Urgent Mortgage Help

Leveraging, renting vs owning, making an investment or buying a home?
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Matt G
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Urgent Mortgage Help

Post by Matt G »

Hey there,

I'm 23 years old from Niagara, completed half my BBA but not in school currently, made an offer for a house for $269k and the conditional offer is good until tonight at midnight. I'm self employed with a business with a questionable future (although I've been running for 5 years). I've made good money and continue to make good money at the moment (200K+/yr).

Currently have about $600K net worth, most money is invested in high quality dividend paying stocks (Canadian banks, telecoms, REITs etc).

Originally I was offered 2.84% from this same mortgage broker, however the dealing bank just informed them that the rate they would be able to give me is 3.94%, fixed, with me putting 50% down.

I'm mainly deciding whether it's worth it to put 50% down, or just pay off the house in cash to have minimal monthly expenses, kind of a "safe haven" should my business go under unexpectedly, giving me ample time to complete my degree. I understand financially a 3.94% mortgage isn't much, but it's much higher than most people are getting currently, and is higher than I was originally told by this mortgage firm. I only have today to change my conditional offer on the property into a firm offer.

Any other information needed just ask I"ll be monitoring this for the rest of the day, although I need to make a decision tonight.
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Re: Urgent Mortgage Help

Post by like_to_retire »

Matt G wrote:I'm mainly deciding whether it's worth it to put 50% down, or just pay off the house in cash...
Remember that by paying off the house instead of taking 50% of its value in a 3.94% mortgage, you are basically investing in a 100% safe, tax-free investment with a guaranteed rate of return. Are your investments presently providing this? - I'll bet not. Food for thought.

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Re: Urgent Mortgage Help

Post by gobsmack »

Bad mistakes are usually made in situations like this when one must act in a hurry. Sometimes these situations are unavoidable but this does not appear to be the case here. Do you really need a house this bad? Obviously, you posted the question here because you are feeling somewhat uneasy about this deal. If it were me, I would prefer to walk away from it (assuming no penalties) and try again later. I don't see the point of being forced to make an important decision in a hurry unless it is absolutely necessary to do so.

BTW: A house is not a "safe haven". A house is a house. It is a roof over your head. If you are thinking about buying a house because you consider it to be some sort of "safe haven", I would advise you to reconsider.
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AltaRed
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Re: Urgent Mortgage Help

Post by AltaRed »

I agree. I wouldn't go through with the sale on this kind of notice. Let it go. There are a lot of RE opportunities, if not today, then next month, or next year. It is much easier to be operating from a point of leverage on your terms than to potentially suffer remorse due to a quick decision.

There is a lot we don't know about the so called 'house'. Is this a relatively new condo, strata townhouse, or a 60 year old dump needing a lot of TLC? Owning any of these has its own set of circumstances and consequences.
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like_to_retire
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Re: Urgent Mortgage Help

Post by like_to_retire »

gobsmack wrote:Bad mistakes are usually made in situations like this when one must act in a hurry. Sometimes these situations are unavoidable but this does not appear to be the case here. Do you really need a house this bad?
Ahh, c'mon guys, I don't read anything in the post that isn't standard fare when it comes to mortgages and conditional offers. It often comes down to a decision that has to be made in a fairly short period of time. Caution is always smart, but let's not scare the OP out of a house deal.

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AltaRed
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Re: Urgent Mortgage Help

Post by AltaRed »

I wouldn't accept a last minute 'drive by' by a financial institution adding a whole percentage point to interest rate. Live to fight another day.

I guess the question though is whether the offer is conditional on financing approval only? Or one with satisfactory terms?

If the former, then the deal is likely firm anyway. The only question is whether to accept the mortgage terms as is, or bluff by telling the FI to stuff it and cash in investments to eliminate the mortgage completely. If the OP has as much investment net worth as the OP says, then the OP can obviously pay cash by selling sufficient investments. That is the route I would go.
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Re: Urgent Mortgage Help

Post by Spudd »

I don't believe in Ontario you have to show any proof if you decide not to proceed on a conditional offer. I suppose if the sellers didn't believe you, they might try to sue, but this seems highly unlikely. You can just say you're not waiving the conditions, and that's the end of it. I have never actually done this but the wording of the offer is such that you have to waive the conditions by X date, so it is implied that if you don't waive, the deal is off.

As for the mortgage question, I would personally be tempted to just pay cash. You would still be left with a 300k nest egg that you could live off if your business slows down. I would think that should last you at least 10 years, especially with a paid-off house, so it seems like a decent stash.

It would irk me to pay 1% higher interest than everyone else with a pulse is getting. Plus, almost 4% is a decent guaranteed rate of return, tax-free. So all in all, assuming you have the money in a taxable account, I'd pay cash.
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Re: Urgent Mortgage Help

Post by Just a Guy »

You can always ask for an extension to remove the condition date.

With the amount of money involved, it's in everyone's interest to grant it.
Matt G
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Re: Urgent Mortgage Help

Post by Matt G »

Hi there, thank you for the responses.

It wasn't as "last minute" as I made it out to be. I did not require financing for the house and the alternative was to pay it in cash. I have been having trouble getting a mortgage to begin with (self employed) so I wasn't all too surprised that the interest rate and down payment amount rose so dramatically. I still have a couple of weeks until closing, so I could technically find a mortgage, or do an equity take out in the future when I can qualify for a traditional bank mortgage. The whole point of mortgaging was to allow more of my money to stay invested - the majority in things like canadian bank stocks, telecoms etc which have higher dividend yields than the mortgage rate. However 3.94% mortgage doesn't give my non-guaranteed stock yields much of a spread.
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Re: Urgent Mortgage Help

Post by BRIAN5000 »

However 3.94% mortgage doesn't give my non-guaranteed stock yields much of a spread.
It gives flexibility, are you going to rent any part of the property?

My first house I could have paid cash for as well but I rented out the main floor and lived in the suite below. The rent covered off mortgage payments and other household expenses and balanced near zero after CRA. This helped allow me to buy our third house, where we presently live, for cash or mortgage free.
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Matt G
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Re: Urgent Mortgage Help

Post by Matt G »

If I had a more "steady" income, mortgaging would definitely make more sense and I wouldn't be looking at a 3.94% mortgage rate. I perfectly understand that even 3.94% isn't a bad mortgage rate (although higher than the typical 2.44 people getting lately). The issue is I'm self employed, so not only was I given that high rate, but I also had to put 50% down. I'm 23 years old, with 2.5 years or so to complete my BBA should I choose to go back to complete it. Currently I'm earning a high income through my online business (over 200k+ USD a year) - but this could slow down unexpectedly. The worse case scenario being my business goes to 0 tomorrow - and I'm left carrying a 5 year term loan. I think at 2.44% this would have been justifiable, but 3.94% is a bit hefty.

I will be renting the basement out to my father to help him for $350 a month, going on a year by year basis so should things go south for me, he will find a new place and I will be able to rent half of the house out for a higher yield while finishing school.

Appreciate all the comments. All in all, paying in cash is the route I will likely take and maybe look at an equity take-out to invest with later once my credit is better and can get those lower rates.
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Re: Urgent Mortgage Help

Post by like_to_retire »

Matt G wrote:If I had a more "steady" income, mortgaging would definitely make more sense and I wouldn't be looking at a 3.94% mortgage rate.
Can you explain this statement? Myself, I have a hard time finding ~ 4% tax free guaranteed investments. The best I can do is GIC's at around 2% taxable that result in about 1%-1.5% after tax.

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Re: Urgent Mortgage Help

Post by Just a Guy »

Saving 4% is not the same as a 4% guaranteed investment. For one thing, you don't make any money on your property if there is no mortgage, unlike a bank that makes 4% on their loan.

Next, what happens if real estate corrects? You get a negative return.

Back to the original poster, sometimes it's better to pay cash and then look for a mortgage. In my case, I find properties below market value, pay cash, fix them up in a month and then go for financing.

If you apply for financing on a purchase, the appraisal usually comes in right around the purchase price. If the place is clear title, even a day after purchase, the sale price doesn't factor into the appraisal. If you can quickly increase the value of your property, you can usually finance the place better than if you just purchase. Of course, my places are rentals, so the more leverage the better.
Matt G
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Re: Urgent Mortgage Help

Post by Matt G »

like_to_retire wrote:
Matt G wrote:If I had a more "steady" income, mortgaging would definitely make more sense and I wouldn't be looking at a 3.94% mortgage rate.
Can you explain this statement? Myself, I have a hard time finding ~ 4% tax free guaranteed investments. The best I can do is GIC's at around 2% taxable that result in about 1%-1.5% after tax.

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My income isn't steady cause I'm self employed with an online business. Not that I anticipate my income dropping - but there's the possibility. This 3.94% mortgage I was offered is based solely on my assets. Banks are giving mortgages for 2.44%~or so but with good credit and a steady income. If that was my case, leveraging the house purchase with a mortgage would make much more sense because 2.44% is very low. Many blue chip stocks are yielding 4-5% in dividends e.g Canadian bank stocks / telecoms. I'd much rather have my money invested in stocks as opposed to GICs. A case could even be made that a 3.94% mortgage is worth it, stocks over the long run are likely to produce returns higher than that even after tax, although I've taken the advice from several sources to just go in all cash.

Furthermore - incase it's not been mentioned - I'm going to live in this house (renting basement to my dad for $350/mo), with the option of renting it out fully later if I choose to. I could very well live in the house forever - I don't know what the future holds for me.
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Re: Urgent Mortgage Help

Post by AltaRed »

Don't let investing in dividend stocks lead you to believe this is a gravy train that wlll beat, on an after tax basis, your 100% 3.94% obligation. The dividend yield might be sustainable, perhaps even grow, but another correction 2008 style will test even the best of investors.

Use your investments to do an all cash deal. Then consider financing at a later time when you can get a better rate, and use the funds to buy stocks back. The interest will even be tax deductible!
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Matt G
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Re: Urgent Mortgage Help

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AltaRed wrote:Don't let investing in dividend stocks lead you to believe this is a gravy train that wlll beat, on an after tax basis, your 100% 3.94% obligation. The dividend yield might be sustainable, perhaps even grow, but another correction 2008 style will test even the best of investors.

Use your investments to do an all cash deal. Then consider financing at a later time when you can get a better rate, and use the funds to buy stocks back. The interest will even be tax deductible!
I'm saying I'm going to do a cash deal, but I am fully aware that stocks on average should beat a 3.94% return over the long run. What was in question was whether or not the spread between the 3.94% mortgage, and the expected average long term return of stocks (including volatility as you're suggesting which could occur at inconvenient times), which my money was invested in previously, justified the potential but unlikely risk of carrying a mortgage with no income for a 5 year term. Given my uncertain next 5~ years - which could include living off the nest egg I've saved for a few years to finish university, I've decided it's probably safer to pay in cash and have committed to doing so. If I can get a mortgage later for the previously mentioned 2.4-2.8% range, the case for a mortgage grows stronger IMO.

Thanks for all the advice.
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Re: Urgent Mortgage Help

Post by brucecohen »

Matt G wrote: I'm saying I'm going to do a cash deal
Joined the thread late and don't know if this has already been suggested. You're going to sell stocks to raise cash to buy the house, right? You could then borrow to rebuy your stocks and the interest will be tax-deductible as long as you follow the rules. As a paid-off homeowner you'll likely find the bank more willing to lend you money, especially if the stocks are blue chip.
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Re: Urgent Mortgage Help

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Matt G wrote:If I can get a mortgage later for the previously mentioned 2.4-2.8% range, the case for a mortgage grows stronger IMO.
And as said by myself and also Bruce, if the mortgage it taken out to make financial investments (paper trail is important), the interest is tax deductible (as long as what you buy has the opportunity to produce income, e.g. dividends).
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Matt G
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Post by Matt G »

I wasn't aware of this, that's very good to know. If I can get a mortgage later for the 2.4-2.8% range, I'll definitely consider doing so to invest in good dividend paying stocks.
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AltaRed
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Re: Urgent Mortgage Help

Post by AltaRed »

It's called the Smith Manoeuvre (google and you shall find) but I've never been one to borrow to invest personally or recommend it.

It's simlar to buying on margin, with the major difference with a mortgage (or HELOC) is that you won't have your broker selling off your stocks to meet your margin loan in a market crisis. It will mostly be just you sweating bricks. Beware leverage.
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