I urge you now to tap into the equity in your home to invest. This is the cheapest source of capital we have and it will never be as available or as inexpensive as it is today.
Canadian homeowners are quickly becoming further constrained in their ability to access the equity in their homes. Potential home buyers are being regulated out of the housing market. As a result property values will slide and our economy will slow. This may seem like bad news, but for you, it is not! As long as we have the foresight, this will be a fantastic opportunity to create wealth.
In response to a slowing economy brought about by the new regulations, and the onerous capital requirements of the regulations themselves, Banks will overreact in order to please the financial markets, tightening credit just as we saw with the credit crunch post-Great Recession. As the Banks retreat from secured lending an even greater opportunity to deploy private capital toward excellent risk weighted returns will open up.
Here are the 3 steps to us creating some wealth together in the next 5 years:
1. Be Prepared.
Access the equity in your home now. This equity is only valuable if it’s being used. If you have no immediate intentions of selling your home, a reduction in property values only negatively impacts your ability to use your home as a source for low cost investment capital. Access that capital now and watch the value of that capital increase, while those around you see their ability to borrow limited by reducing property values and increased regulation.
2. Be Disciplined.
Begin investing in low risk mortgages with low Loan-To-Value weightings. This requires discipline. While others look to make higher returns, foregoing diligent risk management in the blind pursuit of yield, we must look for low risk mortgages that provide safe and stable returns. Those who are rushing to reap massive returns on second mortgages now will be panicking to sell those second mortgages at a discount in the future, wiping out their extra yield and likely a large chunk of their initial investment.
3. Be Patient.
As the Banks retreat from lending there will be some downward pressure on property values. Yet property values will not be as impacted as capital availability, particularly considering the government’s failure to address the supply side constraints that are a significant contributing factor to the strength of our target GTA market. When the mortgage market is affected by a lack of common sense lending and rates artificially increase, investors will see much higher risk weighted returns.
Let’s look at this in more detail:
This week the Minister of Finance announced some changes to take effect in the Canadian Mortgage Market. As an investor in our Mortgage Investment Fund you have probably heard me discussing the possibility of further regulation limiting the amount of equity Canadians will be able to access from their homes. Well, here we go!
It is our belief that we must access the equity available to us in our homes to make investments now. Very soon our access to that equity will be extremely limited by the new regulations and their knock-on effects (reduction in values, and retreat of conventional lenders from the marketplace).
Interest rates are at all-time lows and will continue to be for the foreseeable future. We are in uncharted territory. Typical sources of investment income for Banks, Insurance companies and Pension Funds are being assaulted. Soon mortgage rates will be artificially inflated by the new regulations being imposed. In fact we’re seeing this already, as lenders price in the new policy framework. This is precisely the government’s goal – to artificially raise interest rates within the housing market, without raising rates affecting the broader economy. It’s hard to know the full extent of unintended consequences this action will produce, but one thing we can be sure of is this: increased profits for Banks. Unfortunately, it could also result in a drop in the value of our real estate which, broadly construed, is estimated to account for around 50% of our economy.
By limiting access that Canadians have to low cost institutional funds and then placing restrictions on who can lend money and who can borrow money the federal government is devaluing the wealth Canadians have in their real estate assets. This is a dangerous game. If the measures being imposed are too severe they could create a more serious recession that will likely result in further interest rates drops and a reversal of some of the policies now being implemented.
Regardless of how this unfolds one thing is certain: When Banks no longer approach lending with common sense principals the market will require alternative sources of funds. Cannect will be there. By patiently investing in low risk mortgages now we will be able to take advantage of greater opportunities in the future.
If you are lucky enough to be able to access the equity in your home, what should you do with it?
The Cannect Mortgage Fund has been created to take advantage of opportunities in the mortgage market.
Our fund is currently at a Loan to Value weighting of under 58%. This means that the total value of the loans we have provided represent a little over half of the value of the real estate they are secured against. Over the past year we have worked to reduce this, Loan To Value Ratio (LTV) in order to protect the fund, but more importantly to prepare for the coming changes in the market. There are still many Mortgage Funds, and Lenders active in the market place lending money at or above 85% LTV! These lenders won’t go away because of the new regulations, they’ll thrive. And next to them, we feel very comfortable.
In the short to medium term we expect prices to see some downward pressure as the market adjusts to the new rules imposed by the Canadian Government (have a look at our recent MorCan Direct newsletter explaining those rules here). In the longer term we believe that more opportunities in the market will become available allowing us to generate greater returns as we purchase distressed mortgages and take advantage of a far more profitable market from a risk vs return perspective.
If you or someone you know has equity available to them they should consider using it before these new barriers created make it impossible to access. Our roadmap for the future is clear. Our commitment to our Investors is to protect their investment and make conservative decisions that will create wealth.
Mortgage Brokers typically only focus on using their clients’ equity to pay down higher interest rate consumer debt; our focus is also on helping Accredited Investors use the equity available to them in their homes to increase their wealth. We take this job very seriously.
As the guidelines for refinancing begin to make it impossible for Canadians to access their equity and home prices begin to slide those of us who have accessed the equity in our homes will be in an incredible position to take advantage of opportunities available to create wealth.
This email is not intended to pressure anyone into making a risky decision regarding the hard earned equity in their homes. Many people view this equity as their nest egg, or their savings account, and they are right to be careful. But what happens when you can’t access the money in your savings account and the rate of return offered to you on it becomes negative? Accessing the equity available in your home before it is too late and using it to make an informed investment decision will create wealth for you and your family well into the future.
If the Canadian Government and our Banks are successful in limiting our access to capital and therefore our ability to lend to one another we will be forced to rely solely on the Banks. This will slow down peer to peer lending platforms, and reduce the funds available for investment in assets like private mortgages. It will ensure that Banks can return to making greater profits on lending out our own money back to us at higher returns.