News from Canada's Mortgage Experts

Is there such a thing as a Good Mortgage? The simple answer is “Yes”

Another popular subject these days is how to make your mortgage tax deductible or tax efficient.

Americans have enjoyed the advantage of the Tax Deductible Mortgage for years and it has allowed them to borrow at an unprecedented pace. The meltdown in the U.S housing market has been attributed to the increase in value and subsequent refinancing of mortgage debt. However, the Americans were not purchasing investments with these funds; they were purchasing a lifestyle.

As always, we recommend that you seek professional advice - accountant and financial planner, whenever you consider a tax advantage strategy such as the following example. There is unquestionably a degree of risk involved; however, with most risks, the hope is that an equal, if not greater, reward exists at the end of the tunnel.

Have a look at a very simple example of a Tax Deductible Mortgage: Bill and Mary own a home worth $300,000.00 and a have a mortgage of $150,000.00 with their Bank. Bill and Mary also have a non-RRSP portfolio of investments – (GICs, Bonds, and Mutual Funds of $75,000.00) they want to invest more now but currently do not have access to cash, or do they?

The entire strategy around the Tax Deductible Mortgage or "tax advantaged" mortgage planning is based on the concept that you have equity or cash in your home which is not being used effectively. You can access this equity quite easily and put it to work for you and save money on taxes.

Is this too good to be true?

Bill and Mary Jones may want to consider the following Tax Deductible Mortgage strategy.

Step One:

Review their existing mortgage contract with their mortgage broker to ensure that they have the right mortgage product for the Tax Deductible Mortgage strategy. In essence, you need to be able to distinguish between a tax deductible mortgage and non-deductible mortgage like the mortgage the Jones' currently have on their property. Three or four very strong offerings in the marketplace meet those criteria.

Step Two:

Let us assume their existing bank has the product that meets their objective. The Jones’ would then cash in their non-registered investments of $75,000.00 and pay down their existing mortgage from $150,000.00 to $75,000.00. They now have a non-deductible mortgage of $75,000.00.

Step Three:

In Canada, we can borrow up to 75% of the value of our homes on a conventional basis (without paying insurance premiums). This allows the Jones family to access up to a total of $225,000.00 of their home equity. Therefore, Bill and Mary borrow an additional $150,000.00 from the equity of their home (they have already used $75,000.00). The Jones' then re-purchase the original investment of $75,000.00. They then have the ability to purchase an additional $75,000.00 more. However, now the entire interest payment on the $150,000.00 is tax deductible.

Why is the interest deductible?

Good question, we did not create the rules, we just follow them. When you are borrowing money to invest in Canada, under our tax system, the interest is deductible. However, the money does have to be “at risk” in the marketplace.

What does this look like on a tax return?

Bill and Mary were originally paying $880.97 per month for their $150,000.00 non-deductible mortgage. When they reduced the mortgage to $75,000.00, their payments reduced to $440.00 per month.

Again, in an effort to keep this simple, the new $150,000.00 Tax Deductible Mortgage will cost the Jones an additional $880.00 a month, or $1,320 in total. This is $440.00 more than they were paying originally. However, $630.00 of this payment is the interest cost, which is 100% deductible from their income. This would give them a $7,560.00 a year deduction from their income. This is really just the start of this conversation as it is as important to choose the right investment if you decide to leverage your home and make your debt tax advantaged.

As you can see, there is a right way and a wrong way to complete the Tax Deductible Mortgage transaction. There are also many ways to maximize your investments and your tax savings. Speak to one of our experienced mortgage consultants for further information or feel free to fulfill a contact request or e-mail us at TDMP@MonsterMortgage.ca