Turn Your Mortgage Interest Into a Tax Deduction
Are you looking for a way to accelerate your net worth while maintaining control of your debt? Creating a deductible mortgage may be the solution.
The deductible mortgage is a borrow-to-invest strategy that allows you to gradually unlock real estate equity and redirect it to an investment for growth. It allows you to build wealth without committing large amounts of extra cash and take advantage of long-term investment growth. It can be ideal for investors who have restricted cash flow, or those who do not want to sacrifice their standard of living now for benefits far into the future.
How does it work? Each regular mortgage principal payment builds incremental equity in the real estate it finances. A deductible mortgage plan involves establishing an investment loan equal to the amount of equity that becomes available every time you make a principal payment. As you pay down your mortgage real estate equity becomes available as security for borrowing. You then borrow that amount to fund regular contributions to a non-registered investment account. Interest incurred on the portion of the investment loan is tax deductible because it funds non-registered investments.
By implementing the deductible mortgage, even though you maintain the same amount of debt, your mortgage is gradually replaced with a tax-deductible debt used to finance your investment portfolio, effectively making your mortgage tax deductible.
The benefits of this strategy come from its long-term potential. The compounding effects of regular contributions can make a substantial difference for those with a shortfall in their retirement plans.
The strategy can also be attractive for those who want to accelerate their long-term financial goals to include a future major purchase, such as a family cottage. Like all leveraging strategies, gains and losses are amplified. Ultimately, any strategy you choose should fit your needs and be tailored to your risk tolerance. Meet with your financial planner to assess whether this strategy is appropriate for you.