Canadian Personal Finance Blog

The CBC had an interesting article on how Canada is Tiptoeing Towards a Subprime debacle similar to the United States (but not exactly the same).

I was skeptical, but I was also unaware that there are so many “alternate lenders” for mortgages in Canada (and that these Mortgages are not CMHC insured).

The banks seem to have come to their senses and are now rejecting more than 20% of Mortgage applications these days, because they cannot be CMHC insured, according to the CBC and while I think this is a good idea, folks are simply trying to contravene the system and get a loan that is not insured by the CMHC, and thus are a lot more risky.

The weird thing is that the president of one of these “alternate loan providers” claims their industry takes up 20% of the mortgage market, which is one hell of a big whack of money.

To be clear (at least to my understanding) this is not a SubPrime type situation, the loans being given out are not at low rates (which then ratchet up quickly (at least I hope not)), but it is loans that are being given to folks that banks don’t want to loan money, and that was one of the faulty pillars of the subprime debacle (i.e. people who couldn’t rent a home, were buying them instead).

Are we That Dumb?

These kind of loans worry me, because people are doing stupid things like tying themselves up with debts that would make the Marquis de Sade proud. If you can’t afford a house, maybe the bank is right? Owning a home is not a RIGHT it is a PRIVILEGE, and folks need to figure that one out.

There is a difference between what you want in life and what you can afford. I guess this goes back to whether Canadians are Financially Stupid, but I am willing to discuss if folks think these alternate lenders are simply offering a service (much like pay-day loan companies and such).

 

That was the interesting quandary I was in last week when I went in to talk with my bank about RESPs and such.

Normally when I make an appointment at the bank, I bring a list of things I need to get done and then a few Christmas wishes too. Typically my main wish is to get Free Banking (i.e. no bank fees, or a vacation from fees (yes I already have a PC account, as well)), however this time a co-worker gave me a different idea.

As background normally every time I ask for Free Banking and then the bank representative acts as if I am asking for one of their kidneys (and possibly their spleen), and they say it’s impossible to get that, and such, but will eventually relent and give me 6 months or a year of banking for free (i.e. no monthly service charge). It all plays out as a very badly written soap opera, so I decided this time I’d try for something with more impact, which is the interest rate on my Line of Credit.

Currently most secured lines of credit are pegged at Bank Prime (not the bank of Canada prime) plus 1% or something close to that, so I decided to ask, can that rate be lowered (guessing it wasn’t likely, but again, you never know unless you ask, and the worst thing they can say is No).

The meeting was going very well and I had reached the end of the tasks I needed to get done, so I then figured I’d broach the interest rate subject and asked, “Is there any way to get a lower rate on my line of credit?”. The bank rep did not jump out of her chair screeching obscenities, she didn’t even seem remotely perturbed by the request (which made me concerned that it was an easy NO), she simply typed a few things on her computer and said, “Yes, we can see if we can cut your rate to 0.5% over our prime”.

I believe my mouth dropped open and I blinked a couple of times, but regained my composure enough to say, “Yes that would be very good”. Some forms were filled in, but I believe I have been approved for this rate (no fuss, no muss, no complaining about me wanting an internal organ, all very civilized).

This good news got me scratching my head a little, since free banking costs the bank about $14 a month, whereas a rate cut by 0.5% on my Line of Credit is more than that, so what gives? My guess is that the Service Fee is actual bank income, and is very important to the bank, whereas income from Line of Credit interest (while important) is a more variable value, so losing 0.5% is not as important? I may be out in left field on this one, and if anyone has a better idea, I am open to suggestions.

At the end of it all, I am proven correct, if you don’t ask, the answer is always no.

 

Here Comes Da Recovery!

Bank of Canada announced yesterday that they will not be raising their key overnight rate this month, which is always good news for those who are carrying debt (and bad news for those supplying the money to finance the debts).

The reason given is optimistic globally, and not so much on the Canadian side of things:

The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth and the beginning of the expected rebalancing of demand. The contribution of government spending is expected to wind down this year, consistent with announced fiscal plans. Stretched household balance sheets are expected to restrain the pace of consumption growth and residential investment. In contrast, business investment will likely continue to rebound strongly, owing to stimulative financial conditions and competitive imperatives. Net exports are projected to contribute more to growth going forward, supported by stronger U.S. activity and global demand for commodities. However, the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high.

That is an interesting analysis of how Canada may proceed, and some interesting commentary about Canada becoming a consumer country instead of a producer (which it traditionally has been).

A cautionary comment at the end of the release makes you wonder too:

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.

So we still need the stimulus of low interest rates, for now. Good to know, but I suspect rates may start creeping up this summer, so now is the time to start lowering your debt loads, while the rates are lower.

New Mortgage Rules too

Many fin bloggers have been talking about the new Mortgage rules that were introduced in legislation this week as well. The quick overview is (to quote the official release):

* Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
* Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
* Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.

The HELOC one is interesting as well. Is this the same as a Secured Line of Credit (secured against your home)? Any fin bloggers caring to enlighten me, please feel free to comment!

1 Trillion Dollars in Mortgages in Canada

The CAAMP (Canadian Association of Accredited Mortgage Professionals) put out their Fall Consumer Report and says that Canadians now hold over $1 Trillion in Mortgage debt. To be specific they said that:

As of August 2010, there was $1.01 trillion in outstanding residential mortgage credit
in Canada.

That is a big pile of debt to be holding, but it is well spread out.

A good thing to see is

The average mortgage interest rate for home owners’ mortgages is 4.22%, a drop
from 4.55% a year earlier.

So at least we are not holding this debt at a very high rate of interest.

And I did like reading:

Among home owners who have mortgages, the average amount of equity is about
$146,000, representing 50% of the average value of their homes ($291,000).

So we are close to having half the debt paid off on average too.

I would strongly urge everyone to have a look at this interesting report, just so you understand the scope of the Mortgage industry right now in Canada.

One last interesting quote about the value of all the property held with these loans:

The total value of owner-occupied housing in Canada is estimated at $2.91 trillion.
Mortgages on these homes total $820 billion, leaving $2.08 trillion in home owners’
equity. This equity is equal to 72% of the total value of the housing.

Wow! that is a dilly of a number isn’t it? Remember we are pretty small potatoes compared to our friends to the south as well.

Should We All Be Owning Homes?

There is an interesting debate, to be had. The Wall Street Journal dragged up an interesting article written 70 years ago, by Melchior Palyi which said not everyone should be a homeowner (at least in the U.S.).

The warnings included statements about if everyone owned homes, it would nail their feet to the floor and make them less mobile and worse, heavily loaded down with the costs of home ownership. This is an interesting take on the question of whether you should own a home or not, I know that once I moved into my first house, my ideas of migrating to better jobs in other places, dropped considerably.

The Journal contends that this chap predicted the U.S. housing bubble, not sure I completely buy that concept, but still an interesting take on the whole housing issue, and very topical given the CAAMP report that just came out as well.

Is having over a Trillion Dollars of Debt in the Canadian Economy a good thing? It would be much better if it was less, and if interest rates start ramping up, that debt will grow much faster too.

Another report has come out claiming that Canadian House prices are overvalued by at least 15% (if not higher), which may taint any kind of housing market rebound that might occur in the next few months (if folks who are buying take the report to heart). This is something to keep in mind if you are thinking of buying a house in the near future, because getting value for the money you spent on the house is a cornerstone of  a house.

If you don’t own a house and don’t plan on buying a house, this information is just more lining for the bottom of your parrot’s cage, but what about for folks who own homes currently (like me)?

To me as a home owner, it means nothing, since I am not planning on selling my house in the near future, and unless there is a cataclysmic event in my life, I don’t need to worry about buying a new home, so this information is more fodder for the fireplace.

The only way this might start being important to me (as a home owner) is if the alleged value of my house dropped significantly I need to take into consideration two things:

1. How much is the City of Ottawa valuating my house for the purposes of property taxes.
2. How much I still might owe on my Mortgage

High Market Valuation for Property Taxes

If the city thinks my house is worth $500,000, but all the houses around me (we’ll assume comparable homes) were selling for $325,000, that would be the time to ask for the city to revisit my home’s valuation. Property taxes are a weird tax in that you are paying tax on the estimated value of something you own, so if the value of it drops, your taxes should drop. If you are in an area where you have seen housing prices drop, check out your valuation, and appeal it if you feel it is too high (it could save you some real cash).

Appeals of valuation do work (sometimes), I know of two friends who appealed their valuations, and their taxes were lowered (for a while at least).

House Value Less Than The Amount Owed On It

If I owe $325,000 on my house but it is only worth $275,000, is it worthwhile continuing to pay for this house? That’s a tricky question, if you can afford to pay for the house, and you think the house may eventually go back up in value, then keeping the house and continuing to pay your Mortgage might just make sense.

If you can’t afford your house payments, and your house isn’t worth much, should you walk away from the house? This is something you need to decide for yourself and maybe you need to talk to your Bank about the terms of your Mortgage as well.

This drop in value is what has been happening in the U.S. and has caused a lot of folks to simply walk away from their homes (a very sad time). I don’t know if I could do that, but if it meant it kept me from declaring bankruptcy, then maybe that is an option (for me).

Houses are a very odd investment since you live in it and it is a basic life need (i.e. shelter), so as long as it’s value does not suddenly sky rocket, forcing you to pay huge Property Tax bills or drop in value like a bran muffin through your colon, causing you to ask why am I paying so much for something worth so little, you wouldn’t think of suddenly selling it as an asset. Most of us just don’t think of our houses that way.

My opinion is that a house really isn’t an investment, it is where my family lives and as long as it continues to function in that fashion, I will monitor it’s value, but not worry about it too much.

Question:Do you think your primary residence is an investment? If it suddenly dropped in value, would you abandon it?