Mortgage: what strategy to consider?

Peter Tsakiris
Mortgage broker

People typically believe that a mortgage broker only helps you negotiate the best rate. However, the mortgage broker’s role is primarily to analyze your financial situation in order to find the best mortgage for your needs (called a “hypothec” in Quebec) and not just to negotiate the best rate. This allows you to meet your needs with a mortgage that must be competitive, but that is above all, adapted to your situation!

In fact, a mortgage broker, together with a financial planner, can offer you even more advantages through the strategic management of your debts based on your financial situation.

For example, by choosing a slightly higher mortgage rate, you may be able to obtain a more generous rebate from your financial institution. If you have a $200,000 mortgage amortized over 25 years, you will save $510,95 over a 5-year period by opting for a 5-year closed mortgage at a 2,59% rate which will pay you a $1 000 rebate instead of opting for a mortgage at 2,54% without a rebate.

Here is another example illustrating the benefit of analyzing your overall situation. Let’s say you have a $200,000 mortgage to be renewed on August 1, 2017 and, by looking at the available options, a broker finds the two following products:

5-year closed rate @ 2,64%
5-year closed rate @ 3,94%, but with a 5% rebate

Instinctively, the logical choice would be to choose the lower rate. However, the broker submits the case to a financial planner who sees that it is a loan for a rental property which generates significant taxable profits annually.

Depending on your marginal tax rate and your financial situation, the financial planner explains that, even if the mortgage payments will be higher with the rebate option, it would be more advantageous to select this option, put the rebate in a TFSA account and pay the difference from that account.

In addition, the financial planner calculates that it is possible to make an early repayment of more than $5,000 upon receipt of the rebate and the TFSA account could still provide the principal to pay the difference in the payments for the next five years.

In his calculations, the planner took into account the TFSA’s performance and tax savings that you will receive over the next five years due to the higher interest expense (you can deduct higher interest which will reduce the taxes on your rental income).

Thus, in five years, you will end up with a mortgage balance that is $2,904 lower! And you will save $567 in taxes in your April 2023 tax return for the 2022 taxation year, which means a total savings of $3,471!*

This is all without you having to pay an additional disbursement compared with the lowest rate option.

Here are some other ways to optimize your wealth, where applicable:

Use the “cash damming” technique to convert non-tax-deductible debts into a tax-deductible loan;
Consider a rate diversification strategy by taking half of the mortgage at a fixed rate and the other half at a variable rate. However, it is still very important to synchronize the terms to avoid being taken hostage by the financial institution when one term expires before the other.

In brief, it is very important to look beyond the simple “best rate” test and to analyze each financial situation in depth.

*Assumptions: TSFA rate of 1%, marginal tax rate of 38,4% and mortgage loan payable over 20 years.

N.B.: Please consult your tax advisor before implementing any of these strategies.

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