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Monthly Mortgage Update: November 2014

This month’s mortgage update has a theme: information, or lack thereof. Those that are uninformed typically suffer. In two cases discussed below (mortgage penalties and the Vancouver housing market) this holds true, but in the final case (accelerated mortgage payments) a little ignorance may serve to pad the housing market and line the pockets of Canadians.

All will become clear below. (Pun intended!)

Lack of Information #1: Mortgage Penalties

An Edmonton couple was recently hit with a $17,000 mortgage penalty, as a result of breaking their 5-year fixed mortgage with TD early. The couple first assumed the penalty would only be three months’ interest, before learning the penalty would actually be the greater of three months’ interest or the so-called Interest Rate Differential (IRD). The IRD is a complicated calculation, and often not a transparent one. Banks convolute how it is calculated, but it is essentially supposed to capture the difference in the interest due on your existing mortgage versus that which is payable on a replacement mortgage.

Even after using TD’s IRD calculator on the bank’s website, the Edmonton couple only came to a figure of about $7,000 – a far cry from the $17,000 penalty TD was demanding. This is surprising (or not so surprising?), considering the Canadian Bankers Association (CBA) now has a Code of Conduct requiring lenders to make clear disclosures regarding prepayment options and penalties.

A couple of stipulations for banks in this Code of Conduct:

  • The exact formula used to calculate penalties must be “clear, simple and not misleading”
  • Banks must have penalty calculators on their websites that provide reasonable estimates

After the couple took their case to CBC Go Public – the news network’s popular public interest segment – TD gave the couple an undisclosed settlement offer. (If only all Canadian borrowers could be so lucky!) We here at believe the banks should be required to use a standard calculation for mortgage penalties that is widely understood. In the meantime, we have devoted a lot of time and resources to building a comprehensive refinance education centre and calculators.

Lack of Information #2: Foreign Investment in the Vancouver Housing Market

As reported in the Toronto Star, the housing boom is now over for most Canadian cities. A new housing report from BMO Economics revealed most cities – from Montreal to Ottawa to Saint John – are seeing house prices flatline or even sink, like in Regina, where house prices are down 2.4% year-over-year and Victoria, where they have dropped 9% since 2010.

The Vancouver market, however, seems immune to the impact of a handful of mortgage changes introduced over the past couple years in an attempt to cool the housing market. The price of a detached house in Greater Vancouver hit $1,263,129 in September (well above the $736,284 seen in the GTA) and is forecast to climb to $1,510,000 next year.

How can this be? Local residents know it’s “the most beautiful place on Earth” and, therefore, everyone wants to live in Vancouver – but there’s more to it than that. A recent story in the May issue of New Yorker Magazine asserted Vancouver has become part of a global market in real estate, even though it “doesn’t have the cultural cachet of Paris or Milan”.

This could not be more obvious than in this case study in the Globe and Mail following a wealthy Chinese immigrant to Vancouver. Qiqi Hong, a businesswoman who founded a successful lighting business that thrived in China’s building boom, grew tired of Beijing’s hectic pace and foul air and moved to Vancouver via the Canadian government’s immigrant investor program in 2011. There, she purchased a $6 million home, three other houses, and a downtown condo she uses on weekends and lends to visiting friends.

According the Globe and Mail, at least 30,000 millionaires from Mainland China have immigrated to B.C. over the past decade using the government’s investor immigrant program, almost all of them settling in Vancouver. The federal program allowed those with a net worth of $1.6-million to lend the government $800,000 interest-free in exchange for permanent residency. The program ended in 2014 but is expected relaunch soon; this is good news for immigrants, but not-so-good news for local residents who continue to be pushed out of the market while foreign investors take over.

While the U.S. National Association of Realtors knows that 8% – $92.2 billion (U.S.) – of U.S. housing sales are from foreign buyers, and that Chinese buyers accounted for 24% of that volume, Canada has no such data.

Lack of Information #3: Accelerated Mortgage Payments

Finally, the good news: Canadian mortgage debt is not nearly as bad as the Bank of Canada fears, says Benjamin Tal, Deputy Chief Economist of CIBC. In fact, Canadians are paying down their mortgages earlier than anticipated, and that’s improving our debt service performance.

Tal says 30-40% of Canadian households are now accelerating their mortgage payments, which has the effect of shortening amortization periods. The extra payments means 40-50% of homeowners will have an amortization period of less than 20 years. Ultimately, Canadians are paying $11 billion per year more in principal payments than the central bank has estimated. Go Canada! News

Team Case Study

Follow my Toronto home buying journey in a Q&A blog post series I did with our editor, Cait. I give my first-hand account of every detail, from the rent or buy decision to participating in bidding wars, the latter of which was shared on the Globe and Mail website.

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‘Til next month!