Sep 162019
 

One advantage of owning real estate is being able to access the value of the underlying asset for financial gains. The more properties we own, the more equity we can use to buy additional properties. This is why it’s often easier for homeowners to grow their net worths, but harder for renters. One of the best reasons to refinance is to lower the interest rate on your existing mortgage. Historically, many lenders agree that refinancing is a good idea if you can reduce your interest rate by at least 1.00%.

As we know, a mortgage balance gets paid down slowly over time. In the beginning you might have a $300,000 mortgage. But maybe after the first 5 year term is over, your balance is only $250,000. When you go to renew your mortgage you’ll likely have a couple of options. One is to continue paying down the $250,000 balance. Assuming interest rates haven’t changed, your monthly mortgage payments would also be unchanged, because that’s how mortgages are designed. But the other option is to refinance at a higher balance so your total loan amount is increased. By refinancing, you can access up to 80% of your home’s value less any outstanding mortgages. So if the value of your property is now higher than when you bought it, you could potentially borrow more than your initial mortgage amount against your home. 🙂 But your monthly payments would go up in this scenario because you have more debt.

In order to figure out when is a good time to use one method or the other, we need to consider the following factors.

  • How tight is your budget? 
    If you are already struggling to make ends meet, then it’s usually not a good idea to refinance at a higher balance. Just keep to the lowest amount until your income and spending situation improves.
  • Are there any investment opportunities out there?
    If you expect a good return on a potential investment, then it may be worth it to borrow more money against your home. For example, the Canadian Apartment Properties REIT (CAR.UN) has performed somewhat predictably over the years. Its 1-Year, 3-Year, 5-Year, 10-Year, and even 15-Year returns have all averaged over 10% per year. If my mortgage rate is 3% then that’s a 7% gap minimum, before taxes. It’s reasonable to assume that a margin of safety of 7% is a low level of risk, considering the stability of Canadian real estate.
  • Do you have any other debts?
    Using home equity is a great way to pay out higher interest debt through a refinance. For example, let’s say you have outstanding car loans, student loans, and credit card balances that combine to equal $50,000. Chances are these are all charging a higher interest rate than your mortgage. So instead of refinancing at $250,000 you could simply grow your mortgage debt to $300,000. And use the extra $50,000 to pay off your other debts, saving interest expenses over time.

In terms of how to get more equity out of your home, you could either take on a home equity line of credit, or blend and extend your current mortgage with your lender. Please be aware there are costs associated with refinancing. If you want to refinance in the middle of your term to access equity or lower your interest rate your lender will charge you a penalty. For fixed mortgage rates this penalty is the greater of 3 months interest or the interest rate differential payment (IRD). For variable mortgage rates this is simply 3 months interest. There may also be lawyer fees involved with a refinance. You can also have multiple mortgages from different lenders at the same time, but a 2nd or 3rd mortgage will often come with a higher interest rate and may not be worth it. So it’s important to consider which type of refinance you need before renewing your mortgage. 🙂

 

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Random Useless Fact:

May 212019
 

Farmers are feeling the pain

Last year Canadian farmers couldn’t grow enough canola to satiate China’s appetite. About 40% of Canada’s canola exports go to China every year. In 2018 that worked out to about $3.8 billion. But it all changed this year after Canadian officials detained Meng Wanzhou, the CFO of Chinese tech company Huawei, due to an extradition request from the U.S. government.

In March, China started to ban shipments of Canadian canola on the grounds they’re plagued with pests, even though Canadian authorities say they’ve received no evidence to support that claim. Unfortunately the trade war and political shenanigans between the U.S. and China have affected households around the world, including Canadians. Our farmers in Saskatchewan are in trouble. They’re caught up in a global conflict between the two largest economies in the world, that has nothing to do with them. I canola imagine what they’re going through. Prime Minister Justin Trudeau recently announced financial aid for canola farmers. But it’s not a proper long term solution.

value of major exports from Canada to China

Major export products Canada shipped to China in 2018.

 

But canola isn’t the only export facing bans in China. Canadian peas and soybeans also have restrictions. And earlier this month, China suspended imports from two major Canadian pork producers over paperwork issues. According to the Canadian Pork Council the suspensions appear to stem from a labelling problem and are not tied to any political moves by China. But some people think that excuse is complete hogwash. 🙂 It’s ironic that China is currently experiencing a major pork shortage due to swine fever. The country could lose up to 200 million pigs to disease during the epidemic. To put that into perspective that’s about 3 times the pig population in the U.S. :0 And yet China still refuses to buy our pork. But that’s because China is so big, it can afford to cut off its snout to spite its face. It doesn’t need Canadian bacon because it can import it from other countries.

 

Farm prices rose modestly last year

The new farmland values have been published by Farm Credit Canada. It appears the average value of Canadian farmland increased 6.6% last year. That’s down from 8.4% in 2017 but at least it’s still going up. 🙂 Quebec had the highest increase, while Nova Scotia actually saw a decline.

It’s nice to prices continue to rise for farmland almost across the country. By contrast, Canada’s housing market fell about 5%  in 2018, according to the Canadian Real Estate Association (CREA.) But maybe farmland prices naturally lag the residential market? It would be interesting to how prices change in next year’s value report. 🙂

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Jul 042018
 

Five years ago I acquired a variable rate mortgage from CIBC. It was the cheapest rate I could find at the time. I was quite pleased with the rate but that mortgage term expired a couple of months ago. So I shopped around to see if I can find another good deal.

I expected my mortgage to become more expensive. Surely rates would have climbed over the last 5 years right?

But no. To my surprise I found a lender that offered me an interest rate that’s lower than my previous mortgage by 43 basis points. 😀 CIBC was not able to match this offer so I switched. The new financial institution I am with is not one of the big 5 banks in Canada. It is a lesser known company called National Bank.

I was paying 3.05% with CIBC. This was a variable rate 5 year mortgage at prime minus 0.40%. This was the best CIBC could do.
But my new mortgage with National Bank is only 2.62%. This is also a variable rate 5 year mortgage term. Except the rate is Prime minus 0.83%

A 0.43% difference in interest rates doesn’t sound like a lot. But my mortgage balance is around $193,000. So I will be saving roughly $4,000 over the next 5 years because I switched to a cheaper mortgage provider.

However there are costs associated with changing lenders. Appraisal costs $600, and legal documents from a notary public was $800 in my case. Luckily National Bank has a $750 rebate program for transferring over an existing mortgage. 🙂

In the end the cost of changing banks was worth the extra savings in my case.

Even though most Canadians are choosing fixed rate mortgage I still believe that variable rate is the way to go if you want to save money. The increase in fixed rate mortgages locked in by most home buyers this year is “seen as a response to rate hikes, and fear of higher rates in the future.” But critics have been calling for higher rates for over a decade. Yet rates haven’t actually gone up much. In fact, mortgage rates have dropped over the past 5 years as shown in my post today. That’s why we have to be informed of economic conditions so we can make our own financial decisions, instead of following others. 🙂

I have been a homeowner for almost 10 years. During this time my mortgage interest rates fluctuated from 2.3% to 3.2%. It doesn’t look like rates will climb significantly any time soon. Until we see increasing mortgage rates, I would expect Canadian housing prices to climb even higher.

 

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Random Useless Fact:

30 years ago only 5% of the population admitted to being chronic procrastinators compared to 25% today. Some believe technological advances is the main cause of this change.

Aug 012016
 

Stock Markets Reach Record Highs… Again 

Both the Dow Jones and the S&P 500 indexes have climbed to all time highs in late July. 🙂 But corporate earnings have been stagnant and economic growth remains weak. Restaurant sales have slowed. The U.S. economy only grew a disappointing 1.2% in the second quarter, well below expectations. 😕

So what’s producing so much excitement in the stock market? In short, I believe it’s largely caused by Negative Interest Rate Policies (NIRP). For example, in Europe the benchmark lending rate is negative 0.4%. Usually the bond issuer pays interest to the investor. But with negative rates, the investor pays the issuer. Currently about 1/3rd of the world’s government bonds are producing negative yields. Investors can’t get rich by holding these securities anymore. So in this kind of environment bonds really hold people down.?

As a result of NIRP, more investment capital has moved from the bond market to relatively stable stocks. These tend to be companies that operate gas pipelines, railways, utilities, telecommunication services, and other infrastructure that are recession resistant. Last year I wrote about how to easily make $75 of annual income without using any of my own savings by using leverage to buy shares of TransCanada Corp (TRP.)

16-08-financial-advice-dog-bonds-tennis-balls

I purchased TRP stocks for $42 per share. I mentioned at the time that analysts had an average price target of $57.50 per share. This doesn’t always happen, but sure enough TRP is trading at roughly $60 per share today. 😀 So not only am I making $75 a year in dividends, but I’ve also made $1,800 in unclaimed capital gains so far. 😉

In normal circumstances this kind of price movement in a large cap, blue-chip company wouldn’t happen. But due to a lack of viable investment alternatives, an influx of additional buyers has pushed up TRP and many other relatively safe stocks.

Increasing Valuations and Risk

Unfortunately, NIRP produces asset bubbles and may cause the markets to behave precariously. The chief executive of DoubleLine Capital, who oversees more than $100 billion in assets, recently said that many asset classes look frothy and his firm continues to hold gold, which has also climbed due to NIRP.  At the end of July gold reached $1,350 per ounce, the highest monthly close in years! Stock investors have entered a “world of uber complacency,” said Jeffrey to the media. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong. Continue reading »

Jul 112016
 

Real Estate Incentives

Financial advisors sometimes get a bad reputation for not having their client’s best interest in mind. Many continue to earn commissions even if their client’s portfolio is losing money. But what about real estate agents? Their compensation structure is also heavily based on commissions. They often earn a percentage from the final sale of a home. For a homeowner looking to sell, the ideal situation is to sell his house for the highest price possible. So at first glance it would appear that both a homeowner and a real estate agent would have the same financial incentive; to get the best possible deal for the seller. 🙂

mics-house

But further investigation reveals that maybe that’s not really true. Let’s say a homeowner sells his house for $500,000 with the help of a real estate agent on a fixed 2% commission. This means the realtor earns $10,000 and the homeowner keeps the remaining $490,000. To keep it simple we’ll ignore taxes and other costs.

But maybe with some additional advertising, negotiations, and patience, the house could actually be sold for $510,000. But this is when the incentive structures begin to diverge. As the homeowner selling the house, an extra $10,000 from the sale price means adding $9,800 more to the bank. 😀 Most sellers would like to see that money, even if it means waiting an extra couple of weeks to find the right buyer. But a realtor would only make $200 off the extra $10,000. For most real estate agents, putting in the extra time and effort (and sometimes even money for ads) isn’t worth the extra commission. So if the homeowner stands to gain $9,800 while the agent would only receive $200, then clearly their incentives do not align very well anymore.

Continue reading »