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Baby Boomers 10 yr real estate retirement plan

Last week, I was asked to comment on BMO’s Retirement Report  which pointed out that more Canadian Baby Boomers are using their home as their retirement fund.  The BMO study shows the baby boomer generation were not downsizing like many experts were thinking.  But instead, they are buying bigger, more expensive homes.   The thinking is that the higher priced homes will grow their retirement fund more quickly and more securely.

Several Financial Experts commented on this study…. mostly offering negative reviews about this retirement strategy….. including BMO… you know, eggs in one basket, diversification, that sort of thing…  there is merit in the statements but I really don’t agree with the negative spin….. Here’s a link to my quotes about the “10 year plan” in The Star.

The 10 year plan has grown in popularity over the last 5 years as we’ve seen the value of our RRSPs or other investment drop in value.   It’s capitalizing on real estate values going up over the long-term.    It’s really simple to understand….

THE 10 YEAR RETIREMENT PLAN

Here’s an example of what one couple did….Let’s say you’re between the ages of 35 and 55.

  • You own a home worth $500k.
  • You have a $300k mortgage., but you can afford to buy a $700k home.
  • Your new mortgage is $500k.
  • You are committed to keeping that home for 10 years….and you can afford the payments..
  • In that 10 years, the goal is to pay down your mortgage by at least half, if not more. (a realistic goal considering the average Canadian pays off their home in 12 to 17 years).
  • if your home goes up by 5% each year, on average (and this is probably a realistic number looking back at historical values), then your home should be worth $1.14million.  
  • the 10 year timeframe is critical… we want to give enough time to live through any up or down real estate market…

Using the example above, in 1o years you should have a mortgage of $350k or less and house worth $1.14millon… that’s $790,000 of equity in your home.   Oh, and it’s all Capital Gains Tax Free….

Does it sound too easy or too good to be true?   It’s really not… take any 10 year period in history…  work out your own stats… This is reality…

By the way, the couple I’m referring to are real… they are actual clients of mine.   They bought their home in 2007 for $850k… They have paid down their mortgage to $300k…this is way ahead of schedule…(the low interest rates have helped)….  The value of their home today is approximately $1.5million.  They have $1.2million in equity today.  They estimate the home will be worth $2million in 5 years…  but even if it isn’t, even if the property is only worth $1.2million 5 years from now, I’d say they’ve done pretty well, wouldn’t you agree?

And for those that prefer stocks and bonds, then stick with those investments…  There isn’t one good strategy…  This plan is less exciting and probably a little boring…  but I like boring when it comes to my money and my retirement…

This plan isn’t for everyone.  You need to be comfortable with debt and understand real estate…. and you need to commit to owning real estate for 10 yrs (it doesn’t have to be the same house.. you can move)…

If you need help with this plan or just want more info to help understand it, give me a call anytime.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

Rent vs Own…which is better?

Rising house prices could make you rethink buying a home.. Could renting be better today?  With the average home price in Toronto around $500k and the National average at $356k, renting might look more attractive.  And for certain situations, like short-term accommodations and retirement living, it does make sense.  But I’m not convinced that renting is right for most of us.

Some simple rules of thumb to remember when buying real estate:

  • you should plan on owning the home for at least 7 years.  This will amortize or spread out any associated expenses with the purchase or sale of your home.
  • buying for investment should be a long term play.. again, 7 years is usually long enough to take us through any economic cycle of ups and downs.
  • forgot buying for a quick flip.  Unless you are a professional renovator with a deep pockets, don’t try to imitate people on HGTV (yes, it’s another 4 letter word we shouldn’t repeat in public).
  • don’t buy at your maximum debt servicing ratios…. stretching yourself thin when interest rates are at record lows isn’t smart.
  • speaking of interest rates…. make sure to qualify yourself with an interest rate of 5.00% or higher.. this is a more realistic rate than today’s 3.09%… just plan for rates to go up… when they do, you’ll be prepared…
  • we won’t get into buying a rental property here… it requires more explanation.. but for many, it’s an even better investment than buying your principal residence… a topic we will discuss at a later date.

Type in Rent vs Own or Rent vs Buy on google, and you’ll find several recent articles on the subject.   This one, from the Financial Post, stood out…. it’s against owning.   The article explains that you will be better off, financially, if you rent…  They even give an online calculator to prove the point…. Okay, let’s take a closer look at this calculator…   Ah, there’s where we have a difference of opinion…. Their calculator assumes you can earn an annual 7.00% Return on Investment outside of Real Estate…   And they are using annual house appreciation rate of 2.00%.

Hmmm, how many people have made an average annual return of 7.00% in stocks, bond, mutual funds over the past 5, 10, 15 or 20 years???   Most the people I know are still looking to match the stock market highs of 2000 or recover their investments from the 2008 crash.    And using a 2.00% annual appreciation rate for real estate?  Come on, let’s get real!   Try typing in more realistic numbers like 5.00% investment return and 5.00% house appreciation and see what you get…   And that 5.00% investment return is being generous.    Real Estate becomes the winning choice…

We also have to factor in the intangibles.   Not having to worry about moving because your landlord is selling… and not having to move the kids…. and just plain pride of ownership… There is something to be said for owning your home..  People tend to care a little more about the home they own.

Here’s another article from the Globe and Mail that isn’t against owning but is advocating you save up a larger down payment.   I like the philosophy.   Wait and save… but don’t wait for house prices to go down… that just hasn’t worked… Timing the market is always a tough thing to do…So even if house prices fall over the next few years, you’ll probably end up spending more on your mortgage as these record low interest rates are expected to go up over the next few years..    Here’s a calculator I found through The Star’s Moneyville.   I typed in some numbers using today’s averages… rents, house price, mortgage rate, inflation rate, etc…. the results showed buying would save you over $400,000 over a 25 year period.    Try it out.. see how it would fit your situation.

Let me know when I can help.

Steve Garganis steve@mortgagenow.ca

416 224 0114

A complete overhaul of Mortgage Lending in Canada?

  FED GOVT KEEPS TALKING ABOUT TIGHTENING MORTGAGE LENDING POLICIES

But why?  Why does the govt believe there is a need for all this change?  That’s the question most industry insiders are asking.  Here are some facts with my thoughts mixed in….  tell me if you see some contradiction between the different branches of the govt or a lack of consistency:

  • Surprise…we don’t have a mortgage default problem… Mortgage arrears in Canada are 0.38% as of January 2012.   In Ontario, the housing hot spot, arrears are only 0.28%.   These figures are very low by anyone’s standards.
  • The average resale price dropped 0.5% nationally.  But resale prices in Toronto, are up around 7.3% in a year-over-year comparison.  But that trend is cooling according to The Canadian Real Estate Association.
  • Inflation isn’t a problem… it’s hovering at 1.9%, well within acceptable levels.
  • Housing affordability hasn’t really changed in 10 yrs according to the RBC housing affordability index and it actually improved in Q4 of 2011 (it’s probably even better this year as interest rates are even lower).
  • Personal household debt is around 153% of income.  That’s a record high number, it’s true, but what are Canadians borrowing for?  Studies tell us it’s not for big screen TVs or trips to Bahamas…  We’re actually investing… in stocks, mutual funds, real estate here and in the U.S.  In fact, we are the biggest foreign buyers in Florida and we are also buying in Phoenix, Arizona in record numbers…. Is buying a second home a bad investment?
  • Did you know that 1/3rd of Personal Debt is non-mortgage debt including high interest credit cards, loans and unsecured lines of credit…. yet, there is little to no regulation for these products…
  • Speaking of credit cards… the arrears rate is just over 1.00%... that’s around triple what mortgage arrears are!  Why isn’t the govt clamping down on these credit products?
  • Record-low interest rates were brought in to stimulate the economy.  Haven’t Canadians played their role to kick-start the economy?  Why does the govt want to punish homeowners now with tougher qualifying rules?  OSFI has even proposed you re-qualify for your mortgage at renewal time!!   How absurd is that?
  • The Bank of Canada wants to raise rates to slow our personal debt growth…   but can’t for fear of slowing the economy…
  • The Federal Minister of Finance, Flaherty, wants to tighten mortgage lending to slow the housing market and reduce the amount of mortgage debt we take on.
  • The housing market accounts for up to 40% of this country’s GDP… all these changes will affect our economy.
  • Business for Self mortgage programs have been eliminated by some banks and other Lenders… making borrowing more expensive for this segment of our population…. by the way, they are paying their mortgages just fine.. there is no evidence suggesting Business for Self borrowers have repayment problems…
  • CMHC opted out of rental property mortgages last year in an attempt to slow real estate investment… so you must come up with 20% down or use equity from other sources for the down payment..

FED GOVT’S LATEST MOVE IS TO PUSH CMHC UNDER OSFI CONTROL

  • OSFI will assume control over CMHC, the country’s national housing agency…. You will have an audit dept overseeing a social program… hmm, I wonder what will happen to CMHC??  The possibilities frighten me and should frighten most Canadians… (more on this later).
  • Minister Flaherty made a comment that maybe the govt should consider selling CMHC…  say goodbye to a business that nets over $1billion a year.. $16billion since 2002.   Here’s an idea…why not split CMHC into 2 business… bulk insurance business and the traditional low down payment business… wouldn’t that keep the Canadian dream of home ownership alive and also satisfy the auditors, like OSFI??
  • OSFI wants to limit Secured Lines of Credit to 65% loan to value from today’s 80% loan to value…  This one makes no sense and has received harsh criticism from Financial Experts…. scares me to think that it’s even gone from thought to paper to print… what other changes were they considering that didn’t make it to print??

MY SUMMARY OF IT ALL…

In short, the govt wants to keep the economy stable but they are going to make it harder for you and I to qualify for a mortgage….  Yet, there are no changes coming for the most expensive of debts… Credit cards, loans and unsecured lines of credit rules either don’t exist or will not change…  For some reason, the govt thinks it’s okay to borrow at 7% , 8% for unsecured lines of credit and pay 18% to 20% on credit cards, but please don’t borrow for a home, at 3% and 4%??

If we continue to make it harder for Canadians to get a mortgage, then we will have fewer home sales.. Fewer home sales will affect ALL HOME VALUES and slow the economy.  It’s really that simple…  this affects the biggest asset that most of us will own… our home!

Let’s hope the govt thinks like a carpenter… measure twice and cut once… !

If you’re a homeowner and aren’t sure how these and other changes might affect you, feel free to contact me anytime.   I’d be happy to help.

$24,000 and $19,000 in savings by refinancing their mortgages.

We’ve seen a growing trend lately… Customers calling to find out if there was any way to take advantage of today’s record low rates…..   If you are buying for the first time or are renewing a mortgage, then the answer is simple… YES..  But what if you are one of the thousands of Canadians that listened to their Bankers and the media or so-called ‘Experts’ and took at Fixed rate mortgage a few years ago.

You have a rate of 4.00% to 5.50% and you keep reading about record-low interest rates in the low 3.00% range….. what can you do?   Well, here are 2 recent examples…. These are real clients….  These are real savings…

So where was the Banker in all this?  Why didn’t the Banker call these clients to make them aware of the huge savings?   In case you didn’t know it, the Banks are a business… and they want to maximize their profit.    Don’t ever forget that.

CASE STUDY #1… 6 YEARS REMAINING AT 5.45%

We had a new client contact us with a $350k mortgage… they were with a BIG SIX bank.. their penalty to exit would be $10k… that’s a lot of money, and we don’t like anyone to pay penalties…..but we did the math and found this client a 3.29% mortgage for 5 years… the end result worked out to be a gross savings of $34,000…  After paying the penalty, they realized a savings of $24,000 over the next 5 years.   WOW!  That’s an easy decision to make.. the clients also decided to add the penalty into the mortgage…. imagine savings almost $5,000 per year!

CASE STUDY #2… 7 REMAINING AT 5.25%

Another client had a $235k mortgage… also with a BIG SIX Bank… penalty to exit was $4k…. we also found a 5 yr mortgage at 3.29% for this client… the savings worked out to $23,000…less the penalty, that worked out to $19,000 in savings over the next 5 years!…  Again, a no-brainer… Clients moved on this right away… we added the penalty into the mortgage and put almost $4,000 per year, into their pockets.

CAN YOU SAVE ON YOUR MORTGAGE?

We’re seeing more opportunity to save money by taking advantage of today’s low rates…. Don’t wait for your Bank to call.   These are just a few, recent examples.  If you’ve been thinking about how you can save on your mortgage, then take a few minutes and look into it.   Get your mortgage reviewed by an unbiased person.  Call a good Mortgage Broker.  It could be worth a closer look.   If you don’t have a broker, then feel free to contact me and I’ll do some quick math.   You might be pleasantly surprised with the results.

We’ll be sharing more of our success stories and tips on how you can save money on your mortgage.

Major lender cuts out self-employed and new immigrant lending programs

THE SKY IS FALLING AT CIBC?

On Tuesday, CIBC’s wholesale lending arm, Firstline Mortgages, announced drastic changes to their lending policies.   They will no longer participate in self-employment and new-immigrant lending programs.  These programs made it possible for Canada’s growing self-employed and new-immigrants to get a mortgage at discounted interest rates.

click here for The Star’s report featuring some of own personal comments.

HERE’S WHAT REALLY HAPPENED

The move by Firstline seems to have come immediately after 2 recent reports…  First, CMHC said they are reaching their $600billion cap limit on the amount of mortgages CMHC can insure.   Currently sitting at $541billion, as of the end of 2001.  (I think this is the real reason for Firstline’s lending changes.. a more thorough explanation is below).   But next, a Bloomberg news report was released, earlier this week quoting a 152 page OSFI report (by the way, I searched OSFI and couldn’t find that report).   The article drew comparisons between the US sub-prime mortgage lending and Canada’s self-employed and new immigrant lending programs.

Let’s get something straight… Canadian lending policies are NOT like the US sub-prime policies.  Not even close!  The US sub-prime mortgages were granted to people with poor credit history, they lent up to 125% of the value of the home, amortizations went up to 50 years, they offered interest only payments, appraisals were not always required, they offered low interest teaser rates for 1 to 2 years, they offered Variable rate mortgages with no payment adjustment even if rates went up….  We don’t have theses features or options in Canada…. To suggest that our lending practices are similar is not accurate and has to be corrected…or proven… (there was time when similar mortgages were made available to Canadians this only lasted a few years from 2006-08 and this only accounted for less 5% of all mortgages during these years)

In Canada, we have much stricter lending policies that is in keeping with our conservative reputation….. And let’s not forget, the Fed govt has made 3 major changes in the past 3 yrs… making it tougher to qualify for a mortgage.

-maximum amortization reduced to 30 years maximum.  -refinances were cut to 85%  loan to value.  -business for self without traditional income confirmation will need to put 10% down payment, instead of 5%.

We really don’t need any more tightening.  The record low interest rates are helping to drive the real estate market.  Once rates go up, the values will level off and maybe even drop.

And by the way, if you think this is a small segment of the population, guess again.   The Canadians Association of Accredited Mortgage Professionals (CAAMP), estimates that 13% of the country is self-employed.    (to further clarify, a self-employed person is anyone that is paid in full and then must deduct and pay their own income taxes.)   Being able to reduce your taxable income is part of the benefit of being self-employed…Remember, these people don’t have pension plans and usually don’t qualify for Unemployment insurance…  

New immigrants are a big part of what has made our country the best place in the world, to live in.   In 2010, there were over 250,000 new immigrants that came to Canada.   These are people, anxious to work, wanting a better life…..wanting to spend and borrow…helping our economy grow.   And as a former Senior Lending Manager with a major bank, I can attest to the fact that granting new immigrants a mortgage has always been considered a low risk loan.   Most new immigrants would give up their right arm, before not paying their mortgage.

BANKS HAVE TAPPED INTO CMCH PORTFOLIO INSURANCE FOR YEARS

You bought a house, you put down 20% or 25% and you didn’t have to pay CMHC or Genworth hi-ratio mortgage insurance.  Congrats…!  But did you know that your mortgage might still be CMHC or Genworth insured?   That’s right.  Banks and other financial institutions have been buying and paying for CMHC insurance through portfolio insurance.  This makes the mortgage a secure investment for the Banks.  If you default, the loan is guaranteed by CMHC, a Crown corporation.  Soveriegn debt.  You can’t get any more secure than than.   It also takes the mortgage off the Bank’s books and frees up more capital for other investments.

Here’s a thought… CMHC is a Crown corp that is there to help Canadians own a home… well, maybe they should take a look at the % of mortgages that are 85% loan to value or higher…this number isn’t as high as you might think.

Remember these stats from January 2011?

-there are 12.5million households in Canada…31% rent, 69% own..

-of the 69% that own, 39.9% have a mortgage and 28.9% have no mortgage.

-69% of homeowners with a mortgage have more than 20% equity in their homes… only 30% have less than 20% equity in their homes.

And we also know that last year, the total outstanding mortgage balance in Canada topped $1trillion for the first time in history….. You could say that CMHC has a very well secured book of business….

Come on CMHC, let’s make insurance available for those Canadians that need it…  it seems the Banks have found a way to eliminate all their risk when it comes to lending money…but we know they keep all the rewards and profits (how else do you explain $billion profits through the 2008-09 recession and beyond)   Maybe it’s time to increase that $600billion limit… There doesn’t appear to be any arrears problem with mortgages either… last I heard, we were at around 0.43% for mortgages in arrears more than 90 days.

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