Stan is a middle aged professional in the computer field. He has worked for himself for the last six years. Prior to that, he worked for a large computer company, making big bucks. Way back then, 15 years ago, he bought several investment condos. Through the years, he sold off most of his portfolio, keeping but two units. These units are rented out at $800/month each, and are cared for by a professional management company. He also owns his own home. All three real estate units have low mortgages, totaling $50,000.

A short time ago, personal family problems took up more time & energy than he had anticipated; as a result, Stan needs some money now to pay income tax, property taxes, and some credit card debt. He thought a quick trip to his banker would alleviate the problem. His banker took the application, taking time to key in all the information on the computer screen. His personal income for the last three years was a paltry $18,000, after maximizing RRSP contributions. His property managers made sure that all deductible expenses on the investment properties were claimed, in order for the units to show they were barely breaking even. Each investment property had a payment geared to a remaining amortization of 4 years, while his house mortgage should be finished in 5 years. The banker’s computer profile rejected the application because his overall payments were too high versus his net taxable income. The computer simply added 50% of the rental income to his own income, then calculated all his payments against what they called total income to arrive at a "total debt service ratio" of 63%. In other words, the way the computer analyzed the expenses versus income, the profile said that Stan would have to spend 63% of his income to cover debt. The maximum ratio is 40%. Stan showed the mortgage officer the reduced amortization on all three properties, arguing that, if need be, he could re-amortize the debt & lower the payments by two-thirds. The mortgage officer re-keyed the information only to be told by the computer that the budget still did not fit the profile. Stan tried another lender and got the same answer. He wanted to maintain the payments on the short amortization but he did not qualify under debt service ratios. He knew he could afford the payments, and he wanted to maintain the payments but no lender would let him do so. He found that almost humorous.

In analyzing the deal, I informed Stan that even though the debt could be re-amortized to lower the payments, trying to get the deal done without actually re-amortizing the debt would pose a problem. Stan was aware that re-amortizing all the debt would incur legal fees, appraisal fees, lender fees, on three different properties; an expensive proposition. Instead of trying to re-invent the wheel, I suggested to Stan that he could refinance his residence to absorb all the debt, including the new money he needed to payoff credit cards and income tax. If we applied for a "line of credit" against his residence, the mortgage would be open for prepayment or repayment in any capacity without regard for maximum repayment. In other words, a secured line of credit demands only that the interest be paid every month. If you have the ability and want to pay more, you have every right to do so, and yet the debt service ratios are calculated on the minimum payment.

So Stan can have "his cake & eat it too". He now has but one mortgage, with the flexibility to keep the high payments he wanted, and the interest on the new loan is still tax deductible. He got away with only one set of legal fees, appraisal fees and lender fees. Common sense still holds!