For most of this year the markets have been discounting an economic recovery. That is, they have been in rally mode in anticipation that the worst of the economic crisis is over. While that is likely, all that is left for debate is how meaningful the recovery will be and if it is sustainable. The G20 countries have committed to not let their collective foot off the stimulus gas pedal until they are confident that the economy is on a sustainable trajectory.
As has been expressed before in this space, the distortions being caused in the markets by a weak US dollar are numerous. The floundering US currency has in turn lit a fire under the Canadian dollar. It is up almost 17% for the year and 24% since its lows last March. That has created a conundrum for the Bank of Canada. It was widely expected that the Bank of Canada would have begun raising interest rates by now.
However, some economic data has come in weaker than expected and even more so, the high Canadian dollar has kept the Bank of Canada on the sidelines. The central bank is well aware that if it chooses to raise rates now and thereby further strengthen the loonie, it might end up choking off the budding economic recovery.
There may be yet another concern that might be leaving the Bank of Canada in a quandary. It seems that Canada is gaining a new reputation as perhaps the "new kid on the block" when it comes to the excesses of overheated real estate markets. The real estate revival is being fueled by a wave of mortgage financing that some consider to be sub- prime in quality. In part, this is starting to resemble what we have seen in the US. While it is highly unlikely that we would see anything remotely resembling the experience of the US banks, the story does have some similarities that are disconcerting.
Part of the responsibility for this trend is being put at the feet of the Canadian Mortgage and Housing Corp. (CMHC). This government entity is considered by critics to be the Canadian equivalent of Fannie Mae in that its practices are thought to be provoking a rise in lending that could spell trouble for the Canadian real estate market in the future. This practice was brought about in part by the directive of the federal government to CMHC to effectively "hit the gas" and ensure that mortgage credit was accessible. The theory goes something like this: banks can continue making extended amortization loans to provide prospective homeowners the ability to get into an overheated Canadian housing market because the default risk is being transferred to the CMHC (taxpayers) since it acts as a guarantor for the mortgage market.
According to data from the CMHC, the amount of mortgage credit on the books of the banks has been almost unchanged since 2007 even though they have been issuing an explosive amount of mortgage credit. The reason is that the banks are offloading the mortgages from their balance sheet through the securitization process. Essentially, this allows them to move the risk of default to the broader financial markets.
Recently, the president and CEO of ING Direct Canada stated that he is seeing Canadian habits resemble those of US and European nations during their housing booms. The level of equity in Canadian homes is surprisingly low as more than 50% of all mortgages issued this year are longer than the 25 year range that has been the usual option for borrowers.
Taking this altogether, should rates rise over time, many Canadians might wonder what they have gotten themselves into. The chart above shows that Canadian income growth has not kept pace with the level of mortgage credit and now exceeds Canadian income. This also raises the question about whether or not the federal government can reverse its directives to the CMHC to open the credit spigot given the fact that many households are holding well under 10% equity levels in their homes. If however the Bank of Canada moves too fast in correcting this loose credit situation, the housing market could start to freeze up once again. If it does nothing, we could quickly confirm that the recent housing market surge is in fact the making of a bubble and bubbles are generally known for only doing one thing.
It seems that rather than simply expressing concern about this issue as we have seen thus far, the Bank of Canada might be tempted to follow its words with actions and send a shot across the bow of a surging Canadian housing market.
Since writing about investing in second mortgages, I’ve received a tremendous response from readers looking for more information.
Before I get into the what and why’s of 2nd mortgages, I’d like to explain
The ‘Rule of 72′
The ‘Rule of 72′ is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest.
By dividing 72 by the annual rate of return, You can get a rough estimate of how many years it will take for the initial investment to duplicate itself.
For example, the rule of 72 states that $70,000 invested at 14% would take 5.14 years (72/14) = 5.14 to turn into $140,000.
A 14% investment will take 5.14 years to double. TAX IMPLICATIONS of 2nd mortgage investing.
The income you realize from 2nd mortgage investing is simply added to your other income and then taxed at whatever tax bracket you’re in.
Below are the 2009 Income Tax Brackets
first $35,716 = 20.06% over $35,716 up to $40,726 = 22.70% over $40,726 up to $71,433 = 29.70% over $71,433 up to $81,452 = 32.50% over $81,452 up to $82,014 = 36.50% over $82,014 up to $99,588 = 38.29% over $99,588 up to $126,264 = 40.70% over $126,264 = 43.70%
Example #1 Based on a 2nd mortgage investment of $70,000 at 14% with NO carrying charges.
Let’s assume your regular 2009 income is $60,000 plus you receive $9,800 2nd mortgage income. Your Total income now becomes $69,800 Based on the above table, you’re still in the 29.7% tax bracket.
Example #2 Based on a 2nd mortgage investment of $70,000 that is borrowed (with carrying charges).
Let’s assume your regular 2009 income is $60,000 plus you receive $9,800 2nd mortgage income less $1,575.00 carrying cost (because you borrowed the $70,000 at 2.25% = $220.50) Your Total income now becomes $68,225.00 Based on the above table, you’re still in the 29.7% tax bracket.
Talk to your accountant as you may be able to write off more depending on how you structure the investment.
Why would someone want a second mortgage at 12-14%?
Case Study #1
Mary is an entrepreneur who’s owned her own business for 5 years
Mary needs $70,000 to expand her business and reduce some high interest rate debt.
Mary’s Vancouver residence is worth $700,000
Mary’s bank holds a first mortgage on her property for $350,000
PROBLEM - Mary pays her accountant to reduce her taxable income as LOW as possible
Applies to bank for an additional $70,000
Bank DECLINES based on her taxable income being too LOW.
Mary is referred to Mark for a $70,000 2nd mortgage
Mark reviews Mary’s application and pulls her credit bureau.
Mark requests HIS appraiser to provide realistic value of Mary’s home
Appraisal comes back at $657,000
Mark reviews with investor
Investor likes the deal and agrees to lend Mary the $70,000 2nd mortgage at 14% for 1 year (typical time frame)
Mary agrees to terms and signs Commitment which in turn is forwarded to lawyer
Lawyer requests investor to provide $70,000 to his TRUST account
Lawyer draws up documents and has Mary come in sign and also agree to no additional mortgages
Lawyer registers 2nd mortgage in favour of investor
Mary receives $70,000
Investor receives 12 post dated cheques for $816.68
All costs including legal fees are paid by Mary
House value = $657,000 less the total of the 1st & 2nd mortgage of $420,000 Equals a 64% Loan-to-value i.e. 64% of the value is secured The equity of $237,000 is considered to be the security
How Secure are 2nd mortgages?
Firstly, a 2nd mortgages is secured by REAL ESTATE. History has proven that although real estate prices may have fluctuated from time to time, over the long-term real estate property has appreciated in value.
Private mortgages provide a regular income stream, tangible security and a real return to the investor that is superior to bank deposit, GICs and bonds.
The big-chartered banks in Canada have often been criticized for charging exorbitant service charges. However service charges at best probably only cover the overhead costs incurred by the banks in their operations. Their favorite money making venture is undoubtedly the mortgage business.
There are many reasons why these investments are so highly sought after, which include the following:
Low Administration Costs: The borrower is required to pay the costs to have the mortgage registered against title to their property. You simply sit back and go about cashing the monthly interest payments.
Cash-Flow: A mortgage generates cash each and every month. Obviously the amount of the monthly payment will depend on the size of the mortgage, the interest rate.
Protected Capital: Perhaps the main reason why Banks love mortgages, and why they fight tooth and nail with each other for this business, is the low risk associated with these investments.
Private mortgages require little baby-sitting or watching of an investment. Money is paid regularly and the lender is fully covered by the legal documents signed at the time of the mortgage, ensuring that the investment as well as a profit is collected.
In some cases, property owners turn to private mortgages if their credit is a bit low and cannot get financing elsewhere - and then switch to a bank with better rates as one’s financial status improves.
“I’m not going to say that mine are the safest, because that would be unfair, but I will say that the security has a LOT to do with the due diligence and character of the mortgage consultant”
People who have already decided to invest in second mortgages, like retired couple Mary & Fred below, agree that this is the best investment they’re ever made.
“Before being referred to Mark our retirement income was quite low. Mark helped us transform our only assest, our clear title house, into a revenue generating machine. Now we are enjoying the healthy retirement we had always dreamed of.” Mary and Fred G.
Call Mark today and get you’re money working for you!
Take care,
Mark Fidgett "Your Personal Mortgage Consultant....For Life!"
PS - Please Don't Keep Me a Secret A REFERRAL is when you INTRODUCE someone you care about to someone you TRUST!
Don't forget to tune in to the BIO channel at 10pm - My friend Sean Stepenson's show "3 foot Giant" is on! http://www.youtube.com/watch?v=1_4YpAHxAwA - pass it on...we need 300,000 to see the pilot for it to go to series
Lenders approve loans based on their impression of your ability and INTENT to pay it back.
To figure this out, they look at five things:
creditworthiness
income
job longevity
job stability
and future income prospects.
We'll tell you how to make sure you look good in each of these things, so that you'll get a "YES" when you want to borrow money for your new home.
1. Creditworthiness
Creditworthiness is your history of borrowing and repaying against things like loans, credit cards, rent, and whether you've ever filed for bankruptcy. Lenders refer to your credit bureau for this info.
Order a copy of your bureua today online at http://www.equifax.com make sure you order with the "Score Power".
This is to make sure that there are no errors or surprises that you'll have to explain to the Lender. If there are mistakes, which I often see, it can take a few months to resolve. So it's good to have a compelling explanation ready when the Lender sees it! The best way to demonstrate that you are "creditworthy" is to pay your bills in full and on time, particularly for the year or two before you want to get a loan and don't use more than 60% of your available credit.
2. Income
Lenders want to know that you have a history of sufficient and consistent income - so that you'll be able to repay the loan. So, when you submit your paperwork, make sure to include a letter verifying your employment (how long and what your salary is), your last couple of paystubs, and your last 2 years NOA's (notice of assessment).
3. Job Longevity
Lenders are looking for borrowers who have a stable source of income. If you can show that you've been employed at least 2 years in the same company or industry, you should be fine.
4. Job Stability
Again, lenders like stability - they tend to think that your loan payment behavior will reflect your employment behavior. So, don't make lateral moves between companies just for the sake of change. If you make moves, do it for promotion, or to earn more money.
5. Future Income Prospects
Because most loans are paid back in 15 to 30 years, Lenders are interested in people who will have income for that amount of time. Young professionals, or those with high-demand skills, are the most appealing to Lenders because their income will only increase over time. If you can demonstrate that you have a career plan that only gets better over time, you'll be in a strong position to borrow.
So essentially, pay your bills on time, stay with an employer, have a career path that shows potential, and you'll be sure to get a "YES" when you borrow.
Remember, if your contemplating a purchase of any kind that requires financing, WAIT until after you've bought your home. Otherwise, it will reduce or maybe even eliminate your from the market. Also, stay away from credit applications of ANY kind. The more times you apply for credit, the more times your credit bureau gets pulled and the lower your score will go : (
Now that you have some insider secrets, where is the best place to begin.
The first step is to call me for a FREE consultation at 604-273-2002. If I don't think I'm the right mortgage consultant to help you, I'll let you know immediately - fair enough.
You not only became our broker, but also our friend. It is not very often that someone in your field will put his clients first, but from the first day you thought only of our needs. You were always very informative, patient and totally understanding. You were always there when we needed sound financial advice regarding our old mortgage and helping us to compare numbers for which was the best one to go with. You detached yourself from your business role and became not only our mortgage consultant but also our friend. ~ M. & B. Montgomery
Question: What effect will the HST have on a house buyer’s decision making?
The HST will mean higher final costs for some new home buyers, namely those purchasing more expensive new homes. The final impact, however, will not be as large as the additional 7% provincial portion of the HST.
The province is providing a $20,000 rebate to offset the impact of the HST. Taking the example of a new home priced at $550,000, the additional HST will be $18,500 (7% of the price less the $20,000 rebate).
This, however, is not the net result. When the HST comes into effect, PST will no longer be charged on all the materials used to build the house. The BC Ministry of Finance estimates that this ‘embedded PST’ amounts to 2% of the final cost of a new home. With the HST in place, builders will realize these savings and be in a position to reduce selling prices accordingly. In this example, the embedded PST amounts to $11,000. Therefore with PST removed, the net tax increase from the implementation of the HST on a new $550,000 home will be an additional $7,500 in tax.
The reason we can be confident the savings will be passed on in your question when you suggest that, given the (tax inclusive) price difference between a new and used home, “buyers will flock to buy used homes.” It is precisely this difference that will act as a powerful incentive for builders to pass on the PST savings so that their homes are as competitively priced as possible.
It should be noted that the home building industry believes the 2% figure is too high and that embedded PST in a new home is actually around 1.6%, meaning somewhat smaller savings and price reductions. The home building and real estate industries are currently working with the provincial government to explore measures to reduce the tax impact of the HST. One proposal is a higher rebate threshold or at least a rebate that recognizes regional price differences. Another option would be to phase out the property transfer tax on new homes.
“Your Personal Mortgage Consultant….For Life!”
PS - Please Don’t Keep Me a Secret A REFERRAL is when you INTRODUCE someone you care about to someone you TRUST!
Since I am the “finance guy”, close friends asked me to look at their credit card statement. My friends had reason to be extremely upset.
My friends typically pay their bills on time, however the payment was mailed and ended up being two days late. the card company (Bank) charged $7.40 in interest for a two-day late payment of a huge amount of interest on an amount due on the statement of less than one hundred dollars. My friends immediately called the bank. The Bank kindly reminded them that if you are late paying the balance on the statement they charged interest on all purchases made since the billing date of the original amount due. For clarity, that means if your payment in full is received by the them two days late, and you had added $1000 in additional purchases before you get your next statement, they charge you interest on the additional $1000 for the entire period plus the original amount due. My friends asked me to review their cardholder agreement and in fact it does allow them to charge interest this way, however consider how much interest they would have been dinged for if they had just put that new wide screen TV on their card.
What makes this particular instance more interesting is that they had checked their account balance on-line the day they wrote the cheque and had included payment for their new purchase up to the date they had wrote the cheque. Not only had the card company charged them interest for the period from the date of the new purchase to the date they had received payment they also charged interest on those paid for purchases for nine additional days to the next billing date as if they had not received the money. I prepared an Excel spreadsheet and calculated the actual interest based on their current account balance. For that nine-day period the interest is not the 18.5% the card company claims it to be on the statement. The actual interest for that period worked out to be 92.4% per annum. My friends faxed a memo to the card company asking why they were charged this interest for the period of time the amount due was already paid. The bank has responded offering to reverse the credit charges as a good will gesture because the account is normally kept current, yet were silent about charging interest on the paid amount.
The point of this email is to remind everyone just how the credit card companies’ policies are usurious and the drastic effect that can have on your wallet. If you were late on a small amount and then charge a significant purchase to your card it would incur a substantial interest charge that is totally inappropriate. We know the governments will not fix this. Maybe it is time for the consumers to protest by boycotting one specific card company for an entire month. We would pay our accounts on time, however we would not use their card to charge anything for that month. That would hurt them where they pay attention. It might even cost the Vice-President of that division his/her huge annual bonus!
What are your thoughts?
Mark Fidgett | 604-273-2002
"Your Personal Mortgage Consultant....For Life!"
PS - Please Don't Keep Me a Secret A REFERRAL is when you INTRODUCE someone you care about to someone you TRUST!
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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