Mortgages and Retirement Plans Sept 2012

Q) How many people would ever own their own home if they had to save the entire purchase price before they bought it?
A) Not many!

People use mortgages to buy homes that will, over time, grow in value. Meanwhile they can pay off their mortgage debts. It just makes sense. How else would they ever come to own their own homes?

So why do people save money to retire instead of using a retirement mortgage style loan?
Perhaps no one ever explained to them that they could do this without affecting their credit rating.

To learn how it works let’s look at this example. Chad and Charlene have an increase in family income and have an extra $500.00 of monthly cash flow. They could put this into an RRSP like so many people do to get a tax refund. But could they spend that $500.00 in a different way and receive the exact same tax refund?

Charlene has learned that the Interest on a loan used for investment purposes is used as a tax write off. This would get them the same tax refund as an RRSP. She knows people who have done this by buying income properties. But income properties take a lot of time to manage and Chad doesn’t like that idea. He and Charlene want to spend more time with her kids doing things as a family. What else can that do?

Chad mentioned this to their financial adviser who can up with this simple comparison. Borrow $140,000.00 and invest that money into a secure portfolio of segregated funds (mutual funds with guarantees). Chad and Charlene will pay $500.00 a month in ‘interest only’ payments. By paying the interest only they get to use 100% of their expenditure as a tax write off.

COMPARE …………………… RRSP……………………… INVESTMENT LOAN
Annual Payments ………… $6,000……………………………….. $6,000
Tax Refund @40%……….. $2,400……………………………….. $2,400
Net annual cost……………. $3,600 ……………………………….. $3,600

Amount Invested………….. $6,000…………………………….. $140,000
Rate of return …………………… 6%……………………………………. 6%
Increased value…………….. $ 360……………………………….. $ 8,400

After loan paid……………… $6,360……………………………….. $ 8,400

Tax rate on income…………… 40%…………………………………… 20% *
Taxes due……………………. $2,544……………………………….. $ 1,680
Value net of taxes………….. $3,716……………………………….. $ 6,720

*The 20% is assuming the growth is capital gains. In reality it may be part dividends and some interest.
A more realistic tax rate based on a secure portfolio mix might be about 25% or even 30% tops.

We discourage you from doing this until you have a thorough understanding of the riskss involved. They are similar to the risks involved in buying a home and sghould be considered carefully. Get a professional planner to help. Call us at 1-800-471-0411 if you have questions.

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