Roughly 50% of your interest is paid in the first 10 years of your mortgage. So if we can decrease the lifetime of the mortgage, this could provide a huge value in savings.

So lets say you want to put 25% down on a $1 million dollar purchase, here is why we would we say do 20% down instead. The math may surprise you:

The first chart in this link the is based upon a $750,000 with a 2.79% over 25 years.

Amortization Cheat Sheets

The second chart below is the result based upon $800,000 with a 2.79% over 25 years with a $50,000 lump sum on payment 13

 
Amortization Cheat Sheets
 

So doing some quick math here:

All being equal and the calculation taking the extra 5% actually saves you $71,558 and pays the mortgage off 2 year faster. I have accounted for the payment difference as well. Keep in mind there are additional strategies here that could benefit you. I assumed no yield on the $50,000 for one year. Even a basic GIC or something of the light would produce a small yield. Another strategy would be to use that money to put into your RSP account and generate a tax refund, then apply that amount as an extra mortgage repayment.

Until recently there has not been much in the way of official press releases from the insurance industry, and just this week the Insurance Brokers Association of BC provided a comprehensive document outlining why we have a problem and how it is affecting strata corporations. I encourage current strata owners to have a read of the article, and share this with anyone you know that is either planning on buying a condo or selling their condo.
IBABC Press Release

A new study by Zoocasa shows that homes in Vancouver may be costly to buy, but they are cheaper to own than in other cities. Out of the 25 major cities studied, Vancouver has the lowest property tax rates which can more than offset the higher prices of housing in that city. The owner of a home with an assessed value of $1 million in Vancouver will owe just $2,468 a year in property tax, compared to $6,355 in Toronto or more than $10,000 in Ottawa.
On a pure property tax basis, Vancouver home ownership is also cheap in comparison to cities in the U.S. For example, the annual cost of owning a home in Vancouver with a property tax rate of 0.25% is roughly half that of Toronto (with a 0.64% rate), a third that of Seattle (0.84%), and almost a fifth that of San Francisco (1.16%). So, for foreign buyers, Vancouver is a relatively inexpensive place to park money. This has been a significant incentive for speculative investment, especially in high-end homes and in turn, it is likely a historical factor that has driven up home prices over the past twenty years.
Residential real estate prices have doubled in Vancouver over the past decade. This has put homes out of reach for much of the local population whose wages have not kept pace. The average home price in Vancouver is now a wicked ten times average household income.

Canada’s big banks are locked in a competitive pricing war over variable-rate mortgages, but economic trends point to more interest rate hikes ahead — leaving Canadian mortgage borrowers struggling to interpret the mixed messages.

The Bank of Canada has raised its trend-setting interest rate once this year and is expected to do so at least once more before the end of 2018. When interest rates rise, banks are inundated with demand for fixed rates, so borrowers can lock in their rates.

As a result, Canada’s lenders are working to attract borrowers to variable-mortgage rates, which are tied to the fluctuations of the central bank’s overnight rate. They are offering special rates as low as 2.45% for May, some of the biggest-ever widely advertised discounts advertised by the big banks. At the same time, they have increased the rates of their fixed-rate mortgages.

Even in this rising interest rate environment, experts suggest current variable-rate options are attractive when compared to fixed-rate mortgages.

“Up until recently, when asked, I had been favouring the fixed over the variable,” said Dave Larock, president of Integrated Mortgage Planners in Toronto.

His attitude changed after fixed-rate mortgages became more expensive in response to higher bond yields and variable-rate mortgages got cheaper due to competition among lenders.

As a result, the gap between the available rates from the 15 lenders Larock consults widened to nearly one full percentage point, with the five-year variable rate at 2.45% and five-year fixed rate at 3.39%.

“That’s your margin of safety,” Larock said. “That’s how far variable has to rise before you’re paying more than the fixed rate.”

Larock cautioned there are plenty of warnings that the Bank of Canada’s influential overnight rate will be going up again this year — a move that would quickly push up the cost of a variable-rate mortgage.

But he said it’s debatable whether the central bank will act as quickly as economists anticipate, adding it’s statistically unlikely that the overnight rate will go only upward over the next five years, given historical trends going back 28 years.

“Even if rates go up first, there’s a very reasonable chance that at some point they’ll drop (again).”

As a result, borrowers could very well end up paying less total mortgage interest over the next five years by choosing a variable rather than fixed rate, Larock said.

But some argue it’s unwise to become too focused on securing the lowest available interest rate.

“You might actually not be doing what’s right for you, given all of the things that are around the financial needs of you or your household,” said Stephen Forbes, a CIBC executive vice-president whose role includes personal banking.

Forbes pointed to a client in Toronto who initially wanted to borrow $800,000 through a variable mortgage to help pay for a $1.6m house.

“Her only focus was on rate. She wanted the lowest rate possible,” Forbes recalled.

But the client changed her mind after taking a broader look at the situation, including her household income, non-mortgage debt, children’s ages, and her and her husband’s lifestyle aspirations.

The fixed-rate option provided her the certainty she wanted over knowing what her rate would be for the foreseeable future, he said.

In the end, Forbes said the client opted to borrow only $650,000 with a fixed-rate mortgage — not variable — and also consolidated non-house debts in a line of credit at a lower rate.

There are times when a variable rate mortgage is the perfect decision for a borrower, Forbes said, but that depends on the individual’s circumstance and their ability to cope if the variable-rate mortgage becomes more expensive.

“What I see sometimes that worries me is when people use a variable rate mortgage as a lever to borrowing more — hoping that rates will not change down the road.”

There are ways for people with variable-rate mortgages to protect themselves from a higher interest rate, Larock said.

Borrowers can structure their household budget to be able to pay the higher fixed-term rate for the next five years — even if the variable mortgage’s rate is lower, he said.

“Instead of just pocketing the extra cash … plow that savings back into the mortgage to pay if off more quickly.”

The Canadian Press

Paying off a large debt like your rental property’s mortgage is unquestionably a great and liberating feat, but there are several circumstances where you might not want to do that.

Here are the other situations to consider that could make paying off a rental mortgage early a poor choice:

1) You lose your mortgage interest deduction. The mortgage interest is treated like a business expense for rental property. This deduction is most important in high tax brackets.

2) You lose a low borrowing cost. In the age of low mortgage rates, it makes sense to hold onto a low fixed mortgage rate for as long as possible. On the other hand, if you borrowed at a high rate either pay it down or shop around and refinance.

3) You tie up capital in an illiquid asset. Unless you have a very diversified net worth, having a lot of capital tied up in a property can be risky.

4) You decrease your financial returns. If you put 20% down, a 4% appreciation on the property means a 20% cash on cash return thanks to leverage e.g. $100,000 down payment on a $500,000 house that appreciates by $20,000 = $120,000 equity, a 20% increase. If you’ve paid off the other $400,000 in mortgage early, the return falls all the way down to 4%.

5) You miss out on opportunities to invest more efficiently. Instead of tying up all of your capital in one property, you can invest surgically in multiple properties through methods such as “real estate crowdsourcing” in locations where valuations are much cheaper

If you no longer need motivation to achieve financial freedom, pay off your mortgage. Not having the tax deduction isn’t the end of the world because you still have the ability to deduct “depreciation” on your taxes.
Your goal should be to become debt free when you absolutely have no desire or ability to work a day job or maintain a rental property. You’ll find that the older you get, the less you want to deal with tenants.
It feels great to not only to have no mortgage on a rental property, but it sometimes feels even better re-investing the proceeds of a sale in passive income investments that require no work.

Source: Financial Samurai

Rates have substantially increased over the last 6 of months. We have seen 3 prime rate increases with more on the horizon. Fixed rate mortgages have also followed suit due to bond market instability and the increases are noticeable. Consumer sentiment has rapidly moved from Adjustable rate products to longer term Fixed rates of 5 years or greater. The advantage of Fixed rate is that they provide clients with added security and stability against this recent storm of volatility. This storm doesn’t seem to have an end in sight either with many questions still to be answered in the coming months. When will bond rates stabilize? Will global pressures continue to drive increases? Will we see a return to historical norms? What will be the impact of NAFTA negotiations/deterioration on the Canadian economy?

If clients you are concerned these days it’s with good reason. Perhaps the interim answer to all this instability and volatility is to start looking long “term”. 7 & 10 year terms to be specific. Longer term mortgages like a 10 year term help insulate you against potential increases in the short to long-term as well as provide safety and consistency with mortgage payments that won’t fluctuate with the market. We don’t have to go back very far (6-7yrs) to a time when 10 year mortgages were a very popular and attractive option. During that period of time many case studies show this product didn’t work out for those borrowers who selected those 10 year terms, however there was a major difference between that period of time and today. 6-7 years ago we were in a more stable rate environment and there was very little difference between the 5 & 10 year rates at the time. Shortly after this period, rates quickly dropped to even further all-time lows. Compare those details to our current market situation and it becomes quickly apparent rates have been continually rising with more sustained increases forecasted. So a 7 or 10 year mortgage option today might be work a good look. The 7 yr rates especially are very close to the same as 5 year rates.

7 & 10 year term mortgages give you:
• Security
• Stability
• Protection against rising rates
• Providing cost certainty as part of long term financial plan
• Protection against future legislated rule changes
• Portability options while maintaining their competitive rate
• Standard penalty calculations
• 20% lump sum payment
• 20% payment increases

Contact me to discuss your specific situation more at gregory.ero@dominionlending.ca

The Office of the Superintendent of Financial Institutions (OSFI) issued a revision to Guideline B-20 on October 17, 2017. The changes will go into effect on January 1, 2018, and will require conventional mortgage applicants to qualify at the Bank of Canada’s five-year benchmark rate or the customer’s mortgage interest rate +2%, whichever is greater.

OSFI is implementing these changes for all federally regulated financial institutions. As a result, some customers looking to purchase a home or refinance may experience a reduction in the total principal amount they are qualified to borrow.

Up to December 31, 2017 After January 1, 2018
Target Rate 3.39% 3.39%
Qualifying Rate 3.39% 5.39%
Maximum Mortgage Amount $400,000 $325,000
Available Down Payment $100,000 $100,000

Home Purchase Price $ 500,000 $425,000

A customer’s maximum mortgage amount will be influenced by other factors including product and term selected, amortization period, other debt obligations, and credit score.

One month of headlines suggest interest rates are dropping to new lows, another says no changes anytime soon, and recently many headlines seem to be suggesting an increase soon. This stream of mixed messages contradicting one another has been steady since rates dropped to 50-year record lows in 2009.

Many were adamant in 2009, and each year since, that rates could go no lower, and yet they have. Sure there have been a few shortlived blips upward along the way, in defiance of all who are calling for a return to normal… whatever normal may now be.

The key driver of interest rate movement is the economy in general. Not a thin slice of it such as real estate. What drives interest rates down? Economic bad news. What will drive rates up? Economic good news.
Economic good news seems in short supply since 2008.

Interest rates are a very large economic lever, far too large to be used simply to cool the arguably overheated real estate markets of two particular cities. Cooling of real estate is not addressed via interest rate hikes, markets are cooled and have been cooled as of late through lending policy changes.
Many commentators forget that only a few short years ago there existed 40-year amortizations with 100% financing not just for owner-occupied but for investment properties, and variable-rate mortgage qualifications that were much easier than today.

The reality is that borrowers in 2007 – at nearly double the current interest rates – qualified for larger, and arguably riskier, mortgages than borrowers today do.

And always do the math, yes math is no fun, but here is a shortcut:
A 0.25% rate increase equals a $13 per month increase in payments per $100,000 of mortgage balance.

One month of headlines suggest interest rates are dropping to new lows, another says no changes anytime soon, and recently many headlines seem to be suggesting an increase soon. This stream of mixed messages contradicting one another has been steady since rates dropped to 50-year record lows in 2009.

Many were adamant in 2009, and each year since, that rates could go no lower, and yet they have. Sure there have been a few shortlived blips upward along the way, in defiance of all who are calling for a return to normal… whatever normal may now be.

The key driver of interest rate movement is the economy in general. Not a thin slice of it such as real estate. What drives interest rates down? Economic bad news. What will drive rates up? Economic good news.
Economic good news seems in short supply since 2008.

Interest rates are a very large economic lever, far too large to be used simply to cool the arguably overheated real estate markets of two particular cities. Cooling of real estate is not addressed via interest rate hikes, markets are cooled and have been cooled as of late through lending policy changes.
Many commentators forget that only a few short years ago there existed 40-year amortizations with 100% financing not just for owner-occupied but for investment properties, and variable-rate mortgage qualifications that were much easier than today.

The reality is that borrowers in 2007 – at nearly double the current interest rates – qualified for larger, and arguably riskier, mortgages than borrowers today do.

And always do the math, yes math is no fun, but here is a shortcut:
A 0.25% rate increase equals a $13 per month increase in payments per $100,000 of mortgage balance.

And keep in mind that the majority of Canadians are in fixed rate mortgages, and the majority of them have renewal dates a year or two away. And for those mortgage holders an increase from todays rates of 0.25% – 0.50% would in fact only be equal to their current rate.

A 0.25% increase in the Bank of Canada rate would impact less than 10% of households across Canada, perhaps less than 5% of households. And that impact would be on average ~$39 per month.

Could you handle a $39 increase in your mortgage payment? Odds are you have actually already increased the minimum payment on your own as so many Canadians do. In that case you are already ahead of any increase.

Is the economy truly strong enough for an increase? We shall see come July 12 what the Bank of Canada thinks.

Are the small percentage of variable rate mortgage holders in Canada not already making higher payments ready for a 0.25% increase – overwhelmingly yes, they absolutely are.

The big beneficiaries of these uncertain times or trepidation around even a slight interest rate increase will be those in fixed rates approaching renewal dates over the next 12 months, and those enjoying the ride in their variable rate mortgages.

Be sure to start the renewal conversation with your broker six months out from the mortgage renewal date. Your current lender may suggest that rates are about to move and suggest locking into something early as the right move, but always consult with your independent mortgage broker first to determine if the move being suggested is right for you – or simply just right for the lender.
What is right for you matters to us.