Mortgage principal is not tax-deductible, so if you’re making a significant payment towards the principal, double-check what your tax liabilities will be in that year. Make sure you will have enough cash left to pay the taxes.

Of course, if you’re paying down the mortgage out of savings, you don’t have to worry about that. That’s how it works in Canada – you don’t pay taxes on capital gain when you sell your residence, but the money you pay for the house is taxed in advance, so you’re always paying down the principal with your after-tax dollars.

For those of you who just went, “Pffft, this is common knowledge”, sorry to bore you, but to those people out there who like me had no clue – just take note.

We made our downpayment out of then-current year’s income, and were hit pretty hard with a $11,000 tax bill the next spring. When we were buying the condo, I was 100% confident that the downpayment was a tax-writeoff! Not so, and imagine what a surprise it was. I felt pretty dumb, but then realized why I made the mistake. I lived in the States for a few years, and assumed that Canada was just like the US in financial aspects. It’s simply not true, Canada’s policies are very different in many ways. I’m still learning!

In Aug 2004 we took out a mortgage on a $153,500 condo purchase.

We could put down 0-14% and would have to add 7.95% in CMHC (Canada Mortgage and Housing Corporation) mortgage insurance premiums! Surprised at the high rate? It used to be quite a bit higher for self-employed people compared to salaried employees. We put down 15% ($23,025) which lowered our mortgage insurance to 3.65% ($4,762.38) – still a ton of money on just a $130,475 loan.

But things have improved! In July 2006 CMHC have enhanced and improved their terms for borrowers and now self-employed are treated the same way as salaried people. Right now we’d only have to add 1.75% insurance to our mortgage. Here are the current rates:

Table of CMHC Mortgage Loan Insurance Premiums

Loan Size
(% of Lending Value)
Single Advance Premium
(% of Loan)
Up to and including 65% 0.50%
Up to and including 75%

0.65%

Up to and including 80%

1.00%

Up to and including 85%

1.75%

Up to and including 90%

2.00%

Up to and including 95%
Traditional Down
Payment Flex Down

2.75%
2.90%

Up to and including 100%

3.10%

Note: See your lender for premium surcharges and other terms and conditions that apply.

According to the National Association of Home Builders, the average price for a new home in 1980 was $76,400. In 2005, the average was $295,100.

That’s incredible! $218,700 in caaash …
Before you get too excited thinking about investing in real estate and flipping houses, ponder this: Over a 25-year period, that $218,700 gain comes out to a 5.6% annualized return.

Taken from: What happens when the boom goes bust

This is holding true for us, 5% is about the rate at which our condo has been appreciating every year since we bought it in July 2004. Overall, I’m of course happy that we have at least some kind of real estate, but I’m a bit disappointed in such modest price rise. Condo price increase has been very moderate so far, and like the last Remax newsletter put it, “Waterfront condos in Croatia are more expensive than waterfront condos in Toronto!”.

That’s especially really surprising, considering that in a lot of smaller Ontario towns real estate is expected to boom. Is Toronto not attractive to the newcomers anymore?

“If I were to invest in the country, I’d say Barrie and the Kitchener- Waterloo region would be my two top choices,” said Don R. Campbell, president of the Real Estate Investment Network and author of several books.

Mr. Campbell, who has studied Canadian markets for 15 years, said, “There is a shortterm slowdown in the [Ontario] economy but the fundamentals are strong and investors should invest today so they can benefit from good returns in 2008.”

While the rate of return so far is not impressive, it’s comforting to know that we won’t have to pay any taxes on any gain from sale of the condo.