How To Pay Off Your Home Using
Other People's Money

(or How to make interest payments on your residential mortgage tax-deductible)


In Canada, the mortgage interest you pay on your residential mortgage is not an allowable tax deduction. However, interest paid on money borrowed for investments is tax deductible. Therefore, mortgage interest on a rental property is tax-deductible.
To pay off your home using other people's money you must have some equity in your home. Most likely, this equity will have resulted from appreciation over time.


To pay off your home quicker, the steps to follow are:
1. Arrange a Line of Credit at a financial institution, using equity in your principal residence as collateral.
2. Buy a rental (i.e. revenue) property using creative low-down or no-down payment techniques. (Do not use your Line of Credit for this purchase).

It is not necessary to pay off your own home before buying a rental property.

When you receive the monthly rent cheques, deposit them in their entirety into your bank account, then use these funds to pay-down the mortgage on your principal residence. It is not imperative that income from a rental property be only applied against that property's mortgage.


To pay the mortgage (and all other expenses) on your rental property, borrow funds from your Line of Credit. Now here is the key: because you are now borrowing for investment purposes, the interest is tax-deductible.

Let us look at an example:
Assume your home is valued at $200,000 and that it has an existing first mortgage of $70,000. Your equity, therefore, is $130,000.
The steps to follow are:
1. Establish a Line of Credit.
Arrange a Line of Credit with a financial institution using this equity as collateral. Let us assume the bank will allow you to withdraw up to $50,000 on a Line of Credit.

2. Buy a rental property.
Let us assume that the purchase price is $300,000.
To buy a rental property you could use a number of creative techniques requiring very little or no money down. Two such techniques are summarised here:

Technique #1
Arrange for an investor partner to pay the down payment of, say, $45,000. For doing so, you would agree to share the appreciation above the purchase price of $300,000 on a 50/50 basis when you sell or have the house refinanced in, say, 5 year's time.

Technique #2
Arrange for the vendor to "take back a mortgage". (The vendor in effect takes back an interest in the property. That is, you would still owe him/her money). In our example, he/she may take back a mortgage for $45,000 for 3 years with a low interest rate or better yet, at zero per cent interest! (This is possible; I have done it).

3. Use rental income for personal mortgage payments.
Let us assume that the rental income from the property is $2700 per month. Deposit this entire amount into your bank account. You will then use this money to pay down the mortgage on your principal residence.

4. Pay the mortgage (and other expenses) on the rental property with borrowed funds.
The funds to pay the mortgage on your rental property can now be drawn from your $50,000 Line of Credit.The amount of your mortgage is $255,000 ($300,000 less $45,000). Monthly payments would be approximately $2200 (9.5%, 5 year term, 25 year amortisation). When you add for example, $400 per month for property taxes, insurance and repairs, and other minor expenses, the monthly draw against the Line of Credit would average $2600.


How long will the Line of Credit last?
In addition to your withdrawals of $2600 per month, interest will be charged by the bank against your Line of Credit. As your withdrawals increase, so does the amount of monthly interest. However, a $50,000 Line of Credit will last approximately 18 months, in our example. Assuming once again $2600 per month plus an average of $150 interest, the monthly total would be $2750. $50,000 divided by $2750 equals approximately 18 months.

What happens when I exhaust my Line of Credit?
By that time you should have access to more cash and credit because:

1. The two properties should have increased in value, and

2. Rental income should have increased, and

3. Your residential mortgage will have been substantially reduced. If you need to access more funds you should be able to increase your Line of Credit.


N.B. The ideas outlined above should be discussed with professional advisors before proceeding.


Publisher's Note:
The publisher of Jennings OPEN SECRETS Newsletter assumes no responsibility for the use or application of information, ideas and opinions contained in the newsletter. Before acting on the information, ideas and opinions, readers should engage the services of competent professionals.

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