Mortgages & Financing with Brian Hogben


Given the multiple announcements made in the Federal budget which will have an impact on real estate investors across the country join us for a special edition of our National event to hear from professionals in tax, financing, rent-to-own, and real estate about what the budget proposal may and will mean and what you can be doing to mitigate their impact. In this session join Brian Hogben as they talk about Mortgages & Financing.

Sarah: 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.
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". 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. Congratulations on the five years. That is absolutely amazing and so great to be a part of this community with you guys and be a part of people getting their first rental properties, second rental property, and you guys are really making a difference. To you, Alfonso, Laurel, Daniel kudos to you guys for five years.

Sarah: Amazing, I guess we're going to do a bit of a Q and A. 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: The sky's not falling, but rates are going up. I think we've all seen the fixed rates versus variable rates. Fixed rates have gone up steadily over the past six months. Now, we've just started to see the variable rates go up too. 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 talked to my really nerdy banker friends, like myself, about normal interest rates, they do want to see them around the five.

I wouldn't be shocked to see the bank rate getting up to over the next six months 4.5% to 5% on the fixed. Just be aware, I think that's going to happen. The banks were operating at really small spreads. I don't want to cry the blues for the banks, they did but they normally operate at bigger spreads and by raising the rates, they're going to be able to do that.

I think we have the variable rate, the Bank of Canada made the half a point, increased a cup while last week seems like forever ago, but last week, and then they don't meet again until June. Brace yourself because I think the inflation numbers for those of you aside just came out today and they're out at a 31 year high.

It was 6.7% inflation for March and that was higher than what people expected. I think of inflation, I always equate it to a fast moving train. We up the rates by half a point, try to slam on the brakes to slow down inflation. That's why they raised the rates. I wouldn't be surprised if we see it 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 that inflationary number that comes out next month when it comes out in April. If that number is high, expect 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 seen our inflation might've peaked. No one's said that before. By them saying it might've peaked, that's actually a really good sign to say maybe we're on the downside.

I always look at it like this. I love car racing games. I've got a point here. Inflation and the government of Canada, when they end up using rates to go up and down, I think about it like that card game. You don't want a car game and you go left and then you gotta oh, you went too far less than now. You gotta go right again. You're trying to straighten out the car.

The government of Canada, they're a lot smarter than me playing a card game. The idea is that when they raise rates, we always forget because we get nearsighted and we think 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 consequences. And actually they went too far and if spending slows down and stops and they actually get a 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. I would be surprised to see a quarter or 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, when you're looking at your numbers, you are a savvy investor, right? What we do with all our clients is build in that surplus, run your numbers on the cash flow based on the various. 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, building that buffer zone as if it's going to go up. A really quick and dirty way to do it. 25 bucks per a hundred thousand on a half point increase because the half point that just went up in April. A lot of you won't actually see it or feel it until May.

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 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 okay.

Sarah: I think that's important. For me, I'm staying variable and I think the Delta is quite high, that it doesn't make sense. 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. Why locked in that sleep insurance or risk? 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 fixed, because you're concerned you lose. You don't lose the flexibility, but you're going to pay a significantly higher penalty.

For both those reasons, right now, ride out the storm, you know what? You're going to see your payments, go out, do the math, reach out to my team, our team. We can give you the numbers if you want, but just don't lock it in yet because I don't think the rates have to go up quite a bit more to reach that fixed rate. I don't think you're going to be seeing it.

Sarah: How many more increases like 0.25? Would that be to breach the fixed rate of what it is?

Brian: Sarah. You're making me do math now. I'm not a math guy. Okay, but now you'd probably be looking at so you'd be looking at 1.5. It'd have to go up 10 times, 10 quarter point increase.

Sarah: That's interesting and I don't think they're going to go up 10 different times. I think they're probably gonna go up another, maybe four or five, who knows. The other thing I was going to ask you is, as they're making these increases, we're starting to see the market slowly. People are saying am I going to stay on the sidelines? Obviously, not experienced investors, but like maybe some newer home buyers or whatnot. What is this doing to the newer home buyers qualification? Is that changing anything on their end? And are they now able to buy less than they used to be able to buy a month ago?

Brian: That's a great point, actually. It's an interesting thing for you. For those of you looking to buy homes right now, there's a big dichotomy. That's happened with stress tests. 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 for the stress test of five and a quarter but because the five-year money on a fixed is let's say 4%, you have to qualify..

Depending on the product, this isn't the intention of the stress test, because it's actually driving more people to a variable rate, which is not supposed to be the intended consequences of a stress test. What's 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 an additional addendum to the stress test where they'll universally make it either five and three quarters or 6%. And to your points there, that's going to reduce qualification. Because if the stress test goes up because 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 going to see is first time home buyers right now. Unfortunately some of them are going to be approved for less.

Sarah: Just another question. 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 going to see every three months, are they what's happening in the market and then and go from there, is it a six month lag? What are we looking at?

Brian: That's a great question. There's lots of different indicators. The one I looked at is basically how is it? 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 changed 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 out of 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 we're calling us and saying, hey, if you end up having any refinance like on the BRRRR program. What 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 see if they'll only use an appraisal for two months. That means that any comparable sales that happened in February are done at the end of April. Then in May, they have to start using March comparable. It's not like we've seen the market hasn't gone down, but these are some of those leading indicators when to praise or start to tell us that.

We start to see conditional offers coming back. It looks to be almost like more, there's less people in the market right now. You know what for investors, it was 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.

Sarah: A hundred percent, literally there's less than, today we actually got something with a condition, which is very surprising. We used to have no conditions. It's actually I think, as long as the numbers and the strategy works, and I think there's going to be some strategies that might be riskier in these uncertain times, and then some strategies that will be a little bit less risky. You might want to consider that in, and have a conversation with, your mortgage broker like Brian for example any last final words of advice or anything else that you want to add about any changes or anything that we should be aware of, or that might be coming up.

Brian: I would say, you know what 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. I will say it sounds like a broken record, but it's just being 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 has been in this for five or 10 years, I wish I bought more property when I could buy an investment property with 10% down. I wish I bought more property when I can 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 'cause some people bought 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.

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. And then I think also just, I know you guys talk about this a lot. It's just making sure that you have a look at your properties and make sure that they meet your goals, make 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 cause there'll be underwater because I didn't do my rental increases. That was really bad for me, but it doesn't make sense. I would be over $1,500 negative flow to refinance it. Now I've got to sell that property. Then I'll reinvest it to get it to work for me better. 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 if it makes 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: Thank you so much, Brian. I'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, because again, you can always refinance once you leave your job or different circumstances happen. 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.