Urgent - Can I get a deduction for assuming a mortgage at a higher interest rate at purchase?

[streetcore]

I have a multi-family building under contract that was in a competing offer situation. The vendor is facing a 56K payout penalty on their mortgage based on the difference between current rates and the higher mortgage rate so I offered to assume the mortgage instead of raising my price.

She took my offer over another offer with no assumption.

Since I will effectively pay the 56 K higher interest cost, can I write off the difference between the rate I would have paid and the rate I am now getting from her?

I will also lose out on a lower proportion of mortgage payment going towards the principal.

Input/thoughts appreciated!

 

[Thomas Beyer]

No, you cannot deduct any payout penalty as you assume the mortgage, and therefore there is no payout penalty. It's like buying a used car and writing off the difference between old tire value and new tires. You just pay the mortgage and deduct the interest portion. This mortgage assumption is commonly done in multi-family acquisitions. Also done, less frequently, is a agreement-for-sale (AfS) or vendor-take-back second mortgage (VTB) to bring the required equity in line with a new mortgage.

Example: You acquire an asset for $1M. You could get a 78% mortgage or $780,000 at 2.5% with $220,000 equity. The existing mortgage is $600,000 at 4% due 2018. You are now paying 1.5% above market for $600,000 for 3 years or 3 x $9000 = $27,000. But you also need $400,000 cash to buy, not $220,000. The purchase price needs to reflect that.

One option now is to do a AfS for $780,000 at, say 3%, with $220,000 down. Then, in 2018, you switch title, own the property and refinance at a higher loan amount and/or higher mortgage to cash out the seller.

A second option is to get a VTB at a low rate, say 1%, for $180,000 to mortgage maturity, then re-fi.

The difference is that you are not the owner in the AfS case, but you do not have to ask the bank for permission of assumption. In case of a sale and mortgage assumption you need to ask the bank, although you could do it without qualification and just assume it. You are now technically in default, but most banks do not mind if you pay them 4% instead of 2.5%.

 

[alaas1977]

Hey Thomas

Are you saying that with an AFS one does not have to ask the bank for permission? How does that work? I ask as I'm new to AFS. This is very interesting, I always appreciate your posts as you are very intelligent

Lisa

 

[Thomas Beyer]

An AFS is not a legal ownership change .. yet. It is an Agreement For (future) Sale.

Some $s change hand today, plus an agreement to pay certain $s per month out of which the seller pays his/her existing mortgage, plus more $s in the future when the title actually changes hand, usually on mortgage maturity date with a refinance at that time and a new (usually higher) mortgage.

This agreement essentially wraps the buyer's interest around the existing mortgage, and that is why the Australians call this AFS a wrap-mortgage. Usually you register your agreement as a caveat on title, in second position, behind the existing mortgage. Some banks require permission, but most banks do nothing even if you are supposed to ask for permission.

Similar to a lease-option: lease today and buy tomorrow.