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Thursday, October 31, 2013
CMHC REDUCES 2014 HOUSING STARTS FORCAST
TORONTO, Oct 31 (Reuters) - Canada's federal housing agency has bumped up its forecast for housing starts in 2013 but trimmed its forecast for 2014, setting an essentially flat outlook for a once-roaring market.
The Canada Mortgage and Housing Corp said on Thursday housing starts will be in a range of 179,300 to 190,600 units in 2013, with a point forecast, or most likely outcome, of 185,000. That is up from its August estimate of 182,800.
The agency said there will be 163,700 to 205,700 units started in 2014, with a point forecast of 184,700. That is down from CMHC's August estimate of 186,600.
Both forecasts represent a sharp slowdown from the 214,827 starts of 2012.
Canada sidestepped the worst of the financial crisis of the last decade because it avoided the real estate excesses of its U.S. neighbor, and a post-recession housing boom helped it recover more quickly than its Group of Seven peers.
But the housing market began to cool last year after the country's Conservative government, worried about a potential property bubble, tightened mortgage rules.
While some economists still worry that the U.S. housing crash of the last decade may be repeated in Canada, the CMHC forecasts see homebuilding and sales leveling off, with prices continuing to notch small gains.
CMHC said existing home sales will range from 439,400 to 474,000 in 2013, with a point forecast of 456,700 units. That's up slightly from August's forecast of 448,900 units and about equal with the 454,005 sales in 2012. For 2014, it expects a move up to a range of 438,300 to 498,100, with an increase in the point forecast to 468,200. That's up slightly from August's forecast of 467,600.
Price gains are expected to slow in 2013 and 2014. CMHC's point forecast for the average price calls for a 4.0 percent gain to C$378,000 ($361,600) in 2013, and a 1.9 percent gain to C$385,200 in 2014.
Thursday, August 8, 2013
INTEREST RATES & COMMERCIAL REAL ESTATE
REALpac's sentiment survey indicates growing concern about the impact of
higher interest rates
In spite of strong fundamentals, confidence among Canada's commercial real estate leaders continued to wane as go-forward concerns about the Canadian economy, as well as external factors persist. This and other findings were revealed in the Third Quarter 2013 Canadian Real Estate Sentiment Survey released today by the Real Property Association (REALpac) and FPL Advisory Group.
"Higher interest rates and higher volatility in the equity markets will likely make for more challenging times in the coming year. Perhaps this will lead to a greater separation in values between higher and lower quality assets. This range compressed significantly during the recent period of high liquidity in debt and equity markets," commented survey participant Allan S. Kimberley, Vice Chairman & Managing Director, CIBC World Markets.
In spite of strong fundamentals, confidence among Canada's commercial real estate leaders continued to wane as go-forward concerns about the Canadian economy, as well as external factors persist. This and other findings were revealed in the Third Quarter 2013 Canadian Real Estate Sentiment Survey released today by the Real Property Association (REALpac) and FPL Advisory Group.
"Higher interest rates and higher volatility in the equity markets will likely make for more challenging times in the coming year. Perhaps this will lead to a greater separation in values between higher and lower quality assets. This range compressed significantly during the recent period of high liquidity in debt and equity markets," commented survey participant Allan S. Kimberley, Vice Chairman & Managing Director, CIBC World Markets.
Monday, June 17, 2013
HOME INSURANCE OPTIONS
The first order of business is how to insure your mortgage in case you die before it's paid off. You could either get mortgage insurance through your bank or financial institution, or buy a term life-insurance policy.
People who opt for mortgage insurance do so because it's the only option they've heard about, says Jared Webb, a life agent with Victoria-based Fernhill Financial and a member of Advocis, the Financial Advisors Association of Canada. "They're at their financial institution and are often led to believe they need to have this insurance to continue with their mortgage financing," he says.
Mortgage insurance works like this: You make set payments every month that are included as part of your mortgage. Should you die before the mortgage is paid off, your insurance should pay the remaining balance. Your beneficiary would never see the money; it would go directly to the lender.
The product is not without its wrinkles, Webb notes. For one, the death benefit declines as the mortgage declines. Yet you continue paying the same amount until the mortgage is gone. Let's say you are insuring a $200,000 mortgage. You die 10 years later and your mortgage is down to $50,000. The mortgage insurance would pay just the $50,000 even though you've been paying for $200,000 worth of coverage.
Compare this scenario to buying a 20-year, $200,000 term-insurance policy. As with mortgage insurance, you would pay a set amount of premiums. But unlike mortgage insurance, you'd have a guaranteed $200,000 worth of coverage for 20 years regardless of what the mortgage is, says Webb.
Another difference is that your heirs -- not the financial institution --would directly receive the money and it would be tax-free. That means they could spend the money how they see fit. Perhaps they'd pay off the mortgage or maybe they'd choose to keep the mortgage payments and pay off other debt and expenses instead. "It gives them more options and flexibility with decision-making at a time that tends to be very high in emotional stress," Webb says.
Underwriting is another factor when deciding between mortgage and term insurance. Mortgage insurance is underwritten at the time of claim. That means the financial institution won't take a really good look at your application until after you died. If for whatever reason, the insurers don't like the health assessment, the insurers can "just deny your claim and not forgive the mortgage. It doesn't happen all the time but it does happen," Webb says.
With term-insurance policies, underwriting is completed when you apply for the product. You have a medical, fill out a lengthy questionnaire and the premiums you pay are based on that. Once approved, your policy is guaranteed to pay your heirs.
There's also the issue of cost. In many cases it's cheaper to get a term policy than the mortgage insurance. So for the same premiums, you likely will be able to get more term insurance for your buck. That's a huge selling factor since that policy amount will not decrease, says Webb.
Once you've purchased your home, you'll need to investigate home-insurance policies. A policy will value not only the physical property you own but also the contents inside the home such as furniture, computers, paintings and jewellery, says Ian Morris, partner with Jones Deslauriers Insurance Management Inc.
Morris adds that many people are surprised the value of the insurance policy is not the same as the home's purchase price. "They are not linked together at all," he says.
Your insurance policy is all about what it costs to rebuild the home since you already own the land. For example, if you paid $1 million for a house in Toronto, it may cost only $500,000 to rebuild the property, Morris says. "Outside of bigger cities, it's usually the other way around," he notes. "It may cost more to rebuild the house than what they bought the house for."
To qualify for home insurance, you may need to upgrade certain things in your newly acquired home, or ensure they are taken care of before you take possession. Some insurance no-nos include knob-and-tube wiring and lack of handrails on staircases.
Water damage is the most common home-insurance claim, Morris says, but that doesn't mean it will automatically be covered. "You have a responsibility to mitigate your loss and perform upkeep," he says. If your basement is flooded because you didn't maintain your foundation or regularly clean out your eavestroughs, you're probably out of luck. But if your sewer backed up, that's likely to be insured if you selected it as part of your policy coverage, Morris explains.
If you've bought a home and plan an addition, Morris says you'll need builder's risk insurance, which will insure that part of your property against damages and construction mishaps.
Finally, Morris says title insurance protects you against errors on the property like liens or title fraud. It's typically sold to you by your real- estate lawyer and is a one-time payment when you buy the house.
People who opt for mortgage insurance do so because it's the only option they've heard about, says Jared Webb, a life agent with Victoria-based Fernhill Financial and a member of Advocis, the Financial Advisors Association of Canada. "They're at their financial institution and are often led to believe they need to have this insurance to continue with their mortgage financing," he says.
Mortgage insurance works like this: You make set payments every month that are included as part of your mortgage. Should you die before the mortgage is paid off, your insurance should pay the remaining balance. Your beneficiary would never see the money; it would go directly to the lender.
The product is not without its wrinkles, Webb notes. For one, the death benefit declines as the mortgage declines. Yet you continue paying the same amount until the mortgage is gone. Let's say you are insuring a $200,000 mortgage. You die 10 years later and your mortgage is down to $50,000. The mortgage insurance would pay just the $50,000 even though you've been paying for $200,000 worth of coverage.
Compare this scenario to buying a 20-year, $200,000 term-insurance policy. As with mortgage insurance, you would pay a set amount of premiums. But unlike mortgage insurance, you'd have a guaranteed $200,000 worth of coverage for 20 years regardless of what the mortgage is, says Webb.
Another difference is that your heirs -- not the financial institution --would directly receive the money and it would be tax-free. That means they could spend the money how they see fit. Perhaps they'd pay off the mortgage or maybe they'd choose to keep the mortgage payments and pay off other debt and expenses instead. "It gives them more options and flexibility with decision-making at a time that tends to be very high in emotional stress," Webb says.
Underwriting is another factor when deciding between mortgage and term insurance. Mortgage insurance is underwritten at the time of claim. That means the financial institution won't take a really good look at your application until after you died. If for whatever reason, the insurers don't like the health assessment, the insurers can "just deny your claim and not forgive the mortgage. It doesn't happen all the time but it does happen," Webb says.
With term-insurance policies, underwriting is completed when you apply for the product. You have a medical, fill out a lengthy questionnaire and the premiums you pay are based on that. Once approved, your policy is guaranteed to pay your heirs.
There's also the issue of cost. In many cases it's cheaper to get a term policy than the mortgage insurance. So for the same premiums, you likely will be able to get more term insurance for your buck. That's a huge selling factor since that policy amount will not decrease, says Webb.
Once you've purchased your home, you'll need to investigate home-insurance policies. A policy will value not only the physical property you own but also the contents inside the home such as furniture, computers, paintings and jewellery, says Ian Morris, partner with Jones Deslauriers Insurance Management Inc.
Morris adds that many people are surprised the value of the insurance policy is not the same as the home's purchase price. "They are not linked together at all," he says.
Your insurance policy is all about what it costs to rebuild the home since you already own the land. For example, if you paid $1 million for a house in Toronto, it may cost only $500,000 to rebuild the property, Morris says. "Outside of bigger cities, it's usually the other way around," he notes. "It may cost more to rebuild the house than what they bought the house for."
To qualify for home insurance, you may need to upgrade certain things in your newly acquired home, or ensure they are taken care of before you take possession. Some insurance no-nos include knob-and-tube wiring and lack of handrails on staircases.
Water damage is the most common home-insurance claim, Morris says, but that doesn't mean it will automatically be covered. "You have a responsibility to mitigate your loss and perform upkeep," he says. If your basement is flooded because you didn't maintain your foundation or regularly clean out your eavestroughs, you're probably out of luck. But if your sewer backed up, that's likely to be insured if you selected it as part of your policy coverage, Morris explains.
If you've bought a home and plan an addition, Morris says you'll need builder's risk insurance, which will insure that part of your property against damages and construction mishaps.
Finally, Morris says title insurance protects you against errors on the property like liens or title fraud. It's typically sold to you by your real- estate lawyer and is a one-time payment when you buy the house.
Tuesday, April 16, 2013
EXTRA COSTS In HOME BUYING
Stepping across the great divide between renting and owning a home is the biggest financial move many Canadians will ever make. Before signing any purchase offer, it's essential that prospective buyers understand the costs involved, and know how they will finance the purchase. Doing your homework on home-buying costs and financing before you buy will mean less stress and more enjoyment as a home owner.
Besides the purchase price, buying a home entails a surprising number of additional expenses. There are the professional fees and disbursements for a real-estate lawyer, a home inspector and, in the case of a house purchase, for a property surveyor if the seller does not provide an up-to-date survey.
Arranging a mortgage usually involves property appraisal and loan-processing fees and, for a mortgage representing more than 80% of the purchase price, the premium for default insurance from the Canada Mortgage and Housing Corporation. Property insurance must be in place before the closing date and you will need title insurance.
The tax hit on a home buyer is steep, although some tax relief may be available for first-time buyers. You will pay provincial, and sometimes municipal, land-transfer tax based on the purchase price. If your home is newly built or substantially renovated, GST/HST applies to the sale, and you may be charged a new-home-warranty premium and development fees and levies. As well, there is GST/HST to pay on any goods and services related to the purchase.
Home-closing costs include adjustments to reimburse the seller for costs they have paid that apply to your ownership, such as pre-paid property taxes. There are also the usual relocation expenditures such as utility transfer and connection charges, mail-forwarding fees and moving costs.
Any planned renovations must be factored into your budget. Make sure to include a contingency fund of at least 10% to cover unforeseen costs.
As you settle into your new home, there may be expenses incurred for new appliances, paint and window coverings and other decor, landscaping and home maintenance.
How will you pay for all this? Most buyers use a combination of savings and mortgage money. A tax-free savings account is an excellent place to save money for a down payment. Your savings grow and there is no tax owed on any profits earned within your TFSA.
If you are a first-time buyer, your RRSP could be a source of home-buying cash. Under the federal government's home buyer's plan (HBP), you and your spouse could each borrow up to $25,000 from your respective RRSPs to buy or build a qualifying home that will be your principal residence. At least one-fifteenth of the loan must be repaid each year. Any missed annual payments are deemed taxable income for that year.
Before signing up for an HBP, take the time to understand its many rules. If you do participate, be aware that the process for accessing the funds could take several weeks.
Some individuals are fortunate enough to have parents, other family members or friends willing to give or lend them money toward purchase of a home. The terms of any gift or loan (amount borrowed, interest rate, repayment schedule, etc.) should be formally documented to protect both the borrower and the lender and avoid any misunderstandings.
Buyers should aim for a down payment of 20% or more of the selling price to avoid the extra expense of mortgage-default insurance. The rest of the required funds will come from a mortgage on the new home.
Finding the right mortgage can be a daunting task. There are many potential lenders (not just the big banks) and the many features and options available are constantly changing. Hiring an independent mortgage broker to shop on your behalf is likely to yield the best mortgage for your personal circumstances.
There is usually no direct cost for the broker's service and you avoid spending hours searching for a mortgage. Look for a well established mortgage brokerage that is suitably licensed by the financial regulator in your province, and ask to deal with an experienced agent.
Friday, February 15, 2013
INVESTING--YOUR "CIRCLE of COMPETENCE"
Because overconfidence is so pervasive and dangerous, most investors should ask how they 'know' they can beat the market.
According to a study by hedge fund firm AQR, Warren Buffett's stock portfolio, estimated from Berkshire Hathaway's BRK.B quarterly filings, beat the U.S. stock market by about 2.4% annualized from 1991 to 2011. Among large-cap U.S. equity mutual funds sold south of the border, the highest-returning over that period, Calamos Growth, beat the S&P 500 by about 4.5% annualized. Here in Canada, none of the 16 mutual funds in the U.S. Equity category that were around for that long beat the Canadian-dollar version of the index.
Even if you are very good -- among the best -- you can reasonably expect only a few percentage points of extra return over decades-long spans in a highly competitive market like U.S. large-cap equities.
Why, then, do investors spend so much effort trying to be clever, neglecting the fundamentals? Keeping bonds in tax-sheltered accounts likely adds more value than trying to find the next Apple . The all-consuming quest for alpha is a symptom of overconfidence. More specifically, it is a failure to stay within one's "circle of competence."
I believe this is a big reason many investors fail to achieve their investment goals. Most investors stray outside their circles. I did it myself when I first started investing. I bought shares of Bank of America without even knowing how to intelligently analyze financial statements and the competitive dynamics of the banking industry. I had no business picking individual stocks then, and I have no business picking them now. There are a lot of incredibly smart people picking individual stocks full-time, and they say it's hard. I believe them. I'd feel presumptuous thinking I can do it better with a less-than-full-time effort.
This is not to say you shouldn't own individual stocks or bonds. If you have good reason to believe you have an edge, or if you can afford to lose the money, go for it. But I certainly wouldn't plan my retirement on my ability to outsmart the market. What are your advantages? Most investors don't have many. I can think of two sustainable ones:
1) You're not constantly being measured against a benchmark, which frees you to pursue long-term opportunities.
2) You have a small capital base (relative to professional money managers) which opens up less-liquid, more lucrative opportunities.
These edges will always exist, even though everybody knows about them. Professional investors will always control the majority of assets, and they will always be measured quarter by quarter. The pros often can't be patient enough to ride out bubbles and swoop in to buy during terrifying times like the financial crisis. Good investors almost by definition compound assets quickly, and other investors like to give them their money to manage, so good investors' capital bases tend to outgrow small, illiquid opportunities. There's hope for the brave and clever individual investor. Unfortunately, it looks like most individuals don't exploit their advantages.
After surveying the available literature on individual skill, I don't think there's enough data to know with confidence the percentage of skilled individual investors. Considering how few professional investors beat their benchmarks over the long run, I reckon skilled individual investors are even rarer -- below 5% of the population. Warren Buffett thinks this figure is below 1%.
I believe if you are realistic, you will have a pessimistic view of your own skill, even if you've had years of success. AQR founder Cliff Asness said, "Seriously, anyone, quant or not, with a shred of intellectual honesty recognizes that there is some chance their historical success is just luck." Because overconfidence is so pervasive, I think most investors should ponder how they "know" they can beat the market. I wrestled with this question, and I found it helpful to first assume I knew nothing.
From ignorance
What kind of strategy should an investor with no idea about his own skill pursue? A good case can be made for choosing to make the worst-case scenario as harmless as possible.
With this goal in mind, the first concern for the investor behind the veil of ignorance should be to minimize the chance of being exploited. We've all seen how celebrities and athletes attract swindlers who do a much better job transferring client assets to themselves than managing money. It happens to individual investors, too, though on a petty scale. A few precautions can mitigate this risk: 1) avoid commission-based salespeople; 2) don't buy opaque, complicated, illiquid investments; and 3) deal with people (and firms) with reputations to protect.
Now you can turn to mitigating worst-case market risk, which can be defined as substantially earning below-average returns. An investor can guarantee an above-average return by owning the market-weighted portfolio at a low cost. What does this portfolio look like? A recent study estimates the total world market portfolio as of the end of 2011 was about 55% fixed income, 35% equities and 10% alternatives. Because most alternatives -- hedge funds, private equity and so forth -- repackage equity risk, the portfolio can be approximated by a 50/50 stock-bond allocation. A good know-nothing portfolio, taking into account liquidity, availability and cost, would simply be a 50/50 split between Vanguard Total World Stock Index ETF VT and Vanguard Total Bond Market ETF BND .
Besides guaranteeing above-average returns, the market portfolio has another attractive trait. During bull markets, investors convince themselves they're really in it for the long run, so they overweight equities. When the inevitable bear market arrives, they pull their money out in a panic, permanently harming their intrinsic wealth. The 50/50 portfolio's low volatility reduces the risk of perverse market-timing.
Deviating from the know-nothing, market-weighted portfolio means either 1) you're different from the average investor (due to tax circumstances, investment availability, personal traits and so on); or 2) you think you know more than the market. The former is perfectly fine; the latter is a tough game to play. Every investor should understand this distinction.
To knowledge
The best investors talk about being keenly aware of what they know and don't know. Mediocre or dishonest investors pretend they know. Bad investors don't even know they don't know. I propose that we strive toward becoming more like Warren Buffett and Ray Dalio and less like the pundits in the media.
To that end, I have several pieces of advice:
1) Avoid having individual securities make up a big portion of your retirement fund unless you are very confident in them or locked in with lots of unrealized capital gains (unless you're in a tax-sheltered account, of course).
2) Markets are highly random. Be skeptical of people who discount this fact or admit no fallibility.
3) Keep expenses of all kinds razor-thin. In a world where Warren Buffett's stock portfolio beats the market by 2.4%, you should think twice about paying more than 1% in fees.
4) A good active manager or process can produce bad outcomes, and a bad manager or process can produce good outcomes--for years on end. You can't really tell whether someone's good or bad simply by his short-term performance. Judge process over outcome. If you can't judge the process, then you should probably avoid the strategy.
Why, then, do investors spend so much effort trying to be clever, neglecting the fundamentals? Keeping bonds in tax-sheltered accounts likely adds more value than trying to find the next Apple . The all-consuming quest for alpha is a symptom of overconfidence. More specifically, it is a failure to stay within one's "circle of competence."
I believe this is a big reason many investors fail to achieve their investment goals. Most investors stray outside their circles. I did it myself when I first started investing. I bought shares of Bank of America without even knowing how to intelligently analyze financial statements and the competitive dynamics of the banking industry. I had no business picking individual stocks then, and I have no business picking them now. There are a lot of incredibly smart people picking individual stocks full-time, and they say it's hard. I believe them. I'd feel presumptuous thinking I can do it better with a less-than-full-time effort.
This is not to say you shouldn't own individual stocks or bonds. If you have good reason to believe you have an edge, or if you can afford to lose the money, go for it. But I certainly wouldn't plan my retirement on my ability to outsmart the market. What are your advantages? Most investors don't have many. I can think of two sustainable ones:
1) You're not constantly being measured against a benchmark, which frees you to pursue long-term opportunities.
2) You have a small capital base (relative to professional money managers) which opens up less-liquid, more lucrative opportunities.
These edges will always exist, even though everybody knows about them. Professional investors will always control the majority of assets, and they will always be measured quarter by quarter. The pros often can't be patient enough to ride out bubbles and swoop in to buy during terrifying times like the financial crisis. Good investors almost by definition compound assets quickly, and other investors like to give them their money to manage, so good investors' capital bases tend to outgrow small, illiquid opportunities. There's hope for the brave and clever individual investor. Unfortunately, it looks like most individuals don't exploit their advantages.
After surveying the available literature on individual skill, I don't think there's enough data to know with confidence the percentage of skilled individual investors. Considering how few professional investors beat their benchmarks over the long run, I reckon skilled individual investors are even rarer -- below 5% of the population. Warren Buffett thinks this figure is below 1%.
I believe if you are realistic, you will have a pessimistic view of your own skill, even if you've had years of success. AQR founder Cliff Asness said, "Seriously, anyone, quant or not, with a shred of intellectual honesty recognizes that there is some chance their historical success is just luck." Because overconfidence is so pervasive, I think most investors should ponder how they "know" they can beat the market. I wrestled with this question, and I found it helpful to first assume I knew nothing.
From ignorance
What kind of strategy should an investor with no idea about his own skill pursue? A good case can be made for choosing to make the worst-case scenario as harmless as possible.
With this goal in mind, the first concern for the investor behind the veil of ignorance should be to minimize the chance of being exploited. We've all seen how celebrities and athletes attract swindlers who do a much better job transferring client assets to themselves than managing money. It happens to individual investors, too, though on a petty scale. A few precautions can mitigate this risk: 1) avoid commission-based salespeople; 2) don't buy opaque, complicated, illiquid investments; and 3) deal with people (and firms) with reputations to protect.
Now you can turn to mitigating worst-case market risk, which can be defined as substantially earning below-average returns. An investor can guarantee an above-average return by owning the market-weighted portfolio at a low cost. What does this portfolio look like? A recent study estimates the total world market portfolio as of the end of 2011 was about 55% fixed income, 35% equities and 10% alternatives. Because most alternatives -- hedge funds, private equity and so forth -- repackage equity risk, the portfolio can be approximated by a 50/50 stock-bond allocation. A good know-nothing portfolio, taking into account liquidity, availability and cost, would simply be a 50/50 split between Vanguard Total World Stock Index ETF VT and Vanguard Total Bond Market ETF BND .
Besides guaranteeing above-average returns, the market portfolio has another attractive trait. During bull markets, investors convince themselves they're really in it for the long run, so they overweight equities. When the inevitable bear market arrives, they pull their money out in a panic, permanently harming their intrinsic wealth. The 50/50 portfolio's low volatility reduces the risk of perverse market-timing.
Deviating from the know-nothing, market-weighted portfolio means either 1) you're different from the average investor (due to tax circumstances, investment availability, personal traits and so on); or 2) you think you know more than the market. The former is perfectly fine; the latter is a tough game to play. Every investor should understand this distinction.
To knowledge
The best investors talk about being keenly aware of what they know and don't know. Mediocre or dishonest investors pretend they know. Bad investors don't even know they don't know. I propose that we strive toward becoming more like Warren Buffett and Ray Dalio and less like the pundits in the media.
To that end, I have several pieces of advice:
1) Avoid having individual securities make up a big portion of your retirement fund unless you are very confident in them or locked in with lots of unrealized capital gains (unless you're in a tax-sheltered account, of course).
2) Markets are highly random. Be skeptical of people who discount this fact or admit no fallibility.
3) Keep expenses of all kinds razor-thin. In a world where Warren Buffett's stock portfolio beats the market by 2.4%, you should think twice about paying more than 1% in fees.
4) A good active manager or process can produce bad outcomes, and a bad manager or process can produce good outcomes--for years on end. You can't really tell whether someone's good or bad simply by his short-term performance. Judge process over outcome. If you can't judge the process, then you should probably avoid the strategy.
Wednesday, May 11, 2011
CLOSING COSTS-BIG PART OF HOME BUYING
Hidden costs seem to be an unpleasant fact in business these days and they apply to the real estate and mortgage industries as well.
The issue of hidden costs may be more critical for first-time home buyers because they’re generally green when it comes to matters of real estate. Also, they tend to have the bare minimum down for that first home, so costs that are hidden or extra may be even more overwhelming for them.
For example, on fixed-rate mortgages – the kind obtained by two-thirds of Canadians – there are “shocking” hidden costs to those who need to pay out their mortgage early, says independent Toronto mortgage planner David Larock. “You may be shocked when you see the penalty charged by your lender,” he says, “and even more so when you realize that you could have avoided most of that cost by simply choosing another lender offering the same interest rate.”
As it now stands, the major banks can get away with big penalties because they do not have to disclose their method of calculating mortgage penalties, says Larock. While these penalties – Larock says they are often double or more that of other lenders – don’t surprise him, it’s the customers, who assume the banks are giving them fair terms that do.
Sukkau recently experienced this “hidden cost” issue when listing the home of a young military couple in Niagara. A transfer prompted the need to sell their home and Sukkau hoped the bank might show clemency on the penalty given that the couple was moving to a military base in an effort to serve the country. That, however, didn’t happen. The couple had to pay the bank a $7,500 penalty and because they didn’t have enough equity in the house, the couple took their home off the market and decided instead to rent it out.
“It did adversely affect them,” says Sukkau of her clients. “It’s an excellent, but unfortunate, example of a hidden cost that home buyers wouldn’t be aware of. I think its something that will become more of an issue. We may see CREA (Canadian Real Estate Association) picking up on this as a lobbying item. The penalties are awfully high. When you think about it, is it a fair way to treat consumers?”
Closing or hidden costs vary depending on the price of the property, but are generally estimated to be 3 or 4 per cent of the purchase price. Expect to recommend that clients should earmark at least a few thousand dollars for these costs.
Here, thanks to CMHC, the Manitoba Real Estate Association and the Nova Scotia Association of Realtors, is a list of more unusual or lesser-known costs:
Mortgage application fee --Some lenders may charge a fee to process your mortgage application. However, with the highly competitive nature of the mortgage industry, many will waive the fee entirely, especially if you have other accounts with them.
Mortgage broker's fee -- If you use a mortgage broker to find you a lender, you may be charged a fee which is payable at the time of closing when the mortgage transaction is complete. In many cases, brokers are paid directly by the lenders, so you should ask the mortgage broker about who pays the fee.
Mortgage insurance -- If you have a high-ratio mortgage, the government requires that it be insured against default and that you pay the cost of insurance. The cost to you ranges from .51 to 2.90 per cent of the mortgage amount and is added to the mortgage principal.
Property and title insurance - Besides high-ratio mortgage insurance, mortgage lenders require your client to have property insurance in place. This insurance covers the cost of replacing the structure of your home and the premiums depend on the value of your home, according to CMHC. The lender may also recommend title insurance. For a home worth $500,000, the cost would be about $350
Appraisal fee -- While it’s beneficial to know how much any prospective house your client is looking at is worth in order to negotiate price, home appraisals are also used to protect the lender’s interests. It’s likely a lender will ask for a recognized appraisal in order to complete a mortgage. Usually, the cost of an appraisal ranges from $250 to $350. However, some lenders will pay for the appraisal fees to get the business.
Home inspection -- an independent look at the house and property can cost in the $350-500 range for most single-family homes. Home inspections are recommended to identify if there are any other potentially costly expenses – issues not visible to the naked eye – that may impact the costs and upkeep of the home.
Property survey -- always a good idea, but not always carried out. A land surveyor can make sure the buyer is getting the property they think they are buying. A surveyor can properly install property markers on the corners of the lot. With those, the buyer will precisely know the boundaries.
Water testing -- for properties not on a municipal water system, most - if not all - financing institutions require the water source to be tested to ensure it meets standards for human consumption. Some areas also have compounds in the water the prospective buyer may wish to know about.
Status certificate fee -- When making an offer to purchase a condominium, it’s a good idea to ensure an offer is conditional upon obtaining and having time to review an Status certificate. This fee (not applicable in Quebec) applies when buying a condominium or strata unit and could cost up to $100.
Land transfer tax -- Land transfer tax is specific to each province and is a percentage of the purchase price, usually 0.5%. However, provinces such as Alberta and Saskatchewan have no land transfer tax, while others offer a full or partial exemption for first-time buyers.
Legal Fees -- A lawyer will help protect your clients legal interests and negotiate the terms of any offers made. Legal costs will depend on the complexity of the transaction and the lawyer’s experience.
Prepaid property tax or utility bills -- If a closing date is mid month, a seller may have already prepaid taxes or utility bills. Buyers should be prepared to reimburse the seller for prepaid property tax and utility bills should they request it.
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