CANADIAN HOMEOWNERSHIP COSTS EASE FOR SECOND CONSECUTIVE QUARTER: RBC ECONOMICS

This is great news.

TORONTO, Feb. 24 /CNW/ – Canada’s housing affordability continued to improve in the fourth quarter of 2010, thanks in part to slight decreases in five-year fixed mortgage rates and minimal home price appreciation across the country, according to the latest Housing Trends and Affordability report released today by RBC Economics Research.

“Some of the stress that had been building in the housing market between 2009 and the first half of 2010 has been relieved, but tensions persist overall and the recent improvement in affordability is likely to be short-lived,” said Robert Hogue, senior economist, RBC. “We expect that the Bank of Canada will resume its rate hike campaign this spring and with borrowing costs set to climb further in the next two years, housing affordability will erode across the country. That said, we don’t expect this to derail the housing market because of rising household income and job creation from the sustained economic recovery.”

The RBC Housing Affordability Measure captures the proportion of pre-tax household income needed to service the costs of owning a specified category of home. During the fourth quarter of 2010, measures at the national level fell between 0.4 and 0.8 percentage points across the housing types tracked by RBC (a decrease represents an improvement in affordability).

The detached bungalow benchmark measure eased by 0.8 of a percentage point to 39.9 per cent, the standard condominium measure declined by 0.4 of a percentage point to 27.6 per cent and the standard two-storey home decreased 0.4 percentage points to 46.0 per cent.

“We expect affordability measures will rise gradually in the next three years or so while monetary policy is readjusted, but will land softly thereafter once interest rates stabilize at higher levels,” added Hogue. “This pattern would be consistent with moderate yet sustained stress on Canada’s housing market. Overall, the era of rapid home price appreciation of the past 10 years has likely run its course and we believe that Canada has entered a period of very modest increases.”

A majority of provinces saw improvements in affordability in the fourth quarter, most notably in Alberta where falling home prices once again contributed to lower the bar for affording a home. Only the standard two-storey benchmark became less affordable in Ontario and Quebec, as did the standard condominium apartment in Quebec and the Atlantic region.

RBC’s Housing Affordability Measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 68.7 per cent (down 0.4 percentage points from the last quarter), Toronto 46.8 per cent (down 0.5 percentage points), Montreal 41.3 per cent (down 0.4 percentage points), Ottawa 38.7 per cent (up 0.5 percentage points), Calgary 34.9 per cent (down 3.1 percentage points) and Edmonton 31.0 per cent (down 2.4 percentage points).

The RBC Housing Affordability Measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market in Canada. Alternative housing types are also presented including a standard two-storey home and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.

Highlights from across Canada:

  • British Columbia: Buying a home in B.C. became slightly more affordable in the fourth quarter of 2010, due primarily to a small drop in mortgage rates. After experiencing some declines in the previous quarter, home prices rose modestly for most housing categories; condominium apartments bucked the trend, however, and depreciated slightly. Prices were supported by a tightening in market conditions with home resales picking up smartly following substantial cooling in the spring and summer that saw sellers lose their edge in setting property values. Demand and supply in the province are judged to be quite balanced at this point. RBC’s Affordability Measures fell between 0.8 and 1.0 percentage points in the fourth quarter which came on the heels of much more substantial drops (1.7 to 4.8 percentage points) in the third quarter. Notwithstanding these declines, affordability remains poor and will weigh on housing demand going forward.
  • Alberta: Alberta officially became the most affordable provincial market in the country in the fourth quarter, according to the RBC Measures which fell once again by 1.0 to 2.4 percentage points, extending their declines since late-2007. In addition to the lower mortgage rates, the further depreciation of home prices contributed to lowering homeownership costs. Property values were negatively affected by a substantial downswing in demand in the spring and early summer, which put buyers in the drivers’ seat. The significant improvement in affordability is near the end of its line, however, as demand has shown more vigour in recent months – alongside a provincial economy that is gaining more traction – and the market has become better balanced. RBC expects that this will stem price declines this year, thereby removing a potential offset to the negative effect of projected rise in interest rates on affordability.

ORES Real Estate Index For January 2011

COMMENT: This is a very cool index I found that compares most investments to real estate. It is interesting right now as gold is at an all time high, oil is back up and Canadian real estate has held most of its value and is coming back.

Wednesday, 16 February 2011 10:09
Brian Madigan LL.B.

Here is the “ORES REAL ESTATE INDEX” which tracks the average resale prices of single family homes and condominiums in the Greater Toronto Area (GTA). It also tracks certain benchmark comparisons such as the price of oil and gold, as well as the Consumer Price Index.

In addition, the stock market indices for Toronto, and the three largest US markets are also compared.

For ease of comparison, everything we look at is worth 100 points on the Index as of 1 January 2005. That time period compares favourably with the five year average used as a standard benchmark comparison in the mutual fund industry.

As of 31 January 2011, here is the Index representing average prices:

Real Estate

132.15…..GTA single family homes
130.87…..All condos in GTA
139.34…..Downtown Central Condos
122.53…..East condos
131.35…..West condos
124.97…..North condos

Other market comparisons

310.23…..gold (price per ounce)
206.98…..oil (price per barrel)
147.24…..TSX index
132.15…..ORES Index single family homes
111.59 …..CPI index
130.92…..NASDAQ index
113.37……Dow Jones index
108.88……S&P Index

Using the Index

Just a quick note on reading the information. Have a look at the ORES Index for Real Estate (single family homes). As of the end of January, the index stood at 132.15. That’s a 32.15% increase in 73 months. That means the increase is 0.404% monthly, or it could also be expressed as 5.28% annually. The performance here is shown without annual compounding for the sake of simplicity.

The other statistics are reported in a similar fashion for the ease of comparison.

Observations (on the Index)

As we use index, there are several notable comments:
• Commodity prices are just commodity prices
• There is no other “extra return” for commodities
• The same is true for the CPI
• The CPI is a benchmark to see whether you are keeping pace with inflation, that number is 111.59 (It has been modest and appears under control)
• For a realistic performance goal, you should aim for CPI plus 3.5% annually
• Stocks provide dividends in cash or extra stock. This return is additional to that shown in the stock market indices
• The stock market Indexes only measure the survivors. So, in 2009, both GM and Chrysler would have been dropped due to the bankruptcies
• If you held GM and Chrysler, you lost everything, but two new companies moved in to replace them in the Indexes
• Real estate offers a return in terms of occupancy. You can rent out the property and receive income, or occupy the property and enjoy it yourself
• Actually, I should have mentioned that if you held gold bullion, you could sit in a room, count it, and enjoy that experience too. I’m not quite sure how to measure that. You’ll have to ask King Midas or Goldfinger!

Comparative Observations Using the New Index
• Gold was the best performer, but reached its peak of 324.61 earlier In January
• Oil was the most volatile, (yes it dropped in half over our measurement period)
• Real estate was the most stable, with solid predictable returns at about 5.28% annually
• single family homes continue to show a better overall return than condos
• Our own stock market posted reasonable gains, and is now ahead of single family homes over the measurement period, however, don’t forget that the TSX is still well off its highs
• All three US stock market indicators now show positive numbers.
Conclusion

For steady, predictable, measured gains pick real estate. It’s a solid performer with lower risk (less volatility) and generally moving in a positive direction.

And remember, when it comes to real estate, it’s never “wiped out” completely, like GM or Chrysler stock. So, unless you’re sitting on the edge of a tsunami, you’ll still own something when the storm is over.

For a benchmark of success, there’s 1,000 years of history to point to a rate of return in real estate being about the equivalent of 5% per annum, simple interest (non-compounded). That means that real estate doubles in value every 20 years. There are a lot of companies (now bankrupt, including CanWest Global, and many US Banks) that would have been happy with that return.

‘Window closing’ on ultra-low mortgage rates

Tim Shufelt, Financial Post · Monday, Feb. 7, 2011

Amid the noise of volatile-but-improving economic indicators, mortgage rate hikes are likely to repeat like a chorus in the coming months.

Canadian banks are raising interest rates on mortgages, marking the beginning of a trend as they correlate with rising bond yields and expected monetary tightening.

That’s making a strong case for borrowers to lock into fixed rates before it’s too late, said Benjamin Tal, deputy chief economist with CIBC World Markets. “The window is closing.”

TD Canada Trust and CIBC both announced Monday hikes to their residential mortgage rates, the first increases since changes to the rules of borrowing were announced by the federal government last month. The other big banks where expected to follow the moves shortly.

Effective Feb. 8, the interest rate on the banks’ benchmark five-year closed fixed rate mortgage will increase 25 basis points to 5.44%. The country’s other major lenders are expected to soon follow suit.

Toronto mortgage broker Paula Roberts said rising borrowing costs will compel more of her clients to abandon ultra-low variable rates in favour of higher, fixed-rate mortgages.

That can be a tough decision for borrowers to accept higher payments, but not one that should strain a mortgagee’s finances, she said.

“If you can’t afford [your payments] … that’s a problem,” Ms. Roberts said. “That’s why the government has changed the rules.”

In two stages over the past year the federal government announced changes to the conditions of mortgage lending — shortening the maximum amortization from 35 years to 30 years and requiring borrowers to qualify for a fixed-rate plan, even if they are opting for a variable rate.

Many who only qualify under the old rules, however, will try to secure mortgages before the shorter maximum amortization periods come into effect next month, Ms. Roberts said.

“There are going to be a lot of people that will enter into their agreements by March 18.”

Much of the momentum in mortgage rates can be attributed to a bond selloff and rising yields across the board. That effect is partly a reflection of building global inflationary pressures as well as a global economy that is proving more robust than expected.

“In my opinion, the bond market will not be the place to be over the next six months, and if that’s the case, you will see mortgage rates continue to rise,” Mr. Tal said.

In addition, anticipation of increases to the Bank of Canada’s benchmark lending rates is building, also contributing to rising yields, which puts pressure on fixed-income mortgages.

If there was any lingering doubt that the Bank will soon raise rates, last week’s jobs report erased them. The report showed Canada added four times more jobs than expected in January.

“[It] creates a fairly powerful story for the Bank of Canada, which is clearly concerned on the domestic front,” said Camilla Sutton, chief currency strategist at the Bank of Nova Scotia. “I think there’s a material change.”

So do investors. The probability that the central bank will boost its key policy rate by May, as measured by overnight index swaps, jumped to almost 75% after the jobs data. http://www.financialpost.com/news/Window+closing+ultra+mortgage+rates/4239243/story.html#ixzz1DMwQzyWP

Intra-provincial migration at 20-year high

Comment: This is exactly what started the boom in Calgary in 2006 when 25,000 people moved into town from all over Canada. This should drive the rental market vacancy rate down and increase rental prices. Then it will be more affordable to buy and the slack in the market will slowly get taken up; supporting home prices.

Good news for everyone in the housing industry and for home owners.

—- Nicolas Van Praet, Financial Post · Thursday, Jan. 27, 2011

MONTREAL — The number of Canadians moving to another province has punched to a high not seen in 20 years as people pack up in search of better jobs and salaries elsewhere.

Roughly 337,000 Canadians were on the move in 2010, says a report on interprovincial migration published Thursday by TD Economics. That’s 45,000 more than the year before and the most since the late 1980s. It also represents the largest share of the overall population since 1998.

“It’s a good sign in the sense that whenever you see that kind of movement, it’s an expression of a labour market that’s healing after a pretty severe recession,” said TD senior economist Pascal Gauthier, who wrote the study. “People are either returning home or moving to areas that didn’t have employment before. For those that are already employed, they’re finding potentially better prospects.”

Interprovincial migration matters because when there is a net movement of people to higher-employment and higher-productivity areas, that generates net economic output gains on a national basis. It’s also crucial for businesses because people often make big-ticket purchases when they move, which can have a significant impact on local housing and retail markets.

Canada’s situation lies in stark contrast with the United States, where census data show long-distance moves across states fell last year to the lowest level since the government began tracking them in 1948. Americans used to be a nation of big movers, with as many as one in five relocating for work every year in the 1950s. Now, experts are debating why they’ve become a nation of “hunkered-down homebodies,” as the New York Times put it.

Richard Florida, director of the Martin Prosperity Institute at the University of Toronto, says the United States is experiencing a new kind of class divide now between “mobile” people who have the resources and flexibility to pursue economic opportunity, and “stuck” citizens who are tied to places with weaker economies.

He argues the U.S. housing crisis is a big factor slowing mobility down. When the housing bubble popped, it left millions of Americans unable to sell their homes. “It’s bitterly ironic that housing, for so many Americans, has gone from being a cornerstone of their American dream to being a burden,” he wrote in a recent opinion piece.

Mr. Gauthier agrees that the housing crash is partly to blame for keeping Americans put. “There’s such a glut of supply that it’s just difficult to sell your house. In Canada, that’s not been an issue.”

In Canada, the biggest impediment to the free flow of labour between provinces and territories remains regulation as occupational requirements fall under provincial jurisdiction.

Workers in regulated professions and skilled trades, such as teachers and engineers, still face major barriers trying to work in provinces other than their own. Solving that problem will be key ahead of the looming labour force crunch, Mr. Gauthier argues.

Alberta, B.C. and Saskatchewan have seen the strongest net inflow of people of all provinces for the past three years and that will not change in the short term, the TD report forecasts. The three jurisdictions are working to implement a newly signed trade and labour mobility agreement between them that could eventually see seamless movement of workers between their borders.

TD says Ontario and Quebec will continue to lose residents to other provinces on a net basis, but the bleeding will be at a slower pace than in previous years. It says Manitoba and Prince Edward Island will be the only provinces still shedding a significant share of residents through the end of 2012.

In Manitoba’s case, it’s not that there aren’t any jobs. The province’s unemployment rate has been consistently lower than that of the rest of Canada since the 1990s. It’s that people are being lured by the prospect of higher-paying jobs in neighbouring provinces.

Top 10 Effects Of The New Mortgage Rules

top-ten-mortgage-rule-effectsWe may not go 10 for 10, but crystal ball-gazing is fun nonetheless.

In this humble of spirits, we present ten trends to watch out for in 2011, courtesy of Flaherty & Co.’s new mortgage regime:

  1. Lower purchase and refinance demand will depress mortgage volumes, sparking greater rate competition as lenders battle for less business
  2. A small portion of home buyers will sprint to buy homes with a 35-year amortization before March 18, followed by downward pressure on home prices after March 18 as the amortization reduction removes market liquidity
  3. Negative personal consumption and wealth will result thanks to equity take-out restrictions, rising rates and softening home prices
  4. Unsecured debt usage will increase as homeowners are restricted from accessing as much of their equity, leading to even greater bank profits in unsecured lending
  5. Default rates will see no material improvement
  6. No significant improvement will occur in the number of risky borrowers, due to no change in TDS limits or Beacon score requirements
  7. HELOC rate discounts will be less frequent as some non-bank offerings disappear and HELOC funding costs inch higher
  8. Banks will pick up mortgage market share
  9. More private lenders will offer high-interest uninsured 2nd mortgages to 90% LTV
  10. If amortization restrictions accelerate falling home prices, we’ll see somewhat greater default risk and more negative equity situations among low-equity homeowners

Canada Prime Stays at

Consumer Prime is at 3%. At it will stay the same as well. Nice break for us after the gov’t changes the mortgage rules the day before.

As most predicted it would, the Bank of Canada announced today it is maintaining its target for the overnight rate at one per cent.

“The global economic recovery is proceeding at a somewhat faster pace than anticipated, although risks remain elevated,” said the Bank of its decision to leave borrowing costs at one per cent for the third time in a row.
The Bank cited concerns with the pace of the European recovery due to sovereign debt as well the continued strength of the Canadian dollar and poor productivity performance.
”The recovery in Canada is proceeding broadly as anticipated, with a period of more modest growth and the beginning of the expected rebalancing of demand,” said the Bank in a statement. “However, the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high.”
Overall, the Bank projects the economy will expand by 2.4 per cent in 2011 and 2.8 per cent in 2012 – a slightly firmer profile than had been anticipated in the October MPR. With a little more excess supply in the near term, the Bank continues to expect that the economy will return to full capacity by the end of 2012.
“Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.”

Housing crash is not likely to happen in Canada.

Ben is one of the best economists around and is usually correct….

Benjamin Tal, senior economist for CIBC World Markets told delegates at the Canadian Association of Accredited Mortgage Professionals (CAAMP) conference in Montreal that the U.S. housing collapse is unlikely to rebound soon, and that it will take until 2017 for house prices to rise to the point where the average person in the U.S. is able to get out of negative equity. He said what is leading the U.S. economy right now is “a renaissance of the U.S. manufacturing sector” something being driving by emerging markets. He said Canadian companies can take advantage of this as suppliers to U.S. firms.
His advice to brokers when discussing the economy was “You can’t just discuss the Bank of Canada, You need to discuss the U.S., China and emerging economies.”
Commenting on the global economy, Tal declared “the Chinese consumer will be the most important force in the global economy for the next 10 years.” He said this is good for North America, as the Chinese are “starting to demand quality” and would buy more goods.
Tal said this recovery timeframe is critical as America’s housing market is what is driving its economy, and so this will impact other economies, as well as interest rates for mortgage holders.
Tal said he was “almost positive the [U.S. Federal Reserve] will not change rates until mid 2012” and that the Bank of Canada would not “take chances” and raise rates significantly above the U.S.
While “the next few quarters are safe” from Bank of Canada rate hikes, Tal said Canadian consumers are “exhausted” due, in part, to a 146% debt-to-income ratio, and as a result, it won’t take many rate hikes in future to slow the economy. Tal also indicated a housing crash wasn’t in the cards. For that to happen you need two things, higher interest rates and poor quality mortgages, both of which are absent in Canada. “The trend of the vulnerable sector is declining as a share of the mortgage market,” he said.

However, Tal said that if rates rise, mortgage defaults will actually drop. He explained that is because rising rates imply rising employment, which influences defaults more than anything.

– John Tenpenny, Editor, CMP

Calgary is 1 of North America’s Fastest Growing Cities

North America’s fastest-growing Cities

Forbes has indicated a bright future for Alberta’s premier city, naming Calgary one of North America’s fastest-growing metropolises. According to Forbes, with Canada’s and the US’ major land mass, the area is expected to develop more than 100 million by the year 2050.

The following article discusses North America’s growing cities, and highlights that easy-to-manage cities that are less crowded and more affordable can expect to be driven in large part by continued migration.

Article Source (Financial Post – Calgary, Alberta) – The U.S. and Canada’s emerging cities are not experiencing the kind of super-charged growth one sees in urban areas of the developing world, notably China and India. But unlike Europe, this huge land mass’ population is slated to expand by well over 100 million people by 2050, driven in large part by continued immigration.In the course of the next 40 years, the biggest gainers won’t be behemoths like New York, Chicago, Toronto and Los Angeles, but less populous, easier-to-manage cities that are both affordable and economically vibrant.

Americans may not be headed to small towns or back to the farms, but they are migrating to smaller cities. Over the past decade, the biggest migration of Americans has been to cities with between 100,000 and 1 million residents. In contrast, notes demographer Wendell Cox, regions with more than 10 million residents suffered a 10% rate of net outmigration, and those between 5 million and 10 million lost a net 2.4%.

In North America it’s all about expanding options. A half-century ago, the bright and ambitious had relatively few choices: Toronto and Montreal for Canadians or New York, Chicago or Los Angeles for Americans. In the 1990s a series of other, fast-growing cities — San Jose, Calif.; Miami; San Diego; Houston; Dallas-Fort Worth, Texas; and Phoenix — emerged with the capacity to accommodate national and even global businesses.

Now several relatively small-scale urban regions are reaching the big leagues. These include at least two cities in Texas: Austin and San Antonio. Economic vibrancy and growing populations drive these cities, which ranked first and second, respectively, among large cities on Forbes’ “Best Places For Jobs” list.

Austin and San Antonio are increasingly attractive to both companies and skilled workers seeking opportunity in a lower-cost, high-growth environment. Much the same can be said about the Raleigh-Durham area of North Carolina, and Salt Lake City, two other U.S. cities that have been growing rapidly and enjoy excellent prospects.

One key advantage for these areas is housing prices. Even after the real estate bust, according to the National Association of Homebuilders, barely one-third of median-income households in Los Angeles can afford to own a median-priced home; in New York only one-fourth can. In the four American cities on our list, between two-thirds and four-fifths of the median-income households can afford the American Dream.

Advocates of dense megacities often point out that many poorer places, including old Rust Belt cities, enjoy high levels of affordability, while more prosperous regions, such as New York, do not. But lack of affordability itself is a problem; areas with the lowest affordability, including New York, also have suffered from high rates of domestic outmigration. The true success formula for a dynamic region mixes affordability with a growing economy.

Our future cities also are often easier for workers and entrepreneurs alike. Despite the presence of the nation’s best-developed mass transit systems, the longest commutes can be found in the New York area; the worst are for people living in the boroughs of Queens and Staten Island. As a general rule, commuting times tend to be longer than average in some other biggest cities, including Chicago and Washington.

In contrast, the average commutes in places like Raleigh or San Antonio are as little as 22 minutes on average — roughly one-third of the biggest-city commutes. Figure over a year, and moving to these smaller cities can add 120 hours or more a year for the average commuter to do productive work or spend time with the family.

Similar dynamics — convenience, less congestion, rapid job growth and affordability — also are at work in Canada, where two cities, Ottawa (which stretches from Ontario into Quebec) and Calgary, stand out with the best prospects. Many Canadians, particularly from Vancouver, would dispute this assertion. But Vancouver, the beloved poster child of urban planners, also suffers extraordinarily high housing prices–by some measurements the highest in the English-speaking world. This can be traced in part to the presence of buyers from other parts of Canada and abroad, particularly from East Asia, but also to land-use controls that keep suburban properties off the market.

Calgary, located on the Canadian plains, not much more than an hour from the Rockies, retains plenty of room to grow, and its housing price-to-income ratio is roughly half that of Vancouver’s. Calgary is also the center of the country’s powerful energy industry, which seems likely to expand during the next few decades, and its future is largely assured by soaring demand from China and other developing countries.

The other Canadian candidate, the capital city of Ottawa and its surrounding region, has developed a strong high-tech sector to go along with steady government employment. Remy Tremblay, a professor at the University of Quebec at Montreal, notes that Ottawa “is changing very rapidly” from a mere administrative center to a high-tech hotshot. Yet for all its growth, it remains remarkably affordable in comparison with rival Toronto, not to mention Vancouver.

In developing this list we have focused on many criteria — affordability, ease of transport and doing business–that are often ignored on present and future “best places” lists. Yet ultimately it is these often mundane things, not grandiose projects or hyped revivals of small downtown districts, that drive talented people and companies to emerging places.

Landlords Dodge New CMHC Rule

Landlords Dodge New CMHC Rule

The recent changes to CMHC rules on qualifying for investment mortgage are having an effect that is causing havoc on an investor’s debt-service ratio, making it difficult for investors to qualify without a more-than stable personal income.

The following article discusses how recent investors are experiencing difficulty when qualifying for mortgages, and explores the best ways to avoid CMHC, highlighting that investors should deal with banks that “go outside of CMHC”.

We DO have lenders that still do the offset under certain circumstances. Call to find out how and when.

— Mark Herman

Article Source (Calgary, Alberta – Financial Post) – These are particularly confusing times to be a real estate investor due, for the most part, to a policy change made by the Canada Mortgage and Housing Corp. (CMHC) in April.

The major issue concerns mortgages on CMHC-insured properties with four complete units or less, which went from being calculated using an 80% offset model to a 50% add-back one. As reported in this paper, the offset model meant that up to 80% of the expected rental income is used to offset the cost of the mortgage. With the add-back model, half of the expected gross rental income will be added to an investor’s income, but the entire mortgage is added to expenses.

In other words, it wreaks havoc on an investor’s debt-service ratio, as was the case with full-time Toronto investor and consultant Cindy Wennerstrom, who is currently shopping for her eighth property but is “stuck, mortgage-wise,” she says.

“When banks take off 50% of the rent and apply that to your expenses, there is usually a deficit. That is subtracted from your actual income,” she says.

And with Ms. Wennerstrom’s other properties each producing a cash flow of $800 to $1,100 per month, there still isn’t enough to bring her to the desired debt-service ratio of 40%.

“That means 40% of your gross monthly income has to service your monthly debts,” says Barrie, Ont., broker Adam Bazuk. “That makes it very difficult to qualify investors unless they also have an enormous personal income.”

If that wasn’t difficult enough, the 50% add-back policy is not rubber-stamped across all lending institutions, with some allowing investors to use more than 50%, and others maintaining different versions of the offset program.

“It’s gone from a nice simple A or B plan, to an A, B and C plan, with all different ways to get there,” says Dustan Woodhouse, a B.C. mortgage broker with Invis.

Confusing, perhaps. But is it a bad thing?

Consider the 80% offset, for instance. “Everybody thought rental offset was gone,” says Mr. Woodhouse. “All they could see was that, based on a $1,000 monthly rental income, an 80% offset would qualify you for a $190,000 mortgage, while a 50% add-back would qualify you for $45,000, so it’s messed up the market from that perspective.”

But he says that for “organized property investors,” who have been reporting rental income on their T1 forms for the past two years, there are still good, if not better, options out there.

“Under the old rules, I would only be allowed to subtract 80%,” Mr. Woodhouse says.

While not a true 100% offset, it is the easiest way to explain the program, says Chris Hoeppner, a regional vice-president at Street Capital.

“If a client can provide the statement of real estate rentals from the T1 General, we just go with the net gain or net loss that property produces. As long as a person claims enough rental income to cover all the expenses, it basically becomes a wash, taking that property out of the debt servicing.”

But for those not so organized, who have not been reporting rental income on their T1 forms, there are still options.

As well, private mortgage insurers Genworth allows for rental offset.

Mr. Bazuk suggests avoiding CMHC by having a 20% or more down payment, and dealing with banks that “go outside of CMHC.” He also says Scotiabank, National Bank, Royal Bank of Canada and Canadian Imperial Bank of Commerce still offer a 70% offset arrangement, or are rental-property friendly.

Ms. Wennerstrom, despite being without a mortgage at the moment, is still confident.

“The option is still there, but you just have to buy the right properties,” she says, which means ones with “exceptionally positive cash flow.” To her, that’s more than $700 a month after expenses, plus a 10% reserve for maintenance and a 5.4% vacancy slush fund.

“After that, it’s just what sort of hoops to jump through to get the mortgage,” she says. “They will continue to change the rules and we will continue to find ways around them.”

TD changing to collateral loans for mortgages – the bad news

TD is changing their mortgages to collateral loans as standard.

We think this is to keep people from refinancing with another bank because TD is not offering competitive rates. There are also some other negative points to the new TD mortgage listed below:

Cons:

  1. Most chartered banks will not accept “transfers” of collateral mortgages from other chartered banks. If the consumer wishes to switch their collateral mortgage to another lender upon maturity, there will be legal & appraisal costs. Approx $750-$1000
  2. Upon maturity, would the lender offer only a posted fixed rate or just a slightly lower rate knowing the costs associated with transferring to another lender has legal & appraisal costs.
  3. Collateral charges allow lenders to change the interest rate and/or loan more money to qualified borrowers after closing. On secured lines of credit, the interest rate registered at Prime + upwards of 10%.
  4. Collateral loan involves the other debts you may have. Under Canadian law, a lender may seize equity to cover other debt you have with the same lender. So, in essence, you’re possibly securing all your loans that you have with that financial institution; be it credit cards, unsecured lines of credit, car loans, or overdraft etc.

Now the Pros:
I can’t think of any!

Ensure you do your home work on TD mortgages. There are lots of other lenders and lots of alternatives.