Hello again,

People are constantly asking me what product to take, and are quite obviously torn up about it, so I did this video blog to explain what product to take: fixed or variable.

Transcription of the Video Blog:

Hi everybody, it’s Rowan Smith from The Mortgage Centre. I’m going to tackle the biggest question I get every day: should I get fixed, or should I take variable, and what’s going to happen. I don’t have a crystal ball, but I do have several years in the industry – it adds up to about 10 – and while I haven’t seen the 80’s since I was a kid, I do remember what was going on at those times and I’ve still dealt with many clients that have told me stories.

Here’s my opinion, for what it’s worth, and what I think you should be looking at:

First off, which strategy is best?

It depends on your situation.

Anybody that say otherwise is not worth the license on the wall. Your unique financial position dictates whether or not a variable rate is an option for you, and it dictates whether you should be taking a fixed rate.

Picture two people in exactly the same situation with mortgage amounts and income that are the same. The thing is: one guy is a commissioned person. The second guy makes a base salary. Obviously, the person that makes a base salary, that makes that amount of money  can know it’s going to be there. The guy with the commissions doesn’t know that.

Now, if they had to stretch, or even worse, if they needed the variable rate mortgage in order to qualify for that in the first place. If they need to take variable, so they know they can afford it, well, variable rates change. Rates rise. People in that situation should absolutely not be in variable. They should be in a fixed rate so they know what their payment is going to be, because they know that their salary is going to be a set amount.

Now, on the flip side, if somebody is buying well within their means, and they have the affordability of the payment; maybe the payments make up a very small percentage of their annual income, then they can take that risk that the rates are going to rise. They can afford to take a variable rate mortgage.

I myself have taken fixed rate mortgages on 2 out of 3 that I’ve had. The reason being is, my income fluctuates. I want to know at least one thing is stable, and that’s the payments. So I took the fixed rate.

People that have a risk aversion to possibly paying more, or are going to lose sleep over their rate possibly increasing: these are not good candidates for a variable rate mortgage.  Sometimes it’s best to just take fixed if that will give you peace of mind and put your mind at ease, and also provide you with two, three, five, or ten years of price stability

You look at a payment right now that is $2,200. I’m just grabbing this number out of the air. Look five years from now. Look ten years from now! What is $2,200 going to mean for the house that you’re in right now. Is that going to mean a lot of money? Chances are, with inflation, job increases, wage increases, promotions, moving up within your career, that payment will present a much lower percentage of your overall income in 5 years. So if you are struggling to make ends meet, and you’re looking at that mortgage payment that I’m presenting you with and you’re saying, “Rowan, I don’t think I can take a 5 year, I need to take a variable,” then I don’t think you should buy the house. Variable rates are not a way to lower your monthly payments so you can afford it, it’s a way to take a risk and take a lower payment, but face the upward chance that rates could rise, and thus your payment could rise.

It doesn’t take a lot of rate increase just to make that payment quite high. If today’s prime rate is two and a quarter, and you’re in a variable rate at prime, and you’re looking at it going, “yeah, but I took a three year at 3.49%,” well how much is that? It’s a point and a quarter that rates have to move, FROM THE LOWEST HISTORICAL  POINT THAT RATES HAVE EVER BEEN.

So what should you be taking today when all you have above you is rate room to move upwards ,with virtually no downward move, again:

It depends on your unique situation. Call me up, we’ll go over your numbers, we’ll go over your job, your career, what you’re going to do in the next few years. Are you going to have kids? Is someone going on mat leave? Are you going to be leaving the country? Are you going to travel? These are all things which play into this. If it’s going to be a rental property, then perhaps your want to simply minimize carrying costs. If it’s going to be a home, then maybe you should be looking at keeping your costs stable so your housing is a fixed cost in your budget.

I don’t know what your situation is, but I can certainly help guide you and coach you in what is best for you.

Anybody that doesn’t look at your personal situation and just screams, “variable is best and always best. You save the most!” is absolutely providing dangerous financial advice and you should be asking around.

Thanks for watching!

I get questions all the time about what an option to purchase is. This video blog gives an explanation of what the option is, how it works, and when to use it.

Transcription of the Video Blog:

Hi everyone, this is Rowan Smith from The Mortgage Centre. I’ve been taking several calls recently on Options to Purchase and Vendor Takebacks. This is something that keeps coming up, time and again, so I wanted to address what an Option to Purchase is today.

An Option to Purchase is a registered right for someone to buy a property, that is registered on title. So, for example, let’s just say for simplicity’s sake, that I own my own home clear title. I’ve got no mortgage, and my neighbour wants to try and buy my unit, but doesn’t have the money right now. He is, perhaps, in between jobs, or faces some other complicated factor such that he doesn’t want to transfer it right now into his name. He may not have the money for closing costs, or the bank won’t finance him due to bankruptcy issues right now, and he needs a couple years to re-establish his credit.

I can grant him an option to purchase my property. So what that would mean is, I would take, say, $25,000 in exchange for the right to buy the property at $500,000. So that would be the price. He would be guaranteed that price would be $500,000. That’s what his option is. It would be set to have an expiry date on it. Say, 5 years time.

So, any time within the next 5 years he can buy that property for 500 grand. And in exchange for that right, he has given up that $25,000.

Now the way we see these things come up is that someone comes to us, and they want to sell their property, but there is an option to purchase registered. So these options get put on title. I couldn’t sell my property once the option is on there. The only way to do that would be to have him with the option sign off on it and allow me purchase the property, which of course he wouldn’t do unless I gave him back his $25,000 or whatever he wanted.

One of the downsides to Options to Purchase is that the property is held up and tied for that period of time. So if you have got, say, 5 years on your option to purchase. I as the current owner who has that now registered in your favour to purchase the property, can’t sell it expires or until you execute that option to purchase.

So it’s just another way to tie up property. I’ve seen a lot of these recently with developers where they are trying to do a land assembly and maybe assemble several hundred acres in an area for an industrial complex. What they’ll do is offer options to purchase, for considerable sums, to land owners all around the area. The plan, of course, is that once they’ve got the options on all of this land, then they’ll step up, bring the financing, bring the cash, and they’ll buy them all at one point.

I have seen it in personal arrangements too where one person has a debt to another and wants to give them the property, but maybe that person can’t afford to buy the property, or there is some mitigating factor.

So if you need any information on Options to Purchase, asking a lawyer or notary is the best way to go as they are the ones that actually register it. We brokers aren’t really involved in it except when the person finally decides to execute it, and perhaps need a mortgage at that time. But we do see them, and they can create some complications. So if you are thinking of executing on an option to purchase, or you are thinking of offering an option on your property, in the hopes of getting some money, speak to me first to find out the risks and I’ll put you in touch with an appropriate lawyer to get a legal opinion and express it as well.

For The Mortgage Centre, I’m Rowan Smith.

An article came across my desk the other day, and I’m going to provide the full text below, with my take at the very end. The article is credited to The Province and Sam Cooper. Here it is, reproduced for your reading pleasure

__________ Begin Article __________

The buzz is back.

In scenes rarely seen since the Vancouver real-estate market peaked in early 2008, a horde of hungry investors lined up for hours in a downpour Saturday to get first dibs on pre-sale condo units in a tower to be erected in Yaletown.

Cam Good, who is heading up marketing for “The Mark” by Onni, said some investors even slept outside Friday night to ensure prime line-up positions.

“We’re blown away by the turnout,” Good said from inside the downtown pre-sale centre as about 50 investors scrambled around a model of the building.

He said 190 units in the first 26 floors of the tower, to be completed in 2013 and located at the corner of Pacific and Seymour, were offered in the release, and prices ranged from about $320,000 to more than $900,000.

Developers hope to get approval for 41 floors, Good said, with top-floor sales targeted at international investors expected to be in Vancouver for the 2010 Olympics in February.

While the global debt and credit crisis continues to haunt developments in former real-estate hotspots like Dubai in the United Arab Emirates, Good said Vancouver is back in boom times.

“The [real-estate] strength in Vancouver is unlike anything in the world,” Good said.

Mayur Arora, who told The Province he hoped to land a top-floor unit, and his realtor K.D. Dhaliwal, said location and scarcity make the site an attractive investment.

“I’m here because they are selling Yaletown at today’s prices, but the speculation is [that] prices will go up after the Olympics,” Arora said.

Steve Dhana was amazed by speculator interest as he watched investors rushing to place bids on units.

“The prices went up $50,000 last night,” Dhana said. He hoped to buy a unit in the $500,000 price-range, and also expected prices to surge in February 2010.

The City of Vancouver will also be banking on an Olympics-fuelled condo boom at the $1.2-billion Athletes Village on southeast False Creek. Marketer Bob Rennie decided to take project units off the market until after the 2010 Games. The city hopes to recoup taxpayer dollars on the property by selling about 730 market condos.

According to the latest benchmark figures from the Real Estate Board of Greater Vancouver, October 2009 prices for all residential properties in Greater Vancouver increased 6.8 per cent to $553,702 from $518,668 in October 2008.

Residential property sales in Greater Vancouver totalled 3,704 in October 2009, an increase of 4.1 per cent from the 3,559 sales recorded in September 2009, and an increase of 171.6 per cent compared to October 2008.

__________ End Article __________

MY OPINION OF THIS:

So, back in 2006 and 2007, one of my clients was trying to buy a pre-sale. “It’ll go up by 20% by the time I have to complete, and even if I HAVE to complete, I can still make 10% profit on a $300,000 purchase. That’s $30,000! Any I only need to put a $40,000 deposit down.”

The beauty of leverage, right? You put down $40K and get $70K back in 2 years. That’s a 75% return on your investment.

The problem is, leverage is a two edged sword. Just like a climbing market can cause great returns on your investment, a falling market amplifies your losses. If that same investment drops 10% you’ve lost $30K of your $40K investment, and this doesn’t even take into account realtor commissions, property transfer taxes, and all the other closing costs. All that, only with a 10% swing in prices. Swings much greater have happened many times before.

So what happened to my client? The value came in short, she was forced to complete, and is now listing the properties and hoping to break even. However, she has handled the situation better than many people would by holding out on completion, completing months late, and doing everything possible to get the price reduced: something she accomplished, surprisingly. I really hope it works out for her, and the recent rise in prices can’t hurt.

Why did this situation occur? Because there was a panic to get into real estate. There was a panic to buy pre-sales because with the market that hot, “you can’t go wrong.” I heard this so many times it made me want to get out of the market. In fact, I did, for a while. Once everyone got scared of real estate in January 2009, I dove back in when the fundamentals were stronger, and when the Real Estate Mania that gripped the city was gone.

Well, now it’s back. Let’s ask a simple, basic question: If you read about the market moving on the front page of the Vancouver Sun or Province, do you really think that the profits are there still?

By the time the mass media gets hold of story, the market has run its course. I’ve read several articles in the past weeks about how real estate is RED HOT, and real estate is a can’t miss buy, and with rates so low, who WOULDN’T want to own?

There is one quote from the article above that makes shivers go down my spine:

“While the global debt and credit crisis continues to haunt developments in former real-estate hotspots like Dubai in the United Arab Emirates, Good said Vancouver is back in boom times.

“The [real-estate] strength in Vancouver is unlike anything in the world,” Good said.”

Really? Vancouver has it right, and every other developed nation has it wrong? Real estate in every country in the world has fallen sharply, and capital markets have dried up. However, we in Canada have found some special panacea for real estate downturns and the market is just going to go higher, higher, and higher?

Really? Who believes this?

Not me.

If you want to bet on it, go buy an investment condo in False Creek and wait until the government releases 730+ units after the olympics and come talk to me in the summer. With 757 active condo lists as of Monday this week, that will effectively double the supply of condos on the market in downtown Vancouver. Supply side shock. It’s a basic economic fundamental, and no one but of a few of us labeled fear mongers and pessimists is talking about it. Add to this potentially rising rates and lower affordability, and I’ll sit on the sidelines, thank you, and put my money into something else. There are thousands of options out there, and yes, real estate has had a hell of a run in the recent past, but it still looks like the Greater Fool Theory of sales to me.

Until next time, happy investing!