22 Jul

The Devil In The Fine Print – some mortgages have restrictions

Mortgage Facts & Stats

Posted by: Garth Chapman

Not all mortgages are created equal.  In fact most mortgages, even within a single financial institution, will vary from one another. Pre-payment privileges, portability, increased payment and extra payment privileges, payment holidays, and all sorts of other issues come into play.

Your own particular needs and desires must be understood by your Mortgage Broker or Banker and then be considered what deciding which of these and many other specific rights and obligations are important or even necessary for you to have in your mortgage. Make sure these issues are addressed and explained fully so you will make the best decision possible for your borrowing needs.

One key clue to just how restrictive a mortgage is likely to be is simply the interest rate.  Most often the lower it is the more restrictive the mortgage itself will be.

There is an excellent article on this topic in Canadian Mortgage Trends here The Devil In The Fine Print

19 Jul

If you purchase a new or substantially renovated residential rental property from a builder you may qualify for the GST/HST new residential rental property rebate.

Investment (Rental) Properties

Posted by: Garth Chapman

You generally pay the goods and services tax/harmonized sales tax (GST/HST) when you purchase a new or substantially renovated residential rental property from a builder. If you are the builder of a residential rental property, or if you make an addition to a multiple-unit residential rental property, you are generally considered to have made a self-supply and to have paid and collected tax on the fair market value of the rental property or addition at the time that you lease or occupy the first unit of the property as a place of residence.
As a residential landlord, you cannot claim an input tax credit (ITC) to recover the GST/HST paid or payable on the purchase of a residential complex or that you accounted for on the self-supply of the complex because long-term residential leases are exempt from GST/HST. However, you may be eligible to claim the new residential rental property (NRRP) rebate for some of the GST or the federal part of the HST if you…read on here Which rental properties qualify for the GST/HST new residential rental property rebate?

RC4231 GST/HST New Residential Rental Property Rebate

19 Jul

How to treat Capital Gains on a principle residence when units in the home are rented

Income Tax

Posted by: Garth Chapman

This is a good article I found on the MoneySense website

When you buy real estate you expect that, over time, it will appreciate in value. If you sell that property for more than you paid, you will have an appreciable gain in value and this triggers a taxable capital gain for the Canada Revenue Agency (CRA).
Your home can be an effective tax shelter, but other forms of real estate can attract capital gains taxes. Here’s what you need to know about some of the more nuanced real estate scenarios.

Many readers want to know if their home will continue to qualify for the principal residence exemption if they rent out a portion of their house. Their concern is prompted by stories of people who lost this exemption after years of renting out their basement.

While it’s true—you can lose your principal residence exemption—it really only happens if you rent out more than 50% of your home, or when you decide to claim capital cost allowance on the portion of your home that is the rental. The CRA recognizes that, over time, depreciable property will become obsolete. Believe it or not, this also applies to real estate. Because of this you are well within your right to offset this loss in value by deducting the depreciation over a period of several years. This deduction is the capital cost allowance (CCA). However, if you claim CCA on your home, you are effectively telling the taxman that this property is used to produce income, and you use lose the opportunity to claim a capital gain, which is taxed much more favourably than income.

But what if you buy a duplex or fourplex and live in one unit while renting out the others? Can you deduct costs, including CCA, to offset the rental income you collect each year and still claim a principal residence exemption? Yes: but you’ll need to clearly document what portion is for personal use and what portion is rental. Only deduct expenses for the rental portion. When you sell, you can claim the principal residence exemption for the portion that was for personal use. To understand how this all works, consider the following:

  • Buy a duplex for $400,000.
  • Rent out one unit (for $1,500 per month) and live in another.
  • Each year you report your annual rental income (about $18,000) and then offset these earnings with expenses associated with the unit.
  • Remember: you cannot deduct expenses, including CCA, for the personal portion of the duplex.
  • After four years you sell the duplex for $500,000.
  • Because 50% of the property is used for personal use, you can shelter 50% of the $100,000 capital gain.

But be forewarned: CRA is cracking down on income generated from real estate, and in order to qualify for the principal residence exemption no more than 50% of a principal home can be used for rental purposes. For people thinking of buying and investing homes with a personal use portion you may want to seek out professional advice.
Read on here http://www.moneysense.ca/columns/can-you-avoid-capital-gains-tax/

19 Jul

On Depreciating Rental Properties (aka Claiming CCA) How to Manage this.

Income Tax

Posted by: Garth Chapman

On your tax return you have the option to depreciate your buildings (to claim CCA). The elements of this to consider include those below, and perhaps others as well. This is both a tax planning decision and a mortgage qualification capacity decision.

  • Claiming the CCA is actually optional and it can be started and stopped from year to year.
  • CCA cannot be taken on a property that has the possibility of a principle residence exemption.
  • Claiming CCA reduces your ‘cost base’ for the property. This results in a higher Capital Gains tax when you sell the property.
  • If you claim CCA you are depreciating for tax purposes the buildings on the land. The land does not depreciate.
  • If you claim CCA (depreciate your buildings) you will reduce your taxes now, but you will pay more tax when you sell the properties, as you will have to ‘recapture’ the previously claimed CCA.
  • If you claim CCA the taxes currently saved are taxes on income whereas the future taxes are on capital gains, and there may be a difference in rate between the two.
  • Consider what your likely income will be at the time you sell the properties, and how that might impact your tax rate then as compared to now.
  • When you claim CCA you thereby reduce your income from the properties on your tax return. Lower income can have a negative impact on your ability to obtain further mortgages from some lenders.

The above tips are what I have learned over the years from various Canadian Tax Accountants.  Your own situation is always unique, so always seek out professional advice before you make tax decisions.


19 Jul

Why you should care about the banks’ posted rates on mortgages

Mortgage Facts & Stats

Posted by: Garth Chapman

There are not very many Canadians these days who would accept the posted rate for a mortgage, but that doesn’t mean no one should care when the banks drop their posted rates.

What’s key about the posted rate is that it is used by the Bank of Canada to create what is called the ‘qualifying rate’. The prime rate is 2.45% as of the last change on March 30, 2020 and you can obtain a Variable Rate mortgage at rates that are below the Prime Rate, although the discounts to Prime have gone from nearly 1.0% to about 0.25% with the advent of COVID-19.  And remember, you will qualify based on the ‘Stress Test rate’ — meaning you must borrow based on a higher monthly payment which ultimately means you will be restricted to taking on a smaller mortgage than in the good old days when you qualified on the actual rate of your new mortgage.

If you took a fixed rate mortgage, as 75% of Canadians have been doing for at least 5+ years, and you want to pay off the mortgage now, you would be subject to a mortgage penalty based on a very complex calculation call IRD (Interest Rate Differential).  Ostensibly this is to make the bank whole for you breaking your contract early as the bank would have contracted to pay a given interest rate to the entity that provided the funds for your mortgage for the entire term. When you break the term the bank is still obligated to the payments they committed to. And that’s fair enough, but many would argue that the IRD calculations are not in keeping with the above concept. And that’s because they use the Posted Rate in calculating the penalty.  In fact there is a class-action lawsuit winding its way through B.C. courts now on this very issue Class-action lawsuit against CIBC for mortgage penalties

Read on here for the skinny on this subject in this Financial Post article Why you should care about the banks’ posted rates on mortgages


19 Jul

The Good Old Days, when homes were cheap, or were they?


Posted by: Garth Chapman

Ahhh, the good old days.

Or were they, economically speaking? Let’s take the early 1980’s as an example.

We bought a home in early 1981 near the bottom of the housing crash caused by PE Trudeau’s NEP (National Energy Policy), which dropped that home’s value by about 20% from $111,000 to the $91,000 that we paid.

Oh, and we sold that home 5 years later in 1986 for a $4,500 loss at $86,500. Our thinking was that we were at the bottom and it was time to buy a more expensive home as it would appreciate more as the economy improved. That turned out very well, but that’s another story…

My income as a 27 year-old in a middle management job then was $42,000. Interest rate was around 18%, but our provincial government bought the rate down to 12%.

At 10% down the mortgage was $83,640 with a monthly payment of $863. In 1981.

That same house is now easily $450,000. So at the same 10% down the mortgage would be $414,720 and at an easily obtainable fixed rate of 2.69% the monthly payment would be $1,897. Income for same job now would be about $120,000.

So income is up nearly 300%.
Home price is up nearly 500%.
Down-payment is up from 2.2% to 3.8% of annual income.
Mortgage payment is DOWN from 25% to 19% of monthly income.

So the down payment is a tougher burden, but the monthly cost of the mortgage is way-way down. Hence we live in bigger fancier homes and/or drive nicer cars, have 3 TVs, take more vacations, etc, etc.

Ahhh, the good new days.


19 Jul

Understanding what drives Variable rates and Fixed rates


Posted by: Garth Chapman

Your Variable Mortgage Rates are driven by your bank’s Prime Rate which is set individually by each Bank. They normally (but not always) move in sync with changes in the Overnight Rate, which is set by the Bank of Canada (BoC) and is used as a basis for one-day (or “overnight”) borrowing between the major lenders and financial institutions.

The BoC is responsible for monetary policy, the goal of which is to keep inflation near the mid-point of a 1 to 3 per cent target range, ideally 2%. The BoC is equally concerned with significant movements in the inflation rate, both above the 2% mid-point and below it. When demand is strong, it can push the economy against the limits of its capacity to produce. This tends to raise inflation above the midpoint, so the BoC will raise interest rates to cool off the economy. When demand is weak, inflationary pressures are likely to ease. The BoC will then lower interest rates to stimulate the economy and absorb economic slack.

So when the economy heats up and there is a threat that inflation could get beyond the 1 to 3 per cent target the BoC may increase the overnight rate, which drives the Prime Rate. The schedule of dates when the BoC reviews and sets the Overnight Rate is found here http://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/

Fixed Mortgage Rates are driven by the Bond markets. Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don’t confuse this with bond prices, which have an inverse relationship with interest rates.

Investors turn to bonds as a safe investment when the economic outlook is poor. When purchases of bonds increase, the associated yield falls, and so do mortgage rates. But when the economy is expected to do well, investors jump into stocks, forcing bond prices lower and pushing the yield (and mortgage rates) higher.

The spread between 5-year Government of Canada Bonds and 5-year mortgage rates varies within a range that has fluctuated in recent years. You can follow the 5-year Bond Yield in Canada on the BoC website here and you will notice that a period of Bond yield increases or drops will almost always be followed by a corresponding change in fixed rates for mortgages.

19 Jul

It’s taxes versus a mortgage for the self-employed

Income Tax

Posted by: Garth Chapman

Canada’s government as been acting since 2009 to tighten mortgage lending requirements in their ongoing efforts to ensure Canadians do not face the ruinous housing collapse endured by Americans and many Europeans since the collapse of 2008.  As a signatory to the Basil Accords along with the USA and all the Euro nations Canada’s government is obligated to comply its banks to adhere to much stricter underwriting guidelines and due diligence.  And this has made it tougher for all Canadians to obtain mortgage financing.  Since Guideline B-20 came into effect in 2012 those of us (myself included) who are self-employed (BFS or Business For Self in industry parlance) have been heavily impacted.

Most self-employed Canadians will, usually following the advice of their Tax Advisers, will focus on lowering their taxable income via the use of various expenses to their business.  This is effected easily both with incorporated businesses and for those operating as proprietorships.  This results in lower line 150 income on the personal tax return, sometimes by significant amounts.

Prior to B-20 guidelines being in effect, such borrowers could qualify by simply ‘declaring’ their income, in effect adding back those deductions, and along with proving their self employed status and often backing up the numbers with bank statements showing the scope of cash flowing through those accounts.

There is an excellent piece on the tougher hurdles Canada’s self-employed now face in getting a mortgage, and what they can do to improve their prospects here in the Globe and Mail’s article It’s taxes versus a mortgage for the self-employed

17 Jul

Ten obstacles to getting the best mortgage rate

Interest Rates

Posted by: Garth Chapman

Have you ever wondered why your neighbour or brother-in-law just got a lower or higher interest rate on a new mortgage than you just got?

Reasons for differences, and sometimes they are significant, can be many and varied, including your income, income source, province of residence, type of property being mortgaged, credit score, specific privileges required, and much more.

To help explain all this, here is a good article from the Globe and Mail describing why once you have chosen the term and rate type for your mortgage, you may find that interest rates for that same term can vary by a percentage point or more.

Ten Obstacles to Getting the Best Mortgage Rate