experts: real estate column Tuesday, March 26, 2002

Deciding mortgage term depends on interest

We get a lot of questions every week. Thanks. I try to get to them all. When I donít, donít be mad get even - send another one.

By Ozzie Jurock

This article appeared in The Vancouver Sun on March 23, 2002

We get a lot of questions every week. Thanks. I try to get to them all. When I donít, donít be mad get even send another one. I have abbreviated your questions and taken out all the "I like your story." stuff - I love it ... but as I said before ... I am a legend in my own mind already. Just remember in any investing there are no short cuts ... no expert can do it for you. In the end we all have to exercise our own best judgement. And remember: Experts are people who know a great deal about very little and who go along learning more and more about less and less until they know practically everything about nothing.

Here are some questions, that I thought would be of a more general interest:

Question: I am not sure what I should do with the length of the term of my mortgage? Should I go long or short?
Answer: That is the question asked more than any other. Everyone wants an answer to it. Of course, anyone that claims they can predict interest rates is either a fool or a liar. I am neither ... so (you knew it...) it depends. It depends on YOUR outlook for the future:

  1. If you see a generally low inflation environment ahead stay as short as you can, get the 3 months rate at 1% and then 3/4% below prime. You save a bunch on interest and the odds are with you (For if you locked in for five years at say 6.25%, the prime rate would have to rise to 7.00% from the current 3.75% before you were to pay the same interest as a five year rate.
  2. If you are not sure whither inflation or deflation play it safe by getting a variable open maximum flexibility ... or analyze the TD product where you pay ľ% over prime but the maximum interest is capped at 6.25% or so for 5 years. Other banks offer some such product as well like the BOM which offers a 3.65% variable rate capped at 7.15% for 5 years.
  3. If you believe inflation will be back. Go long go for ten years ... Todayís best 10 year rate at 6.75% is lower than the US - 15 year rate at 7.09% - and you can get out after 5 years (by law) with only a 3 months penalty. If rates go much higher (in an inflationary environment) or back to previous highs, the long term at this low rate will make your home attractive to future buyers.

Question: I want to own my own home, but am not sure whether I can afford it. I want to stay within my means. Is there a rule of thumb for a point beyond which I should not make payments?
Answer: I am with Oscar Wilde who said: "Anyone who lives within their means suffers from a lack of imagination." Kidding aside, your mortgage company has rules. Essentially they will let you pay some 32% of your gross income on mortgage, tax and strata fee payments. Also your total debts cannot exceed 40% (car and other payments). So, the bank will make the decision on Ďmeansí for you.

Question: ... you state that timing is more important than location that decides the value of a property. I donít buy that. A property located on the Westside is more valuable than one on the Eastside so location is more important.
Answer: Of course a waterfront location at False Creek is more valuable than a lot on Stuart Lake. Thatís not the point. Everyone trumpets the location, location, location answer as the panacea to real estate investment yet the average person would have been far better served by observing timing and trends. Downtown condos at False Creek from 1992 to 1997 dropped by up to 35% in value at the finest location, while a building lot in Surrey rose from $65,000 to $130,000. Buying a home ANYWHERE in Toronto, New York or San Diego in 1986 and selling it in 1989 would have made you 60% profit, buying the same home anywhere in these markets in 1989 and selling it in 1994 would have lost you 35% ... buying it back in 1994 and selling in 2000 ... up again by 45%. Real estate markets unlike stock markets - are always local in nature and thus fluctuate with the confidence level of the buyers in a given market. There are a half dozen times, where you could have bought on the Westside and seen values come off substantially. ĎLocationí did not help the loss in value. When I argued in 1995 to go into Toronto, in 1996 into Calgary and back into the Lower Mainland BC in 2000, it did not really matter what location you bought you made money in ANY location as you were at the right time in the cycle.

Question: My wife currently has her name on the title of another property (her current home). We heard that after 5 years you can qualify as a "First time buyer" again if she takes her name off the title of her current place. Is that true? She has never used her RRSP for down payment before, so is it true if that in 5 years she can do that on another property providing that she does have
Answer: Revenue Canada defines a 1st Time Buyer as a person who has not owned a principal residence for the past 5 years. Unlike the B.C. Property purchase tax, ownership is not defined by holding title. If person A occupies a residence whereby their spouse B or common-law partner B holds title and person A and B occupy the home as their principal residence, person A is deemed to "own" the property and would not qualify as a 1st Time Buyer.

If someone used the plan in previous years, sold their home and rented a property for the past 5 years, they could use the Home Buyerís Plan again provided all monies were repaid back into the RRSP from the first time they used the program.

If a person owns a property and does not occupy it as their principal residence, i.e., a vacation home and/or investment property, they could qualify under the HomeBuyers plan as a 1st time buyer.

Ozzie Jurock is the publisher of Jurock's Real Estate Insider an independent real estate advisory service. You can reach him at 604-683-1111 or e-mail ozzie@jurock.com




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