Category Archives: divorce and home ownership

What’s his, what’s hers

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When divorcing partners divide their assets, the split isn’t always as fair as it first appears. Here’s what you need to know.

Two weeks after his divorce, Phil Doughty received a blunt letter from his ex-wife’s lawyer. It informed him he’d contravened his settlement by not giving his ex her $100,000 share of his pension within 10 days of the divorce.

“It was a knockdown punch,” says the retired teacher from Montreal. “I had no idea I had to pay her right away, or that the money would come directly out of my pension fund.” Doughty thought his ex would simply get a share of his benefit after he stopped working. “I’d never heard of a company taking money out of a pension eight years before retirement.”

With his pension fund depleted, Doughty’s monthly cheques were reduced by over a third when he eventually retired, yet he was still required to pay spousal support from what remained, leaving him strapped. “I had to find another lawyer to help me get out of those support payments I couldn’t afford anymore.”

Doughty (we’ve changed his name, and those of all the featured subjects in this article) believes his pension arrangement should have been handled differently—at the very least it should have been explained to him properly. “I guess it was just something the lawyers worked out between them,” he says. “My lawyer and I never really talked about the pension.”

It seems hard to believe a lawyer would not talk to a client about how such an important asset would be divided, but Doughty insists he would have remembered such a conversation. His situation is just one example of how partners frequently get divorced without understanding all the financial implications.

“Divorce changes a person’s financial situation dramatically and often there is no planning for it,” says Debbie Hartzman, a Certified Divorce Financial Analyst in Kingston, Ont., and co-author of Divorce Isn’t Easy, But It Can Be Fair. (CDFAs are planners with additional training in the financial impact of separation and divorce. See “Where to get help,” at the bottom of this page.) “I’ve had clients say things like, ‘I just spent four years fighting with my ex, I have this cheque for $400,000, and I have no idea what that means in terms of my financial future.’”

Surely part of a lawyer’s job entails discussing financial matters surrounding divorce. Apart from custody of children, aren’t money and property the big issues in divorce? “A family lawyer’s job includes giving advice about a number of financial issues, but we are not financial analysts,” says Bruce Clark, who observed many divorce-related financial problems during his 35-year career as a family lawyer in Toronto.

Lawyers may not anticipate the long-term implications of divorce-related financial matters. For example, Hartzman explains it’s possible to have different divisions of assets that all meet the 50/50 requirements of the law but have profoundly different financial consequences for the divorcing partners. Her book includes a case study that presents different ways to legally divide the assets of a middle-class couple. Both are 58 years old, and the largest assets are the house and pensions (his is four times more valuable than hers). In one scenario, the assets are split more or less equally, so the initial net worth of the two partners is about the same. However, her share of the man’s pension is paid out as a lump sum, and the support payments are not structured to reflect the fact his post-retirement income will be higher than hers. As a result, after age 65 the woman’s net worth and monthly cash flow flatline, while the man’s relative financial situation steadily improves. “The person with the pension can end up in a much better financial position than the person with the house, particularly if the pension is indexed to inflation,” says Jim Doyle, a CDFA with Investors Group in Vancouver.

Here’s a different scenario: she keeps the house and gets only a quarter of his pension. To the untrained eye that seems to be simply an alternative way of dividing the pie equally. Yet this arrangement ensures the woman’s net worth stays similar to the man’s for the rest of their lives, without diminishing his financial situation.

Of course, case studies do not translate into rules that ensure ideal financial arrangements for every divorcing couple. That’s why it’s a good idea to consult a financial professional as well as a lawyer if you’re going through divorce or separation.

Don’t assume every asset must be split down the middle. “People often want to split up each individual asset, but not all assets are created equal. It’s usually better to look at assets in terms of how to divide the whole cake,” says Hartzman.

Pinched pensions

Doughty is not the first divorced person to be subject to pension shock. Many people don’t even realize pensions have to be shared after divorce, says Clark. “In my experience, most people consider their pensions to be their personal property, as opposed to an asset that must be shared equally after a divorce. In a longer-term marriage the pension is often the single biggest asset.”

This was the case for Doughty and his ex-wife, who had sold their matrimonial home shortly before separating. By law his ex-wife was entitled to half the teacher’s pension that accumulated during their marriage.

“Pensions are very, very complicated assets,” says Sharon Numerow, a CDFA and divorce mediator with Alberta Divorce Finances in Calgary. “Defined benefit pensions must be independently valued by an actuary, and the rules about paying out a spouse vary from province to province.” For example, in Alberta there are no longer any provincial pension plans that allow monthly payouts to an ex-spouse when the member spouse retires. Therefore, the only option is to give the ex-spouse a designated value that is transferred into a Locked-In Retirement Account or LIRA (called a locked-in RRSP in some provinces). “This almost always has to be done after the separation agreement is signed, and not usually at retirement,” says Numerow.

On the other hand, Ontario recently adjusted its Family Statute Law in the opposite direction. Now a portion of a person’s pension payments can be made directly to an ex-spouse after retirement. Another possibility is for the spouse without the pension to get another asset equal to the value.

Bottom line, don’t underestimate the potential for misunderstanding pension division. It’s important to work with your lawyer to understand the legal issues, then talk to a financial planner who can help you appreciate the short-, medium- and long-term implications of the division of this and your other assets.

Close to home

Another key, says Hartzman, is determining whether it’s viable for one partner to stay in the family home. There are two main questions: Can one partner actually afford to keep the home? And how will keeping the home affect that person’s financial future?

“Most people I’ve worked with live in houses that require two incomes, so after divorce one person would be trying to maintain the home on half as much income, and often it just isn’t affordable,” Hartzman says. “Can you imagine how hard it is to tell someone already going through the emotional turmoil of divorce that they can’t afford to stay in the family home they and their children are so attached to?”

Sandra Baron, an Ottawa mother of two, did manage to stay in the matrimonial home after her divorce. A financial planner helped her figure out how to pull this off. “My first lawyer really didn’t seem to understand my financial situation,” Baron explains. “I went to see a financial planner and asked if I could afford to buy out the matrimonial home from my husband. He helped me work it out.”

Baron and her spouse had always lived within their means. They had no debt other than a mortgage with much lower principal than they qualified for. That, combined with support payments and Baron’s earning potential (she had been an at-home parent most of her marriage but began doing contract work after the divorce), meant she was able to keep the family home.

The financial planner also gave Baron some tax-saving advice on how to invest some money she had brought into the marriage. Since she had that money before the marriage and kept it in a separate account, it was not an asset that had to be shared equally. However, had she used that money to help pay down the mortgage, it would have become part of the value of the matrimonial home and therefore a joint asset.

This is also the case if one spouse receives an inheritance or gift during the marriage. In most provinces, as long as the money is kept in a separate account it does not have to be divided equally after a divorce. But if it is used to purchase a joint asset, such as a house, it becomes the property of both spouses. (In some jurisdictions growth in the value of the inheritance or gift may count as an asset to be shared.)

Perhaps the biggest factor in Baron’s situation was that she and her husband actually saved money for their separation. “It was almost five years from the time we realized the marriage was likely not able to be repaired that we saved for the eventual separation. Unless the relationship was harmful, I felt it was in the best interest of everyone—particularly the children, who are all that really mattered in the end—to plan and wait so things would be better for them financially.”

It’s a safe bet the path Baron and her ex-husband took is not typical of divorcing couples. Obviously they got along well, even after deciding to separate; they had no debts other than the mortgage and were both well acquainted with their family financial situation. The opposite is much more likely, says Numerow. “It’s common for one partner to know very little about the family finances, and they often don’t know the extent of their debts.”

Lady in red

When Anna Masters, of Taber, Alta., separated from her husband she moved in with her sister and started a new job at a bank. She also applied for a new credit card through that bank, so the person doing the credit check was one of her colleagues. When the Equifax credit report came through, the coworker quietly asked Masters to step into her office. “You are behind in all your bills and credit cards. Most of them are in collections,” the embarrassed colleague said.

“I was horrified,” says Masters. “Even the cell phone bills weren’t paid. I didn’t even know my ex had his own cell phone.”

That’s not the worst of it. Masters’ ex-husband had a line of credit she didn’t know about it, which listed her as a co-signer. Masters says he must have forged her signature on the application.

It’s not hard to find similar tales of woe. Alan Leclair of Winnipeg tried to remortgage his house not long before he and his wife split up. “When the credit check came in the banker said to me, ‘You’ve got debts you didn’t tell me about. You’d better go home and talk to your wife about it,’” says Leclair. These debts were considerable—between $30,000 and $40,000 in unpaid credit card balances. Fortunately, Leclair’s ex-wife eventually agreed to take responsibility for them.

Masters was less fortunate. She got stuck with a big chunk of debt—loans and credit cards her husband was supposed to pay off, but didn’t—as well as the line of credit he’d fraudulently put her name on. “I could only get part-time work at the bank, but I worked every other junk job I could find. It took me three years, but I paid off my share, and in a way I’m glad I went through the experience. I’m in control of my finances now,” Masters says.

The one smart thing Masters feels she did in the lead-up to her separation was to start setting aside money (“Omigod money,” she called it) so she’d have something to fall back on in an emergency. “Even before I realized the full extent of the financial mess we were in, I knew my ex was spending irresponsibly, so I started squirreling money away.” That money—about $3,500, which she kept in a sock hidden under a pile of towels in the linen closet—ended up being used to cover her living expenses during a spell of unemployment after moving to a new town after she was separated.

Leclair did something similar. “I had a friend who was going through a divorce and I asked him for advice. He said, ‘Put a few bucks away.’ So I did.” He hid cash in his house and even left about $500 at a friend’s house. “When the separation happened I was in scramble mode, dealing with all kinds of things. It was comforting to at least know that money was there,” he says.

Clark, the family lawyer, explains any money you stash prior to separation “will still be subject to division, but you will have the use of it while property issues are being sorted out. There is nothing illegal about this as long as you declare the amounts you have put aside.”

Other eye-openers

It’s hardly surprising that people have trouble working through issues like asset division and debt. But the path to divorce is laden with other potential financial mistakes.

One is trying to settle too fast. “People want it settled tomorrow,” says Jim Doyle, the financial planner. “Emotions often determine the choices rather than making the numbers make sense. I say to people, ‘Let’s slow down and do the math.’” He says it’s common for partners to make hasty, ill-advised decisions about asset splitting just to avoid conflict. “Sometimes in relationships where there is an imbalance of power, one person might simply capitulate, resulting in a financial decision that may have negative consequences down the road.”

Don’t ignore the tax implications. “One of the biggest items that is often overlooked in separation and divorce agreements is tax deductions, such as child-care expenses, and credits that may apply to separated and divorced parents,” says Numerow. For example, a divorced parent can claim one child as a dependent, but both parents cannot claim the same child.

Another dangerous road is trading property for time with children. “Big mistake—just don’t do it,” says Numerow. In addition, remember that spousal or child support and asset division are, for the most part, completely separate issues.

Finally, if you’re a common-law spouse, don’t assume the process is the same as it is for married couples. Generally, legal requirements regarding spousal and child support are the same, provided a couple has been living common-law for at least two years (three in some provinces). However, the division of assets is not automatic, as it is in a marriage, which comes as a surprise to many people, Numerow says. “Go to a lawyer and find out what you do and don’t have to share. Laws concerning common-law separations vary by province.”

One message Clark, Numerow and Hartzman all want to get across is this: both partners should always be aware of the family’s financial situation. If one partner is more hands-on with the money, the other at least needs to understand the big picture. “I’ve met a lot of spouses who weren’t involved in the finances and they’re ashamed,” says Numerow. “I tell them, ‘Don’t beat yourself up over it. Now is the time to begin your learning.’ However, if both partners were on top of the family finances it would make divorce a lot easier.”—written by John Hoffman

Where to get help

Certified Divorce Financial Analysts usually charge between $175 and $250 per hour. “If people do their homework and bring in all the relevant financial information, we can usually get a fairly good handle on the situation in two hours,” says CDFA and author Debbie Hartzman. “For an individual, it usually takes no more than three hours overall. With couples it usually takes three sessions of an hour or an hour-and-a-half each.” She notes that a better understanding of your financial situation can save your lawyer’s time, which is much more expensive.

To find a CDFA, do a web search for your town and CDFA, or visit the website of the Institute for Divorce Financial Analysts (www.institutedfa.com) and search by city, town or area code.

Source: MoneySense.ca – by  

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Should you buy in the city, suburbs or country?

Buying your first home brings major lifestyle changes – sometimes even a dramatic change in scenery. That’s because homeownership involves taking an honest look at your lifestyle, priorities and goals, and then investing hundreds of thousands of dollars in that vision. One of the first things to consider: should you buy where you rent, or house-hunt farther afield?

 

What’s right for you – the city, burbs or country?

CITY SLICKING

There’s a reason why urban real estate comes with a price premium: excellent public transit, plenty of arts and cultural attractions, lots of dining options, and easy access to everything from medical services to gyms and green space. Steady demand translates into a real estate investment that will grow as you build equity in your property.

PROS
  • Car-free living is a breeze (car share services are everywhere, so there’s no need to stress whenever you do require wheels)
  • Greater employment opportunities
  • Shorter commute to work and play
CONSIDERATIONS
  • Less home for the same price compared with suburbs and rural areas
  • Condos may be the only affordable option if you want to live right in the city core
  • Less privacy, thanks to closer quarters and higher population density

SUBURBAN DREAMS

Is it any wonder that generations of parents have flocked to the burbs to raise their families? It’s here that the much-desired single-family detached house rules, with big backyards (picket fence optional), good schools and a higher proportion of households with kids – perfect for impromptu street hockey or tag. While new communities may be low on shops and services, it only takes a few years of growth before cafés and sushi are just a short drive away!

PROS
  • Lower housing costs mean you get more home for your real estate dollar
  • Daycare costs are often lower than in the city
  • Quieter than the city, yet less remote than rural areas
CONSIDERATIONS
  • Longer commute and higher commuting costs (gas, parking, commuter trains and so on)
  • Some newer suburbs may not be as walkable compared with the city
  • Fewer entertainment, dining and grocery options nearby, aside from big-box chains

COUNTRY LIVING

Fresh, clean air, room to roam, no one to bug you about your bonfire or backyard hens – what could be better, right? Rural living has always appealed to self-reliant types, and in recent years it’s gotten a boost from millennials seeking a more affordable and lower-stress lifestyle (although overall, more people are leaving the country for the city). If you work from home, you can skip the commute and spend the extra time relaxing – or picking up a back-to-the-earth side gig to supplement your income.

PROS
  • Lower housing costs and more outdoor space for kids, pets and gardens
  • Easy access to recreational forests and lakes
  • Better air quality
CONSIDERATIONS
  • More susceptible to extreme weather: potential to be snowed in; power outages can be more frequent and last longer
  • Longer commutes to work, errands, entertainment and medical appointments
  • Harder to make friends in a small, tight-knit community (TIP: Make it easier by joining a volunteer committee!)

Source: homeownership.ca 

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DLC on how to manage mortgages during divorce proceedings

Traversing the thorny issue of mortgages amidst divorce proceedings can prove to be problematic, and a Red Deer-based agent recently offered insights on how to handle the situation.

In a contribution for The Red Deer Express, Dominion Lending Centres – Regional Mortgage Group broker Jean-Guy Turcotte noted that it is possible to purchase a matrimonial home for up to 95 per cent of its value, should one desire to do so.

“[It] feels more like a refinance, but technically one spouse is buying out the other,” Turcotte explained. “The funds can be used to pay off the amount owing to your spouse and debts listed in the separation agreement – keep in mind not all lenders allow payouts and rules are changing on us all the time, so time can be of the essence.”

To qualify for the Spousal Buyout Program offered by banks, lenders, and mortgage insurers, the party who wants to purchase the matrimonial home should first complete a Legal Separation Agreement, “with the bare minimum that a lawyer provides each party with their own Independent Legal Advice (ILA).”

“[Both lawyers] do need to sign off to ensure that your rights are protected and to determine what liabilities are remaining from each other, if any (i.e., child support, alimony, etc.),” Turcotte said. “Ensure you talk about all the debts you jointly have so they can be separated appropriately and can be managed inside the separation agreement.”

An appraisal of the property’s value will also have to be conducted, as “[there] can be large value differences between what you think it’s worth and what it’s really worth.”

Creating a purchase agreement should follow, which can be done quite readily with the help of lawyers. Tapping the assistance of a mortgage professional to help with the other qualifying criteria would also benefit both parties as the process would be expedited.

Source: CANADIAN REAL ESTATE WEALTH – by Ephraim Vecina22 Feb 2017

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Toronto home buyers look to condos which are now getting larger to accommodate them

New condominium prices are rising and the size of them is growing as buyers are forced into the market in the face of a shortage of low-rise homes in the Greater Toronto Area.

 

Toronto-area builders say a shortage of low-rise homes continues to push people into condominium apartments, which are increasing in size for the first time in years to meet the demand.

“The recent increase in high-rise prices can be attributed to the rise in average suite size, combined with a growing price per square foot,” said Brian Tuckey, president and chief executive of the Building Industry and Land Development Association, in a release. “This year we have seen the introduction of larger suites aimed at purchasers who have been priced out of the low-rise market.”

The average size of a high-rise home climbed to 809 square feet, compared to 767 square feet a year earlier. The price per square foot also rose $26 from a year ago to reach $601 per square foot, as new high-rise home sales look to be on pace for a record year.

For the first nine months of the year, 20,596 high-rise homes were sold across the Greater Toronto Area, according to Altus Group, which supplies BILD with its data. Those units accounted for almost 60 per cent of the GTA’s 34,736 new home sales as of the end of September.

Prices for both categories continue to rise. The average price of new low-rise homes — which includes detached, semi-detached and townhouses — rose more than $60,000 in just one month to reach a record $992,231 in September. Prices of low-rise homes are up 22 per cent from a year ago.

High-rise prices in the GTA also broke records in September with the average unit reaching $486,605 last month, up 10 per cent from a year ago. The average detached home sold for $1,194,771 in September.

Tuckey says the GTA’s shortage of housing supply is driving prices across the market.

“We have a serious housing supply challenge in the GTA due to a significant shortage of shovel-ready land and long and uncertain project approval timelines,” he said. “These factors are severely restricting the number of new homes being brought to market and are causing prices to surge month after month.”

The supply of new homes available to purchase has dropped by 10,000 in a year. There were 15,421 new homes and condominiums available for purchase in September across the GTA, which compares with 25,848 a year ago.

Low-rise supply increased from August but the 1,604 homes available last month for sale still represented a 64 per cent decline from a year ago, with the monthly increase attributed to a typical launch of product for September.

In all, there were just 764 detached homes available for sale across the region in September, less than a month’s supply based on current sales trends.

Patricia Arsenault, executive vice-president of research consulting services at Altus Data Solutions, said new low-rise home sales year-to-date in the GTA are very similar to the situation back in 2009, before house prices started to take off.

“What has changed dramatically is the decline in options available to buyers. Back in 2009, there were nine low-rise homes available to purchase for every home sold. Now that ratio is less than two to one. Given the sharp drop in competitive product alongside buoyant buyer interest, it’s no surprise that new low-rise home prices have doubled since 2009,” she said.

 

Source: Finnacial Post – Garry Marr | October 20, 2016 

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The home ownership dream: It’s the opium of the masses

No matter how much money you have to save for a down payment, buying a house is the easy part. It’s much harder to afford the endless financial demands of home ownership and find money for your other goals and obligations. (DARRYL DYCK For The Globe and Mail)

One of the most revealing comments yet on Canada’s obsession with housing can be found in the budget speech given last week by the Finance Minister of British Columbia.

“Is there anything more reflective of who we are as Canadians than the dream of owning a home … and the ability to make that dream a reality?,” Mike de Jong said. God, I hope so. But probably not.

In these uncertain times, housing has assumed a role that is out of sync with its true importance and its role in other countries. Housing is a religion and, if you’ll forgive a personal finance writer making a reference to Karl Marx, it’s the opium of the masses.

Never mind that house prices in cities where the oil industry is a big deal are flat or falling, and that there are places in the country that haven’t seen anything close to the gains in Vancouver and Toronto. Canada’s new national dream is home ownership. Housing completes us.

They thought the same thing in the United States until the housing market cratered in 2008-09. Now, national U.S. publications such as The Atlantic are running articles like this one, which is headlined The New American Dream: A Rental of One’s Own. Our housing market isn’t set up to crash like the U.S. market did as a result of insanely negligent lending practices. But we are putting too much of our financial and political capital into sustaining the housing market. A serious price decline would be traumatic to the economy and the households of the nation.

If I only had a buck for every time someone criticized today’s young people for having fancy smartphones. The point being made is that millennials are mindless slaves to fashion who spend above their pay grade on toys. A millennial should never open her mouth to complain about anything to do with money unless she has a cheap cellphone.

With houses, a vastly more expensive purchase, we encourage young people to spend beyond their means. We feel they’re entitled to a home and must be helped to buy if necessary because ownership is such a great financial move. Parents dig into their own savings to help their children, and politicians like B.C.’s Finance Minister adopt their cause. He just introduced a measure that would conditionally help people save up to $13,000 in property transfer taxes on homes costing less than $750,000. For an exhaustive list of other government measures to help housing, check out this column I wrote last year.

No matter how much money you have to save for a down payment, buying a house is the easy part. It’s much harder to afford the endless financial demands of home ownership and find money for your other goals and obligations.

This is something that housing cultists do not address. Instead, they describe a dream of ownership that legitimizes itself as a depiction of domestic bliss while also offering the promise of a jackpot from rising home prices over the years. Houses are this country’s one big financial success story for the average person.

We had the Nortel Networks era of stock market wealth for all and that blew up. We had income trusts, but they got too big and had to be shut down. Energy stocks tanked, and now our beloved bank stocks are dragging. But houses in many cities have been a lottery win for long-time owners.

And so we hear endlessly about a dream of home ownership that is ultimately about maintaining wealth and status for certain groups. Included here are the long-time owners in Vancouver, Toronto and some other cities, the politicians who depend on their votes and the big chunks of the economy that live off home sales.

A house is a nice place to live, especially if you’re raising kids. Partake if you can afford it, but don’t be persuaded by the voices of the housing sector’s dream syndicate. They’re mainly looking after themselves.

Source: ROB CARRICK The Globe and Mail Published Sunday, Feb. 21, 2016 

No matter how much money you have to save for a down payment, buying a house is the easy part. It’s much harder to afford the endless financial demands of home ownership and find money for your other goals and obligations. (DARRYL DYCK For The Globe and Mail)

For more information on buying your first home or acquiring an investment property, contact the Ray C. McMillan Mortgage Team

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Five things to know about new mortgage rules that came into effect Monday

New federal rules for Canadian mortgages have now gone into effect.

The changes affect properties that cost more than $500,000 – a small percentage of the overall market.

Buyers can still have a five per cent down payment on the first $500,000 of a home purchase but must now put at least 10 per cent down on the portion above $500,000.

Finance Minister Bill Morneau has said the new measure – effective Monday – aims to ensure buyers have sufficient equity in their homes.

Lenders also face new capital requirements to keep pace with the growing risk of the real estate markets that they bankroll.

And Canada Mortgage and Housing Corp. will change the fees it charges issuers of mortgage-backed securities.

The Finance Department has tightened mortgage rules on several occasions in recent years – along with requiring stricter enforcement and management of loans – to weed out marginal buyers and speculators

Here are five things to know about the new rules:

Cough up the cash: Homebuyers now have to put at least a down payment of 10 per cent on the portion of the price of a home over $500,000. For anyone buying a home for $700,000 — a common list price in Vancouver and Toronto — that means the minimum down payment will rise to $45,000 from $35,000. Any home under $500,000 still requires only a down payment of five per cent.

Who’s affected: Primarily those shopping for a home in Toronto and Vancouver. First-time buyers in those cities will feel the pinch since they’ll be required to put down bigger down payments to get into the market. Those selling their homes in order to size up, especially in cities with hot housing markets, likely won’t feel the pain since they’ve built up equity in those properties.

Impact: The influence the new rules will have over house prices is expected to be small, experts say, given their narrow reach. When he announced the changes in December, Finance Minister Bill Morneau said they are expected to affect one per cent or less of the real estate market.

Sales activity: Some analysts expected a surge in sales leading up to Monday’s changes, saying they would lure homebuyers who wanted to avoid making the bigger down payments. Royal LePage CEO Phil Soper says sales activity has been “boisterous” in Ontario, B.C. and Quebec in the first five weeks of this year, but he credits a relatively mild winter and low mortgage rates.

Past measures: Four rounds of changes were made to tighten eligibility rules for new insurable loans between 2008 and 2012. Among them: the minimum down payment was increased to five per cent, the maximum amortization period was reduced to 25 years from 30 years and the maximum insurable house price was limited to below $1 million.

Source:  THE CANADIAN PRESS Posted Feb 15, 2016

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New mortgage rule might ‘temper’ hot markets, but not for long

$500K downpayment graphic

Starting Feb. 15, mortgage insurers require 10% down payment on portion of mortgages above $500K

Beginning next week, many Canadians hoping to buy an abode will need to put more cash down before they can call it home. The extra cost might keep some would-be homeowners from mortgages they can’t really afford, but it’s unlikely to leave any lasting impressions on the country’s most “overheated” real estate markets.

The federal government announced in December that mortgage insurers, including the Canada Mortgage and Housing Corporation — by far the largest in the country — will require a 10 per cent down payment on any portion of a mortgage it insures above $500,000 and up to $999,000.

That’s double the five per cent down they currently ask to insure mortgages worth more than 80 per cent of a home’s value.

“We want to make sure we create an environment that protects the people buying homes so they have sufficient equity in their home,” said Finance Minister Bill Morneau at the time, also noting that “elevated” house prices were the driving force behind the move.

The change will “likely impact a broad spectrum of buyers,” though it will surely be the highest hurdle for those who don’t already have a good bit of equity from one home already.

“The majority of the impact is going to be on first-time homebuyers, particularly first-time buyers in the hotter markets,” says Don Campbell, senior analyst at Real Estate Investment Network, an organization that tracks Canadian housing trends.

Bill Morneau Finance Minister

Finance Minister Bill Morneau announced the new mortgage rule in December, saying the government was trying stabilize real estate markets in some cities, like Toronto and Vancouver. (Chris Wattie/Reuters)

“It could certainly prevent them from getting into a market that is overheated.”

That could, the theory goes, ease the intense demand for starter properties such as single-family detached homes in places like Toronto and Vancouver — one of just several factors keeping average house prices in those cities so astonishingly high — and perhaps help those markets cool off a bit.

Good politics, bad policy?

It could also help save some people from themselves, encouraging sober second thought about getting locked into mortgages that would stretch their finances dangerously thin.

There’s plenty of evidence that many Canadians have taken on alarming debt loads to finance their dream of home ownership, leaving them vulnerable to ruin if the markets start to deflate.

Young Canadians and their families would face the brunt of the impact. A report by the Canadian Centre for Policy Alternatives, for example, found that about 10 per cent of homeowners under 40 would be bankrupted if housing prices dropped 20 per cent.

The C.D. Howe Institute similarly calculated that about half a million first-time homeowners, mainly young people with lower-than-average incomes, could be left ruined if the historically low interest rates that have fuelled drastic jumps in house prices went up, or they faced a personal financial crisis.

Canadians who have built equity in their homes throughout the real estate boom of the last 15 years or so, though, would be on more stable ground.

Once it becomes psychologically normalized for people, there’ll be less of an effect.
– Don Campbell, real estate analyst

The underlying problem is that it’s far from clear if the new mortgage rule — just the latest in a string of government-led measures to shield the economy from the high household debt loads Canadians are carrying around — will make a mark where one is most needed.

“I would say, generally speaking, there is some good politics in this but not much good policy,” says Jon Sowerby, a licensed mortgage broker with Toronto-based TvH Financial.

“It’s made to look like Mr. Morneau is on top of things, but the reality is that it’s not going to have a massive impact on the market.”

$500K downpayment graphic

Starting on Monday, CMHC will require a 10-per-cent down payment on the portion of any mortgage it insures over $500,000. (CBC News)

Drop in the bucket

The Canadian Association of Accredited Mortgage Professionals agrees. The organization revealed last year that first-time homebuyers put down an average of about 21 per cent of their home’s purchase price, a number that has not deviated much since real estate prices began their relentless climb in the late 1990s.

The analysis is based on data gathered from an annual survey of 800 Canadians who just bought a new home.

The same report estimates that of the 120,000 to 125,000 sales of homes that involve a mortgage of $500,000 or more each year in Canada, around 10,000 would involve down payments that had to be increased under the new rule.

Eveline Zia housing real estate prices

Last summer Eveline Xia, who began the popular social media hashtag #DontHave1Million, led demonstrations in Vancouver, demanding more decisive action from the government on soaring real estate prices. (Jim Jeong/Reuters)

It concludes that the change will have negligible resonance in the Canadian mortgages market.

That’s not to say that first-time buyers haven’t been looking ahead to the deadline, hoping to get in before a down payment lightens the coffer that much more.

The minds of homebuyers

Michael Elmenhoff is a realtor who does a lot of work in the east end of Toronto, a formerly blue-collar area of the city where the average starter home in a “cool neighbourhood” sells for about $650,000.

He says he saw about a 50-per-cent traffic increase in the first few weeks of this year compared to 2015, a time that is generally considered a slow period for buying before the spring markets picks up.

For example, Elmenhoff listed a rowhouse with three bedrooms, two baths and no parking on the boundary of the trendy Leaside neighbourhood for $499,999 dollars in early January. The property attracted about 150 prospective buyers and 13 offers before selling for $649,000.

The interest was almost exclusively from first-time homebuyers, Elmenhoff says. “That kind of traffic is unheard of, really.”

He expects to see a slowdown come Monday.

“With the market seeming to be at precariously high price points, the new mortgage rule could help ease the situation,” he says, adding that “anything to temper the speculation and the leveraging” is welcome.

Low rates, inventory remain factors

But realtors and analysts agree that, at best, any changes will likely be very short-lived because so many of the factors keeping prices sky high, like low mortgage rates, a short supply of detached homes, and speculation by foreign buyers, all remain in place.

“Once it becomes psychologically normalized for people, there’ll be less of an effect. It will slow down buyers in that $500,000 to $900,000 range for a while, then it won’t,” says Campbell.

“Or people will just get more creative in securing a loan.”

Source: CBC – Lucas Powers, CBC News Posted: Feb 11, 2016 5:00 AM ET

 

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