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Should you consider making your Mortgage Tax-deductible – YES!

Do you have the wrong kind of debt? The kind that is not tax deductible?

Even though Americans have had tax-deductible mortgages for years, Canadians still don’t enjoy that privilege.

However, there is a way for you to deduct your mortgage interest while increasing your wealth. Known as the “Smith Manoeuvre”, this strategy involves continuously withdrawing equity from your home and investing it. Of course, when you borrow money for an investment, the interest is tax deductible.

So if you borrow money from your home equity to make investments, your mortgage interest becomes tax deductible.

To make this strategy work, you need a line-of-credit mortgage that lets you continuously extract equity as you pay your mortgage down. Every time you make a payment and reduce your principal, you then immediately extract that equity and add it to your investment account. Since you’ve been able to deduct your mortgage interest, at the end of the year you’ll generate a tax refund.

Tax Benefits

Just for an example, a $500,000 mortgage at 4.0% over 25 years will set you back about $289,000 in interest costs. So this means that the $500,000 mortgage will end up costing you over $789,000.

But the other half of the issue is that the money you’re using to pay down your mortgage is after-tax income.  You receive your paycheque, less your income tax, and then make your mortgage payment.  What this means is that you’ll have to earn about $1,127,000 to pay off your home if you’re at the 30% tax bracket.

Now, with that said making your mortgage tax-deductible is a process of converting debt and it can take many years, however using our example above if your $500,000 was 100% tax-deductible you good be adding a $20,000 tax deduction to your tax return. Which depending on your taxable income can create a new tax refund in the amount of $4,000 – $7,000.

These numbers are obviously estimates, and you would need to sit down with a qualified mortgage broker to calculate your actual savings but this should begin to put into perspective:

a) how challenging it is for homeowners to save for retirement or any other of life’s financial goals;

b) the potential benefit of converting your mortgage debt into tax-deductible debt.

Financial Benefits

Although we may have the best of intentions, after ever-rising taxes and the cost of making ends meet, most of us don’t have the resources to put away 10% of our income or max out our RRSPs or TFSAs every year to enjoy the magic of compound growth.

Life just gets in the way.

By using the tax-deductible mortgage strategy you build your investment portfolio at the same time you are paying off your mortgage.

This is so important because so many people miss the point of where the magic of compound interest really is. Yes, I know that the obvious answer is Interest earning interest, but it really should be expanded to interest earning interest over time. The longer your money is invested, the greater the benefit to you. 

Let’s take a real-world look at the what I am talking about here. If you started investing today $500.00 per month today with a 5% return, in 25 years you would have $286,363.00. But if you wait 10 years to start investing and start then after that same 25 year period you only have $129,471.00. I know you are going to say that this is incredibly obvious, the longer the investment period the more money you get and that you didn’t need to be told this, but hear me out for a second.

When you wait to invest, you lose the last years, not the first years.

In the example above you lost years 15 – 25, which with your additional contributions allowed you to double your investment portfolio, one more time. So when you hold off on investing you need to think I didn’t lose the interest I would have earned in year 1, you lost the interest you would have earned in year 25.

Interest Earned in year 1 = $300.00

Interest Earned in year 25 = $19,351.00

Starting earlier makes a huge difference!

With a tax-deductible mortgage strategy, you build this investment portfolio every single month while getting the offsetting tax deductions. Giving you the ability to benefit from the tax saving but also from compound interest as well.

Whatever metaphor you want to use, “its a win, win” or “two birds with one stone” doesn’t matter, because they are both right. Combining this tax-deductible mortgage with a sound investment strategy can significantly increase your net worth over the long term.

You may not think you have the resources to ‘out-manoeuvre’ the tax problem – but you do!

The wealthy have debt too – just because they are ‘wealthy’ does not mean they don’t borrow to buy their homes as well, just like the rest of us. The difference is they routinely turn their non-deductible mortgage loans into tax-deductible ‘good debt’ by enlisting the help of well-paid accountants and tax lawyers.

But with new mortgage products and a well educated ClearHome mortgage broker, you can use their experience to help you set up this program for you.

It’s not hard to set up but it does require you to take certain steps, and since the government is involved, you need to make sure your paper trail is clean and obvious. I wouldn’t recommend you try this on your own, a ClearHome mortgage broker can help you set this up for no cost. They can connect you to the right tax planners that you need to work with and will ensure your mortgage is set up correctly to meet the governments requires.

But is it worth the effort to setup?

If you are like a lot of other Canadians, your mortgage is such a huge part of your monthly budget and it is likely stopping you from achieving your other financial goals. You may not be saving as much as you would like for retirement, children’s education or even vacation and travel.

What the tax-deductible mortgage process does is allows you to legally get tax deductions for interest that you are already paying, and since your interest on your mortgage is likely significant its makes the tax deduction very significant as well.

This essentially improves the structure of your debt by moving it from regular debt to tax-deductible debt.

There are many benefits to setting this up but the primary goal is generating additional tax refunds that you can now utilize to pay down your mortgage faster, save for retirement or your children’s education or even that vacation you have been dreaming about.

To be blunt, its a new source of cash that you can utilize however you want and all you have to do is jungle around the money you are already spending.

So the short answer here is “YES” its worth looking into, its worth the time investment and more importantly it’s worth your attention!

What are the next steps, and what should I do first?

As previously mentioned, the first step is to talk to your ClearHome mortgage broker that appears on this website. They can start the process to analyze your personal situation and determine what is required in order for you to get started.

They will link you to the right tax professional and start your application for the best mortgage and lender for the job.

However, if you are still on the fence you can visit to learn more about Tax-deductible mortgages as they are basically the originators or at least the first company to bring this advice to every day Canadians. They have a great book and calculator that you can buy to determine if it is worth it for you without the need to talk to a mortgage broker or tax professional.

The Smith Manoeuvre a simple, powerful strategy that extends tax-saving benefits to almost any Canadian homeowner.

The Smith Manoeuvre employs refined and proven debt conversion techniques to effectively convert mortgage interest into tax deductions leading to a snowball effect of growing annual tax refunds, faster mortgage pay-down, and higher overall growth of a retirement investment portfolio. This strategy helps homeowners to balance the cost of their home with the priorities they have for retirement and family.

The Smith Manoeuvre has been reviewed by Revenue Canada staff and endorsed by respected financial experts and economists, investment planners, and lenders.  

The Smith Manoeuvre a simple, powerful strategy that extends tax-saving benefits to almost any Canadian homeowner.

You can find the book and the calculator here together in a package on their website:

Or you can buy a used copy of the book from Amazon here:

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