Category Archives: debt management

CBC FORUM House keys sent to the bank? Your thoughts on mortgage defaults

The federal government is worried about Albertans making strategic defaults on their mortgages.

 

Some Albertans are walking away from their mortgages by putting their keys in the mail and sending them back to the bank.

It’s a phenomenon known as jingle mail — sparked by a combination of high debt and lost jobs — and was a big problem in Alberta back in the 1980s.

As a result, the federal government is watching the Alberta market closely. Jingle mail, or strategic defaults, weaken the housing market and increase loan losses among Canada’s banks, say experts.

We asked what this means to you: Does your mortgage keep you awake at night? What would make you send your house keys to the bank? Any personal mortgage anecdotes you want to share?

You weighed in via CBC Forum, our new experiment to encourage a different kind of discussion on our website. Here are some of the best comments made during the discussion.

Please note that user names are not necessarily the names of commenters. Some comments have been altered to correct spelling and to conform to CBC style. Click on the user name to see the comment in the blog format.

Many chimed in with their own mortgage advice.

  • “Sending house keys back to the bank seems very irresponsible. The banks are not going to absorb the costs — customers will be on the hook in the end.” — EOttawa​
  • “People who buy the McMansions in the hopes that someday they will become part of the upper class are the ones who should worry. Big risks have serious consequences. Good luck with it.” —Chris K
  • “No, it doesn’t keep me awake for the simple reason that we bought a home well within our means with a mortgage way lower than what the banks said we could borrow … It’s a question of common sense and priorities.” — docp

There was some discussion on who should be blamed.

  • “Lots of blame and finger pointing to go round. Bottom line, as many others have said, it falls on personal responsibility to make good decisions and sometimes circumstances outside our control force us to make tough decisions to survive — like using ‘jingle mail’ in Alberta.” — Don Watson

Several commenters even had their own jingle mail stories.

  • “My ex-husband and I returned the keys to the bank when it became clear that he was unable to maintain the mortgage payments on the home he had bought before we were married. This happened in the first year of marriage and it was a terrible blow to him. Later he declared bankruptcy.” — LinneaEldred
  • “We purchased our home within our means and have been able to keep up with the payments. We lived in Fort McMurray for four years, after they went through the downturn of the economy in the early 80s. Folks were turning in their keys then and walking away. People still don’t learn from past mistakes.” — Leslie Riley​

There were even some thoughts on the future … or lack of it.

  • “I have a mortgage and I also have a full-time job, yet I still worry about the future of my mortgage. I don’t believe that we need to point out the fact that even if you were or are smart about your money, you cannot predict your future.” — Samantha R.

You can read the full CBC Forum live blog discussion on mortgages below.

Can’t see the forum? Click here

Source: By Haydn Watters, CBC News Posted: Feb 09, 2016 12:26 PM ET

 

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The Best Credit Cards in Canada for People with Bad Credit

bad-credit

As the saying goes, past behaviour is the best indicator of future behaviour. And in that spirit, your credit history is what lenders use to determine your credit worthiness. In other words, they use your past financial history to judge how likely you’re able to repay your debts in full and on time.

If you have a poor credit history or no credit at all, then lenders either don’t trust that you’ll be timely and consistent in your repayments, or they have nothing with which to assess your risk—and lenders aren’t about to give you the benefit of the doubt.

So, how do you go about building (or rebuilding) your credit history? There are lots of credit cards for bad credit, most of them being secured credit cards. Secured credit cards differ from other credit cards in that they require you to provide a security deposit that’s equal to or greater than the credit limit. Here are three of what we think are thebest credit cards in Canada for people with bad or no credit:

Home Trust No Annual Fee Secured Visa Card

Apply Now Button-small

 

 

Highlights:

  • No annual fee
  • 19.99% interest rate
  • Your credit limit is set at the amount of the security deposit you put down
  • Applicants who have been discharged from bankruptcy are eligible to apply at any time

If you’re looking for a credit card with no annual fee but you don’t qualify for an unsecured credit card, then theHome Trust Secured Visa Card might be a good option for you. This card requires you to pay a security deposit equal to the amount of the credit limit you’d like. You can put down as little as $500 and as much as $10,000. This provides you with the opportunity to build your credit rating up at a rate that you’re comfortable with. If you want to use the card for small purchases to slowly regain creditors’ trust but you still want the freedom to buy those bigger ticket items, this card lets you do just that.

 

Alternatively, if you like the credit limit this card offers but would like a lower interest rate, you have the option to apply for the Home Trust Secured Annual Fee Visa Card. This card comes with an interest rate of 14.9% and an annual fee of $59, which you can choose to pay at $5 per month. This is an excellent alternative because applicants are just as likely to get approved for this card as they are for the no annual fee version, and yet the interest rate is five percentage points lower. This card would be the preferred choice for those looking to re-establish their credit rating and who trust themselves to not often carry a balance.

The Affirm MasterCard

affirm-mastercard

Highlights:

  • Annual fee of $84.00 ($7/month)
  • Interest rate of 29.99%
  • No security deposit required

The Affirm MasterCard is an unsecured credit card so it’s an excellent option for those who have bad credit but don’t want a card that requires a security deposit. It comes with a $3,000 credit limit and has a $7 monthly fee. The idea here is that they’re taking a bigger risk in offering a true line of credit to individuals with low credit ratings, so they’re asking for a fee to be paid monthly and not annually as a way to reduce this risk. Another way Affirm manages its risk is by requiring you to make a minimum monthly payment on your outstanding balance: either $30 or 4% of your balance—whichever is greater.

This card has an interest rate of 29.99% on all purchases and doesn’t have a cash advance option. This interest rate is extremely high and is designed to encourage users to rarely carry a balance, if ever at all. Since the whole purpose of getting a credit card for bad credit is to slowly regain the trust of lenders, it’s very important that you pay off your balance in full and on time with this card because with the combination of a $3,000 credit limit and a 29.99% interest rate, it’s very easy to slip into debt. There are no administration or pre-payment fees and you can use this card anywhere MasterCard is accepted. Once you’ve established a good rapport with Affirm and have built up your credit history, they can even re-evaluate and consider granting you an increased credit limit if that’s something you want.

Peoples Trust Secured MasterCard

Highlights:

  • $69.60 annual fee ($5.80/month; collected monthly)
  • 12.99% interest rate on purchases
  • 24.5% interest rate on cash advances

The Peoples Trust Secured MasterCard is a secured credit card with an incredibly low rate of 12.99% on all purchases. This is a good option for those who are trying to build a strong credit rating but may carry a balance every so often. However, this card requires you to make a minimum monthly payment on your balance: the greater of $10 or 3% of your outstanding balance. If you don’t meet this minimum requirement, the interest rate will go up to 24.5% on your next statement so it’s important to keep up with payments.

Virtually everyone who applies for this card is approved, so it’s an ideal card for those who have been discharged from bankruptcy, or have a rocky financial past. The only requirement besides being a Canadian resident is that you have a verifiable source of income. Similar to the Affirm MasterCard, this card’s annual fee of $69.60 is charged monthly at $5.80/month. Finally, the security deposit that you’re required to put down can be as little as $500 and up to a maximum of $25,000, which most credit cards don’t even come close to.

Source: RateHub.ca by Bassel Abdel-Qader  January 31, 2016

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Get your debt under control before building a nest egg

Financial experts say the key to saving enough for retirement is getting your debt under control early.

It seems obvious: save as much money as early as you can. You’ll benefit from compound interest and you’ll build a savings habit that will serve you well when your pay goes up.

But just because it’s obvious doesn’t mean it’s easy — or even possible.

Financial advisers know that real life — schooling, cars, homes, kids — can get in the way.

Three experts who spoke with CBC News say because people are investing in themselves early in their adult lives, the goal isn’t necessarily to save early so much as getting all their ducks in a row for later in life.

One of the most obstinate ducks to manage is debt.

“If you’re in your 20s or 30s, it would be nice to have some savings,” said Preet Banerjee, author of Stop Over-Thinking Your Money!

“But if you are starting a family, getting a new house, etc., it can be pretty tough. So I don’t think you should be freaking out that you haven’t started aggressive savings just yet.”

Though recent headlines suggest Canadians are in fact saving enough money for retirement, Banerjee says the general trend has been a decline in savings — a pattern he attributes to low interest rates and people “launching later,” waiting longer to leave school, get married, have children and buy a home.

Banerjee says that means savings are delayed, too, but he stresses that it’s not necessarily a bad thing, so long as people are moving in the right direction by reducing their debt.

‘Just start with the basics’

“Just start with the basics, which is being able to figure out your monthly cash flow and making sure that you’re running a surplus, and how to figure out your net worth,” he said. “You do those two simple things … you’re going to be in a fairly good situation overall.”

Don’t worry about investing until you’re in a position to invest, he said.

‘If you don’t have anything in savings by the time you’re 40 or 45, it’s hard to have a million by the time you’re 65. So the response is to avoid.’– Melanie Buffel, Money Coaches Canada

“Living within your means is quite a bit different than living at your means, which I think is what people naturally default to,” he said.

Cherith Cayford, a financial educator at CMG Financial Education in Victoria, stressed the importance of getting your debt under control early.

“For millennials the focus should be debt reduction, debt elimination, not putting on more debt, being very focused on that level before they start planning for their retirement.”

She said no 20-year-old is thinking about their golden years, anyway.

 

“We’ve got to get real,” she said. “I wouldn’t even be worrying about it in my 20s. Maybe start thinking about it in your 30s, but sort of position yourself so that you are debt-free so that you can actually start accumulating wealth.”

Cayford lays out a simple plan:

  • Establish a specific year when you plan to be debt-free. “It can’t be on the never-never plan.”
  • Focus on eliminating the debt with the highest interest rate, while making the minimum payments on the others.
  • Continue that process until all the debts are paid off.
  • Use the money with which you’d been paying down your debts to build life savings rather than “living higher.”

While many people, especially in the biggest cities, won’t pay off their mortgage until their 50s or 60s, it’s important to have a handle on it so savings can begin.

Without a proper debt-reduction plan, you might not save a dime until your 50s.

‘It’s going to be very difficult’

Cayford says that’s too late to save enough for retirement from nothing, and you’d likely have to rely heavily on Old Age Security and the Canada Pension Plan. That might mean living with less during retirement.

“It’s going to be very difficult, because CPP was only intended to replace 25 per cent of the average industrial wage,” she said. “And if you haven’t been able to max out your contributions, then that’s even less to try to live on.”

Preet Banerjee

Financial analyst Preet Banerjee says savings can quickly accumulate once your debts are paid. (CBC)

Melanie Buffel, a money coach with Money Coaches Canada in Vancouver, said if people begin saving only at a late age, they can become discouraged.

“It frightens people,” she said. “The numbers just don’t work. If you don’t have anything in savings by the time you’re 40 or 45, it’s hard to have a million by the time you’re 65. So the response is to avoid. This is when it becomes really important not to jump to the big numbers, which will add to the stress, which will add to the avoidance, and then they’re going to go into debt even further.”

She said when people start saving in their 40s and 50s, it’s important to have a clear idea of what they want their retirement to look like. What quality of life do you want? How long do you want to keep working?

Banerjee says if you can get your non-mortgage debts paid off and have a clear end in sight for a responsibly sized mortgage by your mid-40s, there’s no reason to panic.

Once debts such as the mortgage are paid off, people often find themselves with $1,000 to $2,000 free monthly, he said.

“That can do a lot of work for you,” he said. “That’s still a relatively long period of time for people to accumulate the savings they need to retire.”

Source: CBC News Posted: Jan 15, 2016 5:00 AM ET

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Sean Cooper pays off mortgage in 3 years and earns online hate

Sean Cooper torches his loan papers at a mortgage burning party in Toronto. Not everyone admired his efforts.

When Sean Cooper burned his mortgage papers after going to extremes to pay off his house in three years, he never imagined it would get folks so fired up.

But after CBC News reported Cooper’s story late last year, reader comments flooded the internet, either praising or reviling the 30-year-old’s financial achievement.

“What is he going to do next, buy a car and sell one of his kidneys to pay for it?” snarled one reader.

An era of cheap interest rates has helped ignite an escalating and troubling household debt binge. The topic has become such a touchy one it can spark polarized opinions, finger pointing and even contempt.

Fuelling the debt fire

Not wanting to face a lifetime of debt, Cooper sacrificed three years of his life to pay down a $255,000 mortgage on a $425,000 Toronto home he bought in 2012.

He worked up to 100 hours a week at three jobs: pension analyst; financial writer; and supermarket clerk. Naturally, the bachelor’s social life suffered. Cooper also lived like a pauper, maintaining a strict budget and residing in the basement so he could collect rent on the rest of his house.

His story generated more than 2,000 comments on CBC News sites.​

“Well done! Worked your butt off to get away from debt,” wrote a jubilant reader about Cooper’s accomplishment. But others had only harsh words.

“He’ll probably die young,” opined one reader. “What a load of horse patty,” posted another, adding, “Work yourself to an early grave!”

Someone else chided, “Sean Cooper is the most boring man on earth. Life’s [too] short to live like a hobbit.”

Readers also invented details about Cooper’s life such as claiming he got his $170,000 down payment from his parents. Cooper said he saved the cash himself by, yes, living frugally.

Media across the globe have now jumped on the story and also taken sides. “Well done, big fella, congratulations, an inspirational guy,” gushed host David Koch on the Australian breakfast television program,Sunrise.

Sean Cooper on Aussie TV

Cooper appeared on the Australian breakfast television program Sunrise in December, where the hosts praised his accomplishment. (Sunrise)

But America’s Slate magazine had a different take, stating Cooper’s story implied our money troubles were entirely our own fault. The Slate article suggested cash-strapped people wanted real economic change rather than just “inspirational stories of sacrifice and pluck.”

Shaming and blaming

So just how much of our debt is our fault and why has Cooper’s story ignited such a furor?

There’s no denying some Canadians have money troubles. Thanks in large part to fat mortgages, Canada’s debt-to-income ratio is at a record high — on average people now owe $1.64 for every dollar of disposable income they earn.

Cooper said he understands not everyone is in a position to live the single, super frugal life. But he believes many lack the willpower to pay down their mortgage more quickly and that’s what inspired the nasty comments.

“They have different priorities in life, so I guess it’s just easier to kind of hate-on me for trying to accomplish this because they aren’t willing to do [it],” he said.

Financial writer Kerry K. Taylor agrees many people are not motivated to make the extra effort.

“Saving’s hard,” she said. “We want our stuff and we want it now,” added Taylor, who lives her own frugal lifestyle with her family in Toronto.

She has also written about the Cooper story and suggests his feat inspired hate because many of us don’t want to confront our own money problems. “It’s easier to poke holes in his lifestyle rather than take nuggets of advice from it.”

Taylor added that we have no one to blame but ourselves for our debt. “Look in the mirror,” she said.

Understanding the haters

Kitchener-based bankruptcy trustee Doug Hoyes is more sympathetic to the haters. While he applauds Cooper’s accomplishment, he said the 30-year-old’s extreme methods are out of reach for many. “That is not realistic for a single mother of a two-year-old kid,” he said.

He suggests some people find Cooper’s story offensive because they are not in a position to achieve the same goal.

“It could be interpreted that the finger is being pointed at me. Why am I not working 100 hours a week?”

Hoyes also believes individuals shouldn’t shoulder all the blame. While he feels personal choice definitely contributes to debt, so can many other factors such as bad luck, one’s health, a tough economy and policies that allow easy access to massive loans.

Cooper takes it in stride

For those who are inspired by Cooper’s achievement, he’ll soon be offering his services. In addition to his current pension analyst and freelance writer gigs, he’s planning a new venture: advising people how to get rid of their mortgage faster.

He’s working on a book on the same topic. The working title is “Burn Your Mortgage.”

He admits if he had do it again, he’d probably take a couple of more years to wipe out his debt so he would have had more time for socializing. But Cooper wants the haters to know that mortgage-free life is great.

“I’m in a financial situation that people are typically in in their 50s or 60s and I’m only 30 years old, so that’s a nice feeling to have,” he said.

Sean Cooper morgage burning

Cooper’s now owns his $425,000 home mortgage free. To help quickly pay off his mortgage, Cooper lived in the basement and rented out the rest of the house.

Source: By Sophia Harris, CBC News Posted: Jan 14, 2016 5:00 AM ET

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Many Canadian households ‘utterly unprepared’ for rate hike: economist

A slight increase in interest rates is all it would take to spell serious trouble for many Canadian households too accustomed to the current low levels, an economist at a global economic research firm is warning.

“While low rates are a blessing during the initial stages of any economic downturn, they can become a curse if households become addicted to them,” reads a report that David Madani, Capital Economics’ senior economist in Canada, recently produced.

In the commentary, Madani — once labeled “the economist realtors love to hate” — argues the low interest rates that have been a boon to the economy in recent years have “encouraged” household consumption and housing investment to reach a record share of the GDP in the third quarter, leaving some households overleveraged and “utterly unprepared” for a rate hike.

Madani notes that debt repayment is now making up what is approaching an all-time high share of household income — despite interest rates actually declining. “Accordingly, even small increases in the market rates could hit the economy hard,” he states.

“Household indebtedness is a major vulnerability to the economy,” adds Madani in the research note, citing the Bank of Canada’s most recentFinancial System Review, also published this month, which underscores that point. (So did the Canadian Centre for Policy Alternatives in November.)

Further stoking the flames is the fact that some debt consumers have racked up is being put towards mortgages on homes that are considerably overvalued. In Toronto and Vancouver, says Madani, homes are overvalued by more than 30 per cent. “These key regional markets are long overdue for a major correction,” the report states.

“Canada’s economy has long been overly reliant on household consumption and housing as drivers of economic growth,” explains Madani.

Madani adds it is possible the Bank of Canada may ease rates further in 2016, a scenario that increases in likelihood if oil prices continue to sink. However, Capital Economics is forecasting rate increases within two years as US Treasury and Government of Canada bond yields climb.

“Under these circumstances, we would expect household borrowing cost to rise,” concludes Madani. “Unfortunately, even small increases may prove devastating to many households with excessive debt loads.”

Source: BuzzBuzzHomeNews  | DECEMBER 31, 2015

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Household debt still rising, but most Canadians in decent shape: experts Bank of Canada worries some Canadian households may be over their heads

Most Canadians handle debt well, but a small minority have so much, they might everntually be in trouble.

Canadian households will close out 2015 carrying thicker layers of debt after worrisome gains over the past 12 months — extra padding that’s expected to get even fatter in the new year.

But even with the borrowing binges, many experts still believe the finances of most Canadians remain in decent shape.

This assessment comes as the country shows worrisome signs linked to consumer spending. It has a record-high debt-to-income ratio and the central bank has called rising household debt as a growing weak spot in Canada’s entire financial system.

One big bank economist, who has closely studied household debt, said any negative fallout from the debt situation would likely depend on whether Canada sustains an unlikely economic shock.

But trouble could also hinge on how quickly interest rates eventually rise, said CIBC deputy chief economist Benjamin Tal.

Low rates helped build debt

Economic shocks remain difficult to predict and, for at least the next year, Tal doesn’t expect rates to climb at a hazardous speed for those who may have overindulged on debt.

“As a society, there is no question that we are more sensitive to the risk of higher interest rates than in any other time in history,” Tal said. “On its way up, it’s extremely powerful.”

Persistently low interest rates have been a major contributor to rising household debt. Borrowing became even cheaper in 2015 after the Bank of Canada twice dropped its benchmark rate to help cushion the blow of the oil slump.

Households, meanwhile, have dined on debt since the financial crisis and provided spending that has helped the economy recover.

If interest rates rise slowly over the next two to three years, Tal predicts the impact is more likely to curb consumer spending rather than harm their ability to pay down their debt. He doesn’t foresee a wave of defaults if rates make an expected, gradual climb.

“It will be an issue a year from now,” said Tal, who expects the steady climb of household debt to continue. “I think that interest rates will not be rising quick enough to derail … the story.”

Many of the debt numbers, however, have painted a disquieting picture.

Debt-to-income on the rise

Earlier this month, Statistics Canada released data that showed the amount of Canadians’ household debt compared with disposable income rose to 163.7 per cent in the third quarter. It means the average household had nearly $1.64 in debt for every dollar of disposable income.

That was a record high.

The Bank of Canada has described the country’s mounting household debt level the most-important vulnerability in the financial system — a susceptibility that continues to grow.

Governor Stephen Poloz recently said most of that exposure is concentrated among 720,000 households that could struggle to make debt payments in a significant economic downturn.

The proportion of households holding debt higher than 350 per cent of their gross income — a high-risk category — has doubled to about eight per cent since the 2008 financial crisis, the bank found.

They tend to be younger Canadians under 45 years old who usually earn less money, people Poloz has said are part of “emerging pockets of concern.”

But while the bank says income growth has failed to keep up with rising mortgage credit, it argues the chances household debt becomes a serious problem remains low and is likely to fade as the economy strengthens.

HOUSEHOLD DEBT RATIO

So far, the bank says there’s been little evidence of significant increases in delinquency rates.

But the Royal Bank of Canada and the Equifax consumer credit monitoring firm have pointed to early signs of trouble in oil-producing regions like Alberta, where unemployment has climbed following the oil-price slide. They have detected slight increases in auto and credit-card delinquencies.

Most debt, however, is concentrated in mortgages, particularly following the recent ascension of real-estate prices.

In 1999, only three per cent of Canadians held a mortgage that was 500 per cent or more of their income, said economist Craig Alexander, vice-president of economic analysis for the C.D. Howe Institute think tank.

Today, that number is 11 per cent, he added.

Households at risk

“That’s not the bulk of Canadians, but it is half a million households,” said Alexander, who co-authored a recent report titled “Mortgaged to the Hilt: Risks From The Distribution of Household Mortgage Debt.”

“It’s not an insignificant number. There’s a pool of individuals that have leveraged themselves up.”

Still, while Alexander thinks there are risks associated with the amount of debt Canadians are shouldering, he doesn’t believe a majority of them have “behaved irresponsibly.”

In fact, delinquency rates on mortgages are near record lows, said Sherry Cooper, chief economist for Dominion Lending Centres.

“If people were stretched, you would expect that there would be an increase in delayed mortgage payments — and we’ve seen none of that,” Cooper said.

“We’re all assuming that there’s a huge problem here because debt-to-income ratios for households are at record highs. But the reason they’re at record highs is because interest rates are at record lows. So, people, in fact, can afford to take larger mortgages than historically.”

Tighter mortgage rules

The new federal government has already tightened mortgage rules, a move expected to slightly cool off the hot housing market and have a small dampening effect on Canadians’ tendency to pile on debt.

Earlier this month, Finance Minister Bill Morneau announced that starting Feb. 15, 2016, homebuyers will have to put a 10 per cent down payment on the portion of the price of a home above $500,000. Anything under $500,000 will still only require a five per cent down payment.

Morneau has said he has no immediate plans to make additional changes to address growing debt loads, but added he would continue to monitor the issue closely in the new year.

“It’s obviously something that, you know, people when they go home over the holidays they’re going to be worried about their situation, and this is the time of year when people tend to spend money,” Morneau said.

Source:  Andy Blatchford, The Canadian Press Posted: Dec 30, 2015 

Five things to do if you are over-extended on your mortgage

Mortgage default may be rare in this country, but nearly 9% of indebted households need 40% or more of their gross income to pay their debt service charges, says the Bank of Canada Financial System Review.

If you can see problems coming, then you can take action to avoid foreclosure, which happens when lenders run out of other alternatives and borrowers can do no more to pay their debts. Here are five options to consider when you are being crushed by mortgage payments:

1. Extend amortization: If the mortgage has been paid down to 10 or 15 years, then extending it to 20 to 25 years or even to 30 years will decrease payments. In a lot of cases this will work, says Elena Jara, director of education for Credit Canada Solutions, a Toronto-based non-profit organization which offers free credit counselling.

2. Seek better terms: You can go for lower interest rates with the same or a different lender but with a potential penalty, says Bill Evans, a mortgage broker with Mortgage Architects in Winnipeg.“If you are having trouble with payments with one lender, another may not want to take you on. But if you can present a case for a new income, you can go to a so-called specialty lender such as Home Trust or Optimum Trust for a fresh look at your problem and potential solutions,” Evans says. “If you just want to alleviate the problem, timing is crucial.”
3. Renew at a floating rate: There is more risk but lower interest cost in floating rate mortgages. If you are on a fixed rate mortgage with relatively high rates and want to go to a lower floating rate, perhaps by taking the mortgage to another lender, then there may be relief when it is time for loan renewal. The present lender may add a penalty, but over time, floating rates and the often attractive rate on a one-year closed loan can offer relief, Mr. Evans says.

4. Sell it and rent: In markets with high home prices as a result of speculative building, absentee owners will often rent at relatively low cost. That makes for good deals for renters.

5. Discuss a consumer proposal: The homeowner can avoid outright bankruptcy and foreclosure of the home by talking to creditors, suggests Bruce Caplan, trustee in bankruptcy for BDO Canada Ltd. in Winnipeg. “The homeowner can make a consumer proposal in which a settlement plan is devised for the creditors. Secured creditors such as the banks or private mortgage lenders can work out new terms such as reduced payments or a payment bridge for a period of time with the homeowner,” he suggests.

And number 6; Don’t suffer in silence until you lose control of the situation. Contact a mortgage professional who can review your circumstances and possibly offer you a solution to get back in control.

Source: The Financial Post Andrew Allentuck | November 21, 2013 12:40 PM ET

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Are young homeowners doomed if housing prices drop?

A new study from the Centre for Policy Alternatives suggests Canadian homeowners under 40 will take a major financial hit if real estate prices come crashing down, but experts say most will be able to weather the storm without foreclosing just by staying put and being patient.

Young Canadian homeowners are in for some tough times if the housing market comes crashing down around them, a new study suggests, but realtors and economists say there’s no reason to panic.

​​A report released last week by the Canadian Centre for Policy Alternatives suggests that one in 10 homeowners under 40 will be underwater on their mortgages — meaning their debts will be greater than their assets  — if real estate prices crash as expected at some point in the near future.

Right now, real estate prices are overvalued by anywhere from 10 to 30 per cent, according to Bank of Canada estimates. Eventually, most analysts say, the market will correct itself and prices will go down, either due to declining incomes, rising interest rates, or a combination of both.

When that happens, homeowners under 40 will be disproportionately affected — not because they stand to lose more actual dollars, but because they are debt-strapped and will see a bigger drop in their net worth, the study argues.

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Canadians in their 30s carry debt worth an average of four times their incomes, according to the Centre for Policy Alternatives. That means they stand to lose a much bigger percentage of their net worth if their homes lose value. (Joe Raedle/Getty Images)

“Their entire net worth is wrapped up in their home when they’re in their twenties and thirties. They’re early on in a mortgage, so … almost everything they’ve paid has gone into interest,” John Andrew, a real estate professor from Queen’s University in Kingston, Ont., said.

“And the other thing is that they’ve leveraged this to the hilt. So it’s a triple whammy, those three factors.”

‘Not a big deal’

Families in their thirties could lose an average of $60,000 if there is a correction of 20 per cent, and that would represent an average of 39 per cent of their net worth. People in their twenties would see their net worth reduced by 45 per cent in the same situation.

It all sounds scary, but young homeowners do have one thing their older counterparts do not — time. 

“Even if you’re underwater, it’s not a big deal, because as long as you live in this house and you pay your mortgage, that’s fine,” Benjamin Tal, deputy chief of CIBC’s World Markets, told CBC News.

Benjamin_Tal

CIBC’s Benjamin Tal says young homeowners shouldn’t panic about a potential drop in housing prices because they have the luxury of being able to wait it out. (CIBC)

“Of course, it’s difficult to be underwater. It’s not a very good thing to experience. But from a practical perspective, as long as you have a job and you have income, I really don’t see a situation in which you should panic.”

Andrew agrees. Asked what advice he has for young homeowners, he said: “Don’t panic. Yes, your net worth may have declined significantly, but until you go and sell your house, if you’re in the market, you’re in the market.”

Interest rates hikes an ‘urgent issue’

Both Tal and Andrew say the bigger issue at play here is the possibility that interest rates on mortgages will rise, triggering the anticipated drop in housing prices.

“I’m pretty sure we’re not going see a collapse in home prices until we see a rise in interest rates,” Andrew said.

And while most young homeowners can withstand a housing market crash by staying put and waiting it out, not everyone can afford to pay a bigger monthly mortgage. 

“If you can’t keep the house because you can’t afford the extra $350-$400 a month in mortgage payments, now you’ve got a really serious and urgent issue,” he said.

‘The economy will slow down’

Soaring interest rates and declining housing prices can also impact the economy at large.

“You have a situation in which more young people, young families, spend more money on their housing as opposed to anything else. So you don’t go to restaurants, you don’t take vacations — you just finance your mortgage,” said Tal.

“And if you don’t [spend money], the economy will slow down, and that will make things even worse because it means that unemployment starts to rise, and therefore some people actually won’t be able to pay at all.”

That’s particularly bad news in Canada, said economist David Macdonald, who authored the Centre for Policy Alternatives study.

“We’re already seeing weak growth in Canada,” he said, “and this would add to that slow growth.”

What’s the solution?

In his study, Macdonald recommends the government look at adopting U.S.-style policies to help young Canadians weather the storm.

That could mean giving unemployed homeowners some leeway on their mortgages, or allowing those in extreme circumstances to walk away from their mortgages without taking a huge hit to their credit scores.

But these are solutions for later down the road, when prices start dropping, he says.

In the meantime, Tal said young and prospective homeowners should make sure they have enough wiggle room in their budgets to comfortably make monthly mortgage payments even if rates rise by a couple of percentage points. 

“If they cannot do it, they should buy a smaller house,” he said.

Or, not buy a house at all.

‘There’s nothing wrong with renting’

Studies like this one might put you off buying at all, and that’s a perfectly reasonable option, said Andrew, especially in high-cost cities like Toronto, Vancouver and Calgary, where a housing market crash would hit hardest.

“If you look at a lot of world-class cities around the globe, there’s nothing wrong with renting. If you lived in New York City, you could easily rent your entire life and you wouldn’t feel inadequate about it.

“We’ve got this kind of Canadian hang-up,” he said. “There’s this sense that if you don’t own your own home … you’re not a success. And I think that’s changing.”

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Homeowners in big, expensive cities like Vancouver stand to lose the most if housing prices drop. That’s why some analysts say it might be better for city-dwellers to rent. (Robert Giroux/Getty Images)

Renting means avoiding the hidden costs of home ownership, like maintenance and property taxes. What’s more, you can up and leave whenever you want.

“Certainly for young people, as long as you’re saving some money, as long as you’re putting a significant amount away monthly and working toward that long-term goal, there’s absolutely nothing wrong with that.”

Source: CBC Sheena Goodyear, CBC News Posted: Nov 16, 2015 5:00 AM ET

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20% housing correction would push young homeowners under water

Young Canadian homeowners are disproportionately vulnerable to a housing correction, and more than 1 in 10 would owe more than they owned in the event of a modest or larger pullback in the market, according to a report.

The report, by the Canadian Centre for Policy Alternatives, was released Monday. The left-leaning think-tank urges governments to implement policies aimed at bringing down debt loads before its too late.

Policymakers have been warning for years about the dangers of high house prices and the debt loads they tend to generate. But the CCPA report is among the first to quantify how those debt loads are skewing disproportionately towards younger people, who often have no other assets than the house they borrowed so much to buy.

1 in 10 wiped out by 20% correction

Their debt loads make them even more vulnerable than the population at large to a housing correction.

The Organization for Economic Co-operation and Development (OECD) issued a warning Monday about the risk of correction, particularly in Toronto, which has a rapid pace of new condo development.

It pointed to high debt-to-income levels in Canada and urged tightening on mortgage lending in markets such as Toronto and Vancouver, where homes are expensive compared to incomes.

“In Ontario, and especially Toronto, economic activity has been relatively buoyant and demand by foreigners has been boosted by the falling Canadian dollar. That said, newly completed but unoccupied housing units have soared in Toronto, increasing the risk of a sharp market correction.”

Central bank says houses overvalued

The Bank of Canada estimates Canadian house prices are currently 10 to 30 per cent overvalued, and some private-sector economists say the problem is even worse.

“Declines in real estate prices would have a strongly disproportional impact on young homeowners,” CCPA economist David Macdonald said. “If, or more likely when, real estate prices fall, families in their 20s and 30s can expect to lose a substantial portion of their net worth, and could find themselves owing more than their house and other assets are worth.”

He offered some crunched numbers to back up that contention.

The debt-to-income ratio for people in their thirties has almost doubled since 1999, hitting a new high of 4 to 1, the highest of any age group.

Young families hit hardest

If Canada sees a housing correction near the midpoint of the Bank of Canada’s projections, younger families would be disproportionately hit by that:

  • Families with people in their thirties would lose an average of $60,000, which represents 39 per cent of their net worth.
  • 1 in 10 families with people in their thirties or younger (169,000 families across Canada) would have a negative net worth, meaning their debts are larger than their assets. Today, the CCPA says there are 44,000 families in this group who are under water even before any housing price correction.
  • If the correction is larger, say something in the range of 30 per cent, the impact would be even greater, as 294,000 households or one in seven families would be underwater.
  • People in their twenties would lose less in dollar terms, less than $40,000 each on average, but that figure would reduce their net worth by 45 per cent.
  • Families headed by people in their forties and up would lose more in dollar terms to a housing correction because their houses tend to be larger and worth more. But with an average loss of $70,000 to $80,000, that only represents 23 per cent of their net worth because they tend to owe less, and they tend to have other assets beside their house.

Housing corrections tend to have a cascading impact on the rest of household finances because of the large amounts of leverage involved in buying a home. As a rule of thumb, every 10 per cent decline in house prices represents a loss of 20 per cent on the average person’s net worth, Macdonald said.

“In cities with higher prices, like Toronto, Vancouver and Calgary, young families would likely see declines in net worth dramatically worse than the national average due to higher leverage,” he said.

“A badly managed downturn in real estate prices could wipe out the wealth of a large number of Gen-Xers and Gen-Yers,” he said. “We need to recognize that young families are the most likely group to be plunged underwater by a nasty housing correction.”

Source; CBC News Pete Evans, CBC News Posted: Nov 09, 2015 9:27 AM ET

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CMHC predicts housing market cooldown in 2016 and 2017

A sold sticker is seen placed on a for sale sign outside a house in east Vancouver, B.C., on Sunday September 20, 2015. (DARRYL DYCK For The Globe and Mail)

Canada’s housing market is set to cool over the next two years as the frantic pace of both new home construction and existing home sales in some markets slows down, the country’s housing regulator predicts.

National existing home prices will end this year at an average of $437,000, Canada Mortgage and Housing Corp. said in a quarterly forecast, up 7.2 per cent for the year. The federal agency upgraded its predictions for 2015 from a forecast it released in May, when it expected home prices to rise just 3.4 per cent this year to about $421,000.

The housing markets in British Columbia and Ontario have benefited this year from lower gas prices, rejuvenated exports and record-low interest rates, CMHC chief economist Bob Dugan wrote. But those effects will wear off in coming years. Home prices will continue to climb over the next two years, but at a much slower rate – 1.3 per cent in 2016 and 1.4 per cent in 2017, the agency predicts.

New home construction will also fall, with housing starts hitting 186,990 this year before dropping to 178,150 next year and to 173,650 in 2017. The residential construction sector will be forced to grapple with high numbers of newly built, unsold condos that “encourage some builders to channel demand for new housing towards existing inventory,” CMHC wrote.

Not everyone agrees with that assessment. In a Monday report, Canadian Imperial Bank of Commerce economist Benjamin Tal wrote that CMHC’s data on unsold condos appeared to be unreliably volatile and that higher levels of unsold condo inventory in the Greater Toronto Area could be mainly attributed to just five projects by four developers.

“To be sure, the GTA’s condo market will be tested as interest rates start rising in the coming years, and increased resale activity from domestic condo investors will result in excess supply and some downward pressure on price,” he wrote. “But for now, those who look at the rise in unabsorbed units as a sign of increased vulnerability are barking up the wrong tree.”

A look at what CMHC sees in store for regional housing markets:

The Good

Vancouver: The region’s scorching housing market will cool only slightly over the next two years. Housing starts in the Vancouver area will remain “elevated,” CMHC said, while, with 20,000 units under construction each year over the next two years, home resales are expected to hit their highest levels in a decade this year, before slowing slightly in 2016 and 2017. Average resale prices should end this year up 9 per cent before growth slows to 3 per cent next year.

Windsor and London, Ont.: A stronger economy will encourage more millennials to leave the family nest and buy their own homes, boosting housing starts in both cities by 6 per cent next year, CMHC said. Existing home sales in London should rise 3 per cent.

Montreal: An improving labour market will spark new home buyers over the next two years, pushing home prices up by 2 per cent a year. However, a surge in new rental construction to 10-year highs will also boost rental vacancy rates.

The Bad

Toronto: The soaring cost of home ownership will finally begin to weigh on the Toronto housing market. Housing starts should drop by 5 per cent next year and fall another 10 per cent in 2017. Much of that will come from fewer new detached homes, with multifamily construction making up almost two-thirds of new homes under construction in 2017. Existing home sales, which are on track to hit 100,000 this year, will drop to 87,500 by 2017 as more prospective first-time buyers find they’re priced out of the market.

Quebec City: A glut of new and existing homes on the market will push down housing starts over the next two years, but an improving job market will help boost resale home prices by 1 per cent next year and 1.5 per cent in 2017.

Atlantic Canada: An improving economy and private sector energy projects should give a lift to the region’s struggling housing market, but residential starts will likely fall over the next two years. In St. John’s, home prices should fall 2 per cent this year as developers move away from speculative home building. In Halifax, existing home prices will grow below the rate of inflation as the city undergoes its biggest rental-housing renaissance since the 1970s.

The Ugly

Calgary: The city’s housing market has undeniably felt the effects of the struggling energy sector. Construction of detached homes is expected to reach its lowest levels since 1988 this year. By next year, multifamily starts, which include condos, townhouses and other types of attached housing, are expected to be 43 per cent lower than peak levels last year. Existing home sales activity will likely fall by nearly 30 per cent this year. Average resale home prices should end the year down 2.1 per cent, and will rise by less than 1 per cent next year.

Edmonton: Despite the shock of falling oil prices in Alberta, Edmonton has undergone a residential building boom this year, with construction started on roughly 10,000 new units, mainly rentals and condos. That number should plunge to 5,500 next year as sluggish job growth, high rental vacancy rates and a backlog of unsold condos weights on developers. Resale activity is expected to fall by 12 per cent this year and rebound slowly over the next two years.

Saskatchewan: The Prairie province was already grappling with a surge in new home construction in 2014 when oil prices began to plummet. By this year, construction of detached houses in Saskatoon had fallen by 30 per cent to its lowest level since 2009. Multifamily starts are expected to end the year down 34 per cent. Average home prices should fall by 0.7 per cent and see only “modest increases” over the next two years. In Regina, detached housing starts will fall to their lowest level since 2001, while existing home prices will fall by nearly 2 per cent this year.

Source:  TAMSIN MCMAHON – REAL ESTATE REPORTER The Globe and Mail

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