Episode 96: Should You Refinance Investment Properties to Pay Down Your Primary Home Mortgage? [Secret Sauce Ep16]

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Have you ever wondered how you can refinance your real estate and tap into the hidden equity to build wealth while minimizing taxes?

In today’s real estate market, many property owners are sitting on significant untapped potential in their investment properties. Whether you’re facing rising mortgage rates or simply looking to accelerate your wealth-building journey, learning how to strategically refinance and leverage your assets can be the key to unlocking financial freedom. The challenge is knowing when and how to pull that equity in a way that maximizes your benefits while minimizing the cost.

This episode breaks down real-life strategies for pulling equity from your real estate properties and reinvesting it wisely. If you’re looking to reduce the burden of your primary mortgage, minimize taxable income, or open up new avenues for investment, the tips shared will give you practical steps to make your money work harder for you without unnecessary risks.

• Learn how to restructure and/or refinance your property finances to unlock equity and reduce tax burdens.
• Discover strategies to effectively manage mortgage rates and refinancing opportunities.
• Explore the power of permanent insurance as a long-term asset-building tool.

Tune in now and discover how you can unlock hidden opportunities in your rental properties to accelerate your path to financial independence!

Resources:

• Corporate Investment Income Taxes 2024 [Ernst & Young]
• Corporate Income Tax Rates 2024 [TaxTips.ca]
• Like this short, “Wealth Secret Sauce” Episode? Tell us in your rating and review on Apple Podcasts. 
• Dig into our Ultimate Investment Book List
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you take the next step in your Canadian Wealth Building Journey!
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX.
• Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon for your Ontario Mortgage needs so he can share some options.

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting corporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

Have you ever wondered how refinancing your mortgage or leveraging rental property equity could accelerate your path to Financial Independence and early retirement (FIRE)? In this episode, we explore how savvy real estate investors can take advantage of current mortgage rates, manage interest rates, and use refinancing to boost passive income. You’ll learn how to minimize income taxes, navigate Canadian investing strategies, and incorporate estate planning to protect your assets, all while creating a roadmap toward financial freedom. Tune in to discover how these strategies can help you achieve FIRE and maximize your wealth!

Watch Now!

Transcript:

Hey. Hey there. Canadian Wealth Secrets Seekers. I am here with another quick hit secret sauce episode on a Friday, and we’re going to dig into a situation based on a listener who reached out and who had some questions about their scenario and they were looking for some next steps. I thought this would be a really great one, given some of the recent episodes around the Smith Maneuver and around the idea of using leverage, good leverage, and how you can best arrange that leverage to maximize your actual asset growth.

But also minimize taxation along the way. So really, we’re talking about efficiency here. All right. So let’s dig in here. We’ve got an email. This is in response to some questions I had asked. This individual is married, has two children aged four and seven, and I asked a little bit about their situation. They are both t for income earners, so no business here although they do own some rental properties.

So I would argue that is a business, but it is not corporately held. It is actually held personally. In this particular case, his spouse makes about 125, $130,000 a year and he makes 120,000 per year. So about $250,000 of household income. They own their primary residence with a value of about $1.7 million, and they have a mortgage of about $1.3 million on that home.

Now, some other details that are important here is that they actually did a refinance and they also have a home equity line of credit in order to fund the purchase of some rental properties. The one rental property is a condo in Burnaby. It rents for 2550 a month and there’s a townhouse that rents for 35, 90 per month.

And in those cases there’s actually a good chunk of equity in both of those rental properties. The condo is worth about $650,000. We can see here and there it’s a $206,000 mortgage. And on the townhome, the townhome is valued at about 1.25 million and has a mortgage of about $721,000. So the question here is whether they should be trying to shift the equity from the rental properties to their primary residence.

So that’s a great question. And there are some questions and wonders I still have that I’m going to be curious about here and of course, this is not financial advice. This is some ideas and perspectives to consider in this particular scenario. Now, on the onset, I would argue that I would like to have more equity in my primary residence than I would in my rental properties.

Now, that might seem counterintuitive to some people because you’re thinking wouldn’t that affect the cash flow of the rental properties? And you’re right, it actually does. But remember, you know, what is the worst cash flowing property that you own? It is your primary residence, right? So you don’t earn any money on this thing and you don’t get any tax incentives from this particular property.

So in this case, out of the box, I’m going to say yes. In a perfect world, we’re going to actually try our best to get some of this equity from these rental properties into the actual primary residence. But that’s not always easy. And there’s some things that we need to consider. So for this in particular scenario, what I would love to know is, first and foremost, does that primary residence mortgage, that $1.3 million balance, does that also include the home equity line of credit?

My assumption is yes, because right now that would put them at about 76 and a half percent loan to value, meaning they have about 76% of their equity is leveraged. Okay. In that property, there is only about 25%, 24% of that property has equity in it. And typically when you’re refinancing a property like they had said they’ve done, they will only be able to refinance up to 80%, even though when you go to buy your first home, you might be able to put 5% down or 10% down when you go to refinance, the lenders actually want you to keep at least 20% into that property, or at least as of this recording.

Now with the rental properties, the thing that I would love to know is what are the terms of these mortgages? Because out of the box, typically when you are getting a mortgage on a rental property, you are typically going to pay a higher interest rate than you might on your primary residence. The other thing that’s really important for us to think about is I don’t know when these mortgages were put into place.

So, for example, if on their primary mortgage, they locked in to a five year fixed rate somewhere around 2020, 2021 when rates were at all time, or at least 30 year lows, they may have gotten a sub 2% interest rate, which is pretty awesome. It makes it really tough for you to sort of decide whether it’s worth actually paying that down quickly when we know inflation is actually above that 2% rate.

So really the debt that you’re holding is actually, you know, almost in a way you’re making money by holding that debt because dollars are losing value faster than the cost of that debt in that particular case. So I’d really like to know what are the interest rates. I’d also like to know how much of that 1.3 million on the primary home is actually a fixed rate mortgage, or maybe it’s a variable rate mortgage.

What are the terms there? But then also what percentage or how much of that balance is on the home equity line of credit? So the other thing I know about the home equity line of credit is that that rate is going to be variable and it’s going to be based on prime. And it’s probably going to be something like prime plus 0.5% or prime plus 1%.

Some people might be lucky enough to just get prime, but ultimately we know prime rate now is at about 6.45%. Now that we’ve had the recent rate cuts from the Bank of Canada, that number may continue to go down. So the question then becomes is how much of that primary mortgage is actually on that line of credit and are we already writing off the line of credit portion?

Because if you borrowed against your home equity line of credit in order to make an investment, we know from all of our Smith Maneuver episodes for those who haven’t listened to those episodes, we have episode 44, 81, 87 and most recently Episode 90, where we unpack the Smith maneuver. The idea is that if we borrow against our primary residence on a separate portion or on a separate line of credit, that’s easily trackable, we can actually write off the interest there so that higher interest rate might not sit, might not be as high as it really is when you actually account for the fact that you’re writing it off against your income.

All right. Now with those unknowns, we now need to talk a little bit about these actual investment properties. So the condo actually only has about a 3130 2% loan to value. Currently, 650 is the value and only 206 is outstanding. So there’s a lot of equity available there. I love the idea of pulling that equity out, but at what cost and what are we going to be changing in order to do so?

So for example, if I’m able to refinance that cottage or that cottage, that condo and actually take that and get a decent rate, maybe there’s actually a win on the rate arbitrage there. It could definitely be worth it. But if I’m breaking the mortgage, maybe it’s a high interest rate mortgage, six and a half percent or high sixes.

And when you break the mortgage, the lender’s going to be essentially asking you to pay them a certain number of months interest, three or six months, or what they call an interest rate differential. Basically, the difference between what they could get on a new mortgage when they when they lend that money out again versus what they were receiving from you.

So these are things we have to factor in. How much is this going to cost us? If these two mortgages are coming up for renewal anyway, then it’s just going to be some legals, which is not very costly and could definitely be worth exploring regardless of what you end up doing with the money that you pull out of those properties.

In my world, I would much rather pull equity out of my rental properties and repurpose those funds for other investments or potential debt paydown. In this particular case, on the primary residence, it may make sense, but we want to make sure that it makes sense and it is a good cost benefit analysis that’s been done on the townhome we have about just just south of 60% loan to value, which means there’s a good 20% left there that could be pulled out.

And ultimately, if we refinance both these properties and it makes sense to do so, you could essentially be freeing up somewhere between 400 to $600000. Why give that range, as I’m giving you essentially 70% loan to value to 80% loan to value on both properties, noting that you’re going to have to get appraisals done as well, which is also another cost rate.

It might be 400, $500 for an appraisal and they’ll tell the lender how much that property is worth currently based on their opinion and based on the market analysis. And that’s going to impact how much you can actually pull from these 

properties. So the question really here that I have is what are these current rates? What are the current terms and how costly is it going to be for us to refinance these properties at this time?

Does it make sense to just wait until those terms are up? Maybe it’s up in three months or six months, or is it something that actually makes a significant difference now in order to take more of that money that’s locked up in these rental properties, in order to pay down some of that mortgage? If my primary mortgage is a large mortgage amount and it has a high interest rate, it could very well make sense for them to refinance now and to try to essentially create more tax deductible interest on those rental properties and to pay down some of that primary home.

Now, my hope here is that that home equity line of credit is really Vance double meaning as they pay down the actual traditional mortgage portion on the primary home that it’s going to open up more space on the home equity line of credit. And the beauty here is that you could do that and you could leave it there as an opportunity bucket, or you can immediately be pulling that money to leverage this Smith maneuver like we’ve discussed in recent episodes.

Now, if they do decide that they’d like to do some of this refinancing and they want to essentially repurpose some of the equity from these investment properties, there is one thing that I’m going to, you know, sort of advocate that they at least consider here, and that is the use of permanent insurance. As many of you know, your primary home can rise in value.

It can infinitely grow over time. And currently based on our C.R.A. rules or our Income Tax Act, you will not be charged any capital gains on that primary home. However, your condo and your townhome in this case, these investment properties will experience capital gains over time as these properties rise in value. So the goal here is that you’re going to try to pay as little tax on the rental income as possible, but over time, your tenants are actually helping you to pay down this mortgage.

And at the same time, the properties are actually appreciating in value over time as well. While the problem here is that at some point in the future, those assets will essentially create or crystallize a capital gain either through the sale of the properties when you choose to move on or unofficially or I guess, you know, without you asking, sometimes we are forced to move on to the next world and those capital gains taxes may be triggered at that time.

So the goal here is how do we incorporate a tax minimization strategy that doesn’t restrict any of your money, meaning it doesn’t cost you any money, it doesn’t have an opportunity cost to it, or at least one that’s only very minimal in the first couple of years, so that you can essentially be buying more assets, creating more of a tax burden for yourself, but at the same time having the solution to that tax problem at the very same time.

And that’s where permanent insurance comes from. So my secret sauce for this particular episode is in general pulling equity from rental properties and potentially paying down the primary mortgage with a UN or non tax deductible interest I would argue is a good move. However, we do need to do the analysis, the cost analysis to see interest rates, how they affect how breaking mortgages affects things, and what we intend to do with that capital.

If they do decide that refinancing these condo, this condo in this townhome, these two investment properties does make sense. I would be advocating for them to explore where does a permanent policy fit in along this route? I would probably be taking that money out and starting to fund some into a permanent policy to start building that opportunity bucket.

And the remainder could then be put on the primary mortgage and open up more available line of credit room on that home equity line of credit between the permanent policy and the cash value that they build up over time, as well as the increasing home equity line of credit room that they have available to them. They’ll have two opportunity buckets that they can use for leverage to purchase their very next asset.

Be it in real estate or in any other asset class that they choose. So hopefully you found this helpful. And of course, hopefully our wonderful listener who reached out to us with this question find that this video is helpful. And of course, if you’re listening on the podcast, hopefully I’ve described it well enough for you to follow along.

If not, feel free to hit us up on YouTube, hit that subscribe button and leave us a comment over there so that you can follow along with some of these numbers. All right, my friends. That’s it for me for now. If we can help you out with any other next steps on your personal or corporate wealth building journey, I encourage you to reach out to us over at the Canadian Wealth Secrets dot com forward slash discovery page where you can book a free discovery call, where we can go through your specific scenario and help you to map out your very next step in your wealth building journey.

All right, friends, we’ll see you next time

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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