Real Estate

Benefits of not paying down mortgage on investment property.

  • Last Updated:
  • Feb 20th, 2019 12:14 pm
Member
Jul 25, 2008
233 posts
121 upvotes
ottawa
trick91 wrote:
Feb 15th, 2019 12:29 pm
Sorry to bring up an old topic, but I am looking to pay off my rental property faster with a lump sum payment this year. My situation is as follows:

1) No credit card debt
2) Primary residence mortgage paid off
3) Have a 9month old baby, not looking to retire anytime soon

Would it make sense for me to do a big payment? I have no plans to purchase another rental property. One is a headache enough lol.
I'd assume you're still deducting mortgage interest so I don't really see the benefit at these interest rates. You're probably better off plowing that money into TFSA's, RRSPs, or RESP for the little one.
Another option, based on your apparent frustration with landlording (I get it, been there), would be to use the cash to make capital improvements and then sell the property, but I'm guessing you don't want to sell into the Edmonton market right now.
Jr. Member
Aug 16, 2011
148 posts
72 upvotes
OTTAWA
Arkaine wrote:
May 20th, 2018 7:48 pm
I don’t pay down the mortgage early on my rental property for 4 reasons:
1) I use the excess money to pay off my primary residence faster
2) Paying this down faster means that you won’t be able to use the mortgage interest as a tax deduction to lower your taxes owed
3) With interest rates being so low, there are better investments that will generate a greater return than paying down the mortgage on the rental
4) Saving up for the down payment on my next rental property.

If you’re like me one of my, if not the largest, expenses is taxes. So, I do whatever I can to pay less in this respect.

These benefits obviously change if you’re in a lower tax bracket, are close to retirement or have your TFSA/RRSPs maxed.

Hope that offers some insight.
True to all that.... my 3% interest rate on my investment property really amounts to 1.5% when taking into account taxes, if you really think about it that way... whereas I can't tax deduct on my principal residence.
Sr. Member
Jun 7, 2017
567 posts
424 upvotes
Arkaine wrote:
May 20th, 2018 7:48 pm
I don’t pay down the mortgage early on my rental property for 4 reasons:

3) With interest rates being so low, there are better investments that will generate a greater return than paying down the mortgage on the rental
Via the magical unicorn of leverage. LOL, NO! If this was the case, everybody with any borrowing power would become billionaires with no effort, just your simple math. Ughh.
Member
Nov 9, 2017
379 posts
27 upvotes
Can someone give an example of tax savings on mortgage interest on rental property so that everyone here understands what type of difference it can make to invest the money elsewhere and save on taxes or to pay mortgage and save on mortgage interest?
Deal Fanatic
User avatar
Jun 26, 2005
9203 posts
1376 upvotes
Toronto
trick91 wrote:
Feb 15th, 2019 12:29 pm
Sorry to bring up an old topic, but I am looking to pay off my rental property faster with a lump sum payment this year. My situation is as follows:

1) No credit card debt
2) Primary residence mortgage paid off
3) Have a 9month old baby, not looking to retire anytime soon

Would it make sense for me to do a big payment? I have no plans to purchase another rental property. One is a headache enough lol.
Put that money to work in the stock market. Markets are now on an uptrend. XSP or SPY or Visa, MasterCard, etc. Or even BCE
Sr. Member
Aug 4, 2003
588 posts
47 upvotes
Edmonton
rfdrfd wrote:
Feb 19th, 2019 10:13 am
Put that money to work in the stock market. Markets are now on an uptrend. XSP or SPY or Visa, MasterCard, etc. Or even BCE
Dont think i am familiar enough to try the stock market game.
Member
Nov 9, 2017
379 posts
27 upvotes
rfdrfd wrote:
Feb 19th, 2019 10:13 am
Put that money to work in the stock market. Markets are now on an uptrend. XSP or SPY or Visa, MasterCard, etc. Or even BCE
Can you give example of how much he would be taxed on stock market gains vs savings he would make on "rental property mortgage tax savings"?
Jr. Member
Aug 16, 2011
148 posts
72 upvotes
OTTAWA
snowhite445 wrote:
Feb 19th, 2019 12:15 pm
Can you give example of how much he would be taxed on stock market gains vs savings he would make on "rental property mortgage tax savings"?
You basically have to build a model with various attributes to determine what your breakeven would be... back of the napkin calc... lets say you are in the tax bracket 43.41% fed + prov combined... 32.36% fed bracket / 11.16% prov bracket.. if you make between 80k-130k... this is different with every tax bracket thus why you need a model... for every dollar you pay in additional interest, you can deduct 43.41 cents in taxes, so effectively, you are only paying 43% the posted interest rate, if you get my flow. You can use that $1 to invest in the stock market at a 7-8% long term rate... using a rule of 12... that $1 will become about $4 in 25 years... and will only become taxable when you sell it..... but there are so many variables including your tax bracket today, tax bracket when you sell, long term average stock market rate, your mortgage rate for your rental property, etc.... the advantages are deferred capital gains tax on that $1..... a dollar saved today is worth more than $1 taxed today.. is that $1 is put into RRSPs or a regular investment acct, you don't get taxed until you sell that investment... hence the advantage of this plan
Member
Nov 9, 2017
379 posts
27 upvotes
Jeremyl007 wrote:
Feb 19th, 2019 1:12 pm
You basically have to build a model with various attributes to determine what your breakeven would be... back of the napkin calc... lets say you are in the tax bracket 43.41% fed + prov combined... 32.36% fed bracket / 11.16% prov bracket.. if you make between 80k-130k... this is different with every tax bracket thus why you need a model... for every dollar you pay in additional interest, you can deduct 43.41 cents in taxes, so effectively, you are only paying 43% the posted interest rate, if you get my flow. You can use that $1 to invest in the stock market at a 7-8% long term rate... using a rule of 12... that $1 will become about $4 in 25 years... and will only become taxable when you sell it..... but there are so many variables including your tax bracket today, tax bracket when you sell, long term average stock market rate, your mortgage rate for your rental property, etc.... the advantages are deferred capital gains tax on that $1..... a dollar saved today is worth more than $1 taxed today.. is that $1 is put into RRSPs or a regular investment acct, you don't get taxed until you sell that investment... hence the advantage of this plan
Thanks for the example. I think we are getting there but no quiet yet :)

Let's keep it simple and say it's the first tax bracket and that no one, almost no one, wants to put money away for 25 years. So, you buy and sell during the year to three years. Let's say the return is 5% annual. Now, let's say come up with some more calculated numbers.

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