experts: real estate column Tuesday, October 29, 2002

Whether to lock in mortgage is a tricky question

Anyone that tells you they can answer the question: Where will interest rates go, is either a fool or a liar. I am neither.

By Ozzie Jurock

This article appeared in The Vancouver Sun on October 26, 2002

No question about it, we get questions. Please note that we try, but more often than not, the sheer volume of them makes it impossible to get to answer them all. Here are a few that we get more often than others:

Question: Should I lock in my mortgage now?

Answer: Anyone that tells you they can answer the question: Where will interest rates go, is either a fool or a liar. I am neither. The problem lies in the averages. Of course, if you put your left foot in hot water and your right foot in cold water ... on average you're lukewarm, right? NOT! Well, average 5-year term mortgage rates for the last 35 years also fluctuated wildly during every year. (Note for instance that the average for 1982 clocked in at 18.15% but during the year fluctuated between 14.34% to 21.46%, yes!) Below are the year-end averages for posted 5-year term rates.

1995 1996 1997 2000 2001
9.34 9.22 7.08 8.34 7.34

Imagine, buying and selling real estate at a mortgage rate double or triple today’s!? So, if you think today’s mortgage rates are high look at the above … the average for the last 10 years stands at 7.94%. Ok, so much for the five-year rate, what about the variable stuff tied to the prime? Well, since 1990 the prime fluctuated thusly (thusly? Yep.)

1990 1991 1992 1993 1994 (Sept) 1994 (Dec) 1995 (Jan) 1995 (Feb) 1995 (Aug) 1995 (Dec)
13.50% - 14.75% 12.25% - 8.00% 7.75% - 9.00% 9.00% - 5.75% 7.00% 7.50% - 8.00% 9.25% 9.50% 9.75% 7.50%

1996 1997 1998 1999 2000 2001 2002
7.25% - 4.75% 6.00% - 4.75% 6.50% - 7.50% 6.50% 6.75% - 7.50% 7.25% - 4.00%
(7 declines)
3.75% - 4.25%

In the last 8 years the prime has been adjusted 51 times. So if you play the short game and you are say 1% below prime the prime has to rise to 5% for you to pay 7.25% - the current official 5-year term. Possible? Yes. Likely? Probably not. However, if you play it short, make the payments as if your rate were 7.25% (You would have to do that anyhow, if you locked in now!). That’s where you have the real savings. Paying an interest rate of say 3.25% today but making payments at a rate of 7.25%- can knock off thousands of the principal. Even if the prime went against you in a year or two, your savings would be substantial, and the higher rate would be paid on a lower amount. (Yes, yes, we know the best 5-year term today is 5.9%, but just like to stay consistent with the official rates quoted above.)

Question: The ‘no-down payment crowd’ always asks this question: Thanks for finding me a mortgage company that accepts me with no downpayment. But isn’t 9.75% too high. Or, Second mortgage rates are so high. Should I be paying 12%? In other words, I will buy a property but most of my down payment comes (innovatively ... ahem) by way of a first/second mortgage.

Answer: Ask yourself: Does not really matter? IF: You made a good investment in the first place and you can’t get the property any other way. Look at the above average interest rates and see what people paid.

Let’s look at a $10,000 second mortgage with either an interest rate of 8% or 12%. $10,000 at 8% = monthly payment $67 or $10,000 at 12% = monthly payment $100. If you got the deal with little or nothing down AND you expect to make several thousand dollars in capital gain, what do $33 a month matter?

More importantly - look at:

  • Getting the biggest mortgage you can! It keeps you safe longer.
  • Get it as long as you can 5 year or better term, as open, low penalty as you can.
  • Make sure that if the term is short (i.e. a year) that the renewal is not onerous (2% fee etc.)
  • If it is a private mortgage, try for ... ‘no interest, no payments’ interest only, deferred payments.

All this is more important than worrying about a percent here or there ... if you have found a deal. Money is always easy to find. Deals are harder to come by.

Question: When does the Goods and Service Tax apply to the purchase of real estate?

Answer: GST is payable by the purchaser (transferee) of commercial property or new or substantially renovated residential property at a rate of 7% of the fair market value. If a person (or family member) is the first person to reside in the new residential property, then he or she may be entitled to a rebate of as much as 36% of the 7% tax otherwise payable. This rebate diminishes when the fair market value of the land and improvements exceeds $350,000, and there is no rebate when the fair market value reaches $450,000. A builder/developer will often include the reduced amount of GST payable within the sale price, but if the purchaser (or family member) is not the fist person to reside at the property, the Purchaser may be required to pay the value of the rebate over and above the contract price. A purchaser should be aware that GST may be payable on an apparently “used” residential property if the seller is the “builder”, or is a “builder by trade".

Question: Does Revenue Canada allows the proportionate deduction of condo fees for a home based business? For example, if I am using 10% per cent of my home for my business, can I deduct 10% of the condo fees?

Answer: Generally, all expenses directly related to the business are deductible. If you use 10% of the condo directly and exclusively to operate the business then 10 per cent of all condo costs, including condo fees, are deductible.

(We received 27 questions on this story. Most were really answered in the article ... i.e. it is work. Here is an area specific one:)

Question: I am a professional approaching retirement, and will move from the Lower Mainland to my home on Vancouver Island where I would like to pursue my final career in real estate investment in the greater Victoria area. Where do I start?

Answer: The place to start? Make sure you identify your goals first! Monthly cash flow? Capital Gain? How much will I invest, when do I need x amount of cashflow by? Then plan the purchase accordingly. I.e. 3 low priced condos or one foreclosure a month ... etc. Then write it down. Then look at properties. Then get to know Victoria. Then look at properties. Check out the suburbs, the rental vacancy rates for each unit (1/2/3 or so bedrooms) at CMHC. Then look at properties. Then meet pro’s - a good local Realtor, Notary public, Bank Managers, Relocation officers tell them and ask them. Then look at properties. Then evaluate what you can buy ... given your investment criteria. Then look at properties. And then there is the library ... and then look at properties.

Question: I am worried about leaks. I have friends that bought new houses and they leak. Where would I look for leaks?

Answer: Here are the most common areas:

  • around plumbing stacks or plumbing walls
  • chimneys through the attic
  • any light fixtures from the ceiling below
  • electric wiring
  • ducting for fans or heating systems
  • perimeter walls
  • partition walls
  • party walls
  • above lowered ceilings
  • above pocket doors
  • where the side of a cathedral ceiling meets an open attic
  • split level discontinuities
  • where additions meet an older section of the house
  • above rounded corners or staircases
  • balloon frame walls

Leaks can be sealed with caulking, expanding foam, plastic or other methods. Always have PROFESSIONAL QUALIFIED building inspector look at you prospective purchase.

Question: My wife and I would like to buy an investment property. Can we use our RRSPs for the down payment? I have already done this once, when I purchased our current home. My wife is currently not on title. Are there any loopholes?

Answer: Each individual can use up to $20,000 from their RRSP to buy a first house to live in and in some cases, if you have not owned a house for a while, you could use it for your second or third house. However, if your wife has a house, you cannot do it and if you have a house, your wife cannot.

You ask, “is there a way to use the RRSP as a down payment” and the answer is yes. You can cash in enough to get the down payment and even if you pay significant tax, this could be a wise move.

Try these numbers:

Leave $20,000 in your RRSP and get 8% per year for 20 years. You would have $146,000. If you cashed it in at a 50% tax rate, you would have $73,000 left over.

But what if you cashed in $20,000 and paid $10,000 tax so that you had $10,000 left for a down payment on a $70,000 condo in Abbotsford. If the condo went up at 8% a year for 25 years, it would be worth $513,000 with a maximum tax (at today’s rates) of 25% or $130,000 or so. You would have $375,000 left to spend. If the condo went up at 6% a year, it would be worth $312,000 and the tax would be about $78,000 and you would have $234,000 left over. If the condo went up at 4% per year, it would be worth $190,000, you would owe $47,500 income tax and have $140,000 left over.

You would also have earned taxable rent for that number of years. Now, I do not know what the relative inflation rates are going to be. These are examples only. I leave the rest to you. Oh yes, one other factor is that you do not have to cash in the rental apartment at age 69 to buy a RRIF. And, if you wanted to, you could buy a place today (at today’s prices) that you might want to live in at retirement.

Ozzie Jurock is the publisher of Jurock's Real Estate Insider an independent real estate advisory service. You can reach him at 604-683-1111 or e-mail

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