I was at my desk yesterday and one of our TMG broker's was preparing for an on camera interview with a CBC National. This was all in response to an article released by the Globe and Mail on Monday, "Vancouver among world's 'least affordable' housing markets." One of the questions we raised was, "Why exactly is Vancouver such an expensive place to live?"
There are many variables to this question such as income vs. purchase price and the fact that our market is driven and impacted by the recent influx of overseas buyers. It's a fact that there are more millionaires in China than the population of Canada.
A single family dwelling is the hot ticket item to get in today's market, that is if you can afford it - this is key. According to the Globe and Mail, the average two-story residential home in Vancouver is going to set you back a somewhat stifling number of $1,083,750.00. Nonetheless, condominiums and townhouses are still performing extremely well and are a great fit for many venturing into the real estate world; or those who are looking to downsize. For instance, a condo owner may have built up enough equity to provide a large down payment and make the transition to a house where a seasoned home owner may have built up enough equity to downsize and purchase a condo or townhouse outright.
Equity is the difference between fair market value and the unpaid mortgage balance on your home. In other words, if you were to sell your current home for $500,000.00 and the remaining balance of your mortgage is $350,000.00, you would essentially have approximately $150,000.00 in equity. Keep into perspective that it will cost you to move; lawyers fees, real estate commissions, lender/administration fees, property transfer tax, appraisal and so on.
So the question is, how do young professionals afford to purchase a single family dwelling in today's marketplace? Some have opted to live at home throughout their 20's to save up a hefty down payment, others may have purchased their first condominium in their late 20's or early 30's and have now built up enough equity to make the transition work. Some may rent until their 40's and make the move then but one consistency is the average down payment is approximately 10%. If there ever is a market correction of even 10%; something that I do not foresee, a property worth $400,000.00 will drop to $360,000.00 in value. So in hindsight if you only applied a down payment of 5% and needed to get out of your mortgage, you would be in a deficit, essentially owing the bank more than your home is worth. Consider a larger down payment as a bit of a buffer and take note that real estate is a long term investment as there will always be market fluctuations.
The mortgage rules have changed many times over the last few years; minimum 5% for a down payment, maximum 30 years amortizations and mortgage interest rates have also dipped well below average. The margin between a fixed and variable interest rates are currently very slim; about 35 basis points for a 5 year term. You could get a 2.80% variable interest rate for 5 years compared to a 3.15% 5 year fixed rate. This is a difference of maybe $70.00 per month on a $400,000.00 mortgage. If you opted for the fixed rate, add in an extra mortgage payment throughout the year or switch your payments to accelerated bi-weekly and you'll easily make up the difference.
Traditionally, variable rate mortgages have performed better than fixed rate mortgages if you were to take a 20 year average; however, in today's market I would argue that a fixed rate mortgage product would be the product of choice by many. I forecast the interest rates staying low this year with minor fluctuations throughout the fixed rates as they are tied to the short term bond yields. The short term bonds have been rising over the last few days and fixed rates normally follow suit so I wouldn't be surprised if the fixed rates rise slightly over the next 2 weeks. If you're coming up for your mortgage renewal or are looking to purchase property, I would suggest securing a rate hold sooner than later.
There are many homeowners that currently have variable rate mortgages on the market, most will be up for renewal in the next couple of years. Banks have lowered their fixed rates to record levels and in doing so are now competing with the variable interest rates. By enticing more clients into fixed rates provides the bank with assurance and consistencies. The Bank of Canada sets a Benchmark Interest Rate which you need to qualify at for taking a variable rate mortgage. Today, this interest rate is at 5.29%. With this in place, many self employed individuals and even salaried employees simply do not qualify for variable rate mortgages. This Benchmark Interest Rate was put in place as a buffer in case market interest rates rise, the Bank of Canada wants to ensure that you will be able to pay for your mortgage if such a correction were to ever occur.
With the 30 year amortizations available on most mortgage products, there has been speculation as of late that this number may be reduced to 25 years, but it's my opinion that the industry will most likely retain this option as it does provide some flexibility. This single option assists with lowering your monthly payment. You would pay more interest because of this option but there are payment plans and additional ways to offset the added interest charges in which I could go over during a free consultation.
One big factor that stands out for purchasing a house in the Greater Vancouver area as of late, is the monthly mortgage helper...the basement suite. Moving into a house not only eliminates the dreaded monthly strata fees you would find in condomiums and townhouses, it will allow you to borrow more money to service the mortgage. With a tenanted suite in a home, this could potentially allow you to borrow approximately $200,000.00 more than houses or other properties that do not contain suites. This number is based on a home priced in the $800,000.00 range and is dependant on certain variables such as rental income.
If I can make a couple of recommendations, I would suggest saving up a large down payment prior to purchasing a home. This will give you some additional flexibility in finding an ideal mortgage product in addition to paying less fees, especially the Canadian Mortgage and Housing Corporation (CMHC) insurance premium. Another thing to consider is there has been an influx of purchasers locally and from overseas who put a minimum of 35-50% as a down payment to secure the property. Income criteria is less stringent with hefty down payments so this has become more appealing for the self employed community.
For further review, please feel free to read the article in the "News" section of my website exitmortgages.com.
As always, I encourage you to contact me if you have any questions with your current mortgage or are looking for one. Please find me on facebook at Jason Nesseth | Mortgage Specialist | British Columbia and on twitter @jasonmortgages.
"Working with you for the life of your mortgage!"
Jason Nesseth with TMG The Mortgage Group Canada Inc. If you have any questions or comments about this blog, please feel free to call Jason at 604.375.7375, email jason.n@mortgagegroup.com or visit his website at jasonnesseth.com