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Sunday, July 23, 2006

How Mortgages Have Changed

The following are exerpts from an article in the Vancouver Sun about different generations attitudes towards and experiences with mortgages over the years. ALthough the article references the Vancouver market quite a bit, it is still quite relevant to Edmonton. It's quite interesting.

Mortgaged Dreams
Michael Kane, Vancouver Sun
Published: Saturday, July 22, 2006

Attitudes to debt have changed over the generations as real estate prices have skyrocketed in Greater Vancouver and the rest of B.C. While survivors of the Great Depression worked to be mortgage-free, many younger people have been anything but reluctant to borrow money to finance the home they have always dreamed about.

Lindsey McDonald bought her first real estate in Cloverdale two years ago when she was 22. The ambitious student sees her mortgage as an opportunity to build wealth and expects to sign up for more and bigger loans in the years to come.

In contrast, John and Joan Ross bought their first home in 1959 and "survived and sufficed" to become the mortgage-free owners of a bigger home on Vancouver's west side by the end of the 1970s. As children of the Great Depression, the two seniors have avoided significant debt ever since.

In the middle are baby boomers such as Bill and Marlene McLean who bought their first property in the early '70s, worked like the dickens to pay off the mortgage within eight years, and have repeatedly refinanced their home to renovate or build 40 houses for sale. With retirement on the horizon, most of their contemporaries can only wish they had been so bold.

Attitudes to debt have changed over the generations as real estate prices have skyrocketed. At the same time, mortgages have evolved to do much more than simply sustain the great Canadian dream of home ownership...

Once upon a time, the best mortgage was no mortgage. That's if Joe or Jane Average could even find one.

The big banks were barred from offering residential mortgages until 1953...

Single women had to wait many years before being taken seriously as potential homebuyers and the incomes of married women still weren't counted for mortgage qualifying purposes until well into the 1970s.

Until recently, the standard wisdom was to pay your mortgage down quickly because mortgage interest generally cannot be written off against other income. Debt was seen by many as an intolerable burden to be shaken off as soon as realistically possible...

Today we are hanging on to our mortgages for longer, sometimes into retirement. The modern mortgage has evolved into a source of capital for investments, which typically makes the interest cost tax-deductible, and a personal money machine or ATM to minimize the interest cost of consumer spending.

To many, a mortgage has become a flexible friend that allows more first time buyers to enter the real estate market and permits repeat borrowers to maintain their living standards and, potentially, grow their wealth.

To others, the mortgage has become the modern-day equivalent of the company store, enticing Canadians to ratchet up debt beyond their means and keep them chained to work when they might be embracing retirement.

There is a nagging concern that easy money is pushing home prices to unsustainable levels and that younger buyers could find they are in too deep when interest rates move up or when the real estate market sours.

When the Royal Bank entered the consumer mortgage market in the 1950s, its advertising showed an "average" house valued at $8,000 could be bought with monthly payments of $48.88 after an $800 down payment. Fast forward 50 years and the average detached home in Greater Vancouver is selling for $718,687. If you can come up with a 10-per-cent down payment of $71,869, your monthly payments will be $4,023, assuming a five-year term at 5.70 per cent and a 25-year amortization.

- - -

The modern mortgage offers a range of features that were largely unknown a generation ago. There are weekly, biweekly and lump sum prepayment options to reduce the total interest paid. There are open mortgages with rates that track the bank rate and fixed-rate mortgages for terms from six months to 10 years, and even longer. And there are interest-only mortgages that allow people to remain in homes where they have built up equity but which they might otherwise be unable to afford.

The mortgage has even become a tool to reduce borrowing costs through "all-in-one" or "total equity" products such as Envision Financial's "Redfrog" which keeps the customer's money working all of the time...

Mortgages have become increasingly flexible and so much more than a necessary tool to acquire a home, says Vancouver's Rob Regan-Pollock of mortgage brokers Invis Inc.

"Looking back at the previous generation, the mindset was to pay it down and become free and clear as quickly as possible, and then you have a certain number of years to amass some assets for retirement.

"Mortgages were never really thought of an investment vehicle or a way of creating wealth or minimizing interest costs for consumer goods or other items that might be required."

Increasingly, Regan-Pollock is dealing with clients who are borrowing against their principal residence for the down payment on an investment property.

"People are realizing that leveraging, whether to invest in the stock market or to acquire rental properties, is a proven way to create wealth. It's using other people's money to help better your circumstances long-term.

"Of course, there are downsides to that, including market risk and budget comfort, and that's where professional guidance is really essential."...

Mortgages have morphed into a continuous credit facility with homeowners tapping into their equity to pay for investments, renovations, debt consolidations, post-secondary education and even car purchases, says Ben Eyton, an investment specialist with North Shore Credit Union.

"The younger generation feel a lot more comfortable with credit than their parents or grandparents did. They really grew up watching their parents carry debt, so they are familiar with it. They've never really had to feel the pinch of going without."

Eyton worries that today's borrowers fixate on getting the lowest interest rate possible when he would prefer they sit down with a financial adviser to assess how "this ongoing facility through life" is going to impact their cash flow, taxes and estate planning.

He notes that a 40-year mortgage can lower monthly payments on a typical $350,000 mortgage by about $300 monthly but it will increase the borrower's total interest payments by a whopping 75 per cent unless they can make extra payments later on.

Now Canada Mortgage and Housing Corp. has introduced a mortgage that is interest-only for up to 10 years while "sub-prime lenders" are moving into the Canadian market from the U.S. to offer higher cost mortgages to higher risk borrowers...

While rising prices and interest rates are making it tougher for first-time buyers, homes in Greater Vancouver are still more affordable than they were 15 or 20 years ago, says Kevin Lutz, regional mortgages manager with RBC Financial Group.

Of course, mortgage amounts have risen sharply to keep pace with prices. In July, 1999, the average mortgage approved by the Royal's specialists in B.C. was $143,000. In July, 2006, it is up exactly $100,000 to $243,000.

Lutz says borrowers are comfortable with bigger loans when their equity is growing and "they are seeing their homes as their retirement nest eggs more than they ever have before."

As for buyers biting off more than they can chew, Lutz notes that mortgage defaults remain rare and home buyers still have to qualify for a mortgage under the same debt-to-income ratios that applied a generation ago, although they are more likely to push those limits to the maximum today. The rules are even stricter for buyers of investment property...

Mortgage Facts

- Canadians typically pay off their mortgages in 22.5 years, a number that has not changed significantly over several years of tracking.

- The chartered banks hold 72 per cent of the mortgage market but share held by credit unions has grown to 16.6 per cent from 6.4 per cent in 1970.

- Roughly 60 per cent of Canadian homeowners have mortgages. Average remaining mortgage principal is $116,800.

- Two-thirds of Canadians have fixed-rate mortgages, 22 per cent have variable rates, and 11 per cent have a combination of fixed and variable rates.

- 56 per cent of people aged 55-plus hold a mortgage but seven in 10 say it is very important to pay it off by retirement.

- 17 per cent of homeowners say their homes will be their primary source of retirement income.

- Only 28 per cent of baby boomers are very confident they will be financially secure in old age compared to 41 per cent of those who are younger and 47 per cent of those who are older.

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