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newbie investor, personal mortgage questions

Little1

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Hi everyone,



I have a few questions and was hoping those with experience could give me some ideas on how/what I should be doing.

My financial situation looks like this:

I am 29 and currently am federally employed, 55k/year

I have a 180k home with 60k mortgage remaining,

26.5k TSFA

13.5k RRSP

63k cash

I don't have any debts besides my mortgage, and a 13,100 credit limit but I pay my card of in full every month.



I would like to buy, renovate, refinance and rent out single family homes - I live in Manitoba, homes can be bought fairly cheap still - 120k and fixed and refinanced for roughly ~170, with rents to support. I realize I only have so much money so I feel that this would be the way to make it go the farthest.



My own mortgage is up for renewal, as of early Aug it has converted to an open variable.



I am unsure of what my next steps should be. Should I pay down my mortgage significantly - a number that I am comfortable with is paying it down to 27k (this allows me to still have money in the bank) and then pay off the remainder over the next 2-3 years - and with doing so, get a readvancable line of credit - have been in talks with BMO about their Readiline (?) product.

BMO has explained to me that I am able to access 65% of the houses value (max 117k once fully paid off) with this HELOC



Or should I keep the cash out of the mortgage and just have it there ready and pay down the 60k over the next 5 years or so?



I would like to get started with investing (currently have none), and would like to figure out my own finances and get them ready so that when the opportunity comes up, I have my finances structured and ready to go!



Thank you in advance for the advice, thoughts and opinions!
 

Thomas Beyer

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Congratulations on this awesome cash position and equity at such a young age. I had $1000 at that age to my name, no house .. that's it.



Some thoughts:



get an LOC first, to max amount, and if used for investment purposes only the interest is tax deducible.



Become an expert at a property type and area that has upside and quality tenants.



Find a good mortgage broker specializing in mortgages for rental properties.



More here: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10689-121574-Educational_REIN_Posts_by_Thomas_Beyer.html incl how to get started in real estate.
 

Sherilynn

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You may want to consider refinancing your mortgage into a "total equity" type product. Your house gets mortgaged for the maximum allowable amount, but that amount is broken up into sections: 1) your personal mortgage 2) a Home Equity Line of Credit (HELOC) that you may use for business/investment purposes 3) potentially a second (or more) HELOC so that you can divide borrowing. For ours, we have our locked-in mortgage plus a small personal HELOC plus a large business HELOC which automatically increases as we pay down the mortgage.



As Thomas mentioned, all interest on LOC's or HELOC's is tax-deductible, providing that the borrowing on that particular account is 100% for business purposes. Never mix business and personal borrowing in the same account.



The bonus with the above plan is that you may pay your personal mortgage (not tax-deductible) quickly and still use those funds for real estate investments or RE expenses as the mortgage paydown increases the RE HELOC.



This plan works as long as your income can support the higher debt payments. And it sounds like it could work in your case.
 

Thomas Beyer

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[quote user=Sherilynn]locked-in mortgage plus a small personal HELOC plus a large business HELOC
What banks offer that ?



HSBC ? TD ?
 

Anonymous

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[quote user=Little1]

My own mortgage is up for renewal, as of early Aug it has converted to an open variable.



Before you do anything, you should lock in your mortgage at a 5-10 year fixed rate. Rates are being kept artificially low by the government printing money and selling bonds to the Bank of Canada. It looks like rates are going to spike in the fall (Sept/Oct).
 

Thomas Beyer

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[quote user=PatrickGunville]It looks like rates are going to spike in the fall (Sept/Oct).
or not ...
 

mortgageman

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A number of lenders offer mortgage and line of credit combinations. If you want to access the maximum amount of equity in your primary residence (80 per cent loan-to-value) you'll have to have to have at least 15 per cent of the loan as an amortizing mortgage. We used to be able to go 80 LTV on a secured line of credit but the maximum is now 65 per cent for the line of credit component.

As for product.... that depends on a person's risk tolerance for rate increases. It sounds like this person is very financially disciplined so a variable rate at prime minus a discount of say .40 to .45 (2.60 to 2.55 per cent) may be the way to go.
 

Sherilynn

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[quote user=PatrickGunville]

Before you do anything, you should lock in your mortgage at a 5-10 year fixed rate.





A 10-year mortgage is only suitable in certain situations, and with the right mortgage product. Statistically, most mortgages don't even last 5 years because the property is either sold or refinanced to pull out equity. If there is a HELOC attached, the refi may be a non-issue, but selling is always a possibility. And why pay the higher rates of a 10-year mortgage only to sell in 4 years?



I would rather have the lower interest rates and resulting faster mortgage paydown achieved through a shorter term.
 

reinvestors88

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[quote user=Sherilynn]A 10-year mortgage is only suitable in certain situations, and with the right mortgage product. Statistically, most mortgages don't even last 5 years because the property is either sold or refinanced to pull out equity. If there is a HELOC attached, the refi may be a non-issue, but selling is always a possibility. And why pay the higher rates of a 10-year mortgage only to sell in 4 years?





Agreed. I asked the bank on this and finally decided not to do it simply because of the above. Well put Sherilynn. Thanks for sharing.
 

Sherilynn

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[quote user=ThomasBeyer][quote user=Sherilynn]locked-in mortgage plus a small personal HELOC plus a large business HELOC
What banks offer that ?



HSBC ? TD ?




Ours is with Scotia. I believe they allow 3 components and you can divide them however you like. We have a fixed, closed personal mortgage plus a modest personal HELOC plus an automatically-readvancing business HELOC.



Also, you can apply for their "Total Equity" mortgage for rental properties, and you don't need 70% LTV to do it. For one of our rentals, we set it up as a Total Equity product and then activated the HELOC as soon as the mortgage paydown brought the LTV into the acceptable range.
 

Little1

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Thank you to everyone that replied to my post. It is very much appreciated!





I am pretty disciplined with my finances so have been able to accumulate a bit of savings and now want to make my savings work a bit harder for me.





I have been doing a lot of looking at properties and research in different areas etc, that is an excellent bit of advice Thomas!





And I do plan on getting a line of credit, I know that I would only use it for investments, I am a bit confused Sherilynn, is the BMO Readiline the product you are talking about or is it completely different?





Patrick, I don't necessarily agree with you with locking it in for 5-10 years - I actually would like to have it paid off in the next few years (even if I don't pay down a chunk now and unless someone can explain to my why this wouldn't be a good idea ???) and locking it in really limits the amounts of extra payments that I would be able to make





Which brings me to another question to everyone..


What would you do, would you take the savings that I have accumulated and pay down the mortgage - this is what was suggested to me by my mortgage broker - and use the credit line for property purchases





or would you keep paying the mortgage and keep the savings out of the mortgage and in the bank to have access to it?





I am not sure what is the best to do. I haven't bought my first property yet but while looking, would like to have the financial side of things ready to go :)





Jason, When I was speaking to the bank (BMO) they told me that the max that I would be able to access is 65% - can you explain how the other 15% works? If I accessed it, it wouldn't be interest only payments but it would be principal and interest payments, is this correct?
 

mortgageman

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Let's say your property is worth $400,000.

The maximum you can refinance is 80 per cent or $320,000.

Under the mortgage rules pushed through in July 2012, the maximum for a HELOC component is 65 per cent LTV or $260,000. So the remaining 15 per cent ($60,000) would have to be in a mortgage for you to hit 80 LTV.
 

Sherilynn

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[quote user=Little1]is the BMO Readiline the product you are talking about or is it completely different?


I have a Scotia Total Equity Plan, but I would guess that it is similar to the BMO product.



[quote user=Little1]What would you do, would you take the savings that I have accumulated and pay down the mortgage - this is what was suggested to me by my mortgage broker - and use the credit line for property purchases


This is what I do. I pay down my personal (not tax-deductible) mortgage, thereby increasing my available HELOC. I use the LOC to buy properties and/or pay investment/property expenses. The interest on this debt is tax-deductible. So I have effectively converted non-tax-deductible debt into deductible debt. It is called "cash damming" or "the Smith Manoeuvre."
 
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