UNBIASED AND INDEPENDENT SINCE 2009

Posted November 6, 20124 Comments Case study

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

Posted October 17, 201214 Comments Money saving tips

Bridge Loans…your bank hates them but they can be a great financial tool when buying….

Bridge loans are short-term loans that bridge the gap between two different closing dates. More commonly used when an existing homeowner sells their home, and buys another home, with two different closing dates. But bridge loans have become a very popular way to take possession of that new home while it’s empty for 2 or 3 weeks to allow for renos. Best of all, it’s really inexpensive!

In the past, most homebuyers would have their selling and buying dates match. It’s always been a bit of a juggling act as you have to pack your moving truck and unpack it, all in less than a day. Somehow, everyone manages to get it done… but you talk about one of the most stressful days in your life….moving ranks right up there! Throw in some kids, maybe a dog, and a house full of stuff and you have a real chore on your hands….

More buyers are taking a more relaxed approach. Bridge Loans are gaining in popularity.. It allows for a more relaxed move over a 2 or 3 day period… or in the case of renos, maybe 2 or 3 weeks. It’s certainly less stressful and could even save you money if you are doing a bigger reno…(contractors could end up charging you a little more if they have to deal with a family living in the house during renos).

Let’s take a look at one example on how much Bridge Financing works and what it costs…

In this example we’ll use a couple that sold for $400k. Closing is November 1. There is an existing mortgage of $250k. They bought another house for $600k. Closing is November 22. They will spend $50k in renos for a new kitchen and bathroom. They want a $450k mortgage to cover renos, closing costs and take out some money for personal use. Here’s how the Bridge loan works:

Bridge loan amount would be $150k… we calculate this by taking the Purchase price ($600k) less the new mortgage amount ($450k).
Rate of interest will vary but it’s around Prime plus 2.00% (today’s prime rate is 3.00%).
Lender admin fees range from $250 to $500.
Legal fees vary depending on Lender and Lawyer… $200 to $400.
Interest costs are $20.55 per day. Total interest would be $287.70.
Overall total cost of the Bridge Loan would be between $737 and $1200 depending on your lawyer’s legal fees and Lender admin fees.

Some qualification, limitations and risks when getting a Bridge Loan.

Bridge Loans are only offered by the mortgage provider for your new home. It’s a product most Banks don’t like to offer as there is really no profit for them. They get nervous about the possibility of your existing home not closing. There is some exposure and risk to the Bank… it’s limited but it’s there.
Your lawyer will be required to provide an undertaking to register a mortgage if the sale of your existing home collapses (that’s not a common occurrence but it can happen).
Speaking of sales… you must have entered into a firm sale on your current home to qualify for a Bridge Loan.
Lenders will only offer a Bridge Loan equal to the down payment required for your new home. This amount cannot be greater than the equity remaining in your current home.
There is also the option of obtaining Private Lender bridge financing but this is more expensive and should only be considered as a last alternative.

Standing back and looking at the big picture, I think most of us would be happy to pay $700 to $2,000 for sake of being able to have an empty house for 2 to 4 weeks to do a clean up or reno, etc.

If you need more info on how Bridge loans work or need help with a situation, call me anytime. Always happy to help.

Steve Garganis

steve@mortgagenow.ca

416 224 0114

Posted October 11, 20127 Comments Mortgage News

CMHC flawed data? Or is this just a shock value article?

The Globe and Mail’s Grant Robertson and Tara Perkins wrote a shocking article entitled “Potentially flawed data used by banks and lenders bump up house prices”. Wow, that headline is sure to get a lot of attention. I mean that’s a really serious allegation. Let’s continue…

They claim to have documents that quote “confidential statements from banks, appraisers and mortgage insurers show rising worry over the use of a database operated by the Canada Mortgage and Housing Corporation (CMHC). The documents suggest the data are flawed and help push home prices up.”

But keep reading this article… and tell me if you see any substance to this allegation. The article goes on to explain that CMHC has been using an automated evaluation system called EMILI, since 1996 that can determine house values. They also say CMHC will order appraisals when they deem necessary. They even quoted an appraiser that says the system is flawed… So this article must be right… after all, it’s in the Globe and Mail!!

I read this article a few times over, to try and find any real facts to suggest that CMHC is using flawed data…. but I came up empty. Did they make any mention of how many times the EMILI system was used over the past 16 years? Or how many instances this system produced a wrong property valuation? How about how many appraisals were required when EMILI couldn’t support a value? What about the $$ losses that CMHC has incurred due to incorrect property valuation using EMILI? NO.. no data provided… Just a reference to some document that raised concerns about the EMILI system. My guess is that any losses were limited or we would have heard a lot more about it….

Folks, this article is another example the media using shock value to get you reading… This is the type of ‘water cooler talk’ that causes us to panic, to make mistakes. We tend to flock to the negative… bad news travels faster than good news…it’s human nature. Last night, when I saw this article, there were 62 comments…. as of this morning, when I wrote this article, there were over 300.

I want you to read these comments.… full of angry people… all celebrating the possible scandal of a flawed property valuation system… Hooray! There’s a scam…banks, and homeowners got ripped off! Let’s celebrate!!… The attitudes were disturbing… Hey, I want to associate with positive people.. not pessimists… If this is the audience that the Globe is attracting, then maybe we should rethink where we get our information from.

Sensationalism is a dangerous thing. Let’s continue to take emotion out of it… Let’s make sure we look at facts and clearly separate our opinions. Buying a house for personal use or as an investment needs to be given careful consideration. You’ve heard me say that real estate should be a 7 year investment. History shows us that this is how long it takes to amortize the expenses involved with buying and selling a home. It’s also how long it takes to go through an up and down economic cycle. Real Estate isn’t about making a quick buck.

Interest rates are at historical, all-time lows… Have you seen any articles about this lately? Not many… but that’s because it’s lost it’s shock value. This won’t grab your attention. But’s true… and for most of us, it still makes good financial sense to buy a house.

Make decisions based on fact… based on your own personal circumstances… based on what works for you… based on what your goals are…based on professional advice…

As always, I welcome your comments and questions… If you have any questions about mortgages or mortgage related issues, please free to contact me.

Steve Garganis

416 224 0114

steve@mortgagenow.ca

Posted October 10, 20124 Comments Mortgage Products

Mortgage Life insurance… what’s this all about?

You’ve bought a house… you’re arranging the mortgage financing… and now your broker or banker starts talking about life insurance or mortgage life insurance….. sound familiar? Choosing the wrong coverage could cost you dearly.

Today, we’ll clear up some things very important but often overlooked subject.

Does anyone really enjoy talking about life insurance? I don’t, but we must understand what this product is all about…and why you shouldn’t just waive the coverage.

Life insurance and mortgages go hand in hand. After all, for most of us a mortgage is the biggest debt we’ll ever have. And if you should exit this world before that mortgage is paid off, the only thing you want to leave behind are good memories, not a big mortgage payment.

Mortgage Life Insurance or Creditor Insurance as it’s more commonly known with the finance world, is insurance that covers your mortgage balance as of the time of death. This is not my favorite insurance product but it does have it’s place and it can be used temporarily by most of us. Here are some good and bad points about the product:

THE GOOD

it’s group insurance, meaning it’s easier to qualify for as there are less questions asked.
coverage can be instant, as of the mortgage approval.
it’s good short term coverage until you get a more comprehensive analysis done. (I can’t tell you how many clients took this insurance temporarily but continue with the policy for years…. we all love to procrastinate when it comes to insurance).
for smokers or those in less than great health or poor lifestyles, this could be a good option.
this insurance can be cancelled at any time.

THE BAD

your coverage decreases as you pay the mortgage down… but your premiums remain the same.
it’s more expensive than most other forms of life insurance such as term policies.
speaking of term insurance, your coverage remains the same throughout the 10, 15 or 20 year term that you choose, making this a more enviable product.
mortgage life products are not underwritten at the time of application but only at time of death… and your claim can be denied even if you had been paying the insurance premiums for years…
your BANK loves mortgage life insurance. At renewal, when you’re 5+ years older, they will use this against you to get you to sign their renewal… meaning you may not be able to shop for the best mortgage rates! (Don’t think the BANKs don’t know this.. as a former banker, we were encouraged to use this sales tactic).

HOW TO BENEFIT

Take the mortgage life insurance, speak with your insurance advisor, get your needs reevaluated, get better coverage elsewhere if possible, then cancel the mortgage life insurance.. Yes, in other words, use mortgage life insurance as a temporary coverage…. And please get your insurance needs looked once in a while.. at least every 5 years.

If you have any comments or if you need help finding a reputable insurance advisor, call me. I’m always happy to help.

Steve Garganis

416 224 0114

steve@mortgagenow.ca

Posted September 25, 20121 Comment Mortgage Rates

Listings down, prices up…. housing bubble?

Latest housing stats show listings are down, sales are down… but prices are up, only slightly…. and houses aren’t on the market as long. They are selling faster. Doesn’t sound like a bubble to me. More like a soft landing.

This is exactly what the govt had in mind when it changed mortgage rules a few months ago and made it tougher to qualify for a mortgage. It’s still too early to say if these changes are just right or went too far….. We’ll need another 6 months or so to see the full effect. Best guesses are that the housing market could slow by 5%. But I haven’t seen that happen… In the Greater Toronto area, we are still seeing multiple offers and sales go above asking price…. The interesting stat for me is the fewer number of sales… We’ll be watching that stat… fewer sales over an extended period of time will stop any price increases…

This also means we should expect interest rates to remain low. The Bank of Canada will be under less pressure to raise rates with a flat housing market. Throw in the U.S. Fed’s announcement last week that they were going to keep rates the same until 2014-15, and we have the perfect setting for low rates.

RECORD LOW INTEREST ARE STILL HERE…. WHY AREN’T WE TALKING ABOUT THIS?

Speaking of low interest rates… Here’s some advice… before you put your plans to buy on hold, you should remember that we are still enjoying historically low interest rates. 5 year fixed rates at 3.09%… Variable rates at 2.65%..!! This is a fact that so many of us tend to ignore…. maybe it’s just too boring to talk about. I’ll make it more exciting…

A $400k mortgage will carry for $1912/mth based on today’s 3.09% 5 yr fixed rate…….Wanna wait for house prices to fall and save some money? Ok, but you should also expect interest rates to rise… lower house prices are caused by higher interest rates and higher unemployment… We don’t expect higher unemployment so we must attribute any house price drop to a rise in interest rates……a look back at the last housing crash in 1989 showed interest rates went up to 11% and 12% just before the crash….. make sense so far?

This is where so many of us stop thinking or analyzing…Cashflow and affordability are probably just as important or more important than rate, mortgage balance, purchase price, etc… if you aren’t comfortable with the payment, you will run into problems…. By the way, affordability is still VERY good according the RBC affordability index.

REAL MORTGAGE MATH SHOWS TRUE COST OF WAITING TO BUY

Let’s continue….Let’s say rates go to more normal levels… we’ll use 5% interest rates.. That same $400k mortgage will cost you $2326/mth.…. and if you wanna adjust the mortgage size by $40k because house prices should fall 10%, okay… a $360k mortgage at 5% will cost you $2094/mth... That’s still $182/mth more… and let’s also not forget, that you may have lost 1, 2, 3 or more years of not paying a mortgage down…. Did you know you will pay your mortgage down by around $10k per year in the first 3 yrs alone?

Real Estate isn’t always a great investment, but it usually makes more sense to buy, hold and enjoy, than it does not to buy and rent…. And with interest rates at record lows, it’s even easier to make that recommendation. Stop listening to the pessimist that say the sky is falling or the world is ending… If we listened to them, we would be renting for the last 10+ years… for that’s how long they have been saying house prices are inflated and need to drop…..

As always, if you aren’t sure where you fit in or what’s best for you, feel free to contact me to discuss… Your questions and comments are welcome.

Steve Garganis

steve@mortgagenow.ca

416 224 0114