Pay your mortgage in half the time and save too? Here’s a formula to build your wealth Part 2
Now that you have learned how to afford your mortgage and put away 10% of your income to savings it’s time to show you the next stage which is understanding how to pay your mortgage in half the time or less AND create even more savings.
This strategy not only helps pay your mortgage off faster but results in making your mortgage tax deductible as well.It effectively converts your non-deductible interest debt (bad debt) of your mortgage to tax deductible interest debt (good debt), while simultaneously building your investment portfolio.
The Canadian Revenue Agency (CRA) will allow you to secure a loan to purchase investments. You can easily complete this by reorganizing the structure of your debt. You pay for your mortgage interest as part of every mortgage payment, so you can now convert it to good debt and have the government give you a generous, free, no charge, tax paid gift each year!
a) must have at least 20% or more equity in your home (less is OK but you then need some investments)
b) will need a mortgage with a HELOC component (the ideal one is called a re-advanceable mortgage)
c) need amortgage broker with financial planning knowledge
d) need investment vehicles with low volatility and consistent returns unaffected by national or global fluctuations(yes they exist but your average mutual fund salesman won’t tell you about them because they don’t make commissions…sad but true)
4 easy steps
1. begin by liquidating some or all your investments and savings. (especially the under performing ones)
2. use the cash to pay down your existing mortgage and increase your home equity.
3. arrange a new mortgage to access the increased equity like a re-advanceable mortgage.
4. going to a professional financial expert*(not a typical mutual fund salesman or a guy at your bank) with your cash from your new mortgage to purchase new investments.
* most financial planners (referring to mutual fund salesmen who call themselves financial planners) will recommend mutual funds for this strategy. This WILL NOT work. Most mutual fund investments are too volatile. To make this strategy work most effectively, I recommend investing in products that are real estate based which have a much lower risk, have historically higher returns than money market mutual funds and are not affected by a global or national financial crisis.
Factors affecting your tax rebate
1. income tax bracket
2. total interest you pay each year on your mortgage
What is a re-advanceable mortgage?
Each time you make a regular mortgage payment, you pay both principal and interest. With a re-advanceable mortgage, you are able to “borrow back” the principal portion of your payment. This principal portion essentially goes into a HELOC (home equity line of credit) which is used to buy the investment.
In a nutshell the concept works as follows:
- Get a re-advanceable mortgage
- Sell your non-registered assets (like stocks held outside of an RRSP)
- Use the proceeds to pay-down your mortgage principal
- Make your regular mortgage payments
- As you pay off principal, re-borrow that principal into a line of credit (LOC)
- Invest this re-borrowed money at a higher rate of return than the interest you pay on the line of credit
- Deduct your investment loan (LOC) interest and use the tax savings (refund) to pre-pay your mortgage
- Repeat steps 3-7 until your mortgage is fully paid off.
When done correctly, this program will allow you to pay off your mortgage in 1/2 the time. If you choose to continue to work the system after your mortgage is paid, you can create a handsome retirement nest egg.
The coolest thing about this is once this is set up, you don’t have to do anything differently than you are right now, you don’t have to pay anything extra. We can arrange to have the whole process fully automated.
To Your Wealth