When Echo Boomers Buy
Many of today’s young adults are still living with their parents. In fact, 17% more of Canadian young adults born between 1970 and 1990, known as Echo Boomers, still find themselves living with their parents. This is in part due to the recent economic and financial crisis, but also in part due to a trend in the children of Baby Boomers to simply delay the development steps of marriage and home ownership. These Echo Boomers account for 9.2 million young Canadians who have also been call the Boomerang Generation. For some reason I don’t think the term boomerang has anything to do with travels to Australia.
In one generation, we have gone from 33% of young adults (Baby Boomers) living with parents to the now record 50%. Past generations tended to get married earlier, start careers sooner, and buy houses pretty much as a scheduled series of events. The Echo Boomers, however, tend to delay both getting married and homeownership.
Over the coming years, this group of 9.2 million potential consumers will certainly become targets to be marketed to by the realty and mortgage industries. The industries will stress the lifestyle and financial advantages of home ownership to this unique, well-educated group:
-> 97% own a Computer (the same percentage that also use social media every day.)
-> 94% own a cell phone (and perhaps will never own a traditional land line telephone.)
-> 56% own a MP3 Player (I will have to ask my kids what that is, I might even own one!)
-> 40% of Echo Boomers chose television as their main source of news. (I’m sure that you can guess where some of the advertising dollars will be spent.)
-> Most use Email, text, Facebook, MySpace, UTube and Twitter to communicate.
The dream of home ownership is still very much alive in Canada. This Echo Boomer generation has only delayed homeownership rather than eliminating it. When they do buy, they will buy as a demographic group and are sure to become a major force in the Canadian realty and mortgage market. In the interim, perhaps we Baby Boomers can still have help solving computer problems while the Echo Boomers still live at home.
On a side note, one other interesting statistic is that, on average, this group of Echo Boomers speaks with their parents 1.5 times per day.
Paul E. Croy
Pulling a Rabbit Out of the Hat
Lately, many people have questioned the decision by the Governor of the Bank of Canada to raise interest rates. The truth is the Governor has simply been doing what is required to work a little Made-in-Canada economic magic. What the Bank of Canada is doing is an act of balancing today’s need for economic stimulus against the long term requirement for both inflationary and monitory stability.
Over the years, we have seen both hot and cool real estate markets and heard the terms buyer’s market and seller’s market. It is interesting to note, however, that since the three recent increases in the bank rate, residential mortgage rates have been declining. It is now very much a buyer’s market and five year mortgage rates are at a historical low.
It is however, the opinion of more than just a few that the recent moves designed to crack down on what has been described as reckless real estate speculation may have swung the regulatory pendulum just a wee bit too far. Out here on the West Coast we are also dealing with the effects of the recent imposition of harmonized sales tax and a provincial government that is suffering from a financial budget hangover of Olympic proportions.
Making it harder for first time buyers to qualify for mortgages and increasing the required down payment for investors purchasing rental properties have contributed to a cooling of the real estate market. Perhaps, by its recent actions, the Bank of Canada may have pulled a rabbit out of the hat, thereby reducing a need for future interest rate hikes in the short term. We are truly living in interesting times.
Paul E. Croy
Lending Yourself Your Own RRSP Money
Some years back, while working as a Branch Manager for a Canadian Trust Company, I was given an opportunity to gain experience in the area of using your own RRSP to fund a “Non Arm’s Length” Mortgage. Proceeding to then give several seminars on the topic, I went a long way to establish myself as somewhat of a local expert. Recently however, while having coffee with a close friend, it came to my attention that to this date the general public still knows very little about what is required in order to lend your own RRSP funds as a mortgage. Over coffee, my friend claimed that he had just finished a long discussion with a client who was 100% convinced, after listening to a local radio talk show, that he could borrow from his RRSP without being required to even have the funds in his RRSP. Something had been definitely lost in translation.
Just to set the record straight, yes, you have to have the funds in your RRSP in order to fund the mortgage. What you will also find out is that due to the “Non Arm’s Length” relationship between the Mortgagee (your RRSP) and the Mortgagor (yourself), the mortgage will have to be insured by Canada Mortgage & Housing Corporation in order to become a qualified asset for your RRSP to hold. The main focus of all the administrative rules and conditions that apply is to insure that both you and your RRSP are not gaining an advantage or being put at a disadvantage when compared to rates and terms available in the “open mortgage market”. In addition, your RRSP funds would have to be transferred to a self directed RRSP (SDRRSP) account administrated by a Trustee who is an approved National Housing Act lender and who is also willing to administrate this type of RRSP asset. You will quickly find that not every SDRRSP Trustee wants to undertake the task of administrating this type of asset.
When doing your research you will soon become very aware of the many costs and fees. There are one-time set up costs plus ongoing annual SDRRSP Trustee administrative fees. For some clients, once a careful review of the costs is done, lending RRSP funds to yourself can make sense. Prior to 1984, it was commonly thought that Canadians could not use their RRSP funds for such a transaction. In 1984, a tax lawyer based in Toronto obtained a tax ruling establishing that, provided a mortgage met the strict lending guidelines established for an RRSP “Non Arm’s Length” transaction, it could qualify as an asset held in a SDRRSP plan.
Based on my calculations and due to the many costs and fees involved, I found that it was important to have a minimum mortgage amount of at least $50,000.00 available in your RRSP plus a minimum of a 6 – 7 year time horizon before even considering any economic or emotional benefits that might be derived from lending yourself your own RRSP money. The first SDRRSP funded mortgage that I helped set up was in 1984 for a client who was an accountant. Years later, I had the opportunity to ask this client if, in his opinion, it had been worth all the effort and expense. After a long pause, his answer was simply, “It sure just felt good to be paying myself”.
Paul E. Croy
Reducing Portfolio Investment Risk
Investing in a Mortgage Investment Corporation (MIC) can be a good way of adding mortgages as an asset class to your current investment portfolio. Shares of a professionally managed MIC can offer investors access to diversification in the mortgage market that may not normally be available to them. Diversification is very important when seeking to lower portfolio investment risk.
In the mortgage industry, a client who elects to directly invest in a mortgage is commonly referred to as a ‘Private Investor’. A direct investment in the Canadian mortgage market requires, in addition to your money, your ongoing investment of personal time to administrate and manage the mortgage. For Private Investors it can sometimes be very difficult to find quality lending opportunities. Perhaps even more importantly, it can be difficult to truly understand the risks involved when faced with mortgage underwriting decisions. Understanding investment risk and pricing the risk correctly is key to successful mortgage investment. Sometimes the best decision is the mortgage you don’t invest in.
Another risk facing a Private Mortgage Investor is the loss of interest income during the period when a mortgage is paid out and the funds are sitting in cash waiting to be reinvested. By investing in shares of a MIC, this reinvestment risk can be reduced because your funds are always working.
Great Pacific Mortgage & Investments Ltd. offers investors the choice of three professionally managed Mortgage Investment Corporations which can help to add investment diversification to both large and small portfolios.
Paul Croy
Investing in Real Estate
There are several issues and considerations when investing in real estate.
#1- Residence
Purchasing a home tends to be the largest capital investment most people make. It also tends to be the best investment most people make.
Rents go up but mortgage payments remain constant. So with time, the cost of mortgaging remains constant while rents rise with inflation. (There are interest rate fluctuations both up and down but I am assuming a constant interest rate for this example.)
It may seem a long way off at the beginning, but mortgages do get paid off and any capital appreciation from your own house is non-taxable. Equity in property also provides the ability to access funds for other investment opportunities.
#2- Investment Properties
There are several types of investment properties:
A – Revenue Investment (Residential, Commercial, Industrial revenue properties)
I do not have a pension other than CPP so I need to plan for my retirement by creating an income stream that is indexed so that inflation doesn’t erode my standard of living. Buying a rental property can be an effective method to satisfy this goal.
When looking for revenue property to meet this goal, you need to consider how soon the property’s income will cover all of its expenses including debt servicing, management, maintenance, repairs and of course, the various taxes. This may mean that you will need to cover a shortfall at the beginning, but when you have reached the breakeven level time becomes your ally and the property will start paying you an indexed cash flow.
B – Speculative Investment
This investment is to attract a capital gain by selling a property for a higher price than you paid. This investment is quite popular when the market is increasing or expanding. An example of speculative investment would be buying a piece of land that is not yet developed but is in an area where development is approaching. When development does reach your property then there will be an increase in its value. This type of investment is higher risk than rental property (time is not your ally) but it does not require as much ongoing work and can be very lucrative. This investment is more interested in the market and not in revenue.
There are several investments that are part revenue and part speculative. One example is an underdeveloped property that does not have cash flow to pay all costs but can offset some of the costs.
Housing is something that we all need. It has proven to be a stable and manageable investment that one can control or at least influence. Talk to your realtor, lawyer, accountant, mortgage broker, neighbour etc. Everyone has something to say about real estate and some of them can give you good advice, but remember that it is your choice. Be bold and you should be rewarded.
Rory Campbell
Interest Rates on the Rise?
The Bank of Canada has signaled that they do not expect to hold present interest rate levels past the end of June…..
See the March 11, 2010, Business Week article, Canada January New Home Prices Rise 0.4%, Seventh Straight Gain
We are presently enjoying the lowest interest rates seen since the Korean War, and the only thing we can absolutely count on is that rates will inevitably rise. The ‘experts’ cannot seem to agree on when or by how much, but the varied opinions range upwards to an increase of 2.0% – 2.5% by the end of 2011.
I believe that now is the time to become pro-active and ensure that you take advantage of the present interest rate environment. Do you wish to explore the possibility of ‘renegotiating’ an existing mortgage? Would you like to ‘lock-in’ an interest rate for an upcoming purchase? Does your mortgage ‘mature’ in the next few months? Fixed rate vs. variable rate?
Our mortgage professionals are your best source for mortgage advice and can explain all your available options.
Walt Neufeld
What is a MIC? – Why You Should Know
Mortgage Investment Corporations (MICs) are designed specifically for mortgage lending in Canada. MICs lend to qualified borrowers in a ‘niche’ mortgage market who may be finding traditional mortgage lending is not getting them the results they need. A MIC mortgage portfolio can include everything from small second mortgages on residential property to commercial and development mortgages on new projects.
To many experienced investors it’s a no-brainer to include MICs in their investment portfolio. MICs don’t have the volatility of stock markets and they offer returns that are significantly higher than those from money market products.
Owning shares in a MIC allows investors to participate in a diversified and secured pool of mortgages. The income is either paid out on a regular basis or can be reinvested for growth.
A MIC is the investment that everyone should have in their portfolio because it’s secure and will make you a lot of money. Pretty simple.
Find out more about MICs here.
