Mortgages Renewals in 2024 and Beyond with Ron Butler | E115

welcome to the financial planning for Canadian business owners podcast you will hear about industry insights with award-winning financial planner and entrepreneur Jason Pereira through the interviews with different experts with their stories and advice you will learn how you can navigate the challenges of being an entrepreneur plan for success and make the most of your business and life and now your host Jason Pereira oh and welcome to a show I have Ron Butler Ron is the founder of Butler mortgages and a well-known pundit in the mortgage space in Canada and for those you who follow him on Twitter probably one of the best follows you're ever going to have in this country and I brought him on the show today to talk about the upcoming let's call it perfect storm of mortgage renewals that are coming and the interest rate situation and how things are going to impact that and what's happening with that and how you should start thinking about it now and with that here's my interview with Ron Ron thanks for taking time today hey thanks for having me I really appreciate it always a pleasure so Ron Butler tell us a little about yourself I'm just an ancient mortgage broker you know past retirement Aid don't know what else to do most mostly just fool around in social media these days but still we're I'm actively in the business so for 29 years it'll be 29 years in the spring so long long time and uh seen a lot of mortgages not just based on we do higher level of volume than the average average mortgage broker by a factor of about 10 or 20 so yeah so we see a lot and uh been doing it for a long long time

well done all right so I brought you on the show because everyone's favorite topic of interest is interest rates these days and I look forward to the day where the Bank of Canada decision is not the news that leads off the local news because that is driving me insane so let's talk about what has happened in interest rates in the last couple years uh that sets up the stage for what we're dealing with now so I'm sure most people have an idea but let let's let you summarize sure sure and you're right there's Pro we are probably at a moment in time in Canada where more people know the name of the Bank of Canada Governor than has ever happened for the entire history of the Bank of Canada and and that that you're right that is an aberant thing doesn't even make a lot of sense uh hopefully if everything's working correctly the Bank of Canada is something that most of us don't know anything about but that's not the case so if we just go back in time there was uh something called the world financial crisis in 2008 and at that moment in time central banks all over the world dropped rates uh significantly to try to manage the financial crisis that occurred as a result of the United States having billions and billions of dollars worth of fraudulent mortgages and bad Securities to do bad bad fixed income securities to do with mortgages so that that was a problem that had to be managed it spilled over to all parts of the world even though it was absolutely local the mortgage problem was local only to the United States but that's spilled all over the world saw in Europe sought

in Asia in a tiny way saw in Canada but in Canada because we didn't have any of the actual mortgage problems that the United States had it was a serious moment there was contraction of our economy briefly but essentially at the end of 16 months it was over uh it continued in the United States for a number of years Millions literally millions of people lost their homes and it was a very impactful event in the United States and and it's really just gotten over it in The Last 5 Years so what happened then we dropped Central Bank Bank of Canada dropped interest rates to a very low point with the expectation that it was going to rise again once we were outside of the emergency the emergency of the world financial crisis well somehow the emergency came and went and the rates did not return to their historic levels we went through what some people refer to as the zero interest rate period a point time when interest rates at the Bank of Canada level were close to inflation so if you could get yourself a some kind of debt instrument that pretty accurately mirrored that situation you were only paying a couple of percent or a percent and a half over the rate of inflation which quite frankly as you know as a financial adviser is highly unusual normally there is always a reasonable premium for people to borrow money it shouldn't because at a certain point at the point that inflation and your interest rate is the same the money is free so you should use as much of it as you possibly can so unusually we saw interest rates continue at a very low point for a long period of time going

on nearly a decade they had just started their upward Trend everybody had come to agree this is far too long the zero interest rate period has gone on far too long there is no more emergency the economy is buoyant house prices in 2016 and 17 went nuts and there all kind the stock markets were rolling along brilliantly and everything that cheap debt feeds was showing its prowess and then as it decided to raise rates in 19 2019 we saw 2019 increases to the point where we finally got mortgage rates over 4% just almost simultaneously in early 2020 Co struck and interest rates went to absolute zero at the central banks and they instituted quantitative easing which meant that uh government bonds also followed the central banks rate down to nothingness and we were selling fixed rate mortgages fiveyear fixed mortgages for 1.49% which was substantially below inflation uh we observed the unmanageable leap in property values across Canada particularly in Ontario and British Columbia to the point where at some points in 2021 house prices on Ontario were increasing 5% a month which is completely insane uh and suddenly that came to an end uh inflation despite the bank of again the governor assuring us that inflation was transitory along with the majority of economists in the world despite his Assurance inflation was transitory to spite his insurance that rates would be low for long in 2021 uh inflation took off and we reached the point we are today where the bank of Canada's rate has gone up faster on a percentage basis that in the history of the Bank of Canada is the steepest most rapid climb in history our central bank rate at 5% today coming off the ridiculous low of a quarter

of 1% and here we are are mortgage rates that people five years ago could never imagine mortgage rates in the with a six and a seven in front of them and nobody could dream of that five years ago well I'll tell you and to to basically build off that the the low rate environment and what that's done to an entire generation's con like concept of what money costs is astounding to me I mean I still remember back when rates were closer to like 2% when free covid when I was getting calls from people saying hey you know I went to go potentially buy a car and the rate that they wanted to charge me was insane I'm like what did they want to charge you and they're like 7% I'm like we need to have a conversation about what's normal and what's not right and again most people's frame of reference for interest rates tends to be the mortgage right but everybody everybody forgets that the reason you're getting that is because it's a secured asset right and when you're talking about a depreciating asset like a car it's a different story so so yeah so I mean it's it's interesting I mean in Context historically this is not where we are today is not unusual it's just unusual how fast we got there and that causes a lot of potential breakage so here we are we've had free money at one point which I kind of hope I never see again because if I see that again something's really really wrong although I like to benefit from it but nevertheless and now we're getting back to things cost stuff again interest rates actually are going to come at a premium to inflation and now

there's a real cost of carry which there should be because like as you said in any scenario it's broken so with that we are now looking at the largest amount of Mortgage Debt taken on over a period of time which happened during covid in the big bubble because these housing prices went up and we have a ton of renewals coming down the pipe you talked to me about what's happened with people's mortgages not the fixed ones we know that those ones are going to face a dday at some point talk to me what happened with the variable mortgages first and we'll talk about what's going to happen when these things are new so the easiest descriptor is a lot lot of people H in 2021 had variable rate mortgages at 1.45 some less but let's just use that as an example and today there're 6.2 so that in terms of a payment increase if in fact your mortgage was increasing in payments because not all of them did even though the rate was variable the payments stayed the same for some but when you look at that change from uh 1.45 to 6.2 it's shattering I mean they were stress tested at 525 but obviously that were well passed the stress test and it's just some people have sold their houses I mean that's reality they just couldn't manage it anymore they wisely sold their houses and it's impactful it's impactful on people's lives particularly on people who anything it went wrong with their income any job loss any change in job any in a negative way and it was impactful on people who after they got a mortgage they went out and got a car lease for $800 a month that was also impactful

on those people so yes a legit legitimate consumer pain literal pain and having to manage that problem now as far as the renewals are concerned as those renewals come up and we will see more in 2025 than we're going to see in 2024 but actually 2023 is a very low renewal year there it's not it's not like a a linear chart I mean it is there's big there's big Hills and Valleys in mortgage renewal situations so we are looking at a huge year much much bigger year next year the biggest year is in 2025 and then it's it's still huge after 25 in 2026 but it seeed after that and uh yeah every single person who let's say you've had a mortgage for 10 12 13 years you bought in 20 let's say you bought in 2010 through that entire period you never saw any appreciable increase in your monthly payment for that whole time and on several occasions you you probably saw a slight reduction so this is a major change you're going to be looking at some kind of an increase between 25 and 40% on your mortgage and that's what we're going to see coming starting next year 25 big difference yep and for some people who've been it's interesting so want to address the V the variable mortgage problem we have right now with multiple banks that as we know so some variable mortgages your payment goes up when interest rate goes up so you're eating that but you still have the same amortization others don't and have it moved and have blown well past the point where any principal is being paid in fact looking at the Q4 data I have in front of me over100 billion dollar in mortgages

are currently in negative amortization territory yeah which just simply stated is the mortgage gets bigger every month the mortgage is bigger every month than it was before because the interest you're paying does not cover the interest you're being charged yep so those people are unfortunately going to renew uh come up for Renewal with a larger B potentially larger balance outstanding than they took out in the first place some of them absolutely will yes 100% now correct me if I'm wrong I think on both cases of mortgages I believe it was Ben rabido who told me this contractually if you're going to take the renewal it snaps back to the original amortization meaning that if you took a 25 year when it comes when when it comes up for Renewal the rates they're going to show you are for a 20-year amortization and now that number 100% correct you're 100% right so that is now you think think so let's go through the logic here you're someone who started with a 25 year mortgage you go to Renewal you're potentially at a 30-year mortgage now because basically your your mortgage grew your mortgage grew yeah and now you gotta basically come back and actually pay a rate equal to a 20-year mortgage the payment amount I mean forget the you know the renewal because of interest payments interest rates the payment out because of the principal obligations you know just has just skyrocketed so we're talking about potentially even larger increases than that yeah we're we're potentially talking about 60 65% increases it's possible yeah here's the reality the reality of life is for most of those renewing customers their bank will allow them to return to original amortization whether it was 25 years or 30

years without much push back the federal government has told the banks that that's what their expectation is even though you have to actually report every one of those mortgage alterations at renewal to the regulator fsra you required to inform them it's Crystal Clear that the federal government has made it clear that that should be something that should be easily approved now does that really help look if your mortgage has been your point was perfect if your mortgage has been growing and you started at 25 years even going back to 25 years is just going to help a tiny bit it's not going to help a lot yeah yeah and honestly it's it's not like housing was affordable before this started right oh no no no we had I mean depending on what survey you saw we were seeing like upwards of 50% of of of exra tax income going to mortgages y right and now I mean this is one of the the arguments I had with people online who seem to think that interest rates sort that the housing prices continue to increase forever when when meanwhile wages were increasing at just barely around inflation you know sooner or later you can't have 100% of disposable income go to to housing right and this is the challenge is we're already so L people already behind the eightball and even with that extension it's still GNA hurt so the key metric to think about is that if we go back 25 years the average house price in the GTA was roughly equal to between 2 and a half and three and a half times average family income so that's spiked to between nine and 11 times this is a unfathomable increase uh to save up

enough for 20% down payment in the GTA in the Greater Vancouver for the average income earner is about 25 years so by the time you've saved up the down payment you're ready for retirement so it's all just ludicrous the age of zero interest rate of effectively ultra low interest rates has skewed the value of homes in a way that's going to have to change someday and there's there's other contributing factors there's the fact that in a country where there is the highest immigration of any Western Country that exists and you know we're like double but closest next that's impactful on the need for shelter we've also developed a system that makes permitting new builds phenomenally difficult cult a new new building permit in the city of Toronto is about 22 months to get approved they get F finally to to from application to putting a a back on the ground it's not for lack of cost and getting the approval right like we we charge a hefty sum to get these things approved so so if we if we go back to again we go back about 25 30 years the input of governmental cost to the building of a house was probably somewhere just under 5% and today it's 30% we look at all the levy development fees uh different types of taxes on and on yeah we've we've reached the point we're on a million doll on a million dollar town house about 300 Grand is going to government on a brand new townhouse crazy yep crazy absolutely crazy so this is a situation we're in you know it's sum it up a lot of people are going to basically renewing at unfortunately more money than they owed in the first place best

they can hope for is there is to extend their amortization to 25 these years that were depending maybe 30 or 30 maybe 30 yeah depending on the situation how much they owe either way they're going to be anyone who's in a fixed rate is going to be is going to be looking at a big increase anyone who was at a variable rate that was not increasing with rates is going to be looking at a big increase anyone who's got a variable now is already feeling the pinch so for them it's no different but so that's the situation okay talk to me about what they should be thinking about now as opposed to waiting for that Cliff to come whether that Mort whether the renewals 12 months out 18 months out 24 months out what should they be thinking about in terms of how they can prepare themselves for this or or potentially do something about it now well the first thing to consider is if you have a fixed rate listen to No discussion of you doing an early renewal or blending a rate or anything like that you're going to hold on to that ultra low fixed rate until the last day you're not you're not going to give up on that rate any anytime you blend a rate with a bank it's to the bank's advantage and I'm not even beating them up I'm just telling it like it is okay it is not favorable to you it's not radically radical abuse of you but it's not favorable to you so you need to hold on to that ultra low fixed rate for as long as humanly possible you should make preparation for the increase and that's maybe where somebody like you comes

in you shouldn't necessarily be making depending on what your financial situation is you may need to should be making prepayments but maybe you shouldn't maybe uh depending on your tax status and the kind of rate of return you can get maybe you should be investing the money for the day when that renewal finally comes up and then you can apply whatever amount of money youve saved up and accumulated through investment to that point of renewal so that you can get the principal down and you can have a you know a lower payment so that's those are the two key considerations as far as I'm concerned if you have a variable rate and you're going backwards on your mortgage that is something that everybody feels psychologically uncomfortable with and uh the move there has got to be to do voluntary payments voluntary payment increase L some payments to at least get to the point where you understand that you're not going to uh be faced with just unman you no matter what the government Regulatory Agencies tell you or what the so-call financial consumer agency tells you if your mortgage is growing you're paying interest on interest that's reality you just are It's a larger principle you're paying more interest that's just the way it works okay so you should avoid that and the only logical way to avoid uh growing mortgage is through prepayment and increased payment so and you should do it yep fair enough and so it's funny you know hold on to the last last minute it's I think that's part of the reason why we're actually seeing lower volumes in in housing transactions is anyone who's got a good rate is not about to consider moving or doing anything right now

in addition you know people are hoping for a recovery in prices but that's a different story altogether and yes we all longingly look at our American cousins and wish we had the ability to lock in our rates for 30 years like they do can I tell you something interesting about that and that that's this is really a fantastic illustration of Canadian mortgage and real estate Behavior fantastic illustration as much as we've heard people talk about that we should have 25 and 30 year terms by which when you get the mortgage it it's the same rate for 25 years or 30 years until the house is paid or sold we get we heard a lot about of that for the last two years the fastest growing mortgage term in Canada today is variable rate because Canadians because there's enough Canadians believe that the Bank of Canada will drop rate rates next year and all they want is the lowest possible rate so as much as we give lip service to the idea that we would like to get a 25 a 10 year a 25 year a 30-year mortgage we've had 10 year forever and its utilization has never exceeded 3% of mortgages so that tells you something Canadians want low interest rates at all costs yeah it's interesting it's the entire behavioral fin or Behavioral science piece of stated preference versus demonstrated preference yes I would love to have that but wait a sec oh but that mortgage is maybe 2% more than the one I can get variable I'll take that yeah I think I'm gonna outsmart this I'm gonna outsmart this and I'm gonna do that yeah I mean I'm gonna get lucky I'm Gonna Get Lucky yeah it's if you H it's

I will say people's psychology when it comes to when it comes to these decisions the amount of strain or just like pressure they'll put themselves on or the negotiating tax to get to get like 0.1% 0 Z 1% better off like it is like they they literally they will trade off certainty for for going like okay but I can I can pay less and and just clearly a lot of people did that in the situation I mean like I will say I I did take the variable I did it a while back before everything bottomed out so I was very happy for a while I'm not happy now but I also knew that I could absorb the shock in my situation right and I think that's a big thing that people don't take into consideration now it's basically you need to take into consideration the all right but what if it goes wrong are you in a position where you need your your price for Perfection or are you in a situation where okay I'm benefitting and maybe I'm going to use that extra breathing room to pay down the mortgage so I can get further ahead in case it actually starts to increase or am I in trouble right% correct all right so we covered actions we covered uh you know and I always say unfortunately I'm gonna quote the old Brazilian jiu-jitsu saying of best way to get out position is not to get yourself in it in the first place but if you're in the situation now uh you know we covered how to handle that when it comes up um you know this is spe specifically around business owners this podcast and I want to go back to that premise and

talk about the specific challenges around them now we know lending for business owners is a different kind of challenge in lending to just about any any T4 employee because apparently T4 employees never lose their jobs but but talk to me about why it's different uh how it's different and how this may impact the renewal period we have upcoming on these things sure if we look at the average self-employed person whether they're a Sol proprietorship or they're operating through a closely held Corporation the object of your tax planning is to pay less tax so the object of your tax planning is to particularly pay less personal tax and therefore you would want to reduce the number that appears in box 15,000 on your notice of assessment or on your T1 General return okay so to to reduce that accountants and financial planners use a number of strategies to try to get that to the lowest point so you pay the least tax to the federal government legitimately pay the least tax to federal government this simultaneously means that you will have less income to display to a bank who would consider offering you uh a mortgage and the government has made damn sure damn sure that Banks pay attention to this issue doesn't matter you know you might have a million dollars of assets you might have a million dollars of retained earnings in your company it might have you know don't talk to us about that we don't care we only care about net taxable income that's how we base the calculation of what you qualify for as a mortgage and because there's only six big banks in Canada that do 85% of all Financial transactions we want to keep our masters at the federal

government happy and if they tell us that that's the metric we're going to use to decide how much of a mortgage you get we're going to continue down that road so yes there is some definite impacts on self-employed people yep so it's funny though I will say this much I I don't think I will preface to say that I don't think good planners worry solely about the B like the least amount of tax possible in any given year because often times that results in the worst scenario long term right it's really should be about a lifetime tax bill that is minimized and maximizes your net worth and unfortunately doing that Year bye can actually be counterproductive most people don't get that true but we both know that the majority of business owners praise the accountant who can reduce personal taxation above all else that that's just back of life even if it comes at the cost of canidate pension plan which is actually valuable to them and we got to have an episode next year about this as well but in general number of times I've had conversations with buiness with business owners where it's like well I'm taking dividends because it's saving me and saving me tax I'm like well not according to integration it's not it's actually costing the same thing the only savings you have is cada Pension Plan wait a minute I'm not tributing to can penion plan and you can have a conversation about cost benefit but it's it's uh yeah people listening accounts are not magicians okay they're not there is a there is no simple quick way to reduce your tax bill there is always a compromise and Ron just gave us one of the

least looked out compromises out there which is lower reported income which results in a diminished capacity to borrow personally realize that okay just like there's potential loss of RSP room Canada pension plan and well constrained lifestyle in some cases as I've seen before which is ridiculous but it is what it is so excellent all right so we covered it quite well I thank you for this any last words of advice for the listeners R sure interest rates are changing mortgage rates are changing sometime by 2025 or the end of 2024 we will in all likelihood see lower rates than today another reason probably not to panic when as as your 2025 26 renewals comes approaching but still there will be no more 1.49 1.59 1.99 2.49 fiveyear fixed rate in the foreseeable future so everyone who has a low rate today is going to pay more plan accordingly anticipate what's going to happen and please please shop when the time comes for Renewal to come up please shop it's often not a big savings sometimes it's only a quarter percent but there is no there is no advantage to giving the bank more money there is the your comfort with your home Bank does not mean that you should hand them extra $2,000 a year in mortgage interest I mean there's there's no rationality to that and finally in some cases the depending on the quirks of the banking world at the time sometimes it's half a percent sometimes it's three4 of a percent so as that renewal approaches please one thing Canadians are bad at is shopping for financial services I think you're very aware of that in your business unfortunately the horror stories you know all about it so please please people as

the renewal approaches 90 days prior to the renewal please shop it's going to save you some money yeah and it is I will say it is amusing I have seen people like you know what it's already at the current bank it's just easier if I keep it there it's like this is the same bank you complain about charging you $5 a month in Bank fees yet you're not worried about the $2,000 a year in interest payments so I know people don't think dealing with a bunch of with many banks is is is easy and you know what I deal with a bunch of Banks and it can be a pain in the butt but I'm not I'm not here for them right I'm here for me so anyway uh where can people find you Ron if they want to reach out Butler mortgage.com it'll come if you're in Canada it'll come up quick absolutely thank you so much my friend thank you again enjoyed it take care that was Ron Butler Butler mortgages hope you enjoyed that conversation and if you are up for Renewal anytime soon I hope you take Ron's words to heed and also do it and again I'll plug the planning side of this plan for Success reach out to an advisor get things basically organized beforehand because if you're in a already already in a tight spot it's only going to make it worse Let's uh let's get ready for that and hopefully get you some breathing room and as always if you enjoyed this podcast leave a review on Apple podcast SoundCloud Spotify or wherever is it your podcast until next time take care this podcast was brought to you by Woodgate Financial an award-winning financial planning firm catering

to high net worth individuals business owners and their families to learn more go to Woodgate tocom you can subscribe to this podcast on Apple podast pod Stitcher Google Play and Spotify or find more episodes at Jason per.cup