28 Aug

SPOUSAL BUYOUT MORTGAGE?

General

Posted by: Brad Lockey

Spousal Buyout Mortgage?

If you happen to be going through, or considering a divorce or separation, you might not be aware that there are mortgage products designed to allow you to refinance your property in order to buy out your ex-spouse.

For most couples, their property is their largest asset and where the majority of their equity has been saved. In the case of a separation, it is possible to structure a new mortgage that allows you to purchase the property from your ex-spouse for up to 95% of the property’s value. Alternatively, if your ex-spouse wants to keep the property, they can buy you out using the same program.

Here are some common questions about the spousal buyout program:

  • Is a finalized separation agreement required?

Yes.
In order to qualify, you will be required to provide the lender with a copy of the signed separation agreement. The details of asset allocation must be clearly outlined.

  • Can the net proceeds be used for home renovations or to pay out loans? 

No.
The net proceeds can only be used to buy out the other owner’s share of equity and/or to pay off joint debt as explicitly agreed upon in the finalized separation agreement.

  • What is the maximum amount that can be withdrawn?

The maximum equity that can be withdrawn is the amount agreed upon in the separation agreement to buy out the other owner’s share of property and/or to retire joint debts (if any), not to exceed 95% loan to value (LTV).

  • What is the maximum permitted LTV?

Maximum LTV is the lesser of 95% or Remaining Mortgage + Equity required to buy out other owner and/or pay off joint debt (which, in some cases, can total < 95% LTV). The property must be the primary owner occupied residence.

  • Do all parties have to be on title?

Yes.
All parties to the transaction have to be current registered owners on title. Solicitor is required to do a search of title to confirm.

  • Do the parties have to be a married or common law couple?

No.
The current owners can be friends or siblings. This is considered on exception with insurer approval. In this case, as there won’t be a separation agreement, there is a standard clause that can be included in the purchase contract that outlines the buyout.

  • Is a full appraisal required?

Yes.
When considering this type of a mortgage, it is similar to a private sale and a physical appraisal of the property is necessary.

If you have any questions about how a spousal buyout mortgage works, please contact your local Dominion Lending Centres mortgage professional. Be assured that our communication will be held in the strictest of confidence.

28 Aug

MANAGING YOUR MORTGAGE

General

Posted by: Brad Lockey

Why is it important for you to have a mortgage manager? Reaching your financial goals is attainable!

There are some things to consider before securing your mortgage:
Is there a potential of you buying an investment property or a vacation home? Are you considering scaling up or downsizing? Do you think you might move or port your mortgage or retire within the next five years? All these scenarios come into play when setting up your mortgage.

If you had $500,000 cash to invest, how often would want your financial advisor to review your investments?

Why is it different when you are $500,000 in debt with your mortgage?
Why not have an active mortgage broker looking after your $500,000 debt?

Active financial advisors aim to grow your net worth by investing wisely.
Active Mortgage brokers will help you grow your net worth by reducing your debt and growing your asset base. You will cover only half of the prosperity equation without a mortgage broker.

Consider this: your bank’s main goal is to make money for the bank. This is understandable as they are in business to make money. As reported, banks make billions of dollars every quarter, in part, thanks to you. On the flip side, a mortgage broker is an advocate for you and their main goal is to get you the best mortgage to meet your goals. This comes in many forms, not just the interest rate, although it is important there are other areas that could cost you more money in the long run.
An active mortgage broker can save you thousands of dollars over the life of your mortgage.
Most mortgages are set up on a five-year term and a great deal can change in five years.

Changes in life happen. You are forced to move, or you would like to move to a bigger home, downsize, buy an investment home a recreational property, or take equity out to buy a business or perhaps retire.
Mortgage rules continue to change. What worked last year may not work this year. It is important to review your situation with your mortgage broker before making any major decisions with your current mortgage.
Being in the right mortgage may be the difference between being able to buy that investment property or recreational property. It may be the difference of paying a $3,000 penalty or an $18,000 penalty to close out your mortgage.

Remember, it is not getting a mortgage that is important, it is getting the right mortgage that will help you meet your future goals.
When it comes to your renewal time it is important to once again review your options with your mortgage broker.
Your current lender may not have the best rate or option for you at renewal time as there are many lenders and there are many options to choose from. At renewal time, you can change lenders with no penalty. Renewal time is also a good time to take extra equity out of your home to pay off debt, for investment purposes or to pay for that new kitchen you wanted.

I have called many clients well before their mortgage is due when I recognized it would save them thousands of dollars to refinance early. Moves like this help clients pay down their mortgage faster, provide extra cash flow for investments, and provide funds for renovations or a down payment on an investment property.
Having someone manage your mortgage can be a great benefit for you and your family.
If you currently do not have an active mortgage manager, a Dominion Lending Centres mortgage broker would be happy to become your mortgage manager.

21 Aug

EVERYTHING YOU NEED TO KNOW ABOUT REVERSE MORTGAGES

General

Posted by: Brad Lockey

Wouldn’t it be wonderful to be able to have money to do more of the things you love?
To be able to have the freedom to pursue things you truly enjoy, especially in your Golden Years?
Enter in a CHIP Reverse Mortgage!
A Reverse mortgage is a simple and sensible way to unlock the value in your home. This mortgage product can tap into your home’s equity and turn it into cash to allow you to enjoy life on your terms.

A CHIP Reverse Mortgage is a loan secured against the value of the home. With this type of mortgage product, you are not required to make regular mortgage payments. Instead, the loan is repaid only when the homeowners no longer live in the home. Keep in mind that there are conditions with this. The homeowner is required to keep the property in good condition and keep up to date on property taxes and insurance.

There are also other qualifications an applicant must meet in order to qualify for this type of mortgage.

  1. Homeowners must be age 55 or older
  2. You must reside in your home/residence for 6 months out of the year
  3. If the title of the property is registered to more than one person, you must be registered as joint tenants, not just as tenants in common. The difference between these two types of shared ownership is what would happen to the property when one of the owners passes on. If the property is joint tenants, the interest of a deceased owner automatically gets transferred to the remaining surviving owner. If it is tenants in common, the deceased tenant’s property interest belongs to his or her estate.
  4. Although you do not need to have an income to qualify for the borrowed amount as there are no payments required, you will have to stay up to date on paying the property taxes, fire insurance, and strata fees (if applicable). The income you have coming in will have to be enough to adequately cover those associated fees.

Now for the big question you are all asking: How much can I borrow?

Well, to answer this there are factors that contribute to the total value. First, your age is a determining factor for this mortgage product. Essentially, the older you are the more you will qualify to borrow. The second factor is in direct relation to the details of your property. For instance, a detached home will qualify to borrow a higher amount than say a condo or townhome. The final factor to consider in this is the maximum amount that can be accessed through a CHIP Reverse Mortgage.
The max amount is set at 55%.
So, if your property is worth $1,000,000 and you are looking to qualify for the maximum amount, that would give you a mortgage of $550,000. If accessing 55% Loan To Value is not high enough there are private lending options that will consider increasing the Loan To Value up to 65%.

An easy way to take all three of those factors into consideration is to call me at 416-518-7476. I can give you a rough idea of what the maximum amount is that you will be able to receive through a CHIP Reverse Mortgage.

One final note is to consider the costs associated with a CHIP Reverse Mortgage. Yes, there are no required payments due while you are living in your home. However, you should expect the following costs to be associated with this product:

1. An appraisal of your property will be required with an approximate cost of $300;
2. There will be legal costs associated which will be around $1495.00 This amount can be included in the mortgage funds and does not need to be paid out of pocket;
3. Independent legal advice is required on all CHIP Reverse Mortgages. The approximate cost will be $600. However, this again can be included in the mortgage funds and does not need to come out of your pocket;
4. Mortgage Penalties may incur if you are breaking the term of your mortgage.

  • In the 1st year it is 5% balance of the funds owing
  • In the 2nd year it is 4% balance of the funds owing
  • In the 3rd year it is 3% balance of the funds owing
  • In the 4th year and beyond it is 3 months interest penalty
  • If you are deceased, no penalty

If you are selling to move to a nursing home the penalty fees will be reduced by 50%.

In closing, a CHIP Reverse Mortgage product is a unique product that can be very powerful and useful for a certain demographic. It can allow you tap into the funds that you need while allowing you to remain in your family home. We have seen clients use their home’s equity for a variety of things from supplementing their pension income, to paying off debts and helping out family without depleting their current savings or investments. It offers unique benefits that may just be right for you.

If you are interested or want to learn more, contact Brad Lockey at 416-518-7476 today and they can give you the details that will relate to your unique situation.

18 Aug

TOP 5 COSTLY FINANCIAL MISTAKES HOMEOWNERS MAKE WITH THEIR MORTGAGE

General

Posted by: Brad Lockey

1. Not consolidating high interest debt into low interest mortgage;
2. Paying “fees” to get the lower rate;
3. Not looking at their long term forecast;
4. Taking a 5 year rate when 1-4 years can be cheaper;
5. Having their mortgage with a lender that has high penalties and restrictive clauses;

Not consolidating high interest credit or vehicle loans in their mortgage. I hear this often “I don’t want to use the equity in my home” or “I can pay it off”. Many times when people end up with debts is due to inefficient budgeting and understanding what your income is and your debt payments are. There are many folks whose monthly payment is the driving factor in their monthly budget. Making minimum payments can take you YEARS to pay off. Soon after people get mortgages, they are buying that new car at 0% interest and $600 month payments, then the roof or hot water tank goes and they put another $15,000 on credit, then someone gets laid off and boom…can’t make all the payments on all those debts that it took a 2 income family to make. It’s reality.

Paying Fees to get the lower rate.
Dear rate chasers…they catch up with you somewhere. Nothing comes for free. Let’s face it, you go to the bank and their goal is to make money! A lender that offers you a 4.49% with a $2500 vs a 4.64% with no fee and you think “yes, score what a great rate!” Hold your coins… as you could be walking away poorer as the banker didn’t run the bottom line numbers for you. Chasing rates can cost you more money in the long run.

Your $500,000 mortgage was offered with two rates for the business for self guy who needed a mortgage where they didn’t look at the income so much: 4.49% and $2500 fee and $4.64% no fee. Let’s see what it really looks like for a 2-year mortgage.

$502,500 (build in the $2500 feel) 4.49% – payments $2778 per month – $479563 owing in 2 years
Total payments: $66672
$500,000 (no fee) 4.64% – payments $2806 per month – $477634 owing in 2 years
Total payments: $67344.

Wait? So by taking the lower rate with the fee means I owe $1929 MORE in 2 years and only saved $672 in overall payments?

The long term financial planning side.
I counsel many of my clients to take 2-3 year year terms for a variety of reasons. Better rates, lower payments, capitalizing on the equity in your home to pay off a car loan or upcoming wedding. Did you know the average homeowner refinances every 3 years of a 5 year term and pays a penalty?

Taking a 5 year when 1-4 year rates might be a better option. Many times the 1-4 year rates can be significantly lower than the 5 year rates. Remember, the bank wants money and the longer you take the term, the more they make. True, many folks prefer or fit the 5 year terms, but many don’t. Worrying about where rates will be in 3-5 years from now should be a question, but not always the guiding factor in you “today” budget.
Here is an example of a $450,000 mortgage and what the difference in what you will owe on a 3 year term.

2.34% – payments are $990 every two weeks = $402,578 owing in 3 years
2.59% – payments are $1018 ever two weeks = $403,604 owing in 3 years.
You’re paying $28 MORE every two weeks ($2184 total) and owe $1026 MORE in 3 years. Total LOSS $3210! Planning is key. Stop giving away your hard earned money!

Mortgage monster is in the penalties you pay when you fail to plan.
Since many families today are getting in with 5-10% as their downpayment.
If you got your mortgage with many of the traditional banks you know and your current mortgage is $403,750 and you need to break your mortgage (ie refinance to pay off debts) 3 years into the contract you potential penalty could be $12,672! Ouch. vs going with a mortgage broker who can put you with a lender that has a similar rate you penalty would be significantly different – almost $10,000 dollars different!

Get a plan today! If you have any questions, please contact your local Dominion Lending Centres mortgage specialist.

16 Aug

10 THINGS NOT TO DO WHEN APPLYING FOR A MORTGAGE – BUYING A HOME OR REFINANCING

General

Posted by: Brad Lockey

Have you been approved for a mortgage and waiting for the completion date to come? Well, it is not smooth sailing until AFTER the solicitor has registered the new mortgage. Be sure to avoid these 10 things below or your approval status can risk being reversed!

1. Don’t change employers or job positions
Any career changes can affect qualifying for a mortgage. Banks like to see a long tenure with your employer as it shows stability. When applying for a mortgage, it is not the time to become self employed!

2. Don’t apply for any other loans
This will drastically affect how much you qualify for and also jeopardize your credit rating. Save the new car shopping until after your mortgage funds.

3. Don’t decide to furnish your new home or renovations on credit before the completion date of your mortgage
This, as well, will affect how much you qualify for. Even if you are already approved for a mortgage, a bank or mortgage insurance company can, and in many cases do, run a new credit report before completion to confirm your financial status and debts have not changed.

4. Do not go over limit or miss any re-payments on your credit cards or line of credits
This will affect your credit score, and the bank will be concerned with the ability to be responsible with credit. Showing the ability to be responsible with credit and re-payment is critical for a mortgage approval

5. Don’t deposit “mattress” money into your bank account
Banks require a three-month history of all down payment being used when purchasing a property. Any deposits outside of your employment or pension income, will need to be verified with a paper trail. If you sell a vehicle, keep a bill of sale, if you receive an income tax credit, you will be expected to provide the proof. Any unexplained deposits into your banking will be questioned.

6. Don’t co-sign for someone else’s loan
Although you may want to do someone else a favour, this debt will be 100% your responsibility when you go to apply for a mortgage. Even as a co-signor you are just as a responsible for the loan, and since it shows up on your credit report, it is a liability on your application, and therefore lowering your qualifying amount.

7. Don’t try to beef up your application, tell it how it is!
Be honest on your mortgage application, your mortgage broker is trying to assist you so it is critical the information is accurate. Income details, properties owned, debts, assets and your financial past. IF you have been through a foreclosure, bankruptcy, consumer proposal, please disclose this info right away.

8. Don’t close out existing credit cards
Although this sounds like something a bank would favour, an application with less debt available to use, however credit scores actually increase the longer a card is open and in good standing. If you lower the level of your available credit, your debt to credit ratio could increase and lowering the credit score. Having the unused available credit, and cards open for a long duration with good re-payment is GOOD!

9. Don’t Marry someone with poor credit (or at lease be prepared for the consequences that may come from it)

So you’re getting married, have you had the financial talk yet? Your partner’s credit can affect your ability to get approved for a mortgage. If there are unexpected financial history issues with your partner’s credit, make sure to have a discussion with your mortgage broker before you start shopping for a new home.

10. Don’t forget to get a pre-approval!
With all the changes in mortgage qualifying, assuming you would be approved is a HUGE mistake. There could also be unknown changes to your credit report, mortgage product or rate changes, all which influence how much you qualify for. Thinking a pre-approval from several months ago or longer is valid now, would also be a mistake. Most banks allow a pre-approval to be valid for 4 months, be sure to communicate with your mortgage broker if you need an extension on a pre-approval.

15 Aug

Does a 85% Monthly Rate of Return Interest You?

General

Posted by: Brad Lockey

Does a 90% Monthly Rate of Return Interest You?

If you are considering an Open Mortgage or are currently carrying a significant balance on a secured line of credit this post will be of value to you.

Interest only payments are great from a cash-flow perspective, but perhaps there is more to consider, read on.

Short Version

An Open Mortgage, or significant balance on a line of credit, only makes sense if you are paying in out in full inside a 6 month period.

Otherwise the interest rate premium of 1% (i.e. Opens are priced at 3.950% whereas closed variables are at 2.55% or better) will equal the expense of the three month interest penalty to break out of a closed variable mortgage early.

It almost never ever makes sense to take an Open Mortgage, or to carry a significant balance on a Secured  Credit Line as opposed to converting it to a closed variable rate mortgage.

Long Version

We will start with some clarity on a few terms that are routinely misunderstood as they apply to mortgages.

Definitions;

Open – A mortgage that can be paid out at any time without penalty.  A.K.A. ‘Secured Line of Credit’, HELOC, STEP, Homeline Plan, etc.

(The interest rate premium on these mortgage products makes them a questionable choice for many, we will detail)

Closed – A mortgage with some sort of penalty for early payment.  A closed variable is typically the absolute best option for minimal prepayment penalty, as well as minimal interest expense.

Fixed – This word refers to the interest rate component, i.e. the interest rate is fixed at 2.89% for 5 years.

Variable – This word refers to the interest rate component, i.e. the interest rate is set at a discount of .60% below Prime.  Prime is reviewed by the Bank of Canada 8 times per year at preset dates.  The BoC has not moved Prime in over four full years now.

***Variable rate mortgages are convertible to fixed without penalty at any point.  Lenders make it easy as you increase their profits and increase the penalty to break free when you convert to a fixed rate product.

Crossover Point – The point at which the interest expense of the premium paid on lines of credit and open mortgages equates to the prepayment penalty to payout in full a closed variable mortgage.  Typically 6 months, but on occasion as short as 60 days.

Have your Broker to the math for you.

The Math;

Open Mortgage, (Secured Line of Credit)

$100,000.00 at 3.95% (interest only)

Monthly interest expense $326.49 per month.

Minimum monthly payment is $326.49 – (increasing by $20.82 per 0.25% rate adjustment when Prime rises).

Closed Variable Mortgage

$100,000.00 at 2.55% (30yr Amortization)

Monthly interest expense $211.38 per month.

Minimum monthly payment is $397.02 – (A payment that will not increase when Prime finally rises, if placed with the correct lender)

This basic math, leads us to a more interesting question;

 If you were offered a return of $185.00 back on a monthly basis, for each $100.00 invested, is that an investment you would make? 

What if it were a major chartered financial institution offering you this investment opportunity?

An investment of $1,200.00 per year is effectively increasing your net worth by $1,027.68.  Arguably $2,227.68 if the payment increase represents a forced savings plan.

Does an 85% monthly rate of return interest you?

Admittedly cash-flow is negatively impacted to the tune of $100.00 per month per $100,000 of mortgage balance with the closed variable option, but it is very difficult to ignore the $185.00 monthly debt reduction.

There are few better places one could place a $100.00 bill each month.

While speaking of payment amounts, we must keep in mind that a secured line of credit is a variable rate product, and if Prime were to rise just 1.25% the payment (all interest) would then be $428.71 per 100K of mortgage balance.  Whereas with a certain choice of lender you will find that in a closed  variable rate mortgage can in fact have a FIXED payment amount for the entire mortgage term.

Creating certainty of cashflow with a Closed mortgage that is not possible with an Open product.

Let’s look at prepayment penalties.

In a closed variable rate mortgage (again with the correct lender) one will only ever be exposed to a 3 month interest penalty.  Currently that equates to ~$600.00 per 100K of mortgage money advanced.  Recall from above, there is a $100.00 per month interest premium being paid to sit in an Open mortgage product.

In other words the borrower that chooses an Open product pays the equivalent of a 3 months interest penalty every 6 months by way of the higher interest rate.

i.e. sitting in a Open for 18 months will cost triple what being in a Closed variable and paying the penalty would equal.

The lender did all this math for their own benefit when designing these products.  However it is unlikely that this math was spelled out clearly for clients who choose an Open mortgage.

Another Landmine Specific to Secured lines of Credit;

Interest only lines of credit (a.k.a. mortgages) are in fact demand loans.  If the lender gets uncomfortable with the borrower for any reason then said lender is within their rights to demand full repayment within 90 days.  This leads to the next point, the lender may demand repayment of the 3.95% line, but in turn offer a new 4.95% credit line to replace it.  (Revisit 2009 for examples of lenders that increased line of credit interest rates by one full percentage point overnight)

Clients were not impressed.  We humans, we rarely read the fine print.

To be clear I am not suggesting one not have a secured line of credit, quite the opposite as per our own personal mortgage.  Rather I am suggesting one not carry a significant balance on a line of credit for long, and ideally have a line of credit product that offers the ability to lock into a closed variable mortgage which not many lenders offer.

The bottom line;

Keep your options Open, but most likely your Mortgage Closed.

Thank you,

With inspiration from Dustan Woodhouse (Guest Blogger)

3 Aug

FIVE THINGS TO THINK ABOUT WHEN YOU BUY A RURAL PROPERTY

General

Posted by: Brad Lockey

After several years as a home owner, my friend was set to buy the home of his dreams. He always wanted to own an acreage outside of town. He had visions of having a few animals, a small tractor and lots of space.

As a person with experience buying homes he felt that he was ready and that he knew what he was getting into. Wrong. As soon as you consider buying a home outside of a municipality there are a number of things to consider, not the least being how different it is to get a mortgage.

Zoning – is the property zoned “residential”, “agricultural” or perhaps “country residential”?
Some lenders will not mortgage properties that are zoned agricultural. They may even dislike country residential properties. Why? If you default on your mortgage the process of foreclosing on an agricultural property is very different and difficult for lenders. Taking a farm away from a farmer means taking their livelihood away so there are many obstacles to this.
If you are buying a hobby farm, some lenders will object to you having more than two horses or even making money selling hay.

Water and Sewerage – if you are far from a city your water may come from a well and your sewerage may be in a septic tank. A good country realtor will recommend an inspection of the septic tank as a condition on the purchase offer. Be prepared for the inspection to cost more than it cost you in the city. Many lenders will also ask for a pot ability and flow test for the well. A house without water is very hard to sell.

Land – most lenders will mortgage a house, one outbuilding and up to 10 acres of land. Anything above this amount and it will not be considered in the mortgage. In other words, besides paying a minimum of 5% down payment you could end up having to pay out more cash to cover the second out building and the extra land being sold.

Appraisal – your appraisal will cost you more as the appraiser needs to travel farther to see the property. It may also come in low as rural properties do not turn over as quickly as city properties. Be prepared to have to come up with the difference between the selling price and the appraised value of the property.

Fire Insurance – living in the country can be nice but you are also far from fire hydrants and fire stations. Expect to pay more for home insurance.

Finally, if you are thinking about purchasing a home in a rural area, be sure to speak to a Dominion Lending Centres mortgage broker before you do anything. They can often recommend a realtor who specializes in rural properties and knows the areas better than the #1 top producer in your city or town.

2 Aug

Bridge Financing – Part Two

General

Posted by: Brad Lockey

Sometimes in life, things don’t always go as planned. This could not be truer than in the world of Real Estate. For instance, let’s say that you have just sold your home and purchased a new home. The thought was to use the proceeds of the sale of your house as the down payment for the new purchase. However, your new purchase closes on June 30th and the sale of your existing house doesn’t close until July 15th—Uh-Oh! This is where Bridge Financing can be used to ‘bridge the gap’.

Bridge Financing is a short-term financing on the down payment that assists purchases to ‘bridge’ the gap between an old mortgage and a new mortgage. It helps to get you out of a sticky situation like the one above and has a few minimal fees associated with it.

The cost of a Bridge Loan is comprised of two parts. The first is the interest rate that you will be charged on the amount of funds that you are borrowing. This will be based on the Prime Rate and will vary from lender to lender. As a rule, you can expect to pay Prime plus 2.5%. The second cost to consider is an administration fee. Again, this will vary depending on the lender and can range from $200-$695.

The amount that you are able to borrow is easily calculated. The calculation looks like this:

Sale price
(less) estimated closing costs of 7%
(less) new mortgage of the purchase property

=Bridge Financing.

*Note: the closing costs included the expense of realtor commissions, property transfer tax, title insurance, legal fees and appraisal costs if applicable*

So that’s the cost side of things, now the next question is: how long? The length of time that you can have Bridge Financing is going to vary again from lender to lender as well as with what province you are in. For most, it is in the range of 30-90 days but there are some lenders that will go up to 120 days in certain cases.

Before applying for Bridge Financing, you must also have certain documents at the ready to present. These documents include the following:

1. A firm contract of purchase and sale with a copy of the signed and dated subject removal on the property that you are selling and the property that you are purchasing.
2. An MLS listing of the property being sold and purchased.
3. A copy of your current mortgage statement.
4. All other lender requested docs to satisfy the new mortgage of the upcoming purchase.

Once you have those documents, you can work with a qualified mortgage broker to apply for bridge financing. It is an important tool to understand and a great one to have in your back pocket for when life throws you one of those ‘curve balls’. You can have peace of mind knowing that if/when that situation arises, you are not without a strong option that can provide you with interim financing for minimal cost.

As always, if you have any questions about Bridge Financing, or any questions about your mortgage (be it new or old) contact a Dominion Lending Centres mortgage broker. We are well-versed in all things mortgage related and can help come up with creative, cost effective solutions for you.

1 Aug

Investment Property Purchase

General

Posted by: Brad Lockey

If you are retaining your residence as an investment property (rental) and moving on to your next home, there’s one very important first step.

Before you do anything else, evaluate your current financing and look for opportunities to achieve the maximum leverage (i.e., 80% of the value).

There’s a variety of reasons for completing this step well before entering into any written agreements to purchase an additional property.

First, if you (re)structure your current residential financing to maximize the leverage from the property before it becomes an investment property, the mortgage interest becomes tax deductible as soon as the property is occupied by tenants.

It is also important to stretch the amortization back out to the maximum available (typically 30 years). This achieves a variety of goals:

  • Creates a cashflow-positive investment
  • Creates a favourable debt-service ratio for future financing goals
  • Leverages additional capital to achieve future goals
    *Please keep in mind that it is not about what you think you can afford; it is a matter of meeting the lender’s standards… standards that vary significantly from one lender to another.

Once the dust settles, the payments based on current rates are typically ~$425.00 – $450.00 per month, per $100,000 borrowed, which about 40% of, is principal reduction.

It has never been a better time to be a landlord.

Read more on the mathematics of investment property returns here.

Depending on the amount of mortgage outstanding on your current home, and what 80% of the value equals, you will have an increased down payment for Property #2, the new residence. Better still, a tenant will be covering the cost of those funds for you.

This additional down payment money also creates a smaller mortgage balance and payment on your own residence. (Perhaps you have a rental suite in the new property as well and really maximize the advantages of using OPM or ‘Other People’s Money’.)

Too often I seem unable to clearly express the importance of getting this (re)financing locked down and completed while this is the only property owned, or under contract.

Invariably clients return to me months later with a purchase offer that is dependent on the refinance transaction for down payment and/or debt servicing. Now we’ve got a mad rush─not just to complete the purchase financing within five business days, but also to refinance. And we have the added challenge of having to present one as a rental property at this point, which limits access to equity, access to lenders, access to lending products, and access to certain rates.

It is far better, far smoother, and likely less expensive to address the restructuring of the current residence financing well in advance of writing any other offers.

The concern is always ‘paying interest on money I don’t need’. There are a few simple ways to mitigate this as well, best discussed on a case-by-case basis.

The bottom line: if you are interested in taking a look at your personal numbers and potentially retaining your current home as an investment property, let’s have a detailed conversation and set out a step-by-step plan.