This is part two of my three part series on accessing equity in your home.
Many clients have built up equity in their home and would like to use this equity to purchase an investment property. The benefits of this can be large, but there are costs and concerns that an investment buyer needs to be aware of. It often is not enough just to have the equity in your home. In 99% of cases you will need to restructure your current mortgage and physically take the cash equity out of your property to put as a down payment on the new property. This may result in you paying an interest penalty with your current mortgage lender roughly equal to three months worth of payments (this is the standard in the industry, but not always applicable – contact your broker to determine what penalty will apply). This brief report will outline the costs and process for buying an investment property.
For the purposes of this discussion, we will assume that you bought a home 4 years ago for $250,000 with 5% down. The property has since appreciated and is worth $400,000 and your mortgage has been paid down to $200,000 leaving you with $200,000 of built up equity that is not working for you. You see a condominium that you want to purchase as an investment and want to minimize the fees and taxes that you will pay, so you speak to your broker about the best financing option to make this happen for a condo that costs $300,000 to buy.
It is best to put at least 20% down payment on the new property as this avoids costly CMHC fees, and also keeps the mortgage amount lower so that the rental income may cover most of the payments that you have to make to hold the property. In this case, the scenario looks as follows:
$400,000 Value of Your Current Home Today
$200,000 Mortgage remaining on your current home
$200,000 Equity built up in your property
$300,000 Price of the new investment condo (rental property)
$60,000 20% cash down payment required to avoid fees
$240,000 New mortgage required
In this case if you talk to your broker, they can advise you on the best way to tap into that equity. It may be to keep your existing mortgage and get a line of credit. The best option for you, depending on your situation, may be to refinance your home, pay out your existing mortgage, absorb the penalty, but get a lower overall rate and payment with savings sufficient to offset the payment over the term of the mortgage. This is a complicated analysis that is VERY dependent on your job, the stability of your income, your other debts and payments, and the values of the properties in question. Unless you are a financial analyst by profession, don’t leave this type of analysis up to yourself. Using a mortgage broker costs you nothing, and they are experienced in advising clients on what the best structure is for them. There are many permutations and ways that this structure may look, so take the time to seek professional advice.
Once you have decided to purchase the property, and you have been approved by your broker, you need to consider your “closing costs” as well as your “carrying costs.” Closing costs are those costs that you will need to pay up front, in cash, to buy the new home. Carrying costs are the monthly ongoing costs to carry the mortgage and own the new property as a rental.
The closing costs you will face when buying an investment property are (not all are always applicable):
1. Property Transfer Tax (in BC, on the $300,000 condo this would be $4,000 of tax)
2. Legal Bills to purchase the property (roughly $1,200)
3. Appraisal Costs to determine the value of the new property by a qualified professional (roughly $250)
The carrying costs that you will need to budget for are:
1. Your monthly mortgage payments (on the existing home AND the new property)
2. Annual Property Taxes (as this is not owner-occupied you pay the full property taxes without the $570 BC grant)
3. Monthly strata fees (if the unit is a condo, townhouse, or other multi-family unit)
4. Utilities not covered by your tenant agreement (can vary widely)
The costs you will face when you eventually sell this property are:
1. Realtor commissions (Assuming you sell it for $400,000 in 5 years, the stand commission will be $14,500 in BC
2. Capital Gains (you have to pay taxes on your profits!)
3. Legal Fees to sell the property (roughly $1000)
Do not overlook the taxes! Oftentimes this is the single largest number and has turned many an apparently lucrative deal into a break-even scenario. You should be prepared to sit down with your broker and do a cost analysis before putting in an offer on the property.
Lastly, it is important to mention the just because you have built up equity in the property does not mean that you automatically can be approved for the new mortgages. There are many factors that the bank takes into account when “qualifying” you for the mortgages such as verifiable income (in Canada), credit history, other debt payments, potential rental income on the new property, and a myriad of other factors. Your broker is the best person to talk to about all of these issues as the can answer you, before you spend any time and money, on whether or not the situation is realistically going to get approved. As your broker charges no fees for this consultation (at least, they shouldn’t), you can get the free advise required up front and no fee for their services if and when you decide to buy a rental property.
~ by merc359 on August 20, 2008.
Purchasing an Investment Property – Using Equity or Refinance
This is part two of my three part series on accessing equity in your home.
Many clients have built up equity in their home and would like to use this equity to purchase an investment property. The benefits of this can be large, but there are costs and concerns that an investment buyer needs to be aware of. It often is not enough just to have the equity in your home. In 99% of cases you will need to restructure your current mortgage and physically take the cash equity out of your property to put as a down payment on the new property. This may result in you paying an interest penalty with your current mortgage lender roughly equal to three months worth of payments (this is the standard in the industry, but not always applicable – contact your broker to determine what penalty will apply). This brief report will outline the costs and process for buying an investment property.
For the purposes of this discussion, we will assume that you bought a home 4 years ago for $250,000 with 5% down. The property has since appreciated and is worth $400,000 and your mortgage has been paid down to $200,000 leaving you with $200,000 of built up equity that is not working for you. You see a condominium that you want to purchase as an investment and want to minimize the fees and taxes that you will pay, so you speak to your broker about the best financing option to make this happen for a condo that costs $300,000 to buy.
It is best to put at least 20% down payment on the new property as this avoids costly CMHC fees, and also keeps the mortgage amount lower so that the rental income may cover most of the payments that you have to make to hold the property. In this case, the scenario looks as follows:
$400,000 Value of Your Current Home Today
$200,000 Mortgage remaining on your current home
$200,000 Equity built up in your property
$300,000 Price of the new investment condo (rental property)
$60,000 20% cash down payment required to avoid fees
$240,000 New mortgage required
In this case if you talk to your broker, they can advise you on the best way to tap into that equity. It may be to keep your existing mortgage and get a line of credit. The best option for you, depending on your situation, may be to refinance your home, pay out your existing mortgage, absorb the penalty, but get a lower overall rate and payment with savings sufficient to offset the payment over the term of the mortgage. This is a complicated analysis that is VERY dependent on your job, the stability of your income, your other debts and payments, and the values of the properties in question. Unless you are a financial analyst by profession, don’t leave this type of analysis up to yourself. Using a mortgage broker costs you nothing, and they are experienced in advising clients on what the best structure is for them. There are many permutations and ways that this structure may look, so take the time to seek professional advice.
Once you have decided to purchase the property, and you have been approved by your broker, you need to consider your “closing costs” as well as your “carrying costs.” Closing costs are those costs that you will need to pay up front, in cash, to buy the new home. Carrying costs are the monthly ongoing costs to carry the mortgage and own the new property as a rental.
The closing costs you will face when buying an investment property are (not all are always applicable):
1. Property Transfer Tax (in BC, on the $300,000 condo this would be $4,000 of tax)
2. Legal Bills to purchase the property (roughly $1,200)
3. Appraisal Costs to determine the value of the new property by a qualified professional (roughly $250)
The carrying costs that you will need to budget for are:
1. Your monthly mortgage payments (on the existing home AND the new property)
2. Annual Property Taxes (as this is not owner-occupied you pay the full property taxes without the $570 BC grant)
3. Monthly strata fees (if the unit is a condo, townhouse, or other multi-family unit)
4. Utilities not covered by your tenant agreement (can vary widely)
The costs you will face when you eventually sell this property are:
1. Realtor commissions (Assuming you sell it for $400,000 in 5 years, the stand commission will be $14,500 in BC
2. Capital Gains (you have to pay taxes on your profits!)
3. Legal Fees to sell the property (roughly $1000)
Do not overlook the taxes! Oftentimes this is the single largest number and has turned many an apparently lucrative deal into a break-even scenario. You should be prepared to sit down with your broker and do a cost analysis before putting in an offer on the property.
Lastly, it is important to mention the just because you have built up equity in the property does not mean that you automatically can be approved for the new mortgages. There are many factors that the bank takes into account when “qualifying” you for the mortgages such as verifiable income (in Canada), credit history, other debt payments, potential rental income on the new property, and a myriad of other factors. Your broker is the best person to talk to about all of these issues as the can answer you, before you spend any time and money, on whether or not the situation is realistically going to get approved. As your broker charges no fees for this consultation (at least, they shouldn’t), you can get the free advise required up front and no fee for their services if and when you decide to buy a rental property.
~ by merc359 on August 20, 2008.
Posted in Market Commentary, Mortgage Tips, Potential Mortgage Pitfalls and Risks, Refinance
Tags: buying investment property, equity investment, equity mortgage, equity take out, financing, interest rate trends, interest rates, Investment Property, mortgage, mortgage broker, mortgage broker vancouver, prime rate, prime rate trends, real estate vancouver, refinance mortgage, rental properties, rental property financing, using equity to buy investment property, vancouver mortgage broker, Vancouver Real Estate