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And there is the logic that underpins the entire Canadian housing market. It works until it doesn't.
(And it's not capitalism)
My public appeal to property investors
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(And it's not capitalism)
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The problem with PP is that he's a populist, and it's pretty clear he's engineering his "outrage" just to win votes. He's disingenuous and doesn't really believe the things he says.
A guy like PP would just as easily turn around and serve the real estate & mortgage industry lobbyists. That's what happens with politicians who have no core values. They'll say anything, strategically for election purposes.
Beware: PP is tricking you.
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Yes, I know but I want him to win the CP leadership election that he can make a challenging life for Liberal and NDP. All other CP candidate seems to me a pu$$y. Otherwise, Liberal and NDP would destroy the middle class more in the name of helping the middle class.
They know exactly who they're helping; they're just being totally disingenuous with their terminology. They don't mean middle income, except for the highest end of that category, aka "upper middle class" or borderline wealthy. That's why they call middle class whatever someone "feels like" rather than a strict definition. If they were actually honest they'd have to admit the middle class in this country is being hollowed out at an alarming rate.
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I just want to make sure I'm on the record with my clear warning here:
Leveraged property investors may face catastrophic losses -- and personal ruin -- if they remain too leveraged during a property downturn. With home prices weakening and interest rates spiking higher, this may be your best opportunity to sell now, before conditions turn very bad.
It's probably best to sell now, or at least deleverage, for your own good.
The bank prime rate today is 3.2%. With about 200 basis points of increases expected, the prime rate at the end of this year will be over 5%. Into next year, the bank prime rate could get up to 6%.
If you think I'm out to lunch on this one, then please by all means, take on additional mortgages and buy another property. It worked for you before, maybe it will work for you again? Good luck!
Leveraged property investors may face catastrophic losses -- and personal ruin -- if they remain too leveraged during a property downturn. With home prices weakening and interest rates spiking higher, this may be your best opportunity to sell now, before conditions turn very bad.
It's probably best to sell now, or at least deleverage, for your own good.
The bank prime rate today is 3.2%. With about 200 basis points of increases expected, the prime rate at the end of this year will be over 5%. Into next year, the bank prime rate could get up to 6%.
If you think I'm out to lunch on this one, then please by all means, take on additional mortgages and buy another property. It worked for you before, maybe it will work for you again? Good luck!
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Remember that many recent borrowers (last few years at least) were qualified at rates around 5.5%. To me, the bigger risk is job loss and recession, rather than higher rates.
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I don't quite understand. Don't most people have variable mortgages, and immediately pay higher rates as the prime rates go up?
Or are you referring to the projections made by lenders that people have sufficient income to pay at 5.5%?
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during The last bit of lending I did in and around 2018/19, variable borrowers were approved and adjudicated at 5.34%. Even though they were paying much less, the application and the applicable lending ratios were calculated on A 5.34% rate. I believe (but could be wrong), anyone taking a 3 year or longer fixed rate was adjudicated on the their negotiated rate. Could be wrong on this last aspect…cant remember for sure.
as for how payments are treated on a variable rate mortgage where rates are rising. At TD, a “trigger” rate was detailed in the mortgage agreement. only when that trigger rate is reached, do payments start to go up. Before that trigger rate is reached and during rising rates, the payment remains the same, but more of it goes to interest instead of principal. From what I recall, the trigger rate was quite a bit higher than the customers rate at the the time of signing. Perhaps 2-3% higher.
either way, I do believe variable rates would need to go up at least 2.5%, and probably more, before we start hearing about missed payments. I suspect many people are/will be switching their variable rare mortgages to fixed rate.
im sure mortgage u/w can provide some more current info….specifically do the trigger rate clause and if all lenders function the same way.
as for how payments are treated on a variable rate mortgage where rates are rising. At TD, a “trigger” rate was detailed in the mortgage agreement. only when that trigger rate is reached, do payments start to go up. Before that trigger rate is reached and during rising rates, the payment remains the same, but more of it goes to interest instead of principal. From what I recall, the trigger rate was quite a bit higher than the customers rate at the the time of signing. Perhaps 2-3% higher.
either way, I do believe variable rates would need to go up at least 2.5%, and probably more, before we start hearing about missed payments. I suspect many people are/will be switching their variable rare mortgages to fixed rate.
im sure mortgage u/w can provide some more current info….specifically do the trigger rate clause and if all lenders function the same way.
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From TD below…so it appears the payment remains the same until the payment no longer covers the interest portion. So you could theoretically be paying interest only if rates rise sharply.
**
With a variable interest rate, the interest rate can fluctuate. At TD, your principal and interest payments will stay the same for the term, but if the TD Mortgage Prime Rate goes down, more of your payment will go towards the principal. If the TD Mortgage Prime Rate goes up, more will go towards interest.
When interest rates increase, the principal and interest amount may no longer cover the interest charged on the mortgage. The interest rate this occurs at is called the Trigger Rate.
Variable interest rate mortgages can exceed their trigger rate until they reach what is known as a balance called the Trigger Point. When this happens, you will be required to adjust your payments, make a prepayment, or pay off the balance of the mortgage.
**
With a variable interest rate, the interest rate can fluctuate. At TD, your principal and interest payments will stay the same for the term, but if the TD Mortgage Prime Rate goes down, more of your payment will go towards the principal. If the TD Mortgage Prime Rate goes up, more will go towards interest.
When interest rates increase, the principal and interest amount may no longer cover the interest charged on the mortgage. The interest rate this occurs at is called the Trigger Rate.
Variable interest rate mortgages can exceed their trigger rate until they reach what is known as a balance called the Trigger Point. When this happens, you will be required to adjust your payments, make a prepayment, or pay off the balance of the mortgage.
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Recent example as quoted in the globe and mail last last week.
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www.theglobeandmail.com
At Canada’s largest mortgage lender, Royal Bank of Canada, the “approximate trigger rate” would be in a range between 5.51 per cent and 5.65 per cent for someone in the first year of a variable, says Arjun Lombardi-Singh, RBC’s senior manager of communications.
That assumes a $500,000 mortgage at prime minus 0.50 per cent (2.70 per cent) with monthly payments and a 25-year amortization. It also assumes prime rate doesn’t drop along the way.
Using this example above, it would likely take another 275-plus basis points of Bank of Canada rate hikes before we saw a trigger rate over 5.51 per cent. As of Wednesday, the market was only pricing in about 225 bps of additional rate increases in the next five years. (There are 100 basis points, or bps, in a percent)
Have fixed payments on a variable-rate mortgage? Here’s when you’ll really start to feel the pain of rising rates
Despite a surging prime rate, variable-rate mortgage payments are generally fixed
www.theglobeandmail.com
At Canada’s largest mortgage lender, Royal Bank of Canada, the “approximate trigger rate” would be in a range between 5.51 per cent and 5.65 per cent for someone in the first year of a variable, says Arjun Lombardi-Singh, RBC’s senior manager of communications.
That assumes a $500,000 mortgage at prime minus 0.50 per cent (2.70 per cent) with monthly payments and a 25-year amortization. It also assumes prime rate doesn’t drop along the way.
Using this example above, it would likely take another 275-plus basis points of Bank of Canada rate hikes before we saw a trigger rate over 5.51 per cent. As of Wednesday, the market was only pricing in about 225 bps of additional rate increases in the next five years. (There are 100 basis points, or bps, in a percent)
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Those that purchased prior to 2022 took on the risk of interest rate increases and a RE bubble burst but for those that did have likely seen further price appreciation. It will vary by market. Buying Real Estate today comes at a higher interest rate cost but it is my understanding that price appreciation is starting to stall. When a price drop comes some markets may see greater declines than others.
Are you so certain that everyone should be selling? If that is true than who would be buying? More to the point are there any circumstances in your view where it is acceptable to be a buyer at this moment in time? How about a 10 year mortgage with 50% down? Does one have to wait until bank prime gets back to below 2%? What if I plan to hold for the next 25-30 years? I am really trying to understand under what conditions buying real estate would again be a good decision.
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I'm just suggesting the generic advice that applies to any leveraged investor: one should beware of how much leverage they're using. If someone has mortgages they can easily afford even at higher rates, then there's no problem. If someone has minimal debts, no problem there either.
But from what I've seen/read, some property investors are very aggressive with leverage and those people should probably be careful. Stock investors for example can't use anywhere close to the amount of leverage that real estate investors are using.
"Deleveraging" doesn't necessarily mean selling the properties. It can also mean paying down the debts to make sure one isn't leveraged so much.
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Thanks for the clarification. Deleveraging is likely the best course of action for many if you believe we are going to see more hikes beyond this summer. I agree generally speaking real estate is not expected to provide the same return it has recently. However, people will try to explain how they are the exception to the general rule. Just to play devil's advocate. If I were to put out a post about deploying 6 digits into the market at all time highs most of the advice would be to do it right away or in chunks over the next few quarters.
Does this caution apply only to additional properties and not to those that do not currently own? If I had the cash(which I don't but this is just a fun mental exercise) to purchase in full without any financing should I be concerned buying right now? The only fundamental difference I see is the leverage portion(which you have pointed out). How much leverage would be acceptable? If I own my home outright, is it acceptable to take 20% of home equity out for another property or any investment for that matter? Was it ok when lending rates were less than 2%?
Does this caution apply only to additional properties and not to those that do not currently own? If I had the cash(which I don't but this is just a fun mental exercise) to purchase in full without any financing should I be concerned buying right now? The only fundamental difference I see is the leverage portion(which you have pointed out). How much leverage would be acceptable? If I own my home outright, is it acceptable to take 20% of home equity out for another property or any investment for that matter? Was it ok when lending rates were less than 2%?
Certainly not all, at least not a few years ago. I had an MCAP variable and the payments changed with every rate change, both ways.
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These are good questions and I don't know the answers. If someone needs a primary residence (needs a place to live) I don't see any problem with buying a house, either in full or with a moderately sized mortgage.
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In all honesty neither do I. I do not consider RE an investment for me personally, but in reality it is. I have a primary residence and am considering a recreational property. These decisions have a financial component but investment dain/loss is secondary. I have no desire to be a landlord even though I can do most of the maintenance on my property. Thanks for participating in my mental exercise thus far.
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Seems harmless enough as long as you can handle the mortgage debt. The kind of thing that makes my skin crawl as these property investors who start with one property, take out a HELOC on it and then use that as a downpayment on the next property. Repeat it multiple times and end up with $3 million in real estate with maybe only $100K net equity. Lying or bending the truth on loan applications to make it all happen.
That seems like a common game among these young hot-shot property investors in the GTA. I've even seen similar things in Winnipeg, for example in a condo building where I watched a man in his 20s with a moderately paying job own 2 or 3 condo units. First thing you ask yourself is where he's finding the money. Next moment, you realize it's all borrowed. It's a national credit mania.
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Keep in mind, i would suspect the vast majority of investment properties are leveraged only to 65%. A secondary tranche would be leveraged up to 75%. Anything beyond that, and you’re most likely into private borrowing, and yes anybody on that path, is at increased/moderate risk.
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I think people have quite a bit of an equity cushion. I think most investors are not on the very edge. I could be wrong, and I'm sure some of them are, but I believe the vast majority of the investors have deeper pockets and higher incomes than you think.
My second property is leveraged at 40%.
Even if house prices were to drop 50% from current values, I would still be able to sell and not take any loss.
Time will tell, though.
My second property is leveraged at 40%.
Even if house prices were to drop 50% from current values, I would still be able to sell and not take any loss.
Time will tell, though.
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I don't have any plans to establish a leveraged RE portfolio of individual properties. Even the addition of a second property in the current environment gives me pause. I likely would have had the some hesitation if rates had stayed low and prices kept rising. Also the purchase will cause a significant shift in my overall diversification of assets. I will also need to pull back the amount going to equities and RRSP, TFSA until the property is paid in full. In an effort not to derail the thread I will post additional thoughts updates in a different thread. Sale of Principal Residence | Canadian Money Forum
@KaeJS I am not sure how big a correction we could see but I also think most people would find ways to prevent foreclosure.
I am not sure how much leverage is being used in RE but I thought there were rules in place to limit bad practices. Anybody taking advantage of loopholes that go beyond the intent of the lending rules does so at their own peril. Obviously, those that build a house of cards and are way overextended take the chance of losing it all. Simple Risk-Reward.
@KaeJS I am not sure how big a correction we could see but I also think most people would find ways to prevent foreclosure.
I am not sure how much leverage is being used in RE but I thought there were rules in place to limit bad practices. Anybody taking advantage of loopholes that go beyond the intent of the lending rules does so at their own peril. Obviously, those that build a house of cards and are way overextended take the chance of losing it all. Simple Risk-Reward.
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