Mortgage / HELOC Combinations and Taxation

[AmongLions]

Hi there people,

I have two scenarios I'd like to run past you for your feedback.

I have my HELOC - it's split into two equal portions to allow easier calculations come tax time.

I just put a deposit on a 2nd house, using money from the half of my HELOC set up solely for investment purposes.

What I'm considering, at this point, is how best to proceed with closing on my second property. I've been pre-approved for a 5% down mortgage over 35 years at 5.5% for 10 years - I'm sure there's better options out there, but this is my first pre-approval and I'm exploring more options.

The place I'm getting is a large duplex, one unit's currently tenanted, the other needs some work and once that's completed and rented, will be earning more than double my mortgage payments (with 5% down).

Scenario 1 - Borrow an additional 15% against my HELOC to cover a full 25% downpayment (I have the other 5% in personal savings), this would save me paying any mortgage insurance, though I wouldn't really be saving any money in regards to interest payments (HELOC / Mortgage payments combined). Am I able then to deduct the interest from both my HELOC and Mortgage? I've read that other people have done this, but I think I could potentially be running into a bit of a tax grey area. The benefit here is that once the HELOC is paid down, the mortgage payments by themselves are very low and I can then use the money earned to expand my portfolio.

Scenario 2 - Leave my downpayment at 5% and pay my mortgage insurance. In this circumstance, my understanding is that all my interest payments as well as my mortgage insurance is fully tax deductible. If this is the case, it pretty much negates any benefits I can see from Scenario 1.

Or there's Scenario 3 where I've missed something totally.

Thank you!

[Phoenix88]

Borrow the money. CMHC is expensive and you have to pay interest on the amount anyways.

You only need 20% now to avoid CMHC (Atleast thats what I did).

Can't recall what CMHC but I think with 5% down you pay 2.75% of the loan amount. I know where I live duplexes would be $$$$$. So I will assume your place costs 600,000 for the whole building / land.

A)
5% x 600,000 = 30,000 borrowed at say prime.
570,000 x 2.75% CMHC = 15,675
Total mortgage = 585,675 at say prime minus .5
Total debt = 615,675

B)
20% x 600,000 = 120,000 borrwed at prime
480,00 x 0% CMHC = 0
Total mortage = 480,000
Total debt 600,000

15k gone like that plus you have to pay interest on it forever.

One thing, when I got my mortgage they made sure all of my Visa's and LOC were paid off. They didn't like debt outstanding since you can use your downpayment to pay off that debt first. If you need a loop around borrow the money from your wealthy dad or mom then pay them back after you final the deal with your line of credits.

CMHC is great in the aspect that it allows people that normally couldn't buy a place afford one. It is however not something I ever want to do.

Don't think of the write offs, they are still expenses that you can avoid. I haven't encountered CMHC on personal tax returns I've filed so I don't even know if it is deductable for tax purposes or how it is treated. I always thought it would be part of your purchase price but I could be wrong (very easily w/o looking it up).

[Wonderdollar]

You would be better off making full 20% down payment from your HELOC to buy investment property. This way you would be writing off 100% interest on the LOC portion and on the interest amount of the mortgage payments. Make sure NOT to use the investment LOC for personal usage and keep a proper paper trail for CRA.

The CMHC or GE insurance would be much costly for rental units and they will generally lend only up to 90% LTV and the premium would be 4.75% AND NOT 2.75% as mentioned by earlier poster for a 25 year amortization. Add to this 0.20% for every 5 year increase in amortization.

If CMHC lends you up to 95% LTV, then their premium would be 6.5% on a 25 year amortization and hence would be a very costly affair. Of course you can write off the insurance premium but I feel that the total premium and closing costs would have to amortized over 5 years for tax write off, which means that you could only write off 20% every year. May be an accountant on the board would shed some light on this aspect.

[grant]

buying mortgage insurance has nothing to do with tax deductibility.

Borrow the money & avoid the insurance, unless you expect to require that HELOC availability within the next few years.

Congrats on finding such a lucrative property, well done.

[cloudycanada]

I agree with other posters, borrow the 20% if you can.

Only tax concern is to keep a very good paper trail for the HELOC, don't mix the money borrowed for investment with money borrowed for personal. You can deduct the interest portion of both HELOC and mortgage. Ideally, you should see if you can re-organize the HELOC so one has enough room for your down payment and daily operation to make it easier to track.

And yeah, if the rent collected is double of your mortgage payment, it looks very lucrative indeed ......

[AmongLions]

Thank You!

I'm most certainly going to push for 20% or even 25% down. As I said, I've already got 5% down in my savings, but I think I might have to look for a new broker.

I was talking to her about using money from my HELOC to cover the downpayment and she said I couldn't. She insisted if I was to use money for the downpayment I would have to prove that it came from somewhere other than my HELOC. Has anyone else come across this?

I think I might start another thread, see if anyone else has encountered this sort of limitation.

http://www.redflagdeals.com/forums/showthread.php?t=633685 - here's that other thread

[Phoenix88]

They will not let you borrow money for the down payment. They were very picky with me as well. All credit cards, line of credits etc had to be paid off before they would accept my downpayment. Luckily there was nothing outstanding on them so it was ok. If you find a mortgage broker which can find someone that doesn't care as much you will be ok... but typically they won't. Maybe you have to refinance your mortgage or something to get the equity out.

[grant]

When i purchased a revenue property, not only did the bank (HSBC) let me use HELOC funds for part of the down payment, but the HELOC was registered against the property I was purchasing! The mortgage was for 75% and the HELOC was another 10% (85% total debt).

This was about 5-6 years ago. Maybe things are much tighter now considering the sub-prime debacle that's going on.

Nonetheless, keep talking to other banks until you find one that will work with you. There are BIG differences in how friendly they are to rental purchases.

[pdurple]

When i purchased a revenue property, not only did the bank (HSBC) let me use HELOC funds for part of the down payment, but the HELOC was registered against the property I was purchasing! The mortgage was for 75% and the HELOC was another 10% (85% total debt).

This was about 5-6 years ago. Maybe things are much tighter now considering the sub-prime debacle that's going on.

Nonetheless, keep talking to other banks until you find one that will work with you. There are BIG differences in how friendly they are to rental purchases.

...so your HELOC was high ratio (insured)?

[grant]

Not insured.

[Bullseye]

Congrats on finding such a lucrative property, well done.

Hamilton has lots of properties where rents would be double the payments on a 35 year mortgage with 5% down. I've looked at several properties there with gross rents of more than 15% of the asking price.