Real Estate

Advice upon mortgage renewal

  • Last Updated:
  • Sep 13th, 2017 1:49 pm
[OP]
Sr. Member
Dec 19, 2009
601 posts
85 upvotes
Ottawa

Advice upon mortgage renewal

Quick overview of situation:
- principal residence mortgage up for renewal in June 2018. Currently on a fixed rate at 2.09%. $300k left. House valued at approx $430k
- rental property mortgage at 2.5% (variable) with about 2 years left. $220k left. House valued at approx $315k.

With mortgage rates increasing steadily I was thinking of pulling equity from my rental property to pay down my principal residence. Rationale is that when we renew our mortgage in June the rate will be significantly higher than the current 2.09% meaning our monthly payments go up. I don't mind paying more interest on the rental property because I can write off that expense.

So essentially make a lump sum payment on my principal residence (right before renewal) with money pulled from my rental property. I presume I'll have to refinance my rental property to pull that money?

Any other recommendations to maximize the benefits of being able to write off rental property interest?

Just a note - this is not a must as we can easily make our payments as the rates increase but just trying to make a wise decision.
9 replies
Member
Jun 15, 2009
219 posts
50 upvotes
Victoria
If you pull equity from your rental and apply it against your principal residence then that portion of the interest is not deductible. Only rental expenses are deductible. So say you take out 44k of equity from the rental for personal use, then 20% of the interest on the rental is not deductible. Hope this makes sense.
[OP]
Sr. Member
Dec 19, 2009
601 posts
85 upvotes
Ottawa
honsolo wrote:
Sep 10th, 2017 5:48 am
If you pull equity from your rental and apply it against your principal residence then that portion of the interest is not deductible. Only rental expenses are deductible. So say you take out 44k of equity from the rental for personal use, then 20% of the interest on the rental is not deductible. Hope this makes sense.
Not sure what you mean in bold above. That 44k would go directly against the principal portion of the mortgage on my principal home.
[OP]
Sr. Member
Dec 19, 2009
601 posts
85 upvotes
Ottawa
I did some reading on "cash damming". Is this essentially what I'm looking to do?

Advice is welcome as this is all new to me.

Thanks!
Deal Addict
Feb 9, 2009
4197 posts
1929 upvotes
mikek33 wrote:
Sep 10th, 2017 1:48 pm
Not sure what you mean in bold above. That 44k would go directly against the principal portion of the mortgage on my principal home.
What he is saying is if you take money out of your rental to apply to your OWN HOME then it is NOT TAX DEDUCTIBLE.

If you pulled the money out to renovate your rental, etc then it is... if you take the money to apply to your own personal residence the interest on that 44k is NOT DEDUCTIBLE.
Deal Addict
Nov 22, 2015
2082 posts
1113 upvotes
mikek33 wrote:
Sep 10th, 2017 1:49 pm
I did some reading on "cash damming". Is this essentially what I'm looking to do?

Advice is welcome as this is all new to me.

Thanks!
It's not going to work for you.... Cash damming is the other way around.... Converting personal debts into an investment loan.

I.e. you need to take equity from your own home and use it to invest in the rental... Not the other way around.
Member
Jan 15, 2017
477 posts
280 upvotes
mikek33 wrote:
Sep 10th, 2017 1:48 pm
Not sure what you mean in bold above. That 44k would go directly against the principal portion of the mortgage on my principal home.
Whether interest on the borrowed money from the rental is tax deductible depends on if you use the borrowed funds to generate investment or business income. As you are using it to pay down the mortgage on your personal home, it will not be tax deductible.
[OP]
Sr. Member
Dec 19, 2009
601 posts
85 upvotes
Ottawa
Sanyo wrote:
Sep 10th, 2017 1:56 pm
What he is saying is if you take money out of your rental to apply to your OWN HOME then it is NOT TAX DEDUCTIBLE.

If you pulled the money out to renovate your rental, etc then it is... if you take the money to apply to your own personal residence the interest on that 44k is NOT DEDUCTIBLE.
Okay. I think my confusion was in that I wasn't talking about interest on the actual 44k pulled from the rental. I was presuming a full refinance so there shouldn't be any interest associated with pulling that equity. I'd likely pay an appraisal cost but it's not a HELOC...it's just cash equity.

Once that money is put towards the principal portion of my principal residence I'll inevitably be paying less interest because the mortgage owing will be lower.

The principal amount on my rental will now be higher since the principal left on that mortgage will increase once the equity is pulled. But I'm okay with that because I can write that interest off.

Am I still missing something? Are you saying that somehow I have to calculate the difference in what I would have been paying in interest on rental property prior to pulling the 44K versus after?

Maybe I'm making this too complicated but that's why I'm asking the question.

P.s. Who is down voting this thread?! Should I have posted in the mortgage rates thread? Really don't see an issue with asking for some clarification...clearly I'm not well versed in this stuff hence why I'm asking the question.
Thanks to those who've chimed in so far.
Deal Addict
Feb 2, 2014
3744 posts
658 upvotes
Toronto
mikek33 wrote:
Sep 10th, 2017 3:41 am
Quick overview of situation:
- principal residence mortgage up for renewal in June 2018. Currently on a fixed rate at 2.09%. $300k left. House valued at approx $430k
- rental property mortgage at 2.5% (variable) with about 2 years left. $220k left. House valued at approx $315k.

With mortgage rates increasing steadily I was thinking of pulling equity from my rental property to pay down my principal residence. Rationale is that when we renew our mortgage in June the rate will be significantly higher than the current 2.09% meaning our monthly payments go up. I don't mind paying more interest on the rental property because I can write off that expense.

So essentially make a lump sum payment on my principal residence (right before renewal) with money pulled from my rental property. I presume I'll have to refinance my rental property to pull that money?

Any other recommendations to maximize the benefits of being able to write off rental property interest?

Just a note - this is not a must as we can easily make our payments as the rates increase but just trying to make a wise decision.
Keep in mind 2 things:

1-There are costs associated with a refinance (legals, appraisal and discharge).
2-The best refinance rates are higher than the best renewal rates.

Either way, the interest should be tax deductible, as the purpose of the funds is for the investment property. But you have to do the math...are the extra costs and higher rate worth the refinance?

PS - I just reread your post...I think you mixed it up. You said that your owner-occupied mortgage is up in June, but then said you will be refinancing the rental. So are you saying you're going to pay the penalties and refinancing costs to do this? That' doesn't make sense. Also, rental rates are higher than owner-occupied rates, so it doesn't make sense.
Kevin Somnauth, CFA
Mortgage Agent and Real Estate Sales Representative
Member
Jun 15, 2009
219 posts
50 upvotes
Victoria
mikek33 wrote:
Sep 10th, 2017 6:31 pm
Am I still missing something? Are you saying that somehow I have to calculate the difference in what I would have been paying in interest on rental property prior to pulling the 44K versus after?
YES THAT IS EXACTLY IT. You cannot refinance and pull equity from your rental and use it for your personal house, a car, a vacation, etc, and expect to be able to deduct ALL the interest. You can only refinance the rental and use the proceeds from it to either upgrade/repair your current rental property, OR purchase ANOTHER rental property. So if you increase the mortgage on your rental property by 20%, then from that point forward, you can only deduct 80% of the interest for tax purposes.

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