The debt swamp

“What if I told you there’s a way to pay off your mortgage faster without spending extra money – by using CRA’s own rules?” a guy named Adam asked Sylvia in an unsolicited email.

“I thought you might be interested in this,” the Vancouver homeowner says.

And I am. “It’s called the Debt Swap,” says the mortgage broker, who then describes the process, and provides an example.

All you need, he says, is a mortgage and some liquid savings (non-registered).

“Here’s the play:
* Use your savings to temporarily pay down your mortgage.
* Borrow that same amount back as a separate mortgage (now it’s investment debt).
* Put the borrowed money back where it came from (your savings).”

Of course we all know what this means. Interest on money borrowed to make money (an investment loan used to buy appreciating or income-producing assets) is an allowable expense. You can deduct it from income, in the calculation of tax.

In this case Adam mistakenly calls it a refund. “Every year, you get a tax refund. Use it to cover living expenses or pay down your mortgage even faster.” Er, not exactly. But he’s a salesguy. We’ll give him some rope.

And this is his example:

* Home value: $80
* Mortgage: $50
* Savings: $50K
Step 1: Pay down the mortgage to $450K with your $50K.
Step 2: Borrow $50K in a new mortgage component.
Step 3: Put the $50K back to wherever you took it from.
Step 4: Write off the interest on that $50K every year.

Result: You use the CRA’s tax refunds to speed up your mortgage payments without spending extra money. In 10–20 years, you’re mortgage-free faster!

Is this correct and, if so, a rational thing to do?

True enough, you can take cash and apply it to mortgage debt – but only if your home loan has pre-payment privileges. Many do, but it might only be on the anniversary date. Also if your ‘savings’ happen to be in a locked-in GIC then the money is, well, locked-in. Too bad. If your liquid wealth is in stocks or (hopefully) ETFs or even evil mutual funds, those assets must be sold before any mortgage pay-down occurs. And that’s a taxable event. Capital gains will be triggered.

Now if you do all that and reduce the mortgage principal you’ve effectively transferred wealth that was liquid into house equity, which is not. In fact, given the current real estate market, that could be wiped away pretty easily by geopolitical events, monetary policy or you-know-who with the gold Oval Office and green reflecting pool. Not wise, given an uncertain economy and the wisdom of having a reserve that’s liquid.

But wait. Adam says liquidity can be restored by borrowing back fifty grand “in a new mortgage component,” in which case the interest portion of monthly payments would indeed be deductible. Naturally, that would involve fees, plus the loan might end up being a more costly second mortgage and you’d need a broker to set is all up. Yeah, like Adam. He’s so helpful.

At the end of the day the mortgage would be $500,000, like it was before. You would have paid to arrange a new borrowing. You’d have fifty grand to use to buy back the investments that were sold, triggering tax, likely at higher valuations. And a small portion of the overall monthly financing on your home would be an allowable expense that could be used to offset the fees and taxes paid in order to achieve that.

“If you’d like to see how this could work for you,” says Adam, “feel free to reply to this email or book a call. Look forward to chatting with you!”

Pass.

Now, borrow against a fully paid-off home to turn a modest chunk of windfall equity into a B&D portfolio retirement-income machine?

Yeah, maybe. But not with you.

About the picture: “Sending in this pic of our Roxy enjoying a sunset cruise,” writes Randall. “She’s a senior girl now at 11 years but still loves her boat rides in the cool of the evening.  Hope all is good in your world and you are through your healing.  Thanks to you and the team for the continued wisdom!  Enjoy the rest of this beautiful summer!”

To be in touch or send a picture of your beast, email to ‘[email protected]’.