Mortgage refinancing is generally something that is done
in order to access the equity in ones property. There are
a number of reasons why you might want to refinance your existing
mortgage. These are as follows:
- To consolidate non-mortgage debt
- For Home renovations
- A drop in mortgage rates has left
you paying higher interest on your existing mortgage…time
to renegotiate your existing mortgage
- For the purpose of borrowing to
invest in a second property
- For the purpose of rearranging finances
and making the mortgage interest tax deductible
There are many factors to
consider when refinancing your mortgage, so let us help you
negotiate with your existing lender or help you switch to
a new lender who will give you more favourable rates and terms.
With lenders introducing 35 and 40 year amortization periods,
and financing permitted up to 95% for refinances, opportunities
to improve cash flow and interest payments are a plenty.
However, be sure you are refinancing for the right reasons
and that the new mortgage doesn’t simply become a short
term solution and a burden moving forward. For a review of
your existing situation and if it makes sense to refinance
with today’s prevailing rates and products, simply apply
online or email us at mortgages@SAFEBRIDGEfinancial.com.
Consolidate non-mortgage
debt
Most unsecured debt will be priced by your bank at
a higher rate than your existing mortgage in order to compensate
them for the higher risk of default. For many, the only solution
is to use available equity from their homes to pay out this
debt, as it will assist in reducing the overall interest costs,
and improve cash flow. If you add the existing mortgage and
the overall debt obligation that is to be refinanced, and
it turns out to be less than 80% of the fair market value
of your home, and you qualify in terms of income and credit
scoring, then refinancing into a new first mortgage should
be a very straight forward. If any of these components are
missing, the refinance could very well make sense, but we
would need to look at the overall cost benefit analysis before
moving forward.
Home Renovations
Home improvements are amongst the most common reason
why individuals will refinance their home. From the addition
of a washroom or a kitchen to a full scale renovation of a
second floor, the equity that exists in your home currently,
can be accessed for this exact purpose. By placing your home
as collateral, you of course have access to the lowest financing
available, unless of course you are lucky to have some rich
uncle funding the project for you.
The Canadian Mortgage and Housing Corporation (CMHC) has published
many reports as to how much each renovation will increase
your home’s value by. If you would like to visit their
website for more details, then please click
here. Keep in mind that this is simply a market
average and may not be the case with your specific renovation.
Breaking a closed
mortgage to transfer to a new lender
If you negotiated a mortgage when your credit rating
was not as good, and you've repaired your credit through a
good track record of payments, you should certainly refinance.
You may be carrying a 1st mortgage to 80% of the original
purchase price and a smaller 2nd mortgage at higher rates.
It’s not uncommon to hear that some individuals are
carrying a 3rd mortgage as well. If it’s not one of
these scenarios where a 2nd or 3rd charge has been registered
on your property, you may simply find yourself paying a mortgage
at yesterday’s higher rates.
In today’s innovative market where new products are
introduced to the market on a weekly basis coupled along with
interest rates remaining at historic lows, it just may make
sense to pay the accompanying penalties and get yourself a
new mortgage that lowers your overall cost of borrowing.
Many closed mortgages have the feature that allows the balance
to be paid out with a penalty after a certain time has elapsed
on the mortgage. Make sure you double check the "prepayment"
privilege in your mortgage contract in order to determine
your own situation, or better yet, call the lending institution
that holds your existing mortgage and ask them to calculate
the cost of paying out the mortgage in full. Once you have
these numbers we will be happy to provide you with a cost
benefit analysis that incorporates the best rates and products
in the market today.
Borrowing from your
home’s equity to invest
When accessing the equity in your home for the purpose
of investing in an additional property or simply to invest
in the stock markets or even maximize your RRSP’s, you
must be careful in executing the proper paper trail of events,
so that you maximize the tax deductibility of the mortgage
interest. Canada Revenue Agency may come asking for these
documents, so make sure you keep good records of each transaction
and the period it transpired.
It is common to hear lenders
promoting their Home Equity Line’s of credit, which
entitles you to borrow up to 80% of the value of your home,
less the existing first mortgage that you have in place. In
such a situation, you wouldn’t be refinancing the first
mortgage, but simply adding a second mortgage charge. This
line of credit is usually charged at prime and has interest
only repayments each month.
A new stream of products have come to market, that now permit
you to borrow up to 90% loan to value (90% of the houses value),
via a line of credit, which makes for an interesting discussion
on how much should be leveraging their principal home for
the purpose of investing. If you are interested in learning
more about this product or feel that it would be something
that would make sense for your financial well being, then
please email us at mortgages@safebridgefinancial.com
and we will forward you the particulars and address your questions
accordingly.
Re-arranging your
non-registered investments for the purpose of making your
principal mortgage tax deductible
You may have heard of this only being available south
of the border, but its no recent phenomenon here in Canada
either. The wealthy have been doing this for years and why
shouldn’t the average Canadian be doing the same thing.
Well, Fraser Smith, a retired West Coast financial planner,
knows the way to do it and is actively promoting the technique,
known as the Smith Manoeuvre, through seminars, books and
a website (www.smithman.net).
We caution individuals to review this strategy and to make
sure it fits into your overall investment risk profile as
it’s not meant for conservative investors and the faint
at heart.
Fraser Smith has developed a disciplined approach for the
average consumer to convert non deductible interest into deductible
interest and thus enhance ones net worth. In general though,
this technique can be applied to anyone who has investments
outside of their registered accounts and still holds a mortgage
that isn’t tax deductible. If this is the case, the
opportunity to swap the bad debt (non-deductible interest)
for good debt (deductible interest) becomes prevalent.
The following example is meant to be for visual purposes and
is not meant to be for the purpose of basing ones financial
plan on. For a comprehensive review of your particular situation,
please give our office a call to set up an appointment. –
Contact Details
Value of home is equal
to $400,000 and there is a mortgage of $300,000 at 6% with
no part of the interest being deducted for tax purposes. These
clients also happen to hold $100,000 in non-registered investments,
which they have accumulated over the years. Via simple math
we can calculate that the annual interest obligation is $18,000
($300,000 x 6%). If we were to sell off the $100,000 in investments
(we will assume no capital gains taxes for this scenario),
and pay down the mortgage it would mean we are left with $200,000
in equity in the home ($400,000 - $200,000). Now, when this
transaction is complete we would move to place a line of credit
for $100,000 in second position on the house, thus taking
the mortgage debt back to $300,000. However, this time we
borrowed the $100,000 with the purpose of investing it into
a qualified investment (speak with your financial planner
or accountant as to what CRA means by qualified investment),
which means we are able to deduct the interest on the $100,000.
At 6%, it would mean that we are able to deduct $6,000 in
interest each year. If you are someone that is in the 43%
tax bracket, that would equate to $2,580 in after tax savings
each year. Nothing to sneeze at, for simply adjusting your
portfolio in line with what CRA would like to see. At the
end of the day, you still have the $100,000 in investments
and the $300,000 in mortgage/line of credit debt just that
you are $2,580 richer each year.
Remember that this isn’t
for the faint at heart and before proceeding with any such
debt swap, that you contact your accountant and accredited
advisor.
Regardless of the reason that you are looking at refinancing,
make sure you have reviewed your numbers and weighed all the
pros and cons carefully.
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