Friday
April 10, 2020
1 Year Closed : 3.19 %
3 Year Closed : 2.49 %
5 Year Closed : 2.64 %


Fact or Fiction?
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 semimonthly payments each year. Your semimonthly 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 semimonthly to "accelerated” biweekly. This simply means that your payment will remain at $551.00 like the semiannual 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 biweekly, 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 biweekly 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 
BiWeekly 
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 
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 taxdeduct loan interest could in theory sell their equities, use the proceeds to pay off other nondeductible 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 interestonly payments thereby improving cash flow
In summary, points to retain are:

Consult a taxation expert

Be careful to avoid unintentionally triggering capital gains

Utilize the value of the equity in real estate to create more value

Interest rates will be significantly lower than rates on credit cards or car loans

Paying off your credit card balances monthly and underutilizing your available credit will improve your credit score

Borrow responsibly and know your risk tolerance
Mortgage lenders must
insure "high ratio” (over 80% loantovalue) 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% loantovalue. 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...


