How to pay off your mortgage 40% faster.

– So, how can you pay off
your mortgage more quickly? And more importantly, how can you pay off your
mortgage more quickly so you can reach that stage in your life where you can make some
meaningful savings, so that you can increase
your wealth trajectory and have a better retirement. Hi, I’m Mike McKague with
Precedence Private Wealth. And here, with our clients, we use a strategy we call the tax deductible mortgage strategy, to help clients pay off
their homes about 40% faster. So, I’m going to give a detailed example of exactly how the strategy works. But first, just understand, and this is intuitive in peoples mind, why it is such a challenge
to pay off your mortgage. So, to pay off your mortgage
you have to earn income. You have to pay tax on that income. Then, you have to take
that money and pay interest on your mortgage for
the cost of borrowing, before you pay down any principal. Well, Canadians, and think about it, the number one lifetime
expense Canadians will have is paying tax on their income. The number two lifetime expense
that most Canadians have, who have homes, is paying the cost of
borrowing the interest on their mortgage. And this strategy tackles
those two problems head-on. So here’s how it works. This is the example we’re
going to share with you. So we’ve got a home with
a $250,000 mortgage. The market value of the home is $500,000. We’ve got a 3% interest rate and this mortgage is a
25 year amortization. So, most Canadians know, out of your wallet every
month you make your payment. In this case, the monthly
payment’s going to be $1185. Of course it flows to the bank. The bank takes their interest. That interest amount is going to be $600, and the remaining amount pays down your principal, $585. What we’re going to suggest is, that rather than just
paying down that $585, we’ll use that money and we’ll flow it out and re borrow it. So, we’re borrowing the
principal we paid down, we’ll put it into a clearing
account and from there, move it into an investment account. So, we’re going to take
the principal we paid down and turn around and invest it. And over the course of time, that investment, of course, will grow. What I just described to you, this paying down your mortgage, taking the amount of
principal you paid down, re borrowing it immediately
and investing it, is called the Smith Maneuver. And anyone who has been in a 100 level accounting class would know
about the Smith Maneuver. By borrowing money and investing it, the cost of interest that you’re paying, to borrow that $585, becomes a tax deduction, and gives you a tax refund
at your marginal tax rate. So, every month, you’re going
to make your normal payment. Then we’re going to re
borrow the principal, advance it up to this
investment account and, over time, that investment
account is going to grow and also create tax deductions. Now, the other thing
we’re going to do though, if you see on this diagram
that we’ve got a house that’s worth half a million dollars, any bank will lend you up to
80% of the value of your home. So, 80% of a $500,000 house is $400,000. So, in this example, minus the mortgage debt of $250,000, this person also has
$150,000 worth of equity available in their home. So, this is how we
supercharge this strategy. We’re going to take that $150,000 and borrow it as well. We’ll flow it into this clearing account, which I’ll explain is for audit purposes. Because over the lifetime of the strategy, guaranteed CRA will audit you. And this simplifies things for
when our clients get audited. And, of that $150,000, we’re going to move most of it. We’re going to leave $5000
in the clearing account. And most of it we’re going to move to a different investment account. We’re going to call this an income fund. And this money will be
invested and create a return. What’s going to happen now,
and this is a bit of the magic, is that the growth off that investment, we’re going to peel out
of that investment account at a rate of 6% per year, but we’ll do it on a monthly basis, and flow money into your wallet the day before you need to
make a mortgage payment. So, in this example, $145,000 invested and we’ll
take out a 6% distribution, means that every month
we’re going to stick $725 in your wallet the day before you make your mortgage payment. And then you’re going to make an additional mortgage payment
of that same amount, $725. Now, of course, that money
all goes on your principal. You’re all aware that
if you make additional pre payments on your mortgage, it helps pay down your
principal way faster. So, that money goes
directly on your principal. So now, we’re in a
situation where you have your normal mortgage payment, which pays down $585 of principal, plus $725 to make $1310 on your principal. We’re going to flow all that money now and re borrow that money, and flow it to your clearing account. Before we move that sum up into this other investment account, which we call a wealth fund, we need to pay for some things. Because borrowing $145,000 on
an annual basis is not free. So, on a monthly basis
there’s an interest cost to borrow that $145,000, and that’s $483. In addition, our firm will
charge you a monthly fee to coordinate all this cash flow moving. And we charge you $39.95 plus tax, which is basically $42. So, before we move money
out of the clearing account and up into the wealth fund, you have to pay some bills. So, $483 plus $42 is
peeled out of that money, out of that clearing account, and then the residual amount
is sent up to the wealth fund. So, that residual amount is $785, is invested up in the wealth fund. So, if you take a little look here, your original situation was, every month you were
paying down $585 principal. Now, in our tax deductible
mortgage strategy, instead of paying down that principal, and getting out of that valley of debt, you are now investing $785 per month. So, there’s a subtle difference. It’s only $200 a month, but over time, what ends up happening is over time, that investment grows and grows and grows. That subtle difference of $200 creates this snowball of wealth, so that over time you end
up gaining more wealth quickly so that you
can pay off your debts. Now, we’re not done with the whole story. So, you win by investing the money over the cost of borrowing. But, additionally, that $483 per month, which comes out to a $5800 annual interest that you have to pay, can you see that? That $5800 of interest you pay
is tax deductible interest. Because when you borrow money to invest, the interest you pay on an annual basis becomes tax deductible. So, that’s going to
create a $2490 tax refund, that you’ll get in April
after you do your taxes. Now we take that money. And we ask you to please
make an additional yearly pre payment onto your mortgage. So, this just continues to
accelerate and accelerate. And over time, everything gets better. Your normal mortgage payments pays a higher percentage of your principal. So, you accelerate that way. The wealth overall out
of your income fund, and your wealth fund, continue to grow and more
and more of your debt is converted from being
non tax deductible debt, to become tax deductible debt. So, in the case of the $2490 tax refund, that maxes out closer to $7000. Which you can imagine, in the last few years of this project, creates a lot of wealth
really, really quickly. So, in this scenario, instead of a 25 year mortgage, this client ends up
with a 15 year mortgage. At that point the wealth
pays off all the debts and all the capital
gains and all the taxes. And you can walk away free and clear. What additionally happens then, is now you’re a whole decade earlier on being able to create some
real wealth for yourself, so that you can fully fund your TFSAs. So that you can think about
changing your lifestyle. So you can think about retiring earlier. So, there you go, there’s an example of the tax
deductible mortgage strategy and how we help our clients
pay off their mortgage up to 40% faster. I’m sure you have many questions. Every client has a different situation about when their mortgage
is up for renewal, how much equity they have in their house, when does it make sense to
pull the trigger on this? Dig deeper into this. Ask lots of questions. We should be able to help
you achieve mortgage freedom much earlier. Thanks very much for watching. I hope it’s been valuable.

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