How 30-Year Amortizations Will Impact Canadians

[00:00:00] Welcome to the Canadian Real Estate Investor, where host Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio.

[00:00:13] We are here to interrupt your regular schedule of programming for some breaking news.

[00:00:18] It's a very dramatic intro, Nick.

[00:00:20] I thought you want a little bit of drama to start things up.

[00:00:22] Yeah, I did write that, you're right.

[00:00:24] We have a ton of great episodes on deck, but this is pretty important.

[00:00:28] Yeah, two absolutely massive headlines just came out regarding Canadian Real Estate. So you know we had to jump on them and cover it.

[00:00:36] The first one is Ottawa to expand 30-Year Amortization mortgages.

[00:00:43] Whoa, whoa, whoa, whoa. I guess they are trying to prop up the housing market now.

[00:00:48] Things must be bad out here. I don't know if I want to see the data that they're looking at.

[00:00:52] It's the case number two, Dan Ottawa is also raising the price cap on insured mortgages up to $1.5 million.

[00:01:04] Oh, man. I guess we're doing the buying power and more debt means affordability.

[00:01:10] I don't know if I will, like I said, I don't know if I want to see what data that they are seeing that made them feel

[00:01:16] that a policy measure that is inflationary on house prices like this was necessary.

[00:01:22] Can you maybe explain what you mean there? Sure, yeah. I'll give you the highlights since we're basically going to show our work in this podcast.

[00:01:29] Going from a 25-30-year amortization decreases your monthly mortgage payment by about 8%

[00:01:37] since your payment is what you, the banks used to qualify relative to your income. This would instantly boost buying power for first time buyers who are subject to this extension by 10 to 15%

[00:01:50] and the same thing applies to new houses which was already announced before but now they've made it for if you're, if you're anyone buying a new home,

[00:01:57] not just first time buyer, you get the same thing that 30-year mortgage. So 30-30-year amortization for first time buyers on any house,

[00:02:04] 30-year amortization on new houses for any buyer. But this comes at a big cost from my perspective. You pay 26% more interest on a 30-year mortgage than a 25-year mortgage.

[00:02:17] Yeah, that interest payment portion often overlooked but definitely should not be forgotten about it.

[00:02:24] You know, this is massive news and we are going to go over a lot of math in this episode. But they did announce this for as you said,

[00:02:32] brain new homes then and now we're expecting an expanding it to all first time home buyers as well.

[00:02:40] Yeah, that extension is really just the amortization extension is really just the first part, like you mentioned there's two parts to this.

[00:02:47] And the next part is the plan to increase the insurable amount by 50% from 1 million.

[00:02:57] Yeah, which honestly like to me kind of looks like an attempt to move up the price floor a little bit.

[00:03:03] Oh man, I haven't heard a price floor since I lost 100 grand on a NFT last year.

[00:03:08] Did you actually do that? You're fully rich, eh?

[00:03:12] Isn't like a price floor like NFTs though? I mean, a floor price is the lowest price at which a particular NFT and for those not familiar.

[00:03:22] Those are non-fundable tokens. You remember all the little apes that people were paying and have seen a amount of money forward.

[00:03:28] Don't fund those.

[00:03:30] So NFTs is a collection. It's listed as a sale on a marketplace and it represents the minimum cost for buying any NFT from that specific collection.

[00:03:40] Right, that's that price floor. That's that set you start there and go up.

[00:03:45] Yeah, fortunately this isn't the NFT, Canadian NFT investor podcast so that's the last time we're going to mention that an economic price floor, which is, you know, makes a little bit more sense that the context of this is similar to what you just described but it would be a government imposiment and price for a good or a service.

[00:04:03] Which would prevent the price from falling below a certain level effectively setting the lowest legal price that could be charged for a product.

[00:04:11] A common example of this price floor would be minimum wage laws as an example. You can't pay somebody less than whatever, I don't even know what it is but it's going up and Ontario, which set the minimum amount of work or can be paid.

[00:04:22] And in the context of housing or goods, a price floor can be imposed to ensure producers and technically like your development charge is technically your price floor, right?

[00:04:29] Because you got to pay that minimum, so you're not going to do it for free. So then that's doing sure producers or sellers receive a certain minimum price for the products.

[00:04:38] But the government isn't really setting a minimum price here with this policy necessarily, right?

[00:04:47] Right, that's true because it is decided by independent factors so it gets your development charge plus the cost to build it, plus the cost of the land, et cetera.

[00:04:55] But from my perspective, they kind of intend to do that by determining the buying power for some buyers. So it's like it's not a price floor like in policy terms but it's sort of economically will function similarly.

[00:05:07] First time buyers typically buy entry level homes.

[00:05:12] If these buyers are priced out of the market, there will be fewer sales at the lower end of the housing market potentially lowering overall market activity and price.

[00:05:20] Programs targeting first time buyers boost purchasing power, right?

[00:05:24] The effectiveness of these incentives can prop up demand at lower price points creating a floor you could call it below which prices are unlikely to fall.

[00:05:33] As sellers anticipate demand from this group, the first time buyers, as we know from Bank of Canada, data, they're 50% of purchasers almost, I think 49%.

[00:05:43] So functionally, you just moved up the amount that this group is able to pay. Not just like a small amount.

[00:05:50] I always thought this policy would happen, we predicted a handful of times on the show.

[00:05:56] I thought I would go from like a million to 1.25. To go up from a million to 1.5 is just like what is going on?

[00:06:03] That's how we do things here in Canada. We get least, so big swings one way or the other.

[00:06:08] That's a Texas sized anchor.

[00:06:09] First time home buyers are the lowest price marginal buyer, right?

[00:06:15] And so they can really drive market growth and they're also the least experienced buyer which we'll get to some reasons for that.

[00:06:22] But realistically, they compete with investors, right?

[00:06:25] Yeah, no, this show being called the Canadian real estate investor.

[00:06:29] Obviously we cover all things real estate, but I was going to ask, why is this policy so important for people such as us and a lot of our listeners who are in fact

[00:06:39] investors or would be investors like why are we covering it if it's specifically going to affect the first time home buyer?

[00:06:47] Yeah, so it's a good question. First I'll say like the 30 year Amazon new homes doesn't just affect first time home buyers.

[00:06:54] It affects all buyers and so that would be for everybody, but we can't really do a whole episode on that policy.

[00:06:59] I don't think I would expect that that will increase investor demand for new houses likely makes sense.

[00:07:04] And that's their goal. Like that's what they want to do because they want, well, they're like, oh shit the new construction is slowing down a little bit and we got to get some investor capital that that access demand

[00:07:14] Rather than it going and buying older houses, you know, and taking that existing housing stock away that could be immediately consumed by first time buyers.

[00:07:22] Let's move that investor demand to brand new houses. So investors and builders are working together to get housing supply created.

[00:07:28] I get where this is coming from. I don't really like the execution because I don't like using debt as a solution for affordability, but we can get to that later.

[00:07:37] To answer your actual question, there's a few reasons really, right?

[00:07:43] So the first time buyers, they are often tenants.

[00:07:48] I think there's a stat that we put in here, but you know, a lot of them were tenants. So making it easier for them to buy actually makes them less likely to rent.

[00:07:57] Right? And so this could have an impact on your rents and some markets, especially markets where home ownership is affordability and does compete directly with with rents like Alberta, Regina, etc.

[00:08:06] Investors compete in the market with first time buyers and from my perspective, I just mentioned this. There's a least experience and therefore the least rational buyers in the market.

[00:08:16] So they have a high incentive to overpay for houses and they have a qualitative incentive like the hearts in it, right? There's an emotional aspect.

[00:08:23] And so their ability or willingness to pay a different price than an investor is there.

[00:08:29] I won't get into this much more because I don't want to just rag on first time home buyers for being irrational consumers, but most people's journey,

[00:08:36] in their purchase is they're furlough by their first home, right? So if you're a real estate investor, you probably in a lot of cases you own your primary residence, maybe made some wealth that way.

[00:08:45] Realize it's not not a difficult way to make to achieve wealth in a market that we were in for the past 30 years and you know, you take some equity out and then buy the investment property.

[00:08:56] And so that's again another reason why it's important what's happening with first time buyers.

[00:09:00] And then finally, most people think about their home as an investment.

[00:09:04] Yeah, now that last one day and most people think about their home as an investment. You know, we've covered that multiple times in the show.

[00:09:11] And it's kind of wild to me right? I mean, approximately 70 to 90 percent of homeowners in various surveys that were conducted consider their home an investment.

[00:09:22] This number reflects a common view that real estate can appreciate over time and ideally will provide that financial security that they're all looking for right?

[00:09:34] Let's do a quick refresher on a few things here. Let's start with the CMHC insurance to create some context here. Now CMHC can a mortgage and housing corporation.

[00:09:43] They've come up once or twice in the show, a crown corp that provides mortgage loan insurance.

[00:09:51] And that insurance is mandatory for home buyers who have a down payment of less than 20 percent of the home's purchase price because they're in a higher risk position.

[00:10:00] And basically, the CMHC wants to eliminate risk on the banks.

[00:10:05] Yeah, and exactly that insurance protects the banks that that lender if the borer were defaults on that mortgage.

[00:10:13] Yeah, so it's for the bank like you as the home buyer don't benefit from the insurance. Right? It's an important distinction from my perspective.

[00:10:21] Yeah, for sure. Now currently CMHC insures mortgages for homes that are valued up to $1 million.

[00:10:29] This cap has been in place since 2012. Now this is really you see that important distinction between a property listed at 999,000 versus anything over that 1 million dollar threshold.

[00:10:41] Yeah, and you can see a lot of activity in the price range below a million bucks.

[00:10:46] Like because again, Bank of Canada states that almost 50 percent of buyers are first time buyers.

[00:10:52] But basically that, you know, like there was that bidding war earlier in the year. I think in February right in Mississauga it was like a house.

[00:10:59] It was listed at like it was underlistened a lot. 650 or something like that and ended up getting like 30 or like 50 offers.

[00:11:04] But it's over 999 999 why? Because it's a CMHC insured buyer not like 50 offers and not a single person paid more than a million dollars for it.

[00:11:12] And that just showed me at least where all of the demand was in the market.

[00:11:16] So that insurance premium that you mentioned is typically added to the mortgage and paid out over the life of the loan.

[00:11:22] Yeah, exactly in that premium rate can vary based on the size of the down payment that buyer is going to use.

[00:11:31] And that ranges from anywhere from let's say 2.8 to 4% of the loan amount.

[00:11:37] And the top end at 4% the you pay the higher premium the lower the down payment use.

[00:11:43] So 4% if you use a 5% down payment which means if you're a 5% down buyer, you have less than 1% equity in your house.

[00:11:51] So a lot of this sounds kind of like a bad deal to be honest. Why would someone want to have a longer amortization?

[00:12:02] I mean, my honest answer is that we are a debt obsessed country and we have a financial literacy problem in Canada and like this policy move would just drive that home for me.

[00:12:12] Like a lot of people say that Canadians think about the payment rather than the price.

[00:12:16] Even when people are shopping and negotiating for the price on a house they negotiate based on what the bank says they can afford based on their payment,

[00:12:24] not what they actually feel the price is worth.

[00:12:26] Most people actually wouldn't really know what a house is worth.

[00:12:29] So given that I would say most people feel that they just became able to buy a little bit more house for a lower monthly payment.

[00:12:39] And honestly a lot of people will do it. I think that this policy will be very, very well utilized which bothers me a little bit because you're just basically adding young people first I'm home buyers.

[00:12:50] You're adding another five years in which they have to their their in debt now.

[00:12:54] And you're increasing the amount of interest that they have to pay on said debt by 26%.

[00:12:58] So it's not like I think it doesn't take a rocket scientist to understand that that's not like a good outcome for my perspective.

[00:13:06] More interest, longer time indebted.

[00:13:09] And so yeah I think right now I would say most buyers max their budget and take the lowest payment they can get and this just encourages more of that behavior.

[00:13:16] Yeah kind of fuels fuels that fire that we've been trying to dampen for for a while and worn against right and you know this kicks that proverbial can just another five years down the road.

[00:13:27] I mean the psychology of Canadians quote unquote buying payments rather than focusing on the overall price of things as I'm driven by affordability perceptions and budget management now.

[00:13:42] This behavior is particularly evident in big ticket purchases like mortgages or car loans where buyers are often more concerned with whether they can manage that monthly payment.

[00:13:56] Then the total actual cost of the asset whatever they're buying right that car or that house.

[00:14:02] Yeah I think you know if you look at it and mortgage it as an example and we'll use a car payment as an example as well because I think this is a good one.

[00:14:10] And a lot of people can really think about it more clearly when purchasing a home many Canadians are focused on the monthly mortgage payment and it's not their fault like that's literally what the bank uses to decide they use your mortgage payment.

[00:14:22] The way it's been sold in a house or income when when we measure affordability and Canada it's mortgage payment has a percentage of income or income to payment right not income to price and all that cases you know European entities you'll see they'll use price to income here we use mortgage payment to income.

[00:14:37] Even even rents it's like always what is it as a percentage of your monthly income so.

[00:14:43] This is the income versus expenses thing right people manage their finances on a monthly basis you know you pay bills on a monthly basis and so people often consider how much they can allocate from their income to their monthly mortgage payment without stretching their budget they think about it in like that one at a time increments.

[00:14:59] But it's not really one of the time increments because we're talking about long term debt here right mortgage terms often span 25 to now 30 years and this long amortization period.

[00:15:12] Loers monthly payments making the overall cost of a home seemingly more manageable even if the total cost of the loan including of course interest which we can't forget about is actually much higher.

[00:15:26] And this is where you end up with that like interest rate sensitivity so even slight changes and interest rates significantly affect monthly payments not just like on the ones that you already have but if you're a buyer who's in the market.

[00:15:38] You know if rates go up now of a sudden your affordability changes drastically because you're not buying based on the price you're buying based on the interest rate.

[00:15:46] So, a rising interest rates would force buyers to reconsider the house they can even afford and even if the price itself hasn't changed right and this was a big factor.

[00:15:55] In the drop that we saw in prices in 2022 because buyers basically said oh my goodness I can't afford anything on the market anymore and even as prices went down there weren't buyers piling into the market.

[00:16:06] Even though house price declines outpaste interest rate increases and it's because that interest rate sensitivity is impacted.

[00:16:14] The way buyers perceived the cost of a house on a monthly basis not on a price basis.

[00:16:20] Yeah exactly not talk about perceiving in that perception and that kind of psychology behind this this way of thinking right.

[00:16:27] Like lenders will often present that maximum monthly payment right that's literally the way that it's taught the way that's the way that it's sold.

[00:16:36] So, the present that maximum monthly payment that a buyer can qualify for leaving them to anchor their decision on that dollar figure rather than trying to buy you know let's say a less expensive home.

[00:16:48] How dare you suggest everybody ought to buy a less expensive home.

[00:16:51] That is financial advice actually that's the first time I see that.

[00:16:55] So I mentioned that another easy way to think about is car loans right I think it's probably the next most common like amortized credit product a similar pattern no cares with this right like I feel like when I first started looking what going on as young.

[00:17:09] I used to buy you know like used cars and I was always afraid of like these car payments and I think it was like five years was like the max.

[00:17:16] And now it seems like you know they've realized that buyers often care more about the monthly car payment you go to a car dealership or use car dealership or whatever and they're like they're basically mortgage brokers like they make all their money selling the debt not the car which is crazy right.

[00:17:31] But people they care more about that monthly payment than the total price of the vehicle.

[00:17:36] Yeah, so let's let's dive in a bit deeper into into this car loan example.

[00:17:41] So let's say car dealers I mean again as you just sent in they often advertise vehicles based on that monthly mortgage payment rather than the sticker price right think about this you know.

[00:17:51] 399 a month for 72 months rather than hey buy this $80,000 mini van that you probably don't need or $80,000 trucker you know that brand new white BMW because he just became a real estate agent now you know making the purchase.

[00:18:05] Seemingly perceptively more affordable even though that total paid over time is actually a lot higher because you stretch that payment out and your pain more interest.

[00:18:19] Yeah, you know when you buy a new vehicle finance it they give you that like sheet at the end that says like here's the total cost of ownership and.

[00:18:28] We, it makes it all your interest payments and all that stuff they don't have that for housing right but I imagine it would make most people barf if they saw how much interest they were paying what their total cost of owning the house was over a 25 year.

[00:18:40] But anyway just like mortgages that you're getting these longer loan terms right six to eight years now and this is made vehicles appear more affordable by lowering monthly payments even though it increases the overall cost because you're paying interest for a longer period of time and interest is calculated on annual basis.

[00:18:56] Buyers again prioritized keeping the monthly payments within their budget even if it means extending the loan and paying more in the long run.

[00:19:03] Exactly and this is where we have to kind of consider that you know your lifestyle versus your expenditure versus your cost.

[00:19:10] Now many Canadians are happy to justify higher payments for that said lifestyle that we're all trying to achieve now vehicles by reasoning that if you can, you know,

[00:19:22] you're not going to be able to afford that monthly payment the total cost really doesn't matter as much.

[00:19:27] Yeah, it's it's kind of a matter like I don't I don't love this I think that it's kind of.

[00:19:33] It's not good and so I guess the question would be like why do Canadians focus on payment and I do think that our economy like you go to the US like not everyone's driving a brand new car and Canada like there's and maybe that is something to do with like climate and we're so much salt on the road's here whatever I don't know that they're giving it a really the benefit of the doubt but I honestly think it's just.

[00:19:50] We're such a credit for the economy yeah I mean you know you mentioned the states you know I was I was recently in Europe and one of the main things I saw was the amount like.

[00:19:59] There must be you know 15 20% of the cars in the road must be brand new cars whereas you come back to Canada and it's got to be like 80% of the cars are probably you know five years or less.

[00:20:10] Yeah, yeah like probably still have some type of finance.

[00:20:12] Yeah, so a big piece of this comes from you know what I would call mentally counting people organize their financial lives and the budgets and they think that most people really think in terms of because we're not like a wealthy society here in Canada.

[00:20:25] And I'm not saying that to be like negative.

[00:20:27] Our household savings rates aren't massive compared to other countries we don't have a ton of equity and if or cash and if we do most of our equity or or our household savings is trapped in our houses as equity.

[00:20:38] And so people think about okay what can I afford based on my income because we have always had job security here in Canada for a pretty long time and you know the last recession we didn't get hit that hard.

[00:20:49] I think that's about to change personally of throw a disclaimer in there but most people think about what can I afford on a monthly basis rather than an all-arge lump sum and that makes it easier mentally manage these expenses right it's almost like irrationalizing.

[00:21:02] Oh, it's not that bad right.

[00:21:04] Yeah, then you know you don't think oh I just paid 150 grand for a vehicle you're like oh yeah I can I can afford to pay for this for eight years.

[00:21:11] Yeah exactly we've just we've normalized the you know the debt that we're in right and you know in a low interest rate environment which we are in for quite a while.

[00:21:21] The meetings have become very comfortable with high levels of debt and the focus again, Dan is you're saying has shifted from hey I can afford this to hey I can service this debt.

[00:21:33] I can manage these payments rather than minimizing debt or trying to understand what that actual total cost is over time.

[00:21:42] Yeah for sure and then I think like in you know we always talk about delayed gratification like making sacrifices today that benefit you in the future.

[00:21:50] The debt and focus on payments is the opposite it's delaying consequences right so since the total cost of a mortgage or a car loan is paid out over many years the long-term financial burden feels very distant it's outside of the mind right.

[00:22:02] The immediacy of the monthly payments feels more real and manageable.

[00:22:06] Yeah, I mean I wonder how they're going to tear the CMHC down payment structure when they do increase it to 1.5 million so.

[00:22:12] Here's a format for down payment requirements and mortgage insurance so CMHC mortgage insurance this is the current structure that goes up to 1 million dollars.

[00:22:25] Okay, so homes under $500,000 the minimum down payment of 5% for the first $500,000.

[00:22:32] The next piece is homes between 500,000 and that 999,000 that 999999 minimum down payment of 5% still going back on that first 500,000 and then 10% on the portion between that 500 and that 99999.

[00:22:49] And then we get to the homes that are $1 million and over now CMHC insurance is not available for homes of that price category conventional mortgages which are 20% down are required for properties $1 million or more.

[00:23:06] So I came up with sort of like a potential extension to 1.5 million and this is my hypothetical format which would you know that because I don't think there's details on it but starting December 15th.

[00:23:17] If CMHC were to extend insurance coverage for properties up to 1.5 million here's what I think it would look like 5% up to the first 500,000 then 10% on the portion between 59999 and then 15 to 20% so they would require probably that full amount on the payment of the portion or on the

[00:23:36] portion between 1.5 million.

[00:23:39] Yeah, very interesting and I'd take a while to guess and say probably not so far off and if anyone from CMHC is listening to this feel free to use Dan's idea.

[00:23:49] So let's take your example Dan and actually run some calculations on it for a theoretical $1.5 million.

[00:23:57] Okay, so look again first $500,000 5% that is $25,000 cash needed.

[00:24:05] Then we look at that portion between 500 and 9999 so that's 10% to that first 500,000 so it's another 50 grand and then we'll get the portion between that one and that 1.5 million assuming with Dan's new tier

[00:24:21] with 15% down so 15% of 500,000 is $75,000.

[00:24:27] So that total down payment you've got the 25,000 for the first 500,000 50,000 for that 500 to the 9999 and 75,000 for that 1 to 1.5 million which brings you to a grand total of $150,000 10% of 1.5 million which is some pretty crazy savings from what we are dealing with currently.

[00:24:51] Yeah, sounds like a pretty good guess honestly.

[00:24:53] I think the crazy part is that this would get you like the best rates in the market like if you're an insured borrower,

[00:25:00] I think you typically get the best rates right and you also if you're a first time home buyer or home buyer period you get tax recapital gains.

[00:25:08] So this is where we've created this kind of perversive incentive for people to take as much leverage as possible and buy the most expensive house that we possibly can.

[00:25:16] And just basically like ride the capital gains, you know, thing in the primary residence and this I think this is why we're having this conversation on the Canadian real estate investor podcast because most people treat their houses like they are an investor right.

[00:25:35] Yeah so anyway let's move on to just some commentary from the government website about them increasing the immunization and the insurable amount.

[00:25:46] Yeah sure so the Canadian government proposed changes to the mortgage market expanding 30 year amortizations and raising the insured mortgage cap.

[00:25:58] Yeah, so that's just what we summarized and listen closely here because this part is important.

[00:26:03] First time home buyers and those purchasing new builds will be eligible for insured mortgages with 30 year amortizations up from 25 years.

[00:26:12] Yeah that part is really interesting because they made it so the first time home buyers get 30 years, but also that all buyers get it if they are buying a brand new unit.

[00:26:24] Yeah I noticed that Steve Sir asks you pointed out on Twitter that Freeland did refer to it as a supply side solution which means that, you know they want this to stimulate demand for supply to get new construction homes built.

[00:26:38] Yeah I mean and I know that your very concerned about the lack of sales for peak construction in today's market.

[00:26:45] I do think that when the lack of pre construction sales hits the new construction pipeline it could be the largest problem facing Canada's economy in a year or two.

[00:26:55] And I think that increasing the buying power of new home buyers while I don't love it like at all I actually don't think it's I think it's a little bit reckless from policy perspective if I have made that clear yet I don't like the piling on more debt, but it is a way probably not the best way but it's a way to reduce that risk.

[00:27:12] Yeah I mean I know I know you don't love it because you took the liberty of putting out a nice sassy tweet on it that I'm going to read here.

[00:27:19] So just call me tweet sassy yeah I mean it's kind of sassy now take it easy and let me read it here okay this is this is a Daniel Folcher original here read by Nick Hill.

[00:27:29] Just to get things even more confusing an important note among today's CMAC announcements all home buyers got 30 year ams on new builds that's 10 to 15% more buying power for brand new.

[00:27:42] Ph Claire's owners and all the items in the homes with the same income remember when I said that we'd see a bailout for builders facing failed closings this is the first layer.

[00:27:51] Doctor.

[00:27:51] That is a little bit of a puzzle a little bit.

[00:27:54] You're just projecting your own sass on my tweet.

[00:27:58] And I guess it does come off a little bit sassy

[00:27:59] when you read it in that, too.

[00:28:01] That's okay.

[00:28:01] I put my sass tone on now.

[00:28:03] No sass in 10 now.

[00:28:05] Just a reminder that as you mentioned previously,

[00:28:07] and these changes do not come into effect

[00:28:11] until December 15th of 2024.

[00:28:14] So we're recording this in kind of mid September.

[00:28:16] So we still have a few months before this is a reality here.

[00:28:18] Yeah. And the government said that the aim is to help

[00:28:21] Canadians afford the first home by reducing monthly mortgage payments

[00:28:24] and lowering down payment requirements thus like,

[00:28:27] again, just do the math.

[00:28:28] That means that you have to have more debt, right?

[00:28:31] So yeah.

[00:28:31] If there's less down payment and more payments over time,

[00:28:34] it's more debt.

[00:28:35] Exactly. Now, deputy prime minister and minister of finance,

[00:28:40] Chrissy of Freeland made the announcements on Monday,

[00:28:43] just September 16th in Ottawa,

[00:28:46] where members of parliament are reconvened

[00:28:48] meaning for the start of the fall sitting in the house of Commons.

[00:28:52] She positioned that changes as helping Canadians

[00:28:55] afford a first home.

[00:28:57] So that's how it was sold to parliament.

[00:29:00] Yeah. And I, like, it's, I don't,

[00:29:03] I think it will help Canadians buy a first home.

[00:29:05] I think I don't think it will help them afford the first home

[00:29:08] because it's technically financially worse decision.

[00:29:12] Mathematically, right?

[00:29:13] Like putting aside the time value money and whatever,

[00:29:15] but anyway, and this is where it becomes kind of important, right?

[00:29:18] A lot of Canadians use their house as a savings vehicle,

[00:29:21] which means that you know, they're paying principle down

[00:29:24] over the course of their amortization schedule, right?

[00:29:26] So maybe this would be a good time for us to enter Jack

[00:29:29] and talk a little bit about one of my,

[00:29:32] one of my favorite things in real estate,

[00:29:34] which is amortization.

[00:29:35] So why don't we do a little quick refresher on amortization as well?

[00:29:38] Yes, of course.

[00:29:39] Amortization from the Italian amoreatization.

[00:29:43] No, it's not actually, but your amortization...

[00:29:46] Well, it would be the same, but anyway, we had this discussion already.

[00:29:49] I think they are like the same.

[00:29:50] They're both Latin based life,

[00:29:51] because it probably comes from the same,

[00:29:52] but it's not based in love,

[00:29:54] it's based on death actually,

[00:29:55] because I'm mort.

[00:29:56] It's the mort, not the...

[00:29:57] Of the death pledge.

[00:29:58] Remember, we got those shirts, go buy one.

[00:30:00] Your amortization period is the number of years

[00:30:04] you will need to pay off your mortgage,

[00:30:07] the length of your amortization period can affect

[00:30:10] how much interest you pay over that life of your mortgage.

[00:30:15] So historically,

[00:30:16] the standard amortization period has been 25 years.

[00:30:20] However, shorter timeframes and longer timeframes

[00:30:23] may be made available,

[00:30:25] depending on the program like MLI select 55 years

[00:30:28] or the amount of your down payment, et cetera.

[00:30:31] Yeah, exactly.

[00:30:32] Now, a shorter amortization can save you money

[00:30:35] as you pay less interest over the life of your mortgage.

[00:30:38] Your regular mortgage payment demand would be higher

[00:30:41] as you are paying off your balance in less time.

[00:30:45] However, you may build the equity

[00:30:47] in your home faster and be mortgage free sooner.

[00:30:53] Yeah, so the amortization is basically

[00:30:54] how fast you pay back the money that you owe.

[00:30:57] A longer amortization period requires lower monthly payments.

[00:31:00] However, you will pay more interest over the life

[00:31:02] of your mortgage because you're paying down the money

[00:31:05] that you owe less, which means you're paying more interest

[00:31:07] on the money that you owe.

[00:31:08] And it would take you longer to build the equity in your property.

[00:31:12] And then your known as a bit of a chart guy

[00:31:14] in the real estate community here in Canada.

[00:31:18] And you've said multiple times that you feel

[00:31:20] the amortization schedule is one of your favorite charts

[00:31:24] in real estate.

[00:31:25] Can you tell me and our lovely listeners why that is?

[00:31:30] The, this could be the most important chart in real estate.

[00:31:33] I believe my quote was actually that it's the most beautiful chart

[00:31:36] and that's because it shows how with every month

[00:31:42] that goes by, you pay less interest and more principle.

[00:31:45] Which means that the rate at which your property pays

[00:31:48] itself off if you're an investor increases every month

[00:31:51] based on the same payment.

[00:31:53] That means that real estate improves as an investment

[00:31:56] every day that it goes by.

[00:31:58] So an amortization schedule is a table that shows

[00:32:02] how your loan is paid off over time,

[00:32:04] breaking down each payment into the two parts,

[00:32:07] which is principle and interest.

[00:32:09] So here's how it works in simple terms.

[00:32:13] First is your loan breakdown.

[00:32:14] Now when you take out a loan like a mortgage,

[00:32:16] you agree to pay back that money, the U board,

[00:32:20] which is the principle amount plus for the availability

[00:32:25] of that loan, you pay interest over a set period of time

[00:32:28] like we just said 25 or 30 years.

[00:32:30] Now every month you make a fixed payment

[00:32:33] that covers both the interest on the loan

[00:32:35] and the portion of the principle that you owe.

[00:32:39] And interest goes down over time.

[00:32:41] So at the beginning of the loan,

[00:32:43] most of your monthly payment goes towards interest

[00:32:45] because you owe a large amount of money.

[00:32:48] Over time as you pay down the principle,

[00:32:50] the amount of interest that you owe each month decreases

[00:32:52] because the interest is calculated based on the remaining

[00:32:55] loan balance which is shrinking every time you make a payment.

[00:32:58] Now as the interest goes down, guess what?

[00:33:01] Your principle goes up over time.

[00:33:03] At the start only a small portion of your monthly payment

[00:33:06] goes towards that principle which is the actual loan balance.

[00:33:10] That's the actual amount of money that you borrowed.

[00:33:13] Now as the interest portion decreases,

[00:33:16] more of that payment goes towards reducing that principle amount.

[00:33:19] This means that you are slowly paying off

[00:33:22] more of the actual loan each month over time.

[00:33:27] So let's just use a simple example.

[00:33:29] If you have a hundred thousand dollar mortgage

[00:33:30] and a five percent interest rate on a 30 year term,

[00:33:33] your first payment, a large portion of your first payment

[00:33:35] is going to go to interest.

[00:33:36] Say, $416 in interest and $84 towards the principle.

[00:33:41] Later payments as you pay down the loan,

[00:33:43] the interest decreases for example after a few years,

[00:33:46] you might pay $300 in interest

[00:33:48] and $200 towards the principle.

[00:33:50] By the end of the loan term,

[00:33:52] almost all of your payment will go towards the principle

[00:33:54] and only a tiny amount toward the interest

[00:33:56] because you will have paid off most of the loan.

[00:33:58] So you don't owe very much interest on the mortgage anymore.

[00:34:01] Yeah, well said then now the last piece I want to add here

[00:34:04] could this mean that we begin to lose tenants

[00:34:08] because as of recent data around 80% of first time home buyers

[00:34:11] in Canada rented before purchasing their first home.

[00:34:16] Now this statistic has remained relatively consistent

[00:34:19] in recent years reflecting that the most common path

[00:34:23] is from renting to home ownership for many Canadians.

[00:34:28] Yeah, it makes sense because I think a lot of people like

[00:34:30] want to, you know, you're very rarely seeing

[00:34:32] a single income households anymore in Canada.

[00:34:35] Obviously based on affordability and need to

[00:34:37] income stuff for the house.

[00:34:39] So a lot of people will want to experience

[00:34:40] with co-habitation in the rental format

[00:34:42] before they go buy a place together

[00:34:45] and then you get used to making the payments

[00:34:47] and whatever it is.

[00:34:48] And this percentage would obviously very slightly

[00:34:50] depending on the region, economic conditions

[00:34:52] and housing market trends.

[00:34:54] For example, major bin centers like Toronto and Vancouver

[00:34:56] I mean even where you're not seeing, you know,

[00:34:58] like romantic partnerships you're seeing

[00:35:00] roommates and a lot of co-ownership in, you know,

[00:35:03] just like friendship or co-investment situations.

[00:35:07] That's where home prices are high

[00:35:08] in a larger portion of first time buyers

[00:35:10] might rent for extended periods while saving up enough money

[00:35:14] to transition into home ownership.

[00:35:16] Yeah, I mean if it becomes easier for people to buy homes

[00:35:20] due to things like lower interest rates

[00:35:22] or more accessible mortgage financing

[00:35:25] or even government incentives,

[00:35:27] the tenant pool could theoretically

[00:35:29] and likely shrink as a result

[00:35:32] than more people start to transition

[00:35:34] from renting to home ownership.

[00:35:36] However, the impact of the tenant pool size

[00:35:39] would depend on several factors.

[00:35:42] Yeah, and the key factors that you would want to consider there

[00:35:44] is if a significant number of renters can afford to buy,

[00:35:48] this would reduce demand for rental properties

[00:35:50] causing the tenant pool to decrease,

[00:35:52] especially in markets where renting is currently

[00:35:54] in a necessary due to affordability challenges.

[00:35:56] Yeah, then we've got to consider rental supply and demand.

[00:36:00] Now, while home buying would reduce the tenant pool,

[00:36:02] the supply of rental properties may also decrease

[00:36:06] landlords may sell their properties

[00:36:07] further reducing the number of rentals

[00:36:10] available creating a shift in the rental market dynamics.

[00:36:15] Exactly.

[00:36:16] And then you add on top of that population growth.

[00:36:18] So in regions with high immigration or population growth,

[00:36:21] which is pretty much everywhere in Canada at this point,

[00:36:23] the demand for rental properties might remain strong

[00:36:26] despite high home ownership rates.

[00:36:28] New commerce to the country or the market

[00:36:31] often prefer to rent before buying statistically,

[00:36:34] I think it's on average three years

[00:36:36] that they would rent before they purchase a house.

[00:36:38] And this makes sense, right?

[00:36:39] Like you move to a new country.

[00:36:40] I personally wouldn't just guess

[00:36:42] that I like a place enough to,

[00:36:44] like a city that I live in enough or neighborhood

[00:36:47] to just go and buy a house.

[00:36:48] I'd probably like to test it out

[00:36:50] and feel the place out first.

[00:36:51] Exactly.

[00:36:52] It's a little bit like dating before hopping

[00:36:54] right into a marriage.

[00:36:56] And some people have that preference for renting,

[00:36:57] right not everyone wants to be a homeowner,

[00:37:00] whether now or ever.

[00:37:03] Even if it is easier,

[00:37:05] some people prefer the flexibility of renting,

[00:37:07] especially with cities with higher mobility,

[00:37:10] like Toronto, Vancouver, where jobs and changes

[00:37:12] in the lifestyle or choices can make renting more attractive.

[00:37:16] I mean, Dan, you and probably most of our audience

[00:37:18] knows at this point that I've been renting

[00:37:19] for my whole life,

[00:37:21] well still buying real estate investments

[00:37:23] in other markets.

[00:37:26] Yeah, and I did the same thing for a long time.

[00:37:28] And a lot of people that I know

[00:37:29] in the investment banking space,

[00:37:32] as an example, I just use them

[00:37:33] because they are pretty good capital allocators,

[00:37:35] but they all rent most of them

[00:37:39] because it's a liquidity preference.

[00:37:40] So the preference that you just said,

[00:37:42] it's like for them,

[00:37:43] they're just paying a tax each month

[00:37:44] that they don't have to own their house,

[00:37:45] but they all of the money

[00:37:46] that they would otherwise have invested in their house.

[00:37:48] If they get a great deal,

[00:37:49] it comes across their desk

[00:37:50] or really get opportunity to trend in the market.

[00:37:52] They can take that million dollars

[00:37:53] or whatever that they would have had

[00:37:55] sitting aside for a house

[00:37:56] and put it into that opportunity,

[00:37:58] which is gonna get them a better return

[00:37:59] than home ownership.

[00:38:00] The next reason this is what you mentioned

[00:38:02] is what you do is investor purchases.

[00:38:05] If easier home buying terms also implied investors,

[00:38:08] some may purchase properties as rental investments.

[00:38:10] You get a ton of people right now buying

[00:38:13] like a lot of people in our real estate CA course

[00:38:15] are doing the house hack.

[00:38:16] I literally have never modeled so many house hacks

[00:38:19] or like call-steps.

[00:38:21] But this is where we're at,

[00:38:22] and it's I love to see it

[00:38:23] where people are getting a portion of their home,

[00:38:25] their primary residence, home purchase,

[00:38:28] subsidized by a tenant in the basement

[00:38:30] or a garden suite in the backyard or whatever.

[00:38:33] This piece could offset that shrinking tenant pool,

[00:38:35] maintaining or even increasing the supply of rental properties.

[00:38:38] And this is where that policy could actually move

[00:38:42] some of that investor demand,

[00:38:43] hopefully towards new houses.

[00:38:45] I know you and I were just gonna call

[00:38:46] with a developer from Saskatchewan

[00:38:49] and pre-construction broker here in Ontario,

[00:38:53] trying to basically figure out

[00:38:54] how to have a similar environment

[00:38:55] for pre-construction purchases in Saskatchewan.

[00:38:59] If we can get investors to be able

[00:39:02] to buy these properties that will cash flow,

[00:39:04] they're gonna be creating housing supply in the process.

[00:39:07] Yeah, exactly now.

[00:39:08] The last piece to consider here is of course

[00:39:10] the economy and the economic conditions.

[00:39:13] If the economy is growing, wages are rising,

[00:39:16] more people are buying new homes, likely shrinking

[00:39:20] that possible, tenant pool.

[00:39:23] But what about the flip side?

[00:39:24] What if it was a weaker economy

[00:39:26] even with easier home buying conditions?

[00:39:29] Some people may choose to continue just renting due

[00:39:33] to a little bit of uncertainty, right?

[00:39:35] We don't know what's gonna happen in the next couple years.

[00:39:36] If the last few years have taught us anything,

[00:39:39] it's that things get pretty volatile

[00:39:41] and no one can really plan for them.

[00:39:43] Yeah, it is interesting to think about it that way

[00:39:45] because you see a lot of people selling right now

[00:39:47] to define an actual stress.

[00:39:49] In my perspective, a lot of those people would be,

[00:39:52] they would eventually go rent.

[00:39:55] And that could also put upward pressure on the house,

[00:40:00] but you still have 200K equity in it

[00:40:01] or 500K equity in it or whatever,

[00:40:03] but you just can't deal with the payments anymore.

[00:40:05] You don't wanna default and you just wanna take a break

[00:40:06] for a couple of years, wait for rates to come down,

[00:40:09] get your finances in order, right?

[00:40:11] You could sell and rent for a couple of years.

[00:40:14] And now all of a sudden, you're a seller,

[00:40:18] putting supply into the resell market

[00:40:21] and you become a tenant.

[00:40:22] And so it's really interesting to think

[00:40:24] about all of these factors at play right now

[00:40:27] while we're in such a dynamic economy

[00:40:29] where you've got unemployment rising, rents stagnating,

[00:40:34] people moving all over the country,

[00:40:36] you know, policy, huge policy changes being thrown

[00:40:38] in the mix like this.

[00:40:39] So you really wanna think about

[00:40:40] what's that long-term impact on the rental market?

[00:40:43] And rents could stabilize or decline

[00:40:44] if the tenant pool shrinks.

[00:40:46] And there's less competition for rental units

[00:40:48] and landlords may have to reduce rents

[00:40:50] or offer more incentives to attract tenants.

[00:40:51] And I think you're seeing this in the condo space

[00:40:53] and downtown Toronto right now.

[00:40:56] But you can also see like a bit of a shift

[00:40:57] in rental demographics with many first-time home buyers

[00:41:00] and exiting the rental market,

[00:41:02] the remaining tenant pool might consist of younger individuals,

[00:41:05] temporary residents, which there's a lot of

[00:41:06] and you're really seeing Toronto evolving

[00:41:08] as one of those gateway cities like New York

[00:41:10] or London and by no means like compare it

[00:41:12] or you can say, you're a player.

[00:41:13] It's calling it a gateway.

[00:41:15] But you know, New York I think like the average tenure

[00:41:18] of somebody living in New York would be like five

[00:41:19] between five and 10 years.

[00:41:21] So if somebody moves there they get a good job,

[00:41:22] they meet some people then they find

[00:41:24] the other place in the US that they wanna move,

[00:41:26] London being the same thing.

[00:41:27] Toronto definitely being the same thing.

[00:41:29] I think like almost half of the permanent residents

[00:41:32] that come to Canada end up in the greater gold

[00:41:34] and horseshoe like the GTA.

[00:41:36] And so thinking about that.

[00:41:38] But then also just people who prefer renting

[00:41:39] and then I think like if the rental market loosens a little bit,

[00:41:42] you might see a lot of shift of these downsizers

[00:41:45] who often believed in home ownership

[00:41:47] or we have a really cool episode coming up

[00:41:49] about baby boomers and downsizing

[00:41:51] and millennials and Jen,

[00:41:53] what's the bus and bus and no cap ones?

[00:41:55] Jen and Z.

[00:41:56] Then Brock, it broke so mid, bro.

[00:41:59] Come on.

[00:42:00] Is that good or bad?

[00:42:01] I think it's mid, because it can't.

[00:42:03] What's it can?

[00:42:03] It is just like that middle mids,

[00:42:06] like in the middle.

[00:42:07] That makes sense.

[00:42:08] I mean hey, that's the one

[00:42:09] that I have tried to adopt in my regular everyday speech.

[00:42:14] Yeah, okay.

[00:42:15] That's, man we can probably get so much housing built

[00:42:18] and we change it from missing middle housing

[00:42:19] to missing middle housing really.

[00:42:23] Just got a rent, it probably just like those.

[00:42:26] Yeah, anyway.

[00:42:27] I think like this is where there's so many factors

[00:42:30] and formulating an investment thesis

[00:42:32] is like you've just gotta take all of these crazy inputs

[00:42:35] and just be like okay.

[00:42:36] You know think about like think back to the beginning

[00:42:38] of COVID, right?

[00:42:39] It's like there's only one person that I know

[00:42:41] that got it right which was that Gary guy

[00:42:43] that I sent you on YouTube, Gary's economics.

[00:42:46] He's brilliant this guy.

[00:42:48] But he saw this huge run up in house price.

[00:42:51] I didn't.

[00:42:52] I've always been bearish and I got it right

[00:42:54] the most recent time but I definitely got it wrong

[00:42:56] in the way into COVID.

[00:42:58] I remember going out with clients being like,

[00:43:00] oh, it feels like the scariest time ever to buy house.

[00:43:04] And the ones who did it made like,

[00:43:06] I know somebody literally made a 60% increase

[00:43:09] in two years on and sold and upsized

[00:43:12] into something else.

[00:43:13] They bought in 2020 like the week or two

[00:43:16] after the pandemic thing started.

[00:43:18] Anyway, point being had you processed all of those inputs

[00:43:22] and made the right decision.

[00:43:25] You wouldn't been the person making that massively

[00:43:26] outside return of 60%.

[00:43:29] Compared to, you know, the like,

[00:43:34] the people or me who thought the other way, right?

[00:43:36] Today, I think it's the same thing.

[00:43:38] You look at what's happening with tenants,

[00:43:40] what's happening with unemployment,

[00:43:41] what's happening with policy, et cetera.

[00:43:43] There's got to be like a four mil,

[00:43:44] something you can formulate where

[00:43:45] if you get the right combination of okay,

[00:43:47] I think these inputs is gonna,

[00:43:48] the first order effects is gonna be this,

[00:43:51] the second order effects is gonna be that.

[00:43:53] And then all of a sudden you make a bet.

[00:43:55] You could have a massively better return.

[00:43:58] You could outperform anyone you know as an investor

[00:44:00] if you formulate your thesis right based

[00:44:02] on all of these inputs.

[00:44:03] And that's what this whole show is about.

[00:44:05] That's what we talk about on the course.

[00:44:06] That's what our whole thing is about.

[00:44:07] It's like creating investment thesis.

[00:44:09] Don't just buy something with no guidance or no plan.

[00:44:13] Really, really think deeply about it.

[00:44:15] That's what I'm challenging to do in today's episode.

[00:44:17] Yeah, I love that.

[00:44:18] You know, again, I think the investment thesis piece

[00:44:20] is lost on so many, but it can not be.

[00:44:23] It's just pieces.

[00:44:24] I cannot stress how absolutely crucial

[00:44:26] having a well formulated investment thesis.

[00:44:29] And that's again, Dan, as you said,

[00:44:30] one of the things that we focus on in the real estate

[00:44:32] course with almost 100 amazing members across the country.

[00:44:37] If that is not your cup of tea right now,

[00:44:39] then once you start things off by attending or joining one

[00:44:42] of our meetups, almost 4,000 people in 24 cities

[00:44:46] across the country, I was looking at the map

[00:44:48] with all the red dots, and I was like, man,

[00:44:49] this is so cool.

[00:44:50] I don't even know if there's many other cities

[00:44:52] that we can put a red dot and get a meetup going in.

[00:44:55] So only if we go to the US probably.

[00:44:56] Yeah, well, there you go.

[00:44:57] And then we've North American take over.

[00:44:59] So that's my advice today.

[00:45:02] Utilize the work that Dan and I have,

[00:45:05] and the machine that Dan and I have built

[00:45:07] for you, attend a meetup, link in the show nuts,

[00:45:10] and join the realist.ca course.

[00:45:14] There is also a free version.

[00:45:15] We won free webinars, the next webinars on VTB,

[00:45:19] vendor take back mortgages.

[00:45:20] It will be available in it's out later this week.

[00:45:24] So be sure to check that out.

[00:45:26] And I guess we'll finish off with a review.

[00:45:27] I think we're doing those at the end now to remind you

[00:45:30] when this episode signs off that we

[00:45:32] won't eat a diva-ser reviews.

[00:45:34] So this one says, what does it say?

[00:45:37] Amazing podcast.

[00:45:39] Having five stars having recently purchased

[00:45:42] my first rental property, I can confidently say

[00:45:44] that this podcast and community they created on school,

[00:45:48] realist and brackets were key in the purchase.

[00:45:51] The podcast is incredibly valuable.

[00:45:53] Pact with insights and information

[00:45:55] that provide a comprehensive overview of the current housing

[00:45:58] market.

[00:45:59] The best part is they also created the realist community,

[00:46:01] which goes deeper and is also packed with information.

[00:46:05] I couldn't have achieved this without the help from Dan

[00:46:07] and it actually says, Mitch in the review,

[00:46:11] but I'd correct it to Dan and Nick and Mitch.

[00:46:14] Thank you, Mitch's our business partner in the course.

[00:46:18] So thank you for leaving this review.

[00:46:19] I don't have the name.

[00:46:22] It says, hungry bull tent at a tent,

[00:46:23] which is a pretty sick review, right?

[00:46:25] Love it actually.

[00:46:26] Thank you very much, hungry bull.

[00:46:28] Congratulations on your purchase.

[00:46:29] Glad we could be a part of it.

[00:46:30] I got to figure out who you are, but thanks a lot, everyone.

[00:46:33] Please leave a sub-view.

[00:46:34] Please come to a meetup.

[00:46:35] We love meeting all of you.

[00:46:37] We Nick and I attend at least one meetup per month.

[00:46:40] And come check out our free webinar.

[00:46:41] If you want to just see what realist is all about

[00:46:43] and get a feel for like what kind of content,

[00:46:46] you'll be doing it.

[00:46:47] We do monthly free webinars.

[00:46:49] So make sure you come out to those

[00:46:51] and the first one is for this quarter of the year

[00:46:56] is September 20th at 11 a.m.

[00:47:00] And if you miss it, the recordings are always available

[00:47:03] and they come with a lot of cool stuff like work sheets

[00:47:05] and checklists and clauses and turn machines

[00:47:09] that you need for this one's about vendor take back mortgage.

[00:47:13] So anyway, thanks a lot for listening

[00:47:14] and we'll see you on Friday.

[00:47:18] The Canadian real estate investor podcast

[00:47:20] is for entertainment purposes only and it is not financial advice.

[00:47:25] Nick Hill is a mortgage agent with premier mortgage center

[00:47:28] and a partner in the G and H mortgage group.

[00:47:32] Licent number 10317 agent license M21004037.

[00:47:40] Dinofosh is a real estate broker,

[00:47:42] licensed with rare real estate,

[00:47:45] a member of the Canadian Real Estate Association,

[00:47:47] the Toronto Real Estate Board and the Ontario Real Estate Association.