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Tackling That Morgage

May 15th, 2015 Posted by Mortgage No Comment yet

Over the years, I have met some really great mortgage professionals. The best of them know their business inside out, and see their job as really helping home buyers/owners – not just to get a mortgage, but to manage that mortgage intelligently, and pay it off as quickly as possible.

Morgan Vaughan is one of the best. He works out of the RE/MAX Hallmark Pape Ave office, and routinely offers great advice to us Realtors, helping us help our clients with everything from first-time mortgages to complicated re-financing. It’s amazing how much money can be saved by asking the right questions and making the right moves. The other day he shared some great tips about how simple, cost-effective strategies can create big savings over the life of a mortgage. I asked Morgan if he would grace the pages of my blog with a guest post, and he has generously agreed. 😉

Okay, I Have My Mortgage. Now What?

Morgan Vaughan, Mortgage Broker, Capital Home Lending 

With house prices at historical highs, mortgage balances are growing with them. But that doesn’t mean that you have to be saddled with a crushing mortgage for the next 25-30 years. With a bit of planning, and by putting even just a few extra dollars per month on your mortgage, you can pay it down sooner, and save thousands over the life of that mortgage – and the sooner you do that, the sooner you can put that monthly-payment money to other things.

When setting up a mortgage, people generally want/expect/get:

  • A good rate (which should be a given these days)
  • An affordable payment
  • A brief (very brief, in many cases) explanation of terms, privileges, penalties, etc.
  • A 25 or 30 year plan and a handshake….

The most overlooked and, in my opinion, the most important, part is a customized strategy to be mortgage-free faster. Simple strategies with small changes to payments can have a massive impact over the lifetime of your mortgage. We all tend to take what we are offered from the bank when it comes to amortization and payments. Thirty years is the new 25 because the payment is lower – but the real cost is much higher.

Let’s look at this example (*calculations using 5 year, 2.59%):

25 Year Amortization 30 Year Amortization Difference
Mortgage Amount $500,000 $500,000
Monthly Payment $2,262.30 $1,995.45 -$266.85
Interest Paid Over 5 Years $59,692.37 $60,749.75 +$1,057.38
Balance After 5 Years $423,954.37 $441,022.75 -$17,068.38

This is a common scenario. Most people can generally afford the higher payment, but choose the lower because they don’t understand the true cost. You will “save” $266 per month, but owe $17,068 more at the end of 5 years. Principal is your money, much the same as a monthly investment contribution. The faster you pay off your mortgage, the sooner you can keep those mortgage payments in your own pocket.

The real key to being mortgage free faster is creating a payment plan that is both realistic and affordable. Here are a few basic strategies:

Strategy Number 1 – Accelerate Your Payments

Monthly Payments Bi-Weekly Accelerated Payment Savings/Gain
Initial Amortization 25 Years 25 Years  
Mortgage Amount $500,000 $500,000
Payment $2,262.30 $1,131.15  
Balance End of 5 Years $423,954.37 $411,632.87 +$12,321.50
Revised Amortization 25 Years 22 Years  3 Months 2 Years 9 months

This is a powerful and simple start to your plan. By accelerating your payments to bi-weekly you reduce the life of your mortgage by 2 years and 9 months!

Strategy Number 2 – Accelerate Your Payments and Make an Annual Lump Sum

Bi-Weekly Accelerated Payment Bi-Weekly Acc. & Annual Lump Sum $2,500 Bi-Weekly Acc. & Annual Lump Sum $5,000
Initial Amortization 25 Years 25 Years 25 Years
Mortgage Amount $500,000 $500,000 $500,000
Payment $1,131.15 $1,131.15 $1,131.15
Balance End of 5 Years $411,632.87 $398,136.93 $565,522.06
Revised Amortization 22 Years 3 Months 20 Years 6 Months 18 Years 9 Months

Again, very powerful.  If you are able to put aside an extra $416 per month and apply it to your mortgage, you have reduced your mortgage by 4 years!

Strategy Number 3 – Accelerate Your Payments, Make an Annual Lump Sum and Increase Your Regular Payment Once Annually

Bi-Weekly Accelerated Payment Bi-Weekly Acc. & Annual Lump Sum $2,500, Increase Regular Payment by 2% for the first 5 Years Bi-Weekly Acc. & Annual Lump Sum $5,000,Increase Regular Payment by 2% for the first 5 Years
Initial Amortization 25 Years 25 Years 25 Years
Mortgage Amount $500,000 $500,000 $500,000
Payment $1,131.15 Increase Payment approx. $45 once per year Increase Payment approx. $45 once per year
Balance End of 5 Years $411,632.87 $388,641.40 $375,145.49
Revised Amortization 22 Years 3 Months 18 Years 5 Months 16 Years 11 Months

A well thought out and diligently executed strategy can and will reduce most people’s mortgages by up to 10 years.  Mortgages are big numbers and most of us tend to resign ourselves to what seems like a lifetime of mortgage payments. However, if you consider how much money we pay towards our mortgage each year, the above scenario is $30,000 per year in regular payments on a 25 year mortgage. Imagine if you got to keep that money in your pocket 10 years sooner….This one really shows the huge benefits of tackling your mortgage more aggressively: you could shorten your mortgage by ten years!

Every extra dollar you pay to your mortgage is creating equity in your house. It’s not an expense: it’s an investment. The interest is the expense. You pay interest on what you owe – and you owe it to yourself to stop paying interest.

Not every strategy will work for every person, but the key to this is to sit down with a professional, create a plan and then execute that plan. Do it today!*

* This post originally appeared on Morgan’s web site. You can reach him at 416-481-2903 or email [email protected]

 

Toronto Real Estate – What’s going to happen in 2014?

January 13th, 2014 Posted by First-time buyers, Interest Rates, Market Commentary, Mortgage No Comment yet

Twenty-fourteen is shaping up to be another great year for the Toronto real estate market. As I have said many times before, Toronto is unlike other markets. It drives me nuts when people talk about the ‘Canadian real estate market’, as if trends in smaller cities and towns have anything to do with Toronto. Our economy is diverse and our population continues to grow, so there’s no mystery as to why residential real estate prices also keep growing. Of course it makes sense that the real estate market here is out-pacing many markets elsewhere in the country. How could it not?

Add to the picture this year the improving US and global economies. The jobs numbers that came out last week in Canada (net losses) and the US (weaker than expected growth) show that the ‘recovery’ is still, well, in recovery. However, there is a growing sense of inevitability that the US will finally show some upward momentum this year. Even Europe seems to have stumbled towards stability. As the American economy grows, so do Canadian exports, which will give a boost to our own mostly-stable, but slow-growing, economy. Once real growth kicks in we’ll be in for a few good years. (How many is anybody’s guess. This C.D. Howe report indicates that the pre-recession growth cycle was 16 years. We should be so lucky this time around!)

Another major factor this year is interest rates. I think that we are probably still on course for flat rates this year and into next. Even when rates do start to rise, they’ll most likely rise slowly, so as not to jolt the economy. We’ve got another few years of near-record low rates ahead of us. (My first mortgage, in 2001, was for 8.9% – more than double current rates – which was considered a great deal in those days. Perspective is important!)

The supply shortage that has been a feature of the Toronto market since late 2008/early 2009 has yet to ease. As a full-time, professional Realtor I spend a lot of time talking to other agents. As we start 2014 there is a continuing urgency among my colleagues to find homes for our buyer clients. The view ‘on the ground’ is that tight supply will continue to drive prices up, particularly for single family homes and small income properties. I believe that it’s safe to expect a 5-7% year-over-year increase in 2014.

On that latter note, specifically, I continue to encourage my clients, especially first-time buyers, to consider an income property. In the short term, the income will help you afford not only the purchase (assuming you live there, which is an important factor), but a decent lifestyle. If kids are in the plan, or even if you just want more privacy down the road, you can keep the income property and use the equity to move on at some point. Not surprisingly, though, duplexes and triplexes are in high demand/low supply. It’s not a slam dunk, but it’s definitely worth thinking about.

Mortgage rate tip: one of the big bank mortgage pros that we work with told a group of Realtors last week that he expects a mortgage rate ‘sale’ some time in February or March. It has happened in each of the last few years, so he thinks it will happen again. Watch for it, and if you are in the market, try to nail down an interest rate deal before the busy spring market. 

March 2013 Market Review: Once again, the condo market just refuses to collapse

April 10th, 2013 Posted by Market Review, Mortgage No Comment yet

It still amazes (and annoys) me that the MSM insists that the sky is about to fall on the Toronto condo market, despite the market’s stubborn refusal to cooperate. One of the major papers was on about it again recently, clearly oblivious to some key facts.

The facts, as reported by TREB, are that the Toronto condo market continues to show resilience. The average price for a condo in the 416 in March was $367,595, up from $352,614 in February 2013 and $361,800 in March 2012. Clearly, there has been some volatility, but my sense is that the volatility has been a reflection of sentiment – influenced by not only the MSM, but also the federal government and various entities (IMF, etc.) that have chimed in with their own predictions of doom and gloom. Add the apparent fact that nobody can talk about real estate without impugning the character of Realtors, and you end up with a suspicious market place.

I have written about condos recently, so I won’t go into that again.  I’m sticking to my guns that the condo market is an outlet for renters, investors, first-time buyers and down-sizers. Added up, those folks can probably handle the current inventory – especially if the market for single-family dwellings (i.e. houses) remains as tight as it has been for the last couple of years.

As for houses, the average price for a fully detached house in Toronto was up 2.8% to $846,828; semis where up 6.9% to $607,334; and townhouses were up 7.5% to $450,104. With condos edging up 2% to $367,595 we had a city-wide average of $519,879, an increase (across all types) of 3.8%.  Compared to the 1% made by the TSX over the last 12 months, that looks pretty good for the average homeowner!

By the way, tighter mortgage rules are having an impact on more than just first-time buyers, notably self-employed buyers. Even if you currently have a mortgage, do your due diligence before stepping back in to the market. If you are going to your bank branch, ask your rep to be absolutely sure (by making inquiries to HQ if necessary) that you still qualify under the new rules. You don’t want any nasty surprises on closing day.

Lastly, the ‘spring market’ is definitely picking up. If you want to make a move this season, be ready to act. Call me to get started!