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.
Forecast Update: Economies Shutting Down
Rapidly evolving developments necessitate an update to the forecasts we published just last Friday. Additional quarantine or shut-down measures have been put in place in a number of countries in the last few days. As a result, we now anticipate global GDP growth to be 0% in 2020, followed by a sizeable rebound in activity in 2021 given our view that economic activity will rebound quickly once the virus is no longer a serious threat to public health. At present, we believe activity will begin to return to normal in the third quarter, except in countries where containment measures were aggressively deployed in the first quarter (essentially the Asian economies), where activity resumes in the second quarter. In Canada, the closure of non-essential business in Quebec and Ontario announced earlier this week will have large economic consequences. At present, we believe Canadian economic activity will fall by 28% in Q2 as these measures are felt. If other provinces follow, the fall in Q2 economic activity would be in the 35% range. We now assume that economic activity resumes by the start of the third quarter and that growth rebounds sharply at that time. However, the 20% drop in US economic activity in the second quarter will restrain the rebound in Canadian activity in the third quarter owing to the usual lags between US and Canadian economic outcomes. Under these assumptions, Canadian GDP would fall by slightly more than 4% in 2020 and rebound by 5.1% in 2021. Though we have not included any additional measures in this update beyond those already announced, we believe a substantial ramping up of fiscal support measures in Canada is forthcoming. There is a chance that aggressive virus management measures are required beyond Q2 to ensure the virus is truly well-contained. Evidence in Asia this week suggests that even in countries where aggressive management measures have been put in place, COVID-19 can come back quite quickly. If measures in Canada are not lifted by the end of Q2, growth would fall again in Q3, and GDP would fall by 6.3% in 2020 instead of the 4.1% we currently expect. A key question for forecasters is the length of the virus-related restrictions on firms and households. As noted above, a shift of one quarter in the resumption of normal operating conditions can have a large impact on growth outcomes. Since we do not have a good handle on the ultimate length of the interruptions, we consider it more informative to assign probabilities to the time at which virus containment measures end. At this time, we believe there is a 75% chance that activity resumes by Q3 and a 25% chance that activity returns to more normal levels by Q4. How officials manage virus containment internationally, as well as the evolution of the virus, will inform our assessment of probabilities going forward.
Source: Scotiabank Economics
Home resale market was gaining momentum prior to Covid-19
At the national level, resale home prices were gaining momentum in February. The 0.4% monthly gain in the Composite index was double the average of the previous ten years for a month of February. In particular, after 12 consecutive monthly declines, Vancouver HPI rose in each of the last five months, reflecting the fact that Vancouver resale market recently returned to balance. Sure, we still saw weakness in other regions, such as the Prairie Provinces (Alberta, Manitoba and Saskatchewan) where markets were still favorable to buyers. But CREA just reported a rather generalized increase in home sales in February, including for Calgary and Edmonton. Unfortunately, then came the outbreak of Covid-19 and its impact on oil prices and disruptions in the supply chain. The unprecedented sanitary measures imposed by the authorities to tackle the pandemic will severely impact business activity and jobs over the coming months. In that situation, the home resale market should be heavily curtailed for the coming months.
Source: Teranet Inc., and National Bank of Canada