Are Mortgage Interest Rates Dropping?
My Commentary On What The Bank Of Canada Said Today
Where Is Prime Rate Going?
Why Fixed Rates Move So Much?
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.
What Drives Variable Rate Mortgages?
My previous blog post discussed factors driving fixed rate mortgages. What about variable rate mortgages?Variable mortgages are driven by prime rate (which is based on Bank of Canada's benchmark rate) and the discount a lender would provide. For example, 5 year variable mortgage at prime less 0.75%.
The benchmark rate, is set by the Bank of Canada on eight set dates annually. Bank of Canada targets inflation around the 2% level, if inflation is higher then the benchmark rate is increased to control inflation and in cases where there is low inflation (or deflation), the benchmark rate is lowered to stimulate consumer spending and business investments due to the low cost of borrowing.
What does the dollar have to do with prime rate?
Canada's benchmark rate cannot be at a much higher level than the US benchmark rate since a substantial difference between the two would drive foreign investors to buy the Canadian dollar and appreciate its value. A stronger Canadian dollar would reduce Canada's competitiveness by making Canadian products more expensive therefore reducing exports and slowing economic growth. The US economy has and will continue to experience tough and slow economic recovery. The US Federal Reserve will keep its benchmark rate low to stimulate the economy, create jobs, promote consumer spending and increase housing demand through low interest rate environment. With the upcoming US elections in 2012, the US will keep rates low to aid re-electing the current president (historic data shows in re-election years US interest rates are kept low). This low US interest rate environment will exert more pressure on the Bank of Canada not to increase the Canadian benchmark rate aggressively till the end of 2012 which makes variable interest rates favourable. Having said that, the Bank of Canada will have to increase the benchmark rate to control inflation and high consumer debt levels, however it will be gradual. My prediction is 0.5% increase for this year.
For your personal mortgage review, please contact me.
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.
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.