Historical article note: This article was originally published on 2018-01-29. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
I mentioned a financial management idea in the multi-house loan experience sharing lecture: Purchase, Hold, REfinance and SEll, that is, the PHRESE investment method. Don’t worry too much about whether each investment house has positive cash flow. Through the investment model of buy + hold + refinance + continue to hold + continue to refinance + finally sell, you can improve the efficiency of capital use and increase the rate of return. The word "refinance" here has become the most frequently asked question in the WeChat group of the multi-suite tribe this week. Yes, if you cannot do Refinance, this financial life plan will not be established. What the hell is Refinance? Like "mortgage", the Chinese word "refinance" also comes from Hong Kong, China, and is called "additional mortgage". From now on, Hongyu’s customers and readers can directly say “click” and I will know that you have read my article.
The meaning of additional mortgage is to use the current house price and income to refinance the mortgage at this moment, and replace the existing mortgage with a new mortgage. It's just that house prices have risen, and borrowers can't increase their mortgage if they don't have income. If you want to continue to increase your mortgage, that is, increase your mortgage every 5-6 years, you must maintain a good income level. Now in the era of no income and no mortgage, mortgages are scarce resources and are only lent to those with the strongest financial ability. All banks are withdrawing coupons given to new immigrants and non-residents. The reason is very simple. To obtain scarce resources in Canada, you must pay taxes first. If you want to inquire about the specific matters of additional mortgage, first tell me how much income you have. Everyone’s house has increased in value. I know this, but without income, you cannot get money from the house.
As mentioned in previous articles, the debt of owner-occupied housing is bad debt. In my eyes, the mortgage loan of owner-occupied house is consumer credit. It is the debt owed by the family to overdraw future income and consume in advance. It needs to be repaid with after-tax income. The greater the owner-occupied debt, the lower the ability to apply for new loans. For a home loan, try not to add a mortgage unless there are other emergencies at home that require money to be withdrawn from the house. For self-housing loans, my suggestion is to pay it off in one go at one bank. There is no need to switch banks or apply for additional mortgages. When the loan is paid off, re-evaluate and apply for additional mortgages to create a line of credit/HELOC. Do not use this line of credit at all. I have a completely different view on investment housing. Investment housing loans are home business loans, not consumer loans. The purpose of borrowing money is to accumulate personal assets, obtain rental income, and capital gains. The more loans you have, the more efficient your own funds will be. Use additional mortgages whenever possible. Each additional mortgage increases the efficiency of your capital use. To sum up, you only need to remortgage your home once in your life, and you only need to make a credit line as a backup; investment properties are worth it as long as you can recover the initial principal through remortgage.
The biggest question I have about refinancing is: "Are remortgages and HELOCs the same thing?" Come on, remortgage is a verb, which means applying for a redo loan. HELOC is a term. Home equity line of credit is a line of credit that uses a house as collateral. Do you think it can be the same? When adding a mortgage, it is a redo loan, and the borrower can choose to make the new loan a mortgage/mortgage, a line of credit (HELOC), or a combination of a line of credit and a mortgage. I always wonder if Refinance and HELOC look alike? Why do people keep asking me the same weird questions? If the original home loan product was a mortgage loan/mortgage, you can take advantage of the opportunity to increase your mortgage by changing it to a home loan product with a line of credit/HELOC, or vice versa. In short, if the previous loan failed to meet the current needs, or if there are new needs now, there is an opportunity to start over from the beginning through a new mortgage.
For real estate investors, adding a mortgage is a valuable opportunity to extend the repayment period to 30 years. If the original mortgage is only renewed/renewed, then the repayment period/amortization can only become shorter and shorter. The repayment period determines the size of the monthly payment. The smaller the monthly payment, the easier it will be to apply for other loans in the future. Therefore, one thing that real estate investors, especially multi-suite investors, need to do is to often extend the repayment period back to 30 years to prepare for continued investment. Renew refers to renewing the loan contract at the original bank; adding a mortgage can be done at any bank. Renewal does not depend on income, but only on past repayment records. A friend called me and asked me about the interest rate for renewing the contract. Unfortunately, it was not a loan from our bank, so I couldn't answer. Let me repeat again, renewal is renewal and refinancing is refinance. Although they look similar, they cannot be confused.
Switching to a bank refers to switch/transfer, which is called "remortgage" by Hong Kong compatriots. Transfer the original mortgage loan/mortgage balance to another bank unchanged, without increasing or decreasing the amount, or changing the mortgage product. If the original loan from the original bank has a credit limit, it cannot be transferred and can only be extended to another bank.
The cost of a mortgage is not high and usually includes appraisal fees and attorney fees. The evaluation fee is approximately 300 yuan. A lawyer's work can most often be done through a title insurance company. If the borrower's name is not added or deleted, and there are no special legal requirements, banks usually recommend that borrowers use a title insurance company to complete the process of re-registering a mortgage, which is much cheaper than hiring a lawyer. For an additional mortgage of less than 1 million, the title insurance company charges about 470 yuan, while the lawyer charges more than 1,000 yuan.
In addition to looking at the income when adding a loan, the house price must also be evaluated. If it is a self-occupied house with an MPAC valuation, and the loan ratio does not exceed 65% of the valuation, this procedure can be exempted. Investment properties must be evaluated.
Regardless of whether it is a home or an investment property, if the funds withdrawn from the mortgage are reinvested, the interest payments are tax deductible. Reinvest, including as a down payment to purchase an investment property, investing in stocks or mutual funds, and other investments that do not only return capital gains. If it is used to accelerate the repayment of a home loan, invest in a TSFA, hoard land, or for consumption without investment income, the interest on this part of the funds is not tax deductible. It is recommended that you discuss the specific tax regulations in depth with your accountant.
Joseph Schumpeter described credit in his "Theory of Economic Development" as follows: Loan is the purchasing power given by banks to entrepreneurs. For real estate investors, investing in real estate is a business behavior for the purpose of arbitrage. Real estate investors are entrepreneurs. The ultimate goal is to maximize the return on capital. One of the means is to accelerate the speed of capital turnover, and additional mortgages are indispensable. The arbitrage behavior with banks as counterparties is also a business behavior that accelerates the speed of funds. If there is no additional mortgage, it will be difficult to get back the funds originally invested. As the loan principal continues to decline, the leverage ratio will become lower and lower, and the efficiency of fund use will become worse and worse. Additional mortgage means that the bank decides to grant real estate investors more purchasing power after risk assessment. There is a cost to cashing out the funds, but it will be beneficial if the rate of return on reinvestment is higher than the after-tax interest cost. For example, the interest rate on funds withdrawn from a mortgage is 3.3%, the personal tax rate is 33.3%, and the actual capital cost after tax is 2.2%. As long as the reinvestment rate of return is higher than 2.2%, it is profitable.
In Canada, borrowing against equity is encouraged. The government agency, Consumer Protection Authority FCAC, has published an electronic manual to guide consumers on how to withdraw funds from their houses.
For additional mortgages, there are requirements for housing prices and income. The bank is responsible for risk assessment to avoid over-borrowing and only approves additional mortgages for borrowers with sufficient solvency. If multiple real estate investors want to complete PHRESE investment, that is, the process of buying + holding + refinance + continuing to hold + continuing to refinance + finally selling, they must maintain a good credit record, a sufficiently high income, and a fairly low level of bad debt. For some code words mentioned in this article, such as "good debt" and "bad debt", please read the previous articles of this official account. After writing this article, we have another code word "click".