Marc & Jolene want to buy a duplex (two units, stacked one on top of the other) to get the rental income to help defray the mortgage cost. We went through the pros and cons of purchasing such a unit. They decided they still wanted it. They were going to move into the lower unit, and continue to rent the upper unit at $1050 per month. Their provable income was $75,000 per year.

We discussed their downpayment. They had accumulated $22,000 over the last two years. They wanted to buy a duplex listed at $188,000. Their thought was to put 10% ($18,800) down, and use the remainder to pay for closing costs (legal fees, land transfer tax etc.). I informed them that according to CMHC guidelines, they could only mortgage 90% of the owner-occupied unit, and 85% of the rental unit, therefore their downpayment would have to be $23,500. Since the downpayment was less than 25%, high ratio mortgage insurance was mandatory. If they could increase their cash to $23,500, they could mortgage the remainder through a CMHC approved lender. According to present day CMHC guidelines, $164,500 mortgage (that's $188,000 purchase price less their downpayment of $23,500) would carry an insurance premium of $4112 (that's $164,500 times 2.5%). Normally, the insurance premium is added to the mortgage, therefore interest is payable on this amount over 25 years. This mortgage insurance does not give them anything, it simply allows the lender to mortgage greater than 75% of the

I asked if a direct relative had cash. My thought was to involve the relative in financing a portion of the downpayment, so that the total downpayment was 25%. They said that her dad probably could but they were reluctant to approach him for a loan. I pointed out to them that this "loan" was really an investment at a rate of return of 9.5% (same rate as the first mortgage), which was greater than what he could get on the street for his money, and as security, the kids would allow him to register a second mortgage on the duplex. In other words, the kids would put down $18,800 of their own money, and $28,200 from dad. The remaining 75% could be obtained from any lender, without the need to pay for high ratio mortgage insurance, a savings of over $4000. Since the rate of interest granted to dad is equivalent to the rate on the first mortgage, the whole $4000 goes as a savings and their payments drop by some $35 per month. They were certainly interested in the plan, but were still weary about talking to dad. I asked them to bring in dad, I would talk to him on their behalf. Not only was he interested, he approved their second mortgage on the spot. Now these kids can go ahead and make an offer on the unit in question. Their plans have not been altered, as a matter of fact they are saving a sizable amount of money, and the first mortgage lender is happy with the downpayment of $47,000 (that's $18,800 from the kids and $28200 from dad). This method of financing promotes savings for the new generation, and better return of income for the older generation. Everybody wins!