Wednesday
July 26, 2017
1 Year Closed : 2.44 %
3 Year Closed : 2.60 %
5 Year Closed : 2.84 %
No Sweat Mortgage
Mortgage Solutions
Fact or Fiction?
Credit For Smarties
Default Insurance
Reverse Mortgages
Apply Online Now!
Calculators
Rates
News
Links
Rate Club

 

Fact or Fiction?

Changing your mortgage payment from monthly to weekly will save you thousands of dollars.

The Tax Deductible Mortgage?

Fact or Fiction:Changing your mortgage payment from monthly to weekly will save you thousands of dollars.

Fiction! Many people believe that they will save thousands of dollars in interest by simply increasing their mortgage payment frequency.

Let's analyze a very simple example. You have a $250,000 mortgage amortized over 35 years with a 4% interest rate and a 5 year term. Your monthly payments are $1102.00.

At the end of your 5 year term, you will have paid $66,120.00 in payments – which consists of $47,868.04 in interest and $18,251.96 in principal. Your balance owing after 5 years is $231,748.04.

Let's change your payment frequency to from 12 monthly payments each year to 24 semi-monthly payments each year. Your semi-monthly payments are $551.00.

At the end of your 5 year term, you will have paid $66,120.00 in payments – which consists of $47,807.76 in interest and $18,312.24 in principal. Your balance owing after 5 years is $231,687.76. The result of making your payments twice as often is that your principal balance has only decreased by a paltry $60.28 in 5 years!

Now let's change your payment frequency from semi-monthly to "accelerated” bi-weekly. This simply means that your payment will remain at $551.00 like the semi-annual payment option but because you are making your payment every 2 weeks, you will make 26 payments each year instead of 24 payments. These 2 extra payments are applied directly to reduce your principal balance. Let's examine the difference..

At the end of your 5 year term, you will have paid $71,630.00 in payments – which consists of $47,224.33 in interest and $24,405.67 in principal. Your balance owing after 5 years is $225,594.33. The result of making your payments twice as often and making 2 additional payments each year is that your principal balance will be $6,153.71 lower in 5 years compared to the monthly payment option!

Finally, if you change your payment frequency to "accelerated” weekly from accelerated bi-weekly, your principal balance will only be $30.15 lower after 5 years. Why? It's because you haven't paid any additional amounts towards your total principal payment compared to the bi-weekly option – you just paid made your payment twice as often.

In conclusion, there really is no free lunch. The only way that you will save thousands of dollars in interest and dramatically reduce your mortgage is by paying more money towards your principal balance. By choosing the "accelerated” weekly payment in the above example and making those extra payments, you would pay actually pay off your mortgage in 29 years and 9 months plus a final payment of $187.17 – and you would realize a colossal interest savings of $37,556.33.

Principal
$250,000.00
Amortization
35 Years
 

Interest Rate
4%
Term
5 Years
 

 

 

 

 

 

5 Year Term
 

Semi
Bi-Weekly
Weekly
 

Monthly
Monthly
Accelerated
Accelerated
Payment
$ 1,102.00
$ 551.00
$ 551.00
$ 275.50
Frequency
12
24
26
52
Balance: 5 Years
$231,748.04
$ 231,687.76
$ 225,594.33
$225,564.18
Total Payments
$ 66,120.00
$ 66,120.00
$ 71,630.00
$ 71,630.00
Interest Paid
$ 47,868.04
$ 47,807.76
$ 47,224.33
$ 47,194.18
Principal Paid
$ 18,251.96
$ 18,312.24
$ 24,405.67
$ 24,435.82
Reduction in Balance
$ -
$ 60.28
$ 6,153.71
$ 6,183.86
 

 

 

 

 

35 Year Amortization
 

 

 

 

Number of Payments
420
839
773
1,544
Total Payment
$462,840.00
$ 462,017.95
$ 425,593.31
$425,283.67
Total Interest
$212,840.00
$ 212,017.95
$ 175,593.31
$175,283.67
Interest Savings vs monthly
$ -
$ 822.05
$ 37,246.69
$ 37,556.33
Years to Discharge
35
35
29.75
29.75

 

The Tax Deductible Mortgage?

Many opinions are offered about this trendy topic and in the final analysis; the answer is yes…well…maybe.

To begin with, anyone seeking a reliable answer to this question should consult a taxation expert like a Chartered Accountant. This article will hopefully clear up any misconceptions and hopefully inspire the reader to solicit an opinion from a taxation expert before proceeding.

In concept, the interest on any loan where the proceeds are directly applied to an investment that will produce taxable income is deductible against that income.

For most people real estate is their largest investment. Over time, significant equity is accumulated in a home and it certainly makes sense to utilize or "lever” the equity in a home to produce income. While a mortgage is a loan that is secured against real estate the key criteria is not the type of loan but what the funds were directly used for.

There are three main benefits to a borrower of a secured loan:

  • The interest rate is considerably lower
  • More funds are available because the loan is deemed to be less risky
  • It is easier for to qualify for a larger loan because it is amortized up to 30 years

A simple, uncomplicated way of achieving better utilization of the equity in a home is through a secured Home Equity Line of Credit (HELOC). People that own equities that wish to tax-deduct loan interest could in theory sell their equities, use the proceeds to pay off other non-deductible expenses and then borrow from their HELOC to buy the same equities the very next day. Note that in this example, Revenue Canada would likely consider this a disposition and it could create a taxable capital gain. Although the interest rate will fluctuate – sometimes to the detriment of the borrower, the benefits of a HELOC loan are:

 

  • Lower interest rates because the loan is secured against real estate
  • Funds are available without the need to apply when the need/opportunity arises
  • Interest is paid only on the amounts that are borrowed
  • Funds are available in the event of an emergency like illness, job loss, etc.
  • Circumstances in the future may change (i.e. job loss, etc.). It is a good practice to arrange this facility when an individual is able to qualify
  • Many HELOC loans require interest-only payments thereby improving cash flow

In summary, points to retain are:

  1. Consult a taxation expert
  2. Be careful to avoid unintentionally triggering capital gains
  3. Utilize the value of the equity in real estate to create more value
  4. Interest rates will be significantly lower than rates on credit cards or car loans
  5. Paying off your credit card balances monthly and under-utilizing your available credit will improve your credit score
  6. Borrow responsibly and know your risk tolerance

 

Mortgage insurance premiums are 3.15% for loans of 95% loan-to-value - or are they??

Mortgage lenders must insure "high ratio” (over 80% loan-to-value) mortgages against default. While this insurance protects the lender against the risk of default, the cost of insurance is usually passed on to the borrower. This may seem unfair, but without this insurance, most lenders would not lend to borrowers with less than 20% down.

 

The point of this article is to evaluate the true cost of a high ratio loan. Let’s assume two borrowers wish to buy identical $400,000.00 houses. Borrower "A” has a down payment of 20% or $80,000.00 and requires a mortgage of 80% or $320,000.00. Since this is a "conventional” mortgage, the lender does not insure this mortgage so no insurance premiums are due.

 

Borrower "B” only has a down payment of 5% or $20,000.00 and requires a mortgage of 95% or $380,000.00.  This mortgage is regarded as a high ratio mortgage and the buyer will be required to pay an insurance premium of 3.15% (plus PST of 8%) of the entire loan – not just the amount over 80% loan-to-value. Thus, Borrower "B” incurs a cost of $12,927.60 to obtain the mortgage. This amount is calculated as follows:

Borrower "A”

 

Borrower "B”

Difference "A” – "B”

$380,000.00

Mortgage Amount

$320,000.00

$60,000.00

3.15%

Insurance Premium

$0

 

$11,970.00

Insurance Cost

$0

$11,970.00

$957.60

PST (8%)

$0

$957.60

$12,927.60

Total Payable

$0

$12,927.60

 

Borrower "B” will borrow $60,000.00 more than Borrower "A” at a cost of $12,927.60. We therefore express $12,927.60 as a percentage of $60,000.00 and see that Borrower "B” will pay an upfront fee of 21.55% for the extra $60,000.00.

 

While 21.55% is obviously expensive, many home buyers simply would not be able to qualify for a loan without default insurance. Further, to postpone the purchase of a house during times when real estate prices are rapidly rising may in fact, cost the borrower much more than this premium. It is important however to clearly understand what the true cost of borrowing is in order to make an informed, intelligent decision. This decision may entail accepting the cost, increasing the down payment, seeking a more affordable property or securing alternative/additional means of financing like a second mortgage, a line of credit or a private loan.

 
For an informed, intelligent choice...

* Reason for Inquiry
First Name
Last Name
*Location (City)
* Email
Phone


Home | Products & Options | FAQ | No Sweat Mortgage | Why Use TMG/Cogent? | Mortgage Solutions | Fact or Fiction? | Credit For Smarties | Private Lending | Default Insurance | Reverse Mortgages | Purview Reports! | Apply Online Now! | Calculators | About Me |Rates | News | Links | Testimonials | Rate Club | Contact Me | Privacy Policy

© 2017 www.cogentmortgagesolutions.ca   905-582-5363    100-2020 Winston Park Drive Oakville , ON., L6H 6X7

A proud member of TMG The Mortgage Group Canada Inc.