For most of her life, 56-year-old Royal City resident Jackie Olds thought owning a home was nothing more than a pipe dream.

The market in the Lower Mainland was spinning out of control. There was no way she could ever afford to own, she couldn’t pay for those tricky, hidden costs. Or, so she thought.

“During my last experience trying to rent a place it was just a nightmare,” she said.

“Everything was overpriced and filthy. I went to this one apartment and lifted up the bread board and it was covered in bugs. I left in tears.”

Once the tears dried up, Olds decided to sit down and take a long look at her budget and see if she could manage the daunting jump into home ownership.

“It’s so scary, you just never feel like you know you can do it,” laughed Olds, now the owner of a condo in New Westminster’s Brow of the Hill neighbourhood.

“But, if you do your homework and you don’t rush in, it’s amazing.”

Soaring prices

While Vancouver has become a place where real estate watching has become a sport of sorts—seemingly never-ending fodder for dinner party and water cooler chatter—those hoping to break into the market can feel overwhelmed at times.

According to the Real Estate Board of Greater Vancouver, the average detached home on the west side of Vancouver currently sells for $1.7 million. On the east side of the city, a detached home goes for around $746,000; in Burnaby, it’s $791,000.

But according to realtor Adam Goss, there are still attractive options for the first-time home buyer who doesn’t make $200,000 a year. The key is to equip themselves with a few tools before making that uncertain leap.

Goss said first things first: understand your finances.

Know where you spend your money and then decide what expenses you’re willing to part with to own a home.

For most, owning a home is a sort of forced savings plan, Goss said, and it’s going to affect your lifestyle.

“I recommend seeking a mortgage pre-approval and working off the figures provided to determine where buyers feel financially comfortable and what will be manageable.”

Find a neighbourhood

From there, the question arises as to which neighbourhood to live in.

Each presents its unique set of real estate hallmarks—from the type of housing available, to the cost, to the amenities you’ll find there.

For example, New West’s Sapperton neighbourhood has a number of 30-year-old condos. These buildings are generally wood-frame with shared laundry areas. These aspects tend to lower the price of a condo, with one-bedroom suites typically in the $165,000 to $185,000 range. For a two-bedroom suite, buyers will be looking in the $200,000 range.

Similarly, New West’s Brow of the Hill—below Sixth Avenue and west of Sixth Street––offers little in the way of new product. The bulk of buyers interested in this area will be looking at 20-year-old wood-frame buildings with one-bedroom units going as low as $150,000.

“The great thing for new residents in New West is the door to this community is wide open,” said Goss.

“Although we do hold on to our history tightly, and people are attracted to that, there is also more of willingness for change and a move forward these days. There are some exciting projects on the go.”

SkyTrain factor

Next door in Burnaby, new construction abounds.

Just over two decades ago, the area around the Edmonds SkyTrain Station—now known as City in the Park—was dominated by forest and ravine, so the buildings there tend to be newer, concrete structures.

In-suite laundry, gyms, saunas and unobstructed views of the mountains are all available, and will affect the value of a unit. Recently sold two-bedroom units in the area have gone for around $280,000, but some have gone for as high as $349,000.

Over in Burnaby’s Metrotown neighbourhood, the city’s busiest area, the first-time buyer will find much of the same.

Recently sold condos have gone for as low as $308,000 for a two bedroom, and the $325,000 range is the average. Where Metrotown separates itself from other popular areas with first-time buyers is its proximity to the mall and the commercial centre of Burnaby. Location within that corridor, however, raises the value of a property, according to realtor Doris Gee.

“People still, of course, work in Downtown Vancouver so living around the SkyTrain in Burnaby just makes sense,” said Gee, who’s been specializing in Burnaby properties since 1989.

“This convenience of Burnaby has always been attractive for this market. And the option to save on a vehicle is important.”

Watch hidden costs

Demographically, the average first-time home buyer in B.C. is between the ages of 25 and 32 years old.

According to Angela Calla, a mortgage broker with Dominion Lending Systems and the host of CKNW’s Mortgage Show, 70 per cent of the province’s real estate purchases last year were first-time buyers.

“The average income we were seeing last year was $45,000, either combined or from one person,” said Calla.

“And a five per cent down payment was the average from that same demographic.”

Calla advises the rookie buyer to be aware of a few of the hidden expenses, such as closing and moving costs.

On a $250,000 home, Calla says, these expenses, coupled with the five per cent down payment, can run as high as $14,000.

And while the financial hoop jumping of home ownership will remain a painstaking inevitability for most, Goss believes the final decision to become a homeowner is always a personal one no matter what the numbers may say.

“You will always end up having the choice on where you will live,” he said. “You’re not being told where to look anymore. Realtors are here to educate you in every step of the process and show you the factors that can affect your purchase. But you will decipher what it is you want and whether you can do it.”

JUNE 1 HIKE IN QUESTION

By Claire Sibonney Reuters   The negative news has led many to question whether Bank of Canada will start raising rates from their current record lows on June 1.

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada’s key policy rate, have fallen in recent weeks and on Wednesday indicated just a 51 percent chance of a June 1 rate increase.

On April 20, when the bank removed its conditional pledge to keep interest rates on hold until the end of June, the market priced in more than a 90 percent likelihood.

Currencies tend to strengthen as interest rates rise as higher rates often attract capital flows.

“Even with the ongoing uncertainty, the Canadian situation warrants a small move toward more normal rates so I wouldn’t unwind the forecast just yet,” said Craig Wright, chief economist at Royal Bank of Canada., whose bank was the last primary dealer to join the call for a June 1 move.

“We’re really just looking at a 25 basis point adjustment … tapping of the brakes rather than slamming them on.”

OTTAWA – Neither recession, global uncertainty nor growing joblessness appears to have stayed Canadians’ appetite for spending money they don’t have.

A new report by the Certified General Accountants Association of Canada shows that household debt in the country kept rising through the recession and peaked in December at $1.41 trillion.

That’s $41,740 on average per Canadian, or debt to income ratio of 144 per cent that is the worst among 20 advanced countries in the OECD.

“This report is another indication of Canadians’ readiness to consume today and pay later,” says association president Anthony Ariganello.

“The concern is do they understand the full cost of paying later?”

The Bank of Canada has also voiced similar concerns, with governor Mark Carney having repeatedly advised Canadians to ensure they will be able to meet their mortgage commitments once rates increase. Ottawa has put that cautionary principle into effect by stiffening the means test chartered banks must apply when issuing open-ended mortgages.

Most Canadians don’t yet share that concern. The accountants’ survey found that almost 60 per cent of Canadians whose debt had increased still felt they could manage it or take on more obligations.

But the accountants say many households could find themselves in difficulty when interest rates, as expected, begin to rise.

The report estimates that even a small two per cent increase in rates would mean that mid-income and higher income households would have to cut their outlays on non-essentials by between nine and 11 per cent.

The finding is similar to one reached by the Canadian Association of Accredited Mortgage Professionals in a survey results release Monday.

The survey showed that while Canadians appeared well positioned to absorb higher rates, there would be a significant number that would come under stress. The mortgage professionals estimated that 475,000 households would be challenged if mortgages rates rose to 5.25 per cent, and that 375,000 were already facing pressure paying their bills.

The most likely outcome for a debt squeeze is that households will stop spending on non-essentials, and that could ripple in a general slowing of economic growth.

Household spending, particularly in the housing sector, was a mainstay of the economy during the recession. But as interest rates grow, a bigger percentage of household income may need to be diverting into paying off debt, meaning less cash for other purchases, like autos, appliances, furniture and clothes.

BMO Capital Markets economist Sal Guatieri says that is the flip-side to the Bank of Canada’s decision to slash rates to historic lows during the recession.

“That’s why we did not experience a great recession,” he noted. “That was the intention all along of the Bank of Canada, to get people borrow and spend. The problem is if that continued, Canada eventually would have a debt problem.”

But that is why the central bank is preparing to reverse course and start increasing the cost of borrowing, he added.

Most analysts believe Carney will start moving on rates on June 1 with a small quarter-point hike.

Courtesy of the Financial Post

Andrew Allentuck, Financial Post  Published: Thursday, May 06, 2010

Taking on a mortgage is a big commitment. Every buyer who uses a mortgage has the choice of floating or going with a fixed rate that often costs a couple of percentage points higher per year. Today, for example, one can get variable rates at an average rate of 2.34% while five year closed rates average 5.27%, according to Fiscal Agents Financial Services Group in Oakville, Ontario. Negotiated rates can be lower.

If rates never changed very much, there would be no contest – the floating rate deal would win. But rates do rise and fall and therein lies the borrower’s dilemma.

Borrowers with kids and an aging car fear that their ability to pay interest rates twice or thrice the current floating rates are limited. “The test is liquidity and risk tolerance,” says Derek Moran, a registered financial planner who heads Smarter Financial Planning Ltd. in Kelowna, B.C. “People with ample liquidity can afford to take a chance on rising mortgage rates. It follows that those who lack liquidity feel some pressure to avoid drastic interest rate increases.”

The point is not merely academic, for Canada, in spite of recent mortgage rate increases, is still at a relatively low point of rates over the last four decades. “There is more room for rates to go up than down,” Moran points out.

The cost of making a decision to float or go fixed varies with the rate differences.

In 2008, Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business at York University, and Brandon Walker, a research associate at the Individual Finance and Insurance Decisions Centre in Toronto, published a study that measured the direct and opportunity costs of going with either choice. “Over the long run, homeowners really do pay extra for fixed rate mortgages,” they concluded.

The reason is intuitive. Lenders do not want to take the chance that when they have to refinance a loan that they will be stuck paying more than they are getting.

Mismatching what they lend with the cost of what they borrow can cut their profits and even lead to insolvency. So lenders attach what amounts to an interest rate insurance fee and bundle that into the price of money they lend on fixed terms.

Milevsky and Walker confirmed this explanation. “The study showed that a positive Maturity Value of Savings [the value of investing the difference between floating and fixed mortgages in 91-day T-bills] was positive the majority of the time, so the homeowner saved by using a variable-rate mortgage.”

The amount of money that the homeowner can save by taking a chance on floating rates varied in the Milevsky and Walker study, depending on the time periods in question. But the average amount was impressive: $20,630 as of 2008. Put another way, floating allowed borrowers to cut the time it would take to pay off the mortgages by a year or more, in some cases as much as five years on 15-year amortizations.

Rational calculation and personal feeling are, of course, different things. A person with a fixed income and a great deal of debt may be reluctant to put a rate casino between himself and the lender and will therefore go with certainty, even at a high price.

It is also a matter of experience. “First time buyers tend to pay close attention to the cost of the mortgage,” says Laura Parsons, Areas Manager of Specialized Sales – which includes mortgages, for the BMO Financial Group in Calgary. For them, the appeal of locking in is relatively high. Their mortgages are new, the amounts they owe are higher than they would be 10 or 15 years in future when the mortgage is substantially reduced, and their incomes, often early in their adult lives, are lower than they will be in future.

“First time home buyers are net debtors and they don’t want to endanger their finances,” suggests Adrian Mastracci, a portfolio manager and financial planner who heads KCM Wealth Management Inc. in Vancouver.

There are other strategies that the buyer can use to provide some rate insurance without taking on what Milevsky and Walker have demonstrated as the high cost of peace of mind.

“The buyer can take a variable rate mortgage but set payments higher than the minimum required” says Parsons. “That could be at the 5 year closed rate, which would mean a faster paydown and growing asset security while still keeping the low cost of the variable rate mortgage. Faster paydown is itself cost insurance if interest rates do rise.”

Banks are nothing if not inventive in helping clients cope with the fixed versus floating dilemma. For example, TD Bank offers to give 5% of the amount borrowed on a five or six year fixed rate residential mortgage to the borrower. The program, aptly dubbed the “5% CashBack Mortgage,” implicitly acknowledges that fixed rate loans can be more costly than variable rate ones.

For its part, RBC has a RateCapper Mortgage that builds on the initial low cost of a variable rate mortgage but limits the cost if rates shoot up. On a five year mortgage, the borrower will never pay more than the capped rate and if the variable rate, based on the prime rate, drops below the RateCapper mortgage maximum, the interest rate charged to the borrower also drops. The plan is a compromise and spreads interest rate risk. Many other lenders allow borrowers to mix fixed and variable rates, thus accomplishing a similar goal.

Plan selection, it turns out, is gender-related. According to a BMO survey, men, 44% of the time, are more likely than women to choose a fixed rate mortgage than women, who make that choice only 28% of the time. Women, it turns out, tend to make the better choice, for as BMO’s analysis shows, “fixed rates were advantageous during only two periods – through the late 1970s and in the late 1980s, in both cases ahead of a period rising interest rates, as is the case now.”

So where are interest rates headed? The yield curve, a line that links interest rates for periods of time from 1 day to 30 years, implies that rates will rise, but not very much.

There is no sense that we are returning to a period of double digit rates. Moreover, there are deflationary forces at work, notes Patricia Croft, chief economist of RBC Global Asset Management in Toronto. “The present crisis in European finance and the potential fizzling out of the present recovery in North American capital markets could presage falling inflation and even disinflation – the subsidence of rising prices and interest rates,” she explains..

BMO forecasts that the rising Canadian dollar will put downward pressure on consumer prices, reflecting the fact that much of what Canadians eat and use is imported. Inflation could flare up, BMO’s economists say, but there is a balanced risk of declining prices. For now, the Bank of Canada is being very cautious in its interest rate management commitments. For those who are strapped for cash, personal circumstance may dictate the choice of a fixed rate. But for everyone else, the folly of trying to make interest rate predictions over a business cycle and to predict both the short term rates and the long term rates along the yield curve should be apparent. No promises, of course, but the odds of saving money are with borrowers who choose variable rate plans or those that emulate them.