Author Topic: Canada: mortgage against investments?  (Read 6063 times)

scrubbyfish

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Canada: mortgage against investments?
« on: December 14, 2014, 02:49:26 PM »
Because my income is so variable, banks won't generally* look at me for a mortgage.
I don't know if I'll ever want to buy a house anyway, so I'm putting my savings into stocks/bonds for the longterm.
If for some reason I wanted to buy a house for, say, $200,000 and had about that amount invested, would the banks likely give me a mortgage regardless of my income? If so, what is this approach called (so that I can look up the common matters involved in it)?

*I've successfully resolved this barrier in the past, but for the purpose of this question, let's pretend they won't consider me on income alone.

c-kat

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Re: Canada: mortgage against investments?
« Reply #1 on: December 14, 2014, 03:48:26 PM »
Is your income variable because you are self employed? I know the banks offer special mortgages for the self employed that allow for variable monthly income.  I remember seeing something on the manulife site once about using net worth to help in the approval process, but I think your net worth would have to be at least equal to the value you are trying to borrow. You could always call and ask.


nereo

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Re: Canada: mortgage against investments?
« Reply #2 on: December 14, 2014, 03:52:03 PM »
banks use your income as only one measure to evaluate your risk.  They also use your credit history, assets (namely stocks/bonds/liquid cash), and the % down payment.  All of those you can control and will reduce your perceived risk to them.
FWIW, I had a similar situation and had better luck going with a credit union than a traditional bank. they seem more able to factor in different circumstances than the larger banks.

daverobev

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Re: Canada: mortgage against investments?
« Reply #3 on: December 14, 2014, 03:55:43 PM »
If you invested $200k with Interactive Brokers you could borrow against those investments.

If you can show 3 years tax returns, most banks will talk to you I think. If you have 3 years tac returns and $200k with a bank, they will 100% give you a mortgage, at a good rate, but maybe not $200k worth.

Remember, you still need 20% down to avoid CMHC fees.

Self employed is no problem at all. Might only need 2 years.

I'd suggest talking to a mortgage broker first, but take what they say with a pinch of salt as they want to sell you a mortgage. We are with Scotia and have found them decent.

scrubbyfish

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Re: Canada: mortgage against investments?
« Reply #4 on: December 14, 2014, 04:08:42 PM »
Excellent, thanks, c-kat and nereo!

Yes, income is variable due to self-employment.
My "controllables" are all good, it's only the income part that's at issue.

When I did get a house before, neither the banks nor credit unions I tried over the course of a few years would consider me, despite an excellent credit rating, obviously awesome budgeting skills, stable (albeit low) income, and enough cash for the minimum downpayment. They wanted higher income, and from a normal job. Ultimately, some circumstances hilariously aligned and an independent mortgage broker managed to get me taken care of. I think it was Citizen's Bank of Canada that held the mortgage; they were almost a hybrid of bank and credit union.

If you can show 3 years tax returns, most banks will talk to you I think. If you have 3 years tac returns and $200k with a bank, they will 100% give you a mortgage, at a good rate, but maybe not $200k worth.

Thanks, daverobev.

What if I can show those returns, but those returns show only $12,000 income (in my crap years, which has been the last two again, for example)? How much weight is that given against having the value of the house invested in stocks, bonds, and money market?

Again, I'm not keen on buying at this point -I didn't love owning and prefer buyingrenting- but I wanted to find this piece out before committing the bulk of my money to stocks/bonds/etc. If I can sock that away assuming long term, yet still buy a house if I end up wanting to along the way, that's ideal.
« Last Edit: December 15, 2014, 02:25:45 PM by scrubbyfish »

daverobev

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Re: Canada: mortgage against investments?
« Reply #5 on: December 14, 2014, 05:55:06 PM »
Oh, well yeah, $12k is low. Even at the max, 5x income, $60k of mortgage won't get you too far.

If the money you have is unregistered, I'd look, cautiously, at Interactive Brokers. You'd be borrowing on margin, which is variable rate, but the rate would be 3% or something like that. The worst thing would be if you got a margin call, but if you put 200k into diversified ETFs the max you could borrow would be 600k... so if you borrowed 100k it'd basically be impossible for that to happen.

scrubbyfish

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Re: Canada: mortgage against investments?
« Reply #6 on: December 14, 2014, 09:33:41 PM »
Excellent! Thanks so much!

arebelspy

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Re: Canada: mortgage against investments?
« Reply #7 on: December 14, 2014, 11:16:52 PM »
Oh god no.  No no no.

Getting a margin loan against invested money to buy a house is a terrible idea.

If the market drops, you owe the money.  And then?  Ouch.

That's one big advantage of a regular mortgage - they can't call it if you're making your payments.

I can only give you the answer for the US, but let me at least provide that.

The answer is, generally, no, in the US at least.  You can't get a mortgage based on assets, only income.  If you have 1MM in the bank and want a 200k mortgage, but no income, they'll turn you down.  You don't fit in their box.  You might be able to get one from a credit union who looks at the particular situation and does their own in-house underwriting and doesn't resell the loan.  But you definitely won't get one from one of the major banks or anyone who resells the loan to Fannie/Freddie.

Maybe someone can comment on Canada, but I'd bet it's the same.

And no, no please don't get a margin loan against assets to buy a house.  The idea is making me feel icky.
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scrubbyfish

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Re: Canada: mortgage against investments?
« Reply #8 on: December 14, 2014, 11:33:38 PM »
The idea is making me feel icky.

:)

It's okay...  In my financial planning I had started to write that my buying a house is only an option if I can pay the whole thing in cash, thus was reluctant to invest in the market. I just needed to resolve that fear, or at least challenge that belief, so that I could move forward with investing.

The truth is, I really don't envision myself buying. I've done it before, and I sold. It was a solid investment, well planned, and provided great gains, but I wouldn't put myself (with my uncommon set of circumstances) in that position again. I think I just needed to hear that investing my savings wouldn't eliminate my option to buy one day, if my personality changed. If they will consider assets and credit score as part of the bigger picture, and I applied in a better-income three-year stretch, maybe even a conventional mortgage through a flexible credit union would be an option. In any case, I'm assured enough to proceed with investing, which is what I actually want to do. So, no house-buying for me!

arebelspy

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Re: Canada: mortgage against investments?
« Reply #9 on: December 15, 2014, 01:09:17 PM »
Investing your savings is a good way to build up money for a house, regardless of if you borrow against it - you can use that money to buy.  You have the market/variance risk, but if there's no specific timeframe that's not a huge worry.
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falcondisruptor

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Re: Canada: mortgage against investments?
« Reply #10 on: December 15, 2014, 02:22:03 PM »
If you're not too worried about buying right now, just keep doing what you're doing. 

If you do decide to buy in the future, hopefully you'll have better income to show the banks on your tax returns. Generally they'll just use their standard ratios to check applicants.  If you don't qualify, mortgage brokers will have more flexibility, as you've seen.

(when we got our first house together, we used a mortgage broker because I had just become self employed and he was working a couple part time jobs where he was also pretty new.  He ended up sending us to a regular bank anyway.  If you've got a downpayment, they're pretty lenient I've found.  whether you should take their money or not is something only you can decide.)

daverobev

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Re: Canada: mortgage against investments?
« Reply #11 on: December 15, 2014, 02:28:38 PM »
Oh god no.  No no no.

Getting a margin loan against invested money to buy a house is a terrible idea.

If the market drops, you owe the money.  And then?  Ouch.

That's one big advantage of a regular mortgage - they can't call it if you're making your payments.

I can only give you the answer for the US, but let me at least provide that.

The answer is, generally, no, in the US at least.  You can't get a mortgage based on assets, only income.  If you have 1MM in the bank and want a 200k mortgage, but no income, they'll turn you down.  You don't fit in their box.  You might be able to get one from a credit union who looks at the particular situation and does their own in-house underwriting and doesn't resell the loan.  But you definitely won't get one from one of the major banks or anyone who resells the loan to Fannie/Freddie.

Maybe someone can comment on Canada, but I'd bet it's the same.

And no, no please don't get a margin loan against assets to buy a house.  The idea is making me feel icky.

Depends on the margin requirements! If you assume a diverified portfolio is not going to drop more than 50% (bonds plus stock ETFs), work out how much can be borrowed before the margin call. Give a safety cushion, of course.

Also, most mortgages in Canada are 5 year. If you are maxed out at 3.5% now, in 5 years you could be looking at 10%.

Stocks are an asset... nothing more. Could the world economy including government bonds fall 50%? Not likely.
« Last Edit: December 15, 2014, 02:31:03 PM by daverobev »

nereo

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Re: Canada: mortgage against investments?
« Reply #12 on: December 15, 2014, 02:35:02 PM »

Also, most mortgages in Canada are 5 year. If you are maxed out at 3.5% now, in 5 years you could be looking at 10%.
to be clear, mortgage terms in Canada can be up to 5 years.  Mortgages (amortization periods) are typically up to 25 years.  There's a big difference.

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Re: Canada: mortgage against investments?
« Reply #13 on: December 15, 2014, 03:01:45 PM »
If you can rent a place to live under 1% of what it would cost to buy that exact same place. Then buying is not a good economical decision.

It could be a good one if an individual feel the need to own his place, enjoy maintenance and repairs, is a DIY and make some upgrades over the years etc.

The downside is that a home is not a liquid asset and mortgages in Canada (especialy BC) can be huge.

Let see how the 400k+ mortgages owner with 60k familial income will manage to get trough when interests rates goes up from 3% to 5%...

arebelspy

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Re: Canada: mortgage against investments?
« Reply #14 on: December 15, 2014, 04:35:23 PM »
Oh god no.  No no no.

Getting a margin loan against invested money to buy a house is a terrible idea.

If the market drops, you owe the money.  And then?  Ouch.

That's one big advantage of a regular mortgage - they can't call it if you're making your payments.

I can only give you the answer for the US, but let me at least provide that.

The answer is, generally, no, in the US at least.  You can't get a mortgage based on assets, only income.  If you have 1MM in the bank and want a 200k mortgage, but no income, they'll turn you down.  You don't fit in their box.  You might be able to get one from a credit union who looks at the particular situation and does their own in-house underwriting and doesn't resell the loan.  But you definitely won't get one from one of the major banks or anyone who resells the loan to Fannie/Freddie.

Maybe someone can comment on Canada, but I'd bet it's the same.

And no, no please don't get a margin loan against assets to buy a house.  The idea is making me feel icky.

Depends on the margin requirements! If you assume a diverified portfolio is not going to drop more than 50% (bonds plus stock ETFs), work out how much can be borrowed before the margin call. Give a safety cushion, of course.

Also, most mortgages in Canada are 5 year. If you are maxed out at 3.5% now, in 5 years you could be looking at 10%.

Stocks are an asset... nothing more. Could the world economy including government bonds fall 50%? Not likely.

I can't address this politely, so I'll leave it for someone else if they're so inclined.

I will just say that I strongly disagree with this as a good idea.
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daverobev

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Re: Canada: mortgage against investments?
« Reply #15 on: December 17, 2014, 06:23:08 PM »

Also, most mortgages in Canada are 5 year. If you are maxed out at 3.5% now, in 5 years you could be looking at 10%.
to be clear, mortgage terms in Canada can be up to 5 years.  Mortgages (amortization periods) are typically up to 25 years.  There's a big difference.

Yes, of course. If the amortization was 5 and the term 5, rate fluctuations wouldn't be a problem!

My point stands. You can't lock the rate in at 3.x% for thirty years like you can in the crazy States. People in Canada who are currently paying 2 or 3% could be looking at 15 or 20 in 5 short years.

daverobev

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Re: Canada: mortgage against investments?
« Reply #16 on: December 17, 2014, 06:27:57 PM »
I can't address this politely, so I'll leave it for someone else if they're so inclined.

I will just say that I strongly disagree with this as a good idea.

Look, I'm not suggesting taking $200k and borrowing a huge amount for a house! I'm talking about sub $100k. That's why I said initially *cautiously* - it is a possibility, it COULD end up being a very cheap way of borrowing, and really not that different from getting a variable rate mortgage. It's called leverage; lots of people do it. Scrubbyfish could buy the place and get a HELOC if their credit is good.

Would I do it? No, I'd rent. Renting is a good option. Housing in Canada is expensive. I just brought it up as a possibility, something to look into, not something to jump in to with no second thoughts...

lostamonkey

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Re: Canada: mortgage against investments?
« Reply #17 on: December 17, 2014, 06:49:20 PM »
If you had $200K worth of investments and wanted to buy a house worth $200K, couldn't you just sell your investments, buy the house with cash and get a HELOC and use it to rebuy some of the investments. Another advantage of this method is that the HELOC interest would be tax deductible (mortgage interest is normally not deductible in Canada).

I personally feel that now isn't the best time to buy housing in Canada anyway but that's another story.
« Last Edit: December 17, 2014, 06:52:33 PM by lostamonkey »

scrubbyfish

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Re: Canada: mortgage against investments?
« Reply #18 on: December 17, 2014, 08:24:37 PM »
The HELOC idea is also good to know (just for the sense of "options" that allows me to feel comfortable investing at all).

I think we're all agreed that buying in Canada right now -and maybe ever again- is cuuuuuraaaaaaaaazy! I bought at the right time once, and sold at the right time, but I learned in that process that homeownership is precarious. In the few years I had it, my insurance tripled (no claims, just the insurance company having fun and making new things up), municipal water/sewer/garbage fees increased dramatically, and property taxes tripled. Well and good to know one's property value is increasing, but where are we to get the money (without borrowing more and more) to pay those increases? And then there's the matter of mortgage interest rates being potentially higher when it's time to renew. No thanks, Canada. Too many variables to potentially change the financial picture on too little notice.

And now, most of it's just crazy expensive to buy outright anyway. Even the "cheaper" condos around Vancouver, with their wild strata fees, nope. The strata fees are often barely less than my rent! And lots don't accept children.

Happily, while owning the house I was able to rent out suites to more than cover all costs, including mortgage. Unfortunately, I seemed to have a desire to spend on the house -not loads, but just improvements. In the end, it all worked out, but now I know the following about myself:

1. I do not like sharing a building with tenants (noise), so would not own something that required me (financially) to do that.

2. BC residential tenancy laws leave landlords very much at risk of massive costs and problems that go on too long.

3. I prefer living in a detached place, am perfectly happy in a small suite, love paying a fraction of the cost, and prefer renting.

4. If I own, I feel compelled to spend on improving the property. When I rent, I feel no such compulsion, and any required improvements the landlord would be covering the cost of.

The only thing I'd consider buying is a "tiny house" ($40,000), and possibly land to put it on, but I'm pretty sure I could keep finding small, cheap, quiet rentals and/or shared/rented land to put a tiny house on.

lostamonkey

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Re: Canada: mortgage against investments?
« Reply #19 on: December 17, 2014, 09:17:55 PM »
I didn't know you live in Vancouver. IMO, its one of those places where renting is way better than owning and will probably be better for a long time. Just continue renting, and investing and I am sure you will achieve FI in no time.

arebelspy

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Re: Canada: mortgage against investments?
« Reply #20 on: December 17, 2014, 10:56:46 PM »

I can't address this politely, so I'll leave it for someone else if they're so inclined.

I will just say that I strongly disagree with this as a good idea.

Look, I'm not suggesting taking $200k and borrowing a huge amount for a house! I'm talking about sub $100k. That's why I said initially *cautiously* - it is a possibility, it COULD end up being a very cheap way of borrowing, and really not that different from getting a variable rate mortgage. It's called leverage; lots of people do it. Scrubbyfish could buy the place and get a HELOC if their credit is good.

Would I do it? No, I'd rent. Renting is a good option. Housing in Canada is expensive. I just brought it up as a possibility, something to look into, not something to jump in to with no second thoughts...

Fair enough.

It's still not something I'd advise, but that is much more tempered. :)
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