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Refinance Your Home

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:

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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