Family Formation & Housing

For young couples starting families, buying their first home and/or other real estate. Covers mortgages, credit cards, interest rates, children’s education savings plans, joint accounts for couples and the like.

A beginner’s guide to Fixed Rate Mortgages

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By Rebecca Hills

Special to the Financial Independence Hub

Fixed rate mortgages are very popular in Canada. In fact, of the 6 million mortgages that have been taken out by Canadians, 60% are fixed rate mortgages. A fixed rate mortgage agreement stipulates that the borrower will be required to pay interest on their mortgage that will not fluctuate for a set period of time. Presently, the most popular mortgage in Canada is a three-year fixed rate mortgage.

In addition, interest rates for fixed mortgages will differ, depending on the province that you are living in, as well as the number of years on the term, and also the financial institution that you borrow from. Different mortgage brokers will also offer different rates, so doing your homework beforehand, while understanding your unique financial goals and situation, will help you avoid any headaches down the line. Here, our goal is to provide you with a beginner’s guide to the fixed rate mortgage scheme.

What is meant by Fixed Rate Mortgage?

As mentioned, roughly two thirds of Canadians opt for a fixed rate mortgage over a variable rate mortgage. A fixed rate mortgage is designed for people who are averse to risk, as having a set interest rate will eliminate the risk of interest rates suddenly skyrocketing in the future. Imagine a situation where interest rates increase exponentially and you are unable to afford the sudden spike in rates. Such a possibility would not be an issue when you lock in an interest rate for the entire term of your loan.

Also, please note that you don’t have to stick with a fixed rate mortgage forever. For instance, if you receive a job promotion or inherit some money then you may be more comfortable taking a risk and switching to a variable rate mortgage. Once your mortgage has reached the end of its term you can consult with your broker in order to determine if switching to a variable rate mortgage may be the better option when it comes time to refinance your home.

Evidently, in some cases a variable rate mortgage may be the better option, if interest rates happen to be low when you sign, and remain relatively low throughout the term of your mortgage. As can be seen, both fixed rate and variable rate mortgages have their pros and cons, so if you are not sure with which to go with speaking to a financial advisor or broker may help with your dilemma.

Should I choose a fixed or variable rate mortgage?

There are many advantages to fixed rate mortgages. For instance, you won’t have to worry about your payments increasing over the duration of the mortgage term. There are also many options to choose from, from 2- or 3-year terms, to 5- or 10-year terms. In some cases you may also have the option to sign a 6-month fixed rate mortgage or one as long as 25 years. There is also the matter of certainty, as you will know exactly what your mortgage will cost at all times. Knowing exactly how much you will be required to pay will also streamline your billing, and also help you create a budget that is safe and secure. Continue Reading…

Federal Budget 2019: Liberals unveil $22.8 billion in new spending in pre-election budget

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Not surprisingly, the Liberals’ fourth federal budget released Tuesday afternoon is the predicted pre-election spendathon targeting the two big voting blocks of Seniors and Millennials. You may wish to refresh this link from time to time, or check my Twitter feed at @JonChevreau. Also check out FP Live’s “Everything you need to know about Federal Budget 2019.”

One of the first reports out was the CBC: Liberals table a pre-election budget designed to ease Canadians’ anxieties. It said that Morneau’s fourth budget includes $22.8 billion in new spending. The 460-page document is titled Investing in the Middle Class. Not surprisingly, the CBC noted, there is no timeline for erasing the Deficit, projected to be $20 billion next year, then falling to $15 billion two years later, and then to $10 billion in 2023-24.

First-time home buyers can tap RRSPs for $35,000

As predicted, the Budget targets Millennials who are finding it hard to get a foot on the housing ladder. It  boosts the amount of money that can be withdrawn from RRSPs for a first-time home purchase, from the previous $25,000 to $35,000 ($70,000 for couples). Low-income seniors will be able to keep more of the Guaranteed Income Supplement (GIS) if they opt to remain in the workforce and safeguards are being introduced to protect employer pensions in the event of bankruptcies.

Among other spending initiatives is ensuring access to high-speed Internet by 2030 across the country, $1.2 billon over three years to help First Nations children access health and social services, an additional $739 million over five years to repair water systems on First Nations reserves, and a federal purchase incentive of up to $5,000 for electric battery or hydrogen fuel cell vehicles with sticker prices below $45,000.

Little wiggle room in a Recession

The Financial Post’s Kevin Carmichael filed a piece headlined “Liberals leave themselves little wiggle room in the event of a recession.” And Andrew Coyne commented that “the federal budget is a testament to the pleasures of endless growth. Forget productivity, tax cuts or investment.” One of his colourful quips was this:

“I’ve said before that these are deficits of choice, rather than necessity. A better way to describe them might be deficits for show.”

The Globe noted that the $23-billion in new spending spans more than a hundred different areas, although the focus is on new home buyers and training programs for workers. Later this year there will be $1.25 billion (over 3 years) “First Time Home Buyer Incentive” managed by the Canada Mortgage and Housing Corporation. The Globe added that “CMHC would put up 10 per cent of the price of a newly constructed home and 5 per cent of an existing home, and share in the homeowner’s equity.” To qualify you must be a first-time home buyer with annual household income below $120,000.

8 ways personal finances will be affected: GIS, CPP & more

G&M personal finance columnist Rob Carrick listed 8 ways the budget will impact ordinary citizens’ finances. He noted that seniors receiving the GIS will be able to earn $5,000 without affecting benefits, up from $3,500, and that there will also be an additional 50% exemption of up to $10,000. Contributors to the Canada Pension Plan who are 70 and older and haven’t applied for benefits will be “proactively enrolled” starting next year. Carrick said Ottawa says about 40,000 people over 70 miss out on CPP benefits averaging $302 a month. He also writes that the tax break on stock options will be limited for employees of larger, mature companies (as opposed to startups), with annual caps of $200,000 on stock options eligible for preferential tax treatment. Continue Reading…

What do home buyers want from the Federal Budget?

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

The Federal government’s budget reveal is tomorrow, and all eyes  are on what kinds of goodies will be included for beleaguered first-time home buyers.

While Finance Minister Bill Morneau has strongly hinted that some sort of measure would be unveiled to alleviate the home affordability challenges facing Canadians, it remains to be seen what that will entail. In the meantime, the government has been on the receiving end of proposals from various members of the housing industry, including local and regional real estate boards as well as Mortgage Professionals Canada, as to what would best address the issue.

Industry wants Stress Test, Amortizations, reeled back

Much of the focus has been placed on two key areas: the federal mortgage stress test, which was implemented just over a year ago in January 2018, as well as the length of maximum amortizations for first-time buyers.

Relaxing the criteria around both would improve buyers’ chances of qualifying for a mortgage, experts argue, and therefore should be the priority of the feds when implementing change. The result of the stricter threshold has effectively cooled demand in even the largest Canadian markets, and has pushed a greater percentage of buyers to high-rise living across the nation, from Vancouver condos for sale, to Hamilton and Ottawa condos, rather than single-family detached options.

Survey results yield other priorities

However, home buyers aren’t necessarily in agreeance with that approach. According to a recent survey conducted by Zoocasa, while 82% of Canadians feel that housing affordability continues to be a major issue, they’re not so sure the government is in a position to improve the situation. A total of 55% of respondents do not believe that affordability can be fixed via government measures alone, while 21% don’t feel it’s possible for new policies to exact change within the next five years.

Respondents also had different opinions about what measures would be of biggest help to their pocket books. When asked specifically about the mortgage stress test, for instance, only 57% said they were aware of what it was – and of that group, just half felt reducing the test’s rate threshold (currently the Bank of Canada’s five-year rate of 5.34% or 2% on top of the borrower’s contract rate, whichever is higher) would be of help. Only 15% of all respondents felt such a measure would be effective.

They also weren’t sold that extending maximum amortizations for high-ratio borrowers (those paying less than 20% down) or first-time buyers would be of service either; doing so would reduce monthly mortgage payments, making home financing easier on household budgets, and also ease the stress test’s affordability criteria. Continue Reading…

Real Estate Investing: The good and bad of investing in real estate

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By David Miller, CFP, RFP

Special to the Financial Independence Hub

Real estate can be a differentiator in a diversified investment portfolio. But when you watch the pundits in the media and certain TV network shows, as seen on HGTV, buying, flipping or renting a property seems like a sure way to increase your income or get rich quick. As glamourous as it seems when you take a sledgehammer to a useless wall to ‘open up the space’, the reality of making it a marketable investment is often much more daunting. What really is daunting is the sheer number of options you have when it comes to investing in real estate, and the obvious question is:

Does it make financial sense to add real estate to your portfolio?

The Positives

Real Estate does make sense in most investment portfolios but let us back up a little bit here and provide some context:

What are the primary reasons people choose real estate as an investment?

There is something reassuring about investing in real estate, as in the case of owning a rental property. You own a tangible asset and you may feel like you can see the value and the risks just by walking through the property. You may own your home, and assuming you are mortgage free, brings an incredible feeling of security and freedom.

Real estate investing can offer a stable, reoccurring income; after all, ‘who doesn’t pay their mortgage or rent?’ It also carries a fairly high certainty of a higher value over the long term; after all, “they are not making more land” (unless you’re in the South China Sea or Dubai). These are two common positive arguments.

If you look specifically at Canada, there can be times when your rate of return can be incredibly high. We experienced this with Calgary’s real estate boom from 2005-2007. The Greater Toronto Area and Greater Vancouver area from 2015-2018 have seen incredibly high growth and price increases that have been covered extensively through the media.

Real estate investing provides an interesting option that is not directly tied to overall stock market risk, which can provide you with increased diversification. Whether the stock market goes up or down, your real estate price may move independently.

The wealthy endowment funds, private pensions, institutional money and the Canada Pension Plan invest heavily in real estate, private equity and infrastructure projects that average Canadian investors either don’t know about, can’t invest or don’t invest into.

To summarize, the benefits of a real estate investment are that it is a tangible, generally stable income producing, ‘always goes up’ investment and offers other benefits not seen in the stock market. Ready to jump in with both feet? Not so fast. There are some serious pitfalls to understand and multiple options to choose from.

How can I invest into real estate?

  • Buy a rental property (putting at least 20% down)
  • Buy a commercial building
  • Real Estate Investment Trusts (REITs)
  • Exchange Traded Funds (ETFs) of REITs
  • Mutual funds specializing in real estate
  • Private equity or debt (Mortgage pools/investment corps)

Primary Issues

Price Risk

Can real estate values fluctuate? The real answer is yes. Nationally, Canadian housing prices reduced by 4.9% on average in 2018, the worst performance since the 2008 financial crisis. Toronto and Vancouver skew the average price to high side, but even they are starting to fall off their 2017/18 highs and there are obvious concerns of a bubble bursting.

Prices for real estate are difficult to gauge as every property is different and value is in the eye of the beholder. To sell your property, you likely need to employ a realtor to get a starting price and you need to find someone else who agrees on the price to buy. Real estate negotiations can go awry quickly, which causes further delays regarding the liquidity. For this service, there is a sales cost paid to the realtor, usually 7% of the first 100,000 and 3% after, although this can be sometimes negotiated.

In an example of how poor the Calgary commercial real estate market is; this*is an article that explains how the city of Calgary is losing over $300 million in tax revenue every year as downtown core commercial property values have decreased by a collective $12 billion. This is an example of how real estate values can fluctuate to the downside and how unstable a source of income a real estate investment could be.

See the chart below for the relative volatility of the selected Calgary, Toronto and Vancouver markets when compared with the US Equity and Canadian Equity markets. While the annual volatility in the S&P 500 and TSX has been much higher relatively, this chart shows that you could lose out if you sell your real estate holding at the wrong time or pick the wrong city or neighbourhood to invest in.

 

Calgary data via CREB Monthly Average Sale Price “Attached, Detached, Apartment”, Jan 2005 to Dec 2018. Vancouver Data via CREA.ca HPI Tool Greater Vancouver Composite historical price data Jan 2005 to Dec 2018. Toronto Data via CREA.ca HPI Tool Greater Toronto Composite historical price data Jan 2005 to Dec 2018. TSX data via tmxmoney.com price history. S&P 500 data via http://www.multpl.com/s-p-500-historical-prices/table/by-year. The chart above only looks at price change and does not factor the effects of leveraging or reinvestment of interest or dividends.

Liquidity Risk

Liquidity refers to how quickly you can get your money out if you change your mind about your investment. Are you prepared to invest money into a residence only to find out it’s a money pit? What happens when you struggle to sell it when the market turns, and you could really use the extra money for something else? What if there is an emergency and you need those funds and there is no liquidity? If you are buying a stock or ETF on a major open market, the level of liquidity can be measured in volume of shares bought or sold and shares usually change hands instantaneously. While investing in stocks should be a long-term investment, at least you have the option to get out at any time almost instantly. The same is generally true in real estate; however, the liquidity premium is significantly higher. Continue Reading…

Enable, don’t label … but whatever you do don’t call them ‘seniors’!

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By Yvonne Ziomecki, HomeEquity Bank

Special to the Financial Independence Hub

When you are a marketer you tend to look at advertising through a different lens than everyone else – sometimes you are critical, sometimes curious, and sometimes you just admire the genius.  But it’s hard to assess your own advertising through the same lens, especially when you are in your mid forties and the product you market is for people who are retired.  That’s when you call for help!

Last summer our company HomeEquity Bank, provider of CHIP Reverse Mortgages, launched new advertising campaign through a series of humorous ads developed and based on research insights, addressing the fact that older Canadians see themselves as active and able and completely in control of financial decisions related to their home.

Specifically: staying in the home they love.  Our research showed that 93%+ of older Canadians want to age in place.  We also learned that 80% of older Canadians don’t want to be called ‘Seniors’ and most prefer no labels to describe them or their peer group.

In order to better understand if our ads were hitting the mark we engaged the neuroscience research firm Brainsights to study the unconscious brain activity of 300 Canadian Boomers. Research participants were presented with approximately 1 hour of advertisements including our ads, other ads, movie trailers, promotional videos, etc.  Brainsights analyzed participants’ responses to all the content they saw. The findings revealed not only that many marketers were engaging in unconscious age bias, but also that Boomers were pushing back against offensive labels and aging stereotypes.

Research revealed 4 insights to help marketing resonate with Boomers:

•  Say goodbye to old age stereotypes. Today’s Boomers see themselves as being cheeky, mischievous, adventurous and capable. Old age stereotypes depicting 55+ Canadians as frail and fumbling will miss the mark. Continue Reading…