Mortgage Insights
I read this really interesting mortgage article by Garth Turner (http://www.garth.ca/columns/051204.shtml)
If you're thinking about buying a house or condo in Canada, this is a good read for you!!!
As I mentioned here before, a very simple and very powerful financial strategy which many people could utilize, but don't, is the following. First, if you have an investment portfolio and a mortgage of roughly the same size, then follow this four-point plan:
1 - Cash out your investments.
2 - Use those funds to pay off your existing home loan.
3 - Take out a new mortgage (variable-rate, below-prime, of course).
4 - Now use the proceeds of the new mortgage to buy back your investments.
Why would you do this? Because our tax laws allow you to deduct the interest on any loan taken for investment purposes from your taxable income. In this instance, the new mortgage was used to re-establish an investment portfolio, therefore it is classified as an investment loan. So, your mortgage payments are now tax-deductible - and since the vast bulk of each month's payment is interest, this is a big deal.
Follow-up:
As I am sure you know, any money you borrow in this country for investment purposes - to buy a mutual fund or a stock or an apartment building - is tax-deductible. That means the interest charges you incur can be written off you personal income.
Therefore, if you are in the 50% tax bracket (as most middle class folks are), a loan with an interest rate of 5% is effectively reduced to 2.5% once you deduct the interest from your income. And, since the current rate of inflation is 2.6%, this means the loan money is, basically, free. How cool is that?
So, here's the strategy: Lots of people have mortgages on their homes at the same time that they maintain investment portfolios outside of their RRSPs. In many, many cases, the amount of money saved is equal to, or greater, than the home loan. The logic here is that while mortgage rates are as low as they are, it makes sense to keep a mortgage in place.
Wrong. Instead, a person in this situation should liquidate their entire investment portfolio, and use the proceeds to pay off their home mortgage. Then, immediately secure a new mortgage for the same amount, and use the money to buy back your investments. Now, you still have the same-sized mortgage, and you still own an equal investment portfolio, but this time 100% of the interest on your mortgage is deductible from your personal income - because it was turned into an investment loan. And, since 90% or more of your monthly mortgage payment is typically interest, this deduction can mean a big boost in your own after-tax income. This is a mortgage you do not really want to pay off!
If you're thinking about buying a house or condo in Canada, this is a good read for you!!!
As I mentioned here before, a very simple and very powerful financial strategy which many people could utilize, but don't, is the following. First, if you have an investment portfolio and a mortgage of roughly the same size, then follow this four-point plan:
1 - Cash out your investments.
2 - Use those funds to pay off your existing home loan.
3 - Take out a new mortgage (variable-rate, below-prime, of course).
4 - Now use the proceeds of the new mortgage to buy back your investments.
Why would you do this? Because our tax laws allow you to deduct the interest on any loan taken for investment purposes from your taxable income. In this instance, the new mortgage was used to re-establish an investment portfolio, therefore it is classified as an investment loan. So, your mortgage payments are now tax-deductible - and since the vast bulk of each month's payment is interest, this is a big deal.
Follow-up:
As I am sure you know, any money you borrow in this country for investment purposes - to buy a mutual fund or a stock or an apartment building - is tax-deductible. That means the interest charges you incur can be written off you personal income.
Therefore, if you are in the 50% tax bracket (as most middle class folks are), a loan with an interest rate of 5% is effectively reduced to 2.5% once you deduct the interest from your income. And, since the current rate of inflation is 2.6%, this means the loan money is, basically, free. How cool is that?
So, here's the strategy: Lots of people have mortgages on their homes at the same time that they maintain investment portfolios outside of their RRSPs. In many, many cases, the amount of money saved is equal to, or greater, than the home loan. The logic here is that while mortgage rates are as low as they are, it makes sense to keep a mortgage in place.
Wrong. Instead, a person in this situation should liquidate their entire investment portfolio, and use the proceeds to pay off their home mortgage. Then, immediately secure a new mortgage for the same amount, and use the money to buy back your investments. Now, you still have the same-sized mortgage, and you still own an equal investment portfolio, but this time 100% of the interest on your mortgage is deductible from your personal income - because it was turned into an investment loan. And, since 90% or more of your monthly mortgage payment is typically interest, this deduction can mean a big boost in your own after-tax income. This is a mortgage you do not really want to pay off!
posted by Billy Bee Absentee at 8:02 AM
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