Friday Mortgage Round Up: August 24th, 2012

The general sentiment towards recent CMHC underwriting guidelines and mortgage rule changes has been that first time home buyers are the ones feeling the pinch the most – but how far are they really set back?  According to TD Canada Trust’s First Time Home Buyer’s Report it will take 2 years or less to save up a down payment of 5 per cent, 1-4 years to save for a down payment of 10-20 per cent and 3 + years to save for a minimum of 25 per cent down.  Keep in mind that one quarter of those surveyed go from living rent-free to their first home purchase (not a bad deal!).

Home Ownership in Canada on the Rise

The census conducted in 2006 indicated that 68.4 per cent of households owned their homes – the biggest jump to this figure was attributed to the surge of condo purchases among the early 20’s demographic.  Scotia economist Adrienne Warren expects that next month’s census figures will prove to surpass the 70 per cent mark.

It’s no secret that there is a pretty penny to be made in the world of real estate; however given the state of both the local and global economic markets paired with the transforming rules and regulations surrounding mortgages, realizing a return can be tougher said than done.

If You Can’t Join ’Em, Beat ’Em!

Yes, there is a way to capitalize on the inflating housing market without actually buying a home with a little something called a REIT (Real Estate Investment Trust).  A REIT is a security that invests in real estate and is traded on major exchanges.  You can purchase shares directly or invest in mutual funds, whose focus is on public real estate.  REITs are highly liquid (vs. having a property as an asset in your portfolio), cost effective (less expensive per unit than real estate) and they allow you to invest in non-residential property as well if you so choose.

There are 3 major types of REITs:
(1) An equity REIT invests in and owns properties.  Its revenue is primarily generated from rent.
(2) A mortgage REIT invests in and owns mortgages either by loaning money for mortgages or purchasing existing mortgages and  MBSs.  Revenue is predominantly earned from interest on their book of mortgages.
(3) A hybrid REIT is a combination of both an equity and mortgage REIT.

REITS or The Real Thing

What is a better investment?  In a report comparing condo returns to apartment REITs, Michael Smith, an analyst at Macquarie Equities Research, argues that “REITs win”.  January’s report shows REITs rate of return at 31.5 per cent over the last year while Toronto condos returned 12.4 per cent and the Calgary condo market return at 6.1 per cent.  But I’ve found that it really comes down to your savings/down payment and the market that you are in!

Two Trains Leave Toronto Station at the Same Time…

Train A is travelling at 70km/hr. but makes 3 10-minute stops.  Train B is travelling at 60km/hr. but makes one 15-minute stop.  Which train gets to Guelph first?  Who cares; you might be wondering what this has to do with REITs and Real Estate?!  I’m merely pointing out that yes, a 31.5 per cent return is impressive, but would you rather 31.5 per cent of $100 or 12.4 per cent of $300?  It’s all relative!

REITs vs. REALs: The Math

You’ve established some savings, but do you use it as a down payment on a condo or do you invest in a REIT?  To answer that, we need to set a few things straight.


  • Your parents really do love you a lot and have agreed to pay any CMHC fees on your high-ratio mortgage out of pocket, effectively not inflating your mortgage amount.
  • The average price of a Toronto condo is $342,212 (Toronto Real Estate Board).
  • The average price of a Calgary condo is $278,102 (Calgary Real Estate Board).
  • The average returns for REITs and condos in each respective market are based on Smith’s findings.
  • All REIT return calculations are equal to the amount of the proposed down payment (after all you can either invest your savings into a REIT or a down payment).
  • The net mortgage payment (NMP) is the difference between your mortgage balance at issue and at the end of year one.  Therefore your total condo return is the NMP + Appreciated Value.
  • The amount that you have paid off of your principal mortgage balance in one year based on 2.99 per cent rate, 25 year amortization and regular bi-weekly payments.

Please note that in the spirit of the Royal Canadian Mint no longer making pennies, all of the above figures are rounded down to the nearest dollar.  Having said that, based on Smith’s numbers and the assumptions that we’ve made … REITs don’t always win.

Your return is based on the investment or down payment that you’ve established and the market in which you are looking to purchase in.  Your money would have worked harder for you had you invested your 12+ per cent down payment in a REIT instead of a Toronto condo.  However, if you’ve only saved up enough for a 5 or 6 per cent down payment, your best bet would be real estate.  Below is a summary of when to choose REITs over Real Estate and vice versa. Week in Review

We’re finally seeing a little movement in the Best Mortgage Rates page! The largest changes were to the 7 year fixed rate, which dropped 10 basis points, while the 5 year fixed hopped up 9 basis points.  The only other change was to the 4 year fixed which also dropped but by only 5 basis points and sits at 2.89 per cent.

The 5 year terms continue to be the most sought-after rates with 49.4 per cent of visitors searching for the best 5 year fixed rate and 49.1 per cent checking out the best 5 year variable rates.


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