mortgage finance

How Every Real Estate Investor Should Structure Their Mortgage

How Every Real Estate Investor Should Structure Their Mortgage

There are three phases in real estate investing: Acquisition, operation/management, exit strategy.

Don't Buy An Investment Property For Cashflow!

You are probably thinking "What is he saying, especially since he always talks about buying an investment property is buying a business". You are correct, buying an investment property is buying a business. Here is what I mean:A property is purchased at $625,000 with a mortgage of $500,000 (80% loan to value), borrowed at 3.99% for a 10 year term amortized over 35 years.  Rental income for the duplex is $3800 per month, which nets $800 after taking into account 10% safety (for repairs & maintenance as well as vacancy).

There are 2 options when it comes to using the surplus:

  1. Increase the mortgage payment by $800 per month
  2. Use the lump sum feature to pay down the mortgage $800 every month or at a set frequency (quarterly or semi-annually)

If the real estate investor is planning to acquire more properties, option 2 is best, since increasing the mortgage payment would hinder qualification of further properties.  The pre-payment feature would accomplish the same result without sacrificing the ability to qualify for more investment properties.

Let's dig deeper into the numbers:

If the mortgage is pre-paid by $800 every month, the mortgage amortization would drop from 35 years to 20.25 years! Imagine what would it feel like if you owned your investment property free and clear 15 years ahead of schedule and what that additional income would do to your lifestyle.

The next time you are buying an investment property, don't buy it to use the cashflow for personal expenditure, rather use it to payoff the mortgage.

Every real estate investor has unique goals, to discuss your personal real estate investment portfolio and goals, please contact me.

 

How I Ended Up With 2% Equity In My Home!

Over the last few years, real estate prices have appreciated considerably where some first time home buyers have had a hard time qualifying for a mortgage.  Nevertheless, some are able to scramble the minimum 5% downpayment (or have some of the downpayment gifted by a family member) to start their journey of home ownership.

When buying a home with 5% downpayment, the mortgage has to be insured per Government requirement.  The insurance premium is 2.75% (for 25 year amortization) or 2.95% (for 30 year amortization) which equates to the homeowner having 2.25% to 2.05% equity in their home at the day of closing.  In the first few years of homeownership, the majority of the mortgage payment pays for the interest portion and minimal mortgage principal is paid down.  It's important to keep in mind that if one is planning to move in 5 years (outgrow the 1 bedroom condo), once the costs (realtor fees, legal fees, downpayment requirement for new home & closing costs) are taken into account, the seller might find themselves to be short of funds which will mean they have to stay for a longer period of time in their current home.

It's important to have a plan to paydown the mortgage principal which fits a person's long term goals. Afterall, getting a mortgage, setting the payment and forgetting about it is not a sound approach to financial freedom.

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

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.

How You Can Buy A Home With $24.95?

A client approached me a few weeks back with interest of getting pre-qualified for a mortgage to buy their first home. During our initial meeting, we discussed their goals, where they see themselves in 5 years and cash flow projections based on mortgage interest rates over the next 5 years.  One of the questions I ask, is how the person's credit score is. The client stated they had no outstanding debt with very little credit card balance that is paid off every month.  Once all the necessary information was gathered, a credit check was completed and I was shocked to what I saw in their report.There was an outstanding student loan which showed delinquency for over 21 months which literally had destroyed the client's credit score and history.  I contacted the client to notify them of the issue and they were surprised to hear there was a balance since they stopped receiving a bill after they moved to their new address. They had thought the loan was paid off. Unfortunately, the outstanding balance was minimal but had accumulated lots of interest over the 21 months.

In this case, the client will have to re-establish their credit and show 2 years of good credit history to qualify for a mortgage at a decent mortgage interest rate. There are other alternatives, but are more costly.

By checking your own credit score annually from Equifax (http://goo.gl/5xqCP) these type of issues would be resolved. Similar to a medical annual check up, an annual credit check is important to verify there aren't any errors or items that need to be addressed immediately.  The cost of checking your credit score is $24.95.

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

Why Ultra Low Mortgage Rates Are Not Good?

Thumbs_down

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?