FlahertyDespite Jim Flaherty’s assertion that “Most Canadians are quite careful and use common sense in their borrowing,” the government tightened mortgage rules for the third time since 2008.

For high-ratio insured mortgages, the Finance Department outlawed both 35-year amortizations and refinances over 85% LTV. That led to:

    An immediate 40% plunge in insured refinances (as per CMHC’s Q2 stats)
    Greater interest expenses for consumers who could no longer refinance as much high-interest debt
    One less amortization option for well-qualified borrowers who need to maximize cash cash-flow
    A seemingly tacit agreement among the Big 6 banks to reduce their maximum amortizations to 30 years on conventional mortgages (even though this wasn’t officially required by the government)
    Rising popularity of 5% cash-back refinances, which simulate 90% LTV refis but cost more.

The government also made it tougher for non-bank lenders to offer HELOCs by eliminating government insurance on secured credit lines. That was virtually pointless since the major banks dominate this segment and seldom insured their credit lines anyway. Moreover, HELOCs require strong qualifications and 20% equity and those sorts of individuals rarely default.

2) Freakishly Low Fixed Rates

Rate-drop“Lower for longer.” That was economists’ buzzphrase in 2011 as they were forced to repeatedly push their rate hike forecasts further into 2012-2013.

At the same time, investors spooked by European risk fled to bonds in safe countries like Canada. With our bonds being bought up, bond yields (which lead fixed mortgage rates) dropped like a anvil.

In total, the benchmark 5-year government yield tumbled 115 basis points this year (as of today), hitting several all-time lows along the way.

Lower fixed-rate funding costs led to some spectacular rates this year, like 2.49% for a two-year fixed, 2.89% for a 4-year fixed, 2.99% for a 5-year fixed (for brief stints) and 4.34% for the 10-year.

Despite these bargains, however, rates could have been even lower. Funding costs absolutely permitted it but lenders’ desire for fatter profits kept fixed mortgage pricing higher than normal.

3)  Death of the Variable

Rising-variable-ratesVariable-rate mortgages have long been the strategy of choice for savvy homeowners…that is, until August 2011. Variable discounts started shrinking soon after the U.S. debt downgrade. Rates that were once prime – 0.90% ended the year as high as prime + 0.10%.

Lenders made no bones about why they jacked variable rates. Among other factors, banks openly admitted in earnings calls that they wanted wider margins.

With variables becoming so uncompetitive, fixed rates stole the show and the media declared variable-rate mortgages to be “over.”

Fortunately, what dies in the mortgage world can always be resurrected. Expect variable-rate discounts to make a comeback, although it may take a while.

4) Interprovincial Mortgage Brokers

Provincial-Mortgage-RegulationsWhile federal regulation has long allowed bank reps to operate nationwide, provincial regulations have made it onerous for mortgage brokers to do the same. That changed somewhat on July 1, 2011 when the Agreement on Internal Trade dramatically simplified the process for brokers to register in multiple provinces.

Among other things, this change promises to usher in more rate competition and we suspect it’ll be a big net plus for consumers.

Mortgage brokers have yet to clear the “biggest hurdle” standing in their way, according to the latest CAAMP-Maritz consumer survey, pointing to less than 10 per cent of respondents who really understand exactly what it is they do.

“It is very difficult to sell anything if consumers don’t understand the offering and this may be the biggest hurdle standing in the way of future success for Canada’s mortgage broker channel,” reads the report, based on consumer and broker surveys and released this week.

That may be an understatement.

In fact, the poll results indicate just 5 per cent have a full appreciation of the function of mortgage professionals, with only about a third of respondents indicating they have a good understanding.

“The importance of seeing these numbers increase cannot be overstated,” concludes Maritz, pointing to greater broker penetration among consumers who understand the services they bring to the table.

Broker market share is 50 per cent higher among the 40 per cent of consumers who have a full or good understanding of broker services. That translates into a market share of 32 per cent, compared with 21 per cent among those with a lesser understanding.

“When we asked non-broker customers why they did not consult with a broker, the top reason was loyalty to my bank, followed by four reasons relating to lack of awareness of broker services.”

The broker channel is expected to formally address its public awareness challenges in 2012, with growing support for a 1 bps fund.

“If every broker was to contribute one basis point that would equate to $5.5 million to $6 million a year,” Merix head Boris Boziche told brokers this fall, as part of “Winning the Rate Wars,” a webinar hosted by industry trainer Greg Williamson.

That “every broker” is the more than 15,000 mortgage professionals plying their trade across both regulated and unregulated Canadian jurisdictions. That “1 bp” would come off of each and every deal a broker submits and closes.

Those collective funds would get funnelled into a marketing campaign both paid by and focused on promoting mortgage brokers. That idea continues to gain traction as the industry grapples with increased competition from the banks and a slowing real estate market.

“I agree with Boris that mortgage brokers need to pay for this initiative,” said Williamson, head of 180 Degrees Coaching. “The great people at Dominion Lending pay to promote their brand nationally and I suspect they are happy with the results they are getting. We all pay to have the AMP designation promoted nationally why should we not promote the concept of using a mortgage broker and more importantly what we do.”

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TORONTO—A survey suggests that more than a third of Canadians — including well over half of young people — feel more stressed about their financial situation now than a year ago.

The survey commissioned by insurer Sun Life Financial and released Wednesday says 36 per cent of respondents are more worried about their personal finances than last year.

The survey comes as the economy slows down and volatile markets, squeezed incomes and recession fears erode consumer and business confidence.

Economic confidence trends have been moving negatively for months as consumers retrench and businesses worry about the economic future. A scaleback in spending is already affecting the Christmas shopping season and could lead to tighter money next year.

Still, there is some resiliency in consumer spending. On Wednesday, Statistics Canada reported that retail sales rose one per cent to $38.6 billion in October, their third straight monthly increase.

The Sun Life survey shows 43 per cent of women and 53 per cent of Canadians between the ages of 18 to 34 feel more pessimistic about their financial prospects.

The Canadian Financial Checkup survey was done by Ipsos Reid and polled more than 2,136 people about personal finances, work and career and the economy at the end of this year.

Such surveys are routinely done by banks, insurers or other financial companies to research their customers’s views and promote financial products and services such as mutual funds and wealth management.

On the economy, the survey found that one in five men felt more stressed about the economy than they did this time last year. One in five Canadians 55 and older are also more stressed about the economy.

“It’s clear from the survey that the uncertain economic conditions are impacting Canadians and causing financial concerns during an already stressful time of year,” said Kevin Strain, Sun Life’ Canada’s senior vice-president of individual insurance and investments.

“Canadians approaching retirement are feeling these impacts the most because they are planning to put their savings into action,” added Strain, who said Canadians should work with financial advisers to help plan their finances in an uncertain economy.

“If they haven’t prepared accordingly, the current environment may be throwing their plans off track.”

Most economists expect Canadian growth to slow to under two per cent in 2012 as the economy continues to weaken because of European recession fears and slower growth in the United States, China and India.

Such sluggish growth will do little to create jobs for the nearly 1.4 million Canadians now unemployed. With prospects of federal and provincial government restraint looming in 2012 and beyond and an expected jump in the 7.4 per cent jobless rate, consumer and business confidence could erode further next year.

The survey results show more women and younger Canadians are feeling more stress related to personal finances and work.

“We’ve seen that women are often taking care of family finances, and the holidays are when we feel the impacts of our spending habits throughout the year,” said psychotherapist Kimberly Moffitt, a member of the Ontario Association of Counsellors, Consultants, Psychotherapists, and Psychometrists.

Sun Life is Canada’s third-largest insurer with operations around the world. It has about 16,000 employees, nearly half of them in Canada.

Two strategies to help tame your debts

December 19, 2011 By Krystal Yee 0 Comment(s)

 

paul gilligan

With December coming to a close, we are all starting to think about our New Year’s Resolutions. And in addition to resolving to go the gym more often, there’s a good chance that your list of 2012 resolutions involves a financial goal.

If one of your goals is to pay down your debt, you’re not alone. According to a recent Statistics Canada report.

There are two basic strategies to tackling your debt, the debt avalanche: where you pay down the debt with the highest interest rate first and . the other is the debt snowball where you pay down the debt with the smallest balance first.

For example, if you owe $23,000 to five different creditors, you will first need to determine your interest rate for each debt, as well as your minimum monthly payment. Then, after you have satisfied your minimum debt repayment obligations, you must figure out how much extra you can put towards your debt each month.

For the example below, let’s assume there is an extra $200 in your budget to put towards debt repayment:

Debt Snowball 
Using this method, you will list all of your debts in ascending order, from smallest to largest balance. Since your smallest debt would be your Mastercard, you will need to commit to paying the minimum payments on every debt, and apply the extra $200 each month towards the Mastercard.

Once that debt is paid in full, you will then roll the Mastercard minimum payment plus the extra $200 towards the next smallest debt, which would be the store credit card.

This method works because by paying the smaller debts first, you eliminate the number of creditors faster, giving you the motivation she needs to keep going.

Debt Avalanche 
The debt avalanche  is similar, except instead of paying off your smallest debt first,  you repay the balance with the highest interest rate first.

Mathematically, this is the most effective way to repay debt  because you end up paying less interest over the course of your repayment schedule.

So, in this example, you pay off the Visa bill first, because it has the highest interest rate. Then, once that is paid it off, you will take the minimum payment and the $200 extra payment and put it towards the debt with the next highest interest rate – which would be the store credit card.

Which method should you choose?
There is a lot of debate about which strategy is best. The debt snowball plays to emotions and a sense of victory when we achieve goals fairly quickly. However, avalanche is the rational and more mathematically correct method.

The debt snowball is best suited for people who are strongly influenced by emotion and prefer quick, tangible results. It is also an effective method if all of your debts are at relatively the same interest rate, since you won’t end up saving as much interest as someone who has varying interest rates.

 I ended up using the debt avalanche. Even though I missed out on the emotional highs of getting rid of my creditors faster, I knew I was saving more money in the long run by eliminating my debt with the highest interest rate first.

Check out the website unbury.me to calculate whether the avalanche or snowball method will work best for your debt.

What debt repayment strategy do you use?

The Unlikely Retirement Savings Strategy

“…Single individuals and couples with no dependents may be better off accelerating their mortgage payments than contributing to a retirement account,” finds the study. “This is the case for all income levels and savings rates, but particularly for lower-income individuals.”

“Those earning $30,000 annually and saving 2% of their earnings will get a nearly twice higher return by accelerating their mortgage payments compared with saving through a RRSP.”

Once the mortgage is paid off, it’s assumed that one then takes the money formerly allocated to mortgage payments and starts investing it.

There is an exception to the above findings, however, and it applies to better-off homeowners with kids. The CGAAC says: “…In the environment of relatively low mortgage interest rates, savings through a RRSP may generate a higher return for the higher-income couple with dependents than saving through accelerated mortgage payments.”

In addition, relative performance depends on your investment alternatives. Some folks have access to investments yielding more (after tax and inflation) than  a mortgage prepayment. In that case, speeding up your mortgage burning party may not be your best option.

Exceptions aside, mortgage prepayments entail no principal risk and involve little effort. That makes them one of the best “lazy-man’s” saving strategies one can find.

It’s one of the most agonizing decisions homeowners make: Do you go fixed or variable? Mortgage, that is.

The decision could end up costing – or saving – big bucks on what is often the single biggest purchase many will make. Research shows that, in the past, a variable-rate mortgage has been cheaper than a fixed-rate one.

But today’s market is different from decades past in two big ways.

“The spread between fixed and variable rates is extremely low by historical standards. Moreover, we can no longer rely on a long-term down-trend in rates,” said Robert McLister, a Vancouver-based mortgage planner and editor of the Canadian Mortgage Trends blog. “Given all that, the historical advantage of variable is less applicable today.”

It can be confusing for homeowners. Both interest and short-term mortgage rates are sitting at rock-bottom lows. But inflation is the wild card here. Statistics Canada reported on Friday that the core inflation rate has climbed to 2.2 per cent – its highest level in nearly three years.

Given the uncertain global economic outlook, the U.S. central bank has signalled it will hold its benchmark rate at close to zero through to mid-2013. And even though Canada’s economy is not faring too badly, the Bank of Canada is expecting to keep its key rate steady at 1 per cent until well into 2012.

So how do you make the decision? Let’s compare the two mortgage products.

Variable mortgages, which are based on the prime rate set by the central bank, fluctuate alongside the prime rate. And with rates slated to move sideways for the near future, there are still arguably plenty of savings to be had.

With a fixed-rate mortgage, homeowners lock in their mortgage rate for a specific period of time, the most popular being five years. People with a fixed-rate mortgage often pay a small premium for the security of knowing that their payments will stay the same. And since rates can arguably only rise from their current lows, locking in seems like a good call.

“The difference between today’s variable rate, which is 2.7 per cent on the street, and a good fixed rate, something like 2.99 per cent for a four-year, is remarkably tight at 29 basis points,” Mr. McLister said. That is equal to about one rate hike.

It’s a small price to pay for “knowing that you won’t get skewered by rising rates.”

Moshe Milevsky, a finance professor at York University and the often-quoted author of mortgage studies showing that variables tend to outperform, says that because interest rates are so low, the amount people will save from choosing variable over fixed will be lower in the future.

Like most mortgage experts, he believes a person’s circumstances should dictate which mortgage they choose. The decision should also be part of a larger financial plan.

“For people who are making their first purchase with a large amount of debt, small down payment and big risk, I would say not to take on more risk by gambling on floating rates,” Mr. Milevsky wrote in an e-mail.

On the other hand, people who are renewing with a substantial amount of equity, have a strong personal balance sheet, income statement, and other assets to fall back on in the event of a crisis, can go floating, he said.

Mr. Milevsky also suggests checking out a hybrid mortgage, which is partially fixed and partially floating. “By diversifying your mortgage debt you can reduce some of the worry.”

The good news, according to Mr. McLister, is that today’s low interest rates are favourable for all mortgage shoppers. “This is a great time to get a mortgage, if you are in the market for one,” he said. “You are most likely not going to get burned, no matter which term you take.”

Mr. McLister says these are the top considerations for people struggling to decide:

IMF warns about Canadian debt, house prices

The Canadian government may need to act soon to halt the buildup of household debt, according to the International Monetary Fund.

The Washington-based IMF issued the words of caution in its latest regional outlook for the Western Hemisphere.

“Developments on the housing front require increased vigilance and consideration may need to be given to additional prudential measures to prevent a further building in household debt,” said the report.

Finance Minister Jim Flaherty already took some initial measures recently to slow mortgage borrowing, including reduction of the maximum amortization period to 30 years from 35 years.

Julie Dickson, superintendent of Financial Institutions (OSFI), recently also said her office is “stepping in to increase the monitoring” of home loans and lines of credit secured by real estate.

TD Economics recently noted in an economic report that the household debt-to-income ratio had reached 147% in the second quarter of 2011. The report explained a ratio of 138% to 142% is considered “appropriate.”

But the trouble might only be starting. TD Economics warned the debt-to-income ratio would rise to 150% by the end of 2012, then 151% by 2013. House prices have also now risen to concerning levels in some provinces, according to the report.

“On the domestic front, consumption might moderate more than expected from a large retrenchment in highly indebted households amid concerns of a drop in house price,” said the IMF. “The latter are estimated to be above levels dictated by economic fundamentals in some key provinces.”

The economy has remained stronger in Canada than elsewhere around the world, and improved global financial conditions could bolster confidence and thus spur more domestic demand, according to the report.

The IMF predicted a small rate cut is on the way, as well as no monetary stimulus through most of 2013.

Class Action Lawsuit Filed Against CIBC Mortgages on Prepayment Penalties

“Starting in 2005, CIBC started using language in its standard charge terms that was extremely vague regarding how its prepayment penalties would be calculated,” says Kieran Bridge, lead counsel on the case, in partnership with Siskinds LLP.

“That language, in legal terms, is called unenforceable. The net result is that they cannot collect penalties with a clause like that.”

(If you’re interested, you can see some the penalty language CIBC Mortgages has used here—on page 13)

“Even if [part of the language] is enforceable,” says Bridge, the penalties should be “capped at three months interest.”

In addition to the above, the suit claims that CIBC charges the future value of monies owed in its interest rate differential calculation, whereas it should “adjust for present value,” asserts Bridge. “They ‘present-value’ all of their own assets and liabilities. Any actuary or accountant will tell you, you have to present value or you’re not talking about actual value received.”

Bridge says the lawsuit applies to most CIBC mortgages, including many of those originated in CIBC branches and through its related entities, such as FirstLine Mortgages and President’s Choice Financial.

CIBC Mortgages Inc. is one of the largest residential lenders in the country. Bridge estimates it has about 500,000 mortgages on the books, of which 5-10%—25,000 to 50,000 people—prepay every year. (We’re unable to confirm those stats.)

In terms of value, Bridge estimates this case is worth “into the tens of millions (of dollars).” These types of cases are usually settled out of court, however, and don’t usually make it to full trial.

He adds that there is plenty of precedent with respect to mortgage prepayment contracts and “uncertain contract provisions.”

“You don’t start a class action lightly,” states Bridge, adding that his firm has “literally spent hundreds of hours” researching this case before filing it. (Funny enough, we noticed a Siskinds lawyer collecting evidence on Ellen Roseman’s blog back in July.)

Bridge is not a rookie in class actions. He says he brought another prepayment-related class action against RBC where the class members were “paid 100 cents on the dollar” for their claims, plus legal fees.

“That was a very favourable settlement. It’s about the best you could possibly do.” (Although, that case had a very different fact pattern than this one.)

This particular class action all started with a single parent in B.C. whose marriage ended. That individual had to sell the family home and was stuck with a $47,000 interest rate differential penalty from CIBC.

Bridge has reviewed other banks’ practices and hasn’t yet found other lenders that are calculating IRD penalties improperly.

Our take: Mortgage penalty language is notoriously cryptic at the Big 6 banks. It would be interesting to see if a court ruled that CIBC is calculating its IRD penalties in a materially different way than its peers. One thing is for certain, few banks go out of their way to make penalty calculations intuitive. Maybe this lawsuit will change their thinking.

(Incidentally, RBC is one of the best big banks when it comes to IRD disclosure. They outline the formula they use, try to explain it and base their penalty calculations on present value, according to sources at the bank.)

Mortgage penalties remain a top consumer banking complaint, according to the Financial Consumer Agency of Canada. The Finance Department was expected to have new penalty calculation and disclosure regulations in effect by now, but they have continually been delayed. Most would agree, it’s time for the government to stop dragging its feet and move the ball on that.

Note: As a reminder, it has not been established at this point that CIBC has done anything wrong with respect to how it calculates mortgage penalties. Also, the defendant in this case is CIBC Mortgages Inc., not CIBC. “CIBC” is used in a standalone capacity above only as an abbreviation.

September 26, 2011

OSFI Issues “Early Warning” on Mortgage & HELOC Lending

• Low rates have likely “increased the incentive for consumers – again – to borrow. Banks also have an incentive to lend, given low margins and the need to compete.”
• As a result: “…We, at the OSFI, have been very focused on home equity lines of credit, and mortgage lending by institutions – both insured and uninsured books.”
• “The message from OSFI to financial institutions is that…institutions should guard against loosening historical underwriting standards – for example, by moving to higher loan-to-value ratios or waiving any due diligence requirements.”
• FIs must protect against imprudent lending “more so than they have historically.”

After her speech, Dickson told reporters:

• “I think the concern is that the conditions are such that there would be tremendous pressure on banks to loosen [lending] standards.”
• As a result, OSFI is “stepping in to increase the monitoring” of lender portfolios.
• “I think it’s prudent to increase [FI] capital levels as soon as we can.” (This was in response to a separate question on the new Basel III capital/liquidity standards.)

Dickson also noted that OSFI is presently cooperating with the international Financial Stability Board to develop global guidelines “for what constitutes safe mortgage lending.” That includes down payment, loan-to-value and income verification parameters.

Despite the warning, Dickson acknowledged that Canadian banks have “managed risk” well to date, adding that Canadian FIs are in “a position of strength”.