” need to be twice the floor space of the house we grew up in?  Do we need 2+ large screen TV’s and every person in the house have a laptop and an smart phone?  Many Canadians take out 2nd mortgages just to finance affluent behaviours that our income can no longer support.  Borrowers need to think about the pit they might be digging for themselves and it is only common sense to trim one’s budget to fit new circumstances, until they improve.

10 tips to get yourself of debt:  1-  Pay yourself first  2-  Pay in full for depreciating goods and services  3-  Borrow only for goods that appreciate in value  4-  Make the biggest possible down payment on your house purchase  5-  Probably your best investment is to pay down your mortgage  6-  Probably your second best investment is investment into your retirement  7-  Consider the cost of keeping a vehicle on the road  8-  Check out “future preference” and “deferred gratification”  9-  Practice self control in your spending  10-  Never shop for groceries on an empty stomach!!

Something to think about!

For more info:  Toronto Star May 17, 2016:  How to get out of the poorhouse

Colleen Saunders is a 25 year veteran in the mortgage industry, serving Mississauga, Burlington, Oakville and Toronto and offering all mortgage related services such as 2nd mortgages, private mortgages and more.

To contact Colleen, please fill out the form on  www.mortgagesbycolleen.ca  or call 416-459-2406