Shopping for mortgage? Here are some general concepts you might be interested knowing

[protorayish]

@xososaxo The goal is to encourage participation instead of lending, which is considered profiteering and unethical. If a "lender" finances a harvest, it will get more return in good years and less return in bad years. Problem with a home is that except for changes in valuation there is no return, the benefit provided (shelter) is all consumed by the homeowner.

Imagine if home mortgages for the purpose of buying a home would be forbidden in Canada. You can still take a mortgage for the purpose of starting a business (production), but not for the purpose of buying a home (consumption).

On average, about 3/4 of each and every Canadian home is owned by the homeowner and 1/4 is financed by a lender. If you take the lender out of the equation, market dictates that the lower amount of money would be used to hold the same amount of real property and that prices would go down 25% across the board, immediately. In the real world, nothing would change. Canadians would still live in their home. In the financial world, Canadians would have more disposable income and be wasting less money on what is practically consumer credit. The residential mortgage lending industry would collapse. Job losses, bank profitability down.

Now think of it the other way around: let mortgage lender pump money into the hand of consumers who then compete for the same real estate with much more money.

Market dictates that more money will be used to hold the same amount of real property and prices will go up. until someone breaks. In the real world, little would change. Canadians would still live in their home. In the financial world, Canadians would have less disposable income and be wasting more money. Mortgage companies would be more profitable.

You may agree or disagree with the Islamic view of reining in lending. It is just one way that an organized society has found to keep at bay human greed in the context of an unbalanced relationship (lender-borrower). You have to step out of the box in which we are living to understanding it.

 

[hurdacs]

@protorayish Thanks so much, I’m in the process of looking for my first place now!

I didn’t know lenders would let me take on a mortgage larger than I can afford. This definitely helps me aha.

 

[leodrone]

@protorayish One thing I'd like to point out. For point 2, lines of credit can be secured against property. It's not universal, your credit card wouldn't be secured for example. But people can and do get them registered.

 

[protorayish]

@leodrone from a legal point of view, the only differences between a mortgage and a home equity line of credit (HELOC) are the flexibility of withdrawing and paying back and the way interest is compounded. Flexibility has its price. Interest might be higher. Fees as well. Last time I checked, Manulife One was a great product, but the fees were excessive for a Scrooge McDuck fan like myself. Some lenders will also secure a credit card under the same facility.

 

[mikaedi]

@protorayish nice share I will come back to it once the overheated housing market madness cools down.

 

[protorayish]

@mikaedi I do not have a crystal ball, and in fact, following my investment advice resulted in some missed opportunities. For example, back in 2009, I had a proof-of-concept mining rig working on my laptop. Then I decided to focus on law school and not to waste time and energy on crypto-currencies.

The "overheated housing market madness" has eluded me for even longer. Economic studies show a constant relationship between income and housing prices in a geographical market. In the last twenty years, incomes in Canada have not grown as fast as home prices. Go figure.

I have some hypothesis. One of them is that the real estate market is over-leveraged, that banks are doling out too big mortgages that unwitting consumers are using to push the prices higher. But there are no ways to test this hypothesis, nor the rest of my thinking.

One word of caution: in the past seven months, our currency has been completely and totally debased. The federal debt has grown a magnitude. It will have to be repaid and there are four ways for the federal government to deal with it, none of which is particularly palatable:

1. increase taxes;
2. cut services;
3. default on its bonds; or
4. inflation.

It will possibly be a combination of the above. Currently, the "madness" is fueled by printed money and low interest rates. When printed money will stop, there will be a temporary dip. then inflation will kick in, likely with higher rates. While higher rates lower the price of assets, inflation will have a much stronger overriding effect.

This was just a blurb from tired guy at 2AM. NOT LEGAL NOR FINANCIAL ADVICE. DO NOT RELY ON IT, I AM SURELY WRONG, AS I HAVE BEEN IN THE PAST AND WILL LIKELY BE AGAIN IN THE FUTURE.

 

[mikaedi]

@protorayish was watching this two hours ago

 

[protorayish]

@mikaedi thanks for sharing. OFF-TOPIC: I can barely understand what the attraction is of these youtubers. I want information condensed, not information expanded. His argument (which I mostly agree with) can be condensed to 400-600 words and read in less than a minute. Listening to the video/podcast cost me almost the same time as watching an episode of the Mandalorian, which I much prefer.

 

[dale1257]

@protorayish Could you TLDR and save other 22mins? Thanks!

 

[xososaxo]

@protorayish Great post. Thanks!

Can you explain how one can:

access funds from some insurers and pension funds at very competitive rates

 

[protorayish]

@xososaxo Check out their website or whatever sales network they use. MD financial management used to offer extremely low rates for the best borrowers (lowest risk). Investment Group is another name that comes to mind. Manulife, of course. Many more.

 

[sadaraco]

@protorayish This is incredible.
I'm saving all this out.

Am waiting to buy a place....current events have made us hold off for now. Not entirely sure if that's the right idea but it just didn't feel right. With that and the current inflated prices in my city.

 

[areli]

@protorayish you didn't explain about Fixed, variable , hybrid interest rates ???

 

[protorayish]

@areli Fixed, variable, and hybrid interest rates are just mathematical game. CTRL+F "Get a fixed rate if:" for the relevant points. Hybrid rates is a mix, some part of one, some part of the other, less than 5% of the market.

https://www.canadianmortgagetrends.com/2020/03/state-mortgage-market-2020/

Technically, a variable rate is a rate that is contractually adjusted on a regular basis, and it follows a rate set by an institution (e.g. the Bank of Canada), a lender (e.g. a big bank's prime rate), or a market (e.g. LIBOR).

A fixed rate is just that, negotiated.

Even more technical and of little interest to home buyers. Lenders do assets and liability management: one side of their balance sheet is your mortgage, the other side is a deposit. Your mortgage's remaining term is its duration. If the deposit is a savings account, its duration can be as short as one day (the saver can pull the money out). This is why sometimes, fixed rates and variables rates behave differently. Fixed rates are matched against high quality bonds, typically 3-5 years Government of Canada bonds. The bank's prime rate on the other hand, on which variable rates are based, is matched to the international money market.

 

[stefo]

@protorayish I have a question for you. Sometime back I was talking to a bank about a mortgage, and they said as a first time buyer they would want to see me not use much of a leverage during my loan. Now technically ofcourse it doesn't matter. But what exactly does it mean not to use much leverage ?

Did he mean that I should put a larger down payment ?

 

[yaharise]

@stefo = borrow less. In other words, bigger down payment or pay down your debts.

 

[protorayish]

@yaharise This!

 

[josh1992]

@stefo @magicbook you should always put as big of a down payment as you can, if you have an emergency fund stashed away and no high interest rate debt... I touch up on it in this video, check it out:

 

[stefo]

@josh1992 Thanks for sharing. However, I didn't really see you talk about down payment that one should put down for mortgages. Also, as the mortgage payments are primarily close to 1.5-2%, which is kind of free money, then why would you suggest putting in higher down payment when that money can be used elsewhere, like say in the markets and other places ?

 

[josh1992]

@stefo Honestly, I didn’t think you would be interested in the stock market. Most people I hear from who want to buy houses are focused on putting down a large down payment, then get caught up in aggressively paying down their mortgage. If you know what you’re doing with the stock market, and it sounds like you do; then yeah the best option would be to have that money make money for you elsewhere. I’m doing the same with my student loan... because I make more in the stock market than I pay interest, I choose not to pay down my student loan aggressively, but rather invest that extra money. My record on one transaction so far was 68.3% return in one day (Yes, you read that right lol). That 68% return alone without my principal investment covered 2 months of my student loan payments.

The stock market is fantastic. You should definitely expand your knowledge in it since you have some interest in this topic.