The key component missing from many mortgage products available today that would make them attractive options for investors is a re-advanceable home equity line of credit
These more advanced products make money available on a HELOC as soon as a payment is made towards the amount owing on the mortgage.
This core function enables investors to put this money towards the down payment on their next property without having to re-apply to use the built-up equity in the property.
The re-advanceable HELOC products typically enable an investor to finance the down payment for about three properties, depending on the amount of equity built up on their principal residence.
There are a number of banks that offer products that can consist of fixed rate and/or variable rate and HELOC portions. Three superior products of this nature include: National Bank’s All-In-One, Scotiabank’s STEP (Scotia Total Equity Plan) and FirstLine Mortgages’ (owned by CIBC) Matrix Mortgage Suite products.
A re-advanceable line of credit is the best way to continuously access equity within your properties, but if you plan to use the credit for both personal and investment purposes, the All-In-One or STEP products are a good option as they make tracking tax-deductible investment interest easier thanks to the multiple account components contained within these two offerings.
This tracking component is only essential, however, when the HELOC funds are being used for both personal (such as a dream vacation or post-secondary school education) and investment use. While it is possible to track mixed-use portions using the Matrix product, all calculations must be completed manually, which can be quite onerous.
Comparing three top re-advanceable products
The Matrix mortgage is the most basic of the three products listed above. It consists of only two components – a mortgage portion where you can choose the term (eg., three-year, five-year, etc), amortization (ie, payments spread out over a duration up to 35 years) and type (ie., fixed or variable) and a HELOC component.
Up to 80% of the equity built up in the property minus what you owe on your mortgage can be accessed through the HELOC portion. As with any re-advanceable product, as the mortgage is paid down, the HELOC increases without having to re-apply to use the equity in the property. And you only pay interest on the portion of the HELOC that is being used.
The main setback to this product is that if you use the HELOC for both personal and investment purposes, you must manually track your spending, since the interest on your investment portion can be tax deductible, whereas your personal use funds are not.
One major bonus this product has is that you can also get a Matrix mortgage on an
investment property in addition to the initial one on your principal residence if you have at least 20% equity in the investment property. It’s important to note, however, that the maximum number of Matrix mortgages is capped at two – one for your principal residence and one for an investment property.
The STEP product can do everything the Matrix can do and more as it can include up to three components on the mortgage side and three for the HELOC. The mortgage portion can have a mixture of terms, and fixed and/or variable rates. For example, you can place a portion of the mortgage in a five-year fixed, some in a five-year variable, and the remainder in a one-year fixed. And the HELOC can also be split into three portions to track both personal and investment expenditures separately – where all three could be personal, all three could be for investment purposes, or any other possible mix between the two uses to a maximum of three different components.
Like the Matrix mortgage, the STEP product can also be used on your investment property as well as initially on your principal residence. There is, however, no cap on the number of properties for which you can have a STEP mortgage as long as you qualify.
The All-In-One mortgage is the most advanced of the three offerings as it can be split into up to 99 components, although few people require this many options.
The major bonus to this product is that it also has a bank account component. As such, your paycheque goes directly into an account and is used to automatically pay down your mortgage, which saves interest. Money can also be set aside in a sub-account for personal use. And because you can have multiple sub-accounts, you can easily have one sub-account for each investment property.
The downfall with this product, however, is that, unlike the Matrix or STEP offerings, you can’t have an All-In-One on your investment property – just your principal residence. While you can use the HELOC on your personal residence for down payments on investment properties, having the option to also have a re-advanceable portion attached to an investment property can give you automatic access to equity in that investment property.
Finding more capital
Regardless of which re-advanceable product you opt for, sooner or later you’re going to run out of capital for down payments if you’re building a large investment portfolio – most often occurs after the third property has been purchased.
This is where the use of more sophisticated strategies such as vendor take-back (VTB) mortgages becomes essential for real estate investors with ambitious purchase goals.
A VTB scenario often occurs when an investor is looking to purchase multiple properties from a single seller, and/or when the purchase price is above what a financial institution is willing to lend for the purchase.
For instance, if one seller is looking to offload 17 townhouses to one purchaser in a package deal, he or she may be willing to hold a VTB mortgage on the properties. Let’s say the total value of the properties is $2 million (each property is worth about $118,000), and the bank is willing to lend $1.5 million to the purchaser. The investor has $200,000 for a down payment, but is $300,000 short of the money required to close the deal. The seller decides to hold a $300,000 VTB mortgage on the properties so that the deal will go through.
A VTB is really a second mortgage on the properties because the payments are made the same way as any mortgage, says Boughen. But where the interest on a typical second mortgage is likely to be in the double digits, the VTB mortgage holder may be willing to negotiate a lower interest rate with the purchaser of, say, prime plus two per cent (which would be 4.25% in current rate terms) paid out over an agreed upon period of time.
This may be an attractive offer for the seller because he or she wants the properties to sell as a package and understands that it’s not an easy task for someone to have the required down payment for such a large purchase. In a VTB scenario, the seller makes money by offloading the properties as well as on the outstanding mortgage amount via interest.
Regardless of the strategies you use to acquire the required capital to make down payments on your investment properties, it’s essential to fully understand the pros and cons of each option by talking to other investors as well as real estate and financing specialists.
Re-advanceable mortgage quick facts:
Consists of both a mortgage and a home equity line of credit component
More money automatically becomes available on a home equity line of credit as soon as a payment is made towards the amount owing on the mortgage
Up to 80 per cent of the equity built up in the property minus what you owe on your mortgage can be accessed through the home equity line of credit
Home equity line of credit can be used for down payments on properties without having to re-apply to use the built-up equity in the property
Equity can be used through the home equity line of credit for both personal and investment use
The interest on the investment portion of the home equity line of credit can be tax deductible
You only pay interest on the portion of the home equity line of credit that’s in use
Breakdown of benefits/considerations:
FirstLine Mortgage – Matrix Mortgage Suite
Tracking of personal use versus investment use must be completed manually for investment property interest tax-deduction purposes
Basic product that consists of only two components – a mortgage portion where you can choose the term, amortization and mortgage type, and a home equity line of credit
Maximum number of Matrix mortgages is capped at two – one for your principal residence and one for an investment property
No bank account option
Scotia Total Equity Plan (STEP)
Easy to track personal use versus investment use for investment property interest tax-deduction purposes
Both the mortgage and home equity line of credit components can be broken up into three portion, allowing for greater flexibility
No cap on the amount of STEP mortgages you can obtain as long as you qualify (ie, principal residence and multiple investment properties)
National Bank All-In-One
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