Many financial experts, real estate gurus, and those that consider themselves seasoned investors, all have different opinions about being mortgage-free. But whether you want to stay mortgage-free or access your home’s equity to purchase more property always remains a personal choice because there is no right or wrong answer.
There are, however, a few questions you should ask yourself if you are planning on paying off your mortgage and purchasing more property.
Let’s say your current home is worth $950,000. You will be mortgage-free in the next year or your current mortgage is very small and manageable, let’s say around $150,000. The current interest rates are around 2%, and you’ve determined the area you are considering appreciates about 12% each year.
If you purchased an investment property for $550,000 and put $200,000 down, you would have to increase your existing mortgage balance to $350,000. Your monthly payment would be approximately $1,292 per month. You would also have to mortgage the new property for $350,000, which would amount to the same monthly mortgage payment, approximately $1,292 per month.
In a year, your mortgage payments (inclusive of principal and interest) would amount to $15,504 on each property. However, if the area appreciates 12% each year, your value would increase by $66,000 on the rental property. Now, let’s say the area in which your primary home is located appreciates 11% per year on average, which would amount to $104,500. So in this case, based on market appreciation year after year, you would earn $170,500 in equity and pay $31,008 in mortgages, yielding you a profit of $139,492 each year (give or take).
Given the low-interest rates, the current market value, and rate of appreciation (which you must back up with market research), it seems to make financial sense to keep investing provided you have the appetite. Also, keep in mind, I did not use rental income in this example, which could offset further costs associated with owning the rental property.
On the flip side, if you choose not to purchase an investment property, your principal residence would still increase in value and your mortgage payment would be lower because you wouldn’t need to increase the balance to access a down payment. You wouldn’t have to worry about capital gain’s tax as you would when selling an investment property. Depending on your income level and tax bracket, it may be too expensive when selling an investment property based on the amount of capital gain’s tax the Government would require you to pay.
Also, you wouldn’t have to worry about depreciating assets and what that means for the mortgages you hold.
After all, “Equity” is a subjective term and depends on market value, which is dictated by economic factors like supply and demand but also the global and domestic economy. Should some financial disaster occur, the equity appreciated could scale down or vanish completely, which could affect your ability to repay the mortgage loans taken out on each property. Although this occurrence would be historically rare (since most if not all properties bounce back in value when the market recovers), it is still a possibility worth your consideration.
Realistically, however, rental properties provide a retirement fund because eventually, rental income pays off the mortgage, and the property generates passive income. Most Canadians incorporate rental properties into their retirement plan and consider rental income a form of an emergency fund.
Also, if you are mortgaging your primary residence to make investments, the interest paid can become tax deductions, offsetting the amount of taxes you would pay on rental income, for example.
In conclusion, many people dream of the day when they are mortgage or debt-free, but in reality, when mortgage rates are at record lows, it can make sense to mortgage or invest to seize the opportunity to build healthy assets. Also, owning a rental property can provide extra money to save or pursue further investments whether or not they are in real estate.
Building a real estate portfolio can also offer peace of mind and help you weather the storm in the future or even offer a comfortable retirement.
These types of financial decisions must get made with serious contemplation through honestly and accurately answering the critical questions mentioned above.
I would be happy to help you run the numbers or map out a plan that you envision for your future. Please call or write.
Sarah A. Colucci, Mortgage Agent Lic. M14000929.
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
Do you need help with conducting market research? I want to tell you about Purview. Purview is a land titles system we currently use to verify title ownership, legal descriptions, liens and mortgages registered, and the estimated value of a specific property. Purview also estimates yearly appreciation levels based on geographic location and sales. I would be happy to consult with you and help you conduct market research in this regard.
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By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929