Increased Amortization with Leverage

Hidden Money!

Increased Amortization with Leverage

 

Another strategy I employ with clients, involves increasing their mortgage amortization (which decreases payments) then taking out an investment loan and investing, with the plan of using it to pay down the mortgage in future.   It effectively lowers your monthly payment, creates a tax deduction annually, and pays off a mortgage quicker.

This looks really good, & has great potential, however it is important that you are aware of any risks associated with this particular strategy. This is the more risky of the 3 strategies (and although I have attached a sample of what this might look like – using a real client) this is really something we would want to go over before you make any decisions.

SAMPLE – for illustration purposes only

Original Principal: $248,000.00
Mortgage Loan Date: January 1, 2008
Original Proposed
Payment Frequency: Monthly Monthly
Mortgage Type: Fixed Rate Fixed Rate
Interest Rate: 5.000% 5.000%
Term (years): 10.00 10.00
Amortization (yrs/periods): 15.00 / 180 35.00 / 420
Payment Amount: $1,955 $1,244
Total Payments in First Year: $23,455 $14,922
Total Interest Cost For Term: $90,248 $115,032
Total Interest Cost For Amortization Period: $103,818 $274,280
Mortgage Balance at 10 years: $103,702 $213,809
Take out 100,000 Investment loan over 10 years with an 8% rate of growth (see
projections) = $110,226 net.
If used to pay down mortgage, outstanding balance after 10 years = 103,583 left owing on
the mortgage.
Your monthly payments are reduced by $344 per month & because your borrowing to
invest on the $100,000 investment loan. You will get a tax refund of $1764 annually.
Net result
$1764 in new tax savings
$119 less left owing on your mortgage
$344 less in monthly payments
• original cost – proposed + cost of Investment loan (367/month)
These projections are based on certain assumptions that are believed to be reasonable, but there is no assurance that the actual results
will be consistent with this projection. The actual results may vary, perhaps to a material degree, from these projections.

Change in Residential Mortgage Rates TD Canada Trust

Change in Residential Mortgage Rates

Effective December 11, 2008, mortgage rates have decreased as follows:

Term	Rate		Change
6-month convertible	5.90		-0.20
1-year open	8.55		N/C
1-year closed	5.60		N/C
2-year closed	6.25		-0.20
3-year closed	6.25		-0.20
4-year closed	6.09		-0.20
5-year closed	6.75		-0.20
6-year closed	7.00		-0.20
7-year closed	7.20		-0.20
10-year closed	7.55		-0.20
5- year Special	5.59		-0.20
Variable Interest Rate Mortgages	TD Mortgage Prime	Variance	Rate
Closed VIRM: Rate is TD Mortgage Prime + 0.60%	4.00	+0.60	4.60
Open VIRM: Rate is TD Mortgage Prime + 0.85%	4.00	+0.85	4.85
Home Equity Line of Credit	TD Prime	Variance	Rate
Float: Rate is TD Prime + 1.00%	3.50	+1.00	4.50

TD Mortgage Rate Lowers! 4.35%!!

Great news TD Mortgage Rate Lowers!!

 

TD Mortgage rates are lowering! Today it was announced that effective November 19^th 2008 that a limited time offer of 4.35% 1 Year Closed Fixed Rate Mortgage will be offered on applications up to December 31^st 2008. All transactions must be funded by no later than April 30^th, 2009. As with all Mortgage products the offer can be changed or withdrawn at any time – time is of the essence! Is your mortgage working for you, or are you working for your mortgage? Today is the perfect time to start saving money. Today!

TD Canada Trust Decreases effective 5 Year Fixed Rate

Good News!

Yesterday TD Canada Trust lowered the effective rate of its 5 year closed term product, effective November 13, 2008 the lowest 5 year closed rate is 5.79%

TD Lower Mortgage Rates

November 7th 2008 TD Canada Trust is please to advise of a new limited time offer effective Novemer 8th, 2008 Limited Time Offer of 5.34% on the 4-Year Fixed Mortgage * applies to new applications up to November 30th * Must be funded by March 31st 2009 *Offer may be changed to withdrawn at any time Great news for those who are looking for the stability of a fixed rate, or are looking for the maximum qualification. Until today’s announcement the 3 year fixed rate at 5.7% was the lowest qualifying rate. This will allow borrows to qualify for more mortgage while keeping there TDSR and GDSR in line. I am always happy to answer your mortgage questions, please drop me a line at david.hudson@td.com Cheers, David

Canadian Mortgage Changes

“Mortgage changes followed concerns about housing crunch in Canada

by Julian Beltrame, The Canadian Press”

“OTTAWA – Concerns that cracks were beginning to appear in the foundations of Canada’s housing market were behind the government’s surprise decision to crack down on loose mortgage conditions ushered in less than two years earlier, officials and experts say.

Starting Oct. 15, Canadians will no longer be able to purchase a home with a government-backed mortgage with a 40-year amortization and no down payment.  

Instead, mortgages will be limited to 35 years and the government will only insure 95 per cent of the value of the home, meaning buyers will need to come up with at least a five per cent down payment. As well, borrowers must demonstrate that debt servicing costs are no more than 45 per cent of gross income and have a good credit rating.

But while most in the housing sector welcomed the announcement, they also questioned the timing. The Canadian housing sector is cooling after six torrid years of growth.

Bank of Montreal deputy chief economist Douglas Porter said the decision should have been made a year ago, when Canada’s housing market was likely exhibiting signs of a bubble as both prices and starts increased by double-digits over the previous year.

“It’s better a little late than never and better than ridiculously late,” Porter said.

“I think in hindsight, we can attributed a lot of the very strong conditions we saw right across the country in 2007 to the loosening up of rules in the prior year,” he explained. “At the time, I was a little concerned that the Canadian housing market just continued to thunder along last year when the fundamentals were starting to move against it.”

Liberal MP Garth Turner, who recently authored a book warning about a Canadian housing bust, suggested Canadians could expect to see the value of their homes fall about 15 per cent nationally, and 30 per cent in some hot markets such as Vancouver.

While praising Finance Minister Jim Flaherty for acting, Turner said the minister has also set up the conditions under which some Canadians will try to beat the Oct. 15 deadline.

“This pulls the plug right out of the bubble, but it does it in a way that inflates the bubble another few months,” he said.

“If you’ve been shopping around for a home and you don’t have any money for a down payment, you will want to buy now with zero down and a 40-year mortgage. If you’re a lender, you’ve got three months to load up people with debt regardless of what the debt-service ratio is.”

Ottawa said the changes were a precautionary measure designed to head off a U.S.-style subprime mortgage crisis, not an indication of underlying problems in the Canadian system.

But officials said concerns had been mounting for months as the government tracked the explosion in the issuing of mortgages longer than 25 years, for years the standard in Canada.

The government had been consulting with lenders, insurers and brokers for the past few months over generous mortgage products, said Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals (CAAMP).

“I think they were worried about what was coming out of the U.S. in increases in defaults and foreclosures, and I think they were concerned over their 100 per cent guarantee, wondering, ‘What is our risk here in a calamity?’ ” Murphy said.”

Julian Beltrame, The Canadian Press

http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b0710133A&page=2

I think that many folk’s are reading the headlines and forgetting to do a little more research, one of the biggest differences that can be plainly seen from the American counterparts is that the US was using 100 year Amortizations, yes you read that correctly 100 years. In the Vancouver market it is almost impossible for anyone to break into unless they have a substantial source of income, I don’t know of that many young people who have the kind of income to even consider home ownership in the Greater Vancouver Area.

I don’t foresee many being able to buy out there baby boomer parents either, and the parents need to pull the equity out of there homes in order to retire. “Nearly 3 out of 5 middle-class retirees will probably run out of money if they maintain their pre-retirement lifestyles, a new study from Ernst & Young www.ey.com has concluded.

The study, set to be released Monday, finds that Americans will have to drastically reduce their standard of living before retirement to live comfortably, or even avoid destitution, later in life. Middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize their chances of outliving their financial assets, the study found. Workers seven years from retirement will have to cut their spending by even more – 37 percent.” http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/07/13/MN9511OD8S.DTL

More Canadians will continue to be increasingly dependent upon their nest egg that has been built by the equity of homeownership, how will the new generation afford to take over the burden of what have become million dollar mortgages?

Just as an example the amount of income required for a 850,000 home with 5% down over a 35 year term would be 185,535 per year, I don’t know of many people under 40 that are legitimately earning that kind of income—even combined income—a great deal of the Vancouver bubble has been created from offshore money and as of right now the amount of offshore influx is still over 50k people from oversees moving here every year!

What do you think, is the younger generation going to be able to sustain these prices??