Personal Finance

Pay off the mortgage (2.45%) and HELOC (3.95%), or use non-registered margin (2.28%)?

  • Last Updated:
  • Mar 14th, 2018 4:19 pm
[OP]
Newbie
Mar 8, 2018
6 posts

Pay off the mortgage (2.45%) and HELOC (3.95%), or use non-registered margin (2.28%)?

Background

Please see below for a summary of our income and net worth for context:

Image

My wife (31) and I (33) are in Ontario and just bought a condo for $616K. No kids. We've paid the downpayment and have a $484K balance owing. We could take out a mortgage, but we could use a combination of non-registered, cash and TFSA to paid it off in full completely.

We were then thinking of doing a "semi-Smith Manoeuvre" to re-fund the non-registered accounts using a HELOC (at 3.95% from RateHub) or use margin on the non-registered account (Interactive Brokers at 2.285%).

Questions
  1. Is there any reason why we should consider a mortgage at all (Ratehub 5-year variable at 2.45%)? If we have the funds to pay the condo off in full, isn't that the best option? (Assume non-registered account has no/minimal capital gains to report. I moved back from the US this year, so ACB is close to market value, and also why I don't have a TFSA at the moment).
  2. I already have my non-registered account with Interactive Brokers, and their margin rate is 2.285% for $400K (https://www.interactivebrokers.com/en/index.php?f=1595). Is there any reason why should I go with a HELOC at 3.95% when my non-registered cost of borrowing is lower?
  3. Couldn't I just take out funds from my non-registered account and use that to pay the condo, since any interest payable in the non-registered account becomes tax deductible?
Last edited by crysim on Mar 9th, 2018 2:34 pm, edited 1 time in total.
22 replies
Deal Fanatic
User avatar
Oct 1, 2011
5992 posts
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Your financial situation looks great. For once a young couple buying a home well within their means. Astonished Face

Not an expert here, but just layman's opinion.

I agree that HELOC is pointless. My investing mindset is that I prefer having essential expenses taken care of, to invest with a better peace of mind...therefore I would personally pay off the condo in full as well and simply use the margin at IB.

Alternatively, you could take advantage of the low mortgage rate, keep a small mortgage, and use a smaller portion of margin investing. That gives the money borrowed through the mortgage for you to invest and hope for gains exceeding 2.45% plus fees...there are some 2-5 year GICs that exceed this rate, even.

CDIC-insured GICs with EQ or Oaken
https://www.ratehub.ca/gics/best-gic-rates

[the difference is so small though, so not really worth the hassle for my style, especially since you both have a great income]
Deal Expert
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Jan 27, 2004
38320 posts
3113 upvotes
Toronto
Assess the risk of both.

The risk with margin is that it can be called back. So ensure you have proper resources in such a situation.
Are you willing to accept that risk for lower interest rate?
[OP]
Newbie
Mar 8, 2018
6 posts
peanutz wrote:
Mar 9th, 2018 4:03 pm
Alternatively, you could take advantage of the low mortgage rate, keep a small mortgage, and use a smaller portion of margin investing. That gives the money borrowed through the mortgage for you to invest and hope for gains exceeding 2.45% plus fees...there are some 2-5 year GICs that exceed this rate, even.
Thanks, appreciate the comments. When you suggest to take out a low mortgage rate, I assume you mean fixed? Because if we were to take out a variable mortgage, then why not just take it out against the brokerage at 2.28%?
UrbanPoet wrote:
Mar 9th, 2018 4:38 pm
Assess the risk of both.

The risk with margin is that it can be called back. So ensure you have proper resources in such a situation.
Are you willing to accept that risk for lower interest rate?
That's a great point. The non-reg has some margin already; it's got about $530K long with -$96K in margin; the maintenance margin is about $200K. (I revised the sheet).
I'd be at a risk of getting called if I were taking out $200K to cancel the mortgage, since the net would go down from $430K down to $230K.
Member
Apr 27, 2014
304 posts
84 upvotes
Mississauga, ON
crysim wrote:
Mar 9th, 2018 2:34 pm
[*]Couldn't I just take out funds from my non-registered account and use that to pay the condo, since any interest payable in the non-registered account becomes tax deductible?
[/list]
No this isn't how interest deductions work. The purpose of the funds is what matters for interest deduction so borrowing from IB to pay for a personal residence is not tax deductible.
Deal Addict
Nov 24, 2013
4856 posts
1493 upvotes
Kingston, ON
expatflame wrote:
Mar 13th, 2018 11:16 am
No this isn't how interest deductions work. The purpose of the funds is what matters for interest deduction so borrowing from IB to pay for a personal residence is not tax deductible.
Selling shares and using those funds to buy the residence, but then borrowing on margin to invest would count as a tax-deductible investment loan though, right? That would be a good approach to explore, though there'd be tax consequences for realizing any capital gains in doing so.
Member
Apr 27, 2014
304 posts
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Mississauga, ON
Mike15 wrote:
Mar 13th, 2018 2:39 pm
Selling shares and using those funds to buy the residence, but then borrowing on margin to invest would count as a tax-deductible investment loan though, right? That would be a good approach to explore, though there'd be tax consequences for realizing any capital gains in doing so.
Yes, that works. Anything where the purpose of the funds can be traced to investing will be deductible.
[OP]
Newbie
Mar 8, 2018
6 posts
expatflame wrote:
Mar 13th, 2018 2:43 pm
Yes, that works. Anything where the purpose of the funds can be traced to investing will be deductible.
Image

So #1 is not permitted as tax deductible, but #2 is permitted as tax deductible? Both end up in the same state with assets of $500 and margin loan of $150 for a net value of $350.
Member
Apr 27, 2014
304 posts
84 upvotes
Mississauga, ON
crysim wrote:
Mar 13th, 2018 9:17 pm
Image

So #1 is not permitted as tax deductible, but #2 is permitted as tax deductible? Both end up in the same state with assets of $500 and margin loan of $150 for a net value of $350.
Yup you've got it. You need to be able to trace the funds as investment for the deduction.
Newbie
Sep 20, 2015
21 posts
19 upvotes
Nepean, ON
Slightly off topic but how are you each spending 60 k a year on expenses.. Seems a bit much no?..-

Just curious
Deal Addict
Nov 13, 2013
1115 posts
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OTTAWA
ottbram1 wrote:
Mar 14th, 2018 1:43 am
Slightly off topic but how are you each spending 60 k a year on expenses.. Seems a bit much no?..-

Just curious
So they should save more than 50% of their after-tax income?
Deal Fanatic
Mar 24, 2008
5503 posts
1539 upvotes
Toronto
I would pay the condo in cash and then invest any future savings. Why play these games and leverage yourself when you don't have to?
Illegitimi non carborundum
Penalty Box
Aug 10, 2010
781 posts
183 upvotes
Mars.
What's a non registered long term asset? I can't figure out what that's for, because my immediate question is why isn't that in a TFSA? Or even just the cash that's lying around?
Don't be a cooch.
Deal Addict
User avatar
Apr 23, 2009
1230 posts
328 upvotes
This is what i would do:

(1) Pay-off mortgage
(2) Pay-off all other debts, if any
(3) Take refinancing on the condo (find the cheapest rate possible) and invest back into a joint margin with spouse (open a new account to keep it clean)
(4) Make mortgage payments from the dividend income
(5) Do nothing and let the portfolio grow over long term (in your case 30 years)

You will probably pay a very little capital gain tax since your ACB is closed to market (your move from US would have triggered taxes already). This is a perfect timing since you would have very little capital gains to report.
$500K compounded at 8% over 30 years would be $4.65 million. At 10%, this would be $7.93 million. With some planning, this rate of return is achievable.

You may optimize your investments with margin loans of up to 20% (strictly 20%) of equity. This will give you a nice boost. The interest expense on mortgage and margin loan will keep your tax liability in check. Since you will hold the assets long-term, you will be able to defer the capital gains for a long time.

As you pay-down mortgage, you may open a HELOC for emergencies, margin calls (extremely unlikely if you limit your margin exposure i.e. debt/equity to 20%) or opportunity buying. You already have sufficient cash reserves to withstand short-term hiccups.
Deal Fanatic
Mar 24, 2008
5503 posts
1539 upvotes
Toronto
ruchir wrote:
Mar 14th, 2018 12:13 pm
This is what i would do:

(1) Pay-off mortgage
(2) Pay-off all other debts, if any
(3) Take refinancing on the condo (find the cheapest rate possible) and invest back into a joint margin with spouse (open a new account to keep it clean)
(4) Make mortgage payments from the dividend income
(5) Do nothing and let the portfolio grow over long term (in your case 30 years)

You will probably pay a very little capital gain tax since your ACB is closed to market (your move from US would have triggered taxes already). This is a perfect timing since you would have very little capital gains to report.
$500K compounded at 8% over 30 years would be $4.65 million. At 10%, this would be $7.93 million. With some planning, this rate of return is achievable.
...
With a 108k surplus per year, it will take OP < 5 years to have the same 500k invested. How much of a difference would it really make in the long run once your subtract mortgage costs/fees/taxes etc?
Illegitimi non carborundum

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