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CategoryMortgage Tips

Posted 2 Comments on Is this a good time to buy a Rental property? Mortgage Tips

Is this a good time to buy a Rental property?

Owning a rental property can be a great way to build your net worth and also enhance your income.   In recent years, house values increased to a point where it was next to impossible to find a property that had a positive cashflow.

The biggest cost in owing a rental property is the mortgage.    And we are seeing historical low interest rates …. under 4.00% for a 5 year fixed and variable rates of under 3.00%….

Does the math work for you? Let’s take a look at a mortgage I arranged for someone who bought a townhouse for $320,000. Here’s what the math looked like:

  • We arranged a 1st mortgage for $256,000.
  • negotiated a 5 year fixed rate of 3.89% amortized over 35 years.
  • Monthly payment is $1127.
  • property taxes are $240/mth.
  • tenant pays $1500/mth rent plus utilities.
  • end result is a $133/mth positive cashflow.

This was a good situation.. not all rentals will produce a positive cashflow but they don’t always have to.  There are usually some tax advantages to owing a rental property that is producing a slight loss..

Here are my tips when buying a rental property:

  • you should plan on holding for at least 7 years… most economic cycles will have run their course in that time and property appreciation is more likely…any initial costs incurred when the property was purchased are easier to absorb over that time.
  • speak with your accountant and mortgage broker about obtaining the best financing…it usually makes sense to buy with as little down as possible, finance as much as possible and minimize or eliminate any profits to reduce income tax exposure….again, speak with your accountant.
  • maximize the amortization your rental property so  you can minimize the amount you pay towards the principal portion of the  mortgage… again, this requires thorough of your personal situation but generally speaking, most borrowers carry other personal debt that should be paid off before the rental property mortgage.
  • pay off all other personal debt first….. good debt is tax-deductible debt like a rental property mortgage….bad debt is non tax-deductible debt like credit cards, personal loans, mortgage on your principal residence.
  • I love variable rate mortgages, but when it comes to rental properties, you need to consider a fixed rate… it’s important to know what your costs are when buying a rental property… many lenders don’t even offer a variable rate mortgage on rental properties which will limit your choice of lenders.

Qualifying for a mortgage on a rental property has changed significantly in recent years.

The biggest changes started immediately after the U.S. mortgage crisis in October 2008.  Lenders all but stopped financing them.  Earlier this year, the Federal government stepped in and changed CMHC’s rental policies for those with less than 20% down.   I would say it’s almost impossible to qualify for a 1st mortgage greater than 80% on a rental property with ‘AAA’ rates.

And for those with 20% down or greater (a conventional mortgage), it was still difficult to qualify.  Most lenders changed their polices here as well.   Some Lenders wanted as much as 35% down or had debt servicing ratios that were not reasonable or practical.

The good news.… Lenders are interested in rental properties again.. not like pre-Oct. 2008 days, but we are seeing more reasonable qualifying.   These record low rates make rental properties very appealing...

Posted Mortgage Tips

5.5% Cashback mortgage… is this a good deal?

There are some interesting cashback mortgages available these days…. I’ve been asked if they are worth considering…

Let’s take a look at one of the better ones being offered out there…

The deal is simple.. you must take a posted 5 year fixed rate….currently at a very low 5.39%.  You get 5.50% back in cash.  Sounds pretty good but how does this compare with taking a discounted 5 year fixed rate of 3.69%?

We’ll use a $200,000 mortgage with a 25 year amortization in this example….

CASHBACK OFFER

  • 5.5% cashback equals $11,000 in cash to you.
  • mortgage rate of 5.39% will give you a monthly payment of $1,208.01.
  • your mortgage balance after 5 years will be $178,080.91

NO CASHBACK AND A DISCOUNTED RATE

  • interest rate would be 3.69%.
  • monthly payment is $1,018.70
  • your mortgage balance after 5 years will be $173,155.72.

And the end result is…..your monthly payments alone would almost balance out… there is a savings of $358.60 in favour of the discounted rate.   But look at the difference in the balance at the end of 5 years…. a $4,925.19 additional savings.

The obvious first choice is to take the discounted rate….but the Cashback is a good option for those that are just starting out or need funds for the initial expenses associated with buying a home….  The best choice for you will depend on your circumstances, goals and plans….. Talk to a qualified Mortgage Broker that doesn’t work for any one bank to understand the differences…

Posted Mortgage Products

Taking a look at a 1 year and 3 year fixed rates

I’ve had some inquiries about taking a 1 year and 3 year fixed rate…and for good reason.   A 1 year fixed rate can be had for about 2.50% and a 3 year fixed rate is 2.90%.   This does make going with a shorter fixed term an attractive option if Bank Prime rate continues to increase.

Best Variable rate is around Prime less 0.65% or 0.70% for qualified applicants with some conditions….  that puts the Variable rate at 2.30% or 2.35%…

I like Variable rate mortgages for many reasons but these shorter, fixed terms can be a good alternative.. Make sure you understand all the terms and conditions… speak with a qualified Mortgage Broker.

Posted Mortgage News

When should I lock in my Variable rate mortgage?

A thought on the minds of many, with all the talk of ‘Historical low fixed mortgage rates’ and ‘rising Variable rates’.   “When should I lock in my Variable rate mortgage?”

Here’s a quick suggestion and rule that I follow… We only want to lock in our Variable rate mortgage when we think Variable rates will go way up and for an extended period of time…

But we must also look at what we can lock into… if you are in a 2.10% Variable rate mortgage, would you lock into a 3.89% fixed mortgage rate?   I’m not sure I would…. I think it will take a few years before my Variable rate mortgage approaches today’s Fixed rate…..  why pay more today when you don’t have to?

For me, I can’t see Variable rate mortgages underperforming Fixed Rates over the 12 to 17 years that it will take us to pay our mortgage off.  Having said that, we are always evaluating the Market Trends and will adjust our strategies when needed.  A mortgage is a huge debt and deserves a solid strategy to retire this debt with the lowest cost.

Ultimately, it will come down to risk tolerance, your personal budget and what you believe will be the better strategy.  Consult your Mortgage Broker to better understand the differences.

By the way, you might be interested in knowing that certain Banks and Trust companies have recently started to pay us more to offer fixed rate mortgages over Variable rate Mortgages…Good Mortgage Brokers don’t let the compensation dictate which product they recommend.  They recommend what they believe is right for the client.

Posted 1 Comment on 3 year fixed mortgage rates under 3.00% Mortgage News

3 year fixed mortgage rates under 3.00%

Fixed mortgage rates are sitting at around 3.89% for a 5 year closed and 2.90% for a 3 year closed.  These are definitely attractive rates and are at or near historical lows…

Why?  The Bond market has dropped significantly over the past 3 months…. this has come as a surprise to many but not all…  The economic recovery isn’t as certain as we once thought… with mixed data coming out about our economy, this uncertainty will cause interest rates to stay low…

Once trend that has caught our eye is that lenders are now offering Mortgage Brokers a higher commission to sell a 3 year and a 5 year fixed rate product… and although that may attract more busy from some, I’m still recommending the Variable Rate mortgage, even though we get paid less.. it’s always about doing what’s in our client’s best interest.

Variable rate has been a proven winner over the past 25 years… I don’t think our economy is as strong as some would think….There has been improvement but we have a long way to go before we can say we are out… Hence the lower fixed mortgage rates… Variable rates will increase but it will be a slow, steady climb… with current Variable rates at 2.10%, Variable has a long way to go before it is not cost-effective.