Resale Homes
Resale Homes
No-mortgage move not always the smartest
If in the enviable position of being able to buy a house for cash or pay off the mortgage in full, many Canadians would do it rather than keep a mortgage and invest the cash elsewhere.
In Canada, we have been raised with the mentality you shouldn't have a mortgage. "Our parents ingrained that in us," says Jim Rawson, regional manager of Invis mortgage brokerage firm in Toronto. "Our inclination is to pay down that mortgage as quickly as possible, but it really doesn't make a lot of sense if that money can be invested at a higher rate of return than the amount you're paying on your mortgage."
The decision is not always the result of a straightforward calculation.
The biggest factor would be the deductibility of the interest on the loan. "If you take out a mortgage to buy a house, the interest on that loan would not be tax-deductible," says Dean Paley, senior financial planning specialist at Edward Jones in Mississauga, Ont. "Normally, what you'd want to do is use the cash to buy the home and then take out a home-equity line of credit against the property, and then use that home equity line to invest. The interest on that would be tax-deductible."
There is a common misconception that the interest on a loan secured against your home is never tax-deductible.
"A lot of people think, when it comes to interest deductibility, the focus is on 'what's the asset I used for security.' That's not the test as to what makes interest deductible," says Jack Courtney, assistant vice-president, advanced financial planning support at Investors Group. "What makes the interest deductible is 'how did I use the borrowed money?' If I borrow against my home to acquire an investment, then I get to deduct the interest."
"Your tax rate affects the cost of a loan. If you borrowed to invest, is it actually cheaper for you on an after-tax basis?" Paley asks. "Check with an accountant about the bottom line: Take the interest rate on the investment loan, then discount it by the amount of your marginal tax rate. If that amount is lower than what it would cost you to simply borrow for a mortgage, you'd be better off borrowing to invest."
Once the mortgage is paid off, there are a number of options for investing.
One would be just invest the extra cash flow every month into the market, or take out a loan against your mortgage-free home and invest the proceeds.
"If I'm in a higher tax bracket, I have significantly reduced that cost of borrowing (through interest deductibility) and there's a good likelihood that over time my investment performance after tax will outperform my after-tax cost of borrowing," Courtney says.
But he emphasizes that borrowing to invest is not for everybody. It comes down a lot to your ability to sleep at night and your long-term ability to afford the loan payments.
-- Postmedia Homes
Resale Homes
Are you ready to carry two mortgages?
Doing well in the housing market can be all about timing. Ideally, you want to have a buyer for your existing home, purchase the new place, and move smoothly from the old abode to your new dream home.
Of course, it doesn't always work out that way. You could end up purchasing your new home several months ahead of the date you sell your current residence.
Mortgage brokers and financial advisers recommend you explore your financing options before you even look at buying a new home, so you know whether you could cope with financing two properties, even for a short time.
"It's a case of educating yourself before you jump into the open market... before you go out and find that dream home," says Jeff Mayer of the Mayer Group, part of the brokerage firm Mortgage Intelligence. "In a situation where, if you do find a home -- what are you going to do if you haven't sold your old home?"
One option, if your finances can stand it, is to carry two mortgages.
"Take a look at your finances: Can you afford this? What kind of net worth do you have? What kind of income do you have coming in? How stable is your job?" says Carol Bezaire, vice-president, tax and estate planning, at Mackenzie Financial.
Look at your debt flows. You don't want to have more than 40 per cent of your income in a month going out to pay for your home. Work the numbers and make sure you're going to have enough money for groceries and for emergencies.
If you do not have a firm offer on your existing home, or a definite date for the sale to go through, advisers say lenders will likely be extremely wary of giving you a mortgage on both properties.
"First of all, I would look at their finances," says Jennifer Young, mortgage broker with Invis. "If they had equity in the home that they were trying to sell and they were OK financially to cover payments on both homes, then I would say, sure, go ahead and buy that home and keep your other home for sale and eventually it would sell."
If you have received a firm offer on your existing home and you are simply looking for a bridging loan to tide you over for a few months while you own two homes, Mayer says lenders will likely be much more sympathetic. However, he urges his clients to take a good look at the numbers before committing to owning two places even for a short time.
"Bridge financing is very costly if you go to the wrong institution," says Mayer. "Also, can you afford to hold two properties, and, if you can, is it worth it? If you're going to buy this property, and you got a good deal on it but you have to hold another property for X amount of time, is it worth it? What if the market changes? You might lose that other home; you might lose both."
So the advice is to get your head around the numbers before your heart goes for that dream home.
"Ideally, of course, you want to have your house sold prior to buying another one because it just makes more sense financially," says Young.
She recognizes buyers may be keen to secure a mortgage at today's low rates and go for that new home, but cautions they must consult with a mortgage adviser to make sure they really can afford to keep up payments on two properties.
"The worst outcome could be that they could lose their home because holding two residences overstretched them financially," she adds.
-- Postmedia News
