Welcome to a new Blog Series we have started called Ask the Expert: Today’s blog we will be discussing Mortgage Implications.
Our goal is to educate our readership on all level of Real Estate Investing. We would like to Thank Doug Adlam from Champion Mortgage for providing us insight on the New Mortgage Rules and on his thoughts around Investment Properties. We would also like to thank Jared Gardner from RE/MAX Professionals Brokerage Inc. for moderating the discussion.
JG – 1.How do you see the new Mortgage Rule affecting buyers looking to purchase a primary residence or investment property. What are the Mortgage Implications?
DA – The new mortgage rules will have less of an impact on buyers planning to purchase an investment property than a primary residence. Investment property buyers generally over-qualify for their investment properties, and have a greater down payment (20% of the purchase price) that allows them to access different products, lenders, and qualification rules.
The impact will be on Canadians looking to buy their primary residence or vacation/cottage property, however only certain segments of Canadians in my opinion. The truth is, this new ‘stress test’ has been applied to variable rate mortgages and mortgages with terms less than 4 years for quite some time, so there are far less Canadians impacted by the recent changes than the media would suggest.
That being said, Canadians who will be impacted the most will be single income families, those looking to purchase their first home in higher priced regions (GTA, Vancouver, Calgary), and those who are self-employed.,
JG – 2.With TD Bank increasing their Prime Rate; is now the time you would recommend locking into a fixed rate mortgage or are variable rates mortgage still a better option.
DA – By TD changing their Prime Rate outside of a Bank of Canada rate announcement date, they have really changed consumers’ reliance on the big banks to honour the recommendations put forth by the Bank of Canada. The Bank of Canada influences Bank Prime through their key lending rate – without getting overly complicated, essentially the Bank of Canada changes Prime to influence the economy. Technically speaking, if the banks followed the Bank of Canada’s lead, they would all be at a 2.5% Prime rate, rather than 2.7% (or 2.85% for TD).
History shows that variable rate mortgages outperform fixed rates (lower overall interest cost) over 91% dating back to 1950. The banks have more stable income and a known rate of return on fixed rates (and they make more money). They also know how often Canadians break their mortgage and have to pay a mortgage penalty – penalties on fixed rate mortgages through the banks can be as much as 8-10 times that of a variable rate mortgage.
If all banks and lenders raise their Prime Rate, and fixed rates stay low, fixed rates become a much lower risk in the long-term, particularly given we can no longer trust the banks to follow the recommendations by the Bank of Canada by not passing on the savings to Canadians (and instead, increasing their profitability).
As it stands today, the difference between fixed and variable rate mortgage rates are minimal, so we see many Canadians choosing a fixed over a variable. As for locking in a current variable rate into a fixed – every Canadian’s situation is different – understanding the short and long-term plans and goals has a huge impact on that recommendation. With the uncertainty ahead for the Canadian economy given Trump taking over as President of the United States, I would not be surprised if more and more Canadians lock into fixed rates, or make changes to their mortgage now to protect themselves from the uncertainty over the next 5 years
JG – 3.What are your thoughts on the Real Estate Market?
DA – I think the real estate market may be slightly over priced in some areas, and forging forward in others. Foreign investment into the Canadian Real Estate market, and low supply has resulted in higher prices. We may see a slow down in the hottest markets such as Toronto as it has already started in Vancouver and Calgary. The new rules will force first-time buyers to purchase more affordable ‘starter homes’ such as condos, townhouses, or semi-detached homes, and will start looking outside of the more expensive cities around the GTA. Most first-time buyers have the dream of buying a detached home like their parents had, in the city they live in – with house prices and mortgage rules, this dream has to be adjusted for many Canadians.
JG – 4.When dealing with Investors; how many investment properties do you see them purchasing over a 5 year time frame?
DA – Most property investors have their goals set at 1 to 2 rental properties. There is a small percentage of Canadians that are in that 3-4 rental property space, and even less so at 5 or more. How many properties a person purchases over a 5 year time frame has completely to do with capital on hand for the down payment and closing costs.
JG – 5. Is there any advise you would provide to a first time buyer entering the Real Estate market
Start with getting your financing sorted out, and really focus on what you can afford, not just qualify for. Life can change in a moment – be sure you understand all aspects of your mortgage and how it can affect future plans. The right mortgage product with the right lender can save you tens of thousands of dollars. Work with a mortgage professional you can trust to provide you unbiased advice and have your best interests now and in the future as the primary focus. Have an open mind, and be prepared for taking steps towards your dream home – this may entail buying a condo or townhome in a different city to start, and then take steps towards your detached home in the city you want to live in.
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At Champion Mortgage (champion.ca), Our main focus is and always will be client satisfaction, and we’re committed to exceeding the needs of every client. Winner of a national award, Best Customer Service Award for 2015. As a Partner of Champion Mortgage, Doug Adlam constantly challenges the entire company to raise the bar for client satisfaction. Given his reputation and strong professional ethics, Doug also maintains an advisor position in CMHC‘s Broker Advisory Group.
Jared Gardner (jared@jaredgardner.ca) is a Real Estate Sales Representative for RE/MAX Professionals. Jared’s main focus is on Residential House’s and Investment Properties. Jared’s goal is to help all of his clients find the perfect home and ensure each of his clients can retire early through passive income from Investment Properties.