# What should i choose...?



## w0nger (Mar 15, 2010)

I'm making my first home purchase and need some advice. My mortgage broker gave me some, but i'm looking for a 3rd opinion... Here's the situation:

Principle: $202 000
Down payment of $27 000
I'm currently approved for a 5-year fixed mortgage at 4.42 %

I'm only planning on residing at this home for about 3 years, at which point i think i'll be ready to move into a house.

I really want a HELOC, but i don't qualify at the moment because i don't have a 20% downpayment. My mortgage broker did explain another possibility to me:

I could get an Open-Variable Mortgage at possession, then, a month later, get the condo appraised, if the value of the condo appreciates enough, the the difference would cover the neccessary 80% equity, and then i'd qualify for a HELOC so that i can start a SM, at which point they'd write me a new mortgage to buy out the Open Variable. The current open variable is prime +0.8%.

What i'm afraid of is if the condo DOES NOT appreciate enough for me to qualify for the 80% equity and therefore I'd be stuck on the Open-Variable... which normally i don't think i'd be afraid of, but with interest rates increasing dramatically and the BoC increasing prime significantly in the near future, i'm not sure it's the wisest thing. I also wouldn't get the 4.24% 5-year fixed that i've been approved for, but instead get the posted rate if i were to choose to switch over to a fixed rate from the Open-Variable.

So what do I do? Do i take the risk with the Open-Variable trying to get the HELOC? Or do i take the 5-year fixed and just blend the mortgage with a new one when i buy a new place? Is there anything else i'm not or should be considering?


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## Berubeland (Sep 6, 2009)

I'm not 100% sure but something sounds wonky about this. 

First of all appraisers tend to value very conservatively. So the idea that you would gain another $20,000 in value in one month is unlikely in the extreme. 

Also read this post about 5 year fixed mortgages. 

http://www.milliondollarjourney.com/avoid-the-5-year-fixed-mortgage-trap.htm

Second there are fees associated with discharging a mortgage and they tend to be high and probably wipe out any equity you have. 

That's my opinion based on what you said.


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## m3s (Apr 3, 2010)

There's a reason why they don't let people take a HELOC when they don't even have 20%

Based on your questions I assume you aren't an experienced investor, yet you are in a rush to leverage to the max. In my opinion, banks are more than happy to lend too much as is. If you're going to borrow to the max, I hope you know what you're doing

If you plan to buy another house within 5 years, you'd be much better off to build as much equity as possible to avoid CMHC insurance next time.


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## MoneyGal (Apr 24, 2009)

Anything else you should do? Think more clearly about your options. 

You should not buy a home, as a first-time buyer, with less than 20% down, that you only plan on staying in less than three years. A possible exception would be if you are able and willing to very aggressively build equity in the home as suggested upthread. 

Everything in your post suggests you want to use buying a house largely as an investment move, not to build equity efficiently. Either one of your current plans is going to crush you in commissions. 

Not convinced that bold assertion from me is right? Build some models. Find out how much you will pay in commissions (real estate, investment) at each step of the game. Make some assumptions about the rates of return you are going to achieve (and make them realistic, please). Build in a Monte Carlo for the investment returns or find one online if you want a slightly more sophisticated model. 

Your plan doesn't make sense, whether you do the HELOC or non-HELOC version. How do I know this? You are worried about _fluctuating interest rates _in an open variable mortgage, when that is really the least of your worries, because that's probably the least significant risk that you face in any of your scenarios.


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## w0nger (Mar 15, 2010)

thx for the link to MDJ... that was a very enlightening article. i suppose in the end.. my ultimate goal is to save as much money as possible. The SM would simply be an added bonus if i could make it work.

I'm at roughly 12% for my downpayment at the moment and at possesion will most likely be at the 15% down mark. Unfortunately the 20% is just a little out of reach for me due to the date of possession.

According to the article, a variable rate mortgage is the way to go to save money, and i think that's what i'm starting to lean towards... at the moment, my open-variables are prime + .8%.

I do plan on aggressively building equity... atleast for the first few years... with an open-variable i suppose that leaves me the options of re-negotiating at a later date.

i'm thinking maybe it'll be the right direction to go...


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## Shayne (Apr 3, 2009)

I am not sure where your down payment is coming from, but if you are only going to be 5% short of 20% you may want to consider getting an loan for an RRSP and using the HBP. It will save you the CMHC premium.

There are some conditions and you will have to make sure you can debt service the loan and your mortgage, but it would be worth while. If you are thinking of leaving in 3 years ensure you get a mortgage that is portable or get a 3 year mortgage.


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## Cal (Jun 17, 2009)

Are you taking into account losing 4% of your home equity when you sell in 3 years? My only concern would be that you are banking on RE to continually rise. Not sure if you are planning on doing an annual lump sum payment on the mortgage or not.


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## w0nger (Mar 15, 2010)

just curious.. why would i lose 4% ? or are you attibuting that to the decline in the RE market?


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## Potato (Apr 3, 2009)

w0nger said:


> just curious.. why would i lose 4% ? or are you attibuting that to the decline in the RE market?



Depending on where you are, it could be much more than 4% - you've got a lot of fees to sell a property (and buy the next one): realtor commissions (which may be going down soon with CREA vs competition bureau, but you probably can't count on that), land transfer taxes (two, if you're in Toronto), lawyers' fees, other closing costs for when you sell. If you're only going to be there 3 years those will be significant. Add on the interest costs, condo fees, property taxes, CHMC fees, and anything else I may have forgotten and it's unlikely that buying this condo for just 3 years is going to put you further ahead than renting for 3 years and then going straight to the house you want/need then. And that's without considering the risk of decreasing prices (though if you have strong feelings about increasing prices and are looking to speculate, well then, that's a horse of a different colour).

So like MoneyGal said:



> Anything else you should do? *Think more clearly about your options.*
> 
> You should not buy a home [...] that you only plan on staying in less than three years.



If you need help figuring out the various scenarios for your situation, just come back with more details and we can help you out.


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## sprocket1200 (Aug 21, 2009)

wonger, don't listen to them. leverage to the max. RE is surefire win!

but hey, the sooner the bubble pops (or hisses itself out) the better, then we can get back to reality...


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## the-royal-mail (Dec 11, 2009)

To the OP: you're being given good advice here. The way to save is NOT to buy a house for short term. Why can't you live in an apartment? I do, and I am saving tons. And when I leave, no lineup of middlemen waiting to take my money. Your RE agent and the buyer's agent will take 5%. Plus all the other very real costs that potato mentioned. You have to pay that, which will wipe out your savings.

Despite the rhetoric, real estate most certainly is NOT a surefire win. Only the middlemen will gain by what you want to do. So it's a surefire win for *them* lol.


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## MoneyGal (Apr 24, 2009)

My tone was kind of b*tchy in my post, and I apologize for that. But I was thinking of not just the RE commissions, but all the commissions and fees associated with setting up the mortgage, CMCH insurance, SM fees, lawyer fees, commissions and/or fee on the mutual funds bought through the SM, etc. 

Argh! This game is set up so someone wins, and it isn't the OP: it's all the people who get paid no matter what along the way.


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## Berubeland (Sep 6, 2009)

Moneygal, I'm with you on this one. I get very angry at times with people taking advantage of others in this business. It makes me sick.

I can't tell you how many investors I deal with are in cash flow negative properties heralded as the next best thing. 

I have scuttled many deals proposed as "investments" by RE agents. And they'll outright lie about potential rents too. Don't they realize that the $300 difference between their imaginary rent and market rent comes right out of the owner's pocket? I'm guessing they just don't care once they collect their commission. 

I ask you what the hell is wrong with people's basic math skills? An investment property has to pay you !!! Otherwise it's a cash sucking nightmare. Bargaining on the entire market going up is speculation. 

It drives me crazy !!! They'll say things to me like no smoking, no pets, great credit but I need this place rented next month or I can't pay the mortgage. 

It's like the moment someone call themselves an investor they paint a giant bullseye on themselves. 

OK enough ranting already


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## Cal (Jun 17, 2009)

Yes, Potato was right. I was referring to the RE agents fees upon selling the property. Your initial post didn't clarify if you had already taken that into account. 

As mentioned could be more, could be less than 4%.


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## w0nger (Mar 15, 2010)

All worthy tips.. i think i'll end up just living in my condo and maybe pick up a roomate along the way. Really thinking about going with a 3-year open variable... who knows what might happen within the next 3 years...


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## Ed Rempel (Apr 4, 2009)

Hi Wonger,

Here are my suggestions:
1. Try to get the 20% down. The savings from CMHC are huge. Consider an RRSP loan (as was suggested) with the Home Buyer's Plan, or apply for an unsecured credit line.
2. Don't fall into the "5-year fixed mortgage trap"! Don't ever lock in longer than you expect to be in your current home. Try a 1-year mortgage which you should be able to get about 2.35%.
3. Starting Smith Manoeuvre may not make sense if you are buying a house in 3 years. You may need the equity to get the 20% down on your house. The Smith Manoeuvre can have significant long term benefits, but it can be risky if you don't know how to invest effectively. If you need all the equity, you may have to either wait or just do ordinary leverage.
4. Consider staying in the condo longer. When you consider all the costs to buy and sell, plus the cost of moving and setting up your home the way you want, it is unlikely you will make any money unless you stay for at least 5 years. In general, don't buy a home unless you expect to stay at least 5 years.

Ed


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