# Down payment question.



## real_money (Feb 16, 2010)

I am thinking of buying a rental property for 300K. I want to put the 25% down. At least I think I want to put 25% down. My question is this: Should I put the 75K in cash or should I borrow it against my house? Should I put the 25% down or should I put the minimum? Which is now 20% 


If I borrow it against my house it will cost me around $200 a month (I think). I know this cost is a tax deduction.

What would you do and why.


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## Dana (Nov 17, 2009)

It makes sense from an investment point of view to put down the minimum. This will increase your return. If you put $75k down and bring in $10k per year, your return would be 13%. If you put $60k down and bring in $9500 per year your return would be 15.8%. 

If the property cash flow supports borrowing the money from your house (i.e. you will not be out of pocket for interest and principle payments) than that makes the most sense - provided you are comfortable with the risk associated with leverage. This will also allow you to keep your $75k and invest it elsewhere.


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## HaroldCrump (Jun 10, 2009)

If you _have_ 75K in cash, and it's not the only 75K you have, why wouldn't you pay it instead of leveraging 100%?
It is ironic that your post coincides with yesterday's changes in investment property lending....this is exactly what they are trying to prevent.


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## real_money (Feb 16, 2010)

HaroldCrump
I think that "they" are trying to prevent people from getting in over their heads. If I can come up with the 25%, I am not getting in over my head. I think I can put 20% and still not pay the insurance? Can anyone verify this? I live in Ottawa Ontario.


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## Dana (Nov 17, 2009)

real_money said:


> I think that "they" are trying to prevent people from getting in over their heads. If I can come up with the 25%, I am not getting in over my head. I think I can put 20% and still not pay the insurance? Can anyone verify this? I live in Ottawa Ontario.


This confused me, too. CMHC doesn't insure mortgages where the Loan to Value is less than 80%, right? So is Flaherty saying that CMHC is no longer in the rental property business? 

Any insight?


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## Racer (Feb 3, 2010)

Dana, what I understood was that banks could not qualify anyone for any mortgage at all if they can't qualify for the specified terms, but that if someone does qualify for those terms then the banks can sell them whatever mortgage.

In other words, if the only way that someone can get a mortgage is with a low interest rate and low down payment, then the banks can't qualify them for anything. Higher-income folks (or higher cash flow folks) can qualify for a normal mortgage, and so are allowed to purchase from the full portfolio of mortgage products.

I haven't followed it closely - that was just an impression.


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## Berubeland (Sep 6, 2009)

It is my understanding that CMHC will insure any mortgage and there can be long term benefits to doing this. 

The townhouse complex I manage was appraised and valued by CMHC so that the owner could get a lower rate. Their very high fees are actually worth it long term because of the savings on the mortgage interest. 

Any hi-ratio mortgage must be insured. The bank may not legally lend to you without this insurance. 

For a house the fees may not make sense at all. In my case the house I bought the fees to insure the hi-ratio mortgage was about $3500 so we just paid a little more downpayment to avoid those fees.


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## Racer (Feb 3, 2010)

Another thing: in some legal circles, hi ratio mortgages are referred to as "CMHC/Genworth mortgages". Isn't that funny. I have never heard of Genworth before this.

Dana, Berubeland, have either of you heard of someone actually using Genworth to underwrite a mortgage?


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## Shayne (Apr 3, 2009)

Dana said:


> This confused me, too. CMHC doesn't insure mortgages where the Loan to Value is less than 80%, right? So is Flaherty saying that CMHC is no longer in the rental property business?
> 
> Any insight?


The mortgage is still insured if it is less than 80% LTV, but in most cases the lender pays the CMHC premium so you don't know that it is insured.


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## HaroldCrump (Jun 10, 2009)

Shayne said:


> but in most cases the lender pays the CMHC premium so you don't know that it is insured.


Really?
I thought the CMHC premium is paid by the home owner.
It is usually rolled into the mortgage, which is worse.


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## Dana (Nov 17, 2009)

Racer said:


> Dana, Berubeland, have either of you heard of someone actually using Genworth to underwrite a mortgage?


We use to use Genworth as an alternative to CMHC. This was many years ago - we considered them an 'alternate insurer' as they use to over look some borrower issues that CMHC wouldn't overlook.


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## cardhu (May 26, 2009)

Dana said:


> CMHC doesn't insure mortgages where the Loan to Value is less than 80%, right?


CMHC insurance is not generally *required by law* for LTV of less than 80% ... there are exceptions however ... for example, if you borrow from your RRSP (ie. an RRSP-self-mortgage) then CMHC insurance is required regardless of the LTV. 



Shayne said:


> The mortgage is still insured if it is less than 80% LTV, but in most cases the lender pays the CMHC premium so you don't know that it is insured.


Maybe in some cases, but I doubt that lenders routinely volunteer to pay for unnecessary insurance.


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## Shayne (Apr 3, 2009)

HaroldCrump said:


> Really?
> I thought the CMHC premium is paid by the home owner.
> It is usually rolled into the mortgage, which is worse.



For anything 80% LTV or less a the lender will either not insure it or insure it at their cost.


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## Shayne (Apr 3, 2009)

cardhu said:


> Maybe in some cases, but I doubt that lenders routinely volunteer to pay for unnecessary insurance.


Absolutely they do. It is default insurance which protects them. They just don't pass this cost onto the borrower if it is under 80% LTV.


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## cardhu (May 26, 2009)

Shayne, I do not believe that CMHC and its competitors are carrying potential liability for 100% of all residential mortgage debt that exists in this country, as you imply ... I therefore stand by my earlier comment. 

*Maybe in some cases*, but I doubt that lenders routinely volunteer to pay for *unnecessary* insurance.

Your response to Harold ... (_”the lender will either not insure or insure”_ ... is consistent with this.


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## Shayne (Apr 3, 2009)

cardhu said:


> Shayne, I do not believe that CMHC and its competitors are carrying potential liability for 100% of all residential mortgage debt that exists in this country, as you imply ... I therefore stand by my earlier comment.
> 
> *Maybe in some cases*, but I doubt that lenders routinely volunteer to pay for *unnecessary* insurance.
> 
> Your response to Harold ... (_”the lender will either not insure or insure”_ ... is consistent with this.


There are many lenders that insure all of the mortgage submitted to them. The insurance is necessary for protection if the borrower defaults. 

If it is less than 80% LTV they do not pass the cost of this insurance on to the borrower.


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## sprocket1200 (Aug 21, 2009)

there is no way that they do not pass this cost on in one way or another...


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## OhGreatGuru (May 24, 2009)

real_money said:


> If I borrow it against my house it will cost me around $200 a month (I think). I know this cost is a tax deduction.
> 
> .


Isn't there a CRA rule against deducting interest if you borrow it against your principal residence? Because otherwise it circumvents the rule that mortgage interest on your principal residence is not tax-deductible?


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## andrewf (Mar 1, 2010)

OhGreatGuru said:


> Isn't there a CRA rule against deducting interest if you borrow it against your principal residence? Because otherwise it circumvents the rule that mortgage interest on your principal residence is not tax-deductible?


Nope. It doesn't matter what the collateral is, just what the loan is used for.


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