There’s a growing selection of topical discussions to have on;
- Immigration (why we need to keep the doors open)
- Housing supply (how we can radically increase supply in short order)
- The White Lotus (who will carry over into season 3?)
However if I think about what matters, and these are two words that I routinely start a page of thoughts with, then it seems to me that that what matters right now are your own personal finances.
Mine too.
And this post, and the next few are all going to centre around a one word solution to much of what ails the current homeowner, the current landlord, and by extension the current tenants as well.
‘Amortization’
As you might guess, I’ve got myself a variable rate mortgage… perhaps you do as well.
The discount on mine is deep, Prime -1.21%, and locking into a fixed rate has proven difficult to do.
Hindsight makes so many things obvious.
Things are less obvious, much less, when living in the here and now.
Things are uncertain, because well… they haven’t happened yet, or before… maybe ever.
And with a net rate (currently) of 5.74% the prospect of locking into a fixed mortgage product with a potentially challenging prepayment penalty down the road, just to shave a quarter or a half point off seems at best minor damage control.
In reality, it inflicts damage on my cashflow to do this.
Because the mortgage in question is a variable, not adjustable, meaning that there’s a level of certainty around the payment. And to lock in would be to effectively reset the payment.
Add into the mix that the property recently became a rental property, and that a payment reset would put it into a deeply negative cashflow position. So now there is even less motivation to lock in to a fixed rate.
And so here I sit, watching the Bank Of Canada (BOC) focus in their sole mandate;
To drive inflation down to a 2% rate, and keep it there.
And here I sit, watching the Office Of The Superintendent of Financial Institutions (OSFI) focus on their sole mandate;
To protect the stability of the CDN banking system.
And here I sit, wondering who’s mandate is;
To protect the stability of the CDN household.
The Financial Consumer Agency of Canada (FCAC) made some low level noise last week about the consumer, but there was nothing tangible or definitive. No directives, no teeth! This is after all the same organization that was going to address the irrationality of the often devastating Interest Rate Differential penalties charged by chartered banks and Credit Unions 7 or 8 years ago. And nearly a decade later… no changes to calculations, no greater transparency, no change. Sooo…. let’s not hold our breath for help for here.
What about CMHC?
Surely they support some kind of structural change to the current mortgage metrics. After all they were very supportive, for many years, of the 40 year amortization the last time rates were at this level.
What about now?
No.
No love.
In fact the President suggested that lengthening amortizations would be ‘an inflationary measure’ – despite the fact that it isn’t if implemented with a few basic conditions.
In any event, the folks most in need of extended amortizations beyond those trying to enter the housing market are those who entered it within the past few years.
At todays rates here is a payment table to give some perspective on the positive impact extended amortizations could have.
Here’s some basic math;
$100,000 annual income.
25% tax bracket.
$6,000 take home.
Qualified for a $500,000 mortgage.
Payment was ~$2,000.00
Payment today ~$3,200.00
This is a squeeze.
But not all of us are squeezed.
I mentioned that I was in a variable rate product, and indeed my mortgage hit the trigger rate, so what happened next?
The lender initially wanted to push my payment up by just over 50%.
However, when asked, when pressed a bit, they confirmed they had a program available to re-amortize the mortgage over 40 years (from the original 25). No application, no documents, no fees, no nothing, just a docu-sign email, and poof… the payment went up 25%, rather than 50%.
The property does not cashflow anymore, but it breaks even, and that’s a win.
This is lower stress than I’d otherwise have.
How?
Because I asked.
Because I knew to ask.
How many of our clients know to ask, or who to ask?
How many of us are assisting clients proactively with this?
I will dig into this deeper next week… as I will the topic The 50yr AM.
DW