Mortgages Made Easy

The All-Canadian Guide to Home Financing

Douglas Gray

• Publisher: Wiley
• Year: 2010
• Print ISBN: 9780470837320
• eBook ISBN: 9780470739464
• Edition: 1
• Topic: Business
• Subtopic: Real Estate
• Index: Business

Make this book your first stop when shopping for a mortgage!

Whether you are considering making your first home purchase or are about to refinance a mortgage, there is lots of good news. Mortgage interest rates are stable and the competition among lenders is fierce. They want your business. So, how do you determine the best deal for your own individual circumstances? How do you make sense of the fine print that comes with different mortgage products?

Mortgages Made Easy is a step-by-step guide to help you better understand the current real estate market, financing options, how to qualify for a mortgage, and the legal aspects of purchasing a home and having a mortgage. Among the key topics discussed are:

• Types and sources of mortgages
• Mortgages and your RRSP
• How to renew, refinance, or prepay a mortgage
• How to invest in mortgages
• Creative financing techniques
• Government assistance
• Special options for seniors
• Pitfalls to avoid
• And much, much more, including a glossary, checklists, forms, and helpful websites.

Written by one of Canada's most respected real estate experts, let Mortgages Made Easy help you obtain the financing that's right for your home or investment property.

Part I

REAL ESTATE BASICS

Chapter 1

HOW THE REAL ESTATE MARKET WORKS

In order to have a better appreciation of how the real estate market operates, you need to understand the cycles and factors that influence prices and interest rates. No buying or selling decisions should be made without an accurate market assessment.

THE REAL ESTATE CYCLE

Real estate is a cyclical industry. As in any such industry, the cycle historically creates shortage and excess. This relates to the issue of supply and demand in the marketplace. Too much supply creates a reduction in value; too little supply creates an increase in value. It is important to understand that different provinces, regions, and communities may be at different points of the economic cycle. Knowing where your region is in terms of the cycle is crucial when making buying or selling decisions.

One of the reasons for the cycle is that many developers are entrepreneurial by nature and operate according to short-term planning. If financing and credit are available, developers tend to build without regard for the overall supply and demand. If a consequent glut occurs and the demand is soft, prices come down as houses and condominiums go unsold.

External factors that can affect the real estate cycle include the following:

GENERAL BUSINESS ECONOMIC CYCLES

The economy historically goes through periods of increased economic growth followed by recessionary periods. In any given cycle, the economic impact is greater in certain parts of the country than in others. In a recessionary period, people lose their jobs and have to put their homes on the market. Real estate prices become depressed as potential purchasers decide to wait until the economy is more secure.

It is difficult to know for certain when the economy will turn around, but various indicators should give you some insight. If the economy has been in a recession for a sustained period of time, there could be definite opportunities to buy. Once the economy comes out of a recession, prices tend to climb. Conversely, if the economy has been on a buoyant growth trend for an extended period of time, be very cautious in purchasing because a change in the cycle, and therefore a drop in real estate prices, could be imminent.

LOCAL BUSINESS CYCLE

Each local economy has its own cycle and factors that impact on real estate prices. These factors may not be greatly influenced by the general (provincial or national) business cycles just discussed.

COMMUNITY CYCLE

Certain geographic locations within a community can have their own economic cycles as well as supply and demand, all of which affect real estate prices. In addition, a community has its own life cycle from growth to decline to stagnation to rehabilitation. Look for areas of future growth.

As you can see, being aware of economic, business, and community cycles is critical to prudent decision-making. Before buying or selling real estate in a certain area, determine what external factors are prevalent and how they impact on the cycle of the real estate market. Different types of real estate—for example, condominiums, new houses, resale houses, and small apartment buildings—can be at different points of a cycle. You are undoubtedly familiar with the common terms used to describe the three types of real estate markets. As a brief review, they are:

SELLER’S MARKET

In a seller’s market, the number of buyers who want homes exceeds the supply or number of homes on the market. In this type of market homes will sell quickly, prices will increase, and a large number of buyers are available for a minimal inventory of homes. These characteristics have implications for the buyer who has to make decisions quickly, must pay more, and frequently has his conditional offers rejected.

BUYER’S MARKET

In a buyer’s market, the supply of homes on the market exceeds the demand or number of buyers. Homes will be on the market longer, fewer buyers will be available compared to the higher inventory of homes, and house prices will be reduced. The implications for buyers in this type of market are more favourable negotiating leverage, more time to search for a home, and better prices.

BALANCED MARKET

In a balanced market, the number of homes on the market is equal to the demand or number of buyers. Houses sell within a reasonable period, the demand equals supply, sellers accept reasonable offers, and prices are generally stable. The implications for the buyer in this type of market are that the atmosphere is more relaxed and there are a reasonable number of homes from which to choose.

FACTORS THAT AFFECT REAL ESTATE PRICES

There are many factors that influence the price of real estate. Whether you are a buyer or seller, you need to understand what factors are present that are impacting on the market, so you can make the right decisions at the right time and in the right location. Many of these factors are interconnected.

POSITION IN REAL ESTATE CYCLE

As described above, where the real estate market is in the cycle will have a bearing on prices.

INTEREST RATES

There is a direct connection between interest rates and prices. The higher the rates, the lower the prices. The lower the rates, the higher the prices. The lower the rates, the more people who can afford to buy their first home or an investment property. This puts pressure or greater demand on the market. A more detailed discussion of interest rates will follow below.

TAXES

High municipal property taxes can make a potential buyer think twice. So can provincial taxes, such as the property purchase tax. Federal tax legislation on real estate, such as changes in capital gains tax, could have a negative or positive influence on investors. All these factors affect real estate activity, including prices.

RENT CONTROLS

Naturally, provincial rent controls and related restrictions could have a limiting effect on investor real estate activity, thereby resulting in fewer buyers in the market for certain types of properties.

THE ECONOMY

Confidence in the economy is important to stimulate homebuyer and investor activity. If the economy is buoyant and the mood is positive, more market activity will occur, generally resulting in price increases. Conversely, if the economy is stagnant, the opposite dynamic occurs, resulting in a decrease in activity and lower prices. If real estate purchasers are concerned about the same problem, a predictable loss of confidence occurs in the market.

POPULATION SHIFTS

A region that has a booming economy and is attracting business, employment, and tourism will attract people. This means an increased demand for housing and a rise in prices. Conversely, a stagnant or declining economy will force real estate prices to drop.

VACANCY LEVELS

If there are high rental vacancy levels, this could impact investor confidence due to the risk of not finding tenants. On the other hand, if there are low vacancy levels, this could stimulate investor activity as well as first-time homebuyers. Renters who can’t find a place to rent may borrow from relatives or find other creative ways to enable them to finance a home.

LOCATION

This is more than a cliché—it truly is an important factor. Properties in desirable locations will generally go up in price more quickly and consistently.

AVAILABILITY OF LAND

If there is a shortage of raw land, municipal zoning restrictions, limits on development, or provincial land-use laws that restrict the use of existing land for housing purposes, these factors will generally cause prices to increase. Again, it relates to the principle of supply and demand.

PUBLIC IMAGE

The public perception of certain geographic locations, certain types of residential properties (such as loft condominiums), or reputation of a builder will affect demand and therefore price. Some areas or types of properties are “hot” and some are not at any given time.

POLITICAL FACTORS

The policy of a provincial or municipal government in terms of supporting real estate development will naturally have a positive or negative effect on supply and demand, and therefore prices.

SEASONAL FACTORS

Certain times of year are traditionally slow months for residential real estate sales; hence prices decline. For example, November through February is usually a slow time. Conversely, interest in real estate starts to build as winter turns to spring, from March onward. People with children in school tend to want to make a purchase decision that closes during the summertime to avoid disruption of their children’s schooling. The same seasonal factors impact on recreational property.

FACTORS THAT AFFECT MORTGAGE INTEREST RATES

There are many factors that impact on the rate of mortgage interest. Here are the key ones.

FEDERAL GOVERNMENT POLICY

The federal government, through the Bank of Canada (Central Bank), sets the prime bank rate. This is the rate that the Central Bank charges on loans to financial institutions. The rate is set each week at 25 basis points above the average yield (interest return) on three-month treasury bills. The government auctions these bills weekly. One hundred basis points represents 1.00% interest; therefore, 25 basis points would represent 0.25% interest. Conventional lenders (banks, trust companies, and credit unions) adjust their prime rates and mortgage rates using the federal bank rate as a guide. The Central Bank rate, therefore, sets a trend throughout the system. There are various factors and political/economic dynamics that influence the federal bank rate.

When you apply for a mortgage, you may wish to have a variable mortgage, or a six-month open mortgage, if you expect interest rates to go down. Then you can convert to a 3-, 5-, or 10-year closed mortgage when you see that interest rates are heading up. This is just one of many considerations you have to take into account when determining the kind of mortgage that meets your needs. (Other factors to consider will be discussed in Part II.)

EXCESS OR SHORTAGE OF SUPPLY OF MONEY

Real estate cycles are connected to the general economic cycle. When lenders have an excess supply of money to lend due to an inflow of customer deposits (for example, at RRSP deadline time in the spring), interest rates tend to be more attractive and competitive. This is because the lender needs to make money; that is, a “spread” on the difference between what it pays the depositor and what it charges for lending money. This spread could be 1% to 2% or more depending on various factors, including competition.

Lenders realize that borrowers want to get the best rate. Consumers track mortgage interest rates published in newspapers and on the Internet. They can—and should—comparison shop.

Depositors must earn enough money on their savings to be comparable to the returns that they would earn on other investments, relative to the same degree of risk and liquidity. The willingness of people to place money in a savings account is where the pool of mortgage money is created. When the inflow of deposit funds is high and the interest rates are low, the lender will have funds to lend. This scenario is referred to as a “loose money” market. In this situation, real estate activity can be expected to increase, as more people will be able to afford financing and purchase a home or other real estate investment. As there is more activity in the market place, there is a dynamic of supply and demand and real estate prices can be expected to rise.

On the other hand, if the public thinks it can get a better return on other forms of investment than putting their money in the bank in a low-interest situation, lenders will be left with a shortage of money to lend out for mortgages or other loans. This is referred to as a “tight money” market. Lenders may cut back on lending mortgage funds in many cases and be extra selective where the money is lent. Developers and contractors could have difficulty getting funds to build and therefore real estate activity slows down. As potential purchasers could have difficulty obtaining funds, they may choose to hold off on a purchase, so real estate prices could drop due to the reduced demand. If mortgage interest rates are too high, many people may not be able to afford to buy because they may not qualify for the amount of financing they need.

TYPE OF LENDER

Rates vary from lender to lender, depending on their policies and restrictions. A more conservative lender may charge a higher rate than another. In general terms, conventional lenders—banks, trust companies, and credit unions—tend to be fairly competitive in the rates they charge for mortgages. A private mortgage lender may take on more risk but will charge a higher rate.

QUALITY OF BORROWER

Lenders assess the creditworthiness of the borrower and the ability to pay. A borrower with few assets, who is recently employed or self-employed, or who has a spotty credit record, will pay a higher rate of interest than...

Table of contents

• Praise
• BESTSELLING BOOKS BY DOUGLAS GRAY
• Title Page
• Copyright Page
• Preface
• Acknowledgements
• Introduction
• Part I - REAL ESTATE BASICS
• Part II - ALL ABOUT MORTGAGES
• Glossary
• Index
• Reader Feedback and Educational Resources
• About the Author