Numbers Tell The Truth!

There is never a dull moment in the Canadian mortgage landscape with new rules introduced by the Minister of Finance and OSFI, Office of Superintendent of Financial Institutions.  I want to state upfront that I support these changes with the exception of reducing secured lines of credit (HELOCs) from 80% to 65% of home values.  Canada's housing market has been very hot since the credit crunch of late 2008 and the house prices to income ratio gap has grown significantly due to stimulus low mortgage rates.I want to clarify what families will be facing in 2016, 2017 and beyond.  Today's 5 year fixed rates are in the low 3's (3.09%-3.19%) which are fantastic.  However, the extended period of low interest rates will be followed by periods of high interest rates due to the following:

• Focus will turn from stimulus in the global economy to combating inflation due to excessive stimulus (money printing and quantitative easing) since 2008
• Cost of borrowing will increase due the European credit crisis which will only intensify as Italy & Spain (3rd & 4th largest economies in Europe) deal with their debt issues. As you recall, in late 2008 when Lehman Brothers collapsed, money (capital) disappeared from the market, creating a supply issue and variable mortgages went from primes less 0.75% to prime plus 1% in a short period of time

I want to share the following numbers to help you see where I am going:

Family household income (pre-tax): $100,000 Income tax bracket: 45% Mortgage amount: $400,000 Interest rate: 3.09% Mortgage amortization: 30 years Monthly payment: $1912 Renewal Rate in 2017: 5.5% (an increase of 2-2.5% over 5 years is very reasonable based on historical data and the above stated issues) Mortgage payment at renewal: $2103 (increase of $416 per month)

Some would assume taking on an additional $416 per month in 5 years is doable.  Let's dissect a little further:

In order to absorb $416 of additional mortgage payment, the family's pre-tax income has to increase by $9,000.  That might sound reasonable , however, it's equivalent to getting 2.5% raise every year for the next 5 years.  The economy is not in the greatest condition: not many companies are hiring, some are cutting back and the reality is keeping a job nowadays is great news. Furthermore, the increased cost of living (property taxes as municipalities deal with their debt and deficit issues, gasoline which affects goods prices, higher hydro rates....) will eat away into a family's affordability. I didn't mention that children cost more as they grow up!

This blog post is a reality check.  We have been drunk for too long on cheap money.  Plan for the long term and understand how future events should play into your decisions today.  This is a golden opportunity to consider long term mortgages such as a 10 year fixed.

To get more information please visit: www.10YearFixedMortgages.com

Whether you agree or disagree with me, I would love to hear from you.

What You Need To Know About The New Mortgage Rules

The Minister of Finance, Mr. Flaherty, announced today the following regarding insured mortgages which will take effect on July 9, 2012:

• Refinances will be limited to 80% of home value from 85%
• Maximum amortization will be lowered to 25 years from 30 years
• GDS limited to 39% (currently no GDS requirement for 680+ credit scores) and TDS to 44%
• Mortgages over $1 million will no longer be insured

Here is how these changes will impact the following groups:

First Time Buyers

• They will be squeezed out of the market if they don't have the 20% downpayment.  Qualifying at 25 years, especially in Toronto, is difficult due to home prices in the city (condo fees are taken into account when qualifying for a mortgage as well)
• More potential first time home buyers will turn into longer term tenants which is good news for real estate investors
• Parents, get ready to co-sign for your children if they want to buy their first home

Real Estate Investors

• Since more first time buyers will have to wait for their first home, the tenant pool will increase.  This is good news since more demand results in higher rental income
• Qualifying for additional investment properties should not change since government requires minimum 20% downpayment. This is pending conventional mortgage amortization is not lowered to 25 years.  Please note there are lenders offering 35 year amortization for investment properties.

 Homeowners

• If one has 20% equity or more in their home, 30 & 35 year amortized mortgages are available for now.  The changes are not impacting this group, but we will have to wait and see if lenders will reduce mortgage amortization to 25 years

This announcement came out of nowhere and it surprised many.  If this announcement is intended to cool off investors buying condos in downtown Toronto, I'm not sure it will achieve that since the changes are targeted towards insured mortgages only.  Furthermore, this change gives the Bank of Canada room to hold its benchmark rate steady for a longer period of time due to a slowing global economy.  I believe since the Bank of Canada's hands were tied, Minister of Finance came in to help control the high household debt level.

There will be more clarifications coming out in the next few days from the lenders which I will elaborate on. To discuss how these changes will impact your mortgage financing, please contact me.

Double Your Money By Renting Your Home

Lately, I have been dealing with an increasing number of clients who are deciding not to sell their home.  They are choosing to keep their existing property by turning in it into an investment property and using the proceeds of the refinance to buy a home.  Since the financial credit crunch in late 2008, more Canadians are skeptical about the markets, are worried about having enough to retire and are looking for alternative ways to diversify their investments.A greater number of homeowners, after reviewing the numbers, are deciding to refinance their existing home up to 80% of its current market value, take advantage of today's historic low interest rates and rent the property.  Here is real example that I did for a client who owns a condo in downtown Toronto.

Condo value: $350,000 Mortgage amount: $280,000 (80% loan to value) Mortgage amortization: 30 years Mortgage interest rate: 3.29% Mortgage term: 5 years Annual appreciation: 2%

There are two items to pay attention to in the above chart: 1/ initial equity is $70,000 and after 5 years based on 2% capital appreciation and utilizing the inflation hedge mortgage strategy, 2/home equity is at $135,771.  By having the tenant paydown the mortgage and adjusting the mortgage payment gradually for higher interest rate environment, the home owner almost doubles their money in 5 years.  Imagine the financial freedom a fully paid off investment property would create.

If you are interested in finding out how to turn your current home into an investment property and use your home equity to buy a home, please contact me.

How To Use A 40 Year Mortgage To Payoff A Mortgage In 20 Years

You might be thinking can I really use a 40 year mortgage to payoff a mortgage in 20 years.  The answer is yes. Here is a real example of a recent client case that I helped structure:  Client has one rental property which he was paying down aggressively by taking all the net cash flow ($400 monthly) and putting it down on the principal.  This might sound like a good idea, however it is inefficient.  Here is why:

• Paying down an investment property aggressively reduces interest portion of mortgage payment which is tax deductible, therefore resulting in higher taxable income
• Net positive cash flow can be used to pay down non tax efficient debt (home mortgage)

The solution for the client was the following:

• Leave the investment property mortgage at its original 40 year amortization (which is still available for conventional mortgages)
• Use the net positive cash flow ($400 per month) to paydown principal residence ($300,000 mortgage amortized over 30 years at 3.29% is reduced to 20 years of amortization saving $62,461 of interest payments)

The cash repositioning helped the client paydown their principal residence, save thousands of interest dollars and be tax efficient.  It is important when choosing a mortgage for your investment property, the right product is selected that will fit into your long term goal.  Please consult with your accountant regarding your taxes.

In conclusion, there is more to mortgages than rates.  If a mortgage product is used properly, mortgage freedom can achieved faster which is the goal of many homeowners.

To discuss your personal mortgage situation, 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.