Real Estate

Downsizing Mortgage Question

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  • Sep 18th, 2018 2:46 pm
Sr. Member
Mar 23, 2008
861 posts
233 upvotes
Scarborough

Downsizing Mortgage Question

Hey guys,

Just wanted to pick some of your brains here.. Here's the scenario my parents could be facing next year and had a couple of questions about obtaining a mortgage on an investment property.

- Both parents are retired/unemployed = no income other than OAS/Pension
- Current/Primary house is paid off and valued around 1 Million

The kids are out of the house and looking to downsize to a condo, they'd like to have a piece of investment property to generate equity at the same time. If my parents were to buy a condo around 600K as their primary residence and purchase another condo with a 20% downpayment as a rental property, would the bank loan the remainder 80%?

The goal of this is to free up some equity and have cash in pocket.

Thanks
6 replies
Deal Addict
Jan 1, 2017
1826 posts
1876 upvotes
01s0uljah wrote: Hey guys,

Just wanted to pick some of your brains here.. Here's the scenario my parents could be facing next year and had a couple of questions about obtaining a mortgage on an investment property.

- Both parents are retired/unemployed = no income other than OAS/Pension
- Current/Primary house is paid off and valued around 1 Million

The kids are out of the house and looking to downsize to a condo, they'd like to have a piece of investment property to generate equity at the same time. If my parents were to buy a condo around 600K as their primary residence and purchase another condo with a 20% downpayment as a rental property, would the bank loan the remainder 80%?

The goal of this is to free up some equity and have cash in pocket.

Thanks
How old are your parents? Another option to maximize cash in hand could be to rent an apartment rather than buy and invest the proceeds in the stock market.
Deal Fanatic
Jan 15, 2017
5749 posts
6121 upvotes
Ottawa
Your parents are retired and have no other income other than OAS/Pension. What pension? Is it CPP or a private pension? What is their current income level? Is it enough? Could they benefit from additional income right now? Taking a portion of the proceeds from the sale of the house and investing it in a condo to build equity at this point seems ludicrous. It basically means that your parents have no need for the money used to purchase the condo, the down payment and closing costs. It also means that your parents are taking on the risks of a rental at a time when they may not be able to financially recover from any setbacks. Finally, why build equity? When will they realize the equity?

If their goal is to truly free up some money and have cash in their pocket, sell the house and buy a condo. Any proceeds left over could be thrown into a TFSA and invested conservatively and safety and used to fund this stage of their life.
Deal Fanatic
User avatar
Jul 14, 2008
8312 posts
1901 upvotes
Ontario
01s0uljah wrote: Hey guys,

Just wanted to pick some of your brains here.. Here's the scenario my parents could be facing next year and had a couple of questions about obtaining a mortgage on an investment property.

- Both parents are retired/unemployed = no income other than OAS/Pension
- Current/Primary house is paid off and valued around 1 Million

The kids are out of the house and looking to downsize to a condo, they'd like to have a piece of investment property to generate equity at the same time. If my parents were to buy a condo around 600K as their primary residence and purchase another condo with a 20% downpayment as a rental property, would the bank loan the remainder 80%?

The goal of this is to free up some equity and have cash in pocket.

Thanks
IMO, If I could have roughly $400K liquid (or whatever it is), and still have a place to live fully paid for (the new condo), I'd rather invest in the market than buy a property. Good solid dividend paying stocks. But my philosophy is different, in that I don't mind investing in the stock market in old age because it's the best hedge against inflation (in which I care more about the income generated than the current market price of a stock). I'd rather take the additional income 400K would generate that managing a rental.

Will the bank offer you a loan? I doubt you'd have much difficulty. When you say 20%, are you suggesting 400K is the 20%, or will that be smaller (and still hold some back)? Are the kids going to manage the rental or the parents? Managing a rental can be a worthy endeavour, but do the math/calculations where you intend to buy to see if it makes fiscal sense (versus, say, investing in dividend paying stocks).

You could also do both, some in the market and still have enough for a down payment on an investment property.
Sr. Member
Mar 23, 2008
861 posts
233 upvotes
Scarborough
Sounds like investing in the market is the advice here. My parents have limited to no knowledge of the market and has only really invested in extremely safe mutual funds that have yielded low returns. I think at this stage in their lives, they would not be taking any risks.. meaning lower returns.

They've believed in the real estate market their whole lives which is why they would like to continue owning property as their primary investment.


@skeet50 Only source of income is OAS/CPP, no other source of income in terms of private pension.

To answer @onlineharvest question. 400K would not be the 20% (That would be a pretty huge house as a rental property). Let's say.. they buy a 600K condo as their primary home outright. Then purchase another 500K condo with 20% down (100k), leaving 300K in cash in their pockets. And then rent out the second condo as investment rental property.

Thanks
Deal Fanatic
Jan 15, 2017
5749 posts
6121 upvotes
Ottawa
Thanks for the update. So your parents are house rich and cash poor. I would never recommend that they invest in real estate at this point of their lives. Buy a condo for themselves and then invest the remainder in HISA or GICs. I would suggest that they make a plan to spend some of the money. $400K over the next 10 years is $40K extra in income for them. That would be massive for them and could make a big difference in the quality of their life.
Sr. Member
Mar 23, 2008
861 posts
233 upvotes
Scarborough
skeet50 wrote: Thanks for the update. So your parents are house rich and cash poor. I would never recommend that they invest in real estate at this point of their lives. Buy a condo for themselves and then invest the remainder in HISA or GICs. I would suggest that they make a plan to spend some of the money. $400K over the next 10 years is $40K extra in income for them. That would be massive for them and could make a big difference in the quality of their life.
Thanks for the reply! My parents are the old school type generation that doesn't like to spend money on themselves, don't like going on vacations and don't like buying nice things..

My brother and I have encouraged them to be comfortable and to enjoy their retirement. With the addition of my newborn nephew recently, they're in a position where they are contemplating a move closer to Markham(currently in Scarborough) to be accessible to Stoufville year long.

Ideally, trading for another house in Markham would be nice. But prices in Markham are pretty high to trade and wouldnt give them any cash gain.

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