# Strategies for buying new home but keeping current condo



## explorer416

Hello all,
I wanted to ask this group for their opinion on what the best strategy would be for my situation.

Here's the current state (we're in Toronto):
- Wife and I are in our early 30s with one kid and hopefully more to come 
- Own our primary residence, a condo, worth about $400k; remaining mortgage on this is $109k as of Sept. 1st when mortgage is up for renewal
- We are planning on buying a new home within the next 6-18 months; expecting to pay around $600k-$700k in total, putting at least 20% down
- We are considering the option of not selling the condo at this time, and renting it out
- We have some open investments earmarked for the new home purchase, but we would need to pull equity out of the current home in order to maintain both places for tax purposes
- Don't think this is relevant, but it might be: we own another investment condo with associated mortgage; it pays for itself and we enjoy the deducting the mortgage insurance for our income during tax season
- Assume best available closed mortgage rate come Sept 1st is P - 0.6; best available open mortgage rate come Sept 1st is P + 0.8; HELOC rate is P + 1.0

What strategy should we take? Here are some options we considered and related questions. Please do correct if any assumptions made are inaccurate:

1.) Refinance this Sept. 1st when mortgage is up for renewal. Take sufficient money out of current home and park it somewhere for when we eventually buy.
Assumption:
- Cheaper to refinance in between mortgage terms?
Pros: 
- Funds available for 20% down payment when we are ready to buy
- Big mortgage at smallest rate is in place for when we start renting condo out; so interest is deductible come tax time
Cons:
- We don't know the amount to take out as we don't know the price of the new home yet (as we haven't bought anything yet)
- Increased mortgage on primary residence for up to 18 months unnecessarily
- Cost of refinancing?

2) Simply renew on Sept 1st and refinance whenever we need the money when we actually buy the new home
Assumption:
- More expensive to refinance in the middle of a mortgage term?
Pros: 
- Exact funds required taken when exactly needed
- Big mortgage at unknown future rate in place for when we start renting condo out; so interest is deductible come tax time
Cons: 
- Increased cost of refinancing mid-term?

3) Obtain HELOC when I renew this Sept 1st and associate it with current condo; pull funds out of HELOC when required for purchase of new home
Assumption:
- HELOC rate is P+1.0
Pros:
- Easy to set up on Sept 1st
- No refinance (and associated cost) necessary (no cost?)
Cons:
- The interest from the HELOC is NOT tax deductible as the funds are not used to pay for an investment, but rather for my primary residence. Is this true?

4) Simply renew on Sept 1st; Obtain a second mortgage on current condo when we buy the house to obtain required funds for downpayment
Pros:
- Mortgage interest will be is tax deductible
Cons:
- I believe second mortgages come with much higher rates?

5) Liquidate almost all open investments and pay off remaining $109k on Sept 1st. Remortgage when it comes time to buy the new home
Pros: 
- Low remortgage rate available when we need it
- Mortgage interest will be is tax deductible
Cons:
- HUGE capital gains hit all at once
- Not a great time to liquidate some of the investments we have

6) Get an open mortgage on Sept 1st; pay it off from open investments when we find the home we want; immediately remortgage it for amount required for down payment
Pros: 
- Low remortgage rate available when we need it
- Mortgage interest will be is tax deductible
- Buys us a bit more time, so can be a bit more calculating about the timing of selling off open investments
Cons: 
- Open rate is higher than available closed rates
- Forced to sell investments before it may be ideal to do so

Any other options? Am I just over-thinking this? I'd like to hear your thoughts. 

Thanks in advance!


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## slacker

I'm a novice, so I don't have much useful advice. But I'll note this. Once you rent out your condo, it's no longer your primary residence. If and when you choose to sell your condo, you'll pay capital gain tax.


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## Potato

Quick points:

- Are you really sure you want to own three properties, and have what sounds to be basically no other assets? That's a huge bet on real estate when it's already high in Toronto. What would your rate of return on the condo even be?

- What do you mean "maintain both places for tax purposes?"

- No matter what refinance scheme you've got in your list, none of them make the interest tax deductible when the money goes to buy your next principal residence (i.e., your note on option 3 is correct, and also applies to the other options).


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## GeniusBoy27

I think there are a few other options, to be honest. 

1) Go for a 1 year-loan at a relatively low rate. If you're buying before that, I'm sure the bank will wave the fees, as long as you renew with them. But talk to your banker first.
2) Consider selling your place (because of the capital gains exemption) and then reinvesting in another property using a HELOC. This has the benefit of having a clear line of tax deductibility, and also capturing the value of your current property now. Yes, there are costs associated with this (land transfer, legal fees, etc.). It'd depend on your appreciation of your condo, which wasn't given here. 
3) Another option would depend on when the other mortgage (your investment condo) is up for renewal.


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## kcowan

The ideal state to achieve is that all debt will be in your two investment properties and no debt on your home. So you need to tell us about your other mortgage.

Have you considered buying a small apartment building for the same debt as you will have on your two investment properties? I think you will find the exercise valuable.


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## andrewf

You don't need to sell in order to benefit from the primary residence capital gains exemption. You just need to get it assessed, and use that value as the new adjusted cost basis for the property as an investment. Call CRA or ask your accountant and they can walk you through it.

I think two investment properties might be excessive, leaving your portfolio rather undiversified.

I didn't see any mention of cash damming, so you might want to look into that (a way to rapidly pay off your non-deductible mortgage, replacing it with a tax deductible loan). Million Dollar Journey has a post on it.


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## GeniusBoy27

Andrew's absolutely right about the benefit from the primary residence capital gains exemption. 

Sheesh, I did that with my condo. 

And I think Andrew talked about cash damming in another thread.


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## Jungle

andrewf said:


> You don't need to sell in order to benefit from the primary residence capital gains exemption. You just need to get it assessed, and use that value as the new adjusted cost basis for the property as an investment. Call CRA or ask your accountant and they can walk you through it.


Are you talking about where you get the market value appraised before you rent it, then use that number for your capital gains tax if sell in the future ?


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## andrewf

Yes. There are threads on this forum discussing this topic. Effectively, you pretend you sell the house to yourself at fair market value. Before the sale it is your primary residence and after it is an investment. The gain to that sale price is tax exempt, but any future gains past that point are subject to taxation.


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## explorer416

*answers to some questions asked*

Original Poster here; thanks to all for the feedback. A bit more context, first: We don't want to own three properties long term and agree that it is putting a lot of eggs in one basket. We do believe though that the area that our two condos are in will benefit greatly from a new development that will be complete in two years. Our thinking is to hold on to our current condo until we "maximize" that appreciation.

There were some questions asked so I'll try my best to provide the answers.

@Potato: What do you mean "maintain both places for tax purposes?"

Okay, that was very poorly worded. What I meant was that if we really wanted to keep both places, we had better make sure that the newly converted to investment property has as big a mortgage as we are comfortable with and the new primary residence has as small a mortgage as possible, as this would be best for tax purposes.

@Potato: No matter what refinance scheme you've got in your list, none of them make the interest tax deductible when the money goes to buy your next principal residence

I believed (and you confirmed) that this was true for a HELOC, but is this true for the mortgage on the current condo as well? If we did nothing regarding the mortgage on the current condo, its interest would be converted to tax deductible would it not? We assumed then that refinancing to make that mortgage bigger would result in more tax deductible interest. Is this thinking incorrect?

@GeniusBoy: Go for a 1 year-loan at a relatively low rate.

We may go for this idea if we decide to go forward with this plan and not sell the condo. Thanks.

@GeniusBoy: Consider selling your place and then reinvesting in another property using a HELOC.

We wouldn't buy yet another investment property. We already have one and we don't like the idea of having too many properties. As stated in this post, we'd only look to keep it for an additional 2, 3 years to "maximize the appreciation" (hope we're right on that one!).

@GeniusBoy: It'd depend on your appreciation of your condo, which wasn't given here.

I bought in 2004 for $309k. I believe I could get $400k for it today.

@kcowan: you need to tell us about your other mortgage

Purchased for $241k in 2009; has $188k mortgage remaining. 5 year closed variable at P - 0.6 starts Aug 2010.

@andrewf: You just need to get it assessed, and use that value as the new adjusted cost basis for the property as an investment

Did not know about this capital gains exception. Thanks for the tip.

@andrewf: I think two investment properties might be excessive, leaving your portfolio rather undiversified.

Agreed. It would be just for a 2-3 year period. Note that we do have other investments, RRSP, etc., but we may be slightly nervous for a bit until we sold our current condo.

@andrewf: I didn't see any mention of cash damming, so you might want to look into that

Agreed. Once we buy the new permanent home, we'd definitely want to set this up and utilize the *other* investment property for this purpose.

Thanks again to everyone. I'd really like to know more about the refinancing the mortgage thing. If doing that means the interest is NOT tax deductible as we used the equity we pulled out towards our new primary residence, well then this whole idea may be dead.

I would need to pull equity out of the current home in order to buy the new home (and keep the current home).

I would need the mortgage interest on the current home to be tax deductible when we start renting it out.

If both of these are not possible, then we may just sell and buy. You know, the normal way of doing things.


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## GeniusBoy27

No doubt you can claim the tax deduction once you convert to an investment property. That's absolutely clear by CRA.


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## Four Pillars

"As stated in this post, we'd only look to keep it for an additional 2, 3 years to "maximize the appreciation" (hope we're right on that one!)."

For the record - this is an extremely high risk move. Real estate is sort of like stocks - you need to be in for the long run.

If I said I thought the stock market was going to go on a tear over the next 3 years and borrowed a lot of money to "take advantage" - what would you think of that strategy?


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## kcowan

explorer416 said:


> @kcowan: you need to tell us about your other mortgage
> 
> Purchased for $241k in 2009; has $188k mortgage remaining. 5 year closed variable at P - 0.6 starts Aug 2010.
> ...
> @andrewf: I think two investment properties might be excessive, leaving your portfolio rather undiversified.
> 
> Agreed. It would be just for a 2-3 year period. Note that we do have other investments, RRSP, etc., but we may be slightly nervous for a bit until we sold our current condo.
> ...
> I would need to pull equity out of the current home in order to buy the new home (and keep the current home).
> 
> I would need the mortgage interest on the current home to be tax deductible when we start renting it out.
> 
> If both of these are not possible, then we may just sell and buy. You know, the normal way of doing things.


Just trace the transaction. If you borrow on the current condo to buy a permanent residence, then that amount borrowed is NOT deductible.



Four Pillars said:


> "As stated in this post, we'd only look to keep it for an additional 2, 3 years to "maximize the appreciation" (hope we're right on that one!)."
> 
> For the record - this is an extremely high risk move. Real estate is sort of like stocks - you need to be in for the long run.


I agree with Four Pillars. You are about to become guilty of a highly leveraged transaction in a volatile market. Unfortunately, the costs of trading is very high in capital gains taxes, realtors fees, lawyers fees and transfer taxes. This is one of the reasons for keeping properties that you currently hold. Also it seems like less work.

Have a look at liquidation costs. This will tell you how expensive your properties are as speculative vehicles. Good luck in whatever route you pick!

("And don't let the tax tail wag your investment dogs.")


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## GeniusBoy27

kcowan said:


> ("And don't let the tax tail wag your investment dogs.")


That's the best quote I've heard in a long time!


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## kcowan

GeniusBoy27 said:


> That's the best quote I've heard in a long time!


Well I hesitated to sell Jones Soda when it was trading at $36 because I had bought it at $0.88! Finally sold it at $9.52 over the objections of my broker who kept getting broker and broker...


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## cardhu

Refinancing the existing mortgage on your condo, to buy a new principal residence, is a bad idea. 

Whatever is left of the existing mortgage at the time you convert the property from principle residence to income-property MIGHT qualify for deductible interest … it depends on what the borrowed money was used for … if the existing mortgage is simply the balance of the money you originally borrowed to purchase the condo, then YES, interest on the remaining balance would become deductible when the property becomes an income-producing property. … However, if you refinance that property, and use the money to buy your new principal residence, then the interest on that portion would definitely not be deductible … CRA is very clear about this. 

If you did this, you’d end up with a commingled debt … partially deductible and partially not … this is not an efficient setup, as it prevents you from directing your cash flow in a tax-efficient manner … normally, if you have both deductible and non-deductible debt, you’d want to direct all your free cash flow against the non-deductible debt, and either make interest-only payments on the deductible debt, or even capitalize the interest … however you cannot do that with commingled debt.


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## andrewf

^ Agreed. It should be a second mortgage. I don't know how bad the rates are for second mortgages if the total LTV is still under 80%. There's no reason for it to be higher than first mortgage in that case.


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## GeniusBoy27

Actually, accountants do the merged mortgages between principal and income properties all the time. It's just much messier, and far more complicated, and hence will cost you in accountant $. 

Much cleaner to try and separate the 2 burdens out.


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## cardhu

It costs in more ways than just accountant$$ ... the lost tax-efficiency could easily cost more than accounting fees.


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## GeniusBoy27

Fair enough. I agree.


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## marina628

Just want to put it out there that if they are investment properties you need 35% equity ,there may be some brokers out there who can get you approved on 20% but personally if you cannot keep 35% equity into a property maybe you should not buy it.


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## kubatron

the wording of your post is wrong

you don't "NEED" 35% equity - your OPINION is that that is the minimum you SHOULD HAVE


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## marina628

When we bought investment number 3 , TD bank insisted on 35% down and showed us some docs which changed rules from 20% to 35%. I bought two previous homes with 20% down but since Jan 2010 all our homes have 35% down payments .We have 6 so maybe it has to do with the number we have now....


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## kcowan

No Marina, it applies to any investment purchase. It is a part of the government cool-down strategy for real estate.


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