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“In today’s mortgage market, the consumer has been put at the helm”

The Mortgage Game: Gamble or play it safe?
Education is Essential for First-Time Buyers
Lower Rates Drive Housing Frenzy
Mortgage Brokers Look After Your Best Interest
Finding the Right Mortgage

The Mortgage Game: Gamble or play it safe?

The Toronto Star
Your First Home Section
Thursday, May 16, 2002

Many are taking their chances on variable rates

By Paul Dalby
Special To The Star

In the last 12 months it has become the biggest gambling game in town. The pot stands at $400 billion a year and is rising faster than Super 7.

Welcome to the new Millenium edition of the Mortgage Game.

Mortgage customers are deserting play-it-safe locked in mortgages by the thousands for the high risk gamble of variable rate interest rate. The savings have been huge all year.

"I just wonder how many people will find their comfort level with variable rate mortgages when the interest rate moves up", says Rick Lunny, senior vice-president of real estate lending at TD Canada Trust.

Currently, about 18 million Canadians own their own homes and most have a mortgage on their real estate whether it's a condo or a cottage, a townhouse or a turreted mansion.

Once upon a time we all played it safe with our mortgage. In the 1970s you could lock in a fixed interest rate for 10 years and forget about it. By the time you had to renew the mortgage again, the kids had gone to university, bell-bottoms were out, you'd lost your hair and nobody drank mai tais any more.

Then in the boom-bust of the '80s and '90s, people played real estate for a fast profit. But in the end everyone got burned by soaring interest rates. Only the banks got rich, mainly because they made all the rules and controlled the game.

It wasn't always that way. In medieval times, the Italian moneylender did his business from a bench (or banco in Italian) in the marketplace. If he didn't deall fairly with his customers, they would smash up his bench and leave the moneylender banco rotto (bankrupt in today's parlance).

Fast-forward to the Mortgage Game of 2002. It's a new world but once again the customer calls the shots.

"In today's mortgage market, the consumer has been put at the helm," says Toronto mortgage broker Calum Ross. "They don't have to accept what's handed to them by their bank any more."

Mortgage customers are shopping their business around for the best rate with the same prudence they apply to finding the weekly supermarket specials.

The lowest interest rates in more than 40 years have persuaded more and more people to roll the dice once again. But this time it's the lure of home ownership, not flipping houses for a quick buck, which is driving the current hot housing market.

"People are saying 'I want to lay roots and make an investment in the future,'" says Nancy Mitchell, senior residential mortgage manager at the Royal Bank. "And the low interest rates have opened up the ability of Canadians to buy a home."

All of which has fuelled the most competitive mortgage market in living memory.

"The biggest change is the move of the customers to choose variable rate mortgages," says Lunny, at TD Canada Trust.

He says that traditionally 75 per cent of mortgage customers brought five-year fixed mortgages so they could "grow" in their mortgage. "Now half of that business has gone into variable interest rate mortgages."

A variable interest rate mortgage means quite simply that the interest rate on the mortgage you've taken out on your house is pegges to the current rate dictated by the Bank of Canada and the marketplace. The terms of these mortgages can be as short as three months.

It's a high-risk poker game but as long as the interest rate stays down in the bargain basement where it's been for the past year, you'll save a bundle on your payments.

Right now, the variable rate sits at 3.25 per cent compared with the best five-year fixed rate hovering around 6.3 per cent. That's a 3 per cent difference so if you have a $100,000 mortgage, it shaves $200 a month off your payments.

Is there a snag? Of course there is. Interest rates go up as well as down and they will take your mortgage rate with them.

"If you are going to stay awake at night worrying when the interest rate will go up, then the variable interest mortgage is not for you," says Ross.

"You have to ask yourself if the peace of mind that comes from paying a higher rate of interest on a fixed-rate mortgage is worth the extra money out of your pocket or are you ready to take the risk of a variable rate mortgage."

The problem, according to the mortgage experts, is that newcomers to the Mortgage Game panic when they see the rates creeping up. They forget to look at the big picture and calculate what they've been paying in interest over a five-year period.

"When you do the math, short term variable interest rate mortgages tend to pay off," says Ross, owner of three Mortgage Centre offices in the GTA.

And there's strong evidence that today's mortgage consumers are a much more savvy group than the high rollers of the 1980s, according to Lunny.

"A lot of people taking variable rate interest will still peg their monthly payments at the level of a 6.75 per cent fixed mortgage," he says. "Not only are they paying down their mortgage faster but any changes in the interest rate don't affect their monthly payment."

But there's a lot to be said for the safety of the fixed rate five-year mortgage, says the Royal Bank's Mitchell.

"You're looking at the lowest interest rate of the last 10 years right now and it takes away the fear of timing out the financial market as you have to with a variable rate, she says.

"Let's face it, the whole business of buying a house and taking out a large mortgage is for most people a process fraught with fear. It's a life event."

She says the other factor bringing a rush of new people into the housing market is the easing of restrictions on Canada Mortgage and Housing Corporation (CMHC) - insured mortgages.

They enable people to buy a house with only a 5 per cent deposit instead of the customary 25 per cent for conventional mortgages.

For many years the CMHC-insured or high-ratio mortgage was only available to first-time homebuyers. Now it is on offer to any homebuyer who falls into the CMHC's prescribed income bracket. Homebuyers with a CMHC-insured mortgage pay an insurance premium on top of their payments. But most consider it a small price to pay for realizing the dream of home ownership.

"Depending where you are buying your house in the country, but certainly in the GTA, the (down payments) are very expensive and this affects the very affordability of housing," says Mitchell.

And Lunny says: "The 5 per cent down mortgage means that people can get into the housing market much earlier and let their equity work for them."

But if people are shopping vigorously for the best deals on first-time mortgages, they play it safe when it comes to renewing that mortgage down the road.

"People don't put the same amount of energy into refinancing their mortgage and the banks don't compete so aggressively for this business," says Ross. "They make far too much money sending out a mortgage renewal at a higher interest rate."

A new survey by the Canadian Institute of Mortgage Brokers and Lenders reveals that 90 per cent of people renewing their mortgages stay with their current lender - and a staggering 60 per cent of those simply accept their lender's first renewal offer on their mortgage.

"That's not a good thing because it shows people have forgotten their bank manager or mortgage loans officer gets rewarded for locking your mortgage in at a higher rate of interest," says Ross.

His advice: Don't accept what your bank offers you. Shop around for a better deal elsewhere then challenge your bank to match it.

Education is Essential for First-Time Buyers

The Toronto Star
Your First Home Section
Thursday, March 28, 2002

Mortgage process can be confusing

By Michael B. Davie
Staff Reporter

John and Teresa Christou following the path of many newlyweds and bought a house. With it came the biggest financial commitment most people will make in their lifetime.

That financial commitment is called a mortgage and, for some people, getting one for the first time can be a confusing or even intimidating process.

Terms like amortization, open, closed, fixed rate variable rate, conventional and high-ratio litter the mortgage minefield. But with a little education and guidance, first-time buyers can negotiate their way to the loan that suits their needs.

The Christous are a case in point. Last month, they took possession of the two-storey house they bought in Mississauga for $281,000. Two weeks later, they flew to Jamaica and got married on Feb. 27.

"A lot happened all at once," John chuckles as he sits by the fireplace amid unopened moving boxes. "We both went from living at home with our parents to living inour own home as a married couple. But if we hadn't lived rent-free, it would have been very difficult to save for a down payment."

John, 28, earns $45,000 a year as an Ontario government civil servant. Teresa, 27, makes $32,000 as an early childhood educator. While living with their respective parents, both put away as much as they could over three or four years, then pooled their savings to come up with a $70,000 down payment.

"We knew how expensive it can be for first-time buyers, because you don't have any equity from any previous home to help increase your down payment," John explains.

Last fall the couple attended a homebuyers' seminar, where they met mortgage broker Bruce Davison of The Mortgage Centre of Mississauga.

As a broker, Davison shops the market, comparing interest rates, terms, and conditions offered by about 50 lenders, including majjor banks, to find the deal vest suited to each client.

In the Christous' case, "we were able to get them a very attractive rate" of 5.15 percent for five years on a $211,000 mortgage with Co-operative Trust of Saskatchewan, says Davison, a mortgage broker for 25 years.

Usually, the client pays no fees for his services because the lender pays him a commission of .5 to .75 per cent of the value of the mortgage. In a few cases where a client's financial situation presents greater risk, the client pays the same commission rate to cover the extra work.

While many first timers buy a home with a smaller down payment than the Christous, their approach was a good one, according to Paul Bimm, national sales manager for mortgages with RBC Royal Bank. "The bigger the down payment, the better."

With a down payment of 25 per cent or more of the purchase price, a buyer will get what's called a conventional mortgage. A mortgage for more than 75 per cent of the value of the home is considered a high-ratio loan and must be insured against default. Both Canada Mortgage and Housing Corp. (CMHC) and GE Capital Mortgage Insurance Co. offer default insurance.

The carrying costs of a high-ratio mortgage are higher than a conventional mortgage because they include the default insurance premium, which adds several thousand dollars to the loan.

First-time buyers should take a thorough look at all the mortgage options available, Bimm adds.

Options include:

Open mortgage: You pay a slightly higher rate of interest, but you're free to pay down or pay off the mortgage at any time, without penalty.
Closed mortgage: You pay a slightly lower rate of interest for a set term, usually one, two, five or ten years. During that term, you cannot renegotiate or repay the mortgage without incurring a penalty, usually the equivalent of three months' interest. Some closed mortgages will allow you to make an extra lump-sum payment each year.
Variable Rate: Payments are usually fixed but the interest rate may fluctuate depending on market conditions. When the rate goes up, a smaller portion of the payment goes towards the interest; when the rate falls, more goes toward the principal.
Fixed Rate: Your rate and payments remain the same for the term of the mortgage.
Short Term: A mortgage term of six months to two years. If rates are falling, a shorter term might let you renew at a lower rate. But if rates rise, you might end up with a higher rate.
Long Term: Locking in for three, five, or even ten years at a fixed rate does provide stability. But the lack of flexibility can come back to haunt you if interest rates fall and you're stuck paying a higher rate.

Patrick Hansel, a broker with Mortgage Solutions Canada, says it's a good idea to obtain pre-approval for a mortgage - as the Christous did.

"We do a credit check, take a look at your debt servicing costs, income levels and down payment size, and give you a clear idea how much mortgage you can handle, before you go house-hunting," he says.

The Christous had a definite financial picture in mind when they went shopping. And the three-bedroom home they bought fit perfectly.

With their $211,000 mortgage, they chose an amortization (the time it takes to pay off the debt) of 25 years.

"We pay about $630 every two weeks for principal and interest, and our property taxes - about $2,900 a year - are paid by us separately," John says.

Another couple who recently bought a house were also able to shop with realistic expectations after being pre-approved for a mortgage. Gino Ionta, 26, and his fiancee Filomena Vite, 26, who are getting married this December, began saving about two years ago.

With Ionta's $40,000 annual income as a letter carrier and Vite's $38,000 salary as an early childhood educator, the couple set aside a $40,000 down payment. It helped that, like the Christous, they each lived rent-free with their respective parents.

The couple tried to confine their search to homes in the $180,000 to $200,000 range. "But we decided to spend more so we'd get something decent that we wouldn't have to put a lot of money into upgrading," Ionta says.

They ended up buying a three-bedroom raised bungalow with an attached two-car garage in Bolton for $228,000. The deal closes April 26.

Since their $40,000 down payment was less than 25 per cent of the purchase price, they needed an insured loan that added $3,000 in a one-time insurance premium to their mortgage, making it $191,000.

The mortgage, at 5.4 per cent for five years, is with MCAP, a mortgage lender jointly owned by the Bank of Montreal and Clarica Insurance company. The payments every two weeks are $587 in principal and interest and total around $700 once property taxes are added on.

"We're really happy," Ionta says. "We've got a nice house on a quiet street that backs on to a ravine - and it's only a 20-minute drive to our jobs in Toronto."

Guaranteeing your payments

A mortgage is likely the biggest debt you'll ever take on - and it makes sense to insure it.

"You'll want to at least take out life insurance, so that if something happens to you, your surviving spouse isn't saddled with a big debt, a huge financial responsibility that they may not be able to handle," says Bruce Davison of The Mortgage Centre.

He says disability insurance also makes sense and some life insurance policies have a disability component.

"You can also get out-of-work insurance and critical illness insurance," he adds. "Especially, you're buing protection so that if anything goes wrong - you die, become disabled, become critically ill - and you're not in a position to make your mortgage payments, the payments will either continue to be made through the insurance or the insurance, in the case of death, will pay off the mortgage."

Insurance rates are based on the homeowner's age and the size of the mortgage, adding from $10 to $25 to monthly payments for a $150,000 mortgage held by a 25-year-old buyer.

Patrick Hansel, a broker for Mortgage Solutions Canada, says default insurance can be compulsory if your down payment is less than 25 per cent of the purchase price.

In such cases, Canada Mortgage and Housing Corp. insures the mortgage to guarantee the lender will continue to receive payments if the homeowner defaults. GE Capital Mortgage Insurance also sells default insurance.

The Insurer charges a one-time premium of 2 to 3.75 per cent of the total mortgage, depending on the size of the down payment. That premium, often between $2,000 and $4,000, is added to the mortgage and slightly increases the monthly payments.

Lower Rates Drive Housing Frenzy

The Toronto Star
Your First Home Section
Thursday, March 28, 2002

By Michael B. Davie
Staff Reporter

First-time buyers are entering the housing market in record numbers.

As many as 75 per cent of people buying homes this year may be first timers, says a survey release last November by Canada Mortgage and Housing Corporation (CMHC).

"Interest rates are low and the improved affordability has drawn more people into the market," says Alex Meadow, Ontario regional economist for the federal housing agency.

Last month was the strongest February ever, with 6,866 resale homes sold in the Greater Toronto Area, up 44 per cent from a year ago, says Mike Murphy of the Toronto Real Estate Board.

"Basically, every month for about the past 12 months has set a new sales record," notes Murphy.

Sales of new homes are also booming, according to the Greater Toronto Home Builders' Association. There were 4,583 new homes and condos sold in January, the strongest single month since 1987.

About 70 per cent of potential buyers are looking for resale homes, according to an RBC Royal Bank survey.

The survey found many first-time buyers are surprised to discover how little they need for a down payment - and how low their mortgage payments can be.

But they also realize this is the best time in years to get into the housing market, according to Amalla Costa, senior manager for residential mortgages with RBC Royal Bank.

"They're certainly aware interest rates are at historical lows, making home ownership that much more affordable," she said. "And there's a definite sense of urgency out there."

According to the survey, 77 per cent of people now renting believe buying a home is a good investment in this market, and 60 per cent fear the price of that investment will be higher next year.

Bruce Davison, a mortgage broker with The Mortgage Centre in Mississauga, agrees it's the low rates that are driving first-time buyers.

"The increased affordability is a dramatic change that's brought a lot of people into the market who previously couldn't afford to be there," he says.

"Just five years ago, you were looking at a 9 per cent interest rate for a five-year term, and now its' as low as 6 per cent," he adds. "The difference between paying 6 per cent and 9 per cent is an additional $50,000 in purchasing power, so if you could afford to carry a $150,000 home at 9 per cent, you can buy a $200,000 home at 6 per cent."

According to Davison, the average price for homes in Toronto is $240,000. Prices are slightly lower in the 905 regions.

He says the average mortgage for first-time buyers is $180,000 and, again, interest rates make a big difference.

"Basically, when you had to carry that $180,000 mortgage at 9 per cent, you were looking at paying about $1,500 a month in principal and interest payments. But with the interest rate at 6 per cent, your monthly payment drops to $1,150. That's a huge difference of $350 a month, and means you can afford to buy a home you previously could not afford."