2009 Budget has measures to stimulate the housing industry

If you haven’t heard yet, the new budget released on January 2009 has some goodies for first time home buyers and the housing industry.

• First time home buyers can claim a 15% non-refundable tax credit up to $5,000, for a maximum of $750.   This is to help defray the cost of the closing costs and transfer taxes in a home purchase.  If a home is purchased jointly, the total credit that may be claimed by all purchasers is $750. The unused portion of the credit can be transferred to a spouse or common-law partner
• The maximum you can now withdraw from your RRSPs under the Home Buyer’s Plan has been increased from $20,000 to $25,000.  Couples can withdraw up to $50,000 without paying taxes.
• The budget offers a temporary home renovation credit for projects paid between January 27, 2009 and February 1, 2010.  Homeowners can claim at 15% credit against renovations with a minimum cost of $1,000 and a maximum cost of $10,000.

Consider Refinancing and to Reduce Interest Expenses

What a difference a year makes.  After a spike in interest rates starting in July 2008, home buyers were of the opinion that rates were going through the roof.  To avoid risk, many home buyers locked in their mortgage at the 5 year fixed rate between 5.7 – 5.9%.  As we see now, rates have softened significantly and will stay there for some time.  It therefore makes sense to re-evaluate whether it makes sense to switch to a lower interest rate mortgage.

Breaking a mortgage will result in a prepayment penalty to your current lender.  The question that needs to be answered is whether the savings from the lower interest rate mortgage is enough to cover the penalties and any closing costs.   I’ve run into several cases where it there were significant benefits to switching to a lower rate mortgage.   Here is one such scenario:

• Mortgage amount – $341,000
• Term – 5 yr term with 4 yrs remaining on mortgage, 35 year amortization
• Interest rate at 5.7%.
• Prepayment penalty of $10,000 (approx.)

The borrower had 2 options in this case – switch to a 4 yr term mortgage at 4.39% or get a variable rate at 3.8%.  Here is the total interest he would pay over the remaining 4 years of his mortgage based on these terms:

• 4 yr term – $59,263
• Variable rate mortgage – $50,037
• Stay at the current mortgage for the next 4 years – $75,500

The client saves $25,463 (or $75,500 less $50,037) by switching to a variable rate mortgage.  The net savings is $15,463 (or $25,463 less $10,000 penalty).

Interest Rate Forecast Update

With the 1/2% drop in the Bank of Canada’s overnight rate, the next question is whether there is still room to lower rates further.   According to some of the major banks, yes, there is.  Here’s what some of they are saying:

• CIBC World Markets – CIBC’s economists are forecasting another 1/2% drop in the BoC’s overnight rate.
• TD Bank – Another 1/2% reduction for 2009
• RBC – This bank forecasts interest rates to remain the same for 2009
• BMO – BMO newsletter indicated that rates cuts are still a possibility

Fixed rates have dropped as well.  A standard fixed rate is around 4.39% – 4.54%.  If you have locked-in late last year when rates were at its peak, it may benefit you to refinance at current lower interest rates.  Be sure to discuss your options with your mortgage professional.

Monthly Review of Interest Rate Forecasts from the Major Banks

The year 2009 was a year of reductions in the Bank of Canada (BoC) overnight rate.  In little over a year, the BoC cut their rate by 3%.

Our roundup of the Big 5 Bank’s economic forecasts show that economists at these institutions are expecting rate cuts between 1/2% to 1% in 2009.  None of the banks were forecasting a rate increase in 2009.  It’s a safe bet that keeping your mortgage as a variable is a wise idea.

Here is what the big banks are forecasting for interest rates:

• TD Economics – TD expects a rate cut of 50 basis points in January 2009 – TD Quarterly Economic Forecast dated December 10, 2008
• BMO expects 1/2 percent rate cut in January 2009 – BMO 2009 Outlook dated December 19, 2008
• RBC forecasts 1/2 percent drop in January 2009 – RBC Economic and Financial Market Outlook for Dec 2008
• CIBC Wood Gundy expects a 3/4% rate reduction by February/March 2009 – CIBC World Markets Weekly Market Insight dated December 19, 2008
• Scotia is forecasing a 1% drop in the BoC rate for 2009 – Scotia’s Forecast Update for December 17, 2008

Stay up-to-date on interest rates and home buying trends by signing up for my e-newsletter at www.bcmortgage.ca/opt_in.htm .

Prices Drop for Pre-sale Condos

With home values coming down, pre-sale condo buyers should move forward as soon as possible on securing their mortgage.

I’m currently working on a file where in the buyer purchase a pre-sale condo in the Coquitlam area.  The couple purchased the condo in September 2006 for $445,000 plus GST.  The building is almost complete and the move in date has been set for February 2009.  The client approached me to secure a mortgage.  The big surprise was that the current appraisal came in more than $100,000 lower than the purchase price.  Based on my discussions with the appraiser, this is becoming a very common scenario.

This is a problem for lenders since the value they use for the property is the lower of the purchase price and the appraised value.  If the appraised value is lower the purchase price, the borrower will need to come up with a higher down payment.  Thankfully, for my client, this wasn’t a problem since they could come up with a higher downpayment.

If you are in a situation with a pre-sale condo, you should look into whether the value has dropped in your area.  It can only a few sales by financially strapped condo owners to bring down the market value of the properties in your area.  With lower values, you will need to discuss with your mortgage broker the appropriate measures you need to take so you can move into your new home.