Fixed Rate Strategy 



This year we saw record low interest rates, followed by increasing rates.  The increase in rates allowed us to develop and execute a strategy that has saved some of you thousands of dollars.

Here's how it works:

When rates are at historic lows, many people break their higher interest rate mortgages to take advantage of the lower rates.  Not only do you get a lower rate -- thus saving in interest cost-- but you will likely have the lower rate for a longer period of time than your present mortgage term... creating a greater savings. 

Breaking your mortgage for a lower rate would seem like a 'no brainer' if it were not for the high penalties currently charged by lenders which are known as Interest Rate Differentials.

An Interest Rate Differential (IRD) is the difference in interest cost between your current rate and the rate currently offered by your lender for the amount of time remaining in your term.  If you have 3 years until your mortgage term matures, they will calculate the difference in interest cost between your fixed rate and their 3 year fixed rate for a period of 3 years. The penalty is the amount of money your lender will lose.

If you are in a fixed rate, below is the strategy.

1. As rates rise, your IRD penalty will decrease because the difference between your current rate and the lenders rate lessens. 

2. We can currently hold a fixed rate for a period of 120 days (4 months)

3. We anticipate that rates will rise in the future.  

4.  If rates do rise, your penalty decreases, but the low rate is still held for you which means you may now be in a position to save thousands of dollars.

5. If rates decrease we will get you the lower rate. If rate remain at record lows, we can extend the rate hold further into the future until such time as rates begin to rise.

This strategy may seem confusing but a simple calculation can be done to see if it will work for you.  Please e-mail us if you are interested in the calculation.

Cash Damming -- Making Your Mortgage Tax-Deductible
 

Cash damming is a technique which allows the interest paid on the mortgage secured against your principal residence to become tax deductible.

 

First of all, you need to know that the Canada Revenue Agency allows the interest paid on any amount of money borrowed for the purpose of investment to be tax deductable, provided that the investment is non-registered (RRSP’s are not eligible under this rule).

 

Next, find the plan that suits you.  Below is a list of cash damming techniques which pertain to different types of investments.  Before you decide to participate in one of the plans, please contact us so that we can properly assess your individual financial situation to ensure that the plan is set up properly.

 

Non-registered Investments

If you take out a loan or mortgage to purchase non-registered investments such as stocks, bonds or mutual funds, the interest paid on the loan or mortgage is completely tax deductible. 

 

If you already own non-registered investments and currently have a mortgage on your principal residence, you can sell the investments to pay down (or off) your mortgage, take out a new mortgage which can then be used to purchase new investments (in some cases, such as stocks, you can purchase the same investments all over again).  The amount of the mortgage used to purchase the investments then becomes tax-deductible, as well as some of the associated fees incurred during the process.

 

Please note that the sale of non-registered investments may be subject to capital gains.  This is why it is important assess your individual financial situation prior to implementing the plan.

 

Entrepreneurs / Self-employed Individuals

If you are self-employed, you can create a business line of credit which can be secured against your home and has a much lower interest rate than that of an unsecured line of credit.

A combination of mortgage and line of credit, a product offered by many lenders, can be used as follows:

1) The mortgage component:  You may choose either a fixed or variable rate mortgage which will be used to consolidate all of your current mortgage and consumer debt.  Income received by business is used to pay down this mortgage component.

2) The line of credit can be designated for business purposes whereby all of your business expenses are paid with cheques from the line of credit.

3) With some lenders, as you pay down the mortgage component, the limit on your line of credit will grow proportionately (i.e.; if you pay down your mortgage by $1,000, the limit on the line of credit grows by $1,000).  If you are nervous about the variable rate factor of the line credit, the lender will allow you to convert the amount owing on the line of credit to a fixed rate with a term 3 years or greater.  Eventually the entire amount owing against the home becomes tax deductible.

Investment/Rental Properties

The interest paid on a loan used for the purpose of purchasing an investment property is tax-deductible. 

Purchasing an investment property requires a downpayment equal to 20% of the purchase price.  If you have enough equity in your current residence, you may increase you mortgage in order to provide the downpayment, making the amount borrowed for the downpayment is tax deductible.

Using a line of credit to make payments on the mortgage secured against the rental property

Interest costs incurred by borrowing money to make a payment on a loan secured against an income generating property is tax-deductible, therefore if you use a line of credit to make a payment on a mortgage secured against an income generating investment property, the interest on the amount used for the payment becomes tax deductible (i.e., if the mortgage payment on the rental is $1,000 and you use a line of credit to make the payment, the interest on that $1,000 is now tax deductible).

Using a mortgage with a line of credit component as described in #3 above:

1) You may use the income from the rental property to pay down the mortgage component secured against your residence (non-tax deductible debt).

2) You then make the payments on the mortgage secured against the rental property with the line of credit secured against your residence (becomes tax deductible debt). 

Once the mortgage portion is paid off, the entire amount owing against your principal residence will be tax-deductible.  The interest costs on the mortgage secured against the rental remains tax deductible as well.
As mentioned above, amounts owing on the line of credit secured against your residence can be converted to a fixed rate.  This will protect you if the prime rate (benchmark for the line of credit and variable rate) rises.

We highly recommend that any person participating in one of these plans employ the use of an accountant due to avoid the possibility of errors which could cause the Canada Revenue Agency to disagree with the manner in which the plan is set up.

Our office will be closed on Monday, April 23 for training purposes.  Like professionals in many other industries we are required to expand and continue or education to better serve our clients.  Our office will be open on the morning of April 24th.

With 2011 coming to an end, it’s time to think about taxes again.  It is well known that investing in RRSP’s is the perfect way to reduce your taxable income.

Many people I have spoken to in the past couple of years are hesitant to invest in RRSP’s for the sole reason that they are uncertain which direction the stock market may be headed; however they either forget or are unaware that investing in RRSP’s does not necessarily mean investing in the stock market.

If you are one of the many that are weary of investing in the stock market at this time, RRSP’s can be invested in a number of things such as fixed income investments such a bond GIC’s and even a bank account designated as an RRSP savings account.  What these investments allow you to do is park your money until you become confident in the stock market once more.

You may ask: Why put the money into an RRSP savings account that will not appreciate?  The contribution alone will earn you an immediate savings.  For instance, if you live in Ontario and earn an annual income between $42,707 and $68,719, for 2011 your estimated tax rate is 31.15%.  Making contribution of $10,000 would essentially provide you with an immediate return of $3,115.

What if you do not have $10,000 to contribute to your RRSP?  Borrowing to invest in RRSP’s, in addition to contributing savings, has been proven to provide Canadians with a higher net worth upon retirement than just contributing savings alone, for instance:

Based on the example above, if you were to borrow the $10,000 at a rate of 3.50% (slightly higher than today’s 5 year fixed rate and the average variable rate available), with an amortization of 25 years, it would take over 10 years for the interest cost on the borrowed money to equal the immediate return of $3,115..... after 10 years you will have invested the amount into high growth investments such as stocks and ETF’s which will have appreciated.  If you are in the belief that the stock market will not have improved in 10 years time, then you are either unaware of the nature of economic cycles or are anticipating that we in for an even greater economic downturn than the great depression.

You will be taxed on amounts withdrawn from your RRSP when you are retired, but the investment will have grown substantially by then if you invest as early as possible in your lifetime, and you will be in a much lower tax bracket when you are retired (especially if you are able to participate in income splitting).

The bottom line is that rates are at all time lows at the moment and being at the bottom of an economic cycle, we can expect at some point in the future that a “bull market” will occur in the stock market, as is normal with economic cycles.  Based on past economic statistics and chart patterns, we should expect a bull market to begin within the next 3 years.

The Truth about Bi-weekly Payments

 

To calculate a bi-weekly accelerated payment you take the required monthly payment (let's say $1,000) and divide it by two ($500).  Because there are 26 (not 24) pay periods in a year when you pay bi-weekly, you will make one full extra monthly payment compared to paying on a monthly basis. 

If you are more comfortable paying monthly, to achieve the same savings as bi-weekly accelerated payments you simply take the bi-weekly accelerated payment, multiply it by 26 and divide by 12. 

i.e.; $500 x 26 / 12 = $1,083.33

You can see by the above example that principal behind accelerated payments is essentially paying an amount above your minimum required payment, thus reducing the amortization of your mortgage.  Any amounts paid above the minimum payment go directly towards paying down the principal balance of the mortgage.

Prior to changing to an accelerated payment or increasing your monthly payment, make sure that you do not have any outstanding consumer debt with interest rates above that of your mortgage.  Any extra money you were planning to put towards the mortgage payment would be best used to pay down higher interest debt.

 

Harmonized Sales Tax (HST) and it's impact on the real estate consumer
 

As of July 1, 2010, Harmonized Sales Tax has become effective in Ontario.  The majority of goods and services are now taxed at a rate of 13% (5% GST + 8% PST).  Newly constructed homes sold by a builder and substantially renovated homes with closing dates on or after July 1, 2010 are subject to HST; however a “new housing rebate” is now provided.  The rebate is calculated as 75% of the PST portion payable on the purchase, to a maximum of $24,000.  An additional rebate is applied to the PST portion at a rate of 2% on the first $400,000 of the purchase price, and 8% for any amount above $400,000. This rebate is also applied to houses built by the owner.

Although resale homes are not subject to the new tax, HST is charged on services such as realtor commissions and most legal costs as well.  Condominium fees are not subject to HST.

 

 

 

Some other items worth mentioning is an increase of 8% in the cost of gasoline, home service calls for electrical work, plumbing and other repairs.  Landscaping, lawn care and snow removal services is also subject to HST.  Also there have been increases in the cost of cable television, home/cell phone services, internet access, municipal water, home insurance, as well as home electrical and heating.

 

2010 Torch Award - Professional Services Category

Is it time to review your mortgage?

It’s always a good idea to review your finances from time to time.  Your mortgage -- likely being your largest debt -- can affect your financial health if it is not the right mortgage for you.

If you have undergone life changes, changed your retirement strategy or wish to do renovations to your property, reviewing your mortgage is the key to achieving your goals.

Often it is even worthwhile breaking your current mortgage and paying the pre-payment penalty to take advantage of lower rates.