Mortgages - Don’t Worry, Be Smart

Posted on May 5, 2008 
Filed Under Buying Your New Home, Valerie Zinger

All the press on the effect of the U.S. sub-prime mortgages has highlighted the need to read a little more about it.  Here is a related article written by the President of the Ottawa Real Esate Board, Heather Skuce.

  Many of you have spent the last few months reading about the current crisis in the U.S. housing market, and wondering whether it could happen here in Canada. Garth Turner, an MP who recently published a book about real estate in Canada and the U.S., believes that Canadian homeowners are as overextended as Americans, and that Canadians will experience a similar crisis in the near future. Today, we’ll address two questions: whether the Canadian real estate market is at risk, and whether it’s still a good idea to buy or sell a home here in Ottawa. 

The fact is, the Canadian mortgage industry didn’t take as many risks as the U.S., and that has helped the Canadian real estate market remain healthy. According to the Canadian Bankers Association, a record low number (0.24%) of Canadian mortgages were in arrears as of July 31, 2007. Also, the Canada Mortgage and Housing Corporation (CMHC) notes that last year, only five per cent of mortgages in Canada were classified as “subprime” (loans given to high-risk borrowers who have below-average credit ratings), while in the U.S. in 2007, about twenty per cent of all mortgages were subprime. That’s a huge difference. Much of the current situation in the U.S. can also be attributed to “exotic” loans, sold to borrowers without a proven history of managing debt, that are not available in Canada.

There’s also been talk in the Canadian media about homeowners overextending themselves by taking advantage of new mortgage products such as 40-year amortization and no down payment plans. However, borrowers who take advantage of those products still have to prove, in addition to many other requirements, that they have an excellent credit history and that they have been employed full-time for several years.   In the U.S., foreclosures are up and home prices are down because too many homes are sitting on the market, and owners reduce their asking prices just to find a willing buyer. But data from the Canadian Real Estate Association and the CMHC show that in Ontario, home prices are increasing at a faster pace than residential mortgage debt, meaning that sellers can still get a fair price for their homes. Prices across Canada are forecast to continue to rise through 2008. Also, sales are brisk: homes sold in Ottawa last month stayed on the market for an average of just 34 days. In other words, the market looks a lot like it has for the past few years - strong and still growing.   So don’t worry - but be smart and realistic about which home you purchase. Leave room in your monthly budget for emergencies and small luxuries. That may mean buying a different home than the one you envisioned, but no one wants to be so “house poor” that they can’t afford occasional niceties like dinner out or a new pair of shoes. Take advantage of tools such as the federal Home Buyer’s Plan (which allows first-time homebuyers to withdraw up to $20,000 from their RRSP to put towards their down payment) and the Land Transfer Tax rebate for first-time buyers. Account for closing costs, new furniture and appliances or renovations. In the end, buying a home that leaves room in your budget for more than just your mortgage will help you sleep better under your new roof.    

The President’s Pen column was prepared by the Ottawa Real Estate Board and first appeared in the April 8, 2008 issue of the EMC community newspapers.

Comments

One Response to “Mortgages - Don’t Worry, Be Smart”

  1. West Toronto realtor on May 5th, 2008 7:46 am

    Working for several years as a Toronto realtor I`ve experienced many surprising situations regarding the real estate market but I have always been sure that as the Canadian economy is stable the real estate market is staying solid. We have already noticed that what does it mean when slowdown comes in but fortunately it hasn`t ruined the market. People in Canada are still very eager to invest into real estate and I think that we shouldn`t disregard this fact.

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