Investing

Efficiency Paying cash for house vs. mortgage

  • Last Updated:
  • Jan 27th, 2017 3:46 am
Newbie
Jan 19, 2017
2 posts

Efficiency Paying cash for house vs. mortgage

I can buy a house in cash (north of 1M) or put down a minimum of 35% and invest the rest.
If investing the rest, then I would need to withdraw/sell shares to keep up with the mortgage payments.
The mortgage rate is about 2.5% 2-year fixed.
My registered accounts are all maxed out, so most of my portfolio would go in taxable account; thinking HXT and HXS, so it would be taxed as capital gains if I were to sell them...

Another concern might be if in a couple years interest rates are higher and I want to pay it all off, then I'd withdraw the invested amount but would incur significant capital gains all at once?

Trying to see which would be better/more efficient. Please let me know if any more info needed.
Last edited by 00xx00 on Jan 26th, 2017 3:04 pm, edited 1 time in total.
4 replies
Member
Apr 13, 2009
296 posts
149 upvotes
Kelowna
As opposed to taking out a mortgage and investing the remaining amount, I think it would make more sense to pay in cash, then take out a mortgage and invest the proceeds. That way the interest on the mortgage is tax deductible. This isn't exactly the Smith Maneuver, but I'm sure you can find some useful info if you Google Smith Maneuver or check the threads on that topic in the rfd forums. Hopefully some others can chime in with more details on the best way to do this in your scenario. Good luck.
Deal Fanatic
Mar 24, 2008
6278 posts
2753 upvotes
Toronto
If you have the cash, don't bother playing these games and just buy the house in cash. You can always invest your future income and make the same mortgage payments to yourself, into your investment account.
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Newbie
Jan 19, 2017
2 posts
ksgill wrote: If you have the cash, don't bother playing these games and just buy the house in cash. You can always invest your future income and make the same mortgage payments to yourself, into your investment account.
Good point, while thinkiing about this I never considered what I'm doing with my future income with a paid off house. Guess the argument for paying cash is no withdrawing/paying mortgage monthly on my mind.
Deal Guru
User avatar
Aug 8, 2012
10198 posts
4028 upvotes
BC
00xx00 wrote: Good point, while thinkiing about this I never considered what I'm doing with my future income with a paid off house. Guess the argument for paying cash is no withdrawing/paying mortgage monthly on my mind.
Your investment of the lump sum now is much more likely to grow MUCH more than the extra future income you invest.

With the singleton smith maneuver you are paying sub-3% interest rates with that being a tax deduction -- making it an effective rate of more like sub-2% actual net cost.

Something else to consider - Here's another question for you ... how much would it cost you to rent an equivalent place to live?

$1M can easily throw off $40k in income. That's $3,333/mo.
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