Mortgage Considerations When Property Values Drop - Don't Be Caught By Surprise
Broadly speaking, properties in Alberta have seen a decrease in value in the last couple of years. This has been more prominent with certain property types (condos for example) and locations, but lower property values are a new reality for many Albertans. In this environment there are new considerations for managing your mortgage:
Plan To Stay Put Longer - Purchase Accordingly
Without an increase in values to help cover the costs of selling, it will take more time to be able to sell, clear your mortgage balance and any costs of selling (realtor fees, mortgage breakage penalty), and come away with down payment for your next purchase. This is particularly true for those who buy with minimum down payment and have the mortgage default insurance premium added into the mortgage. The best way to prepare for this is to purchase a property that you can stay in longer, if possible.
Higher Down Payment Or Make Mortgage Pre-Payments - Protect Your Equity Position
We all know that having a higher down payment and paying off your mortgage saves you in interest costs, but it does something else...it protects your equity position. Your equity position is the current value of your property minus the mortgage balances owing on it. Having a higher down payment when you purchase or paying down your mortgage more aggressively both allow you to sell sooner and not be upside down, where you owe more on your property than it is worth. If you are concerned that you are in this position now, you can maintain your flexibility to sell in the future by paying extra on your mortgage to reduce the balance.
Dont Count On A Refinance - Pay Debts Down
When property values are increasing it can allow you to refinance or restructure your mortgage and draw on that home equity. This is often done to clear higher interest debts. In order to refinance, 20% of the current value must remain in the property. When property values are flat or drop, it takes more time before your mortgage balance will be low enough to allow a refinance. This means debts will need to be paid down without using the equity in your home. While I still do many successful refinances, I am seeing more clients who want to consolidate debt but their property values do not allow it. Plug away and pay that debt down!
Purchase and Refinance Plus Improvements - Do Those Renovations At The Start
This one is for my house hunters! Much like refinancing to pay out debts, homeowners often refinance to add a home equity line of credit or draw equity out to pay for home renovations or repairs. Now that it takes more time to be in the equity position to allow a refinance, the purchase plus improvements mortgages at time of purchase have become an even more important tool. This allows a buyer to build in a renovation, paying for a new roof, new flooring, or a finished basement at time of purchase. There is a refinance plus improvements product as well for those who JUST have 20% equity and want to build in a renovation.
Renewals - Call Me!
Lenders know it is tougher to qualify to switch your mortgage when property values move down, and they are quoting rates higher as a result. DO NOT ASSUME you do not qualify. I have successfully moved many clients to new lenders saving them thousands! If your current lender offers you competitive rates, great. But you will not know if they are competitive without speaking to a broker, and if they are not, you do not want to miss out on significant savings!
Until we see a significant up-tick in the housing market that would push up values, it is important to understand how your mortgage options are impacted. If you have any questions please do not hesitate to reach out.
Benefits Of A Buyer's Market - Don't Miss An Opportunity
You may have seen For Sale signs lingering on your neighbors lawn, lower values on your property tax assessments, or maybe you have even experienced difficulty selling your own house. Our Edmonton real estate market has been seeing the impact of a slow economic recovery from the Alberta recession from 2015 and the impact of tougher mortgage lending requirements. Lending on insured mortgages changed drastically in the fall of 2016, and the lending market tightened again in January 2018 with stricter requirements on how residential mortgages need to be underwritten, along with a stress test for conventional mortgages.
All of this has added up to a challenging real estate market in Edmonton and area, and really for most of Canada. But in this environment, there is an upside for buyers looking to enter the market.
Benefits Of A Buyers Market
Whenever a market is seeing this type of downward pressure, consumer confidence takes a hit and people pull back from what they perceive as risk. In reality, times like this can be a fantastic time to enter the market:
More Bang For Your Buck - With property values slipping down, you get more value for your dollar. This is particularly true at higher property prices. You may get less for the property you sell but you are getting that discount and MORE at higher values in a move-up.
Low Interest Rates - A benefit of a weaker Canadian economy has been a reprieve from the increasing rates we saw over the last 18 months. Interest rates have continued to slip down from where they were this fall and winter, making mortgage payments more affordable again.
Less Pressure - When the market is hot, you feel much more pressure as properties sell faster and you need to make decisions to write offers quicker. There is also a push to shorten the time you have for financing and home inspection. In a slower market these pressures lessen, giving buyers more time to make a good decision and prevent buyers remorse later.
More Choice - Although listings are currently down from their peaks last year, they are still high. And, we will likely see them move higher as we move into spring. This increase in listings provides buyers with a greater selection and higher likelihood of finding a property that meets your needs.
NOTE: I have had 3 clients experience multiple offers in the last 2 weeks. Even in a buyers market, a property that is well prepared for sale, in a popular location, and listed at a fair price WILL get attention.
Is This Bottom?
The answer is: we dont know. In any market down turn, we do not know what bottom is until we are on the other side of a decrease and prices have already climbed back up again. And guess what, at that point you have often missed the best opportunities.
When Is The Right Time?
The right time is a lot more about what is happening with you than what is happening in the market. If you are financially prepared to buy a property, are buying within your affordability, and are purchasing something for the long term, consider the benefits of buying in a market with these types of opportunities.
I am always happy to complete a mortgage review, discuss your mortgage options, and help you plan for your purchase goals.
Payment Frequency And Interest Costs - What You Can Save
There is a commonly held belief that that increasing the frequency of your mortgage payments pays your mortgage off significantly faster. For example, paying bi-weekly versus monthly will allow for much faster mortgage paydown. This all stems from confusion around the fact that there are two types of payments - regular and accelerated. Here are the definitions of the various payment frequencies and an example of the impact of payment frequency on interest costs.
Payment Frequency Options
Monthly - one payment per month; 12 payments per year
Semi-Monthly - Monthly payment x 12 / 24 (or half the monthly payment); two payments per month; 24 payments per year
Bi-Weekly - Monthly Payment x 12 / 26; payments every two weeks; 26 payments per year
Accelerated Bi-Weekly - Monthly Payment x 13 / 26; payments every two weeks; 26 payments per year
Weekly - Monthly Payment x 12 / 52; payments every week; 52 payments per year
Accelerated Weekly - Monthly Payment x 13 / 52 payments every week; 52 payments per year
Interest Savings By Payment Frequency
Lets break out the total interest savings over 25 years for each payment frequency versus the base required monthly payment. This is for a mortgage of $300,000 amortized over 25 years at 4%. This is a bit simplistic because it does not take into account the varying terms and rates within the life of a mortgage, but it will still illustrate how much payment frequency drives interest savings.
Monthly payment = $1578 ($173,420 interest paid over the life of the mortgage...GULP)
Semi-Monthly payment = $789; interest savings $390
Bi-Weekly payment = $728; interest savings$420
Accelerated Bi-Weekly payment = $789; interest savings $24,550 and mortgage paid off 3 years 1 month early
Weekly payment = $364; interest savings$605
Accelerated Weekly payment = $395; interest savings $24,820 and mortgage paid off 3 years 1 month early
While there is a slight benefit to paying more frequently this is a very minor amount. The amount you pay extra, above your base mortgage amount, is what has the big impact. This can be done by setting your mortgage payments to be accelerated, or by using other pre-payment options such as lump sum payments or by calling to increase your payment.
You shorten your mortgage and save significant interest costs by increasing your mortgage payments, not by paying more frequently.
If you have goals for paying off your mortgage faster, lets come up with a plan! Small amounts over time add up to a big impact later.