Sell Or Refinance Your Condo?

A large number of condo buyers in downtown Toronto are first time buyers who enter the journey of homeownership with the intent of moving up to a larger home after a few years to start a family. The data is loud and clear about Toronto's condo market; it has shifted into buyers territory and now buyers have the upper hand in the condo market.  The days of bidding wars seem to be long gone.  Condo sellers are having a hard time getting the price they thought they could have gotten earlier in 2012.  Should one sell or refinance the condo and rent it?

Opportunity in Toronto Condos

I recently had a number of clients who had their condos for sale, but didn't get the price they wanted. They had 2 options to entertain:

1. Sell at a price lower than expected and take a loss 2. Refinance condo, pull the equity out and rent the unit

I choose to look at situations with a glass half full perspective.  I showed the clients by taking advantage of today's low rates and the shortage of rental units in downtown Toronto, there is an opportunity to generate positive cash flow, have someone else pay down their mortgage and wait for a few years till the market balances itself out.

In all cases, the clients had multiple offers on their condos for rent, got higher rent what they listed the condo for and rented the condos to professionals who are easier to manage.  Here are examples of what some of the condos were listed and rented for:

List: $1800, Rent: $1900 (Bathurst & King) List: $1600, Rent: $1700 (Cityplace) List: $2300, Rent: $2350 (King & Sherbourne) List: $1450, Rent: $1500 (King & Portland)

Investing In Toronto Condos

If you own a condo in downtown Toronto, this is a great time to consider locking into the historic low mortgage rates and take advantage of the high rental demand.

Now is the best time to consider restructuring the condo's mortgage due to the following 2 reasons:

1. Condo values have not dropped significantly 2. Mortgage rates at historic lows

Waiting for the "right time" can be costly especially if condo values drop there will be less equity to take out and when interest rates rise (even slightly), the monthly carrying costs will increase and might result in negative cash flow.

There is a lot of doom and gloom in the media and blogosphere, but there is always an opportunity if you have a long term approach to real estate investment.

To find out if you can refinance and rent your condo, please email Nawar or call at 416.637.3308.

2 Factors That Can Affect Your Home Value

The second factor that can affect your home value is jobs creation or an unemployment spike. Cities or towns that are reliant on one major industry are exposed to large swings in real estate values.

For example cities such as Windsor and Oshawa are reliant on the automotive industry. Since the automotive industry downturn, many jobs that support the auto industry have been lost as well (tool & die, transportation, manufacturing companies, sub suppliers...). As unemployment numbers rise, the supply demand pendulum swings towards more people selling their homes and/or less having the appetite to buy homes since there is a lack of job security which lowers real estate values.  This has been evident in Windsor over the last few years which continues to struggle in creating jobs.

Keep in mind the next time you are looking for a home or an investment property in a city, to take a look at job creation activities such as companies relocating or expanding, infrastructure investment or a city that is diversified in multiple industies. Afterall, having all the city's eggs in one basket is risky!

To discuss your personal mortgage needs, please contact me.

2 Factors That Can Affect Your Home Value

Toronto and GTA's real estate values have increased significantly over the last 10 years.  The prices continue to increase as the global economy struggles to emerge out of the slowdown since late 2008.  There are 2 factors that can negatively affect the housing market in Toronto, GTA as well as Canada: Interest rate and/or unemployment spike.

1/ Interest Rate Spike

For the last 3 years, Canadian homeownerns and real estate investors have enjoyed historically low interest rates which have resulted in record sales and prices.  Interest rates have remained low to stimulate consumer spending and promote GDP growth.  As Canadians reach record debt levels (approximately $1.50 of debt to $1 earned), Canadians are running out of steam for further debt accumulation. Many Canadians have fixed mortgages in the 3.3%-3.8% and variable mortgages at the prime minus level.

In order to save the global economy from a depression, governments around the world took on aggressive stimulus (printing money) since late 2008 which will result in high inflation sometime in the future.  As inflation becomes the primary objective of governments, interest rates will have to rise to control and moderate inflation.  Canada is already experiencing high inflation numbers, however the Bank of Canada is choosing to keep its benchmark rate low due to the uncertainty originating out of Europe.

A spike in interest rates would effect Canadians since mortgages will renew at higher interest rates and unsecured loans would cost more.  Based on August 2011 data, the affordability index in Toronto for 2 storey homes and bungalows is at 61.4% and 51.9% respectively (http://goo.gl/8rK5B). If one assumes that an income earner is taxed at 40%, it means that in order to buy a 2 storey or bungalow in Toronto, 2 incomes are required. Condos are a more affordable option in Toronto at 34.2%.

A spike in interest rates which diminish the ability of many to qualify for a mortgage especially insured since qualification is based on posted rates.  Demand would therefore be reduced since less buyers can qualify for a mortgage.

The main point to take away from this post is to have a plan regarding mortgage/debt paydown and plan to renew ones mortgage at a 6% level.  For more information, click here.

My next post will discuss unemployment spike.

What's Happening To Variable Mortgages?

What Was That Lender's Name Again?

Mortgage brokers promote dealing with 20 or more lenders.  However, many homeowners only recognize the big 6 banks they have seen on street corners.  So who are these other lenders that brokers promote? In Canada, approximately 25% of homeowners use the services of a mortgage broker.  These lenders are Canadian owned and operated, but choose to fund their mortgages through the broker channel to cut overhead costs on "brick and mortar".  Afterall, having full-time salaried employees with benefits cost money, not to mention the costs of operating a bank branch.  Due to the reduction of expenses for the "non-bank" lenders, they tend to pass on the savings to borrowers through lower rates.

What are The Risks of Dealing With Non-Bank Lenders?

There is a mis-conception, especially after the financial credit crunch in late 2008, that borrowers will lose their homes if the mortgage is funded by a non-bank lender.  This is absolutely not true.  The risk is assumed by the lender since they are the ones giving out their money with the understanding the borrower will repay the mortgage on time.  Also, keep in mind these lenders function under the Canadian Government rules and laws.

Why Should I Choose a Non-Bank Lender Over A Bank?

You don't have to.  A non-bank lender is an option that is presented by your mortgage professional to consider.  Other important factors to consider when choosing a lender are:

• How is the mortgage penalty calculated?
• If I decide to lock in, do I get the posted or discounted rate (typically 1.5% difference)?
• What features are built into the mortgage (pre-payment, increased payment, portable, assumable...)?
• What are the fine print terms that I should be aware of?
• Who & how will my mortgage be managed? Afterall, getting a mortgage is one thing but working with someone who will oversee the mortgage and optimize it to reduce overall interest is another skill (click here for inflation hedge mortgage strategy)

Bottom line, if you pay your mortgage on time no on will take your home away!  This is Canada afterall.

To discuss your personal mortgage financing situation, please contact me.

Why Ultra Low Mortgage Rates Are Not Good?

We have experienced low mortgage rates since the financial credit crisis in late 2008.  The purpose of the low rates is to stimulate consumer spending which will result in economic growth and recovery out of the recession.  In the last few weeks, there have been talks regarding the European debt crisis and how similar it looks like the 2008 credit crisis.  It started with Ireland and Greece, which are considered small economies in Europe. The credit crisis talks have shifted to Spain and Italy which are large economies.  As Germany and France continue to bailout their Euro zone counterparts, they accumulate more debt.  There were talks last week that France is in financial trouble which resulted in a stock market sell off among other bad economic news.  The bottom line there is a storm brewing in Europe which will come to fruition sooner or later.  This uncertainity has resulted in bond yields dropping to historic lows which will result in lower fixed mortgage rates.

There are now possibilities the Bank of Canada might hold or even consider cutting its benchmark rate (which sets prime rate) to stimulate the Canadian economy just in case Canada gets dragged into a slowdown due to what's happening in US & Europe.  This means continued low rates for the foreseeable future.

So What You Might Ask?

The concern with even lower interest rates, is creating more demand in the Canadian real estate market.  This is good news for first time home buyers since the affordability requirements will drop, however, more bidding wars might result (I can only comment on Toronto's real estate market since this is where I conduct my business) and some would lose out.  Canadian household debt is already at an all time high and taking on further debt could result in an unpleasant consequences for all (http://goo.gl/zzcDH).  The lower rates will pull the future demand into the present and leave a void in the future.  The other concern is Canadians getting used to these low mortgage rates and not plan for higher interest rate environment when mortgages renew in a few years from now.

Finally, taking on debt with a responsible plan to pay if off can be a good thing. However, taking on debt and not planning for higher interest environment will have dire consequences.

To discuss your personal mortgage financing situation, please contact me.

Are Mortgage Interest Rates Dropping?

My Commentary On What The Bank Of Canada Said Today

What's Your Best Interest Rate?

Typically, one asks for the best mortgage rate when looking for a mortgage.  In this video, other questions to be considered are discussed to help one decide since a mortgage is an investment vehicle not a commodity.

Where Is Prime Rate Going?

Why Fixed Rates Move So Much?

Are You Ready For 6%?

Today's mortgage rates remain to be extremely low due to the uncertainity in the global market (risk of Greece defaulting), anemic job creation in the US and massive government debts and deficits.  In Canada, we have been lucky not to experience the pain of our neighbours to the south or across the pond in Europe. Fixed mortgage interest rates are hovering in the mid to high 3% which are historically low.  Over the last 25 years, fixed rates average around 6% (see chart below which shows posted rates. Typically, there is 1.5% difference between posted and discounted)

It is important to budget ahead for the time when mortgages are up for renewal at the 6% level. Inflation hedge strategy, is a pro-active plan where the mortgage is reviewed annually and adjusted according to the projected renewal rate.  This strategy saves the borrower thousands of interest dollars and accelerates paying down the mortgage principal.  At renewal, the borrower's mortgage balance is reduced and adjusted for higher interest rate environment eliminating any payment shock.

For variable mortgage holders, the savings are even greater, since the mortgage is paid at the fixed interest rate level which contributes more monies towards paying down the mortgage principal.

For your personal mortgage review and inflation hedge analysis, please contact me.

Is That The Best Rate You Have?

In today's competitive mortgage market, there is lots of "lowest interest rate" and "best mortgage rates" advertising in the media. I even saw a jeweler offering mortgages!!  Is the best rate really what's best for one's situation?

Asking for and making a decision strictly on lowest rate is similar to someone walking into a financial planner's office and asking for the lowest MER mutual fund.  Mortgages are investments and need to be chosen based on where the economy is currently, what's expected to happen with interest rates over the next few years (inflation, job creation and global factors), personal and financial situation and borrower's risk tolerance. The fine print of the mortgage such as compounding, prepayment priviliges, increased payments, portability, assumability and how the penalty is calculated are important features to be understood upfront prior to commiting to a mortgage product.  It's unfortunate that homeonwers have been programmed to get the lowest rate, set the payment and not look at the mortgage till renewal time. There are significant opportunities in optimizing the mortgage to reduce the amortization and build significant equity in a shorter period of time if the mortgage is managed properly by a professional.

The next time you are in the market for a mortgage whether you are buying a home or an investment property, renewing, or refinancing, please email me to send you a checklist of factors to consider in choosing what's right for you and your family.

Please contact me should you have any questions regarding your mortgage.