Mortgage Penalties - Are Canadians getting a fair deal?

When you signed your mortgage contract did you sit down and fully read through everything or, did you do what most people do, rely on your mortgage specialist to explain the ins and outs of your debt? I would suggest you take some time and read it through toughly. In the end I think you will agree it isn’t exactly a two way street.

I think we all understand the charges for NSF, missed payment or late fee’s but the real scorchers are the ones that come when you are looking to get a head or just looking to get out!

For instance, let’s say you sign a 5 year mortgage of $300,000 at a fixed rate of 5.69%. 3 years go by and a friend tells you they just locked in at 3.59%. Obviously you would want to make the switch right? Well to do so you will be looking at paying a hefty fee to part with your lender.

How about if you run in to tough times and are struggling make the payments. You decide to sell, rent for a few years and get back on your feet. Lucky for you the market is good and you‘re in a position to sell and turn a profit!

Hold on - You have 2 years remaining on your term. The bank could hit you with a breakage penalty of anywhere between $5,000 to $14,000 dollars. It may make you think twice about what you want/can to do.

Pre-payment penalty charges are well stipulated in your mortgage document. The amount depends on many factors, however, for fixed rate mortgages they are calculated using the IRD method (Interest Rate Differential) and usually come to thousands of dollars. I was personally faced with this a few years back. If we decided to payoff and close our $170,000 mortgage we would have to pay a penalty of $8,600. We decided to port the mortgage and bring it to our next property.

If you ask the banks to explain the reasoning behind these fees they will most likely tell you they need to collect a portion of the interest the bank would’ve made if you stayed on until the end of your term. Makes sence right? In other words the contract that is signed when you opened your mortgage is an agreement that holds risk for both yourself and the bank and the bank needs to realize the benefits of the contract.

Let’s break this down:

1.      Lendy Equity Inc. does its due diligence and approves Jane Doe for a mortgage of up to $350,000 and offers her a rate of 5.69% on a 30 year amortization loan.

2.      Being the conservative lady Jane looks and finds a home for $300,000. She has saved $20,000 to be put towards her new home and heads to the bank!

3.      Jane decides she will put down the $15,000 (5% the Canadian minimum when buying a new home) and save the rest for closing costs.

4.      Because Jane is only putting down 5% she has no choice but to take out CMHC Insurance which protects the bank in case the mortgage goes in to defaults and will cost her over $9,000.

5.      During talks with her lawyer she decides it is necessary to obtain title insurance to protect her investment against title fraud, unknown liens or encroachments.

If the buyer can’t pay the lender is protected, if the house has issues with the title or liens it falls on the buyer and if they want to get out of the mortgage for a better rate the buyer faces lavish buyout fees. If you ask me it the bank is pretty safe.

Side Note – in the example above the interest collected by the bank after 3 years of the 5 year term would be $47,133.14. The principal paid would only be $11,920.90. I’d say it seems pretty excessive to charge someone a penalty after that kind of a return.

Around the world countries seem to feel the same way. On March 23, 2011 Australia banned the so called “Exit Fees”. Australian regulators found that such fees are so unfair that they have to be banned made them illegal. Here is what International Business Times reports.

Australian Treasurer Wayne Swan spoke of how this law was a victory for Australian families “This is an important day for consumers because one of the biggest roadblocks stopping Australians getting a better deal for their families will finally be removed,” he said…“This critical measure will help boost competition in the home loan market over time, by giving consumers greater freedom to walk down the road if their bank isn’t doing the right thing by them.”

“Exit fees” in Australia are the equivalent of our pre-payment penalty fees. Here is the explanation of “exit fees”:

Exit fees, or early redemption penalties, are fees that are charged to a home owner when they are finishing their loan at an earlier stage of the loan than agreed… Exit fees are often a hidden cost when changing mortgages. A mortgage can look to be a lot cheaper, but the exit fees from the old mortgage will often mean that the cost is quite a bit higher than it appeared at first.

As of June 1, 2011 exit fees are banned in Australia. Canadians on the other hand will continue to pay thousands of dollars if they decide to try and get a head.

Another Example of how the tide may be changing is SBI (State Bank of India). On April 23, 2011 SBI announced that they will no longer be charging a penalty to break a mortgage. You may ask, “is this true, a bank making the decision to not charge a fee just to be fair?” Well that what happened! To read more go to the Hindu Business Line.

So what is a person like you a me to do? Maybe nothing, but if you think like me that isn’t good enough. I suggest we all write our local MP and demand they address this issue publicly. Canada is known for our strong standards on how we govern our banking industry. Maybe it’s time we not only protect the bank but also the people who use them.  After all, the Government is supposed to protect the average Canadian, and in the end it would do just that.

Marihuana Grow Ops: What a buyer should know

An increasing number of houses in communities across Canada are used as indoor marijuana growing operations, or “grow ops”. The houses undergo significant structural changes in order to be used to grow the plants; these changes can compromise the integrity and inhabitability of the house, and can require major repairs and renovations to correct. The average cost to repair a home previously used as a grow op is $41,000, according to the Insurance Bureau of Canada. In rare large operations repairs to a home could exceed $100,000-$200,000 in damage and may need to be tore down all together.


The Ottawa Real Estate successfully lobbied the City of Ottawa and Ottawa Police Services to create a “Grow Ops Registry” where the addresses of houses that have had search warrants executed and drug operations dismantled are published online. This service began February 1, 2008. The list can be found here:


Ottawa Police Service - Marijuana Grow Operations


Further information on how to spot a grow-op in your neighborhood can be found here:


Ottawa Police Service - How to Spot a Marihuana Grow Operation


If you suspect that a home is being used as a grow-op, please contact police immediately.

Here are some links to more information about grow ops:

Government of Ontario legislation on grow ops:


CTV News - Possible provincial grow ops registry:

When a home is being sold it is a Realtors obligation to make it known that it was previously used as a grow-op. In fact, even if the home was sold a few times it is still the responsibility of the Realtor to disclose the past history of the home.

March sales back to normal after HST-fueled 2010

Members of the Ottawa Real Estate Board sold 1,232 residential properties in March through the Board’s Multiple Listing Service® system compared with 1,495 in March 2010, a decrease of 17.6per cent. The five-year average for home sales in March is 1,256.


Of those sales, 296 were in the condominium property class, while 936 were in the residential property class. The condominium property class includes any property, regardless of style (i.e. detached, semi-detached, apartment, stacked etc.) which is registered as a condominium, as well as properties which are co-operatives, life leases and timeshares. The residential property class includes all other residential properties.


“As you can see, last month was an extremely average one in terms of resale home sales, in a way that 2010 was certainly not. The effects of the introduction of the Harmonized Sales Tax in July were already being felt in March as buyers leapt into the market to try to avoid taxes on the services associated with a real estate transaction,” said Board President Joanne Tibbles. “Years in which there are unusual market forces, such as the HST in 2010, tend to create skewed comparisons with subsequent years. Ottawa’s housing market is ticking along much as it usually does in early spring,” Tibbles added.


The average sale price of residential properties, including condominiums, sold in March in the Ottawa area was $346,148, an increase of 4.9 per cent over March 2010. The average sale price for a condominium-class property was $253,763, an increase of 6.5 per cent over March 2010. The average sale price of a residential-class property was $375,364, an increase of 5.6 per cent over March 2010. The Board cautions that average sale price information can be useful in establishing trends over time but should not be used as an indicator that specific properties have increased or decreased in value. The average sale price is calculated based on the total dollar volume of all properties sold.


The Ottawa Real Estate Board is an industry association of 2,640 sales representatives and brokers in the Ottawa area. Members of the Board are also members of the Canadian Real Estate Association.


The MLS® system is a member based service, paid for by the REALTOR® members of the Ottawa Real Estate Board. The MLS® mark symbolizes the cooperation among REALTORS® to effect the purchase and sale of real estate through real estate services provided by REALTORS®. MLS® commercial and residential listings are available for viewing on the Board’s internet site at www.OttawaRealEstate.org and on the national websites of The Canadian Real Estate Association at www.REALTOR.ca and www.ICX.ca.

Resale homes sold more quickly in February

Members of the Ottawa Real Estate Board sold 936 residential properties in February through the Board's Multiple Listing Service® system compared with 1,030 in February 2010, a decrease of 9.1 per cent. 213 of those sales were in the condominium property class, while 723 were in the residential property class.

The average sale price of residential properties, including condominiums, sold in February in the Ottawa area was $338,408, an increase of 6.7 per cent over February 2010. The average sale price for a condominium-class property was $260,112, an increase of 6 per cent over February 2010. The average sale price of a residential-class property was $361,475, an increase of 6.9 per cent over February 2010. The Board cautions that average sale price information can be useful in establishing trends over time but should not be used as an indicator that specific properties have increased or decreased in value. The average sale price is calculated based on the total dollar volume of all properties sold.

Once again we're seeing sales numbers very close to the five-year average for February, which is 962 sales. It's important to note that the homes that sold last month did so far more quickly than in January, spending an average of just 33 days on the market. As well, prices rose slightly more than they had in the previous two months which indicate we still have a very steady market here in Ottawa. This tells us that there is a demand for resale homes in Ottawa, and that when buyers see the home they want, they're going after it, perhaps even going up against other bidders.

If you are in the market for a new home, and think you might encounter a multiple-offer situation, don't be nervous: be prepared! Having a real estate professional working on your behalf is a great place to start. He or she knows the ropes, can act as your negotiator with the seller or their agent, and can offer advice on how to proceed if another offer does compete with yours.

You'll want to make sure you have your mortgage financing pre-approved before submitting an offer, so that you know what you can afford and still maintain your lifestyle. In a multiple-offer situation it's easy to get swept up and try to win the offer at any cost, but you don't want to overpay, get yourself into financial hot water or find out that it won't pass an appraisal.

Next, get the name of a registered home inspector to call when you find a property you want to make an offer on. Making your offer conditional upon a satisfactory home inspection by an accredited professional is always a good idea. Also, talk to your insurance provider to make certain you can get home insurance on the property you're interested in bidding on. Your mortgage provider won't release your funds if the property that acts as collateral for your mortgage loan is uninsurable.

When you enter into a multiple-offer situation well-prepared, with professional advice and a solid strategy, you'll be able to make your best offer with confidence.
To view archived articles, click on the Newsletters, Guide & Useful Articles button on Ottawa's REALTOR Link® home page. From the blue left-hand menu, click on Useful Articles, and you will see a list of the last ten articles. Click "more" to see older articles.

The President's Pen column was prepared by the Ottawa Real Estate Board and first appeared in the March 10, 2011 issue of the EMC community newspapers.

Strong Economic Recovery & Low Interest Rates Point to a Stronger Than Anticipated 2011 for Housing Market

Prospect of rising mortgage rates may prompt heightened buyer activity early in the year, according to Royal LePage forecast

TORONTO, January 6, 2011 – The average price of a home in Canada increased between 3.9 and 4.6 per cent in the fourth quarter of 2010, compared to the previous year, as markets shrugged off a lackluster third quarter and returned to a post-recession growth profile. Home values are forecast to continue a moderate and steady climb in many of the country’s key housing markets through 2011 with sales activity skewed to the first half of the year, according to the Royal LePage House Price Survey and Market Survey Forecast released today.


The low cost of borrowing stimulated the housing market in 2010, and this trend is predicted to continue in the first half of 2011. The widely held consumer belief that rates will rise in the latter part of 2011 may prompt an increase in buying activity early in the year.


“Trends in the housing market continue to be driven by the lingering after-effects of the recession,” said Phil Soper, president and chief executive of Royal LePage Real Estate Services.  “Canadians realize that interest rates are unsustainably low and that homes will become effectively more expensive when mortgage rates return to normal levels.  We will likely see more price appreciation early in 2011 as some buyers complete transactions in advance of anticipated higher borrowing costs.”


Soper added, “2011 is expected to unfold much like 2010, when close to 60 per cent of sales volume occurred in the first half of the year in anticipation of interest rate increases that never materialized. However, housing market activity in the first half of 2011 will be modestly closer to the norm, as last year’s phenomenon was exacerbated by mid-year tightening of mortgage accessibility and the introduction of HST in Ontario and British Columbia.”


Regionally, the strongest price appreciation of the cities studied is expected in mid-sized urban centers where affordability is better than the national average. For example, in Winnipeg, St. John’s and Fredericton, two-storey homes below $300,000 are still widely available. Demand in these cities is expected to be strong, putting upward pressure on home values.


Cities in Alberta are expected to be among Canada’s strongest performing markets in 2011. Woes in the historically volatile region’s housing market stretch approximately five years, when the Alberta housing market suffered a sharp correction following several years of double-digit price increases.  The province’s energy-driven economy staged a comeback in 2010, recovering from the recession-led plunge in oil and gas prices.  Major employers are expected to steadily increase hiring in 2011 which should attract new residents to the province and put upward pressure on the limited supply of housing. Royal LePage forecasts the average price of a home in Calgary will increase 5.4 per cent through 2011 while Edmonton home prices will increase 3.3 per cent. Home sale transactions are predicted to rise 6.7 per cent in Calgary and 9.1 per cent in Edmonton over the same period.


Across Canada, the average price of a home is forecast to rise 3 per cent over the coming year to $348,600 while the number of transactions is expected to drop 2 per cent.


During the fourth quarter of 2010, average home prices either increased or stabilized year-over-year, with Winnipeg, Ottawa, Montreal and St. John’s seeing the biggest gains.  Nationally, the average price of detached bungalows rose to $324,531 (up 4.6 per cent), the price of standard two-storey homes rose to $360,329 (up 4.4 per cent), and the price of standard condominiums rose to $226,746 (up 3.9 per cent), compared to the fourth quarter of 2009.


Mr. Soper continued, “Like many Canadians, we anticipated an end to the ultra-low interest rate era before year-end 2010.  Paradoxically, global economic weakness, particularly in the United States, allowed policy makers and financial institutions to keep borrowing costs low, resulting in a stronger Canadian housing market and a better than forecast fourth quarter.”

 

REGIONAL MARKET SUMMARIES

The residential real estate in market in St. John’s, Newfoundland saw strong year-over-year price gains across all three housing types surveyed every quarter this year. However, market has showed signs of cooling as inventory starts to rise.


Detached bungalows and two-storey houses in Montreal saw an 8.7 per cent year-over-year increase in the fourth quarter, while standard condominiums jumped 11.3 per cent. Average prices in Montreal are forecast to increase by a more modest 3 per cent in 2011 as a more balanced market emerges.
Ottawa’s housing market saw year-over-year price appreciation ranging between 6.3 and 10 per cent across all housing types surveyed this quarter. However, as inventory grows, Ottawa can expect price increases to be closer to 4 percent in 2011.


House prices surveyed in Toronto increased modestly year-over-year. Standard two-storey homes witnessed the largest increases at 5.6 per cent. Market activity slowed in the second half of the year as buyers rushed to the market in the first half of the year in anticipation of interest rate hikes and HST.  For 2011, price increases are expected to be very modest at approximately 1 per cent.


Detached bungalows, standard two-storey homes, and standard condominiums in Winnipeg witnessed strong year-over-year price gains this quarter. Detached bungalows performed the strongest, increasing 10.3 per cent compared to the fourth quarter of 2009. Although the market is showing signs of cooling, sellers are still seeing multiple offers and are often receiving higher than their asking price. Winnipeg is expected to maintain its momentum throughout 2011 with prices rising around 7 per cent.


Single family homes performed best in Regina, which saw standard two-storey homes increase 9.1 per cent, while detached bungalows rose 8.4% and standard condominiums increased 2.4 per cent. Prices in Regina are expected to increase an overall average of 5 percent in 2011.


Both Calgary and Edmonton are positioned for house price increases in 2011 with a rebounding energy sector. In 2010, Calgary witnessed moderate year-over-year price depreciation across all housing types surveyed. Edmonton saw more modest price depreciation for two-storey houses, while condominiums decreased 5.7 per cent. Detached bungalows witnessed the only price increase among housing types surveyed at 1.2 per cent.


Single family homes in Vancouver dominated house price gains as two-storey houses rose year-over-year by 9.8 per cent in 2010. Condominiums on the East Side performed particularly well and, on average, Vancouver’s standard condominium market rose 7 per cent.  Vancouver prices are expected to increase 3.7 per cent in 2011.


Article written and produced by Royal LePage.

2010 Year in Review

2010 was a quite a year in Real Estate. It was a Sellers market at some times and a Buyers at others. We also saw record prices once again.


The total number of residential properties sold on the MLS system in 2010 was 15,536, down 787 from 2009 when 16,323 properties were sold. 12,318 of the 2010 sales were residential freehold properties and the remaining 3226 were condominiums. The average price for 2010 was $327,225, an increase of 7.7% over 2009.

Ottawa Real Estate Board President Joanne Tibble had this to say about the last year numbers,“2010 was an interesting year because of the introduction of HST. This, and changes to mortgage regulations affected spring and summer home sales, pushing many buyers and sellers into the market earlier in the year. However, we see from these numbers how stable Ottawa’s housing market remained, partly due to our diversified employment base that continues to weather unstable economic conditions with relative ease. Sales may have declined from what was, in fact, a record year in 2009, but prices have continued to rise at a healthy rate, demonstrating continued demand for resale housing in Ottawa.”

December 2010 Update

Members of OREB sold 581 residential properties (both condo and freehold) in December 2010 through the MLS system compared with 631 in December 2009.

Of December’s sales, 150 were in the condominium property class, while 431 were in the residential property class. The condominium property class includes any property, regardless of style (i.e. detached, semi-detached, apartment, stacked, co-operatives etc.) which is registered as a condominium, but does not include life leases and timeshares. The residential property class includes all other residential properties.

The average sale price of residential properties, including condominiums, sold in December in the Ottawa area was $324,556, an increase of 5.6 per cent over December 2009. The average sale price for a condominium-class property was $254,776, an increase of 3.5 per cent over December 2009. The average sale price of a residential-class property was $355,860, an increase of 7.8 per cent over December 2009. The average sale price information can be useful in establishing trends over time but should not be used as an indicator that specific properties have increased or decreased in value.

The average sale price is calculated based on the total dollar volume of all properties sold.