Ajax Pickering Real Estate Blog

By Kathy Flaxman - Globe and Mail

When 37-year-old Halcyon McIntosh bought her stylish two-bedroom, two-bathroom condo on St. Clair Avenue West, a half-minute walk from Yonge Street, she certainly knew the advantages of a 40-year mortgage. But she decided it wasn’t for her.

She opted for a 25-year amortization, which means, if she stays with that term, she’ll have her home paid off while she’s still young enough to read the numbers on her watch. Yet the 40-year period was tempting.

“If I were planning to sell my place in a year or two, I might have been interested in financing like that,” the accountant says. “Why pay more every month than you have to? But I don’t have that in mind. I want to stay here and see how I like condo life.”

A 40-year amortization is relatively new to the Canadian market. It’s designed to help people enter the real estate market and cope with high house prices. (Fifty-year amortizations are being offered by smaller lenders that don’t require mortgage insurance, such as that provided by Canada Mortgage and Housing Corp.)

Toronto financial planner Wayne Bryson points out that the smaller payments with a 40-year amortization give consumers more flexibility and choice.

These products make a home — or a larger home — more affordable, he adds. “These days, people live longer and they work longer and they want to afford different things. Depending on their cash flow, they can repay the mortgage more quickly as their income grows. Perhaps they will get a bonus or inherit [money]. This will be attractive to a younger market that does not have a lot of cash. Home prices are way up there.”

Using the TD Canada Trust mortgage calculator, a $300,000 mortgage at 7 per cent interest would cost about $260 less a month with a 40-year amortization than it would with a 25-year amortization ($1,842.56 compared with $2,101.25). To take a phrase from David Suzuki’s commercials on energy conservation, you could buy a lot of beer with that.

But the downside is the total interest paid over the life of the mortgage. Using the same mortgage as an example, the total interest with a 40-year amortization would be $385,038, compared with $257,868 with the 25-year amortization, a difference of $127,170.

Mortgages come up for renewal every few years, of course, and a homeowner may decide to opt for a less-expensive overall option when his or her financial situation changes.

John Caprara, who as Eastern Canada sales manager for TD Bank Financial Group deals with real estate and personal lending, points out that some people who may want to own homes may also be tied down to significant financial obligations that will be temporary. Their earning potential may, however, be excellent.

“A professional with a large student debt who is setting up a practice is a good example,” he says. “The 40-year amortization mortgage option will give them access to a home. But they do not necessarily have to carry the mortgage debt for that long. They can accelerate or increase their payments as the situation changes. The previous generation was focused on paying off debts as quickly as possible. This generation is accepting of this type of planning.”

But he stresses: “People need to do some homework when they are planning their finances.”

Ms. McIntosh agrees that a long amortization could be beneficial for some people. “There are a lot of aggressive and creative lending options in the [United] States,” she points out. “This type of product could help a young couple with a few kids. Say both the husband and wife work and they have three kids. It’s hard to bring up a family in an apartment. This could enable them to buy a home.”

But if the real estate market changes and house prices fall, this method of financing could spell bad news for that family.

Giles Osborne, Toronto manager with Parker Prins Seel Chartered Accountants, feels that because the family or individual who purchases a home with 40-or 50-year financing may have less available cash (which perhaps led to the decision in the first place), they will be more vulnerable should interest rates rise or house prices fall. The payments could rise, but the borrower might not have the funds to meet them.

“If house prices fall, and someone has to sell a house for less than they paid, that can be a very difficult situation,” Mr. Osborne says.

“If borrowers do not have sufficient financial resources, perhaps they shouldn’t be buying a home in the first place,” he adds. “Buying a home without a down payment, with a high-ratio mortgage or with an extended amortization period all expose the buyer, and are detrimental to the real estate market. What can happen is that buyers are purchasing homes that they really can’t afford.

“In the States, you can see the situation. Interest rates have gone up, investment has gone down along with consumer spending and there is unemployment. In this situation, people stop buying houses and there is a glut of unsold homes that builders have to get rid of.”

Circumstances alter cases, however. “Say you would save $200 a month with a 40-year mortgage,” Mr. Osborne says. “If you will get your foot in the door and in two years the house you are buying will be worth twice as much and you will be earning twice as much, this could be valid. You have to ask yourself why you need to save that money. Are you really stretched? Keep in mind though, tons and tons of people lose their houses by getting overextended.”

There don’t seem to any hard numbers, but industry sources say that the interest in 40-year mortgages has been higher than expected, and they don’t think there is a unacceptable risk in such products.

“The 40-year mortgages are quite popular,” says Steve Mennill, director of product and strategic direction for Canada Mortgage and Housing. “People get more cash flow to use at their discretion for a longer payment period [with the longer amortization periods]. We are very careful when we qualify a buyer. We check their credit history and their debt ratio. We would not view this as more risky for us or for the consumer.”

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Contact the Jeffrey Team for more information - 416-388-1960

So you want to be a landlord - beginning young can be a major advantage when building a rental portfolio

Sarah Dougherty, Freelance

Gerard Philipps bought his first investment property at the tender age of 21.

His son Jonathan beat that record, buying a rental building when he was just 18.

“It’s the ongoing joke in the family,” Jonathan said of the friendly father-son rivalry.

Now 24, Jonathan Philipps has managed to grow his portfolio to four revenue properties in the Montreal suburb of Lachine - three triplexes and one with four units.

He bought these buildings by leveraging other people’s money, which helps revenue property investors compensate for small down payments and generate cash for future purchases. But the downside of high levels of debt is vulnerability to changing conditions, especially fluctuating interest rates.

Following in his father’s footsteps didn’t take any prodding, said Jonathan Philipps, a business school graduate who holds a day job as an analyst with the Montreal office of a real estate lending company.

“He didn’t push me into it,” Philipps said. “I wanted to buy.”

Philipps got a leg-up when he bought his first triplex in 2001: His father co-signed on the loan and offered a property as security.

But for his most recent purchase, a four-plex he picked up in January, Philipps didn’t need his father’s backing. He got an interest-only mortgage from the vendor for the balance of the purchase price - $200,000 - at 5.5 per cent. (The down payment was $58,000.)

The arrangement means that for the five-year term of the mortgage, Philipps pays twice-yearly interest instalments of $5,500 and no principal.

At the end of the five years, Philipps plans on refinancing the mortgage with a bank, but based on the reappraised value of the building, which he projects will have increased, allowing him to take out a larger loan.

He hopes to make his refinanced mortgage a high-ratio one - about 85 per cent of the building’s value.

“You can keep your money to invest in other properties and your cash flow is available,” Philipps said of his rationale for taking an interest-only mortgage.

From the seller’s point of view, offering a so-called vendor-take-back mortgage makes the property attractive to buyers who cannot piece together all the necessary financing from an institutional lender, Philipps said.

Since the building is taken as security for the mortgage, risk is minimized.

Taking an interest-only mortgage frees up cash, but is usually expensive and increases exposure to interest rate fluctuations, according to Jean-Francois Bigras, chairman of the Corporation des proprietaires immobiliers du Quebec, an association of rental property owners.

He also gives courses on real estate investing and is a property owner.

Bigras took an interest-only loan at 8.5 % on a building he intended to keep for six months and resell. He says an investor’s time horizon will often dictate strategy.

“If you want to keep (the property) for a long time, pay down the mortgage so it becomes a cash cow,” Bigras explained. “If you want to sell it earlier for capital gains, why use cash to draw down a mortgage you will pass on?”

By law, high ratio loans - more than 75 per cent of the building’s value - like the one Philipps wants to obtain when it comes time to refinance, must be insured against default, either through Canada Mortgage and Housing Corp. or a private mortgage insurer.

Although the borrower must pay insurance premiums, there is an upside, Bigras said.

Lenders will offer better rates on insured mortgages and “if the economy slows down, lenders will prefer CMHC mortgages because they’re risk free,” he said.

Bigras advises revenue property investors to crunch their numbers with higher interest rates than they negotiate on the initial mortgage term.

“If there is an interest rate switch when you renew, you may be in dire straits,” he said.

And if you don’t qualify for a bank loan, using a mortgage broker can open up other financing avenues, Bigras said.

Brokers usually deal with a range of lenders, including credit unions, trust and insurance companies, pension funds, private lenders and banks.

Bigras said alternative lenders might be willing to finance revenue properties banks tend to avoid, including buildings with smaller units (studios, for example) that have higher tenant turnover and buildings in less affluent neighbourhoods.

Mortgage consultant Pelagia Nickoletopoulos specializes in helping clients who aren’t a good fit for banks.

That includes buyers who are self-employed or who work on commission and don’t have sufficient declared income to satisfy a bank, but do have good credit ratings.

She also works with clients who have difficult credit histories.

“Bank rates are better, but they are based on declared revenues,” she said of the trade-off of using a non-traditional lender.

Based in Laval, Nickoletopoulos is affiliated with the brokerage firm Mortgage Architects. About half her business is placed through that firm, but she also deals with other lenders.

Nickoletopoulos jokes that she charges clients a black coffee for her services; she receives commissions from lenders and does not charge clients fees.

Some mortgage brokers do charge fees on top of the commissions they earn.

Revenue property buyers should also know that real estate agents and brokers might have agreements with financial institutions to refer business to those lenders and might receive compensation for these referrals.

Nickoletopoulos specializes in owner-occupied buildings with four units or less. She can get qualified clients “no cash down” deals on these buildings, although the mortgage must be insured.

“It shows you are serious if you live there,” she said about one reason financing is easier to obtain on owner-occupied properties.

Nickoletopoulos also knows tricks to boost clients’ credit scores, like regularly spending less than half your credit limit on credit cards.

She can also direct clients to institutions offering blanket mortgages, which are registered against two or more properties.

Normally used when a buyer wants more money than the lender will provide on the basis of one property, they are useful for investors who want to ramp up to more expensive properties.

Nickoletopoulos also helps owners withdraw equity from their properties and refinance them, so they can use the money to buy something else.

For his part, Jonathan Philipps wants to push the envelope more than his father did.

“I tell him ‘by refinancing, you could have bought more,’ ” said the budding tycoon, who is setting his sights on his next purchase. “I want to go bigger next time.”

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Contact the Jeffrey Team for more information - 416-388-1960

Five-year mortgage remains the most popular term for Canadians

Jim Murphy, Financial Post

The Canadian Association of Accredited Mortgage Professionals (CAAMP) recently released its biannual report “Consumer Mortgage Choices in a Changing Market.” Written by CAAMP economist Will Dunning, it contains a wealth of information on Canadians’ attitudes toward their mortgage, and includes key findings based on a national telephone survey of Canadians undertaken by Maritz Research in late February, 2007.

The report indicates that even if mortgage rates were to rise by as much as one-half point, 80% of Canadians could tolerate the increase to their mortgage payments. A half-point increase in rates would translate into an average increase of $62 in monthly mortgage costs. The total cumulative impact of such an increase would be $3.66-billion, which pales in comparison to the overall size of the Canadian economy estimated at $1.2-trillion.

Since the report was written, posted rates on a five-year mortgage have increased by .20%, or a fifth of a point. Canadian consumer expectations for interest rate increases are benign, with 29% anticipating increases, 8% expecting decreases and 63% neutral. Canada’s overall economy remains strong with record-low unemployment and continued population growth.

At a time when the U.S. mortgage market has been affected by defaults in the sub-prime market, CAAMP asked Canadians if they were aware of alternative mortgage products such as longer amortizations and no-down-payment mortgages. About half of respondents had heard of these new products, with 36% responding positively to the alternatives, 27% negatively and 31% had no opinion.

Interestingly, younger Canadians, and those not owning a home, were the most positive and the most interested in these new mortgage alternatives. This corresponds to other research CAAMP has undertaken, which shows younger Canadians are also the most likely to shop their mortgage, wanting several quotes before arriving at a final decision. Those in a position to benefit the most from new mortgage products are the most positive. A further indicator of the health of the Canadian economy is that of the 4.9 million homeowners in this country, almost 300,000 will not renew their mortgages because they will have been paid off.

In terms of their mortgage, Canadians remain fairly conservative, with 73% opting for a fixed-term mortgage rate, compared to 67% a year ago. The five-year mortgage remains the most popular term for Canadians. With regard to mortgage renewal activity, almost one-quarter of respondents have yet to decide on the type of mortgage, although 44% of surveyed mortgage holders who expect to renew their mortgage in the coming half of 2007 will choose a five-year term.

Overall mortgage market growth in Canada is expected to exceed 10% in both 2007 and 2008. By the end of this year there will be more than $800-billion in outstanding mortgage credit in Canada. Canadians remain confident about the future housing market.

Finally, Canadians were also asked to comment on their local housing market and whether it was a good time to buy a home. Across Canada, only 9% of consumers surveyed expressed negative opinions about the prospects for real estate prices in their community. The most positive responses were in Atlantic Canada and Ontario while British Columbia had the most significant jump in positive responses. Albertans provided the most negative outlook, where many consumers considered their local housing market overheated. In recent months, resale prices in Calgary have increased near 50% year over year.

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Contact the Jeffrey Team for more information - 416-388-1960