Risks Of 5 Year Fixed Mortgages

Have rates ever been this low? With historic lows for the 5 year and 10 year terms, it is very enticing to take advantage of today's low interest environment.  The question is whether one should go for 5 or 10 year. Before I answer the question, consider the following:

• US Federal Reserve stated its benchmark rate will remain at or near zero till the end of 2014
• Canadian household debts is at an all time high and will continue to increase since Bank of Canada has to remain close enough to the US Federal Reserve benchmark rate, otherwise the Canadian dollar will skyrocket negatively affecting exports in a sluggish global economy
• Governments around the world have been "stimulating", printing, money since late 2008 to get the global economies growing again which has lead to high government debts and deficits. Basically, governments are carrying the load until the private sector feels it is their time to start spending again.
• The European zone is in crisis and it is taking on huge amounts of debt by bailing out countries

These factors will eventually lead to inflation, but when will it happen? in 2015? 2016? 2020? No one really knows, but it will happen.  In my opinion, the longer the rates remain superficially low, the more aggressive the increases will be to control inflation.

Homeowners who are taking on or renewing their mortgages in 2012 will renew in 2017 (if they take a 5yr term).  Based on the fact the US Federal Reserve will keep its rate at or near zero and the Bank of Canada will stay relatively close till end of 2014, it is likely aggressive rate increases will commence in 2015 to control inflation and slow down Canadian household debt.

Today's 10 year fixed mortgage term is at an all time low and provides a good protection from economic and rate shocks.  Consider this: would you take a 5 year fixed at 3.99% in 2017? What's the risk of a 10 year term one might ask?  The mortgage is portable and assumable and the day after the 5 year anniversary, the penalty is based on 3 month interest NOT interest rate differential. I believe it is a great time to consider a long term safe mortgage strategy. To run your personal mortgage analysis comparing 5 year term versus 10 year term, please contact me.

It Feels Like The 2008 Credit Crisis!

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?

The Roller Coaster Market And Your Mortgage

It has been a roller coaster for the last few days in the market!  There has been a lot happening over the last month or so in the global economy which has resulted in some serious volatility in the market (stocks & bonds).

The majority of homeowners, unfortunately, get a mortgage from their local branch, set the payment and forget about it till renewal.  I call it "set it & forget it" approach.  Since 2008, there has been a lot volalitility which is anticipated to continue as the western economies deal with unprecedented levels of debt.  Here is a number to put things into perspective: Between today and September 1, 2011, European countries have to pay 57 billion euros of interest!  These numbers will have a huge impact on the recovery of Europe, not to mention the US which is dealing with its own fiscal challenges.

Why Should You Care?

A mortgage, whether it is for a home, cottage or rental property is an investment vehicle.  Similar to one's RRSPs, which I am sure lots of Canadians are now reviewing on a daily basis, a mortgage needs to be reviewed on a regular basis to optimize it for what's happening in the economy. This means someone overseeing the mortgage, notifying the borrower when to adjust the mortgage payment to reduce the mortgage amortization and save thousands of interest dollars as well as adjusting the mortgage for renewal at a higher interest environment.  These low rates will not be around forever.  The beauty of all this after mortgage funding service, is it comes at no cost to the borrower from a mortgage professional, believe it or not.  Unfortunately, the majority of homeowners don't utilize this free service.

This is a great opportunity for Canadian homeowners to take advantage of this low interest rate environment and set up a plan to achieve mortgage freedom and save thousands of unnecessary interest dollars.  Afterall, it is your hard earned dollars!

To discuss your personal mortgage finance situation, please feel free to contact me.

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.

Cash flow Or Capital Appreciation?

When buying an investment/rental property, sometimes the question is: Should I buy the property to generate cash flow on a monthly basis or do I sacrifice cash flow (break even) and hope for capital appreciation over the long term? In today's downtown Toronto condo market, it is difficult to generate positive cash flow without a significant downpayment.  Buying an investment/rental property is a buying a business. If you were presented with an opportunity to buy a business which requires 30-40% capital investment that breaks even, would you buy it?  Being profitable on a monthly basis and having time on your side for capital appreciation is a win-win investment strategy. The stronger the cash flow of the property, the easier it is to sell the property in future when you decide to do so.

Here is an idea: Having 2 rental properties that generate $400 each on a monthly basis will net $800.  If you were to put the $800 on your personal mortgage (which is not tax deductible), your mortgage amortization will significantly be reduced paying it off faster thus providing access to your home equity for further investments.

In conclusion, it is important to surround yourself with a team of professionals who are investment savy (mortgage broker, real estate agent, accountant and insurance broker) who understand your long term goals and can help you be on the right track.

For detailed cash flow, cash on cash return, return on investment, cap rate and capital appreciation analysis for your rental properties portfolio, please contact me.

Buying An Investment Property Should Be Like Having a Three Course Meal!

I heard Russell Westcott, REIN™ General Manager, in an interview on Inside Toronto Real Estate show say: "Buying an investment property should be like having a three course meal" and I couldn't agree more with him.  Here is his, and my, approach to buying an investment property, otherwise it's not worth it:

• Mortgage pay down: the generated rental income has to pay down the mortgage to build equity over the long term
• Cash flow: the rental property has to generate cash flow after all expenses.  Having an investment property is owning a business, and no one in their right mind would acquire a business that does not generate cash on a monthly basis
• Capital appreciation: Investing in areas where there is long term capital appreciation due to job growth, infrastructure investments and immigration

I believe the above three courses, or rules, provide a solid foundation when deciding where and what to buy. For a complete cash flow, return on investment, cash on cash and investment property analysis, please feel free to contact me.

How To Get Financing For An Investment Property?

Buying an investment property is an option many Canadians have considered over the last few years to diversify their investments. Arranging financing for an investment/rental property can be complex depending on the applicant's employment situation (salaried, hourly or self employed). The most effective way to get the mortgage approved is to have the rental property looked upon as a business.  What does that mean?There are lenders who require a 1.1 to 1.2 DCR (debt coverage ratio) to approve the mortgage financing.  Debt coverage ratio is the ratio of net operating income (rental income - vacancy - repairs & maintenance - management fee (if applicable) - property taxes - insurance - condo fees (if applicable)) to monthly mortgage payment.  If that ratio is 1.1 to 1.2 (depending on lender) then the mortgage would be approved.

The conventional method of GDS/TDS (gross debt service ration / total debt service ratio) is usually maximized after the applicant owns more than 2 rental properties based on the revised government guidelines which went into effect April 19, 2010. Also, the GDS/TDS might not work if the applicant has a car loan and some outstanding debts.

Please contact me if you are contemplating buying an investment property (single family home or a multi-plex) and to get access to my cash flow, cash on cash return, ROI and property analyzer worksheets.