Sarah: Hey REITE club nation, it's Sarah Larbi here. And welcome to this podcast episode. Recently, we had a special national webinar event related to the numerous federal budget announcements about real estate and brought together a number of experts to offer their thoughts on what this can mean to you.
In this episode, I had the opportunity to speak to Brian Hogben from mission 35 mortgages about what we need to know from a financing and mortgage standpoints. And I'm sure that these insights were helpful to your real estate investing business and how to move forward as well. Be sure to listen to the other special episodes that are cut out each Tuesday in May.
And now here is Brian Hogben from Mission 35 Mortgages, also a sponsor and longtime supporter of our club. Brian began his career as a commission based mortgage agent, built a massive real estate portfolio and opened Mission 35 Mortgages becoming one of the top mortgage brokers in its first three years of existence. And it currently has 11 locations across Southern Ontario. Wow, you are growing fast.
You are also the author of How to Get Mortgage Free, Really F*$%ing Fast. There's like a, you know, I won't say the word, but I guess that's in your title to show other people that becoming mortgage free many years earlier than what typical Canadians think is possible. It's not just a pipe dream. It can be reality. Welcome Brian.
Brian: Thanks Sarah. Thanks for having me. And congratulations on the five years. That is absolutely amazing. It's so great to be a part of this community with you guys and see people you know, be a part of people getting their first rental property, second rental property, and you guys are really making a difference. To you Alfonso, Laurel, Daniel, kudos to you guys for five years. That's awesome. Good job.
Sarah: I guess we're gonna do a bit of a Q and A, so I know there's some questions that our REITE Club nation have been really wanting to learn and know more about. We'll have a few questions you can give us your best insights, financing obviously there's lots of changes happening. There's lots of talk. There's lots of increases and talks of increases. But in general, what do we need to look out for?
Brian: Well, the sky's not falling, but rates are going up. I think you know, we've all seen the fixed rates versus variable rates. Fixed rates have gone up steadily over the past. Well, really six months now we just started to see the variable rates go up and I always like to put things into perspective. When you go back to 2018, 2019, five year money was at around 4%, just under 4%.
Now you see five year money at 4% right now. And the bankers, when I talk to my really nerdy banker friends, like myself, about normal interest rates, they do wanna see them around the five. I wouldn't be shocked to see the bank rate getting up to over the next six months four and a half to 5% on the fixed. Just be aware, I think that's gonna happen. The banks were operating at really small spreads. I don't wanna cry the blues for the banks. They did okay right? But they normally operate at bigger spreads and by raising the rates, they're gonna be able to do that.
And then I think, we have the variable rate, the Bank in Canada made the half a point increase a couple last week seems like forever. But last week, they didn't meet again until June. Brace yourself because I think the inflation numbers for those of you saw, it just came out today and they were at a 31 year high.
It was 6.7% for inflation from March. That was higher than what people expected. I think of inflation, I always equate it to like a fast moving train. We've upped the rates by half a point, trying to slam on the brakes to slow down inflation. That's why they raised the rate.
I wouldn't be surprised if we see in June another quarter to half a point rise on that variable rate, it wouldn't shock me. I think it's really gonna come down to what is that inflationary number that comes out next month, right? When it comes out in April. If that number's high, expect a half a point increase again. If it's coming down, the one cool thing that I did notice in the articles the economists are saying right now is it's the first time they've said, our inflation might have peaked. No, one's said that before.
By them saying it might have peaked, that's actually a really good sign to say, well, maybe we're on the down end. I always look at it like this. I love car racing games. I've got a point here but like Inflation and the government of Canada, when they end up using rates to go up and down, I think about it like that car game. You don't want a car game and you go left and then you gotta like, oh, you went too far left.
Now, you gotta go right again. And you're trying to straighten out the car. Well, I think the government in Canada, they're a lot smarter than me playing a car game. But the idea is that when they raise rates, we always forget because we get kind of nearsighted and we think rates are going up. Rates are going up, rates are going up well, If the rates go up another half point in June and we have maybe other changes that happen. And then that actually slows down the economy has the intended consequence. And actually they went too far and if spending slows down and stops and they actually get borderline recession, what's the tool to stop a recession. You decrease rates.
I wouldn't be surprised if we see a quarter and a half in June. You know what, I would be surprised to see a quarter or a half in June, and then continue along that trajectory in the fall. Just the way things are looking right now. I wouldn't be surprised if we see a quarter and a half over the next two months and then possibly a level out.
You might even see a drop in the fall again, too, when it comes down to interest rates. I think, you know, when you're looking at your numbers as savvy investors, right? Like what we do with all our clients is build in that surplus, run your numbers on the cash flow based on the variable. Going up a quarter, going up a half, going up another quarter, do a cash flow analysis on yourself.
If you're really losing sleep, build in a buffer zone. Build in that buffer zone as if it's gonna go up. A really quick and dirty way to do it, 25 bucks, per hundred thousand on a half point that just went up in April. A lot of you won't actually see it or feel it until May because typically, if you have a variable rate mortgage, it won't come into effect until the next month. Just keep that in mind. I don't lock in and I'm just going on that because we see so many people asking right now based on the uncertainty, if we should lock into a fixed rate and please God no.
Sarah: I think that's important. And for me, I'm seeing variables and I think the Delta is quite high, that it doesn't make sense. And you take away from the control that you have to be able to refinance, but why are you saying that? Like not to lock in?
Brian: I think you're totally right Sarah. That is because you're right. The Delta doesn't make sense. You're locking in at almost 1.5% increase. I geeked out and I like to know numbers. If you had a $500,000 mortgage and you went up a half a point on a variable, your rate went up about 133 bucks, give or take. If you lock in, you're locking in your payment by 350 bucks higher. And you know what? Why lock in that sleep insurance or risk insurance?
Just for peace of mind. It's not worth it as real estate investors. We can't be emotional about these things. We need to end up doing that. That's why I say don't lock in the second thing that we often forget a variable rate gives you the most flexibility with most variable rates. You get a three month interest penalty. If life changes, if it makes sense to sell the property, refinance it, break that term. If you go and lock into a fix, because you're concerned, you don't lose the flexibility, but you're gonna pay a significantly higher penalty.
For both those reasons, right now, ride out the storm, you know what? You're gonna see your payments, go out, do the math, reach out to our team. We can give you the numbers if you want, but just don't lock in yet because I don't think the rates have to go up quite a bit more to reach that fixed rate. And I don't think you're gonna be seeing it.
Sarah: How many more increases like 0.25? Would that be to reach the fixed rate of what it is?
Brian: Sarah, you're making me do math now. I'm not a math guy. Okay. Mm-hmm but now you'd probably be looking at like, so you'd be looking at one and a half. That is two, four it's 10 it'd have to go up 10 times, 10 quarter point increase.
Sarah: And that's interesting. I don't think they're gonna go up 10 different times. I think they're probably gonna go up another, maybe four or five who knows right? The other thing I was gonna ask you is, you know, as they're making these increases, we're starting to see the market, you know, slowly, you know, people are, am I gonna stay on the sidelines?
I mean, obviously not experienced investors, but like maybe some newer home buyers or whatnot. What is this doing to maybe the newer home buyers qualification? Is that changing anything on their end? Are they kind of now being able to buy less than they used to be able to buy, you know, a month ago?
Brian: That's a great point, actually and it's an interesting thing for those of you looking to buy homes right now, there's a big dichotomy. That's what happened with the stress test. Now you can actually get approved more with a bank. If you're a first time home buyer or even an investor, you can get approved more on a variable rate now than you can on a fixed because of a variable rate right now.
You have to qualify at the stress test of five in a quarter. But because the five year money on a fixed is let's say 4%, you have to qualify at a rate of 6. Right now, depending on the product and this isn't the intention of the stress test, cuz it's actually driving more people to a variable rate, which is not supposed to be the intended consequence of the stress test. But what ends up happening is people choose a variable to get approved for more, but what is happening because these rates are going up.
I think what you will see in the coming weeks or months is in addition to the stress test where they'll universally make it either 5 and 3 quarters or 6%. And to your points there, that's gonna reduce qualification, because if the stress test goes up, cuz rates have gone up, that's bringing the price point that people can approve for down because their incomes are not going up. It's the same rate that the interest rate is. I think what you're gonna see is first time home buyers right now, unfortunately some of them are gonna be approved for less.
Sarah: Just another question, as you're talking and you're talking about these rate increases just from your experience, like how long does it take the market to actually shift? For example, is it three months? And then they're gonna see like every three months, what's happening in the market? And go from there, is it a six month leg? Like what are we looking at?
Brian: That's a great question. There's lots of different indicators. The one I looked at is basically housing. We get a lot of leading indicators at the brokerage because we see purchase agreements come in. One leading indicator that I see right now of a change in the market is that we're actually seeing more and more, every single day conditional offers. Whereas we were in a market before where that was just completely unheard of.
If you needed a property cash, no conditions. That's how you bought it right now, we'll get one or two conditional offers a day right now. What that means, that's a leading indicator that there's not as much competition anymore, or everybody's just pricing things outta the market. Now for that to flush through, I would say that's anywhere from 30 on the light side to 90 days.
The other indicator that we look at too, is we're very close with our appraisers. Appraisers right now are calling us and saying, hey, if you end up having any refinance like on the BRRRR programs where we're trying to refinance out the money for the renovation. Try to get the renovations done sooner than later, just because some lenders will only take appraisals for 60 days. Some will take 90, 120 of the comparables.
They'll only go so far back. For certain lenders, let's say if they'll only use an appraisal for two months, that means that any comparable sales that happened in February are done as the end of April. In may, they have to start using March comparables. It's not like we've seen, you know, the market hasn't gone down, but these are some of those leading indicators when appraisers start to tell us that, and we start to see conditional offers coming back.
It looks to be almost like more, there's less people in the market right now. And you know what for investors. Warren Buffet always says, I love that guy, "be greedy when people are fearful". And because there's that uncertainty right now. I think it's probably a great opportunity for real estate investors as well.
Sarah: A hundred percent. I mean, literally there's less than, today we actually got something with a condition, you know, which is very surprising. It used to have no conditions. And so for us, it's actually as long as the numbers work you know, and the strategy works and I think there's gonna be some strategies that might be riskier in these uncertain times.
Some strategies that will be a little bit less risky. You might wanna consider that and have a conversation with you know, your mortgage broker, like Brian for example. Any final words of advice or anything else that you wanna add about any changes or anything that we should be aware of or that might be coming down.
Brian: I would say, like one thing that we always end up talking about. I think every time I talk to The REITE Club, I always end up saying refinance now. I almost say it sounds like a broken record, but it's just been in this industry for so long. We're not in a market right now where the government's looking to make rules and regulations easier for investors. They just aren't. If they change rules, that's not great.
They'll change rules for first time home buyers to make it easier for them, not for our demographic. I've never had someone say, oh, I wish I didn't refinance because any property investor who's been in this for 5 or 10 years, I wish I bought more property when I could buy an investment property with 10% down. I wish I could buy more property when I could amortize it over 40 years.
We may be going into a time because with the federal budget, their focus is on getting Canadians into homes, not getting investors more money. There may be some restrictions there. I would say refinance now, take out the money that you can and not just refinance your rental, but your primary residence.
We're getting a lot of our past clients calling us now to say, hey, listen, you know what? I might be in a little bit of a negative cash flow position as rates go up. Because some people bought it pretty tight spreads when it came down to cash flow. Why don't I refinance my primary residence just in case, the rates go up a little bit more, put it over a 30 year amortization again.
Now I have a bit of a buffer zone. I can still opt to prepaid more if I have a mortgage on my house, but I have the option to pay more. I don't have to pay more. I think refinancing that out, putting it over 30 years, again is a great strategy right now. I know you guys talk about this a lot. It is just making sure that you have a look at your properties and making sure that they meet your goals, like making sure that your properties that you've had.
Still meet your goals like I have a property right now that I've had for 10 years. It doesn't make sense to refinance it. Because they'll be underwater because I didn't increase my rent. I didn't go there. That was really bad for me, but it doesn't make sense. I would be over $1,500, negative cash flow to refinance it.
Now I've gotta sell that. And then I'll reinvest it to get it to work for me better. And I think just be married to your strategy and your spouse of course, but don't be married to the property. Be okay to let something go and make sense to reinvest it. And I think that's about it and make sure you just talk to your mortgage broker about your numbers.
Sarah: Amazing. Thank you so much, Brian, we'll put your contact information there so that The REITE Club nation can reach out and contact you, but I a hundred percent agree, even if you don't need it today, you might as well refinance. If you've got some equity and you still have your T4 income, or you have the ability to easily refinance, cuz again, you can't always refinance once you leave your job or different circumstances happen. But if you have equity and you can even if you don't need it, at least it's there for the future. Thank you so much, Brian. Really appreciate it.
Brian: Thanks Sarah.
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