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Tax Deductible Mortgages for Canadians

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For years Americans have enjoyed the benefits of being able to deduct the interest paid on their residential mortgages and save on income tax. Some people may say that this benefit is partly why Americans have encountered so much housing trouble as this concept encourages you to keep a high mortgage balance…after all the interest is tax deductible, why not? Luckily or not, in Canada, we are more conservative. While we don’t have all the same benefits in Canada, there is a way to build your net worth and benefit from some legal tax deductions. Fraser Smith popularized this strategy with the release of his book entitled “The Smith Manoeuvre”. He’s not reinventing the wheel with this book; however he does bring forth a lot of common sense and good advice.  His book takes up many pages and to offer a summary in this space would not be doing anyone justice, therefore I will offer up the basic idea behind it and give you some recommendations as to whether or not it’s right for you. 

The book explains in detail the concept of borrowing money against the equity in your home and then investing that equity in order to make that portion of the interest paid tax deductible.  As you build your equity, your investment portfolio builds and so does your tax deduction. It’s in my view a very sensible approach for Canadians and our sensible approach to fiscal matters is perhaps something that has contributed to enabling our real estate market to remain quite stable despite the economic doom and gloom down South. 

This strategy is for you if you have at least 25% equity in your home and are not adverse to some risk associated with investments. This strategy is not for you otherwise. It’s a bit complicated to manage and few lenders offer the right type of mortgage product to enable the reallocation of debt from one account to another. Currently I’m aware of 3 lenders who do offer the types of mortgages to keep your accountant and Canada Revenue Agency happy. Merix Financial, FirstLine Mortgages and National Bank offer these types of “all-in-one” sort of mortgages that can automatically reallocate the equity to a readvancable credit line.    

For more info or to find out if it’s right for you feel free to call me anytime at 604-790-7253 or send me an email to mortgageteam@live.ca.

Top 5 Ways to Improve your Credit

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  1. Don’t open any new creditor accounts. If you already have enough credit cards etc…please don’t open or take out any new loans. A new loan will report on your credit score as an R0 and will be considered “too new to rate” and will take big points bite off your credit score. 
  2. Pay everything on time. If you haven’t been paying stuff on time, start NOW. You don’t have to pay off the whole balance, but do make a little more than the minimum payment required.
  3. Keep balances LOW versus your available limits…as low as possible. Let’s say you have a VISA with a 10,000 limit…please try to keep that limit below 7000.00 and do this with all your revolving credit accounts. It’s better to spread the debt over different accounts than to accumulate it all on one credit card. And being over your limit takes a big hit on your credit score.
  4. Don’t close any old credit accounts…the longer you have had a good account open, the better. Even if you don’t use that student Visa with the 500.00 credit limit…if you’ve had that card for the past 10 years…GREAT! Close it after the mortgage!
  5. If you do not have any credit…or have had credit issues in the past and have NO CURRENT credit…open an RRSP loan. Banks won’t do a credit cheque on an RRSP loan for 2000.00 or less and it’s an instant approval. These loans will report to the credit bureau and will boost your score faster than a secured credit card would…plus think of the tax savings, take some of those tax savings and put it down on your loan. But, if you have a long term plan in mind…don’t pay off that loan too quickly! It should be reporting to the credit bureau for at least 1 to 2 years. Then, once you have had this reporting for 6 months, you can then apply for an unsecured VISA or MC as your second piece of credit on the way to building your credit worthiness for a mortgage or other major loan.