With the Canadian Real Estate Market softening and a recent decline in bond yields, will interest rates continue to increase in 2019? Top Investment Mortgage Broker and Owner of the Green Mortgage Team, Kyle Green, joins Adam & Matt to highlight drastic changes to lending policies, what it means for borrowers and the market at large, and how all of this will unfold in coming months. Spoiler alert: Kyle is not timid about sharing his predictions! As an avid real estate investor with a large investor client-base, Kyle also offers his favourite markets, areas for potential growth, and some pro-tips for improving your portfolio. One thing is for sure: this episode will definitely get your interest rising… Zing!
Vancouver Real Estate News, Market Updates, Insider Tips, Stats, & Analysis
Kyle is the owner of the Green Mortgage Team, a successful group of mortgage specialists based in downtown Vancouver. Kyle has been a mortgage broker for most of his adult life, starting in the business when he was just 19 years old. He is also a part owner in a franchise that trains new brokers to succeed in the industry. Kyle loves people, money and numbers which is why he loves being a mortgage specialist. He is investor focused.
On why he focuses on investors:
Kyle dropped out of college when he was young to pursue a career as a mortgage broker. He had been working at a credit union at the time and taking accounting classes. One of his teachers had a rich brother that was a stock broker who owned a boat, fancy car and a nice house. This made Kyle strive for a job where he would see the benefits of his hard work and effort. It just made sense to become self employed and work with investors that had the same vision that he did.
Advice he can give to first time investors:
The easiest way to invest in real estate is to buy a home and later on when you want to upgrade to a nicer place, just keep the existing home and rent it out. The challenge to buy real estate in Vancouver is the down payment. A principal residence is available to buyers with 5% down as long as it will be their principal residence. Upgrading your home only requires 5% down and this rule is available whenever you are buying your principal residence (not only your first home). Conversely, if you were to remain in your own home and purchase an investment property separately, you would have to put down a 20% deposit. This makes upgrading your principal residence and keeping your existing residence as a rental property an attractive option. Kyle’s advice is to buy your principal residence with future rental options in mind and leave a trail of properties behind you.
On the difference between mortgage brokers that focus on investors and others that focus on end users:
This is something Kyle addresses all the time. First, brokers that don’t specialize in this class don’t recognize the pitfalls that a large investor might run into later. Kyle deals with investors that have several properties, but most brokers or bankers will only see people that own a single property on a regular basis. Only about 4% of residential real estate is purchased for investment; therefore, most brokers do not specialize in this field. Second, it requires a different skill set. Kyle deals with lenders that are investment friendly that might be less mainstream, but will finance deals that others wont. Third, Kyle understands how to structure a corporation or the tax implications of real estate investment. For example, the interest portion of your mortgage is a deduction for tax purposes. If an investor has cash, they should still consider borrowing the money to finance an investment property to take advantage of the tax deduction for the interest costs. Kyle considers himself an advisor and not just an order taker as some banks or brokers may be. This is how he adds value.
Kyle’s thoughts on variable vs fixed rate mortgages in this current climate:
Generally, variable rates are still the best option. Lenders are offering deep discounts for variable rate mortgages. In some instances, recently, the interest rate would have rise 8 times over a 5 year period for the variable option to break even with the 5 year fixed rate option. This seems unlikely, so Kyle advises his clients to chose variable rate mortgages. Also, you can convert a variable into a fixed rate mortgage at any time that you feel the interest rate is getting higher than you expected.
Kyle’s thoughts on the current interest rate environment and how the stress test affected the Vancouver market:
Right now, it is just harder to get a mortgage than it was in past years. Sometimes, a deal would have been possible 2-3 months before, but now lenders are not willing to fund the mortgage. Kyle attributes this to where we are in the real estate cycle in Vancouver. Right now, you might have more people waiting on the sidelines to see if the ‘bubble is going to burst’. Currently, the stock market is very volatile, which is pushing more people to purchase bonds. Bond rates will continue to drop as more people are interested in them, and the mortgage rates generally rise and fall with bond rates. This suggests to Kyle that if current trends continue, we will not see any major interest rate increases and may even see interest rates decrease soon.
Buying a cash flow property is Vancouver is tough to find. You are doing well if you get something that breaks even. The average appreciation of properties in Vancouver over the last 30 years has been 6%. Even if we don’t see this appreciation over the next 2-5 years, you should still see growth over the longer term. Kyle also notes that even if you are just breaking-even on an investment property, with no appreciation, you are still benefiting approx. 7-9% on your money per year by having a tenant pay down your mortgage. This is a very good return for any investment, which makes real estate investing a great option regardless of what is happening with the market.
On what will happen with interest rates in the upcoming year:
We are starting to see economists calling for a recession in 2020. This suggests that interest rates will drop around this time. This would be a good time to be in a variable rate mortgage to take advantage of this. Predictable things normally push interest rates up, but unforeseen things normally push interest rates down. For example, 9/11 in the USA, Brexit in the UK, Trade wars, etc have had negative effects on interest rates. In the current year, we might see slight changes in the rates, but rates will begin to decrease if we enter a recession in 2020.
On why it is more difficult to get a mortgage right now than in the past:
The biggest challenge to getting a mortgage is not the mortgage stress test. The toughest thing has been government audits of banks in 2018. If a bank has been audited and they have mortgages that do not meet all of the requirements, they will pull back in the short term from issuing mortgages that have ‘exceptions’. The other reason is non income qualified mortgages. The government wants banks to lend based on a person’s income and not necessarily their net worth or down payment. This puts self employed people or sole owners of a corporation at a disadvantage unless they draw a large salary. This is being done to prevent a mortgage meltdown like what happened in the US recently.
On how long this tightening on lending will take place:
In the last 12 years, we have had one instance of loosening of lending policies. It has mostly been a constant tightening over this period. Mortgages continue to require more documentation and Kyle feels the tightening will continue for the next year or two. Banks used to engage in relationship style banking where the customer was evaluated based on past activity and how long they have been a customer. Now, banks engage in transactional style banking where everyone needs to meet the same requirements with no exceptions.
On the recent changes to HELOCs (Home Equity Line of Credit):
Some lenders are now factoring in the limit of the HELOC and not just the outstanding balance. If the whole limit is used to assess buyers, customers with access to funds that they are not using will now be penalized when trying to get a mortgage. This rule ignores peoples favourable credit scores and good credit. This rule is to stop people from using their homes like ATM machines.
On his Vancouver market predictions for 2019:
Detached homes are at the end of their slipping phase and will flatten out. More people will jump back into detached homes as the prices move closer to townhomes. Condos will continue to drop, but not as much as they have been recently. Condos took a real hit in the last half of 2018, but Kyle doesn’t think this will continue at the same pace in 2019.
Areas that he is excited about in BC and Canada:
Fort Saint John, Dawson Creek are exciting areas. With the LNG Canada and the Site C Clean Energy Project going into those areas, there will be approximately $50 Billion dollars invested in an area with a population of 40,000 people. The average age of this area is 31 years old with a high median income of over $100,000. These factors make this area a great investment.
Kyle is cautiously optimistic about the Kelowna market. It may be a bit overbuilt at this time and Kelowna is not exempt from the BC Speculation tax. It is still a strong market and when Alberta’s economy recovers, you may see a lot more money coming to Kelowna. Single family detached homes in Kelowna seem to cash flow quite well.
Vancouver Island is also strong based on new hospitals being built in the area. This attracts health care workers that can receive the same salary on the lsland that they did in Vancouver, but see a decrease in their cost of living.
There are also deals to be had in the lower mainland if you look for them.
Finally, mobile home parks are a good investment if you can find one. If you own the land the trailers are sitting on you have land that cash flows. This is unique because normally the building is the cash flow asset on the land. For a mobile home park, you can have land that produces cash flow and may be sold to developers in the future as the area changes or grows. This makes for a unique and great investment.
- Favourite neighbourhood in Vancouver: Cambie Village (quite but still close to downtown)
- Favourite bar or restaurant: Celebrities (good electronic music and shows)
- First place he brings someone from out of town: Stanley Park (rent a bike and go along seawall)
- West-side mansion or downtown penthouse: Penthouse (close to office and city)
- Something she’s purchased in the past year under $500 that’s changed his life: Alarm Clock Wake Up Light (lights up the room to emulate the sun rise)
To find out more about Kyle Green and the Green Mortgage Team, visit Green Mortgage Team.