Saturday, September 19, 2009

Canadians investing in US real estate - learn the facts before heading south

From my CBC radio national column, September 17, 2009:

As we anticipate another chilly winter, Canadians may be tempted to play let's make a deal on U.S. real estate. Should you play or walk away?

We've all heard the reports. The Canadian dollar continues to climb toward parity with the U.S. greenback, while American real estate is stuck at rock bottom. So with winter approaching, who could blame you for thinking it's the perfect time to swoop in on some property in the sunny south. But before you do, here's some words of advice for would-be buyers.

We've heard this week that home prices are up in many parts of Canada. What's the U.S. real estate market looking like these days?

There have been huge dips in U.S. home prices over the past couple of years-especially in the south.

Home prices in Las Vegas for example have dropped by more than fifty per cent from their August 2006 peak. Prices in Phoenix are down just about the same amount.

With numbers like these, it's no wonder some Canadians are taking note. It's tempting, especially with our strong loonie allowing a buyer to get more bang for their buck than in the past, but there's certainly more to the story.

The head of the U.S. federal reserve, Ben Bernanke, said this week that the recession may have come to an end south of the border. Some might think that's a signal to buy now, before prices start to climb again. What's your take?

Although there have been recent reports of modest increases, the U.S. real estate market is still volatile.

According to the Wall Street Journal, home prices could drop again as job losses drive foreclosures higher. Mortgage defaults and foreclosures aren't likely to peak until unemployment ebbs.

Even when the U.S. economy starts to grow again it will take a while for job creation to kick in. That's why many experts say it really is too soon to see this juncture as a turning point.

Recently, I spoke with Canadian real estate expert, Don Campbell, president of the Real Estate Investment Network He warns that people must look at the precarious financial situation of many U.S. homeowners.

Close to a quarter of mortgage holders in the US are upside down on their mortgages. That means they owe more on their mortgage than the property is worth. That was as of the second quarter of 2009. So they're very recent numbers.

And according to Deutsche Bank this figure could double, with almost 50 per cent of mortgage holders being under water by the first quarter of 2011.

Finally, a Globe and Mail article a few weeks ago, said that $3.4 trillion worth of US houses are at risk of default. So prices could drop still further.

That's a strong cautionary note. What else should potential buyers be aware of?

Three additional considerations: residency, health care and taxes should be other major considerations.

1. First, you can't simply up and move to the US.

There's a 183 day rule for visitors. Non citizens can't be in the U.S. for more than six months of the year.

So, what will do with that property the rest of the year? Rent it out, pay someone to maintain it? Consider the utilities and up keep needed.

2. Then there's the fact that you'll need health insurance when you're there. And what if you have a health issue that stops you from visiting your property at all?

3. And then last but never least, there's the tax issue. A Canadian who owns US real-estate will face capital gains taxes in both countries, when they eventually sell. Individual states also levy taxes of their own, and then there are estate taxes to consider, if the place as to be sold after a death.

All these issues depend on your personal tax rate, the state in which you buy and the cost of the property.

Added together, these factors add up to a complex buying decision.

What about trying to arrange financing in the US. What should people be aware of there?

If you're looking to the US, you may well have to come up with your own financing from Canada - don't expect to get a loan down there.

Final words of advice

Here's another thing to consider. Whenever you buy in another country, currency risk come into play. If our dollar continues to rise against theirs, you'll need to earn much more on your actual investment to get ahead.

Here's some additional words of wisdom from Don Campbell. He points out with no health care issues here at home, low interest rates, some deals still to be had on real estate here, and with better fundamentals in place, Campbell urges those interested in investing in real estate to look here first before ever being tempting to do so down south.

If, after all this is taken into account and you're still eager to escape the Canadian winter, you might consider renting. After all, it's a great deal with no risk.

Tuesday, September 15, 2009

Reverse mortgages - advantages and disadvantages

From my CBC radio national column, September 10, 2009:

You’ve probably seen them…those commercials telling seniors that thanks to their paid-off home, they’re sitting on a gold mine. Why not take a vacation, put the grand kids through school or help your kids with a down payment on a home of their own. The products these ads are promoting are called reverse mortgages, and here you'll find the straight goods on them.

So what exactly is a reverse mortgage?

  • They’re an option for homeowners over the age of 60 years old.
  • A senior is able to tap into the equity in the home up to 40% of its value.
  • The ads are targeted at people who have already paid off their homes (although you can still qualify if you have an existing mortgage.)
  • People taking out a reverse mortgage don’t make any payments unless they sell or move. Repayment would also be required in case of death. or pass away.
  • The amount a person receives can be paid in a lump sum or even monthly or annual instalments.
  • The company that most people know is CHIP, or Canadian Home Income Plan. But there’s another firm that offers reverse mortgages, called Seniors Money.

I must stress the fourth point that yes, you don't make a payment during the life of the reverse mortgage (unless you sell, move or pass away) and thus interest is compounding during that time period. This is the lure of the reverse mortgage but it needs to be fully comprehended by the senior that the longer the reverse mortgage is in place, the more it's depleting equity in your home.

Why would someone consider this strategy?

This might have appeal to cash-strapped retirees. If someone wants to stay in their home and simply doesn’t have the monthly income to manage the bills, wants to renovate their home, perhaps needs money for home care assistance, it could be an option worth considering.

What the experts have to say about reverse mortgages

I had last week with PJ Wade. She’s the author of Reverse Mortgages: Best Friend, Worst Enemy...Your Choice!. As an expert on the subject, she stressed that education is key. She points out that many seniors don’t realize that, while a reverse option might end up being the right choice for them, there are other options they should know to consider first. She suggested that seniors start by looking five years into the future.

So five years before they think they might need to tap into the value of their home, seniors should gather all available information on the options to them—everything from reverse mortgages to home equity loans.

This way if someone tries to sell them on a product like a reverse mortgage down the road or a desperate need comes along, they’ll be well prepared. We generally don’t make good, informed decisions when we’re stressed or under pressure.

The other thing to think about is inheritance. Maybe you want the value of the home to go to your children down the road or maybe that’s not a priority. But it should be thought about in terms of your advance or estate planning.

Consider that the sales pitch for these products is often "well, in theory your home will increase in value as the interest is accrued, so you could actually not dip into your equity at all." Sure, that's possible, but we all know that "in theory" and "in reality" are two very different things. We've also seen housing prices slashed in many provinces.

What do some other financial professionals have to say about reverse mortgages?

The big criticism of reverse mortgages are the fees involved.

Besides PJ Wade, I also spoke with Keith Costello, President of the Canadian Institute of Financial Planners. He cautions the high fees that exist with reverse mortgages including closing, appraisal, legal and administrative costs. These are all upfront costs. So you have to be aware of the fact that these fees will be taken right off the top of the amount they give you.

I called CHIP myself and asked about fees.

First there’s a fee of $1,495, that includes their legal and administration costs. Anyone arranging a reverse mortgage will also need to pay a lawyer – that cost of that typically ranges from $300-600. And lastly, there's an appraisal, which is also out of pocket - they range of $175-400.

Also, the interest rate on reverse mortgages tends to be higher than what you would negotiate for a traditional mortgage with your banker (see rates below.)

Finally as with any loan, which is really what a reverse mortgage is, the responsible use of the money is really important. What if all the funds are used on vacations and other spending and the senior out lives that money?

As a precaution, Mr. Costello, suggests that although you might be able to get up to 40% of the value of your home, ONLY take what you need.

What other options exist?

There are lots of other options that might exist including a line of credit or traditional mortgage with your bank if you have the cash flow to cover the payments.

Or you could consult a CFP might be able to help you restructure your investments to free up cash flow.

And when it comes to needing funds to renovate, a reverse mortgage might make sense if the money is being used to increase the overall value of the home and your enjoyment of living in it. But seniors should also remember that there might be some government grants out there that could pay or help them pay for things like windows and furnaces for example.

Would I recommend my mother take out a reverse mortgage?

As with any product, there’s no good or bad out there, it’s what’s good or bad for one’s situation.

If she had no other option, desperately needed the money and no other sources existed and she was adamant about staying in her home, then maybe yes. But, having said that, I would advise her that it should be a last resort option, not a quick fix as the commercials portray due to the high costs up front and compounding interest over time.


More CHIP facts:
-they do have approx 7,000 rev. mortgages on the books
- totalling approx $833 million dollars
-their rates as of September 9 were more than RBCs for example
-As of Sept 10th, 2009 - CHIPs rates - 5.3 for variable, 6mth is 6.25, 1 year is 5.95, 3 year is 6.95 and 5 year 7.50

RBC's rates for example (Sept 10th, 2009 posted rates)
6 Month 4.55% 4.05%
1 Year 3.70% 3.20%
2 Year 3.85% Call for details
3 Year 4.35% Call for details
4 Year 4.94% 3.89%
5 Year 5.49% 4.19%

Monday, September 7, 2009

Advantages and disadvantages of using a mortgage broker

From my CBC radio national column, September 3, 2009:

To use a mortgage broker or not to use a mortgage broker? Once you've got that dream house picked out, here's some advice on how to pay for it .

There was news last week that the federal privacy commissioner is investigating a number of mortgage brokers because of the way they may be treating client information. So today we're looking at the advantages and disadvantages of using a mortgage broker. Here's everything you need to know before you sign on the dotted line.

The mortgage broker sector has grown in recent years

Once fairly rare, the use of brokers has become a lot more common, especially among younger, first-time buyers.

While mortgage brokers are responsible for about 30 per cent of the mortgage business in Canada, a CMHC survey from earlier this year showed that 44 per cent of first-time
buyers used mortgage brokers in 2009. Compare that to 35 per cent in 2007.

So the share of the $235 billion mortgage market handled by brokers is clearly growing.

Advantages of using a mortgage broker

There are many reasons for using a mortgage broker.

First, they can shop your mortgage to all of the big banks, non-traditional and event private lenders, so that raises the competition for your business.

Second, by pulling your credit report only once, they can shop your deal to numerous institutions without hurting your credit score.

Lastly, their marketed advantage is that they'll do the rate negotiation for you. If you have good credit, a stable job with good income numbers - basically, all the criteria the big banks are looking for and don't have the time or inclination to haggle with the banks over your interest
rate, then they can be a great idea. You know you're getting the best rate they can find.

That makes mortgage brokers sound like they could be a good option for many people. So why has the privacy commissioner decided to take a closer look at the business?

According to a Globe and Mail report out early this week, the privacy commissioner is auditing a number of mortgage brokerages because of concerns about the security of borrowers' personal financial information. The audit, which began this month, is looking into possible misuse of consumers' information. The commissioner is concerned about the potential for identity theft and fraud if this information ends up in the wrong hands, which is a serious issue. Here's a link to the Globe article -

We've all heard about the sub-prime mortgage crisis in the US, with some of the blame being placed on overzealous brokers. So what should you look for if your considering using a mortgage broker for the first time?

Most mortgage brokers are above board. And many are in favour of tough privacy rules in order to protect the integrity of their industry.

Still you have to protect yourself. And if the main reason you're considering using a mortgage broker is that you're not an ideal candidate for a conventional mortgage at a Schedule one bank - that's the big guys that have to follow the rules of the bank charter--you should know that the broker may end up presenting ideas for private mortgage options, some that could be defined as sub prime.

This might seem like a good thing, because at least you're getting access to credit. But even though as a eager home owner you just want to get your hands on that house now, you need to step back and ask, at what cost?

Getting into a mortgage like this can be extremely expensive with high fees and interest rates.
So although home ownership is a worthy goal, not at any prince. And remember, the job of these individuals is to get you into a mortgage, period.

Anything else to keep in mind?

Yes, it's important to remember that you may not be getting a full selection of quotes. For example, the Bank of Montreal recently decided to stop offering its mortgages through mortgage brokers. This wasn't due to a specific problem with specific mortgage brokers; it was more of a
strategic decision about how they would sell their products. So you should know you're not going a full sense of what's available if you limit your mortgage shopping to one broker.

How should someone proceed if they want to do their own mortgage shopping?

First, get a copy of your credit report and score. You can do that for around $24 bucks at or With your score in hand, when you shop around at the different banks, you can tell them that you're not wanting to go through the approval process just yet. If your banker has your score and basic details such as income, net worth, etc. they can give you an idea of what rate they'll give you and if you'd be approved. Once you decide on a bank to deal with, they will have to pull your credit report, but by bringing it in yourself and asking doing a "pre approval" interview, you won't have a bunch of banks pulling your report and pulling down your score.

Some final tips for mortgage shoppers

Get on the internet before you call your banker and be armed with the best rates on the market. Remember, like everything else in your financial life, your mortgage is negotiable. Just asking for a simply rate reduction from your bank can save you thousands And don't feel you have to use the mortgage broker recommended by your real estate agent.

If you do choose to opt for a mortgage broker, I'd suggest calling up a Certified Financial Planner for some referrals. Unusually these pros have vetted a few and always shop around. A CFP isn't generally allowed to be paid a referral fee, so, they're likely to give a more honest referral. Plus, they have no vested interest in getting the deal approved, while the real estate agent does.

Before you even apply for a mortgage with these folks, get the bottom line costs to you, their fee, hidden fees, the interest rate and details if the deal will be with a sub-prime lender.

Saturday, September 5, 2009