The Tax Deductible Mortgage
All the titles I’ve read about this topic always say something to the effect of: Make Your Mortgage Tax Deductible. Although the titles say that, I believe it’s only used because that’s what everyone searches for. The fact is, your mortgage is never tax deductible (in Canada) unless it’s inside your RRSP or the government makes a change to the rules. That’s a different topic I’ll possibly tackle later.
Even though the title implies it, I’ve read the descriptions in some of the top finance blogs and they do describe the method correctly. However, to me, the title is incorrectly used. What’s really happening is that you’re just restructuring your finances to be more tax efficient. And the mortgage happens to be a large part of it. The mortgage is not tax deductible.
There are two particular circumstances needed to make this restructuring happen.
- You should have a mortgage
- You should have investments that are not locked in or in some type of registered retirement plan.
How Does the Overall Plan Work?
Let’s use an example of a homebuyer couple who just bought a home with a $300,000 mortgage. The couple also has $100,000 in investments that is not in their RRSP and that they did not use as down payment towards their home.
So, what can they do to make their situation more tax efficient or as other bloggers point out, “tax deductible”? Let’s say we can go back in time and redo this.
All they have to do is sell their investments and use it to pay down their home so that they have a $200,000 mortgage instead of $300,000.
Then, they take out a loan for $100,000 and invest it.
The end result: They have a $200,000 mortgage, $100,000 loan, and $100,000 in investments. It’s practically the same in that they have a total of $300,000 in debt and $100,000 in “valid” investments, which is what they had in the first place.
How is this more tax efficient than before? Well, the interest on the $100,000 loan is now tax deductible. So, if you pay $3,500 in interest, you actually can apply that to reduce your income. And that’s “how you make your mortgage tax deductible”. Which really is a bad description. It’s about restructuring your debt and investments in a tax efficient way since your mortgage is still not tax deductible. And it’s only $100,000 that is tax deductible. Only if you had $300,000 in investments (instead of $100,000) would you be able to have the equivalent of your whole mortgage amount tax deductible.
And what is “valid” you may ask? It’s basically investments that pay investment income. Also, you can’t deduct more than the income you earned in investments. Which means to maximize the efficiency of this strategy, you need to find investments that pay the same or more than interest you pay.
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