Articles

Tips for helping your kids buy a house

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TriDelta President Ted Rechtshaffen joins House Money on BNN with advice for parents possibly looking to help their kids buy a home.

Ted Rechtshaffen
Posted By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

If you’re retired, is now the time to sell your house?

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ted_bnn_15sep16cTriDelta President Ted Rechtshaffen appeared on BNN TV as a guest speaker to discuss retirement income from selling a house in Toronto.

Ted Rechtshaffen
Posted By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Our housing market – is this the top?

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The explosive growth of the Canadian housing market in the last decade may finally be coming to an end.

Interestingly there is good logic on both sides of the debate and it is anyone’s guess where markets go in the short term:

The reasons for it to continue growing:

  • Foreign buyers remain very active despite a slowdown in Vancouver due to the new 15% BC foreign buyers tax. This has however likely boosted Toronto sales.
  • Three decades of low interest rates.
  • Job growth in the major centres outpaces the national average, particularly Toronto and Vancouver, which collectively accounted for all of Canada’s increases in 2016
  • Demographics reflect that there are more people aged 25 to 40 in these two cities and they have grown faster relative to other age groups. This segment is also in their prime home buying and child producing years, further stimulating home sales.
  • The number of single detached homes built in Toronto in 2015 was the lowest since 1979 according to a BMO report. This imbalance in supply and demand is a big reason prices for single-family houses are experiencing double-digit price jumps. In May 2016 the average detached home price jumped 18.9%, while condos only saw a 5.9% increase.
  • Housing market speculators flipping properties are very much part of this process although hard data on this activity is sparse.
  • A continued weak Canadian dollar is stimulative to the housing market. Since 2011, the Loonie has lost 27% of its value against the greenback, while Canadian homes appreciated by 26%.
  • If houses were priced in U.S. dollars, a very different perspective emerges. Canadian home prices aren’t appreciating, but show a decline of about 9% against the average benchmark price. The same trend is evident when pricing Canadian homes in Chinese yuan. This is worrisome because Canadians are actually being devalued on a global scale.

Among reasons for the long boom to end:

  • Steven Poloz, head of the Bank of Canada says the Canadian housing boom is unsustainable for a number of reasons including overall household financial stresses and climbing debt.
  • The anticipated interest rate trend, changing from the past three decade decline to a rising rate environment, appears to have already started in the U.S.
  • Continued weakness in the price of oil as is anticipated by many given slow global growth and excess oil supply.
  • Asset prices inevitably revert to their historical mean, which is overdue in Canadian housing prices.
  • Buyers believing the real estate market is different this time.  Canada’s housing market dropped about 15% in 1957 over six years and a whopping 25% in the early ‘90’s so maybe this market needs to digest some of the recent gains, which are more than double our long-term averages.

The correction may already have begun. Consider that the Teranet-National Bank index of house prices in Canada’s 11 largest metropolitan regions rose 6.1% in November, yet only four cities—Toronto, Hamilton, Vancouver and Victoria actually posted gains. Values in the other seven cities contracted, suggesting that a correction is well underway.

Here are two recent articles that provide more food for thought on our real estate market:

The first article from Maclean’s suggests that population growth isn’t driving Toronto house prices as many have claimed.

The second article from MoneySense magazine, takes a broader approach and provides the Canadian Real Estate Associations (CREA) perspective.

Anton Tucker
Compiled by:
Anton Tucker, CFP, FMA, CIM, FCSI
Executive VP and Portfolio Manager
anton@tridelta.ca
(905) 330-7448

What you need to know about the new mortgage rules

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mortgage

On October 3rd , the federal government announced new mortgage requirements, which are designed to dampen the housing price euphoria.

Getting a mortgage approved at a great rate or maximizing the value of your real estate could both be impacted by these changes.  At TriDelta, we are able to help you or your children with getting the best mortgage, and also help those with their planning around whether to buy, hold or sell real estate.  Feel free to ask us for help in either of these areas.

These new requirements follow four rounds of changes made previously to tighten eligibility rules.  For new insurable loans between 2008 and 2012, the changes included:

  • the minimum down payment was increased to five per cent from zero
  • the maximum amortization period was reduced in stages to 25 years from 40 years and the maximum insurable house price was limited to below $1 million.
  • Buyers with a down payment of at least 5% of the purchase price, but less than 20% must be backed by mortgage insurance. This protects the lender in the event that the home buyer defaults. These loans are known as “high loan-to-value” or “high ratio” mortgages.

New rules include:

Applying a Mortgage Rate Stress Test to All Insured Mortgages.

Effective October 17, 2016, a stress test used for approving high-ratio mortgages will be applied to all new insured mortgages. This includes those where the buyer has more than 20 per cent for a down payment. This new stress test is designed to build in some wiggle room so new buyers can manage an interest rate rise. The home buyer would need to qualify for a loan at both their contract mortgage rate (currently +-2.5%) and the Bank of Canada’s conventional five-year fixed posted rate, which is currently 4.64%.

The stress test also requires that the home buyer spends no more than 39% (previously 32%) of income on home-carrying costs like mortgage payments, heat and taxes. The buyers also have to ensure their Total Debt Service (TDS) ratio, which includes all other debt payments does not exceed 44% (previously 40%). This shows the government easing up on previous limits as they allow home owners to allocate more of their income for housing and debt payments.

This new provision ensuring home owners have an ability-to-repay will put pressure on self-employed borrowers who will have to make sure they can document at least two years’ worth of sufficient income to get a mortgage.

Down payment requirements have also been boosted:

Under the changes Canadians can still put down five per cent on the first $500,000 of a home purchase, at least 10 per cent down on the portion of a home that costs more than $500,000 and for homes that cost more than $1 million will still require a 20 per cent down payment.

For those purchasing with less than 20% down, the affordability table below illustrates the impact of the new mortgage rules, indicating  the maximum house price before and after the October 17th changes.

Changes to Low-Ratio Mortgage Insurance Eligibility Requirements  –  Effective November 30, 2016, mortgage loans that lenders insure using portfolio insurance and other discretionary low loan-to-value mortgage insurance must meet the eligibility criteria that previously only applied to high-ratio insured mortgages.

Impact of Changes: Based on year-to-date 2016 data, it is estimated that a little over one third of insured mortgages, mainly for first time home buyers, would have difficulty meeting the required debt service ratios and home buyers would need to consider buying a lower priced property or increase the size of their down payment. Additionally, approximately 50% to 55% of new insurance requests, would no longer be eligible for mortgage insurance under the new Low Ratio mortgage insurance requirements.

This will affect all home buyers who are seeking a mortgage that may stretch them too thin if interest rates were to rise.The government is responding to concerns that sharp rises in house prices in cities like Toronto and Vancouver could increase the risk of defaults in the future should mortgage rates rise.

An additional change that may come as a surprise to many, is the new reporting rule for the primary residence capital gains exemption. As you know, any financial gain from selling your primary residence is tax-free and does not have to be reported as income. As of this tax year, the capital gains tax is still waived, however the sale of the primary residence must be reported at tax time to the Canada Revenue Agency. Everyone who sells their primary residence will have a new obligation to report the sale to the CRA. The change is aimed at preventing foreign buyers who buy and sell homes from claiming a primary residence tax exemption for which they are not entitled. However this will catch many off guard.

These new rules will definitely have an impact on new and upgrading homebuyers, but also come into effect at a time when many who are thinking of retiring, may not be able to sell their homes as quickly or for as much as they originally hoped to fund their retirement plans.

To review how these changes may impact your home purchase or retirement plans, please contact us for a no obligation review of your situation.

Lorne Zeiler
Written By:
Heather Holjevac
Senior Wealth Advisor
heather@tridelta.ca
416-527-2553

Record debt levels only bad if you’re using the money wrong

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ted_bnn_15sep16cTriDelta President Ted Rechtshaffen appeared on BNN TV as a guest speaker to discuss the implications of Canadian household debt levels at new highs.

Ted Rechtshaffen
Posted By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Collateral Mortgages – The Good and the Bad

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Most people think of mortgages as pretty straight forward products. Our message is don’t be fooled, they are not. Finding the right solution is best done by partnering with an expert such as a mortgage broker.

The last couple of days have delivered the lowest rates ever, which is great news for those of us needing a mortgage, but again be diligent in working with the right partner to find the solution that is best for your particular situation – talk to us and we will guide you.

A relatively new option is a collateral mortgage solution. Most people are not familiar with this type of mortgage, but it has some unique features that may be beneficial.

We asked one of our preferred mortgage brokers, Jacques du Preez of Mortgage Allies to clarify things and provide his advice on collateral mortgages:

What is a Collateral Charge?

It is an alternative way for lenders to place a mortgage against a property. A collateral charge can contain more than one mortgage component such as a classic mortgage and a secured line of credit. Collateral mortgages are also re-advanceable.

What is good about collateral mortgages:

  • Borrowers have access to the equity that they have created by paying down the mortgage principal.
  • The borrower does not have to qualify for borrowing inside the collateral limit.
  • This can be a great tool for business people to cash flow their businesses.
  • The increasing equity can be used for investment purposes.

What is bad about collateral mortgages:

  • Collateral mortgages are not transferrable. This means that the borrower will have to pay full legal fees to transfer the mortgage to a different lender at term maturity.
  • These products are used as forced loyalty tools by lenders.
  • They are often the source of increased debts and can be a hindrance to become mortgage or debt free.
  • Collateral mortgages are not portable, nor assumable.
  • They block out any other loans against the subject property, which means a borrower has no way of securing any other emergency funding if they need it.
  • Collateral charges can lead to Power of Sales of properties.

Collateral mortgages are not for everyone and they should always be entered into as a result of a strategy.

Here are a few guidelines:

  • Only allow the financial institution to collateralize the property for the total borrowings. Some institutions collateralize above the borrowing limit or even to 125% of the property’s value. There is no need for this and does not serve the borrower’s best interest.
  • If a mortgage is above 80% of the value of the property the mortgage should not be collateralized. Under government rules there is no potential for future borrowings so there is no need to place a collateral on the property.
  • Disclosure about collateral charges are usually only provided in the lender’s Standard Terms package which the borrower sees at the solicitor when the mortgage is closed. This is too late so insist to see your bank’s Standard Terms when you enter into mortgage discussions.

The golden rule: Don’t allow your lender to place a collateral mortgage on your property unless you have a reason to do it.

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Ellen Roseman of The Toronto Star also wrote an article highlighting the differences between a conventional and a collateral mortgage.
Read the entire article.

Anton Tucker
Compiled By:
Anton Tucker, CFP, FMA, CIM, FCSI
Executive VP
anton@tridelta.ca
(905) 330-7448
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