Combine or separate 5 yr interest free loan?

Addy · 07-20-2010, 08:17 AM

I've thought about this a number of times and can't wrap my head around which way is the best.

Whenever my husband is transferred, we get an interest free loan of $25K for five years. It must be used towards real estate, so we have the option of either having two loans (our mortgage plus the $25K loan) or combining the two. We also put any extra money from our move towards a mortgage interest rate buy down because, for some strange reason, we don't pay tax on the money if it's to buy down the interest rate - but if we take the extra $ left over in cash we're taxed on it. (Which is another matter... can anyone clarify why this is?).

When we bought our last house, the house was so inexpensive we decided to simply combine and pay off within the five year term as the combined interest rate was only 0.845% (yes less than 1%).

However, when we move, we will most likely have at least a 50K mortgage, if not a lot larger (upwards of 200K). I can't figure out in THIS case, if it's better to have separate loans or combine.

Keep in mind the interest free period is only for five years. If you need any additional information to clarify please ask.

andrewf · 07-20-2010, 08:41 AM

I'd go for the interest rate reduction, instinctively, but without knowing the rates and amounts it's hard to give you an answer other than 'it depends'.

MoneyGal · 07-20-2010, 08:49 AM

You are taxed on the CASH but not the value of the loan because the Income Tax Act allows employers to provide low- or no-interest loans to employees (for specified purposes), but there's no way to provide tax-free CASH to employees.

See this CRA page for more info.

andrewf · 07-20-2010, 10:34 AM

So the choices are:

a-$25k cash (payment)
b-$25k interest free loan
c-$25k toward 'interest reduction' on your mortgage?

In this case, I'd say that there's a pretty solid chance that a $25k payment is better after tax than a $25k interest free loan, especially since rates are so low right now anyway. It's hard to say, though, because you weren't very clear.

MoneyGal · 07-20-2010, 10:48 AM

No. The choices are:

Interest-free loan (technically, the employee receives a loan at the prescribed rate, with interest charged as an employee benefit on the T4, and then receives a deduction equal to the amount of interest for the first five years of the loan) held separately from mortgage

Interest-free loan combined with mortgage

Addy: you should get some advice beyond this forum. In general the most advantageous solution will always be to NOT (formally) combine the home relocation loan with a commercial mortgage. You should allow the interest-free period to expire over five years and then re-set the loan (if there is a balance outstanding) at the prescribed rate, which is based on the average interest rate on 90-day treasury bills during the first month of the preceding quarter. Current prescribed rate is 1%.

However - I'm not totally clear that you are getting a home relocation loan. It sounds like that's what it is, but I'm not sure and I'm not sure whether you are sure.

I recommend having an accountant review the paperwork and run some scenarios for you.

GeniusBoy27 · 07-21-2010, 12:52 PM

Generally, it's better to separate out the two, but like Money Gal says, it isn't clear if this is a home relocation loan or not.

07-20-2010, 08:17 AM	#1
Addy Senior Member Join Date: Mar 2010 Posts: 165	Combine or separate 5 yr interest free loan? I've thought about this a number of times and can't wrap my head around which way is the best. Whenever my husband is transferred, we get an interest free loan of $25K for five years. It must be used towards real estate, so we have the option of either having two loans (our mortgage plus the $25K loan) or combining the two. We also put any extra money from our move towards a mortgage interest rate buy down because, for some strange reason, we don't pay tax on the money if it's to buy down the interest rate - but if we take the extra $ left over in cash we're taxed on it. (Which is another matter... can anyone clarify why this is?). When we bought our last house, the house was so inexpensive we decided to simply combine and pay off within the five year term as the combined interest rate was only 0.845% (yes less than 1%). However, when we move, we will most likely have at least a 50K mortgage, if not a lot larger (upwards of 200K). I can't figure out in THIS case, if it's better to have separate loans or combine. Keep in mind the interest free period is only for five years. If you need any additional information to clarify please ask.

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07-20-2010, 08:41 AM	#2
andrewf Senior Member Join Date: Feb 2010 Posts: 466	I'd go for the interest rate reduction, instinctively, but without knowing the rates and amounts it's hard to give you an answer other than 'it depends'.

07-20-2010, 08:49 AM	#3
MoneyGal Senior Member Join Date: Apr 2009 Posts: 1,171	You are taxed on the CASH but not the value of the loan because the Income Tax Act allows employers to provide low- or no-interest loans to employees (for specified purposes), but there's no way to provide tax-free CASH to employees. See this CRA page for more info.

07-20-2010, 10:34 AM	#4
andrewf Senior Member Join Date: Feb 2010 Posts: 466	So the choices are: a-$25k cash (payment) b-$25k interest free loan c-$25k toward 'interest reduction' on your mortgage? In this case, I'd say that there's a pretty solid chance that a $25k payment is better after tax than a $25k interest free loan, especially since rates are so low right now anyway. It's hard to say, though, because you weren't very clear.

07-20-2010, 10:48 AM	#5
MoneyGal Senior Member Join Date: Apr 2009 Posts: 1,171	No. The choices are: Interest-free loan (technically, the employee receives a loan at the prescribed rate, with interest charged as an employee benefit on the T4, and then receives a deduction equal to the amount of interest for the first five years of the loan) held separately from mortgage Interest-free loan combined with mortgage Addy: you should get some advice beyond this forum. In general the most advantageous solution will always be to NOT (formally) combine the home relocation loan with a commercial mortgage. You should allow the interest-free period to expire over five years and then re-set the loan (if there is a balance outstanding) at the prescribed rate, which is based on the average interest rate on 90-day treasury bills during the first month of the preceding quarter. Current prescribed rate is 1%. However - I'm not totally clear that you are getting a home relocation loan. It sounds like that's what it is, but I'm not sure and I'm not sure whether you are sure. I recommend having an accountant review the paperwork and run some scenarios for you.

07-21-2010, 12:52 PM	#6
GeniusBoy27 Senior Member Join Date: Jun 2010 Location: GTA Posts: 157	Generally, it's better to separate out the two, but like Money Gal says, it isn't clear if this is a home relocation loan or not.