Q: We have two mortgages on two separate properties:
No. 1: $100,000 at 2.5% fixed that comes up for renewal in Feb. 2017
No. 2: $160,000 at 2.94% fixed that comes up for renewal in Feb. 2018
Last year my husband took out a home equity line of credit (HELOC) on the first home for $150,000 (for business use). Eventually we opted to transfer this debt into a secured loan of $100,000 with a hybrid rate—a fixed rate portion at 1.99% (up for renewal in Oct 2017) and a variable rate at 2.7% (prime+0%). Now he is ready to pay the monthly payment as well as make an extra $1,000 to $2,000 per month payment. We just don’t know what debt we should tackle first? Every time I use a calculator, it shows that I save the most if I pay down the debt with the lowest interest rate, but everything I read tells me to pay off the debt with the higher interest rate first. Help!
— Julie M., Toronto
Robert McLister, mortgage planner at intelliMortgage and founder of RateSpy:
When deciding which of the two debts to pay off quicker, always choose the one with the higher interest rate, unless there’s a special consideration. The one consideration for not following this general rule of thumb is whether the loan is used solely for the purpose of generating business income and meets Canada Revenue Agency (CRA) guidelines for interest deductibility. In that case, it may be wiser to pay the non-deductible loan even if it’s at a lower interest rate. In your case, accelerate payments on property No. 2’s higher-rate mortgage, especially if the interest is non-tax deductible.
Nawar Naji, mortgage broker with Mortgage Architects:
Paying off the highest interest first makes sense, however it has be tax efficient. In your case, paying off the 2.94% mortgage first makes sense assuming it’s a second home and not an investment property; once this is paid off, put your money towards mortgage No. 1 (of $100,000 at 2.5%) since neither debt is related to the business. The interest on the $150,000 business loan is a tax write-off, so pay that last. Consult with your accountant who can confirm this advice.
Nawar Naji is a licensed mortgage broker with Mortgage Architects in Toronto, Ontario. He has been brokering since 2007, helping clients finance homes and investment properties.
Steve Garganis, mortgage broker and editor of CanadaMortgageNews.ca:
For the record, I don’t like hybrid mortgages. I find these are horrible products that often handcuff the borrower—keeping you tied to the bank where you have that mortgage debt. Renewal dates for the two portions of your mortgage never end up matching, so negotiating a new mortgage term and rate tends to put you at the mercy of your lender. This is, in part, because your lender knows you can’t leave without paying a penalty.
Steve Garganis is a mortgage broker at Mortgage Intelligence and editor of CanadaMortgageNews.ca.