Fixed Or Float? Combination Mortgages Increasing In Popularity

The popularity of combination Toronto mortgages – which offer both fixed and floating rate segments – is on the rise, according to RBC’s 17th Annual Homeowners Survey. In fact, 40 per cent of Canadians who are likely to purchase a home within the next two years plan to take out a combination mortgage, compared to 32 per cent in 2009.

The surging popularity of combination mortgages indicates that Canadians are trying to maximize low interest rates while at the same time retaining the security of a fixed mortgage. The poll also revealed a marked gender split with more women (46 per cent) than men (35 per cent) preferring a combination mortgage.

“Although interest rates are expected to rise, our study shows that not all Canadians intend to automatically opt for a fixed mortgage with a longer term,” said Marcia Moffat, head, Home Equity Financing, RBC Royal Bank. “As consumers begin to learn about the benefits of mortgage diversification, we’re seeing more homebuyers gain a better comfort level with adding floating rate mortgage options.”

While combination mortgages are gaining in popularity, fixed-rate mortgages continue to be the most common choice for potential buyers and are preferred by 44 per cent of Canadians likely to buy a home within the next two years. Atlantic Canadians are most likely (54 per cent) to opt for a fixed rate, with Ontarians (41 per cent) least likely to do so.

“Many Canadians believe that a fixed-rate Toronto mortgage is the only way to have a locked-in and predictable payment, but a variable rate does not always mean variable payments,” noted Moffat. “With our floating-rate mortgage, the portion of your payment that’s applied to the principal changes, as interest rates change, not the actual payment itself. This means that when interest rates go up, your payment will pay off more interest; when interest rates go down, your payment will pay off more principal.”

When current homeowners were asked about the impact of potential interest rate increases, 66 per cent said they were concerned, with women (70 per cent) more concerned than men (60 per cent).

“We expect the Bank of Canada to increase the overnight rate starting in June, with the pace of increases being fairly steady through the remainder of 2010 and 2011, which will continue to put upward pressure on borrowing costs,” added Paul Ferley, assistant chief economist, RBC Economics.

Mortgage findings at-a-glance:

Fixed rate mortgages are preferred by:
44 per cent of Canadians likely to buy a home within the next two years – down from 47 per cent in 2009

54 per cent of Atlantic Canadians (the highest in Canada)

Variable rate mortgages are preferred by:
16 per cent of Canadians likely to buy a home within the next two years – down from 20 per cent in 2009

19 per cent of men compared with 12 per cent of women

Mortgage term most likely to be chosen by those opting for a fixed or combination mortgage:
Five-year term: 43 per cent

More than five-year term: 29 per cent

Three-year term: eight per cent

63 per cent: the proportion of Canadian homeowners who have mortgages (compared to 56 per cent in 2005)

$124,131: the average amount remaining on Canadian homeowners’ mortgages (compared to $109,504 in 2005)

RBC recently introduced a RateCapper mortgage, in response to increased demand for mortgages options that provide both rate and payment protection. The interest rate on the RateCapper mortgage over the five-year term is based on the lower of Royal Bank of Canada’s prime rate, which is currently at 2.25 per cent, and a set maximum rate, currently capped at 5.50 per cent. Canadians can visit the mortgage centre www.rbc.com/mortgageadvice for access to advice about all aspects of their homeownership goals.…

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Home Ownership Still Affordable

Home Ownership remains within reach for most Canadians but is getting increasingly difficult for families with household income less than $50,000, finds CIBC World Markets Inc.’s new Home Ownership Affordability Index.

Today, Canadians spend 15.6 per cent of their average gross personal income on mortgage payments, which is about the same as ten years ago. When adding in hydro bills and property/municipal taxes, it rises to about 22 per cent of gross income. However, this amount varies widely depending on where you live, how much you make and how old you are.

“The vast majority of home owners in Canada regardless of their age have not experienced any worsening in affordability despite the rapid increase in prices,” says Benjamin Tal, senior economist at CIBC, in his latest Consumer Watch report. “The only sub-group of households that have seen some deterioration in their affordability position is older Canadians with average income of less than $50,000. Zooming in on this group we find that on average they spend close to 60 per cent of their gross income on mortgage payments, property taxes and electricity costs. This is three times the average ratio seen among households at the same age groups but with income of over $50,000.”

While these mortgage holders have seen their affordability drop over the last year, Mr. Tal notes that, unlike the U.S., this vulnerable group of Canadian mortgage holders is on the decline. This group accounts for only 13 per cent of all mortgages in Canada, down from 19 per cent five years ago. He adds that the least vulnerable mortgage holders in Canada – those over 35 with incomes over $50,000 – now comprise some 65 per cent of mortgages in Canada, up from less than 50 per cent of the market in 2003.

“The practical implication of this finding is that the composition of the mortgage market in Canada has, in fact, improved over the past few years,” adds Mr. Tal.

In addition to percentage of income spent on mortgage payments, he also looked at house prices and interest rates in determining affordability. When it comes to prices, he finds that Canadian homes are overshooting their fair value. “The average price of a house has risen by almost 23 per cent since reaching its recent cyclical low in January 2009, and it is now almost seven per cent above the level seen before the recession. This pace of appreciation has been quicker than justified by housing market fundamentals such as income, rent or demographic changes.”

Mr. Tal estimates that, on average, Canadian home prices are now around 14 per cent over their “fair” value. This translates into more than 1.5 million houses in Canada – about 17 per cent of all dwellings in the country. He calculates that about 760,000 of these are overvalued by more than five per cent. B.C. and Alberta house prices have overshot the most with nearly one in four homes in those provinces above their fair value.

“It is hardly a surprise that British Columbia has the worst affordability reading in the nation. But note that the gap between British Columbia and Ontario is not as large as most people think. Despite strong housing markets, Manitoba and Saskatchewan still enjoy the best home ownership affordability in the nation.”

The Canadian housing market has started to stabilize in recent months. Supply is on the rise with April’s new listings climbing by close to 3.4 per cent on a smoothed month-over-month basis. The current pace of monthly increases in new units is the fastest seen since early 1990. At the same time, unit sales are now falling on a month-over-month basis following a very strong increase in mid-2009. As a result, home prices are starting to respond, with the three-month moving average growth decelerating rapidly over the past six months.

“While the booming housing market is starting to come back to earth, the fact that prices are overvalued today does not necessarily mean that they will crash tomorrow,” says Mr. Tal. “After all, a violent market correction needs a trigger such as the sub-prime crisis which ignited the U.S. real estate meltdown, or abnormally high interest rates as was the case during the 1991 property crash in Canada.

“Fortunately, that is not on the horizon this time around. While the Bank of Canada is very clear about its intention to raise rates soon, an array of limiting factors including a strong dollar, the end of fiscal stimulus, a slower pace of economic activity in the U.S., and a more rate-sensitive household sector suggest that rates will only climb very slowly over the next two years.

Unlike the U.S., the extended period of low interest rates in Canada did not lead to a surge in the number of mortgage borrowers in this country. In …

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Strong Fundamentals Should See Canada Lead G-7 Economies

Strong commodity demand, comparatively low government and corporate debt along with favourable demographics should see Canada’s economic prospects lead those of the G-7 nations for much of the next decade, finds a new report from CIBC World Markets Inc.

The report notes that eurozone debt woes, along with geopolitical tensions in Asia, have, not surprisingly, grabbed the attention of the investor world recently. These concerns have overshadowed the strong longer-term fundamentals of Canada’s economy that could see the second decade of the 21st century be this country’s time to shine.

“Canada’s resource endowments, resilient financial system and favourable demographics relative to other G-7 nations make it an economic contender looking out over the next 5-10 years,” says Avery Shenfeld, Chief Economist at CIBC. “Another notable positive is in the healthier state of public and corporate sector balance sheets.

“These factors are no iron-clad recipe for national success in the near term, but do mean Canada is better-positioned than many of its competitors to deal with the challenges of the upcoming teen years. And where economic growth goes, corporate earnings, dividends and other rewards for investors are likely to follow.”

Mr. Shenfeld agrees with research that says economic rebounds from recessions linked to financial crises face greater headwinds than typical up-cycles. Government debt and the need to tighten fiscal policy in the aftermath of crisis rescue efforts appear to be the key transmission mechanism for this relationship. The research shows that countries that have higher indebtedness typically have slower rates of real per capita growth in the five years following the recession.

Given this, Canada is well positioned to outpace the typical major industrialized economy in the next few years, having less gross debt, and much less net debt, than most other nations. He notes that while an earlier rate hike cycle could prevent such a growth differential from showing through in 2010-11, Canada will have a longer-term advantage of dealing with a much lighter burden from fiscal restraint. Canada’s current federal deficit of three per cent of GDP (or five per cent including the provinces) pales next to double-digit deficit-to-GDP ratios for national governments in the U.S. and the U.K. The result is that if each country aimed to stabilize its debt-to-GDP ratio at 45 per cent, Canada would require a retrenchment of less than three per cent of GDP, while others would need fiscal cuts several times larger.

“That doesn’t mean that Canada won’t see a huge fiscal drag in 2011 – we estimate that the swing from stimulus to restraint represents a two per cent of GDP headwind in that year,” says Mr. Shenfeld. “But thereafter, the pain will be much lighter here than elsewhere.”

He adds that Canada’s economic growth will be driven by medium-term trends in population and productivity. “Demographers here and elsewhere are concerned about an aging work force that will slow growth ahead, but Canada is still well positioned relative to other mature economies. Japan is already seeing labour force shrinkage, and is ill-positioned to attract immigrants given language barriers and cultural homogeneity in its existing population. Fueled by immigration to a multi-cultural society, Canada’s economically active population is still set to grow faster than that of the U.S. or Europe.

“Immigration also has a side benefit, in terms of helping Canada make inroads into some of the world’s faster growing developing-economy markets. Research across countries has identified that bilateral trade tends to be enhanced between countries in response to the movement of people from one to the other. Business and cultural ties to the home country can facilitate the movement of goods, a trend that appears evident in the Canadian data. Continued in-migration from East Asia and South Asia should help build Canada’s export prospects in these fast growing markets.”

Mr. Shenfeld also expects Canada’s economy will see an output boost in the coming years as Canadian businesses invest in productivity-enhancing capital equipment. He notes that corporate Canada is carrying less debt than its U.S. counterpart leaving it more room to finance those plans. Governments have also done their part to encourage such spending, with corporate tax rates headed below those in all of the nation’s major developed-economy competitors.

“Productivity, which focuses on the volume of goods produced per hour, doesn’t, moreover, tell the whole story in terms of income and wealth,” finds Mr. Shenfeld. “In the past decade, volume gains were supplemented by an improvement in the global market value of the goods that Canada sells to the rest of the world (particularly commodities) relative to what it imports (consumer goods).”

He adds that even including the setback from softer energy and metal prices during the recent global recession, those terms-of-trade gains accounted for about a third of Canada’s domestic income growth since 2002. That trend almost certainly has further to run …

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BMO Urges Business Owners To Take Advantage Of Incentives On Eve Of Tax Deadline

With one day left for small business owners to file their income tax return there are still ways for entrepreneurs to take advantage of various tax-saving strategies.

“It’s not too late to maximize tax incentives that can ultimately help small business owners boost their bottom line,” said Mark Shoniker, Director, Commercial Banking, BMO Bank of Montreal. “From choosing the right payment method to maximizing income-splitting, entrepreneurs should work with a tax expert – such as a Chartered Accountant – to make the most of the tax strategies available to them.”

Mark Shoniker is available for interviews with media on last-minute tax tips and strategies to save this season.

Small business owners can also check with their financial institution for tax information. BMO SmartSteps for Business (bmo.com/smartsteps) is an online tool providing tax tips to entrepreneurs as well as a customized plan to make their banking more efficient, while taking care of financial needs that go beyond their businesses.

Key tax tips for business owners found on BMO SmartSteps for Business include:

Income splitting

Family-run businesses can capitalize on income-splitting by hiring a spouse or children as employees, since a reasonable salary is deductible. They pay the tax themselves, and if they pay at a lower rate, there could be tax savings for the overall family.

Take caution to ensure their pay is reasonable, their roles in the company are clearly defined, and their performance is well documented.

Deductions for small businesses

A small business tax deduction can reduce the combined corporate tax rate on the first $500,000 of active business income to as low as 12 per cent.

The deduction may be available if your company qualifies as a Canada Controlled Private Corporation (CCPC), carrying on an active business in Canada.

Exemptions for capital gains

Small business shares can qualify for a lifetime capital gains exemption of up to $750,000. Some rules apply, however, including that the claimant must have owned the shares for at least two years before selling.

Remuneration options

Small business owners who have incorporated their business have greater flexibility in determining how to be compensated, such as choosing to pay themselves a salary, dividend, or both.

For example, a reasonable salary can create personal RRSP room, provide a deduction for the business, and help bring taxable income below the $500,000 threshold for the small business deduction. On the other hand, a dividend may be taxed at a lower rate for the owner than a salary or bonus, but would not be deductible for tax purposes.

It is important to note that with corporate tax rates poised to decline in Canada, knocking down profit to below $500,000 by taking out salaries may not be the best strategy. Instead, small business owners could pay the corporate tax rate instead of the top personal rate, and wait until funds are needed before paying a dividend.

“Entrepreneurs can always benefit by dusting off their books and doing a little spring cleaning,” added Mr. Shoniker. “Evaluate your goals, review your tax strategy with a CA, and use BMO SmartSteps for Business for tips on boosting efficiency and productivity.”…

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Renovation Spending In 2009 Up By $4.5 Billion Across 10 Major Centres

An estimated 2.1 million households in 10 major surveyed centres indicated they completed renovations last year according to the Renovation and Home Purchase Survey released today by Canada Mortgage and Housing Corporation (CMHC). The average cost of renovations was approximately $12,100.

The Renovation and Home Purchase Survey reports on actual renovation expenditures made in the previous year, as well as intentions to buy or renovate a home in 2010 in the following 10 major centres: St. John’s, Halifax, Québec City, Montréal, Ottawa, Toronto, Winnipeg, Calgary, Edmonton, and Vancouver.1 The survey provides timely information on renovation market trends.

“More than $25.8 billion was spent on renovations in 2009 across the 10 major surveyed centres, an increase of about $4.5 billion compared to 2008,” said Gustavo Durango, Senior Economist at CMHC. “As well, when Canadian homeowners were asked about their renovation plans for this year, 43 per cent indicated that they intend to spend $1,000 or more by the end of 2010.”

Half of the households surveyed reported that the cost of renovations undertaken in 2009 was in line with what they had budgeted, while 35 per cent said that they went over their planned budget for the renovation. Twenty-seven per cent of households that undertook a renovation project hired a contractor for a portion of the work. Twenty five per cent of renovations in 2009 were completed by “do it yourselfers”. However, many households (42 per cent) chose to contract out the entire renovation project.

Across the surveyed centres, 76 per cent of households who undertook renovations in 2009 paid for the work from savings, a slight increase from 75 per cent in 2008.

The main reason given by households for renovating in 2009 was to update, add value or to prepare to sell (52 per cent). Thirty-two per cent said the main reason for renovating was that their home needed repairs. The top three renovations completed last year were: remodelling rooms (34 per cent); painting or wallpapering (29 per cent); hard surface flooring and wall-to-wall carpeting (27 per cent).

Of the 10 major surveyed centres, the highest percentage of homeowner households that renovated in 2009 was in St. John’s at 59 per cent, followed by Ottawa at 58 per cent, and Halifax and Winnipeg (both at 55 per cent). The centre with the lowest proportion was Montréal at 45 per cent.

Renovation intentions for 2010, across the 10 surveyed centres, are highest in St. John’s, where 55 per cent of consumers indicated they plan to undertake renovations costing $1,000 or more. This is followed by Halifax, Winnipeg and Ottawa (all at 50 per cent). The proportion of potential renovators is lowest in Québec City and Montréal (both at 39 per cent).

On the home purchasing front, six per cent of all households indicated they bought a home in 2009, unchanged from 2008. The largest share of homebuyers was in Edmonton (nine per cent), followed by St. John’s, Quebec, Ottawa and Winnipeg (all at seven per cent). The lowest share of homebuyers was in Toronto (five per cent).

Five per cent of households across the surveyed centres intend to purchase a home that will be used as a primary residence in 2010.

Home buying intentions are strongest in Edmonton where seven per cent of households reported that they are considering buying a home this year, up from six per cent in 2009. Purchase intentions are the lowest in St. John’s and Ottawa at four per cent (these were the only jurisdictions reporting lower intentions than last year, a decline from five per cent in 2009).

As Canada’s national housing agency, CMHC draws on more than 60 years of experience to help Canadians access a variety of high quality, environmentally sustainable and affordable homes. CMHC also provides reliable, impartial and up-to-date housing market reports, analysis and knowledge to support and assist consumers and the housing industry in making vital decisions.…

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Ontario Out Of Recession, But Road Back To Balanced Budget Will Be Tough

The Ontario economy has pulled out of recession as the auto sector is rebounding and domestic demand, led by housing, is gaining strength, according to the Provincial Outlook report by BMO Capital Markets Economics. But the recession left a deep dent in Ontario’s economy, and a number of factors will likely temper growth in the coming years: a strong loonie, sluggish U.S. consumer demand and fiscal restraint. Growth this year is expected to reach 3.4 per cent before slowing to a below-average 2.9 per cent in 2011.

“The auto sector did the most damage to the Ontario economy in 2009, with production falling as much as 60 per cent below prior-year levels,” said Robert Kavcic, Economist, BMO Capital Markets. “However, production has since bounced back, and recent announcements like the $245 million investment by GM in St. Catharines, a third shift at GM in Oshawa and a second shift at Honda in Alliston, are encouraging. Still, the recovery in the broad manufacturing and export sectors will remain tepid as the loonie hovers at strong levels; real net exports were negative in the last two quarters of 2009.”

The trouble in manufacturing has lifted Ontario’s unemployment rate to 8.9% in May, above the national rate and now also above those in Quebec, New Brunswick and Nova Scotia. Still, while the goods sector remains depressed, service-sector employment has recovered to record levels and will remain a key support.

Domestic demand in Ontario has firmed and will drive growth in 2010. Retail sales have bounced more than 10 per cent from their recession low, while the red-hot housing market is starting to cool.

The government of Ontario is projecting a $19.7 billion deficit in fiscal 2010/11, and has begun to plant the seeds of future spending restraint. The deficit clocks in at 3.3 per cent of GDP, and will be followed by another six years of red ink before returning to balance in fiscal 2017/18. “This represents by far the longest and deepest stretch of deficits among the Canadian provinces,” noted Mr. Kavcic.…

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