To Deduct or Not to Deduct ?
If you haven’t heard by now there is a revolution underway. This revolution will affect all of us who have a mortgage and will allow us to structure our mortgage to make the principal part of those horrible monthly payments into a TAX DEDUCTION!
How does it work?
There are two strategies, a Plane Jane approach and a more accelerated version of the Plane Jane.
Let’s look at the regular Plane Jane only since there is limited space here:
First, both strategies require you to have a mortgage that includes a Home Equity Line of Credit (HELOC), we can arrange to have this setup for you.
It is through this HELOC that the strategy can work. At its simplest, your mortgage payment is made up of interest and principal. It is the principal amount, which once paid to the mortgage is re-advanced to you via the HELOC. Once this principal payment is in the HELOC it is withdrawn and placed into a new chequing account. From here the interest on this withdrawal is paid and the remainder invested each month for retirement.
The interest charged on the money borrowed is tax deductible (as long as you expect to earn income from the investments which would allow this to qualify under CRA’s rules) due to the fact that we are using this money to invest. At the end of the year you will receive an interest paid statement from the bank. Use this on your tax return and take the tax refund and apply this as a direct payment onto your mortgage. This in turn will take years off your amortization while building up a nest egg for retirement.**
Here’s an example. Mr. & Mrs. Have Not:
John is 37 and Marge is 36, both earn $75,000, have a house valued at $475K and a mortgage of $300K with a 25 year amortization costing $1,883.90/month at 5.8% for a five year term. If they did nothing more than pay their mortgage payments each month at the end of 25 years all they have to show for their efforts is a house that is free and clear.
Mr. & Mrs. Have:
James is 37 and Sonya is 36, both earn $75,000, have a house valued at $475K and a mortgage of $300K with a 25 year amortization costing $1,883.90/month at 5.8% for a five year term. By utilizing the Plane Jane Strategy above the Have’s will pay off their house 3 years faster and have an investment nest egg (assuming an 8% growth rate) of $542,547 less the HELOC, which is $300,000, less taxes, equals roughly $217,000 NET!**
*(These calculations were performed using the The SmithMan Calculator)
The difference between the Have Nots and the Haves is $217,000 in extra liquid assets for the Haves. While both of them have their homes paid off, the Haves have a much rosier retirement ahead of them.**
**Disclaimer: You must consult your accountant to confirm this strategy is applicable to your specific situation and within CRA rules & guidelines.