Re: Again mortgage question
 

Yes...thank you Butchy boy thats very helpful :p

Re: Again mortgage question
 

For example though. Say you have £300,000. You put £50000 down as a deposit and invest £250,000 at a fixed rate for 5 years. The interest is around £1200 net a month. If you then borrow $400,000 at 4 ish % fixed for 5 years the interest payments are around £700. Hence, £500 better off. I know your up against exchange rates but they would have to fall a long way to come off worse. Of course, you have to have £300,000 in the first place!!!
But after 5 years, you are that much nearer to paying your mortgage off and you still have your original lump sum.

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Well, actually, it isn't.

A closed mortgage is a contact for a specific period of time. So if you have a five year closed mortgage and want to repay it after three years you will have to pay a penalty.

An open mortgage is repayable at any time without penalty.

Both mortgages will have to be renewed at the end of their term.

Open and closed terms have nothing to do with the interest rate.

Interest rates are either fixed or variable and these terms mean the same as in the UK. You can have a closed fixed rate or variable rate mortgages, or open fixed rate or variable mortgages. More often than not, fixed rate mortgages are closed, but the two words are not synonymous.

I will eat my hat, and any other article of clothing around, if you can find a 5 year fixed rate mortgage of 4.1%. A closed, variable mortgage yes, fixed no. ING Direct are currently quoting 5.45% for a five year fixed, closed, mortgage. A Canadian resident with a good credit history, a low LTV, and strong negotiating skills might be able to get up to 25 basis points below that from a retail bank.

Re: Again mortgage question
 

Thank you for that lesson. And that was indeed my understanding (re closed Vs open) until this weekend when discussing with our TD Rep.

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Sigh.

Closed Mortgage - A mortgage agreement that cannot be prepaid, renegotiated or refinanced before maturity, except according to its terms.

Open Mortgage - A mortgage which can be prepaid at any time, without penalty.

Fixed-Rate Mortgage - A mortgage for which the rate of interest is fixed for a specific period of time (the term).

Variable Rate Mortgage - A mortgage for which the rate of interest may change if other market conditions change. This is sometimes referred to as a floating rate mortgage.

http://www.tdcanadatrust.com/mortgages/glossary.jsp

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I bow to your ability to do a simple websearch oh great one.

(BTW I'd already done such a search)

I think we have now cleared up MY MISINFORMATION but hey I couldnt have done it without you.

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I have been doing this for years. The fact is I get more interest on my UK accounts (net) than what I pay interest on my mortgage in Canada (prime + 3/4 per cent). And, as you say, my original investment is still intact. I made most of my gains during the years the Canadian Peso was low (or lower).

Re: Again mortgage question
 

So, I just need to find £300000 then!

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And the golden rule is that if it sounds to good to be true, it is.

One catch is that 4.15% is a variable rate, not fixed.

Another catch is that interest on your savings is taxable in Canada, whereas the interest for the mortgage on your home is not an allowable expense.

The final catch is that the exchange rate moves to reflect interest rate differential (amongst other things) so you run the risk that over time your 5.5% in GBP only exchanges to sufficient CAD to pay the 4.15% mortgage.

Re: Again mortgage question
 

No, interest in the UK is paid net of tax and there is a reciprocal tax agreement between the UK and Canada. I admit that you run the risk of exchange rate and interest rate fluctuations, but historically, it has always worked in my favour mainly due to a relatively strong UK pound.

My prime +3/4 percent mortgage is also locked in with the National Bank (for 1 year at a time). The interest on a home is not an allowable expense regardless of where the money comes from. Unless you use it for business purposes.

I agree though, like anything financial, it always boils down to what you are comfortable with.

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Under the tax treaty, if a deposit is in the UK, and the beneficial owner is tax resident in Canada, then the UK Government is entitled to tax the interest at 10%.

Say, for example, you receive 5% pa from your UK deposit net of tax, the actual interest rate you are receiving is 5.56%. UK Government keeps 10% (0.56) and you get the 90% which is 5.0%.

However, the full 5.56% is taxable in Canada. How much you get to keep depends on your marginal rate here. If you do not earn enough (including the gross interest) to pay tax then there is nothing more to pay. If your tax rate in Canada is 20%, then you would owe 1.11% of the interest received as tax in Canada. You would get a credit for the 0.56 already paid to the UK Government and would pay 0.55% to the Canadian Government. Your effective after tax interest rate is (5.56 - 1.11) = 4.45%.

If you are a higher rate tax payer in Canada and have a marginal rate of 40% here you will owe tax of 5.56 x 0.4 = 2.22%. Again you will get credit for the 0.56 paid in the UK, but your effective after tax interest rate received is 3.34%. If your mortgage is prime + 3/4 this will be quite a bit more than the after tax interest you receive on your UK deposit.

Let's put these into a simple example. Say you have $100,000 on deposit, and $100,000 mortgage.

1. You pay tax at 20% in Canada:

Deposit interest received = $100,000 x 5.56% - (5.56% * 10%) = $5,004

Additional tax due in Canada = 5,560 * 0.2 - (5,560 * 0.1) = $556.

Net interest received = 5,004 - 556 = $4,448.

Mortgage interest = prime + 3/4% = $100,000 x (4.75 + 0.75) = $5,500.

Loss = $4,448 - $5,500 = -$1,052.



2. You pay tax at 40% in Canada:

Deposit interest received = $100,000 x 5.56% - (5.56% * 10%) = $5,004

Additional tax due in Canada = 5,560 * 0.4 - (5,560 * 0.1) = $1,668.

Net interest received = 5,004 - 1,668 = $3,336.

Mortgage interest = prime + 3/4% = $100,000 x (4.75 + 0.75) = $5,500.

Loss = $3,336 - $5,500 = -$2,164.


To be honest, prime + 3/4 is not a great rate for a variable mortgage. If you have a decent credit rating and a reasonable LTV then you should be able to get a mortgage of prime less 1/2. In the example above this will give mortgage interest of $100,000 * (4.75 - 0.5)% = $4,250. In these circumstances scenario 1 is worthwhile, but still risky.

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But we currently pay 20% tax on the interest in the UK anyway?
So if we now pay 10% in the UK and around the same in Canada don't you end up in the same place?

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So what fixed rate mortgage could a newcomer hope to get with no credit history but a decent deposit?

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It is very strange situation. I spoken with two mortgage specialists and they said me that: "You, as newcomer to Canada, can have mortgage even with 5% down payment, but you have to have a job here in Canada. If you are self-employed ( owner of business) your down payment can not be less than 30%".
Please advise if anybody has different experience.

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The email that we got off our abank was

"We can usually finance with 5% down if you are a landed immigrant. The only other option would be under a special program for new immigrants to Canada which would require 10% down on the purchase."


So yeah it is possable to get 5% down :thumbsup: