Personal Finance

Investment Options For Larger Mortgage

  • Last Updated:
  • Dec 27th, 2020 9:02 am
[OP]
Newbie
Dec 25, 2020
3 posts
1 upvote

Investment Options For Larger Mortgage

My wife and I are purchasing our home and want to capitalize on the low mortgage rate by taking out a larger mortgage and investing the excess. We would like some advice regarding what our investment options can be.

Our investment options:
  1. Maxing out our TFSA and RRSP
  2. Taking a second mortgage to purchase a rental property
  3. ?? (Additional ideas are welcome)

Some numbers:
  • We (wife and I) are in our early 30s
  • We each make $90,000 annually before tax
  • We have been approved for $800,000 mortgage
  • We need to borrow $400,000 to purchase our home
  • My remaining contribution room: TFSA=$60,000, RRSP=$80,000
  • Her remaining contribution room: TFSA=$40,000, RRSP=$5000

My questions:
  1. Do we have any additional investment options?
  2. Are there any negative effects when I max out my RRSP of $80,000 when my annual salary before tax is $90,000?
12 replies
Deal Addict
Jan 19, 2017
4429 posts
2570 upvotes
You can contribute 80k to your RRSP assuming you have the contribution room, but don’t deduct 80k in one year because you won’t get the same refund amt back because RRSP is a deduction, not a credit. The refund is based on marginal tax rate.
Sr. Member
Apr 29, 2007
635 posts
307 upvotes
Richmond Hill
jayceex86 wrote: My wife and I are purchasing our home and want to capitalize on the low mortgage rate by taking out a larger mortgage and investing the excess. We would like some advice regarding what our investment options can be.
That's not how a mortgage works, generally speaking.

The lender sends the loan amount to your lawyer (eg $400,000). You send your down payment to your lawyer. The lawyer sends the money to the seller. There is no excess amount.
The lender doesn't just give you an $800,000 cheque just because you're pre-approved for it.
Newbie
Jan 7, 2017
22 posts
13 upvotes
I agree with fkl118. The mortgage is of a set amount, sometimes brokers are able to get you a little extra amount if you have an outstanding balance on credit cards, line of credit and car loans. You can apply for HELOC Mortgage which gives you a line of credit attached to your house (up to 80% of property appraised value) which keeps increasing as you pay down the mortgage. you can take money out of HELOC but interest rates are high around 5%. It's better to pay the mortgage weekly and reduce the overall interest cost or reduce the length of the mortgage. The only best option is to buy a rental property using HELOC funds. In most cases, you have to pay a 20% down payment for the second property. The attached article will provide more info on paying the mortgage early or use a free calculator on the bank website to calculate amortization and how it changes with increasing payment and frequency.

https://www.moneysense.ca/spend/real-es ... age-early/
Newbie
May 9, 2018
72 posts
37 upvotes
if you have a 400k, down payment, your best bet is to only use 20% of the sale amount (160k) and to take what you have left (240K) and put it into investments. essentially your paying mortgage rate interest to invest the 240k. and will have a mortgage of 640k @ a low interest rate.
[OP]
Newbie
Dec 25, 2020
3 posts
1 upvote
Sorry, I should have been more clear.

I have $1,300,000 in cash, and the home I plan to purchase costs $1,700,000. This means I need $400,000 to close the deal. I was thinking of taking a larger mortgage to purchase the house, and use our cash to invest.
[OP]
Newbie
Dec 25, 2020
3 posts
1 upvote
ml88888888 wrote: You can contribute 80k to your RRSP assuming you have the contribution room, but don’t deduct 80k in one year because you won’t get the same refund amt back because RRSP is a deduction, not a credit. The refund is based on marginal tax rate.
Sorry, I don't quite follow this.

Since my annual salary is $90,000, and I plan to contribute $80,000 to my RRSP (I verified I have enough room), I would be taxed only on $10,000. Is my understanding incorrect?
Deal Addict
Jan 19, 2017
4429 posts
2570 upvotes
jayceex86 wrote: Sorry, I don't quite follow this.

Since my annual salary is $90,000, and I plan to contribute $80,000 to my RRSP (I verified I have enough room), I would be taxed only on $10,000. Is my understanding incorrect?
I am assuming yo don't know how tax refund is calculated when you deduct RRSP contribution. The same $80K deduction can give different total refund amt based on your income and hence marginal tax rate for the year of deduction. If your total income is $90k, it is better to claim $40k deduction each year for 2 years, instead of deduction of $80k in one year. You will get more total refunds by deducting $40K each year for 2 years vs. deducting $80k in one year.
Deal Addict
Jan 19, 2017
4429 posts
2570 upvotes
jayceex86 wrote: Sorry, I should have been more clear.

I have $1,300,000 in cash, and the home I plan to purchase costs $1,700,000. This means I need $400,000 to close the deal. I was thinking of taking a larger mortgage to purchase the house, and use our cash to invest.
In that case, just put less down payments and borrow more for your mortgage. Use your cash left over after down payment to invest.
Newbie
May 23, 2011
80 posts
107 upvotes
jayceex86 wrote: Sorry, I don't quite follow this.

Since my annual salary is $90,000, and I plan to contribute $80,000 to my RRSP (I verified I have enough room), I would be taxed only on $10,000. Is my understanding incorrect?
You could, and you’d be correct. But no self respecting accountant would advise you to do that.

If you claim all that deduction in one tax year your tax return wouldn’t be as large as it should be.

If you claim all 80k,
30k or so would be at 35% tax bracket. So 30k x .35 = 10.5k refund.
30k would be at 30%
And 20k would be at 20%.
I just made up those numbers. Too lazy to check.

But if you spread out those claims over 4 years,
Each other year your could claim 20k at 35% marginal tax rate. Tax refunds always come off the top.
So basically it’s diminishing returns the more you deduct per year. The other way to think of it is, you pay very little tax between your 10k to 20k earning. But you pay more for your 80k to 90k earning. So deducting down to 80k is way better return than deducting from 20k down to 10k.

Sounds like what you should do is max your tfsa and RRSPs. Deduct the RRSP only to lower your tax bracket to the next level down.

If you don’t want to fill up your RRSP all in one go, fill up your tfsa and let it grow tax free. Then withdraw and invest into RRSP when you need.

Tfsa isn’t taxed on withdrawal but RRSP is. So tfsa is more flexible.
Newbie
May 23, 2011
80 posts
107 upvotes
TonyG35088 wrote: if you have a 400k, down payment, your best bet is to only use 20% of the sale amount (160k) and to take what you have left (240K) and put it into investments. essentially your paying mortgage rate interest to invest the 240k. and will have a mortgage of 640k @ a low interest rate.
Even better. For investments in non tax sheltered accounts, have that money as. Separate mortgage.
So instead of 640k mortgage. Have 160k as one mortgage and 480k as the other. Use the 480k for investments and that will be tax deductible. But you’d have another mortgage payment. Basically smith maneuver.
Deal Addict
Jan 19, 2017
4429 posts
2570 upvotes
JoloLo wrote: You could, and you’d be correct. But no self respecting accountant would advise you to do that.

If you claim all that deduction in one tax year your tax return wouldn’t be as large as it should be.

If you claim all 80k,
30k or so would be at 35% tax bracket. So 30k x .35 = 10.5k refund.
30k would be at 30%
And 20k would be at 20%.
I just made up those numbers. Too lazy to check.

But if you spread out those claims over 4 years,
Each other year your could claim 20k at 35% marginal tax rate. Tax refunds always come off the top.
So basically it’s diminishing returns the more you deduct per year. The other way to think of it is, you pay very little tax between your 10k to 20k earning. But you pay more for your 80k to 90k earning. So deducting down to 80k is way better return than deducting from 20k down to 10k.

Sounds like what you should do is max your tfsa and RRSPs. Deduct the RRSP only to lower your tax bracket to the next level down.

If you don’t want to fill up your RRSP all in one go, fill up your tfsa and let it grow tax free. Then withdraw and invest into RRSP when you need.

Tfsa isn’t taxed on withdrawal but RRSP is. So tfsa is more flexible.
tax rates are here : https://www.taxtips.ca/taxrates/canada.htm
Newbie
Nov 29, 2020
20 posts
15 upvotes
The advice you have been given so far in this thread is fairly good. From experience these things take time to understand and from your responses I can see that you're only just starting to explore the benefits of this option. Since you're working with a relatively large amount I recommend you either take a long time to first understand tax law, how RRSP deductions work, and how paying interest on loans for non-tax-sheltered investments work before proceeding. Otherwise you may be better off with just finding a good accountant who can help you with all of this. Best of luck to you and congrats on finding a home!

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