Variable vs. Fixed Rate Debate Solved Once and For All – with Dustan Woodhouse
In Canada approximately 18% of all mortgages are variable rate mortgages. Dustan Woodhouse is one of Canada’s top mortgage brokers and 93% of his clients get variable rate mortgages – find out why on today’s episode.
Andrew la Fleur: Find out why one of Canada’s top mortgage brokers says you should always go variable when you’re getting a mortgage. Coming up on today’s episode.
Andrew la Fleur: All right. It’s my pleasure to welcome to the show for the first time Dustan Woodhouse. Dustan is a mortgage broker based in Vancouver, one of the top mortgage brokers in Canada. Dustan, it’s great to have you here.
Dustan: Thank you, Andrew, happy to be on the show.
Andrew la Fleur: Great. I’ve seen some of your stuff online. I’ve followed you a little bit. Obviously, I just know of you as a person in the mortgage industry even though we’re in different cities here. I wanted to have you on this show in particular because you just posted this fantastic video recently about the fixed versus variable debate, which is just a question we’re constantly coming back to in this business and dealing with buyers. I wanted to talk about that today. But before we get into that, maybe you could just tell us a little bit about yourself. How did you get started in this business?
Dustan: I got into this business in 2008 just as the world was going through its massive economic meltdown. You know, when there’s a financial crisis, it just seems like the logical move to get into the financial services industry, right?
Andrew la Fleur: Of course.
Dustan: You know, which is obviously a sign that there wasn’t really a necessarily a macro plan in place. It was more a matter of having a number of people around me in my life saying, you should be a broker. You should be a broker. Including my wife, some good friends, and a couple influential people in the industry who … Well, people who I knew, who later, I discovered, were rather influential and significant in the industry.
Andrew la Fleur: What were you doing at the time, then, before this, before mortgages?
Dustan: Well, I had actually … I call it, brokering is then Act II, and Act I. Act III is yet to be named. We’ll see where life takes me. But I’m still in deep in Act II right now. I’m enjoying what I’m doing. But Act I was actually running a mail-order high performance automotive parts business. All those low, loud Volkswagens and what not back in the late ’80s or ’90s, mainly, I was to blame for a lot of those. I actually had a lot of clients in Toronto as well.
Andrew la Fleur: Interesting.
Dustan: Or if you knew somebody that drove a cool looking Volkswagen, especially in the mid to late ’90s, I probably shipped them a part or two at one point.
Andrew la Fleur: Yeah, I know a few of those. I know a few of those. That’s a completely different business. I’m curious then, why were people telling you, the mail-order automotive parts guy, you should become a mortgage broker?
Dustan: Well, part of it was because I had done things like get myself incorporated when I was 20 years old, bought my first property. It was a commercial [inaudible 00:03:23] unit when I was 19. We wrote the offer when I was 19 and closed when I was 20. Then bought a few rental properties. We bought a condo in downtown Vancouver on a presale. Totally ridiculous. I mean, the market clearly overheated in a bubble. We paid $97,000. What were we thinking to pay that money for 400 square feet down in Gastown? Very, very foolish. A few years later, we also bought a house up in the suburbs. Again, I mean, we paid $168,000 for that detached house, which is obviously just a huge mistake, right? I mean, the same type of mistakes people are making today. All the signs were there. I mean, we bought that house from a woman who had paid $42,000 for it 11 years earlier. It had gone up 400% in 11 years. Clearly, it couldn’t go any higher. I mean, but when you think about it, who can afford a house for $168,000.
Andrew la Fleur: Sensing some serious sarcasm.
Dustan: Yeah. Yeah, yeah. And you know what? This will segue quite nicely. Having done all these things, I had a lot of people asking me a lot of questions about property and structuring their business and buying rentals. I was always happy to share my experiences. Those experiences included, ironically enough, because as I say, I didn’t realize I was setting up a segue back to your opening comment on fixed versus variable, but of course, in 1995 when we bought that house, of course, we locked into a 5 year fixed because rates were under 10%. Clearly, they were going right back up over 10% any second. So, thank goodness we were able to lock in at, I think it was 7.25%. Phew. What a great move.
And 18 months later, when we discovered that our first child was on the way, and you know, don’t know how that happened, right? Anyway, we had realized that this 600 square foot, one bedroom house we bought maybe wasn’t going to be ideal. So, you get that nesting urge going. We decided we needed to sell that house and buy a bigger house. Business was taking off at the time and things were going in the right direction, so we could afford to level up a little bit. A lot sooner than we had anticipated, but that’s the way it goes. We went to the bank to port our mortgage.
Our mortgage is … Is my mortgage portable? People always ask this. To this day, I say yeah, but so what? I think it’s fewer than 1% of mortgages in Canada are ported from one property to another. So, 99% of mortgages are portable, but who cares? You’re not going to port it anyway. There’s always a reason. In our case, the problem was the house we were buying was on well water. The bank that had our first mortgage on the first house didn’t like well water. They would not move our mortgage to that new home. They left us with no choice but to break that mortgage and go find one somewhere else.
When we broke that mortgage … I mentioned $168,000. We had put about $8500 down on that property. Our prepayment penalty was $6400. Almost our entire down payment was gone 18 months later in a penalty to this bank. I’m like well, where is that written down? Where is that number? Where do you show us that, that was going to happen. Of course, to this day, no banker that I’ve ever had a client work with has ever explained to them prepayment penalties, how they work, dollarized it for them on the opening conversation. It never happens.
Andrew la Fleur: Never happens, right.
Dustan: I bought a 200 page book. I won’t even give you the title because I don’t want anyone to go seek the book out because it’s 30 years out of date. But I bought a 200 page book at the time on mortgages written by a mortgage broker. I read that book cover to cover. I went back to the bank. I understood how to calculate interest rate, differential penalty much, much better than the person I was dealing with at the bank. So, they were trying to move us into something else. I’m like, well, that’s not going to work, either. Here’s the math. I’m doing all the math. In the end, [inaudible 00:07:59] 25 years. Everyone should have been variable. These were the rates in 1980.
The majority of people, I’m sure if you pulled all the actual documents up, you’d find the majority of people in the early ’80s when those interest rates shot up into the double digits, who lost their homes weren’t so much people in variable rate mortgages. Absolutely, some people got burned in a variable rate mortgage. But who really got hurt were the people that locked in for five years of 14%, 15%, 17%, 18%, 20% because a year later, rates had fallen back down below 12%. If you were in the variable and you made it through that 12 to 18 months of horror, things normalized after that. Whereas if you locked in to one of these higher rates the whole way through, not only were you getting beat up on the payment every month for years, the penalty to get out was huge.
To dollarize things for listeners, typically speaking in today’s market, for every $100,000 … Well, I’ll give you a percentage and then I’ll give you dollars. A variable rate mortgage, if you break that early, which statistically right now, two out of three Canadians will break their mortgage early. They’ll break it around the three year mark on average. Two out of three mortgage holders will break that mortgage early. They’ll sell. They’ll refinance. People always say well, why would I break my mortgage? I’m like well, it’s a laundry list of reasons. Of course, when you have a newlywed sitting across from you, you don’t want to say well, 6 out of 10 marriages end in divorce. But we don’t have a newlywed couple sitting across from us right now, Andrew. So, I’m going to get a little more factual. 96% of businesses will not make it 10 years.
So, if you have a couple sitting across from you and they just got married and they each are running their own businesses, there’s no way they’re making it five years through a mortgage. I mean, one of those businesses is not going to survive five years. The marriage may or may not survive. Of course, as one thing creates stress in life, it affects everything else in life. There’s a multitude of different reasons. But the reality is being, two out of three Canadians breaking their mortgage in an average of three years, most of them triggering a prepayment penalty they had no idea was coming.
If you’re in a long term, fixed rate mortgage with a major financial institution, you’re looking at typically 4.5% of the balance. So, $4500 per $100,000. That’s a big number. A typical mortgage in Canada is $400,000. That’s an $18,000 prepayment penalty. I guarantee you there are people listening right now going yeah, that’s almost exactly what we paid. They’re like yeah, we got hit with that. There’s a few other people going well no, we broke ours. I think our penalty was only like $5000 or $6000. Those are people who probably didn’t have their mortgage with a chartered bank, or the majority of credit unions. They probably had their mortgage placed with what we call a mortgage finance company. I’ll stay nondenominational. I won’t name any different companies.
But mortgage finance companies play a fundamental role in the mortgage market in Canada. They only take triple-A clients. They’re very selective. They take the cream of the crop. But they do have a little bit friendlier prepayment penalties on fixed rate mortgages. But here’s the difference. If they’re in a variable rate mortgage, that penalty is 0.5% of the balance. Pardon me, that’s changed a little bit with prime having changed and whatnot. I should correct myself. It’s about 0.75% of the balance. So, 0.75%. So, about $750.00 per $100,000. On that $400,000 mortgage, you can have an $18,000 penalty, or you can have a $3000 penalty. There are certain lenders that you have to watch out for where they have in the fine print that their variable rate mortgage has a 12 month interest penalty, not a three month. But again, 95% of lenders have a three month interest penalty. That’s it in a variable rate mortgage.
Again, a whole bunch of listeners are going no, no, my five year fixed, it’s only a three month interest penalty, too. It’s like no, no, there’s a comma after that, not a period. It says three month interest, or the greater of, and then it lists this term called interest rate differential, which of course-
Andrew la Fleur: Nobody knows what it means, yeah.
Dustan: The financial services industry is a lot like the medical industry. They make up a lot of big, confusing words for really simple concepts. It’s unfortunate that our government allows contracts to be written in these arcane, using such arcane language. I use the word arcane purposely. Like, what the hell does arcane mean? Exactly.
Andrew la Fleur: Yeah, yeah. Interesting, yeah. We’re getting a lot of value here already from you, Dustan, just getting into the whole subject of breaking mortgages. Another topic, which comes up a lot as well with me talking to clients all the time and people just not realizing like you said, just the basic math of a mortgage because nobody is going over it with them. We’re going to get into the fixed/variable thing. Before we do that, I’m just curious. You being based in Vancouver, most of your business I assume is in Vancouver. What are you seeing in the market there? Obviously, you are an active real estate buyer and investor yourself. How would you describe the market in Vancouver right now?
Dustan: Well, I mean, the upward pressure on rents is intense. Rents are steadily climbing. Not a lot of availability for rental product because well, again, we still have tens of thousands of people flowing into the lower mainland every year, and they all need somewhere to live. What a lot of people don’t understand is they’ll say oh, but there’s a crane on every block. I mean, they’re overbuilding. Well, no. For that crane to actually go up on that block, the builder has to have typically pre-sold 65% of the units in that building before they’re able to get the financing to put a shovel in the ground. So by the time you see a building rising up out of the ground, it’s typically 75%, 80%, 85%, 90% pre-sold, at worst. I mean, we still have situations here where people are lining up overnight. Just a few weeks ago, there’s a tower in Burnaby that sold out. People lined up overnight. I think it was actually two nights before to get in there to pay $1300 per square foot.
Andrew la Fleur: $1300 a square foot in Burnaby?
Dustan: In Burnaby. It would have been a half an hour east of downtown Vancouver.
Andrew la Fleur: Wow.
Andrew la Fleur: What are you looking at in downtown Vancouver for price per square foot right now for a new build?
Dustan: Well yeah, for a new build, you’re pushing $1500 a foot as well. I mean, there’s the outliers that, of course, that the media likes to write about that are $2000 a square foot buildings and this sort of thing. Those are ultra high-end buildings. I mean, you can still find a lot on the market for around $1000 a foot. There are still a number of units available for $1000 a foot, older units. Typically, resale type product, which again, to pay $400,000 for 400 square feet. At the beginning, I mentioned we bought a loft in Gastown for 400 square feet for $97,000, right? I mean, and that was deemed to be crazy at the time. But the numbers still work.
I know it sounds totally heretical to say this, but the market still makes sense on product under $1 million. That’s really we have two markets. Here in Vancouver, and I’m sure it’s very much the same in Toronto, what we’re seeing in the stats is a tale of two markets. That’s been created unbeknownst to most people by the federal government. Federal government has put a limit, a price point, of $1 million in for insured mortgages or uninsured mortgages. You have to have 20% down plus to buy a $1 million plus property. There’s no flexibility. Not 19%, not 18%, you have to have 20%.
What that has done, combined with the far more stringent qualification criteria to qualify for mortgage money … Again, to dollarize that for listeners, $100,000 income if you were buying a house with a basement suite that had good rents … And again, we’re in a 1% vacancy market for 30 years. 1% vacancy in the rental market for 30 years running. That basement suite is going to be rented out. Using the suite income and the $100,000 household income, you could push mortgage qualification as high as $800,000. Today, that’s been cut back to $500,000.
Now people might argue that $800,000 was way too much money for $100,000 a year household. Mind you, keep in mind, that basement suite would have been renting for about $1500 in that equation. So, that would [crosstalk 00:17:52]-
Andrew la Fleur: Wow.
Dustan: Care of over $300,000 of mortgage money in the real world. But at this point, as I say, that same $100,000 household has been cut back to closer to $500,000. I think the argument can be made that, that’s a little too far in the opposite direction. Most clients now feel like logic has left the equation. So what we’re seeing, as I say, is under $1 million, the market is still multiple offers, condition free. It’s crazy. You’re still seeing things go over ask in a day. You know, 107 people going through a house listed for $850,000 when you can find that house. And poof, they’re gone. So yeah, the multi-family, which is mainly what you’re buying in our market under $1 million, is a townhouse or a condo very, very strong. Over $1 million, it just cools right off. Then go past $1.5 million, and it’s ice cold.
Andrew la Fleur: How do you see this playing out? We’re seeing … It’s almost the exact same story we’re seeing here in Toronto for the reasons you mentioned. How do you see this playing out in the long term under, let’s say, the scenario where the stress test and everything stays as is, how do you see it playing out? And then, what if one day the stress and everything just vanished? How would you see the market react?
Dustan: You mean when there’s a political change potentially?
Andrew la Fleur: Yeah.
Dustan: Yeah, I think the one day is probably going to involve a federal election most likely. But to answer your question, three, four years ago, maybe even further back, I was asked, and I’ve been asked multiple times since what I saw as the number one risk for the Canadian housing market? The number one risk for the GTA, the GVA? Where is the danger? I’ve always said the government is the danger. They will overregulate us into a recession. They somehow seem to fail to understand how significant a role housing plays in our economy. A $400,000 condo, $100,000 of that price is tax. It’s municipal, provincial, federal tax. 25 cents on the dollar. If the government really wanted to do something about affordable housing, maybe they could waive-
Andrew la Fleur: They have the biggest lever, yeah. They have the biggest lever in the universe. They can control it, but instead, they do the opposite. They just tax it more.
Dustan: Yeah, they could literally roll prices back 25% overnight on housing. If they felt that housing was important for Canadians, they could find their tax somewhere else. Roll it back, and poof, there you go, 25% reduction in housing. So as I say, I’ve always said that government overregulation is the biggest concern. It seems that we are absolutely moving that way at this point. I mean, it’s crystal clear. The meddling that they have been doing. It’s just, as I say … Well, you can hear. The first time in the conversation I’m struggling for words. But it’s just mind blowing how detached from reality they are. I mean, we’re in a market with a 0.24% arrears rate. That’s not foreclosure. That’s arrears. That’s people who’ve missed two mortgage payments in a row. 0.24%. It’s as low as it’s ever been.
During the real economic crisis, we went all the way to 0.41%. In the US, they went to 10% foreclosure. Not arrears, 10% actual foreclosures. We were at 0.41% arrears. If you’re at 0.41% arrears, your foreclosure rate is probably a quarter of that number. It’s always been very low. Canadians do not miss mortgage payments. And actually, that line right there was delivered by CMHC’s Chair in a Parliamentary testimony. He said that’s the problem. An interesting clip. I really wish I’d saved it. I should really search it out one day in my spare time that I don’t have too much of.
But I will paraphrase, but I think I’m going to be within a few words of quoting him when I say, the biggest concern that the government actually has right now is that precisely, Canadians don’t miss mortgage payments. In other words, the government is concerned that Canadians are getting themselves into these bigger mortgages that they’ll never miss a payment on. There won’t be any foreclosure crisis or anything like that, but we may go through some economic contraction and all of our money will go towards making our mortgage payments and we won’t be out there buying a new refrigerator. That’s the example he used. We won’t be out there buying new fridges. We won’t be out there buying new TVs, going to the restaurant and spending $200.00 on dinner. That impacts the overall economy. He spoke to that. Their concern is not just housing. Their concern is the national economy.
But as I say, I really feel like a lot of what they’ve done is now going … They’ve done so much, and multiple levels of government have done different things. We’ve got a vacant home tax in the city of Vancouver. We have a foreign buyer tax in outlying areas. By the way, a foreign buyer, you understand that you’re a foreign buyer, Andrew? If you wanted to buy a place in Kelowna, lake country, about three and a half, four hours east of Vancouver, you would be a foreign buyer. In fact, if your parents, grandparents, great grandparents had bought a lot on the Lake there for $10.00 and built a little family cabin and it had been in your family for four generations, guess what? It’s now foreign owned because you don’t live in BC, and you don’t report tax in BC. So you’re going to pay a 2% of the value of the property tax to the provincial government.
I mean, basically, our provincial government are morons. I mean, they took these tourist-heavy, very, very tourism-heavy communities and told all the people from Alberta and the rest of Canada that owned properties in those communities, we’re going to tax the hell out of you. Don’t come here. We don’t want your money. It’s mind boggling. As I say, you’re just seeing the stupidity from every level. I mean, the foreign buyer tax. What a moronic move. If you’re actually concerned about foreign ownership of property, hello, we have an incredibly robust land title registry. You simply say, Mr. and Mrs. Foreign Buyer, you are only allowed to own one property. Period. If you’re worried about laundered money and all this kind of stuff, if that’s what you’re really worried about, don’t say give us 20% more of your laundered money.
Andrew la Fleur: Right.
Dustan: And that’s what they did. They talk about being concerned about laundered money, but they’re asking for more of it. The government is saying well, you’re bringing in this foreign money. They call it dirty money, which is a total misnomer. Money laundering implies drug dealers. That’s what, I think, most people think when they hear money laundering. What they’re using the term to describe are capital controls where a country … So, imagine Canada says to you, Andrew, you can’t take more than $50,000 out of our country. But you look right across the border at New York, and you can buy a studio in New York for $50,000. Like it’s way cheaper than in your home country. It is. It’s a bargain.
Now of course, everyone in New York is saying prices are insane. It’s so crazy. But to you, it’s just looks unbelievably cheap. And you’re really worried about the stability of your nation’s government. You’re worried about your children’s future. Are you going to sew $50,000 into your suit and get on a plane and fly down to New York and park that money in a piece of real estate? Of course, you are. Just about every single Canadian would do that put in the same situation. Does that make them a criminal? Well, yes, if they’re taking more than the government says you’re allowed to take out of their country. That’s a criminal act. The thing is in Canada, if you arrive at the airport here and you say yeah, I’ve got $1 million cash in my briefcase, but here’s where it came from. I sold this property and this business, and you can show where the money came from, we let you in. We don’t have a law against you bringing in more than $10,000. You just have to report it.
Andrew la Fleur: You just have to report it. Yeah, sure.
Dustan: And tell us where it came from. So, it’s not “laundered money” in the way that we think it is. As I say, we link it to like crime, that kind of thing. It’s just a lot of people trying to look out for their families just like any one of us would do who are coming from a country that’s a little more fragile than ours. Although, ours is starting to feel a little fragile, too. You know, I just think these rules that have come into play, and well, I mean, [crosstalk 00:27:43]-
Andrew la Fleur: Right.
Dustan: We just had the coolest spring market in 10 years, maybe 20 years. It’s unbelievable. The number [crosstalk 00:27:49]-
Andrew la Fleur: Right.
Dustan: Just came in. I haven’t had a chance to go through them. I just did briefly. But wow, it’s unbelievable how they’ve cooled things off. But prices are not plummeting. So there’s a little bit of that question, who is going to blink first? Are buyers going to come back? Or are the sellers going to have to start dropping their prices? We’ll see.
Andrew la Fleur: Interesting, interesting. Very interesting stuff here, Dustan. I want to get to this fixed versus variable debate. You put out that great video. Basically, in your video, you summarize it nicely. You say if you’re choosing fixed over variable today, you’re making two bets. So maybe you could just explain a little bit for our listeners what you mean by that? These two bets that you’re making and why, as you say in your video, variable is absolutely the way to go right now?
Dustan: Yeah. Well, I mean, variable … When we use the word debate, I’ll say it’s as much of a debate as is ice cold? Yes, ice is cold. Is fire hot? Yes, fire is hot. Should you go variable? Yeah, you should go variable. I mean, it’s not cut and dry. Oh, but I’m a first time home buyer. Yeah, I was, too. 18 months later, I got hit with this huge penalty that I didn’t see coming.
So, sure, I mean, the two bets conversation is basically this. If the listener is sitting there screaming at the podcast saying no, fixed. Fixed is the way to go. Mr. and Mrs. Fixed Rate listener, what you’re saying to me, you’re making a bet. You’re placing a bet. Anytime you put money into any kind of financial instrument, you’re making some kind of bet. The bet you’re making when you say I want a five year fixed mortgage is that the bank in Canada is going to increase prime to the point that you’re going to have paid less interest. Unfortunately, you could almost title this “Math is Hard”. I use that phrase all the time. Math is hard. Life is hectic. People don’t have time to do the actual math.
Most people will say well, if I can get a variable rate mortgage at say 2.75%, but I can lock into a five year fixed at 3.75%. Those are just sort of rough market rates right now. There’s obviously a little bit better rates here and there to be found. But we’ll use that as our example. 2.75% variable versus 3.75% fixed. Most people say well, the Bank of Canada only needs to go up four times, and I’ll be wishing I locked in. Well sure, if you’re not doing the math. Then you might feel that way because remember, you saved money every single month that you were at 2.75%, 3%, 3.25%, 3.5%. You were saving money the whole way along. You were ahead of your neighbor that locked in on day one. So yeah, but when it hits 3.75%, I’m at the same rate. Sure, but you’ve saved money.
Now the question, of course, the unknown variable is how long does it take the Bank of Canada to increase prime four times? Well, I would suggest that it’s unlikely, it will go up four times in the next five years in my personal opinion. That’s my personal opinion based on my experience owning properties and being in the market and whatnot. The thing is, even if it goes up four times, you’ve still won in the variable. The variable rate mortgage holder is still the winner because they saved. If we assume a linear set of increases, so quarter point incremental increases, and we were to assume it went up eight times in five years, you still don’t win. You were even. If it went up exactly linear eight times. Okay, great. We close the gap at the two and a half year mark. But at the five year mark, I’ve just given back … I’ll stay in the variable. So I’ll have just given back the last of my savings of being in the variable for the first two and a half years, roughly speaking.
I realize there’s a more detailed mathematical equation. But in layman’s terms, this is basically what it boils down to. The question is not, or the bet really, is not is prime going to go up four quarter point hikes? And it’s not is it going to go up eight quarter point hikes? Is it going to go up nine hikes? 10, 11 hikes? And if it does, how much are we talking about? I mean, you need it to go up a big chunk fast. You need it to move up far, fast. That’s not going to happen for all the reasons we were just talking about. I mean, the housing market is cooling off big time.
An awful lot of people don’t realize just how connected their livelihood is to the housing market. If the economy starts to contract and cool down thanks to all of the measures the government put in place, you’re really not going to see interest rates go anywhere at all because they can’t. Interest rates go up to cool an overheating economy. I would suggest we are certainly not in danger of an overheating economy with the trend that we’re seeing in the real estate sector. So, as I say, that’s the first bet.
How much are you betting? If you’re talking a quarter point, a half point, savings over a five year term, you’re looking at a few hundred dollars. I’ll give you $2000. Maybe it’s $2000 you saved. But again, in the history of mortgages and in the recorded history of about 50 years with rates, it’s never been the right day to lock into a five year term. You’ve always won by going variable. You’ve always won that small bet.
But here’s the other thing, and it goes back to the earlier conversation around prepayment penalties. That’s the other bet most Canadians do not realize they’re making. In that $400,000 example, they are pushing $18,000 out on the table. That’s a lot of chips to push out on the table. They’re saying I bet you I last five years in this mortgage. They’re betting against odds completely not in their favor. Two out of three people will be wrong. If I’m the house, I’ll take that bet all day long. Canadian banks do not make $1 billion plus every three months by accident.
Andrew la Fleur: They are good at math. Most people are not. The banks are good at math.
Dustan: Very, very succinct, yeah. The banks? Good at math. Us? Not so much. I don’t know about you, Andrew. I didn’t make $1 billion last quarter.
Andrew la Fleur: I’m almost there. But yeah, not quite.
Dustan: Should you be a shareholder of a financial institution? Of course, you should. They know how to make money. Should you be a client dealing directly with a financial institution? No. No, you shouldn’t. It’s like going into a courtroom and using the other guy’s lawyer to represent your best interests. You want to have somebody on your side. There’s my little plug for independent mortgage brokers.
Andrew la Fleur: There we go. I was waiting for it. I was waiting for it.
Dustan: I didn’t even intend to bring that up, really.
Andrew la Fleur: No, of course.
Dustan: If it closed. I mean, realistically, you want somebody independent on your side giving you this information that the institution isn’t. You’ve made this huge bet unknowingly because you don’t even know how much the prepayment penalty is going to be because you didn’t ask, and they didn’t tell you. But I’m telling you. You’ve made roughly 4.5% of your balance as a bet. That’s about 3.75% more than if you were in the variable that you’re going to go the distance. You’re going to be the one in three that’s going to last the full five year term on your mortgage. That is just not a bet I’m willing to make. [crosstalk 00:36:03]-
Andrew la Fleur: Right, right.
Dustan: Life is [crosstalk 00:36:04]-
Andrew la Fleur: Some … Absolutely, yeah. Interesting. Two out of three, statistically, two out of three mortgages will break. Average break time is three years. I mean, these are very important numbers for everybody to consider when they’re making that decision. Obviously, variable is … You’re loud and clear on the variable is the way to go. What percentage of mortgages actually go variable versus fixed? What’s the latest stat on that? Do you know?
Dustan: The last time I heard a stat, it was growing. I think it was 18% were in variable rate mortgages at one point. I think that’s the highest number I’ve ever heard reported is 18%. In my own book of business, 1641 mortgages later, it’s above 90%. Most years, it’s about 93%.
Andrew la Fleur: Wow. That’s incredible.
Dustan: A lot of them wound up going five year fixed because for a few years there, the government had created this ridiculous situation on qualification where you actually qualified for about 20% more mortgage money if you went five year fixed. So, a lot of buyers in the GTA and GVA had no choice but to go five year fixed in order to qualify. You know, we’ve covered a lot of ground here, but maybe this is the most important takeaway. The variable is a no brainer. Like I said, ice, cold. Fire, hot. Mortgage, variable. If I had a tagline, if I was advertising, it would be life is variable. Your mortgage should be, too.
Andrew la Fleur: I like it. I like it.
Dustan: At least I got it documented out there. We’ll have a date stamp on that one.
Andrew la Fleur: Trademarking.
Dustan: You know, as I say, it’s something to really keep in mind. Not enough people do the math at the end of the day.
Andrew la Fleur: Right. Interesting. Yeah, you’ve just summed it up so nicely. I’ve been telling my clients for years variable is the way to go, for sure. I mean, I’ve always gone variable myself as well on all my properties. I mean, the way I try to sort of explain it in my terms to people is basically telling them look, the variable rate is the actual true rate of money. It’s the true cost of money. It’s the truest we can get to it. It’s a rate that will change from day to day. The fixed rate is you’re paying a premium for the … The bank is saying okay, if you want a guaranteed rate, then you’ve got to pay a premium for it. We’re going to make sure that it’s a new product and we’re going to make money off of that to give you that certainty. The banks are good at math. They’re going to figure out how to make more money off of you going that way for that premium than to not take that premium.
Dustan: You pay a premium for a sense of security, for a sense of certainty. But of course … And I should clarify your comment about the variable. I mean, there’s eight Bank of Canada meetings per year. People’s payments don’t double overnight. They don’t fluctuate wildly week to week. There’s eight different preset dates where that rate may change. Then depending on the lender, the payment may or may not change. Some lenders actually offer a fixed payment for the entire term of the mortgage. But that’s something to have a conversation with your broker about. We don’t need to get into that.
But to circle back, I sort of got all revved up and said this is the most important thing I’ve got to say and then I didn’t say it. Here’s the most important thing for a lot of listeners. If they are in a five year fixed mortgage, and they definitely, they know they stretched to get into the mortgage they’re into, and they did that before January 1st of 2018 … Maybe in 2017, 2016, 2015 zone. They need to understand that their mortgage, yes, it’s portable, but you have to re-qualify to port that mortgage to a new property under today’s rules. Even though you’ve never missed a payment, even though you’ve been carrying that mortgage balance just fine, you cannot move that mortgage over to another property without re-qualifying under today’s rules. Today’s rules, a lot of people who had to go five year fixed, unless your income has gone up 20%, 25%, you are not porting that mortgage balance over. You’re only going to be able to port 70 cents on the dollar to a new property. We’re already seeing that start to become a problem. You know, [crosstalk 00:41:03]-
Andrew la Fleur: That’s interesting, yeah. Yeah.
Dustan: They can’t take the mortgage with them and they don’t realize things have changed. We’ve done our best to reach out to all our realtors that we work with, especially the listing agents and let them know. The question is not is my mortgage portable? The question you need to ask your financial institution is, looking at my current credit report, looking at my current income document, do I qualify under today’s rules to move my mortgage to another property? It needs to be a really robust question with a really detailed answer. If they aren’t looking at your documents, if they’re not pulling up your credit bureau, they’re not giving you a real answer. They’re just giving you a made up answer. We have lots of instances where well, we phoned and the bank said our mortgage was portable. Technically, it’s portable. I mean, my car goes 240 kilometers an hour, technically. But if they can’t get away with that, or they won’t be able to even make that happen between my home and my workplace. It does it, but can I do it? No, I can’t.
Andrew la Fleur: Right. Right. It’s just … Yeah, and it’s, once again, more friction just being added to the process of buying and selling a home. The government just basically clamping down the market, and so they’re restricting people from moving. They’re restricting economic activity from happening.
Dustan: Well, as I say, the devastation that this kind of thing causes to a family … I’ve sat with government officials and they love this word. They love this word. They say that’s anecdotal. When you give them a real life example of a family whose life has been turned upside down due to some of the rules that have been created, well, that’s anecdotal. I’m like, you know what? It’s anecdotal until it’s your sister, cousin, uncle, brother, parent.
Andrew la Fleur: Right, right. Until it’s you, yeah.
Andrew la Fleur: Yeah, good luck with that. Just maybe as a last point, given everything we’ve talked about and the mortgage market as it is today, and all the intervention of the government and the new rules, what … A lot of investors obviously listen to this podcast, people who are buying multiple properties who either own multiple properties or are planning on buying multiple properties, what advice are you giving your investor clients today and dealing with obviously, just being harder to get multiple mortgages? Harder to get mortgages in the first place than it was a year, two years ago. What is your advice to investors looking to buy multiple properties today?
Dustan: I mean, I don’t want to make it an infomercial for mortgage brokers. If you’re an investor, 95% of investors need a broker in their life just to navigate which lenders are doing what. If you own more than two doors, if you own more than three or four doors in particular, qualifying for that third, fourth, fifth property has just gotten ridiculously difficult. It’s a complete maze of policies from one lender to another, the range. For instance, $1000 worth of rental income will cover somewhere between $40,000 and $160,000 worth of mortgage money. I mean, from $40,000 to $160,000 and a whole bunch of numbers in between, it just depends on which lender you’re talking with. That alone is just one part of the matrix of qualifying somebody.
They get people all the time that say but my rentals are positive cash flow. Yeah, in real life they’re positive cash flow. But this lender uses such a restrictive form of rental calculations that you need to earn another $300,000 a year personally to cover the “shortfalls” on your rentals. They’re like but what shortfall? I have money left over every month. Yes, I know, but you’re talking about real life. That’s just silly. You don’t want to talk about real life. We’ve got to look at it through the bank’s lens. Of course, I’m joking when I say that’s silly. I mean, the whole thing is very complicated and logic has left the room. Logic is a four letter word, it basically seems like.
For the investor, you certainly aren’t going to run out there and just write offers on things. You’re going to have long conversations with your financing person, and make sure that you’re actually going to be able to get where you want to get things done. Be prepared to pay a higher interest rate. It may only be a quarter or a half a point higher rate, but it may be a full two percentage point higher. Do the math. Make sure that this property is going to make sense at that type of interest rate. You may not be able to buy with 20% down on investment property anymore. You may have to go 25%, 30%, 35% again, depending on which lender you’re actually going to be able to qualify to buy that next property through.
Getting a handle on the math of that, understanding what your costs of mortgage money are really going to be. It’s no longer what it was. It’s no longer as low. It’s no longer as easy as it was. Then as far as going out there and buying in the market, I don’t care what the market is doing. Whether the market is going up or down, what I care about is can I rent this property out? Will it have a positive cash flow? If the answer is yes and yes, then I’m going to buy that property. Again, I’m in a market with below 1% vacancy rate. That vacancy rate hasn’t changed. When is the last time you saw a headline in the newspaper that said watch out for the bubble in rent?
Andrew la Fleur: Right, exactly.
Dustan: Nobody’s rent is going down. As I say, if I know that the rent is going to cover the cost, I’m good. Believe it or not, you can still find positive cash flow properties in the greater Vancouver area, in the greater Toronto area. They do exist. They are there. They’re not easy to find. But they’re out there. The reason I say I’m not really worried about where the market is going one way or the other is because the sooner I have a tenant paying off that property, the sooner I win. By win, I mean 25 years down the road, the property is paid off. It’s just flowing cash into my life. It’s my long term retirement program.
But what if the market goes down 50%? So what? As long as my tenant is paying the mortgage on it, I want to have millions of dollars of mortgage debt that somebody else is paying off for me. At the end of the day, that means I will own millions of dollars worth of real estate that somebody else bought me. It’s looking down at the end goal, way, way down the road, 25, 30 years down the road and not losing sight of what that goal is. You will not find anyone who is happy they sold a property five years ago. You cannot find anyone who is happy they sold a property 10 years ago. Are there people who are happy they sold last year? Of course. Talk to them in 5 to 10 years. Talk to them in 20 years. Talk to them in 30 years when that property would be free and clear, fully paid off by strangers. They definitely will not be happy they sold that property. You buy, and you buy some more. Buy and refi. [crosstalk 00:49:08]-
Andrew la Fleur: Yeah.
Dustan: And buy another one.
Andrew la Fleur: Refi until you die.
Dustan: Exactly. There you go. Keep on going.
Andrew la Fleur: I love it. I love it, yeah. No, it’s … You’ve said it perfectly.
Dustan: And even if the value is down by 50%, what do I care? I didn’t pay it. I paid nothing for it.
Andrew la Fleur: Exactly, yeah.
Dustan: I’ll have gotten my down payment back out of the positive cash flow. So I literally will have no money invested in these properties. Even if there were zero, I’m still laughing because I’m getting paid rent every month. I don’t know. I mean, maybe I’m [crosstalk 00:49:44]-
Andrew la Fleur: People over-complicate it, don’t they? People over-complicate it and they think too short term. They just continue, as you said, you just keep losing. If you’re thinking short term, and if you’re bad at math, you’re just going to keep losing.
Dustan: [inaudible 00:49:59]. We’re all bad at math. I mean, I’m bad at math. I’m just really good with mortgage numbers and property numbers because that’s what I work with all day, every day for years and years. And I’m really interested in it. I’ve got a pretty good handle on those numbers, but there’s whole other sections … I was talking to my plumber the other day. He can calculate the volume of a cylinder. I cannot calculate the volume of a cylinder. He knows what the flow dynamic of a certain pipe, depending on the inside diameter, outside diameter, wall thickness. He’s got all this math around pipes and flow that I couldn’t touch. He sounds like a next level genius when he starts talking about it.
Andrew la Fleur: Right.
Dustan: And then of course, he calls himself just another dumb plumber.
Andrew la Fleur: Right, okay.
Dustan: I’m just another dumb broker. All of us have unique math skills related to what we do. I mean, when you’re serving as a teenager into your 20s, it’s one of the first best jobs I think most of us ever have is serving in a restaurant. I mean, you learn the math around money and percentages really quick. Did they tip me 10%, 15%, 20%? You know what that dollar amount is. You learn that math. You get reasonably good with that math around money. But only that one little specific segment. That’s just the nature of life, right?
Andrew la Fleur: Mm-hmm (affirmative). Well, that’s why this podcast exists and that’s why I love talking to people like you, Dustan, just to help get this message out to more people and help people understand mortgages, help people understand money, help people understand how to especially make money investing in real estate. You’ve given us some great food for thought to think about here today. If people want to get a hold of you or learn more about you, what’s the best place for people to do that?
Andrew la Fleur: Google? Okay. Google Dustan Woodhouse. But do you want to drop a phone number or an email if people want to just hit you up directly?
Dustan: I don’t want to make it that easy. If you really want to ask me something, Google [crosstalk 00:52:07]-
Andrew la Fleur: Okay. That’s a-
Dustan: It was funny, yesterday I had somebody in a comment section type this big long sentence asking for my email address. I said to them, that is more characters than if you’d typed my name and email into Google. It took them longer to type the question. Just go to Google. Type the name. Boom, there it is. I purposely make it a little bit difficult. I actually only work with pre-existing clients or referrals of pre-existing clients. I don’t work with people. I do a number of different podcasts through the course of the year, maybe two or three. I shouldn’t say a number. The number is two or three. And invariably, I do get some inquiries. But as I say, I only work with past clients or referrals from those past clients. But I’m always happy to answer questions.
I’m sure someone is going to take me to task on well, this two out of three breaking in three years. I can’t find any evidence of that on the internet. No, you can’t. You kind of have to be an industry insider. You kind of have to know some VPs in the mortgage division of one of the lenders and have a conversation with them. They’ll tell you that’s what the numbers are. They’re common with all lenders. There is one piece I’ll head off. There’s always [crosstalk 00:53:22]-
Andrew la Fleur: Okay.
Dustan: The I can’t find proof of this. I’m living proof myself.
Andrew la Fleur: Right, right. People either believe you or they don’t. Well, Dustan, it’s been great having you on. If people want to find you, they will Google Dustan Woodhouse. Go ahead and do that if you want to reach out to Dustan. I appreciate your time. I appreciate your insights. Hopefully we’ll have you on the show again soon.
Dustan: Yeah, I really enjoyed it, Andrew. Thank you for reaching out. I appreciate the opportunity.
Andrew la Fleur: Great. Thanks, Dustan.
Dustan: Take care.
Andrew la Fleur: Take care, bye.
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