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  • Why are mortgages so expensive in Canada? – MoneySense

    Why are mortgages so expensive in Canada? – MoneySense

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    A total of three rate cuts passed down from the Bank of Canada since June have cumulatively lowered the cost of borrowing for Canadians by 75 basis points, from 5% to 4.25%, offering home buyers some much-needed relief in terms of affordability.

    This is according to the latest affordability report compiled by Ratehub.ca, which crunches the minimum annual income required to buy an average home in some of Canada’s major cities. (Ratehub Inc. owns both Ratehub.ca and MoneySense.) The report is based on September 2024 and August 2024 real estate data reported by the Canadian Real Estate Association (CREA). It illustrates how changing mortgage rates, stress test rates and real estate prices are impacting the income needed to buy a home. 

    The September edition (updated monthly, so bookmark this page) shows the required income lowered in 11 of the 13 housing markets studied, as the average five-year fixed mortgage rate dropped to 5.04%, compared to 5.16% in August. As a result, the corresponding average mortgage stress test rate—which tacks on an additional 2% to a borrowers’ contract mortgage rate—fell to 7.04% from the previous 7.16%.

    Let’s take a look at how that’s impacted home buyers across Canada.

    The best places to buy real estate in Canada

    Housing affordability across Canada’s major cities

    Check out the chart below to see how affordability changed between August and September in Canada’s main housing markets, based on the income required to qualify for a mortgage.

    September 2024: How much do you need to earn to buy a home in Canada?

    City Average home price in August Average home price in September Change in home price  Income required in August Income required in September Change in income
    Vancouver $1,195,900 $1,179,700 -$16,200 $224,000 $219,000 -$5,000
    Toronto $1,082,200 $1,068,700 -$13,500 $204,100 $199,800 -$4,300
    Hamilton $840,300 $831,500 -$8,800 $161,800 $158,740 -$3,060
    Victoria $866,700 $864,400 -$2,300 $166,420 $164,450 -$1,970
    Halifax $543,700 $538,100 -$5,600 $109,940 $108,000 -$1,940
    Calgary $586,100 $582,100 -$4,000 $117,360 $115,600 -$1,760
    Ottawa $646,000 $642,800 -$3,200 $127,830 $126,100 -$1,730
    Edmonton $400,200 $399,400 -$800 $84,850 $83,990 -$860
    Winnipeg $361,800 $362,500 $700 $78,140 $77,600 -$540
    Fredericton $311,300 $312,000 $700 $69,310 $68,860 -$450
    Regina $319,700 $320,700 $1,000 $70,780 $70,360 -$420
    Montreal $535,700 $543,400 $7,700 $108,550 $108,900 $350
    St. John’s $354,600 $364,100 $9,500 $76,880 $77,880 $1,000
    Data in the chart is based on a mortgage with 20% down payment, 25-year amortization, $4,000 annual property taxes and $150 monthly heating. Mortgage rates are the average of the Big Five Banks’ 5-year fixed rates in September 2024 and August 2024. Average home prices are from the CREA MLS® Home Price Index (HPI).

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    Canadian cities where affordability improved

    Where in Canada is owning a home becoming more affordable?

    Vancouver: A chilly start to the autumn market

    Vancouver topped the list of cities with most-improved affordability, largely due to the fact that the average home price absorbed a $16,200 drop from August. Make no mistake,—this is still Canada’s most expensive housing market with an average property price tag of $1,179,700. But demand has been quite cool coming out of the summer months. According to the Greater Vancouver Realtors, sales fell 3.8% year-over-year in September, while the supply of new listings rose 12.8%, leading to an easy buyers’ market. As a result, Vancouver home buyers need to earn $5,000 less than they did last month to qualify for a mortgage on the average-priced home, at an income of $219,000.

    Toronto: A month of flat sales

    The city of Toronto came in second, as home prices continue to fall within Ontario’s largest city; the average property sold for $1,068,700, $13,500 less than it did in August, according to the Toronto Regional Real Estate Board. This is largely due to the fact that sales were unchanged from the previous month (though things are improving on an annual basis, coming in 8.6% higher than in 2023). Meanwhile, fresh supply continues to flood the market with new listings, which surged 35.5% year-over-year. Combined with easing mortgage rates, the average Toronto home buyer saw their required income shrink by $4,300, to $199,800.

    Hamilton: Hovering below the historical average

    Rounding out the top three cities is Hamilton, which has long been a popular Southern Ontario real estate destination, without the million-dollar price tag that characterizes neighbouring Toronto. The average home price in Hamilton in September came to $831,500, a decrease of $8,800 from August. The Association of Hamilton-Burlington reports that while sales were brisk in September, they continue to lag 2023 levels by 4% year-to-date and remain 28% below the long-term average. Meanwhile, new listings and inventory levels continue to rise, now sitting at a cumulative five months. That’s all cooled home prices, and as a result, Hamilton home buyers need to earn $158,740 to buy a home, $3,060 less than they did in August.

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    Penelope Graham

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  • I want to switch mortgage lenders—do I have to pass the stress test again? – MoneySense

    I want to switch mortgage lenders—do I have to pass the stress test again? – MoneySense

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    Speaking at Global Risk Institute summit on Wednesday, Routledge said he was worried that the requirement by lenders to run the “OSFI stress test” is making Canadians feel the regulator is too directly involved in their affairs.

    “If I were that person, I would feel regulated by OSFI. And that’s what we hear from Canadians. And I don’t think that was ever part of its intent.”

    The concern helped lead to OSFI’s announcement last week that starting Nov. 21, it would no longer require a stress test for uninsured mortgages when borrowers are making a straight switch between lenders, meaning they aren’t changing things like their amortization or borrowing amount.

    Only between 2% and 6% of borrowers make such a switch, so while it was something Routledge previously maintained was part of sound underwriting practices, the agency no longer saw it as worth the cost. 

    “It wasn’t a big enough prudential risk to justify that appearance of unfairness,” he said.

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    Why OSFI decided to change the stress test

    The removal of the stress test requirement comes as the regulator is also looking at a broader switch away from the B-20 stress test on individual borrowers, to a system that would regulate mortgage risk at a bank portfolio level.

    The regulator will next year be testing the alternative system, which sets limits on how much of a bank’s loan book can be taken up by borrowers with a high loan-to-income ratio. The regulator will then decide whether to add it to the current mortgage rules, or replace the existing stress test.

    While the new system would similarly limit concentration of risk, or even do a bit of a better job, it would also have the benefit of seeming to be less directly applied at the specific borrower level, said Routledge.

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    The Canadian Press

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  • Should you get a 30-year mortgage?  – MoneySense

    Should you get a 30-year mortgage?  – MoneySense

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    What to see the difference in a 25-year versus 30 year mortgage? Tap the filter icon on the far right to expand the data fields. Change the amortization to 25-year or 30-year mortgage (second from the right, second row).

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    The pros and cons of a 30-year mortgage

    Signing up for a 30-year mortgage allows a buyer to stretch their mortgage payments over a longer period of time. “You’re spreading your debt over five extra years [compared to 25-year mortgages]. That usually gets you a higher purchase price or mortgage amount that’s needed in the big markets,” explains Verceles.

    On a home selling for $699,117 (the average Canadian home price as of May 2024), a buyer who puts 20% down and takes out a 30-year mortgage at a five-year fixed rate of 4.99% will pay $2,982 a month on their mortgage. (You can run the calculations yourself using a mortgage payment calculator.) Another buyer with the same down payment and mortgage terms but a 25-year amortization would shell out $3,250—that’s $268 more than the first buyer every month, or an extra $3,216 a year. 

    At first glance, the 30-year mortgage seems like the better choice—except that the buyer would end up paying a total of $514,068 in interest over the life of the mortgage, assuming rates did not change. The 25-year mortgage buyer, on the other hand, would pay $415,615 in total interest—a difference of $98,415 on the same mortgage principal. 

    In Canada, a 30-year mortgage is not insurable through the CMHC, meaning a minimum 20% down payment is required, unless it is for a new build as outlined above. Even with the new change around 30-year mortgages, this can make it more difficult to purchase the home that you want. A 15% down payment on a $748,450 house is $112,268. At 20%, the down payment jumps to $149,690—meaning you will need to access $37,422 more.

    Plus, Verceles says, mortgage lenders tend to give borrowers slightly better rates for mortgages covered through CMHC insurance, because the lender isn’t the one shouldering the risks of a default. Usually, those savings can amount to a quarter of a percent in interest, according to Verceles.

    Pros

    • Ability to stretch mortgage payments over a longer period of time
    • Access to a higher purchase price or mortgage amount

    Cons

    • More interest paid over the term of the mortgage compared to shorter terms
    • Not insurable through the CMHC, which could mean paying a higher interest rate
    • A minimum 20% down payment is required
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    Can you get a mortgage of more than 30 years?

    In some countries, such as Japan, mortgages with terms of 35, 40 and even 100 years are not unheard of. The long term mortgages are intended to be paid over multiple generations. Canada’s major lenders once offered 40-year mortgages, but that ended when the North American housing bubble burst in 2008. Shortly after that meltdown, Canada’s Department of Finance decreased the maximum amortization to 35 years, then later reduced it to 30 years.

    “They don’t want people to leverage themselves too far,” Verceles explains. (Some alternative lenders still offer 35- and even 40-year mortgages, albeit with steeper interest rates than a shorter mortgage from a bank.)

    Widespread concern about housing affordability in Canada have made the idea of longer amortization periods more attractive to homebuyers, but Verceles says he isn’t sure whether the Canadian government will loosen rules to allow 30-plus-year amortizations again. But given the importance of real estate to Canada’s economy, it’s possible that the federal government may to ease the financial burden of homebuyers by letting them spread out their payments over a longer period of time.

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    Brennan Doherty

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  • Tools to calculate your mortgage payments and costs in Canada – MoneySense

    Tools to calculate your mortgage payments and costs in Canada – MoneySense

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    Mortgage payment calculator

    Understanding the long-term financial implications of a home mortgage, particularly the cumulative impact of interest, can be complicated. A mortgage payment calculator is an essential tool to help you make informed home buying decisions. It helps you estimate your regular mortgage payments based on the home’s purchase price, down payment size, loan interest rate and amortization.

    A reliable mortgage payment calculator provides a comprehensive overview of your expected payments, including the total interest you’ll pay over the mortgage term. Additionally, many other housing expenses, such as property taxes, land transfer taxes, and the need for mortgage default insurance, are directly linked to the size of your mortgage and the home’s value. 

    The mortgage payment calculator on MoneySense helps you understand your mortgage payments, including the required closing cash and monthly carrying expenses you will need to buy the home you want. 

    Mortgage insurance calculator

    If you buy a home with less than a 20% down payment in Canada, you must get mortgage default insurance (sometimes, referred to as mortgage insurance). Unlike home insurance, which covers property damage, mortgage default insurance protects the lender if something happens and you can no longer make your mortgage payments. In Canada, this type of insurance is provided by three institutions: CMHC, Sagen and Canada Guaranty.

    The mortgage insurance calculator on MoneySense calculates how much you will pay for mortgage default insurance. Your premium is based on the loan-to-value ratio (LTV) of your home.

    Based on this ratio, the insurance premium falls between 2.8% and 4% for down payments below 20%. While a down payment higher than this may exempt you from purchasing mortgage insurance, the lender might still require it in certain situations. To use the tool, enter the asking price and down payment amount, and it will provide an estimate of your mortgage insurance premium. 

    Land transfer tax calculator

    A one-time fee called a land transfer tax (or land transfer fee) must be paid whenever a property changes hands. The charge is levied by the provincial and territorial governments and/or local municipalities. 

    Land transfer tax—which must be paid in cash—is in effect across all regions except Alberta, Saskatchewan and the three territories. In these areas, a much smaller land transfer fee is imposed instead. If you’re purchasing in Toronto or Montreal, you’ll pay municipal land transfer tax in addition to provincial land transfer tax. 

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    Angela Serednicki

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  • Rent or buy? Here’s how to make that decision in the current real estate market

    Rent or buy? Here’s how to make that decision in the current real estate market

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    Choosing whether to rent or buy has never been a simple decision — and this ever-changing housing market isn’t making it any easier. With surging mortgage rates, record rents and home prices, a potential economic downturn and other lifestyle considerations, there’s so much to factor in.

    “This is an extraordinarily unique market because of the pandemic and because there was such a run on housing so you have home prices very high, you also have rent prices very high,” said Diana Olick, senior climate and real estate correspondent for CNBC.

    By the numbers, renting is often cheaper. On average across the 50 largest metro areas in the U.S., a typical renter pays about 40% less per month than a first-time homeowner, based on asking rents and monthly mortgage payments, according to Realtor.com.

    In December 2022, it was more cost-effective to rent than buy in 45 of those metros, the real estate site found. That’s up from 30 markets the prior year.

    How does that work out in terms of monthly costs? In the top 10 metro regions that favored renting, monthly starter homeownership costs were an average of $1,920 higher than rents.

    But that has not proven to be the case for everyone.

    Leland and Stephanie Jernigan recently purchased their first home in Cleveland for $285,000 — or about $100 per square foot. The family of seven will also have Leland’s mother, who has been fighting breast cancer, moving in with them.

    By their calculations, this move — which expands their space threefold and allowing them to take care of Leland’s mother — will be saving them more than $700 per month.

    ‘You don’t buy a house based on the price of the house’

    “You don’t buy a house based on the price of the house,” Olick said. “You buy it based on the monthly payment that’s going to be principal and interest and insurance and property taxes. If that calculation works for you and it’s not that much of your income, perhaps a third of your income, then it’s probably a good bet for you, especially if you expect to stay in that home for more than 10 years. You will build equity in the home over the long term, and renting a house is really just throwing money out.”

    Mortgage rates dropped slightly in early March, due to the stress on the banking system from the recent bank failures. They are moving up again, although they are currently not as high as they were last fall. The average rate on a 30-year fixed-rate mortgage is 6.59% as of April — up from 3.3% around the same time in 2021.

    But that hasn’t significantly dampened demand.

    “As the markets kind of bubbled in certain parts of the country and other parts of the country priced out, we’ve seen a lot of investors coming in looking for affordable homes that they can buy and rent,” said Michael Azzam, a real estate agent and founder of The Azzam Group in Cleveland.

    “We’re still seeing relatively high demand” he added. “Prices have still continued to appreciate even with interest rates where they’re at. And so we’re still seeing a pretty active market here.”

    Buying a home is part of the American Dream

    The Jernigans are achieving a big part of the American Dream. Buying a home is a life event that 74% of respondents in a 2022 Bankrate survey ranked as the highest gauge of prosperity — eclipsing even having a career, children or a college degree.

    The purchase is also a full-circle moment for Leland, who grew up in East Cleveland, where his family was on government assistance.

    “I came from a single-mother home who struggled to put food on the table and always wanted better for her children … it was more criminals than there were police … It is not the type of neighborhood that I wanted my children to grow up in,” said Jernigan.

    The new homeowner also has his eye on building a brighter future for more children than just his own. Jernigan plans to purchase homes in his old neighborhood, renovate them and create a safe space for those growing up like he did.

    “I’m here because someone saw me and saw the potential in me and gave me advice that helped me. … and I just want to pay it forward to someone else” Jernigan said.

    Watch the video above to learn more.

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  • The mortgage rate you get depends partly on your credit score. Here’s what to expect

    The mortgage rate you get depends partly on your credit score. Here’s what to expect

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    Phiromya Intawongpan | Istock | Getty Images

    Anyone who’s exploring homeownership may know that rising interest rates and elevated home prices are making that goal challenging.

    The average rate on a typical 30-year, fixed-rate mortgage has been zigzagging between 6% and 7% for the last several months — down from above 7% in early November but roughly double the 3.3% average rate heading into 2022, according to Mortgage News Daily.

    Yet the interest rate that any particular buyer is able to qualify for depends at least partly on their credit score — meaning you have some control over whether you’re able to get the best available rate, experts say. And the difference that a good or excellent score makes in terms of monthly payments — and total interest paid while you hold the mortgage — can be significant.

    “The score impacts practically everything: loan approval, interest rate, monthly mortgage insurance premiums … and ultimately their payment,” said Al Bingham, a credit expert and mortgage loan officer with Momentum Loans.

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    The median home price in January was about $383,000, according to Redfin. Although prices have been sliding since mid-2022, that amount is still 1.5% higher than a year earlier. In January 2020, the median was below $300,000.

    While you may be able to negotiate on the price of the house to bring the overall cost of homeownership down, it’s also worth making sure you go into the process with as high a credit score as possible.

    Lenders check three scores but use one number

    Although things like steady income, length of employment, stable housing and other aspects of your financial life are important to lenders, your credit score gives them additional information.

    The three-digit number — which ranges from 300 to 850 — feeds into a lender’s calculation of how risky a borrower you may be. For example, if you’ve always made your debt payments on time and you have a low credit utilization (how much you owe relative to your available credit), your score will benefit.

    And the higher the number, the less of a risk you are to lenders — and therefore the better terms you can get on a loan.

    Lenders check a homebuyer’s credit report and score at each of the three large credit-reporting firms: Equifax, Experian and TransUnion. For mortgages, the score provided by those companies is typically a specific one developed by FICO, because it is the score currently relied on by Fannie Mae and Freddie Mac, the largest purchasers of home mortgages on the secondary market. (In the coming years, this reliance on one score is poised to change.)

    However, because that particular FICO score can differ among the three credit-reporting firms due to differences in what is reported to them and the timing, mortgage lenders use the middle number to inform their decision.

    The higher your score, the lower the interest rate you’ll be charged. For illustration only: On a $300,000, fixed-rate 30-year mortgage, the average rate is 6.41% (as of Thursday) if your credit score is in the 760-to-850 range, according to FICO.

    This would make your monthly principal and interest payment $1,878. On top of this amount typically would be property taxes, homeowners insurance and, if your down payment is less than 20% of the home’s sale price, private mortgage insurance.

    In contrast, if your score were to fall between 620 and 639, the average rate available is 7.99%. That would mean a payment of $2,201 (again, for principal and interest only).

    Most of your monthly payment goes to interest at first

    Because of how loans are structured, most of your monthly payment would go to interest at the beginning of the loan instead of toward the principal.

    For example, if you started paying on that $300,000 mortgage next month with a rate of 6.41%, in two years you would have paid $39,600 in interest and just $7,438 toward the principal, according to Bankrate’s mortgage calculator.

    In comparison, a rate of 7.99% would mean that in two years, you would have paid $49,570 in interest and $5,455 toward the principal, according to the Bankrate calculator.

    There are ways to boost your credit score

    If you want to get your score up before applying for a mortgage, there are some key things you can do.

    “Improving your credit score really comes down to the fundamentals,” said Ted Rossman, senior industry analyst for Bankrate. “You should aim to pay your bills on time, keep your debts low and show that you can successfully manage a variety of types of credit over the long haul.”

    And, he said, there are some things you can do to improve your score fairly quickly.

    “My favorite is to lower your credit utilization ratio,” Rossman said, referring to credit card balances. “This resets every month and it typically reflects statement balances, so you might have a high utilization ratio even if you pay your credit cards in full to avoid interest.”

    You may want to consider making an extra mid-month payment or asking for a higher credit limit to bring the ratio down, he said.

    “It’s often recommended to keep [the ratio] below 30%, although below 10% is even better, and your credit score should improve as long as you bring it down,” Rossman said.

    He also recommends checking your credit report — which you can do for free at annualcreditreport.com — before applying for a mortgage. “Look for any errors and correct them as soon as possible,” he said.

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