YVR REMO Show EP. 06 - Coronavirus And Your Mortgage
Updated: May 5, 2020
The YVR Real Estate & Mortgage Show
Episode 6: Coronavirus And Your Mortgage
We're here to talk about the effects the virus has had on the stock and real estate markets, the lending space, what you should or not do, and who should take advantage.
The purpose of this episode is to round up everything we know about the impact and try and bring a sense of understanding.
FIXED INTEREST RATES
In the last three to six weeks there's been a drop in the range of 0.6% off of fixed interest rates. About a month ago we were sitting just above 3%, 3.09%, 3.19%. Today we're down to about 2.59%.
The main reason for this change is that people have pulled money out of public markets to buy bonds. Our fixed rates in Canada are tied directly to the bond price. When the bond market gets flooded, the price comes down, and our fixed interest rates drop along with that.
FIXED vs. VARIABLE
We get a lot of people asking right now if it's a good time to take a fixed vs. variable rate. It depends on your financial situation. There's no one right decision. We tend to lean toward variable rates, but after looking at your situation, a fixed rate could be a solution. Fixed rates are at a two and a half year low. A benefit of taking a variable rate is that the fixed rates may go lower.
Your bank will not proactively call you to notify a drop in the rate. Contact us and we can help you make the best decision!
If you take a $500,000 mortgage:
- About 1 month ago at 3.59% fixed, your monthly payments would have been about $2,160
- Dropping the rate to 2.59%. Payment is about $1,995
The difference is about $165 per month. This doesn't factor interest savings and principal paydown. Because the interest rate has gone down you pay less interest and more payment. You will pay down about $5,000 principal in the first 5 years. This creates equity.
A strategy we recommend to our clients often is to take that difference in savings and increase your payment by that amount. You will automatically triple up on the amount of principal you are paying down. Doing this would also drop your interest in terms of total interest paid.
We also have a lot of questions by people with variable rates wondering if they should lock-in. It depends on the type of product you have. Some clients have a frozen variable rate. If you are comfortable with your payment already, you will end up paying more of the principal down faster. With a floating variable rate, your payment will go down to the current rate. If you are comfortable with your current payment we suggest you ride it out because we may see a couple more decreases.
WHERE IS THE OPPORTUNITY
With the lower cost of borrowing, we can look to the equity in your home. A lot of our clients are accessing their equity in the form of a line of credit or refinance to invest further into real estate. The line of credit rate has dropped 0.5%. We love to help our clients find long term wealth.
Where we live, rental property values are high. It is tough, unless you put a 35% downpayment, to find a property that's going to cash flow. This drop in the variable-rate can make that difference. It is a great time to utilize your equity.
Consumer debt is not uncommon. One of every 10 borrowers that we deal with are debt-free. If your income doesn't support being able to pay your expenses month after month, you're stuck with that debt. Sometimes there is a cost involved with doing a refinance but in the big picture what is it doing for you personally?
Real Life Scenario:
We had a client who owns a property and wanted to buy another. He had his downpayment and didn't want to touch his existing mortgage. He didn't qualify because he had a big truck payment of $750 a month. As much as he didn't want to roll that in and prolong his payments, it allowed him to qualify for the purchase.
We refinanced the existing property, consolidated the truck loan, allowing him to make the purchase he wanted. The only other alternative was to sell the truck. The way interest rates compound on a car loan compared to a mortgage is significantly higher.
Based on what's been going on in the economy, we could see job loss. People will be spending less money and there will be a reduced trade demand. The government will likely have to stimulate it. We are also likely to see another one or two rate drops happen this year. That is a win on the side of the variable rate client.
There's a discount on variable rates. They take your prime minus about 1%. Right now we're seeing variables in the range of around 2.5%. What we think will happen is those discounts will begin to shrink because the variable rate is so low. It could come down to prime minus around 0.7%.
If the current global situation makes you hesitant about buying, keep in mind that real estate is a long term investment. You will create equity. If you're planning on owning a home that has a renter and is owner-occupied, there's never a bad time.
It's important for anyone out there shopping for a home or getting a refinance to know that people are working from home and lenders have reduced staff. We're still working for you full time!
Reach out to us, we do have alternative options to help our clients!
Call or email us if you have any more questions!
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