It PAYS to shop around.
Many Canadian homeowners pay too much for their homes because they are not getting the best mortgage financing available in the market.
THE STORY OF TWO BROTHERS
The Story of Two Brothers
This is a story of two brothers each of whom secures a mortgage to buy a $200,000 home. Each earns $70,000 a year and has $60,000 in savings.
The first brother, Brother A believes in the old way of paying off a mortgage, which is as soon as possible. Brother A bites the bullet and secures a 25 year mortgage at the 5 year fixed rate and shells out all $60,000 of his savings as a 30% down payment leaving him zero dollars to invest. This leaves him with a monthly payment of $698.00
Brother B, in contract, subscribes to the new way of mortgage planning, choosing instead to carry a big, long-term mortgage. He secures a 30 year mortgage at a 5 year variable rate and shells out only $40,000 of his savings as a 20% down payment leaving him $20,000 in an investment account (specifically a TFSA, earning annual interest of 8% tax free). This leaves him with a monthly payment of $639.00. Every month he adds the $60 difference to his investment account to earn additional income at 8%.
Results after 5 years
Brother A has a mortgage balance of $120,769.87
Has $0 in savings and investments
Brother B has a mortgage balance of $141,154.15
Has $33,154.15 in savings
Ahead by $13,110.97
The story becomes even more compelling over 15 years.
Brother A has a mortgage balance of $70,728.18
Has $0 in savings and investments
Brother B has a mortgage balance of $95,309
Has $87,039 in savings and investments
Ahead by $62,458
More importantly Brother B has less than a year left before his savings and investments exceeds his balance owing on his mortgage and therefore if he wished he could stop making mortgage payments and use his savings to payoff the mortgage. Additionally saving him $75,358 in mortgage payments.
CREA Updates Resale Housing Market Forecast
The Canadian Real Estate Association (CREA) has updated its forecast for home sales activity via the Multiple Listing Service (MLS) Systems of Canadian real estate Boards and Associations in 2018 and 2019. Housing market fundamentals remain strong in many parts of the country. Nonetheless, many housing markets continue to struggle in the face of policy headwinds.
The new mortgage stress test announced last October had been expected to cause homebuyers to rush purchases in advance of the new rules coming into effect in January and for the pull-forward of sales activity to result in fewer transactions in the first half of 2018.
Evidence suggests the policy response was stronger than expected, with seasonally adjusted national home sales last December having surged to the highest level ever recorded before dropping sharply in early 2018.
Actual (not seasonally adjusted) national sales figures for March, April and May are typically among the most active months in any given year. Combined sales fell to a nine-year low for the three-month period. The seasonally adjusted trend suggests sales momentum has not yet begun to rally.
Interest rates are widely expected to rise further this year and next. Home sales activity is nonetheless still expected to strengthen modestly in the second half of 2018 as housing market uncertainty diminishes.
Taking these factors into account, the national sales forecast has been revised downward and is now projected to decline by 11% to 459,900 units this year. The decrease almost entirely reflects weaker sales in B.C. and Ontario amid heightened housing market uncertainty, provincial policy measures, high home prices, ongoing supply shortages and this years new mortgage stress test.
Bank of Canada maintains overnight rate target at 1¼ per cent
The Bank of Canada today maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1 per cent.
Global economic activity remains broadly on track with the Banks April Monetary Policy Report (MPR) forecast. Recent data point to some upside to the outlook for the US economy. At the same time, ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies. Global oil prices have been higher than assumed in April, in part reflecting geopolitical developments.
Inflation in Canada has been close to the 2 per cent target and will likely be a bit higher in the near term than forecast in April, largely because of recent increases in gasoline prices. Core measures of inflation remain near 2 per cent, consistent with an economy operating close to potential. As usual, the Bank will look through the transitory impact of fluctuations in gasoline prices.
In Canada, economic data since the April MPR have, on balance, supported the Banks outlook for growth around 2 per cent in the first half of 2018. Activity in the first quarter appears to have been a little stronger than projected. Exports of goods were more robust than forecast, and data on imports of machinery and equipment suggest continued recovery in investment. Housing resale activity has remained soft into the second quarter, as the housing market continues to adjust to new mortgage guidelines and higher borrowing rates. Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018.