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.

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?

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?

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?

My Commentary On What The Bank Of Canada Said Today

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.

Where Is Prime Rate Going?

Why Fixed Rates Move So Much?

Are You Ready For 6%?

Today's mortgage rates remain to be extremely low due to the uncertainity in the global market (risk of Greece defaulting), anemic job creation in the US and massive government debts and deficits.  In Canada, we have been lucky not to experience the pain of our neighbours to the south or across the pond in Europe. Fixed mortgage interest rates are hovering in the mid to high 3% which are historically low.  Over the last 25 years, fixed rates average around 6% (see chart below which shows posted rates. Typically, there is 1.5% difference between posted and discounted)

It is important to budget ahead for the time when mortgages are up for renewal at the 6% level. Inflation hedge strategy, is a pro-active plan where the mortgage is reviewed annually and adjusted according to the projected renewal rate.  This strategy saves the borrower thousands of interest dollars and accelerates paying down the mortgage principal.  At renewal, the borrower's mortgage balance is reduced and adjusted for higher interest rate environment eliminating any payment shock.

For variable mortgage holders, the savings are even greater, since the mortgage is paid at the fixed interest rate level which contributes more monies towards paying down the mortgage principal.

For your personal mortgage review and inflation hedge analysis, please contact me.

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.