Building wealth using a re-advanceable mortgage
There’s a nice little tax advantage that American homebuyers have been enjoying for years that has never been available in Canada. Our tax rules do not allow us to directly deduct the interest we pay on our homebuying debt as they can in the U.S.
Here in Canada though we do have an investment-friendly tax policy that has a little-known advantage for homeowners. With the right professional guidance, thousands of Canadian homebuyers are using a conversion strategy to get a tax-deductible mortgage. You heard that right: you can write off the interest you pay on your mortgage, and you can do it – perfectly legally – right here in Canada.
The strategy takes advantage of our tax breaks designed to encourage non-registered investing. If you borrow money to invest, the interest on that debt can be tax-deductible. If for example, you borrowed against your home equity – for the purpose of investing to make money – the interest on that loan would be tax-deductible. There are many types of qualifying investments: you could purchase a rental property, for example, or a bunch of blue-chip stocks or mutual funds, if that’s what you’re comfortable with. Your goal then is to convert your non-deductible mortgage debt into a tax-deductible investment loan.
What makes this strategy such a great fit for many Canadians is that those of us in our homebuying years are always juggling to find a balance between paying off our homes, and investing for the future. Using a re-advanceable mortgage that includes a line of credit (LOC), we can actually do both.
Here’s how it works. You convert your existing mortgage to a re-advanceable mortgage/line of credit combination, which will allow you to automatically take advantage of any increasing equity in your home. As you create equity in your mortgage account through mortgage paydown, your line of credit is automatically increased by the same amount. As the non tax deductible mortgage is paid off on one side, then, it is re-advanced to the wealth-building investment LOC, or the tax-deductible side of the ledger if those funds are used for investments. The tax refunds you generate can be used to accelerate mortgage paydown and increase the LOC portion for further investments.
For years now Canadian homeowners, after having built up some equity in their homes, have taken out lines of credits on that equity so they could access that money for renovations, debt consolidation or investments. Often though those lines of credit are separate from the mortgage and have set limits so they don’t automatically increase as equity builds unless the homeowner applies for an increase. The re-advanceable/line of credit combination then offers more convenience and flexibility over this more traditional approach.
The mortgage planners at Dominion Lending Centres have access to over 50 lenders, many of which offer a competitive re-advanceable mortgage. They know them all so they can find the one that best meets your needs and goals. Some offer flexible feature that include:
- Sub accounts so you can borrow for different purposes and keep track of the interest expenses (important when tracking interest for tax purposes);
- Automatic deposit features – so you can use your paycheque or other deposits to temporarily offset your debt while those deposits aren’t in use, which will save you interest;
- Flexibility to split the mortgage into sections with different rates, terms and amortizations, pay interest only, or even skip a payment
When you are in your mortgage years and life doesn’t stand still, a re-advanceable mortgage may be the perfect tool to help you balance your financial goals: debt paydown and wealth accumulation.
Mortgage Planning and You
These days, you see signs everywhere for mortgage brokers. Who are these people anyway, and what do they do?
Mortgage brokering is one of the fastest-evolving industries in the country. Today, only the best brokers provide a very high-value service known as: mortgage planning. And they’re changing the way Canadians look at their biggest personal investment.
Back when independent mortgage brokers started gaining market share in the 1970’s, they focused primarily on securing low rates and dealing with bad credit situations. Over time, though, they took on the role of consultant: finding the best mortgage rate while educating their clients on strategies to become mortgage-free faster. Today, we’re beginning to see a breakaway group of top brokers who are going one step further on the advice spectrum. They’re known as mortgage planners – they help clients incorporate their mortgage into their overall financial plan; essentially managing debt for the creation of wealth.
Demographics are helping to fuel this trend. It’s estimated that over 50% of front-end boomers are not prepared financially for retirement. They are ‘home’ equity rich but will have a shortfall in their retirement income. As a result, they are looking to their home equity and mortgage planners to help close the gap.
Mortgage planning is not just for boomers though; there are strategies for buyers at every age and every stage. Credit advice is part of mortgage planning, for example; a planner can show buyers how to boost a low credit rating to ensure access to future wealth-building opportunities (and lower lending rates). There are different strategies for first-time and seasoned home buyers. And for equity rich homeowners, one of the most popular strategies: tax-deducting a portion of mortgage interest by investing home equity in real estate or blue-chip investments to maximize overall long-term wealth accumulation. Wherever a client starts in the mortgage planning process, the goal is ensure they have a plan that carries them through to their next goal: a home purchase, real estate investment, cottage property purchase or debt paydown.
Mortgage planning shows you how your mortgage can be a powerful financial tool, giving you more options to consider than the traditional “pay-off-your-mortgage-as fast-as-you-can” approach… which, as it turns out, isn’t always the smartest strategy. The focus of mortgage planning is to use low-interest mortgage debt to accumulate assets. It’s important to note, though, that some homebuyers really need the discipline of a forced savings plan; for them, mortgage paydown remains a very prudent strategy. That’s why mortgage planners develop plans for each person’s specific situation and long-term goals.
A growing number of Canadians are beginning to accumulate assets by tapping their home equity for tax-deductible investments: a strategy that gets their money working double-time. They still get to enjoy their rising home equity… at the same time as they watch their other investments grow. These clients are effectively “mortgage free” when the value of their investments outstrips their mortgage. They’ve got the hardest-working mortgages anywhere!
But financial discipline is required if you’re tapping home equity to invest. The planners at Dominion Lending Centres recommend equity extraction for wealth accumulation only if two key requirements are met: you have qualified advisors to help you oversee its investment and manage the risk; and, you have the discipline necessary to implement a long-term financial plan.
It’s important to note that not all mortgage brokers are mortgage planners. If you are intrigued by mortgage planning, it’s critical that you seek out an experienced planner. Dominion Lending Centres is an elite national brokerage that recruits only the very top mortgage professionals. To join, the highest professional standards must be met, including reputation and breadth and depth of experience. When it comes to mortgage planning, the planners at Dominion Lending Centres are leading the way.