Variable Mortgages Are Not Portable!

Variable mortgages up to late summer of 2011 were very attractive due to the large discount off prime at that time (prime less 0.75%).  Many homeowners and real estate investors took advantage of getting a variable mortgage on their home or real estate investment properties.  The mortgage product is portable and assumable which means the homeowner or real estate investor can port (transfer) the mortgage to a new home as long they qualify and it's done within a certain period of time between selling one property and buying another (typically 90 to 120 days). As for being assumable, the mortgage can be taken over by the buyer should they qualify.There is a catch however when porting a variable mortgage.  Unless the exact mortgage amount is transferred over to the new property, lenders will reset the rate to whatever the market rate is at that time.  Here is an example, let's say the borrower got a variable mortgage at prime-0.75% and the balance at the time of moving is $250,000. They are buying a home which will require the mortgage amount to increase to $300,000.  The borrower can consider 2 options:

• Port the mortgage of $250,000 and obtain a line of credit for the difference, in this case $50,000 in order to maintain the prime-0.75% on the variable mortgage
• Obtain a new $300,000 variable mortgage at today's rates (prime-0.1% to prime+0.1%) with the same lender without incurring a penalty

In the above case, it's clear that keeping the mortgage at prime-0.75% is a wise option.  It's important to understand the fine print of the mortgage and and discuss the available options with your mortgage professional.

As for the blog post title, yes variable mortgages are portable, but with a catch!

To discuss your personal mortgage financing situation, 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.