Welcome to the November issue of my monthly newsletter!
This month’s edition looks at whether you should go fixed or variable and tax write-offs on your rental property.
I would love to hear back from you if you have any questions or feedback regarding anything outlined below.
Thanks again for your continued support and referrals!
Should you go fixed or go variable?
It's the first and only thing anyone usually asks when you talk about your mortgage: What's your rate? While everyone can recall their rate off the top of their head, it's the only detail of the mortgage they remember or care to know. Though the rate is obviously important, your mortgage is so much more than a rate, and if you're not paying close attention, it can cost you money.
Before we dive deeper, let's talk fixed rate vs. a variable rate and which one is better. Well, that all depends. First-time homebuyers and older homebuyers typically love the stability of a fixed rate. Keep in mind, seven-in-ten fixed mortgages are broken before the term ends. A fixed rate for five years is fine as long as you stick with a lender that's going to calculate the penalty if you break your mortgage on the contract rate versus the Benchmark rate. That's because the Benchmark rate, or as it's sometimes called the Bank of Canada rate, is higher than your contract rate. Typically a credit union or monoline is the right choice for this mortgage.
Variable rates are great with any lender as it just comes down to who offers the best discounted variable rate. There's a pretty simple way to decide whether a variable or fixed makes sense, based on rate alone.
It's called the 50-basis point rule
Basically, take the best fixed rate out there and the best variable rate out there and subtract the two. If the number is less than 50 basis points, there is strong argument to go for a fixed rate. However, if the difference is more than 50 basis points, there's a solid case to go with a variable.
Pretty simple right? What's not as simple is the personality of your mortgage. It may not seem like it, but yes, your mortgage has a personality. Think of it like a shiny sports car. It may look amazing when it rolls off the lot, but as the years go on, does it meet your daily needs? Besides your mortgage rate, you need to consider portability, and whether it can be blended and extended and how penalties for breaking the mortgage are calculated. When people start looking for a mortgage, they're usually getting advice from friends or their parents, and the only question they're asking is, what's the rate? But if they don't know the details of the mortgage like the ones listed above, you can tell them to stick their head in the sand, because they're giving you bad advice. And if a mortgage broker is only fixated on the rate, you're working with the wrong one.
Life happens and our circumstances change. You really want to make sure the mortgage will work for you in the future before you sign on the dotted line.
Using the interest on a second mortgage as a tax write-off
We all know owning a second rental property is a great way to invest and build your wealth portfolio. Unfortunately, a lot of homeowners sitting on plenty of equity are afraid to use that money for a downpayment to purchase a rental or investment property. The idea of a second or third mortgage tends to spook people away. While there are always financial risks in any investment, there's a little-known incentive that might make you take the leap from homeowner to real estate mogul.
Thus, when you're refinancing or taking equity, you can pull money from your existing owner-occupied home and use the funds on a rental property. Now the interest on the money you pulled out (and only that money, not any existing money) can be written off or expensed against your rental income.
You could expense your rental income down to a negative which in turn lowers your overall taxable income.
Putting even more money back into your pocket
It might only lead to a savings of a few hundred dollars a month, but not many people know it's an option and is an extra incentive to consider.
You'll definitely want to talk to your accountant and your mortgage broker to get more details.
There are also a few things to consider if you're going down this route for an investment property.
You must claim your rental income on your tax return. It's tax evasion if you don't.
Mortgage rates are also typically cheaper for owner-occupied homes compared to rental or investment homes. Don't be tempted to tell your broker or lender the house use will be owner occupied when it will actually be a rental because you want the lower rate. That is mortgage fraud. You could get charged and or the lender could call the balance.
While taking on a second or third mortgage might seem a little daunting at, there are some options available to save you money and your mortgage broker can help.
Let the heat reach you:
Dust or vacuum radiators, baseboard heaters and furnace duct openings often and keep them free from obstructions such as furniture, carpets and drapes.
Replace/Clean Furnace Filters:
Check and clean or replace furnace air filters each month during the heating season. Ventilation system filters, such as those for heat recovery ventilators, should be checked every two months.
DID YOU KNOW...
When you’re buying your first house, negotiating for the mortgage can seem like the least fun and most complicated part of the process. But having no experience making one of life’s biggest purchases doesn’t mean you’re destined to pay the bank’s listed rate. I will work on your behalf with multiple lenders to ensure you receive the best mortgage product and rate catered to your unique needs – whether it’s your first or fifth mortgage.