Canadian homeowners are green with envy over the fact our neighbours to the south are allowed to deduct the interest paid on their mortgages from their taxes. Is it possible to do the same thing here?

I received an elegant little flyer in my mailbox the other day. It was a small glossy fold-over, and it had a quality look and feel to it. The only text on the front flap of the flyer asked me a provocative question: "Is your mortgage tax deductible?" The inside of the flyer told me that I could learn how to collect tax refunds from my mortgage loan. "Canadian homeowners are entitled to collect Tax Refunds from their mortgage payments under Canada Revenue Agency (CRA) guidelines for 'Cash Damming'.

By following CRA's specific guidelines for borrowing and investing, you will claim thousands of dollars in Tax Refunds every year from your mortgage." The small flyer mentioned "Tax Refund" five more times, and twice pointed out that I could use my Tax Refund to pay off my mortgage faster. That's pretty exciting,

The biggest single expense of many Canadian families is their mortgage payment, and we've all been making those mortgage payments with after-tax dollars. Many a Canadian has looked across the border in envy at the tax deductibility that Americans enjoy on their home mortgage interest. If it turns out that we can be getting Tax Refunds from our mortgage payments too, well, that's just a no-brainer.

As it happens, I am quite familiar with this topic and strategy, so I can spare you the inconvenience of having to leave the comfort of your home to discover how this works. In fact, I'm going to provide you with all the essential information that you really must know about Canadian mortgage deductibility and Tax Refunds, all in the very next paragraph! How can I possibly do that? By using an enhanced information conveyance technology I like to call No Baloney™.

Ready? Here's what you really need to know about Canadian mortgage deductibility and Tax Refunds: In Canada, when you borrow money to buy your home, you can't deduct the interest. When you borrow money to make certain investments, you may be able to deduct the interest. There. Now that we've covered all the really important stuff, let's review some of the details. First of all, nothing about buying your personal residence is tax-deductible. You don't get to deduct your mortgage interest, there are no special tricks that have escaped your notice, and you will not be getting "Tax Refunds" from your mortgage payments. Period.

That being said, when you borrow money to make investments which have a reasonable expectation of income, you may be able to deduct the interest on the debt. So if you use your home as collateral when you borrow money to invest, you may be able to deduct that interest expense from your income taxes. You could, therefore, have a mortgage with interest that is partially or entirely tax deductible.

However, it's very important to remember two things: (1) No matter how you twist it, turn it, or wordsmith-manoeuvre-it, the money you borrow to buy your principal residence is not tax-deductible; (2) The only way the interest on your home mortgage can be tax-deductible is if you borrow against the equity you already own in your home, and use that money to investment.

The reason it's so very important to be clear about this issue is that borrowing to buy a home is something that most people must do in order to buy a home, and as long as they can afford their mortgage payment, they're psychologically comfortable doing so. They generally don't worry that their money is at risk. In fact, they feel a sense of security about the equity they are building as they pay the mortgage down. Borrowing to invest, on the other hand, is not something that anyone needs to do, and most people are not psychologically comfortable with it. In order for borrowing to invest to make sense, the average long-term, after-tax return on the underlying investment has to be higher than the after-tax interest rate on the loan.

That invariably means taking on investment risk. And for most people, tolerating investment risk is already sufficiently challenging without the added stress of knowing that those investments were made with borrowed money. Think about the recent gyrations in the stock markets, and consider how using leverage might change your emotional response to the hysteria. Don't get me wrong - I'm not picking on leverage as a concept. Using "other people's money" is an age-old investment strategy, it absolutely has its place as a financial planning strategy, and I've used it myself.

What I am picking on is the packaging of leverage - a strategy that inherently adds risk to investing - as a clever and heretofore overlooked way to get tax benefits on your home mortgage. Let's be No Baloney™ clear: For some people, borrowing money to invest may be an appropriate investment strategy. But borrowing money and investing it because you can get a tax deduction on the interest expense is a ridiculous tax strategy.

In concept, getting a mortgage quote from 4 or 5 different mortgage companies is a wise decision to finding the lowest mortgage rate you qualify for. Mortgage companies and brokers alike can claim that they have hundreds of lenders and thousands of programs, and I am sure they do, but I have yet to see the one mortgage broker who has that magical lender that can get you a better mortgage then every other mortgage broker out there. The bottom line is, they all have access to the same lenders and same programs, it is just that some mortgage brokers know their programs better then others.

The problem today with submitting your information to an online mortgage lead company is that the demand for your information is at an all time high, and the supply is very low. In order for these companies to stay in business they need to be price competitive with other online mortgage lead companies. The way that they do this is by selling your information to numerous mortgage companies. Just recently I spoke to an individual who received over 40 phone calls from the one application he filled out online.

Sometimes it is not the online mortgage lead companies fault that your information gets oversold. There are other online mortgage lead companies that buy your information from the original lead company where you filled out the application and then they turn around and sell them to their client's base. After all, your information is not cheap and some mortgage companies will pay in excess of $35 for it.

The good news is, you can avoid these headaches by doing some research on your end. Over the years mortgage brokers have realized that the internet is a powerful tool that can generate mortgage applications. It is now easier to locate your local mortgage companies and fill out an application directly with them. It is very unlikely that your local mortgage company is going to sell your information to their competitors, as they are in the business of closing loans.

This is where the research on your end comes in. Using your favorite search engine, type in your city, state or even zip code followed by the word mortgage. This will generate a number of pages full of local mortgage companies that would be more then happy to compete for your business. When visiting these websites, look for quality content and educational information.
There are plenty of dull sites out there that only talk about themselves and the hundreds of lenders and thousand of loan programs with the lowest mortgage rates anywhere in the galaxy.

More than twice as many Canadians as last year say they expect home prices across the country to fall, according to a new survey by a national mortgage industry association.

The Canadian Association of Accredited Mortgage Professionals (CAAMP) says that 35 per cent of Canadians now believe that home prices will drop, up from 17 per cent last fall.

Jim Murphy, the president and CEO of CAAMP, believes the survey results suggest recent news coverage of the economic crisis may be having an impact on attitudes about the housing sector.

"I think (the numbers are) reflective of the attitudes about the economy overall -- and the media reports that are out there and the statistics that are provided," he said from Toronto.

Here is what the CAAMP survey found:

• Twice as many people as last fall, or 35 per cent, now believe home prices will drop.
• The number of people who thought prices would go up fell from 40 per cent to 20 per cent.
• Residents in the West are most negative. In B.C., 48 per cent said they expect prices to fall.
• Thirty-eight per cent of Canadians believe now is a good time to purchase a house and 32 per cent say it's a bad time. These figures are similar to last year's results.

The survey also found that almost 85 per cent of home owners are satisfied with their mortgages.

"In historical terms mortgage rates are still very low, so when people are asked why they're happy about their mortgages, the number one reason is the rate," Murphy said.

CAAMP's chief economist Will Dunning said the mortgage crisis in the U.S. doesn't appear to have hurt consumer confidence in Canada's housing sector.

"Canada is a financially conservative country where consumers are able to meet the terms of their mortgages and buying decisions are based on affordability," said Dunning in a press release.

"This contributes to a solid real estate market that will not experience the same drop off we see south of the border."

The information for the CAAMP report was gathered by Maritz from an online survey of over 2,000 Canadians in mid-October. Last week, the Canadian Real Estate Associate reported that the multiple listing service (MLS) dropped 14 per cent in October. It was the biggest month-to-month decrease since mid-1994.

While blue skies and picturesque lakes certainly drew people to this valley, its postcard-perfection hasn’t been enough to stave off the effects of worldwide economic trouble.

The first signs came when water-cooler talk changed from estimating real estate gains to lamenting losses in retirement plans and higher costs for just about everything.

Legitimate concerns about the state of the economy made consumers nervous and more thrifty, despite assurances of “strong economic fundamentals” from Canada’s mortgage economists and political leaders.

And then came the more literal signs. For Sale boards started to pop up in front of houses and never left.

Home owners and speculators who once bragged it only took a week or so to sell their houses or condos are now just boasting “reduced” or “new price” on their sale signs.

While economists were slow to acknowledge what most could surmise by a walk through their neighbourhoods, there are now significant rumblings of a slump in prices for houses this side of the border.

Some are going so far as to call it a housing recession, as realtors and sellers are already well into contingency plans that will allow them to ride out the storm.

Where the market is going

A report last month from Central 1 Credit Union said the province’s housing market in a recession, and it’s not expected to be a quick dip.

According to Helmut Pastrick, the bank’s chief economist, housing sales across B.C. will decline by 30 per cent this year, 17 per cent next year and five per cent the year after that. And prices will be in tow.

Prices will continue falling from their March 2008 high into next year, bringing the provincial median sales price down 13 per cent to $310,000 in 2009 and by a further five per cent in 2010—in total nearly an 18 per cent drop.

Things are supposed to look up later that year following a sales turnaround and relaxing credit conditions. “Recession in any industry—housing, auto or lumber—is a period where the industry experienced sustained declines in output and in prices, and that fits what’s happening in B.C.,” said Pastrick.

He noted that the Okanagan won’t be exempt from any downward trend.

“All regions are participating in this to largely the same degree and the trends and conditions are very similar throughout the province, which is usually the case when we have major economic event or factor coming into play.”

That major economic effect is, of course, the financial crisis in the United States, which has put a crimp on the many industries that are finding it difficult to access credit and move operations forward.

In turn, its stagnated economic growth across the U.S., and to some degree, in Canada hypotheque as well.

“As the general economy suffers and slows down, it has feedback into housing sector.”

Over at the B.C. Real Estate Board, chief economist Cameron Muir is on the same page, although his group’s fall forecast projects declines in the area of 10 per cent, as opposed to 18.

According to him, Okanagan home prices should be down to 2006 levels by the end of the year and remain flat throughout 2009.

“Throughout the province there’s quite an imbalance between supply and demand. There are more homes for sale, while home buyers have dropped off considerably from a year ago, and the combination of those two factors has put downward pressure on prices,” he said.

Muir said real estate markets most conducive to recreation and investment buyers— such as the Okanagan—will be a little bit worse off than major markets, like Victoria and Vancouver, simply because of the fact that there are fewer investment and recreation home buyers around now.

Kelowna, he said, is well diversified but part of the responsibility of the downward trend can be placed upon the same group who helped drive up prices.

Just as fast as oil money flowed into the Okanagan, it’s started to dry up in relation to the Albertan housing market flattening.

Calgary, for example, saw their housing prices start to tumble months before B.C. felt any pangs of contraction, said Muir.

Basically, that’s meant those who were leveraging gains in home equity for new home purchases are out of luck and, as a result, no longer looking to buy.

But, that’s not what Kelowna residents will have to worry about.

The real test of how this region will fare is the level to which residents are able to comfortably live and work here, Muir said.

“What we really need to look at is what are the financial conditions and the confidence of people who live work and raise their families there because they are the ones who drive positive demand,” he said.

“Unlike the U.S., the financial condition of households in this province, and in Kelowna, are on relatively strong footing.”

B.C. isn’t seeing a sharp increase in foreclosure activity, the unemployment rate is staying quite low from a historical perspective as are interest rates, Muir said.

“Without a collapse in household financial positions, homeowners are not in a position where they have to sell at any price like they are in the U.S.”

According to Muir, the biggest stumbling block is consumer confidence, which is at the lowest it’s been in 26 years.

Realtors

A lack of consumer confidence is something local realtors are far too familiar with.

Ian Share, of the Century 21 office in Glenmore, has seen a sharp decline in sales, although he said he remains busy. The problem, as he sees it, is that sellers are having a hard time adjusting to the market. A house that may have flown off the market a year ago for a cool $500,000 isn’t going to have the same appeal today as buyers have far more to choose from and are taking their time.

While his focus is on North Glenmore, Lake Country and Phoenix, Arizona, he says only the latter market is seeing eager buyers.

Share tapped into the Phoenix market successfully to pursue an opportunity he saw resulting from the U.S. financial crisis.

“The conclusion you can start to draw is that the real estate market is adjusting and correcting massively and that the buyers that are willing to step up to the plate are few and far between,” he said.

“Generally they consist of investors picking up rental properties and other clients who are relocating here for work.”

Drawing upon some of his office stats, Share also pointed to a much sharper decline than the 10 or 20 per cent the economists are forecasting—and it’s happening now.

Share was the listing agent on one of only two homes that sold in Lake Country (excluding Carrs Landing) last month—118 were listed.

While the lack of sales may be disturbing, Share pointed out it’s actually the pricetag changes that are the most dramatic, citing the two Lake Country listing sales examples.

“One was originally listed for $549,000 and sold for $400,00—that’s a difference of $149,000,” he said.

“The other was originally listed for $449,000 and sold for $351,500—that’s a difference of $97,500.”

In the months leading to the dry spell, Share added only nine single family homes sold and the average price difference from the original list price to the sold price was $37,966, whereas this last month the average price difference was $123,250.

“Even though we’re been reassured that our banking system is solid and that our economy is ticking along nicely…in my opinion we’re crazy to think that Canada is impervious to some sort of significant adjustment in our economy and in the real estate market,” he said.

That said, this is the time for buyers to gather their resources and plunge into the market and time for sellers to start listening to their agents, Share believes.

“Sellers that are in this current market generally dump realtors if they haven’t sold their homes during the listing period, and they probably most likely figure they’ll just get someone else that will get the job done,” he said.

“The majority of time it may not be the fault of the realtor if he or she priced it correctly and aggressively to start with…If it isn’t priced right in this market then both the realtor and the seller get frustrated as they’re simply just spinning their wheels.”

Over at Coldwell Banker, Horizon Realty, Paul Pofpnikoff is also feeling the pinch.

Like Share, he’s finding a way to leverage the conditions of the current market so they work to his benefit and opened a sideline project.

Focusing on developers who have a property they need to market, he’s created a website—www.propertyexchangekelowna.com—that lures potential buyers from markets as far flung as Europe.

He has to go there “to create opportunities” because he admits things have dried up locally.

“I know realtors have to have this rosy picture, but currently there aren’t many buyers and I am finding many people that could are resorting to renting their place rather than selling it,” he said.

“I have had vendors calling about listing, and quickly changing their mind, saying, ‘The price we’d be getting wouldn’t be good enough—we’ll rent for a year or two until the market gets better.’”

It’s something “everyone” is seeing and he too blames it on the problems in the U.S., the “troubling effect it’s had on the psychology of the buyer.”

Reduce the price, or rent?

For contractor Robert Tissington, building, buying and selling homes has been a way of life for as long as he can remember.

It’s what his dad and grandfather did, and he followed their lead into the local market a few years ago.

His first house—among several properties he owns and can’t currently sell—was purchased in Kelowna’s North End a few years ago for about $200,000.

He added a carriage house to it for about $130,000 and got ready to move into another place.

When he listed his property with a real estate agent, he was told to list somewhere in the area of $700,000, which he thought to be quite high, but competitive. It didn’t move. His price dropped by nearly 10 per cent and it still didn’t move.

With that, he decided to take it off the market.

“A year ago I thought selling it for about $550,000 would have been brilliant, but it’s the type of property you hang onto,” he said.

His property is a good rental—a market that’s not shrinking—and will continue to earn as the real estate market fluctuates.

In the meantime, he didn’t see the point of putting his life on hold waiting for the property to sell.

“The amount of tire kickers you have to go through—the people who want to see all the houses, but aren’t prepared to buy, even if they think they are—just aren’t worth it.”

He’s comfortable with the idea of riding out the changes in the meantime, and as a contractor thinks he sees a lot of opportunity in the current market—if not to sell, to buy.

“You just sort of acquiesce, give it a reasonable chance, and go off in another direction,” he said.

“Now I feel great about the decision, but you have to be moving forward or backward.”

Tissington said that the current market should have been expected, as Kelowna functions on a six-year cycle.

“Prices peak and everybody lists when they sense it’s the end of cycle and then there’s a glut of houses on the market,” he said. “The last one was in 2001, and before that in 1993-94.”

When he bought his house for $212,000, that seemed like an incredible amount of money for an old house, but he pointed out it was worth the investment.

“This whole economic situation is running alongside what may have been a natural price adjustment anyway,” he said.

The good news

Property owners may be in a pinch, but this region has suffered the pains of rising costs for years.

Reports earlier in the year boasted that young buyers were still entering the housing market with “reduced expectations,” while many complained prices became too restrictive for many to enter the market at all.

Now prices are becoming more competitive. Developers trying to unload units are offering bonuses, rent to own incentives and coming out with a product that’s more attainable.

All in all, it’s something Brenda Moshansky, a director with the Okanagan Mainline Real Estate Board, believes will create some opportunities for first-time home buyers looking to get into the market.

“Properties that are marketed competitively will continue to sell, and with the interest rates where they are, it’s a wonderful time for buyers to get into the market,” she said, adding realtors are working a lot harder to draw interest in their listings.

Moshansky said that the Okanagan and its natural allure will ensure that the prices don’t dip too drastically.

“One thing that’s very unique about this region is that it’s a little bit immune to some of the problems because it’s a destination market,” she said.

“Ski hills are expanding, popular resorts as well as accommodations are coming here and we accommodate a lot of recreational consumers for second homes as well as being a retirement market.”

Although Moshansky knows the economic predictions for the next year, she believes that the market is already correcting itself as fewer listings are starting to come out. “Real estate is traditionally very cyclical,” she said.

“Some people say it’s a six year cycle, others say it’s seven…it will turn around. Real estate is not as volatile as the money market.”

When it will end?

Housing is a high reach industry. Realtors, retailers, builders and architects are just a few who will feel the pinch if the bottom falls out of the market.

Construction has become a major economic driver of this region, and job growth has been substantial, with some estimates being in the area of 94 per cent.

“Usually there is a time delay to response in new construction and housing market conditions after sales decline,” said economist Helmut Pastrick, adding that housing starts are likely to drop off by 30 to 40 per cent next year.

But, things will get better.

“It’s not a downward endless spiral,” said Pastrick.

“There will be forces at play to reverse the downturn and some of them are already beginning to materialize.”

It’s still early in the decline of sales and prices, but by 2009, and 2010, things will get better.

“Lower interest rates, lower mortgage rates and lower prices can stimulate demand so that will set the stage for some improvement in housing sales,” he said.

“It’s open to debate how strong that recovery will be—at this time it doesn’t look that strong, but as long as the decline ends…that’s positive.”

The drop in Canadian home prices in September may not be as severe as it seemed, TD Securities said on Wednesday, bolstering the case that the country is not headed for a U.S.-style housing meltdown TD, a unit of Toronto-Dominion Bank, argued in a report that home prices fell 1.3 percent in major Canadian markets in September, not the dramatic 6.2 percent drop that was reported by the Canadian Real Estate Association (CREA) last week.

CREA said the average house price fell to C$315,461 (about $252,000), dragged down by sales declines in Vancouver and Victoria, British Columbia, which offset rebounds in Calgary and Edmonton, Alberta. CREA said the fall came despite year-over-year gains in average home prices in 17 of 25 major Canadian markets.

TD crunched its own numbers and applied a weighting to each major city to fix "compositional shifts", which it said were behind the distorted CREA view. It said the association has acknowledged the problem.

For example, if Vancouver was the only city that reported sales in one month, and the next month Montreal was the only city that reported, then it might seem that prices had fallen in half because Montreal prices are much less expensive than those in Vancouver.

TD fixed the weight of each city to year-earlier sales levels as of September 2007.

"We wanted to get rid of the whole compositional issue. We really just controlled for the allocation. When we did that we ended up with a 1 percent drop instead of a 6 percent drop," said Eric Lascelles, chief economics and rates strategist at TD Securities.

"That's not catastrophically different, but to me that's a number that makes more sense. Yes the housing market is correcting moderately but it does not have the making of a U.S.-style correction."

He said Canadian housing starts may fall below the 200,000 mark, home prices will continue to correct in some inflated cities, but there is no need to brace for big delinquencies or a hard drop in prices.

The TD calculations aren't perfect, Lascelles acknowledged, because they do not eliminate some factors such as type and quality of home in each city.

Canadian housing data has shown signs of softness but nowhere near the slump that hit that United States, stemming from a crisis in the subprime mortgage sector.

Canadian banks are trying to convince consumers to lock in their mortgage rates because more than 20 per cent of the home loans they have negotiated have become unprofitable, according to industry sources.

The push has come after the banks cut the discount they offered to consumers with variable-rate products tied to the prime lending rate. Two weeks ago, a consumer could get a variable rate product at 0.60 percentage points below prime; today it is one percentage point above prime.

"Banks are scaring people and those people are calling asking whether they should lock in.
( hypotheque montreal )

Anybody with a mortgage negotiated in the past two years would be out of their mind to lock in to, say, a five-year term. They would be going from a rate as low as 3.35 per cent to 5.79 per cent. Lines of credit previously negotiated at a rate below prime are also still valid.

"If you've got a mortgage rate negotiated below prime, you have a dinosaur. It doesn't exist anywhere.
You should hold onto until the end of the term. The banks propped up all their rates 160 basis points because they knew the Bank of Canada would be lowering rates."

Last week, the Bank of Canada lowered interest rates by 50 basis points only to see the major banks cut their prime lending rate by half that amount. After some pressure, most of the banks cut their prime lending rate by the full 50 basis points.

Joan Dal Bianco, vice-president of real estate-secured lending with Toronto-Dominion Bank, said the banks were reluctant to pass on the full 50-point rate cut because they were losing money on variable-rate products.

"At the prime minus rates we were basically earning zero or negative. We kept holding off (cutting the discount)," said Dal Bianco, adding that in the past year 50 per cent of her bank's new mortgages were variable-rate products.

With a cost of funds generally above four per cent because of the lack of liquidity in the market, the mortgages previously negotiated ended up below water after the latest rate cut.

Prime is now 4.25 per cent at TD but two weeks ago the bank was offering a variable rate of 60 basis points below prime, meaning the consumer was borrowing at 3.65 per cent.

For those now entering the housing market, the rate is 5.25 per cent for a variable rate product but Dal Bianco said that might not be high enough. "We are not making much money on those if anything." she said.

The move into variable mortgages tied to prime has come in the last five year with many of the banks promoting products that allow consumers to float with prime but lock in a rate at any time during the term of their mortgage.

The Canadian Association of Accredited Mortgage Professionals says, as of 2007, 21 per cent of mortgages were variable rate, 72 per cent were fixed rate and seven per cent were a mix of the two.

Asked whether the banks are actively encouraging consumers to convert variable rate products, Dal Bianco said that hasn't happened. "We are making sure (staff) have the right conversations if people are really nervous and do not want to see their payment moving."

Another key question going forward for consumers will be whether the prime rate at the banks will continue to move with Bank of Canada's rate and nobody is guaranteeing that.

"It's not that (prime) is less meaningful, it just doesn't mean what it used to," says David Wolf, chief economist at Merrill Lynch Canada. "(Prime) is more likely to fall if the overnight lending rate is zero than if it's 2.5 per cent."

New home construction in Canada was nearly unchanged in September as a decline in single-family homes erased a jump in multiple dwelling units, and economists predicted the credit crunch would lead to a slowdown in ground-breaking.

Housing starts inched to a seasonally adjusted annualized rate of 217,600 units from an upwardly revised 217,400 units in August, Canada Mortgage and Housing Corp. said on Wednesday.

The September number beat the consensus expectation of analysts who had called for 203,000 starts. August starts were originally reported at 211,000 units.

While construction activity again stayed above the 200,000 unit mark, some analysts said this level would not likely be sustained in months to come.

"Because residential building permits tanked in August and the credit crunch reached a crescendo in September and into October, this could well be the last starts print north of 200K," Scotia Capital economists wrote in a report.

Canadian housing data has been in stark contrast with the state of the housing market in the United States, hit by a crisis that began in the subprime mortgage sector and spread across other parts of the market and the broader economy.

Economists generally expect the Canadian housing market to ease but not fall into crisis as it has in the United States, largely because risky mortgages are not a large part of the market. Even so, the Canadian economy is also expected to slow, which would likely soften demand for housing.

"This slowdown, however, is expected to be both measured and orderly, and in no way do we expect the extent of the correction to be comparable to that currently taking place in the U.S.," said TD Securities strategist Millan Mulraine.

Gains were reported across the country, except in Ontario and Quebec. British Columbia and the Atlantic provinces both reported 10 percent gains, followed by the Prairies.

Urban single home starts declined 8.1 percent to 70,000 units from 76,200, while urban multiple starts rose 5.5 percent to an annual rate of 122,500 units from 116,100 in August.

Rural starts were estimated at an unchanged seasonally adjusted annual rate of 25,100 units in September.