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.
<!-- Facebook Badge START -->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!
T 604.273.2002 | F 604.522.2072
W http://www.notapennydown.com
An independent Mortgage Specialist associated with the Verico Mortgage Network.
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
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:
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!
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!
T 604.273.2002 | F 604.522.2072
W http://www.notapennydown.com
An independent Mortgage Specialist associated with the Verico Mortgage Network.
Can you still buy with ZERO Down in Canada?
*Buy A Home without needing a down payment *Own your own business and can't prove income? No problem, approvals up to $700,000 *Refinance your current mortgage and pay off your debt.
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