13 Feb

Changes to Canada’s mortgage rules since the 2008 financial crisis

Financial

Posted by: Garth Chapman

Actions taken since the 2008 financial crisis to address the federal government’s concerns about Canada’s housing market.

July, 2008:
• After briefly allowing the CMHC to insure high-ratio mortgages with a 40-year amortization period, then Conservative finance minister Jim Flaherty moved to tighten those rules by reducing the maximum length of an insured high-ratio mortgage to 35 years.

February, 2010
• Responding to concern that some Canadians were borrowing too much against the rising value of their homes, the government lowered the maximum amount Canadians could borrow in refinancing their mortgages to 90% of a home’s value, down from 95%.
• The move also set a new 20% down payment requirement for government-backed mortgage insurance on properties purchased for speculation by an owner who does not live in the property.

January, 2011:
• The Conservative government tightened the rules further, dropping the maximum amortization period for a high-ratio insured mortgage from 35 years to 30 years.
• The maximum amount Canadians could borrow via refinancing was further lowered to 85% of a home’s value.

June, 2012
• A third round of tightening brought the maximum amortization period down to 25 years for high-ratio insured mortgages.
• A new stress test was also introduced to ensure that debt costs are no more than 44 per cent of income for lenders seeking a high-ratio mortgage.
• Refinancing rules were also tightened for a third time, setting a new maximum loan of 80 per cent of a property’s value.
• Another new measure limited the availability of government-backed insured high-ratio mortgages to homes valued at less than $1-million.
• Limit the maximum gross debt service (GDS) ratio to 39% and the maximum total debt service (TDS) ratio to 44%.

December, 2015
• The recently elected Liberal government moved to tighten lending rules for homes worth more than $500,000, saying it was focused on “pockets of risk” in the housing sector.
• The package of measures included doubling the minimum down payment for insured high-ratio mortgages to 10% from 5% for the portion of a home’s value from $500,000 to $1-million.

October, 2016
• Borrowers who take out insured mortgages that are fixed-rate loans of five years or longer will be subjected to a “stress test,” by qualifying at the Bank of Canada’s Benchmark rate (then about 2% higher than a typical 5-year fixed rate). This same stress test is already in place for all mortgage terms of less than 5 years and for those taking a Variable Rate.
• Ottawa unveiled new measures aimed at portfolio insurance, a type of bulk insurance that banks use for mortgages with down payments of 20 per cent or more. Starting Nov. 30, the federal government will now require portfolio-insured mortgages to qualify under the same criteria used for the insurance taken out on homeowners with small down payments. Portfolio-insured mortgages will now be limited to a maximum amortization period of 25 years and a maximum purchase price of less than $1-million. It requires all portfolio-insured mortgages to be owner-occupied, prohibiting insurance on rental homes and investment properties. This change handed the banks a huge advantage over the Monoline mortgage lenders, and increased their market share and ultimately allowed the banks to increase mortgage interest rates.

January, 2018
• Home buyers with a down payment of 20% or more will be subject to stricter qualifying criteria (also known as a “stress test”) that would determine whether a homebuyer would be able to afford their principal and interest payments should interest rates increase. REFINANCING an existing property (20%+ Equity) will also be subject to the stress test. For qualification, the stress test will use either the 5-year benchmark rate published by the Bank of Canada or the customer’s actual mortgage interest rate plus 2.0%, whichever is the higher. Estimated reduction in borrowing for the average borrower, 15-20%
• OSFI directs lenders (excluding credit unions and private lenders) to have internal risk management protocols in higher priced markets (sometimes called “hot real estate markets” like Toronto and Vancouver). This is a continuation of a policy already in place. Many mortgage lenders have been following the principles of the policy for the last 10 to 12 months.
• Mortgage lenders (excluding credit unions and private lenders) are prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law. This is often referred to as “bundling” or “bundle partnership”.

23 Feb

Currency exchange: How to get more for your Canadian dollars

Financial

Posted by: Garth Chapman

With the recent steep slide in the CAD as it relates to the USD this is something Canadians are once again paying close attention to.  We have generally found that the banks do not deliver the best deals.  We have saved up to 1% and more by exchanging via a Online currency exchange (we use Payline by ICE and deal with Debbie Siouras who is National Manager, Financial Institution Services (see her contact info below).

As we are now Snowbirds spending several months in the USA, we now have an ear tuned to the markets and the news on the subject of exchange rates and what drives them, and we’ll often buy up to a year’s worth of USD when we think the CAD is about to drop.  Fortunately we did just that last year and avoided much of the drop that occurred in the last several months.

These days your choices include Banks, Online currency exchanges, no-foreign-exchange-fee credit cards, and there is even a Peer-to-peer currency exchange.  And if you want to get really sophisticated you can buy shares in an interlisted company on a Canadian stock exchange and then selling those shares on a U.S. stock exchange.

More here in this article I found on the CBC News Business section http://www.cbc.ca/news/business/foreign-currency-exchange-1.3412059

Debbie Siouras
National Manager, Financial Institution Services – Payline by ICE
Phone: (604) 813-3393
Toll Free: 1 (888) 989-4636 ext 0572
dsiouras@paylinebyice.com
www.paylinebyice.com

12 Feb

Capital Gains Explained

Financial

Posted by: Garth Chapman

So what is a Capital Gain, as defined in Canada? Well, Duhaime’s Law Dictionary defines it here as follows:

Capital gain or capital gains is an accounting term but one with substantial relevance to tax law as jurisdictions are wont to tax capital gains when the capital asset is sold or otherwise disposed of, just as tax-payers would then seek tax credit or deduction in the event that, in lieu of a capital gain, the tax payer suffered a capital losses.

Therefore, to the extent that it is not expressly defined in a tax statute, what is or is not a capital gain has become a matter of judicial interpretation, often hotly contested as the tax authority seeks to capture transactions as capital gains, and the tax payer seeks to avoid the designation. The law reports contain complex decisions on the status as capital gains of lottery winnings, royalties, business income and many creative tax avoidance transactions.

In more simple language you have a capital gain when you sell, or are considered to have sold, what the Canada Revenue Agency deems “capital property” (including securities in the form of shares and stocks as well as real estate) for more than you paid for it (the adjusted cost base) less any legitimate expenses associated with its sale.

More on all this this MoneySense article with excerpts taken from it below:

How is it taxed? Contrary to popular belief, capital gains are not taxed at your marginal tax rate. Only half (50%) of the capital gain on any given sale is taxed all at your marginal tax rate (which varies by province). On a capital gain of $50,000 for instance, only half of that, or $25,000, would be taxable. For a Canadian in a 35% tax bracket for example, a $25,000 taxable capital gain would result in $8,750 taxes owing. The remaining $41,250 is the investors’ to keep.

The CRA offers step-by-step instructions on how to calculate capital gains.

How to keep more of it for yourself

There are several ways to legally reduce, and in some cases avoid, capital gains tax. Some of the more common exceptions are detailed here:

  • Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.
  • The sale of your principal residence is not subject to capital gains tax. For more information on capital gains as it relates to income properties, vacation homes and other types of real estate, read “Can you avoid capital gains tax?
  • A donation of securities to a registered charity or private foundation does not trigger a capital gain.
  • If you sell an asset for a capital gain but do not expect to receive the money right away, you may be able to claim a reserve or defer the capital gain until a later time.

If you are a farmer or a newcomer to Canada, they are special capital gains rules for you. The specifics can be found at the CRA website.

For more specific questions and stories on this topic, see the MoneySense section on Capital Gains here http://www.moneysense.ca/tag/capital-gains/

19 Jul

The Good Old Days, when homes were cheap, or were they?

Financial

Posted by: Garth Chapman

Ahhh, the good old days.

Or were they, economically speaking? Let’s take the early 1980’s as an example.

We bought a home in early 1981 near the bottom of the housing crash caused by PE Trudeau’s NEP (National Energy Policy), which dropped that home’s value by about 20% from $111,000 to the $91,000 that we paid.

Oh, and we sold that home 5 years later in 1986 for a $4,500 loss at $86,500. Our thinking was that we were at the bottom and it was time to buy a more expensive home as it would appreciate more as the economy improved. That turned out very well, but that’s another story…

My income as a 27 year-old in a middle management job then was $42,000. Interest rate was around 18%, but our provincial government bought the rate down to 12%.

At 10% down the mortgage was $83,640 with a monthly payment of $863. In 1981.

That same house is now easily $450,000. So at the same 10% down the mortgage would be $414,720 and at an easily obtainable fixed rate of 2.69% the monthly payment would be $1,897. Income for same job now would be about $120,000.

So income is up nearly 300%.
Home price is up nearly 500%.
Down-payment is up from 2.2% to 3.8% of annual income.
Mortgage payment is DOWN from 25% to 19% of monthly income.

So the down payment is a tougher burden, but the monthly cost of the mortgage is way-way down. Hence we live in bigger fancier homes and/or drive nicer cars, have 3 TVs, take more vacations, etc, etc.

Ahhh, the good new days.

 

19 Jul

Understanding what drives Variable rates and Fixed rates

Financial

Posted by: Garth Chapman

Your Variable Mortgage Rates are driven by your bank’s Prime Rate which is set individually by each Bank. They normally (but not always) move in sync with changes in the Overnight Rate, which is set by the Bank of Canada (BoC) and is used as a basis for one-day (or “overnight”) borrowing between the major lenders and financial institutions.

The BoC is responsible for monetary policy, the goal of which is to keep inflation near the mid-point of a 1 to 3 per cent target range, ideally 2%. The BoC is equally concerned with significant movements in the inflation rate, both above the 2% mid-point and below it. When demand is strong, it can push the economy against the limits of its capacity to produce. This tends to raise inflation above the midpoint, so the BoC will raise interest rates to cool off the economy. When demand is weak, inflationary pressures are likely to ease. The BoC will then lower interest rates to stimulate the economy and absorb economic slack.

So when the economy heats up and there is a threat that inflation could get beyond the 1 to 3 per cent target the BoC may increase the overnight rate, which drives the Prime Rate. The schedule of dates when the BoC reviews and sets the Overnight Rate is found here http://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/

Fixed Mortgage Rates are driven by the Bond markets. Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don’t confuse this with bond prices, which have an inverse relationship with interest rates.

Investors turn to bonds as a safe investment when the economic outlook is poor. When purchases of bonds increase, the associated yield falls, and so do mortgage rates. But when the economy is expected to do well, investors jump into stocks, forcing bond prices lower and pushing the yield (and mortgage rates) higher.

The spread between 5-year Government of Canada Bonds and 5-year mortgage rates varies within a range that has fluctuated in recent years. You can follow the 5-year Bond Yield in Canada on the BoC website here and you will notice that a period of Bond yield increases or drops will almost always be followed by a corresponding change in fixed rates for mortgages.

30 Apr

The rainy day debate: Contribute to your RRSP or pay off debt?

Financial

Posted by: Garth Chapman

A good article on an age-old question. Rob’ Carricks bottom line advice: RRSPs beat a mortgage paydown in today’s low-rate world, but credit cards and high-rate loans and lines of credit beat RRSPs.

Get rid of that high-rate debt. Kill it dead.

http://www.theglobeandmail.com/globe-investor/personal-finance/retirement-rrsps/the-rainy-day-debate-contribute-to-your-rrsp-or-pay-off-debt/article7928044/