Canadian Mortgages Survey Reports"Interesting" Statistics

There are very interesting statistics "out there" that were released in the CAAMP's (Canadian Association of Accredited Mortgage Professionals) Spring 2008 Survey Report. Two stats stand out particularly for those interested in Canadian mortgages and real estate markets generally.

First, according to the CAAMP's Spring Report, "2/3 of Canadians are neutral or pessimistic on whether it's a good time to buy a house right now." Undoubtedly, this is the fallout from residual fears brought on by Canadians witnessing the collapse of the highly speculative U.S. housing market - an issue we have addressed here before. Yet, the CAAMP's stats show that arrears on Canadian mortgages are miniscule relative to the mortgage mess in the U.S., where as of early spring one in ten homes had been in some stage of the foreclosure process during the preceding months. In Canada, the CAAMP notes, the rate of mortgage arrears at Canada's top seven lenders (defined as mortgage payments that are 90+ days overdue) is only 0.25% - one in four hundred homes in Canada versus one in ten homes in the United States. Clearly, if Canadians' concerns over the state of the mortgage market are premised on what we have seen in U.S. markets, their concern is misguided.

The second statistic that stands out - particularly if wary financial products consumers are in the belt-tightening mode the foregoing stat would suggest - is the underusage of Canadian mortgage brokers and their expertise. The CAAMP reports that only 34% of first-time home buyers utilized a mortgage broker. This number, on an intuitive level, seems low considering the magnitude of the financial undertaking and the wealth of varying products and pricing on the mortgage markets for first-time home buyers. Yet, this number pales in comparison to the 50 percent or so drop-off in use of a mortgage broker when it comes time for Canadians to renew their mortgage or refinance. Only 16% of Canadians used a mortgage broker's services when seeking a mortgage renewal, and only 17% turned to a mortgage professional when refinancing.

This begs the question: If Canadians are generally pessimistic or neutral about the state of the housing market, as the numbers suggest, why then are they not shopping around and getting independent mortgage advice from brokers when it comes time to renew or refinance their homes? Looking at this drop-off in using mortgage brokers' services when someone is already in the housing market, it would seem (as other statistics and analysts have pointed out) that innate pessimism in the Canadian mortgage and real estate markets is more the psychological result of our watching what is happening to our U.S. neighbours than it is the effect of a basic concern with our own market fundamentals.

Canadian Mortgages with Extended Amortization a Tool for Our Times

So what's the deal? From perusing Canadian newspapers and magazines, it would seem that mortgages designed with an amortization period longer than 25 years (the former industry standard) may be the most 'controversial' mortgages product. Rather than being seen as 'innovative' in the eyes of many industry watchers, extended amortization mortgage products seem to be viewed in some quarters as being somehow inherently 'evil'. I believe that sort of a judgment tends to tell more of the analyst and his or her preferences and perspectives and the audience he or she is writing for, than it does about the product or service under scrutiny.

Wealthy Boomer columnist, Johnathon Chevreau - questions, anyone, on Mr. Chevreau's perspective and audience? - in Saturday's Financial Post Weekend seems to suggests that a fourty-year amortized mortgage is more problematic than solutional for Canadians' long-term financial planning and wealth accumulation strategies. I suggest this is much more a reflection of the demographic Mr.Chevreau writes for, and the life perspectives he and they have formed over time, than it is on extended amortization mortgage products.

Mr. Chevreau's advice is aimed at wealthy boomers, those demographically fortunate many who were raised in and have ridden the crest of the great post-WWII economic expansion. For the rest of us - those making their first home purchasing decision, or needing to make a tough home refinancing decision in difficult economic times - a fourty year mortgage amortization - may make all the difference between home ownership and staying in, or going back to, the rental market. While the interest heavy, capital-light payments under a mortgage with an extended amortization period is perhaps less than ideal, it sure seems to me like a better option than continuing to pay someone else' s mortgage off with my monthly rent cheque - perhaps the mortgage on the investment property of yet another wealthy boomer who has reaped the windfall of the aforementioned fourty-year economic expansion.

The crux of the dilemna seems to be the assumptions as to why individuals choose homeownership over rental accommodation. After all there are tax credits available to non-homeowners, together with the time and money not spent on repairs, upkeep gardening etc. that are quite advantageous. For most of us, however, the security and future financial freedom envisioned when investing in a home remains tanatalizing alluring.

Mr. Chevreau quotes Mercer Consulting actuary, Malcolm Hamilton, as saying, "The idea of a 40-year amortization and making minimum payments for 40 years is just financial slavery. I don't see that as a foundation for any kind of sensible financial plan." Yet Mr. Hamilton almost concedes the point that is made statistically by others: Canadians do not sit idly by for decades paying off mortgages as slowly as possible. Unlike in the United States where interest paid on one's mortgage is tax deductible, in Canada it isn't. Most Canadians make periodic lump sum payments on their mortgage debt, and a majority of Canadians make their mortgage payments weekly or bi-weekly thereby effectively reducing amortization periods.

Having already "got theirs" so to speak. It is disingenuous for wealthy boomers and their advisors to discredit financial products and strategies that were not optimal (and therefore weren't used) when they were buying homes and raising families. It smacks of self-satisfaction for boomers, wealthy or not, to turn around and advise their kids and grandkids against products that they didn't need to use and were not available to them in the first place. Recommending that newcomers to the wealth accumulation game speak to a knowledgeable and experienced Canadian mortgage broker who can help the aspiring homeowner with the information and products to make home purchasing a reality in today's housing markets, would seem to be a more honest and broadly-perspectived approach to take rather than blithely revisiting and reviewing the strategies that worked for a generation of demographically fortunate individuals who are either now monied, or who are unlikely ever to be so at this stage in the game.

Canadian Mortgage Rates Drop in Response to Bank's Lower Costs

Financial institutions in Canada have begun slashing their Canadian mortgage rates to reflect their lower costs of borrowing. CBC News nicely summarizes the recent rate cuts introduced by leading banks, credit unions and caisses populaires in response to the lower costs financial instituions are facing in raising money on the bonds market as well as the increasingly competitive Canadian mortgage market.

While the Bank of Canada slashed its base, overnight lending rate by 1.5% in recent months (with the banks showing uncharacteristic initial hesitancy to immediately follow suit with their prime lending rates: see our analysis at the time), it hasn't been until this week that the full effect of the central bank's rate slashing has been fully felt in the Canadian mortgages market. "Until this week, cuts to fixed mortgage rates have been relatively modest," as CBC News observes, as commercial banks and other financial institutions have faced higher borrowing costs themselves due to the mess the U.S.'s credit crunch has made out of global borrowing markets.

With what looks like the worst of the sub-prime mortgage-inspired credit storm having blown itself by leaving Canadian waters only moderately choppy but with all boats still afloat, it seems Canadian financial institutions have finally gotten around to the more serious business of competing for our mortgage business. Now may be the best of times - with mortgage rates dropping and an extra-large inventory of houses on the resale block in most Canadian markets - to get with a knowledgeable Canadian mortgage broker to secure the best financing that's been out there for quite awhile if you've been putting off or waiting for the best time make a home purchasing decision.

Canadian Mortgages and Real Estate: Bull-Market vs. 'Raging Bull-Market"

Insiders in the Canadian mortgages and real estate industries seem non-plussed by the wild swings in markets to the south of us. But if forecasts of the leading analysts are correct, it looks as if Canadian markets won't be seen swinging wild punches like Robert DeNiro playing the all-time great Heavyweight Boxing champ, Rocky Marciano in Raging Bull, but rather that the 'raging-bull' housing markets we've seen over the past seven years in Canada are more likely to settle into a more placid and domesticated 'barnyard bull market' rather than tip the scales and turn into a nasty 'bear' market as some doom-sayers predict.

Scotiabank economist, Adrienne Warren, writing in Scotiabank's Scotia Research Group Real Estate Trends report released May 15th and picked up by the Toronto Star states that, "There is now convincing evidence that Canada's housing market has come off the boil. Yet, Ms. Warren sees no evidence that Canada's cooling housing market is headed for the type of bear housing market that followed the last two booms in Canada's housing market cycles.

Ms. Warren notes that what we are seeing in today's market is "reduced affordability, limited pent-up demand and (an) increased supply" of homes on the market. And while Scotiabank's long-term housing price model shows that average Canadian home prices are marginally above their long-term trends, it is most probable that the market will go from a boil to a sustainable simmer instead of boiling over. Housing prices will continue to rise instead of collapsing as skeptics fear, albeit they will rise at a diminished rate.

Scotiabank, like the Bank of Canada and the Federal Finance Minister, seems to expect that normalized growth rates in demand for housing, housing sales that are 15% last year's record numbers and a reduction in new home starts reflected in the current falloff of demand for residential building permits will take up the current excess housing supply on the market and growth in housing price rates will return to a long-term balanced and sustainable level through 2008 and into 2009. (Interestingly, and counter-intuitively, even south-of-the-border new home construction starts posted their biggest increase in two years, despite that country's housing woes.)

The analysis coming out of Scotiabank's Scotia Research group is based on economic modeling that tracks home prices over time, and which shows that average Canadian housing (except in the most grossly distorted areas of the country, Calgary and Edmonton are mentioned) average housing prices are not close to the distortions of 12% and 18% above long-term market trends that peaked out in 1976 and 1989 when previous bull housing markets turned bearish. Canadian mortgage brokers and real estate professionals, as well as new and existing homeowners should be buoyed by this latest anlayis coming out of Scotiabank. It looks as if this 'raging-bull' may be able to be domesticated instead of its having to be put down.

Toronto mortgage seekers reassured by federal Finance Minister

Torontonians who have licked their fingers and stuck them in the air trying to gauge the economic winds in which to make their home purchasing or home refinancing decisions - be they first-time homebuyers, homeowners who are thinking about upsizing or downsizing, or just those of us who are very comfortable with where they live ("thank-you-very-much") but are looking at their options as it comes time to renogotiate their mortgage - caught a welcoming fresh breeze from federal Finance Minister, Jim Flaherty, yesterday, as he gave a state-of-the-markets speech at the Economic Club of Toronto.

Summary of Mr. Flaherty's key points, as reported by Eric Beauchesne of the Canwest News Service: "Canada is in good economic and financial shape to weather the challenges it faces.... Jobs are still being created, unemployment remains near its lowest level in a generation, incomes are rising, inflation and interest rates are low, and Canada has the largest budgetary surplus and lowest debt burden of the major major industrial countries."

Good news, I say! And although it comes from a politician, it seems to be bourne out by information that streams past me in the papers and online. (Also, the front of my moistened index finger seems to be much cooler than the back, although I'm not sure how reliable that economic indicator is.)

Maybe because he was speaking in Toronto, where the numbers coming out of the real estate numbers have been mixed in the first quarter of '08, but Mr. Flaherty took special care to highlight key differences between Canadian mortgages and real estate markets and those south-of-the-border, where the winds are not so fair . . . . to put it mildly.

"Although our economy is closely tied to the United States," Mr. Flaherty said, "We are not the United States" (emphasis added). "The factors behind the current American malaise are not likely to be duplicated here."

Addressing American housing woes brought about by the collapse of the U.S. sub-prime mortage market and the bursting of the American real estate bubble, Mr. Flaherty noted that our housing market remains solid, and our exposure to the U.S. sub-prime market is low. Only 3% of Canadians' outstanding mortgages are sub-prime versus about 43% to 48% in the U.S. at the height of their speuclative housing spree, depending on how sub-prime is defined.

"We are not the United States," Mr. Flaherty cheers. "We are Canadians!" we roar back! . . . . Now, I'll hoist a Molson's to that. . . . . Canadian, anyone?

Home Equity Loans or Second Mortgages as Diversification Strategies

Recent buzz in investment circles has been about utilizing a home equity loan or second mortgage to extract some or all of the existing equity that has built up in your home and utilizing the money freed up to invest in a conservative, diversified investment portfolio spread across a number of markets. That way the assets that are locked up in your home are spread across a number of markets and less susceptible to any market adjustments than are assets which are solely invested in Toronto's real estate market.

While the Canadian and the Toronto real estate markets continue to weather the storm that U.S. markets are suffering through as a result of lax lending policies and overwrought speculative fever, ensuring that all of your nest eggs are not necessarily in one basket is always a prudent move. There are a number of analyses available which set out the the benefits of this diversification strategy, as well as the tax advantages a homeowner can tap into by going this route.

Home Equity Loans and Other Canadian Mortgage Products to Finance Your Home Renovations

There are an array of financing vehicles for home renovations, ranging from home equity loans, to secured lines of credits, to mortgage refinancing options, that can help everyone from first-time home buyers to "empty-nesters" improve and secure the value they have invested in their biggest financial "nest egg" - their family home.

When contemplating home renovations - whether major or minor renovation jobs - the scope and timing of what, when and how renovations will be done, whether by you or by a professional, will depend largely on how you plan to finance that renovation project. If you are just installing a new tub-surround its fairly easy, dip into your wallet, your savings account or pull out your wallet, give up your weekend, and this sort of minor renovation is done. Small project, minimal planning and a little bit of work, and your project is complete. (Well, perhaps its more than a little work - depending upon how comfortable you are with drywalling, plumbing, and following the "simple instructions" included with the tub-surround kit. You know, the "easy-to-do-it-yourself" step-by-step instructions that were actually written by an anonymous committee of dyslexic, mechanically challenged technical writers in Urdu, and then translated into a whole host of indecipherable languages, including an incomprehensible English translation. Or, worse yet, no translation - just the annoying little Swedish cartoon guy on the Ikea instructions who, invariably, leads me down the garden path to thinking, "I, too, can do this simple installation in just a few hours.)

When it comes to major home renovations, however, careful consideration of your financing options will save you money, as well as major hassles if you or your contractor run into unforeseen time delays, complications or problems. When contemplating any significant home renovations it is prudent to talk to an experienced Canadian mortgage broker to understand what your best financing options are.

Check out our recent article, "How To Finance Your Home Renovations - Whether To Dip Into Savings Or Secure A Home Equity Loan", to get a basic understanding of some of the options that are available to finance your renovation project.