1. How important is interest rate to your success as an investor?
Many investors call their lender and ask, “What is your best mortgage rate?”
While reducing your cost of lending, including lowering the interest paid on your mortgage is important, there is more to evaluate when it comes to arranging a mortgage for an investment property.
• Prepayment privileges
• Prepayment penalties
• Cash back and cash-back clawbacks
• Value-add services and quality of mortgage advice provided by your lending advisor
• Low lender fees (if applicable)
Your investment strategy and objectives should drive what you are looking for in a mortgage.
Let’s assume you’re buying a cash-flowing investment property to build equity and to possibly re-finance at some point in the future.
You call up your lending advisor and ask, “What’s your best five-year mortgage rate for a variable rate mortgage?” and you get the answer prime -90, beating an earlier quote you received by five basis points. You then decide to move forward based on this great rate.
If you have not enquired about and paid attention to the prepayment privileges in this case, you may be dealing with a product with a deep discounted rate but with restrictions on re-financing including your ability to do so during the mortgage term.
You could unintentionally limit your ability to effectively execute on your investment strategy or incur costs that could have been avoided in the first place.
It is not all about the rate. It is about the right mortgage and working closely with a lending advisor who understands your financial situation, portfolio objectives and the types of investment strategies you are using to achieve those objectives
2. Should you pay down your mortgage fast on your income property?
According to recent research by the Canada Mortgage and Housing Corporation (CMHC), more Canadians are planning on paying down their mortgages sooner. Three quarters of the participants in the CMHC research felt that it was “very important” to pay off their mortgages as soon as possible and 39 per cent had a set payment higher than required.
So as a real estate investor, should you consider doing the same for your investment properties?
We believe that reducing your cost of lending (through lowering your interest cost) is something to consider regardless of the investment strategy you are following. This will help put more cash towards building equity in your investment property.
But should you accelerate, top up your payments and/or shorten you amortization?
We believe that the answer depends on your investment objectives and the type of strategy you are using to attain those objectives. For example, if you are using a short-term flip strategy, then focusing on paying your mortgage down is not the best use of funds.
If you are using a buy-and-hold strategy, then paying down your mortgage faster (through rental income) will help support that objective despite the short-term effects on cash flow.
Alternatively, if your focus is on maximizing short-term cash flow from your rental property, then a mortgage with stretched amortization, a low interest rate and regular payments, combined with deductible expenses, will help achieve that.
The implications to your total return on investment should be also considered as part of evaluating whether or not paying down your investment property mortgage faster is worth doing.