27 Jul

Avoiding “Sticker Shock” When It Comes to Mortgage Renewal.

General

Posted by:

Imagine that, a few years from now, the time has come to renew your mortgage.

Several years back, you got a $350,000 at the then great rate of 2.24%. Your mortgage payments are $1522 per month.

Because we are now in what the financial brainboxes call “ an escalating rate environment “ – normal people just say rates are going up – when you open your renewal notice you might encounter the same feeling you get when you look at the price of a car you like.

When you actually do look at the renewal notice, you see that the remaining balance on your mortgage is now $294,662, the new ( very competitive rate ) is 3.25% and that the new payment is $1668, actually $150 dollars a month MORE than you were paying previously. You think “WHAT THE….???”

This type of sticker shock is a new sensation to an entire generation of Canadians. Brokers are fond of talking about the fact that rates have not moved in 7 years but we rarely talk about the fact that rates have been trending down for more than twenty years and chances are, if you’ve had a mortgage for any time during that period, the payment at renewal has always been lower than when you started out.

‘Well, what’s to be done’, you ask? ‘How do I avoid “sticker shock”?

The key to avoiding that sinking feeling is to increase your payment slightly every year. You can find out how much to increase it during your Annual Mortgage Review. By increasing your monthly payment by even 2% a month, you can potentially avoid that sinking feeling  – and pay off your mortgage even faster!

But wait; “Annual Mortgage Review? Qu’est-ce que c’est”, you ask.

An annual mortgage review, done with either your mortgage provider’s representative or your own mortgage representative ( i.e. your friendly Mortgage Professional) is just a quick check up to discuss what the current balance is, how things are going and do a quick review of your early payment privileges, increased payment privileges and potential prepayment privileges.

Its best to have these annually because , well, the average human needs to be shown the same information seven times to learn it – save time and start today.

Seriously, if you feel like you need to do annual review and need help, just give me a call.

JB

7 Jul

Affordability; Let’s put our national housing agency back to work.

General

Posted by:

By now, many of you have heard that, in addition to stress testing insurable mortgages, the government now intend for lenders to similarly stress test non insurable ( what we previously called ‘conventional’ ) mortgage financing, in a bid to better manage risk in the Canadian housing market.

By way of an example, imagine you are a couple who, by dint of hard work, luck and the bank of mum and dad, have amassed a down payment of $600,000.

By some miracle, you’ve located and purchased the very last liveable 3 bedroom semi in East Vancouver for 1.2 million dollars.

Today, given your excellent credit rating and your $85000 a year income, you can qualify for the $600,000 in additional financing needed. Its squeaky, but you’ve demonstrated your ability to pay larger amounts over the years – it’s very “approvable”.

Spool down the road a couple of months however and because the government wants to better manage risk and affordability, you no longer qualify for the financing required. In fact, your purchase cap is now 1,100,000, in a market where prices will likely escalate 2 % in those intervening days.

So who does this extra protection serve? Not our buyers, not our lenders, not even our market place.

Without a concerted effort on the part of the government to actually manage affordability, the changes are meaningless.

Several countries get rolled out as examples of thriving free market economies with stable housing markets; 2 often cited are Austria and Germany. How do they do it?

Well, the key is an entrenched, robust social housing programme. Austria, for example, provides low cost financing to low or no profit developers who in turn partner with the government to build social housing. The ‘developers’ are often community based institutions. One example cited of a common “developer” is a trade union. Bonuses are paid to the developers in order to maintain quality standards, meaning that the build quality cannot be differentiated from commercial developments.

Having recognized that successful social housing means having people from all walks of economic life actually living together rather than in silo complexes in the same neighbourhood, the maximum income threshold is actually quite high. If you are a high income earner, you are just as eligible as a medium or low income earner.

Because the programmes are so robust, market demand for owned real estate is balanced and actually stable.

Last night, I had a two hour conversation with a friend who expressed nothing but frustration about the whole situation here in Vancouver.

From that sense of frustration, I’ll pass on this key message; CMHC, get off your cash swollen backside and get back to work, fulfill your original mandate.

For those of you who have gotten this far and are now rolling your eyes about the whole “social housing thing” it need not be in the same style or format as the European models, but let me make three final points;

1. The only way to increase affordability is to increase supply and thereby reduce purchaser competition. Nothing is currently being accomplished by providing incentives to the commercial housing market. The only way to increase supply is by throwing full support behind the development of social housing.
2. There’s 4 BILLION dollars in profit going back to the federal government from CMHC, that should by rights, be used to fund such an initiative. Even the most conservative of you will agree that “profit”from a Crown Corporation is actually just taxation.
3. There is already precedent for such a scheme. I’d invite you to have a look at Ajax, Ontario. What was then known as Central Mortgage and Housing Corp. managed the development of Ajax. The project was meant to house returning WW2 vets and it was handled by CMHC right up until the town was incorporated. It worked, as far as I can tell, but you’d probably like to check with the townsfolk.

Anyway, end of rant.

Thanks for reading If you’ve gotten this far.

JB

5 Jul

Buying a home? One simple secret to increasing your buying power by $100,000.

mortgage finance

Posted by:

Mortgage financing

My other job… buying fishing gear.

With new mortgage rules in place since October, 2016, housing affordability is even more of a challenge than it was, particularly in areas like Vancouver.

There are, however, actions you can take today to increase your buying power.

To begin with, let’s start with some easy math; for every $100,000 you borrow, the monthly payment is about $450.00.

Based on that, I know that if you make $85,000 a year, regardless of whether your down payment is 5% or 50%, you could potentially afford ( and qualify for ) a $600,000 mortgage. Payment on that mortgage by the way is about $2700 a month, potentially as much as you’re currently paying for rent.

I say potentially, because during the course of our conversation, you tell me about your Audi Q7, which costs you $900 a month. It’s a nice car, but that’s the equivalent of a two hundred thousand dollar reduction in your buying power.

Further on into our conversation, the one that really stings… you have $15,000 in credit card debt.

Unfortunately, that’s another $100000 from the bottom line… your maximum mortgage is now $300,000.

‘Hey, wait a minute! – That’s only fifteen grand, the payments are only $150!’, you say.

Well, that’s correct, except that when creditors are calculating debt servicing, they use a 3% payment (what it actually was back when I had black hair) and poof! The payment is $450.

So, want to increasing your home buying power by $100,000? Eliminate the $15,000 as quick as you can and poof!

( If you want to increase you buying power even further, downsize the vehicle and cut the payments in half – another $100,000 – poof! )

As always, if you have any questions, need help or would like to run through some (real) scenarios, please call or email and poof! – I’ll be there to help.

Regards,

JB

Jonathan Barlow
778-230-2572
jbarlow@dominionlending.ca