Pay off mortgage or shelter in Prof corp

Leveraging, renting vs owning, making an investment or buying a home?
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Sleepy
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Pay off mortgage or shelter in Prof corp

Post by Sleepy »

Talking to accountant the other day and given changes to increasing tax brackets not sure whether to pay off my home mortgage early or to let it ride and renew while leaving money in Prof Corp. Stable job in Alberta.

Have 5 year term that ends August 2018 with 262K left at 2.81% fixed. Should I make a large tax payment take out cash from PC as a large dividend this year with lower taxes so that I can make 92K payment in 2016 and 2017 and finish mortgage early or should I leave money in PC and invest in index ETFs? Currently at maximum repayment schedule $1500 weekly payments.

Would like to know people's thoughts on this.
longinvest
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Re: Pay off mortgage or shelter in Prof corp

Post by longinvest »

Serious question: If you owned your home free and clear, would you go to the bank and take a mortgage to invest in the stock market*?

* Investing the money in bonds would most likely yield less than the mortgage rate.
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adrian2
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Re: Pay off mortgage or shelter in Prof corp

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longinvest wrote:Serious question: If you owned your home free and clear, would you go to the bank and take a mortgage to invest in the stock market?
The answer, for yours truly, is yes, of course.
My HELOC is proof of that.
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Koogie
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Re: Pay off mortgage or shelter in Prof corp

Post by Koogie »

adrian2 wrote:
longinvest wrote:Serious question: If you owned your home free and clear, would you go to the bank and take a mortgage to invest in the stock market?
The answer, for yours truly, is yes, of course.
My HELOC is proof of that.
Just to be different, no, of course not.. :wink:

Actually, just this fall TDCT gave us a monster HELOC against our paid off home.

Am I sorely tempted to put that equity to work ? yes
Am I to chickenshit conservative to do it ? yes

The HELOC would increase our investments by another 12.5% That would come at the expense (for me) of sleepless nights and worry about capital depreciation versus the average income yield of what ? 3 or 4% ?

For me it is not worth it. I'd probably spend all that extra income on Gaviscon...
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Re: Pay off mortgage or shelter in Prof corp

Post by longinvest »

When we bought our home, we liquidated our few investments to keep the mortgage as small as possible, while keeping a sizable emergency fund (of course). We then stopped all new investments except for mandatory workplace pension contributions (me) and employer-matched contributions (wife), as it's hard to beat a guaranteed 100% immediate gain. We put all our extra savings on our mortgage and got rid of it as fast as we could. As it happens, we got lucky: had we invested in the stock market, instead, we would have lost a lot of money over that specific time period.

Each of us should decide based on our own risk tolerance. A low-interest non-callable mortgage is probably one of the best forms of leverage. But leverage involves risk.

If there were no risks involved, one would go and take as big a mortgage as possible with a 25-year amortization schedule on a home owned free and clear, and put the money into stock index ETFs. Then, every month, one would sell just enough of them and use the proceeds along with any distributed dividends to pay the mortgage payment.

If there are no risks, as apparently "stocks never lose money over a 25 year period"*, one will always be done with the mortgage in 25 years and have a residual index ETF investment continuing to grow. If there are risks, then there's a possibility that the index ETF investment will get depleted before the mortgage is paid-off, leaving the investor worse off. I'll let readers decide. :wink:

* I do not endorse this statement nor any future return prediction for stocks.
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adrian2
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Re: Pay off mortgage or shelter in Prof corp

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longinvest wrote:If there were no risks involved, one would go and take as big a mortgage as possible with a 25-year amortization schedule on a home owned free and clear, and put the money into stock index ETFs. Then, every month, one would sell just enough of them and use the proceeds along with any distributed dividends to pay the mortgage payment.
Actually, no, not a mortgage with a 25-year amortization schedule, but an interest-only mortgage or HELOC.
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Re: Pay off mortgage or shelter in Prof corp

Post by longinvest »

adrian2 wrote:Actually, no, not a mortgage with a 25-year amortization schedule, but an interest-only mortgage or HELOC.
The interest-only mortgage would have to be non-callable.

Unfortunately, that's not the case of HELOCs, as far as I know, so it doesn't work. If it's callable, the lender can call the loan back during a crisis when it needs liquidity just as the stock index ETF portfolio is down in value. That's a pretty bad recipe for the borrower. Or, if your prefer, it's a very good way of losing a lot of money. Actually, that's often one of the main drivers of stock market crashes: people being forced to sell due to liquidity issues.

In my previous post, I assumed that using a regular mortgage with normal 25-year amortization, the bank would automatically renew the mortgage every 5-years, adjusting the interest rate to the current rate environment. In reality, I don't know what would happen if either the credit score of the borrower or the house value were down. Let's not go there. :wink:
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Re: Pay off mortgage or shelter in Prof corp

Post by Sleepy »

Thanks for the suggestions and frame of reference.

I guess I was wondering also whether by tax sheltering the additional capital because I would be taxed at the small business rate of 17% instead of the dividend rate, which I think is quoted around 38%, I would have about 21% additional capital to invest. I would eventually pay off the mortgage and if I didn't make the bigger payments, I would probably finish the mortgage without taking out money above the highest tax bracket 3 years later than if I did take out the money.

Does that make sense the way I'm thinking about this?
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