Q: I have been posted to a new location where housing is expensive. I still have a $50,000 mortgage on my home in the old location as well as some smaller payments to other creditors. Here’s the problem. In my new location, either renting a place or buying a property are both very expensive and I don’t have the cash to make a down payment. And I’m still making my mortgage and other payments for my house in the old location. Problem is, my salary is not enough to cover both (mortgage/renting a new property + mortgage on the old).
As well, due to the bad housing market where the home I own is, I haven’t been able to sell it. So I can do one of two things: lower the price and sell the home I own OR reduce my mortgage payments on this house. Is it possible to reduce my mortgage payments and how would I do this? Also, do you think this would be the best option, as I’d like to eventually have my family here in the new location with me. Any advice?
– Brennan T.
A: Hi, Brennan. Yes! I do have some advice. But first, I’d like to lay out a few options for you.
The good news is that you have options. As you rightly point out, you could sell your current home at a reduced list price but selling an asset in a down market and buying in a more expensive market doesn’t sound like great personal finance advice.
Two paths to refinance
Instead, you could refinance your current home. This option lets you do one of two things: It can reduce your monthly mortgage payments or it can give you some cash up-front, for a down payment on a home in the new city.
To help illustrate, let’s assume your current home was appraised at fair market value for $350,000 (a drop of $50,000 from six months ago). We’ll also assume there’s two years left on your current variable-rate mortgage debt of $125,000. Current mortgage rules allow you to borrow as much as 80% of your home’s equity, minus any debt owed.
Based on these rules, you could refinance in one of two ways. The first is to keep your current mortgage debt but refinance at a lower interest rate. However with such low mortgage rates these days, chances are you won’t be saving all that much per month to make this option worthwhile.
Another option is to refinance and take on the maximum possible mortgage debt. In our example, this would mean increasing your mortgage debt to $280,000. Your monthly mortgage payments would jump from roughly $625 per month to $1,290 per month, but it would also put $155,000 in your pocket ($280,000 minus $125,000 in mortgage debt on the current home). This money could then be used as a down payment on a new home in the new city. This option, however, only makes sense if you know you can find good, reliable tenants willing to pay at least $1,400 a month.
Keep in mind, the refinance strategy comes with a few caveats. You will be required to pay a penalty for breaking your current mortgage term. This fee can be as little as three-months’ worth of interest (on variable-rate mortgages) or quite high based on a complicated formula known as the Interest Rate Differential (IRD). If you have a fixed-rate mortgage on your current property, call your mortgage lender. Ask for a breakdown of the penalties you’ll be charged to break and refinance your mortgage. If the penalties are too high, talk to your lender about the possibility of securing a second mortgage, instead.
Also, if you do opt to keep your current home remember that there are pros and cons to being a landlord, as well as tax implications. Make sure you educate yourself before taking this step.
Third option: Take an income-tax deduction
Believe it or not, there is a third option. Sell your home now, but claim the moving expense tax deduction.
It may seem crazy to suggest this (why on earth would someone sell an asset that has depreciated in value?), but it might just make sense given your moving situation.
Since your relocation was requested by your employer, I’m assuming that the move is to get you closer to your place of employment. If that’s the case, you may be entitled to claim moving expense deductions, as outlined by the Canada Revenue Agency. The biggest criteria is whether or not your new home is “at least 40 kilometres closer to your new work or school.” (For more on the criteria, please see the CRA site.)
Now, if you do qualify, this deduction can be quite substantial. For instance, you are allowed to deduct transportation and storage costs for household items (including boats and trailers), travel expenses, temporary living expenses (up to a maximum of 15 days), costs to maintain your vacant home (up to a maximum of $5,000), as well as costs associated with selling your old home and buying your new home. A quick tally, based on our prior assumptions, and your moving expenses could easily climb to $25,000 or more in direct income-tax deductions. For a family earning $97,000 per year, these moving expense deductions could reduce your annual taxes by more than $8,500.
The advantage of this strategy is that it allows you to capture the equity in your home, reduce or eliminate the transactional costs of real estate and reduces the overall income tax you pay in that income-tax year.
Of course, it’s always a good idea to pay a professional a consultation fee to get precise, personalized advice before tackling any of the above strategies.
Good luck with the move.
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