Vancouver's Real Estate Market

[supafamous]

Originally Posted by blkgsr

for the topic of pull investments (or invest said money) vs pay down mortgage.

Let's assume we're in the highest tax bracket or close to. Let's assume it's not in a TFSA but a regular taxed account.

If I have $20K to invest and I'm getting 10% return, I'm going to lose %50? of the to the tax man? so let's say it comes to approx 5% gains?

Assume mortgage is in the 4.5% range, it would be slightly less gain putting that money direct on the mortgage?

Please correct my numbers and logic if I'm missing something

For the simplest math let's just say the marginal tax rate is 50% so if you record a 10% gain in your taxable account (let's say you made $100k) you'll get taxes on half of it at your marginal tax rate so you will end up paying $25k in taxes and have a real gain of 7.5%.

This would mean investing has a highest return than your mortgage of 4.5% (a 3% diff) but you were choosing a riskier investment versus the sure thing of a 4.5% return on your mortgage.

Some more context on my choice to pay down - my portfolio is relatively high risk for someone that's near retirement (I hold around 15% cash/bonds and am heavy in tech) because of how much my stocks have grown (I've held Apple and Amazon for 10+ years) so my pay down of my mortgage is partly driven by this. I'm taking the sure thing of a 5.37% return on a portion of my portfolio in the face of a what I think will be a relatively flat year in the market and what was a huge year for me in 2024. I chose not to pay down much in 2023 or 2024 because I was bullish on the market.

[lowside67]

Originally Posted by blkgsr

for the topic of pull investments (or invest said money) vs pay down mortgage.

Let's assume we're in the highest tax bracket or close to. Let's assume it's not in a TFSA but a regular taxed account.

If I have $20K to invest and I'm getting 10% return, I'm going to lose %50? of the to the tax man? so let's say it comes to approx 5% gains?

Assume mortgage is in the 4.5% range, it would be slightly less gain putting that money direct on the mortgage?

Please correct my numbers and logic if I'm missing something

The proper way to analyze this is to assume that your mortgage debt is tax deductible when you are comparing it to a non-registered portfolio. While it may take some up front work and perhaps realizing some capital gains to reorganize in this way, the point is that you should be able to use the Smith maneuver to result in your interest being deductible if you leave the mortgage in place to keep a non-registered portfolio in place.

Therefore, the math should really be (assuming you are in the top marginal tax rate):

Cost of debt = 4.5% with a 53.5% tax credit of that amount, net cost = 2.1%

It's also worth remembering than equity portfolio that returns 10% per year in the long run would typically do a few percent in dividends, and most of the rest in capital gains which is half the tax bill.

The net of this is that the after-tax result of having 4.5% debt and a 10% return on an equity portfolio is an average gain larger than 5.5% each year, not less.

-Mark

[JDMDreams]

Yea I'm not paying debt, your house will keep appreciating in value, same with equities, also don't forget cad just lost like 5% in value since Trump got elected. Just in that + inflation which may go back up has already offset the interest. I don't want to be in a tied down position where I'm house rich or cash poor. You are tied what you can do without cash. And if you reheloc again we'll then you shouldn't have paid it off in the first place.

Your portfolio sounds like it's big enough that even if a 25% correction, it's not like you will go homeless and you can ride it out.

[supafamous]

Originally Posted by JDMDreams

Your portfolio sounds like it's big enough that even if a 25% correction, it's not like you will go homeless and you can ride it out.

I'm pretty much just rebalancing especially as I'm sorta semi-retired now due to my health issues (I'm not sure I'll be returning to my line of high income work ever again). My mortgage was well over a million bucks not too long ago and carrying that while semi-retired doesn't feel fun even if I can carry it. I need to dial down my risk levels a bit as a result.

[blkgsr]

Originally Posted by lowside67

The proper way to analyze this is to assume that your mortgage debt is tax deductible when you are comparing it to a non-registered portfolio. While it may take some up front work and perhaps realizing some capital gains to reorganize in this way, the point is that you should be able to use the Smith maneuver to result in your interest being deductible if you leave the mortgage in place to keep a non-registered portfolio in place.

Therefore, the math should really be (assuming you are in the top marginal tax rate):

Cost of debt = 4.5% with a 53.5% tax credit of that amount, net cost = 2.1%

It's also worth remembering than equity portfolio that returns 10% per year in the long run would typically do a few percent in dividends, and most of the rest in capital gains which is half the tax bill.

The net of this is that the after-tax result of having 4.5% debt and a 10% return on an equity portfolio is an average gain larger than 5.5% each year, not less.

-Mark

assume your mortgage is tax deductible? isn't that only possible for a rental/income property

[68style]

Look up Smith maneuver

[lowside67]

Originally Posted by blkgsr

assume your mortgage is tax deductible? isn't that only possible for a rental/income property

No. Deductibility of a loan is not based on what provides the security for the loan (your primary residence), it has everything to do with what the purpose of the loan proceeds are.

-Mark