If or when the real estate market drops, will you be protected?
If or when the real estate market drops, will you be protected?
Homeowners should think about their financial situation, if or when the real estate market drops!
As an owner of several properties, I am ecstatic with the incredible equity increases that I have realized; but at the same time, I'm wondering when it will stop, and drop.?If you are a homeowner, I'm sure you thought of this, too.
My name is Roland Hack and I'm a real estate agent Broker servicing:?Waterdown, Burlington, Toronto proper, and the entire GTA.
This article is?NOT?about what I think will happen with our real estate market in the future.
It's??ABOUT?getting homeowners to really think about their financial situation & stability, well before a market correction occurs.
Where will you be financial??Critical?things to?think about:
The best place to start is by understanding:
Firstly, if you have a mortgage, grab a coffee and pay close attention to what I'm about to show you.?
If you don't have a mortgage, grab a glass of wine, relax, and enjoy the read.
None of us can absolutely predict the real estate market with precision. Who would have guessed that COVID would result in skyrocketing real estate home values! But it happened.?Just the same, sometimes we can't predict losing our job, being handed divorce papers, or finding out that you were diagnosed with a debilitating disease and can't work, plus other life events that we can't control.
For these reasons,?homeowners?should always know where they stand when it comes to their home equity, mortgage, and credit lines.?This is critical because you can easily calculate your remaining equity if you need to sell in a pinch.
Perhaps the best question to ask yourself is: Where do I stand with my mortgage?
If you don't have a mortgage, then you are doing well. Perhaps the only thing you need to consider is: how will you?retain your spending power?in another 5, 10, 20 years? In this real estate market, you are already growing faster than inflation by owning a property outright; but you ALSO may benefit from buying mutual funds by way of a credit line. This way you may be able to use your credit line interest as an expense against your mutual fund gains. But that's for another blog.
At the time of this article, the average selling price in Toronto, Ontario, was?$1.158M. For those of you with a very low mortgage, let's say under $200K on a million-dollar property;?you are in an excellent position. Even when the interest rates increase?and if/when real estate market values decrease, you will retain a lot of equity, in the event you choose to sell.
If you have a mortgage of $500K on a million-dollar property, and you are mid-way with equity, you can weather higher price drops of the home's market value and an interest rate increases, and still come out a winner!
Unfortunately, there are many homeowners who are in a high mortgage range who need to watch the markets carefully. If you have a mortgage for 80% loan to value, I would be concerned with large decreases in market value.?
Situation #1:
This means:
That is correct: There is a?FINANCIAL LOSS?of -$162,100 for this seller.?Keep in mind that the seller?put down?a?20% down payment ($200K).?The?large?down payment became the?buffer for the loss?in the market. Home sellers who grew in the market for 10, 15, 20, or more years,?built up equity?by way of both?A)?increase in market?and?B)payments in principal?while they?paid off?their?mortgage.?Furthermore, when buying, this seller got?hit with the egregious Toronto land transfer tax?(if in Toronto) to the tune of about?$33K?plus lawyer and Title insurance of about?$2K.
Total losses for this seller: -$197K.
This is based on a very conservative 10% drop in value!
But wait... there's even more!?The loss of -$197K is actually?after-tax dollars.?I would say most salaries would have to fall into a 50% tax bracket when buying in or near the million-dollar range. This means a loss of -$394,000?in earned?income!
Think about that one.
Situation #2:
Just imagine a?20% correction?– which I, and many other professionals think is very realistic. This already happened back in 2017 – just look at the historical statistics.
This means:
That is correct: There is a FINANCIAL LOSS of -$257,100 for this seller. Keep in mind that the seller put down a 20% down payment ($200K).?The large down payment became the?buffer for the loss?in the market for only the equity portion and does not cover closing costs. Furthermore, when buying, this seller got hit with the egregious Toronto land transfer tax (if in Toronto) to the tune of about $33K plus lawyer and Title insurance of about $2K.
Total losses for this seller: -$292K.
This is based on a 20% drop in value!
But wait... there's even more!??The loss of -$292K is actually?after-tax dollars.?I would say most salaries would have to fall into a 50% tax bracket when buying in or near the million-dollar range. This means a loss of -$584,000?in earned income!
Think about how debilitating that loss is!
As a Realtor, I must make these calculations when listing and selling properties because it's illegal for me to sell a property knowing that it won't be able to close. In the above case, I would have to decline to list this property as it would be unsellable;?technically it could sell, but could?never?close due to the shortfall. Most likely it will fall prey to Power of Sale.
There is a major difference between Situation #1 and Situation #2:
In situation #1, the seller was able to get out of the home with some?equity left over.
In situation #2, there can't be any conventional sale of the property because there are?not enough funds?to payout debts on closing. The sellers will face?power of sale(different from a foreclosure)?and be?forced out?of their homes.
Top Reasons Why Homeowners Are?Forced To Sell?(based on what I've seen from clients):
INTEREST RATES
What interest increases?really mean!
Low interests rates changed our real estate market and our affordability. However,?there is more to it than just low-interest?rates...
Most homeowners, including real estate agents, fail to understand and talk about how banks increased your spending power by increasing your ability to buy based on your salary/income. Back in the 1980's, it was simple:?we wouldn't even CMHC,?a minimum 25% down payment, and your affordability was calculated at?3 times your gross salary or income.??Over the years, the banks have opened up your ability to borrow by raising this figure to 4, 5, and even 6 times your gross income. In 2008, banks were allowing you to calculate your loan based on 6 times your gross income! At the time of this article, it's about 5 times your gross income. If you want to check for yourself, just visit my?https://myrealtorroland.ca/Resources/MORTGAGE-AFFORDABILITY?.?
Simply enter 100,000 as a salary/income, and you will see that such an income would qualify for a $505K loan (at the time of this article).?If lending was held to 3 times your gross income, much of the real estate market would have been locked in?closer?to our incomes; forcing house prices to remain lower; allowing you to be mortgage-free, sooner! At 3 times your gross income, where the gross income is $100K, it obviously works out to $300K. Imagine having a nice spacious home for around 300K, and being mortgage-free at 45 years old, along with a healthy savings account! That's the way it should be.
Back to mortgage rates:
As for?interest rates: do you really know what a?1/4 or 1/2 percent increase means??It's?huge! You can easily check these numbers yourself using my?Mortgage Calculator?at?https://myrealtorroland.ca/Resources/MORTGAGE-PAYMENT?. I've already calculated some scenarios for you, below:
Below is the example of my calculator with the entire Amortization Schedule:
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There are many homeowners who have locked into very low-interest rates, years ago.?When their mortgage comes due, they will most likely find very large increases in their monthly payments.
A 1/4% or 1/2% interest increase?doesn't sound like much,?but it is. Many homeowners who were lucky enough to acquire a?low home interest rate of 2%?are due for renewal very soon. Most likely, they will see interest rates at?3.25%?or so. Remember, your original low rate was to get you to sign up with that lender; renewing usually means a higher interest rate since you are now with that bank, already.
Based on the numbers below, a move from a 2% to 3% interest rate means that there is a?51.1% percent increase?in the amount of interest that you pay, each month; translating into an extra?$782 per month!?Worse, this means a homeowner in a fifty percent tax bracket,?must earn?an extra?$1,564?per month on salary,?to pay this extra interest cost. That amounts to an extra $18,768 per year! I don't think your boss will give you such a raise in salary.
This is why I tell my clients to fight with the bank and get bank?management involved to make sure that they reduce their rate as much as possible.
Scenario 1:?Calculating a 1/2% interest rate hike on a 2% interest rate:
Calculation:
$1,919 – $1,530 = $389. To get percentage increase of your monthly interest payment :?$389/$1,530 =?25.4%.
Based on my calculations, a?1/2%?rate hike on a very low?2.0%?interest rate, translates into an increase of?25.4%?on your monthly interest payment; being an extra $389 per month. You would have to earn an extra?$778?per month on salary at a 50% tax bracket, to pay for this.
Scenario 2:?Calculating a 1% interest rate hike on a 2% interest rate:
Calculation:
$2,312 – $1,530 = $782. To get percentage increase of your monthly interest payment :?$782/$1,530 =?51.1%.
Based on my calculations, a?1%?rate hike on a very low?2.0%?interest rate, translates into an increase of?51.1%?on your monthly interest payment; being an extra $782 per month. You would have to earn an extra?$1,564?per month on salary at a 50% tax bracket, to pay for this.
Scenario 3:?Calculating a 1.75% interest rate hike on a 2% interest rate:
Calculation:
$2,904 – $1,530 = $1,374. To get percentage increase of your monthly interest payment :?$1,374/$1,530 =?89.8%.
Based on my calculations, a?1.75%?rate hike on a?2.0%?interest rate, translates into an increase of?89.9%?on your monthly interest payment; being an extra $1,374 per month. You would have to earn an extra?$2,748?per month on salary at a 50% tax bracket, to pay for this.
Scenario 4:?Calculating a 1/2% interest rate hike on a 2.75% interest rate:
Calculation:
$2,508 – $2,115 = $393. To get percentage increase of your monthly interest payment :?$393/$2,115 =?18.6%.
Based on my calculations, a?1/2%?rate hike on a?2.75%?interest rate, translates into an increase of?18.6%?on your monthly interest payment; being an extra $393 per month. You would have to earn an extra?$786?per month on salary at a 50% tax bracket, to pay for this.
Scenario 5:?Calculating a 1% interest rate hike on a 2.75% interest rate:
Calculation:
$2,904 – $2,115 = $789. To get percentage increase of your monthly interest payment :?$789/$2,115 =?37.3%.
Based on my calculations, a?1%?rate hike on a?2.75%?interest rate, translates into an increase of?37.3%?on your monthly interest payment; being an extra $789 per month. You would have to earn an extra?$1,578?per month on salary at a 50% tax bracket, to pay for this.
My charts above are sobering reminders of reality. My calculations are?simplified?for easy number crunching and?illustration. Each month that you pay in, your interest changes slightly due to principal payments reducing your debt.?To keep these calculations easily comparable, and to have a large sampling of payments, I have taken an average of interest payments for a term of 5 years. Also, keep in mind that when you renew your home mortgage, your principal will be lower due to your previous years of paying in. For accurate numbers consult your bank, financial institution, and accountant based on your situation and needs.??For an overview on your situation, call me, Roland Hack real estate service provider Broker Realtor, for a free no-obligation consultation.?
Every home owner or condo owner's?situation is different in our housing market, and there may be several different solutions.?In any event, expect interest rates to increase; just be prepared by doing the math now.
While you are doing the math, keep in mind that real inflation is?7 to 8 percent?(as per my excellent accountant),?NOT?the reported government numbers of?4.8%?as of Jan 2022 (the time of this article).
TIP:?When calculating your increase on your projected new rates, also include the increase of cost of living across the board, because that is what you will be paying!
Even if you are months, or years away from your renewal date, call your bank to?find out what the bank will charge you presently and compare that to posted interest rates offered to new clients. This is very important, as it will give you an idea of how much their renewal rate is compared to their advertised rates for new clients.?You can then simply watch the rates online and add that extra on top; then use my calculator to figure out what your payments are, at?https://myrealtorroland.ca/Resources/MORTGAGE-PAYMENT?.
VERTICAL LINE PRICE INCREASES!
Below:??the chart says it all.?Courtesy of The Canadian Real Estate Association.
Take a look at what happened in 2017. Think it will happen again?
BE VERY CAREFUL ON WHAT YOU ADD TO YOUR CREDIT LINES?and CREDIT CARDS:
Worthy of mention:?do?NOT?buy what you?do not need?at this time unless you have to, or you have lots of money.?In the event you?must sell, the?last thing?that you want is to have a?huge credit line in place.
****ON THE POSITIVE SIDE****
If you have been in the?real estate market?for many years, you have prospered.?Moving because you want to and because it makes sense (better value, larger house, etc) is a?good idea. I help many buyers and sellers move, and they are so happy and satisfied with their decision.?I help them plan and figure out the costs involved, and if it makes sense, only then do we move forward.
I find that most of my seller/buyer clients that have owned a home or condo in our real estate market for the last 4 years or longer are moving laterally, up or down by about $300K or so. In some cases, it's much higher. The important thing to remember is that you can safely afford what you are buying and that you are improving your and your family's well-being and?future financial success.?
If you can carry your debt load and remain stable with your income and plan to keep your home for the long term, then you will have an excellent?chance of weathering any financial storm that comes your way.?
If NOT,?start planning carefully?and?know your options?and what to?anticipate?in the?near future.
Roland Hack is a full-time Real Estate Broker, who specializes in coordinating?BOTH the Selling and Purchasing of a Seller's home; even coordinating moves to cottage country from the GTA & Toronto.
" I'm with my clients right from the start – to well beyond their closing date – offering expert assistance and direction".
No Seller should ever feel overwhelmed or confused or uncertain when to sell or where to go. A 5-minute call with me – will make all the difference!
Direct:?416-543-7348
MyRealtorRoland.ca?
Blog Source: https://myrealtorroland.ca/Resources/Blog/2022/02/03/If-or-when-the-real-estate-market-drops-will-you-be-protected