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First-time buyers go for longer loans

National Post: Thu 13 Sep 2007

Faced with eroding affordability, at least half of Canadians now buying homes for the first time have decided to extend their loans up to 40 years, according to a new study. Royal Bank of Canada says you have to go back more than a decade to find housing affordability eroding as quickly as it is now, according to the financial institution's latest index on the topic.

Derek Holt, assistant chief economist with the bank, says to make the numbers work half of new insured mortgages are for 35-year and 40-year amortizations, up from the traditional 25-year amortization. In the refinance market, 25% of consumers are going for the longer loans.

"What's really changed is how popular these longer amortization mortgages have become," said Mr. Holt. "People are getting into a more highly priced home than they would have purchased [with a 25-year-amortization.]."

The bank says Canadians with a standard two-storey home worth $340,000 with 25% down and a 7% interest rate are spending another $47,000 by extending their amortization period from 25 years to 40 years.

Royal Bank says all major housing classes have been impacted by the combination of rising interest rates and rising prices.

"In the second quarter, Canada’s housing affordability experienced one of the largest and most broadly based quarterly deteriorations since the mid-1990s," said Mr. Holt. "Higher house prices, mortgage rates, utilities and property taxes all combined to drive the country-wide deterioration."

The Canadian Real Estate Association said last month that the average price of a home sold in July was $311,495, a 12.6% increase from a year earlier. It was the strongest year-over-year increase in 14 months. The Royal Bank, in its affordability index, measures the proportion of pre-tax household income needed to service the costs of owning a home. Condos remain the most affordable alternative, requiring only 28.7% of income up from 27% a quarter earlier.

A standard townhouse takes up 32.7% of income, a detached bungalow 40.9% and a standard two-storey home 46.2%. A quarter earlier, a standard townhouse took up 30.9% of income, a bungalow 38.3% and a standard two-storey house 43.2%

The bank says Saskatchewan, Alberta and British Columbia saw the greatest erosion of housing affordability in the country. Prices have been rising faster in Saskatchewan than any other province, with the average price of a house sold in Saskatoon now up 53.7% from a year ago.

Another report issued yesterday from Genworth Financial Canada and the Conference Board of Canada says the increased cost of housing has pushed more Canadians into the relatively cheaper condominium market. Canada Mortgage and Housing Corp. also said this week new home construction climbed 5.1% last month from July, largely because of the booming condominium sector.

"Condos are roughly 20% of overall purchases across Canada, so it has become a significant property class," said Peter Vukanovich, president of Genworth. "We don't see any sort of bust in condominiums."

Mr. Vukanovich, whose firm has led the way in providing insured mortgage products with longer amortizations, thinks the new products have had what he calls "a significant impact" on purchases.

"People are choosing the 35-year and 40-year options because they can pay less now and pay more later," he says.

Don Lawby, chief executive of Century 21 Canada, says people in the Vancouver market, where he has based, have no choice but to buy a condo. "You have to start some place," he says. "Sometimes you have to start in a below average home."

According to the RBC study, Vancouver is the most expensive market in the country. A standard two-storey home worth $609,092 eats up 73.3% of average the average pretax household income in the city. That's up from 68% a quarter earlier. To qualify to buy the home you would need household income of $133,584.

"You can afford to buy here if you take a long term mortgage, but boy oh boy will you pay in interest," says Mr. Lawby.
Posted on Tuesday, October 9, 2007 at 06:00PM by Registered CommenterElaine in | Comments2 Comments | References1 Reference

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Reader Comments (2)

Royal Bank of Canada, (RBC Centura) : Corporate Bully - I'm a commercial fisherman fighting the Royal Bank of Canada, (RBC Centura) over a $100,000 loan mistake. I lost my home, fishing vessel and equipment. I need your support to fight this corporate bully. RBC contacts are posted on my website Thanks, Paul Fraser.
December 28, 2007 | Unregistered CommenterPaul Fraser
Att: RBC Bank President Gordon Nixon - Salary - 11.73 Million!!

I'm a commercial fisherman fighting the Royal Bank of Canada (RBC Bank) over a $100,000 loan mistake. I lost my home, fishing vessel and equipment. Help me fight this corporate bully by closing your RBC account.

There is no monthly interest payment date on the contract.
Date of first installment payment, (Principal + interest) is approximately 1 year from the signing of my contract.
Demand loan contracts signed by other fishermen around the same time showed a monthly interest payment date on their contract,(agreement).
The lending policy did change at RBC from one payment (principal + interest) per year for fishing loans to principal paid yearly with interest paid monthly. This lending practice was in place when I approached RBC.
Only problem is the loans officer was a replacement who wasn't familiar with these type of loans. She never informed me verbally or in writing about this new criteria.

Phone or e-mail:
RBC President, Gordon Nixon, Toronto (416)974-6415
RBC Vice President, Sales, Anne Lockie, Toronto (416)974-6821
RBC President, Atlantic Provinces, Greg Grice (902)421-8112
RBC Manager, Cape Breton/Eastern Nova Scotia, Jerry Rankin (902)567-8600
RBC Vice President, Atlantic Provinces, Brian Conway (902)491-4302
RBC Vice President, Halifax Region, Tammy Holland (902)421-8112
RBC Senior Manager, Media & Public Relations, Beja Rodeck (416)974-5506
RBC Ombudsman, Wendy Knight, Toronto, Ontario 1-800-769-2542
Ombudsman for Banking Services & Investments, JoAnne Olafson, Toronto, 1-888-451-4519
August 29, 2008 | Unregistered CommenterPaul Fraser

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