The 2011 BC Property Assessments are now available online and many homeowners have received a copy in the mail. This has triggered many inquiries from my clients, wanting to know if they can dispute the assessed value and in turn reduce their tax bill.
The simple answer is yes, but is it worthwhile? I recently posted an article illustrating an example of what happened when a colleagueof mine tried.
For the full article , click here: Can I Reduce My Property Taxes?
Will Dunning, Chief Economist for the Canadian Association of Accredited Mortgage Professionals (CAAMP), of which I am a member, wrote an article for the Mortgage Journal called “Keep an Eye on Wealth Effects”.
What is the ‘Wealth Effect’?
It’s really all about perception…. our perception of wealth, particularly with respect to the value of our homes and equity portfolios.
As these grow, we get an increased sense of being better off financially.
True? Perhaps, but the money is not in the bank.
We tend to see this growth as another form of income. And even though we don’t receive that income per se, we sometimes begin to act as if we do.
Thus we may well reduce the amount we save, or even borrow more; and we increase our spending.
For more on how the “Wealth Effect” impacts us and our economy, click here: WEALTH EFFECT
Fixed Versus Variable Mortgage Rates – Finding the Right Strategy for You!
Many property buyers and current mortgage holders are faced with a major decision:
Should you choose a fixed or variable rate?
Recent fixed rate increases have made this decision more difficult, as the spread between the two has increased, making the low variable rate a lot more attractive.
As always, I recommend my clients do what’s best for their risk tolerance, as it’s quite difficult to predict what rates will do in the future. Historically, you would have been better off with a variable rate (on average) over the past 50 years. However, it’s important that you can withstand the risk of potential fluctuations, as well rest easy knowing your rate is floating.
The bottom line is: if the uncertainty of a variable rate is going to cause you stress, it’s simply not worth it.
If you are one of those willing to gamble a bit on the rate and you’re okay with the risk it entails, here are two strategies I’d recommend for a variable rate mortgage, to help offset the impending and inevitable rate increases:
1. Variable/Floating rate with Fixed Rate Payments
Currently we can offer a variable rate mortgage as lows as 1.75%, versus a current 5 year fixed rate of around 4.49%. It’s hard to predict with any certainty but I would guess it could take a minimum of at least a year for the variable rate to go a high as 4.50%, and possibly two or three years.
So what I recommend is taking the variable rate but setting the payments based on 4.50%. That way, instead of guaranteeing to pay the bank 4.50% over the next 5 years, you instead pay yourself during that time, as the differential between the floating rate and the 4.50% extra payment will go directly to the principle of your mortgage.
So not only will you pay off the mortgage aggressively ahead of schedule, but you will also offset the risk of future increases by saving on interest. Furthermore, once the rates do increase, there will not be a huge payment shock, as you will have already been paying based on the higher rate.
2. Fixed and Variable Combination
Another good option is to split the mortgage into two components, for example 50% fixed and 50% variable. Using the same rates from the previous example, you would wind up with 50% at 4.49% fixed for 5 years and 50% variable at 1.75%. This would give you an effective rate average of 3.12% on the entire mortgage while only taking on half of the risk.
Please note, this strategy is not available with all lenders or scenarios so please consult with me to see if this option is applicable to your situation.
So to summarize; the variable rate option has been the best way to go historically and that will likely be the case going forward. However, it’s important that you can tolerate the risk and that you implement an appropriate strategy for this option, to ensure you mitigate risk and maximize savings.
Self-employed and seeking a mortgage?
If you are like many self-employed or commissioned individuals, you may be caught in a difficult situation; how can you reduce your income and, in turn, your tax bill, while still being able to qualify for a mortgage?
To find a solution to this dilemma, you can make use of a ‘stated income’ program, in which you provide a reasonable figure for lending purposes, without having to provide verification based upon tax returns.
The only requirements under this program are: that you have an above average credit rating, and proof that you have been in business, or at least, in the same industry, for 2 years or more.
If this sounds too good to be true, well, that’s because it is.
The downside is that the CMHC premium applied to this kind of mortgage qualification is close to double the regular premium. Now, while this is added to your mortgage, and might seem acceptable to you at the time, it’s nevertheless a cost added to the purchase of your property, and can result in tens of thousands of extra dollars in interest over the life of your mortgage.
In an effort to avoid this, it’s important that your mortgage planner or lender try to fully qualify your income under regular guidelines.
To do this, the bank or lender will take a 2-year average of your net income on your tax returns. If that’s not enough, there are other methods available before going straight to a stated income program.
First, many banks will allow a 15% ‘gross-up’ of this 2-year average, in order to reflect a more realistic picture of income if you are self-employed, but aggressively using expenses to pay less tax.
Under the new CMHC guidelines, implemented April 19th, if your income has increased for 3 consecutive years, they will now allow the banks and lenders to use the most recent, highest year, and gross that up by 15%, instead of a 2 year average.
If this does not provide enough income to qualify, many banks and lenders will allow add-backs to income. The top three expenses on a tax return that can be ‘added back’ are Capital Cost Allowance, Business Home Use, and Use of a Vehicle. Many expenses that you might expect could be used, such as entertainment, are not permitted.
In my experience, more often than not, if a broker or lender will just take the time to review your tax returns in depth, for add-backs etc, you will qualify without having to resort to a stated income program and, in turn, will save thousands of dollars in premium and mortgage interest.
So, if you are a self-employed individual looking to qualify for your mortgage, be sure to speak with a qualified mortgage planner and discuss these avenues to see if they are applicable to your situation.
I recently sat down with a group of investors that are setting out to acquire a portfolio of rental properties. They wanted clarification on the Federal Government changes coming April 19th, and how they will affect the mortgage qualfication process. In addition to having to put 20% down on investment properties, one of the biggest changes involves the bank no longer using a rental income offset for qualification, and instead taking any rental income and adding 50% of it to the applicants income. This has a drastic impact on one’s qualification and results in a reduced amount you may be able to qualify for.
The rental offset, versus added to income, is a complicated concept and difficult to explain. I recently came across a great article that outlines the mechanics of the calculation and illustrates the effect. To read this article, CLICK HERE
For further information on the upcoming changes to the mortgage qualification process, please contact me.
The strong Canadian dollar and recent corrections in the U.S. real esate market have made properties south of the border an attractive investment. Many Canadians are flocking to the U.S. to buy investment properties, at discounts of up to 60 and 70% of 2007 prices.
I recently worked as a consultant and mortgage advisor for a group of clients who pooled their Canadian funds, with the intention of buying a portfolio of properties in the United States. I do not arrange U.S. mortgages, however, my role was simply to assist with the application process and provide advice.Their dilligent research uncovered that many potential properties would produce positive cash flow from rental income, with a down payment of as little as 5%. However, when it came time to obtain a mortgage in the U.S., they ran into some major road blocks. Unfortunately it’s not possible to obtain a mortgage from a Canadian bank or lender on a U.S. property. When my clients approached both U.S. banks and mortgage brokers, they were told that getting a mortgage was simple and they could likely be approved with as little as 20% down payment and in some cases less. Once they actually went through the application process in preparation to begin offering on properties, the reality was quite different.
The banks, upon reviewing the application, all declared that a down payment of 30% would be required, due to their non-resident status. Furthermore, being a foreign purchaser entailed higher than normal rates, in some cases up to 3% higher. Another issue they came across during the purchasing process is that many of the subject properties were in a foreclosure type situation, controlled by the courts or an organization and they were not receptive to foreign buyers requiring a mortgage to complete the transaction. Needless to say, they felt their offers did not receive fair consideration and they would have had to pay quite a bit more than a local, cash buyer.
I am certainly not trying to discourage anyone from purchasing in the U.S. Provided you’re prepared to hold the property for 5 to 10 years or more, I believe there are many attractive investment opportunities down south. I do think it’s important for one to investigate the process before attempting to make such a purchase. This would include speaking with more than one bank or mortgage specialist, finding a qualified realtor with experience in purchasing for foreigners and also seeking advice from a lawyer and an accountant, to be made aware of any liability and taxation issues.
For more information on purchasing in the U.S., click the following link for a detailed report:
INFO ON BUYING A PROPERTY IN THE U.S.
If you are considering buying in the U.S., please feel free to contact me, as I’d be happy to share more information on my experiences.
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As Vancouver hosts the 2010 Olympic Winter Games, we are reminded of how fortunate we are to live in such a wonderful city. Apparently, The Economist magazine agrees. A recent study by the Economist Intelligence Unit (EIU), recently ranked Vancouver as the most liveable city on the planet for the second straight year. The study gives a score from 0 to 100 to cities in the world, based on such factors as stability, health care, culture and environment, just to name a few. Vancouver topped all cities with a score of 98, based on the weighted rankings for each category.
For more on the EIU study, click here: EIU STUDY
So here’s to you Vancouver! And to all our visitors for the Olympic Games, it’s a pleasure to have you amongst us.
Is it a good time to buy?
Given all the recent positive data on the real estate market, I’ve had a lot of inquiries about whether or not it’s a good time to buy, or is the greater Vancouver market overpriced and headed for another pull back.
There is a general consensus that rates will increase over the next few years, which could certainly slow demand and cool off this hot market, which is once again approaching unaffordable levels.
However, if you’re considering purchasing, you might want to take the following into account:
At current rate levels, you could secure a 5-year fixed-rate mortgage for as low as 3.69%. The total interest paid to the bank or mortgage lender over these 5 years would be $52,907 based on a mortgage of $300,000 (assuming a purchase of $400,000 with a down payment of $100,000 or 25%, for the purpose of this discussion).
If you were to wait a year or so and find that the market ‘corrects’ or pulls back by 5%, as you had hoped, the same property could be purchased for $380,000, but could quite possibly come with a 5-year mortgage rate of 5.69%, a level we’ve seen as recently as 2007.
The total interest paid over the 5 years at this increased rate would be $71,298. This difference in interest of $18,391 would wipe out over 90% of the 5% savings on price.
So the important question then is; if you plan to buy a property, will you need a mortgage?
If you’re fortunate enough to be able to purchase a property with your own savings or resources, then it may be worth trying to time the market and avoid buying in the midst of this current peak.
If you’re like most Canadians and require a mortgage, should rates increase and the market correct, it appears to be all relative.
We’ve all heard the advice from our bank or financial planner about investing: “Time in the market is often better than timing the market.” One could certainly argue the same for real estate; as securing a property with a mortgage at historically low levels could bring your average rate down for the life of the mortgage, drastically reducing your interest costs and the overall cost of the property.
This is just one way of looking at this decision. The example outlined above makes a lot of assumptions and things may not necessarily play out this way. While there are several other variables to consider, I hope this gives you some food for thought. The best of course of action would be to speak with a mortgage planner and find out if it’s the right time for you, depending on your financial objectives.
I welcome any comments or a different perspective.