Vancouver Mortgage News Update – June 2013
Spring market is upon us and most markets in the lower mainland seem to be reaching “balanced” status. We’re hearing of multiple offer situations in many cases (East Van and North Van particularly) and in general, noticing a big uptick in volumes. We’re likely to see the market continue at this pace until July or so, when market activity generally cools off, but the spring market started a little late this year, so who knows?
Without further adieu, the topics for this month:
- Rates moving up – Bonds are WAY up
- The long forgotten mortgage pay-down is making a big comeback
- Murmurs of more government tightening, possible changes to the amortization….again
Bond yield hike causing mortgage rate increases
Bond yields up .33% from their low 4 weeks ago
Bond yields are hitting 3 month highs, and many lenders that were undercutting the “consensus” 2.89% 5yr rates are now bringing up their rates. For a while, we had lenders offering 2.79% (although for very limited circumstances, like less than 20% down and 30 day closing period) but now many of those lenders have come up to 2.89% or higher.
So why have we seen bond yields rise?
- Canadian dollar dropping 3% relative to our US counterparts means Canadian bonds much be priced at higher returns to compete.
- Stock markets becoming a “safer” (to be taken lightly) investment as the stock markets have been performing well for the few months. This will cause a shift from bonds to stocks for Money Managers, causing an increase in bond yields to attract funds.
- Positive US economic data.
If you don’t have your pre-approval done, if you have a mortgage renewing or are thinking of refinancing within the next 6 months, you should consider getting a rate hold in the event more lenders follow suit and bump up their rates.
Call Kyle Green today at +1 604 551 8976
Final Thoughts: I still think many lenders will hold on to their 2.89% 5yr rate specials for the time being, but there’s no stopping them if bonds hit well over 1.5%. This would cause margins to shrink to below 1.4% which is likely to cause rate hikes across the board.
Mortgage Paydown – The Tortoise
It just keeps chugging along, guaranteeing your investment returns
First, I would like to ask a very simple question:
Why buy investment real estate today?
There are 3 main pillars when considering a real estate investment purchase:
- Cashflow (…the other Tortoise?)
- Appreciation (the Hare)
And #3? The oft forgotten mortgage paydown
Generally when most people are considering purchasing an investment property, cashflow is #1 and the appreciation is the icing on the cake. Too often the mortgage paydown has been left alone and forgotten, but it may play a bigger role in your investment returns than the other 2.
Let’s take a quick look at how mortgage payments are currently broken down on a $300,000 mortgage:
Nearly 50% of the mortgage payment is going towards principal!
How about 5 years ago, when mortgage rates were around 6% in late 2007, early 2008?
What a big difference! Not only are the overall payments over $500 more per month, the principal portion has been cut down to only $437.83, a decrease of 36%.
On a typical investment property perhaps you see $200/month positive cashflow. The investment’s return from mortgage pay-down is 342% greater than the return on the $200/mo cashflow.
The same investment property using mortgage rates from 5 years ago would be cashflow negative $300/month, and the principal paydown would barely cover the cashflow loss.
Remember too, that because the principal reduction starts off greater to begin with, the mortgage paydown is accelerated and less interest is paid over long periods of time. We need to use an amortization table to determine the long term effects of paying the mortgage off more aggressively, which shows us that at the end of the 5 year period 56% of the payment is principal at today’s rates, and only 31% at rates from 5 years ago.
Assuming no appreciation, here are the returns over a 5 year period:
– Cashflow: $12,000 ($200/month x 60 months)
– Mortgage pay-down: $44,120.36
Rates 5 years ago:
– Cashflow: -$18,000 (-$300/month x 60 months)
– Mortgage pay-down: $30,489.89
Same property, but now the property will earn nearly an additional $40,000 not including any appreciation, just because of the lower mortgage rates. It’s funny to think that the market was so hot in 2007 and early 2008 when rates were this high, and yet investors have cold feet in today’s market when the only items you can really “bank” on are cashflow and mortgage pay-down.
I was chatting with a friend on the way to the last Real Estate Action Group meeting and we got into talking about how he’s renting out the condo he bought last year with 5% down. He expects to be about $50/mo short on the cashflow, but since such a large portion of his mortgage was going towards principal we figured (in our heads) that about $400/mo was going towards principal. His down payment was only $13,000, but he is net $350/mo ahead because of mortgage pay-down.
As an annual return, that’s a whopping 32%!
Final Thoughts: No matter how you slice it, you need to consider mortgage pay-down as part of your investment returns. In fact, with cashflow always hard to achieve in the lower mainland and with the consensus that appreciation won’t be like the good ‘ol 2000’s, mortgage paydown could be your primary source of investment returns. Don’t forget about it!
Finance Minister Jim Flaherty has confirmed that he is done intervening in the mortgage industry:
“I’m not going to intervene in the mortgage market, I don’t need to.”
….But, unfortunately Flaherty was referring only to CMHC insured mortgages(less than 20% down). We have been hearing murmurs that OSFI (Office of the Superintendant of Financial Institutions) may be considering chopping back the maximum amortization for uninsured mortgages to 25 years as well. This would certainly not bode will for home buyers, self employed borrowers as well as investors who are able to manage their money well, and prefer longer amortizations to allow for better money management (read: have money for investments).
Hopefully, if there are adjustments, stronger applicants who can manage their money well will still have the option of taking a 35 year amortization. The way these rule changes have come down though, we expect the worst.
Final Thoughts: Keep your eye on this news. If amortizations are in fact going to be reduced, it may be wise to re-evaluate your portfolio to ensure we don’t need to take action before any rule changes.