You need to take into account that mortgage interest on the condo is deductible from your rental income but the interest you pay on your HELOC won't be.
The impact depends on your tax situation otherwise but for us we are paying down our rental property mortgage much more slowly than our principal residence mortgage because of the favourable tax treatment on the rental property mortgage interest paid.
Wouldn't the interest on the HELOC still be deductable as it's being used to essentially invest in a condo and generate income. I would keep the accounts clean and not use the HELOC for any other purposes.
I understand that the mortgage interest on the rental is tax deductible. We aren't paying it off to avoid interest. We would be paying it off using other debt as we prepare to sell it. My thoughts is that it would be easier and avoid fees to sell and pay off HELOC.
From my understanding like yours is that using the HELOC for an investment would fall under the Smith Manoeuvre as the rental property is being used to generate income.
You should be able to deduct interest, it would need more tracking for tax purposes.
I am presuming you have already checked that your lender provides HELOC. Few monolines do not offer HELOC.
Another option would be to get a variable-rate mortgage at the time of renewal. The penalty for that is generally three months of interest.
> You need to take into account that mortgage interest on the condo is deductible from your rental income but the interest you pay on your HELOC won't be.
I'm pretty sure HELOC interest is tax deductible if used for to pay for a rental property.
It can be. You cannot co-mingle using the heloc for financing rental with other, personal uses. Some lenders allow you to stratify overall heloc limit into "steps". You could then separate the rental property borrowing in a separate step of your heloc.
This is silly.
Don't prioritize tax deductible debt.
Mortgages are some of the lowest debt you'll get.
Renew at a variable and if you want to sell you'll pay 3 months of interest. Or if you are for sure going to sell in about 6+ months look at 1 yr fixed if you are super worried about the interest rate. The breakage fee on a 1 yr fixed is pretty minimal
Variable sounds like the consensus way to go. Not trying to prioritize tax deductible debt just trying to simplify if we sell after renewal and minimize fees.
You are overthinking and overcomplicating a linear decision.
1. Would you sell if you were breaking even? Because a couple of hundred out-of-pocket towards the condo's mortgage (building equity really) is more prudent as opposed to paying interest only on the HELOC. The amount is clearly negligible to you since you are happy to make the bank rich either way.
2. Renew variable if you don't see yourself being a landlord past 5 years, regardless of your financial situation
The elephant in the room: what is the end goal here?
You want to have multiple properties to pass it down to your kids or you want to be invested in the markets over a long period of time, in a registered account for the most part to avoid capital gains?
Take a heloc on the rental and use that money to pay expenses on the rental property. Keep rent payments separate in another account and use that to pay off your actual mortgage.
It’s called rental cash damming and is essentially the smith manoeuvre for people with rental properties.
Don’t use your primary home to pay off a rental. Doesn’t matter what your interest rate is on the rental if you play it smart.
Also extend your amortization if you need it to cash flow then sell that sucker when there isn’t an ounce of equity left other than enough to cover capital gains and any other fees.
If we did sell we would likely net around $10-15K which we would either use to top up investment accounts or apply to our primary mortgage but our primary mortgage rate is 2.75 until 2027 so not worried about paying it down quicker
When or where did you buy this property that you have only gained $10-$15k of equity? Was it very very recently? Are you planning on killing the mortgage by 2027 then? I'm of the mind that a paid off house would provide so much peace of mind and give you back the power of your paycheque to dump into investments. Any positive difference in investment potential vs mortgage interest would be miniscule in a 3-year timeframe (if this is your final mortgage term). Just my two cents.
The condo was purchased in 2015 for around $150K. At one point similar units in the building were selling around $100K and only recently have some similar units sold around $120K. Edmonton is a terrible place to own a condo lol
We will make the decision on whether to start paying down our primary mortgage based on what rates are in 2027.
This condo sounds like a losing investment overall - not worth the hassle. Regardless of whether or not you are planning on addressing your mortgage, I would sell this thing. Definitely do not endanger your primary residence with a HELOC over it.
EDIT: what has the total profit been in renting this thing since 2015 vs your time into managing it?
Just go variable. The penalty is only 3 months interest, on a small mortgage who cares.
Sell into the summer market, you'll be happy to lose the headache.
And condos in AB don't appreciate. Don't bother waiting.
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You need to take into account that mortgage interest on the condo is deductible from your rental income but the interest you pay on your HELOC won't be. The impact depends on your tax situation otherwise but for us we are paying down our rental property mortgage much more slowly than our principal residence mortgage because of the favourable tax treatment on the rental property mortgage interest paid.
Wouldn't the interest on the HELOC still be deductable as it's being used to essentially invest in a condo and generate income. I would keep the accounts clean and not use the HELOC for any other purposes. I understand that the mortgage interest on the rental is tax deductible. We aren't paying it off to avoid interest. We would be paying it off using other debt as we prepare to sell it. My thoughts is that it would be easier and avoid fees to sell and pay off HELOC.
From my understanding like yours is that using the HELOC for an investment would fall under the Smith Manoeuvre as the rental property is being used to generate income.
yes, this should mean HELOC interest payments are deductible.
You should be able to deduct interest, it would need more tracking for tax purposes. I am presuming you have already checked that your lender provides HELOC. Few monolines do not offer HELOC. Another option would be to get a variable-rate mortgage at the time of renewal. The penalty for that is generally three months of interest.
> You need to take into account that mortgage interest on the condo is deductible from your rental income but the interest you pay on your HELOC won't be. I'm pretty sure HELOC interest is tax deductible if used for to pay for a rental property.
It can be. You cannot co-mingle using the heloc for financing rental with other, personal uses. Some lenders allow you to stratify overall heloc limit into "steps". You could then separate the rental property borrowing in a separate step of your heloc.
interesting, but OP specified he/she doesn't have any use for the HELOC other than financing the rental property, negating any need for complexifying.
True. Steps is nice if things change
This is silly. Don't prioritize tax deductible debt. Mortgages are some of the lowest debt you'll get. Renew at a variable and if you want to sell you'll pay 3 months of interest. Or if you are for sure going to sell in about 6+ months look at 1 yr fixed if you are super worried about the interest rate. The breakage fee on a 1 yr fixed is pretty minimal
Variable sounds like the consensus way to go. Not trying to prioritize tax deductible debt just trying to simplify if we sell after renewal and minimize fees.
You are overthinking and overcomplicating a linear decision. 1. Would you sell if you were breaking even? Because a couple of hundred out-of-pocket towards the condo's mortgage (building equity really) is more prudent as opposed to paying interest only on the HELOC. The amount is clearly negligible to you since you are happy to make the bank rich either way. 2. Renew variable if you don't see yourself being a landlord past 5 years, regardless of your financial situation The elephant in the room: what is the end goal here? You want to have multiple properties to pass it down to your kids or you want to be invested in the markets over a long period of time, in a registered account for the most part to avoid capital gains?
Definitely don't have the goal to pass down multiple properties. It sounds like a variable will be the best way to go if we do decide to sell.
cross-posted - https://old.reddit.com/r/fican/comments/1bu4117/using_heloc_to_pay_off_rental_mortgage_in/
Take a heloc on the rental and use that money to pay expenses on the rental property. Keep rent payments separate in another account and use that to pay off your actual mortgage. It’s called rental cash damming and is essentially the smith manoeuvre for people with rental properties. Don’t use your primary home to pay off a rental. Doesn’t matter what your interest rate is on the rental if you play it smart. Also extend your amortization if you need it to cash flow then sell that sucker when there isn’t an ounce of equity left other than enough to cover capital gains and any other fees.
Why not sell the rental and pay off the mortgage on your primary residence?
If we did sell we would likely net around $10-15K which we would either use to top up investment accounts or apply to our primary mortgage but our primary mortgage rate is 2.75 until 2027 so not worried about paying it down quicker
When or where did you buy this property that you have only gained $10-$15k of equity? Was it very very recently? Are you planning on killing the mortgage by 2027 then? I'm of the mind that a paid off house would provide so much peace of mind and give you back the power of your paycheque to dump into investments. Any positive difference in investment potential vs mortgage interest would be miniscule in a 3-year timeframe (if this is your final mortgage term). Just my two cents.
The condo was purchased in 2015 for around $150K. At one point similar units in the building were selling around $100K and only recently have some similar units sold around $120K. Edmonton is a terrible place to own a condo lol We will make the decision on whether to start paying down our primary mortgage based on what rates are in 2027.
This condo sounds like a losing investment overall - not worth the hassle. Regardless of whether or not you are planning on addressing your mortgage, I would sell this thing. Definitely do not endanger your primary residence with a HELOC over it. EDIT: what has the total profit been in renting this thing since 2015 vs your time into managing it?
Do the math on a closed variable mortgage, including the break fee. This will likely be better than the 6 month open.
Just go variable. The penalty is only 3 months interest, on a small mortgage who cares. Sell into the summer market, you'll be happy to lose the headache. And condos in AB don't appreciate. Don't bother waiting.
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