Tax Deductible Mortgage Plan (TDMP) – Worth It?
There was comment in the popular Smith Manoeuvre thread about comparing the tax deductible mortgage plan (TDMP) to the traditional SM. Here are my thoughts on the issue.
What is TDMP?
The TDMP is a basically a way for someone interested in leveraging their home to invest to hand off the whole setup. That is, TDMP will arrange the readvanceable mortgage, investment account/investments along with arranging payments, and mortgage pay down. Coincidentally, their setup is very similar to the way that I have constructed my leveraged investment strategy.
What Does it Cost?
While not everyone has the time to watch their investments, automation can be a good thing. The automation with TDMP, however, comes with a cost (and other problems). From their site:
The TDMP Setup fee is $2750 + GST and recurring Cash Management fees are $39.95 per month. These fees are 100% Tax Deductible and are funded from the proceeds of the plan so you are never out of pocket.
The Problems
While the fees are high (even if they are tax deductible), the biggest problem I have with TDMP though is their choice of investments. The TDMP invests in a high distribution fund, and uses the monthly distributions to pay down the non tax deductible mortgage. High distributions are great right? With a leveraged investment account, it really depends on the content of the distribution. Their 8% income fund has at least a portion of the distribution in the form of Return of Capital (ROC).
The TDMP withdraws all of the distribution and uses it to pay down the mortgage, similar to my modified Smith Manoeuvre strategy. As readers of MDJ know, withdrawing ROC from a leveraged investment account can mean tax trouble for the underlying investment loan. Basically as time passes, and the mortgage gets paid off, the investment loan will slowly become a non tax deductible loan due to the return of capital.
Over time, the investor will be left without a mortgage (hooray!) but with a large non-deductible investment loan in the place of a mortgage (boo!). So basically back to square one. Without the tax deductibility of the investment loan, the investor will be taking higher risk and will most likely face sub par returns after fees.
Final Thoughts
In my opinion, the only way that TDMP would make sense is if they use an income fund that payed distributions in the form of dividends only. Dividends are tax efficient and can be withdrawn from a leveraged investment account without any consequence to the underlying investment loan. That way, when the mortgage is eliminated, the investor will be left with a tax deductible investment loan.
25 Comments, Comment or Ping
1. Tom @ Canadian Finance Blog
Good review FT. I hadn’t looked into what they were investing in, the fees were enough to turn me off. Besides picking stocks for a SM seems more fun!
Jul 6th, 2009 @ 2:09 pm
2. Brendan
Isn’t this called the Smith/Snyder manoeuvre?
I don understand why anyone would knowingly do this, yet alone pay the crazy setup , and monthly fee’s?
What would be the point of swapping the mortgage for a non deductible loan?
Since the investments are ROC, would you eventually be left with zero investments, and a loan outstanding?
Jul 6th, 2009 @ 2:38 pm
3. NoDebtGuy
People without a full understanding of the process only see “tax deductible mortgage” and when presented with the basics think it is a good idea. This company makes it easy for them and shows that they will save money. Makes it a no-brainer for people who don’t do their research and don’t know there are better ways.
Mortgage acceleration products are marketed the same way. Without doing proper research and reading through blogs such as this people do not find out that there is a cheaper, more effective way!
People without the DIY attitude will always pay extra for these types of products.
Jul 6th, 2009 @ 3:34 pm
4. Victor
People without the DIY attitude will always pay extra for just about all types of products (and services).
Jul 6th, 2009 @ 5:33 pm
5. Jared
Does anyone know any income funds that do pay distributions in the form of dividends only?
Jul 6th, 2009 @ 11:28 pm
6. cannon_fodder
It would be interesting to calculate whether a person has a high likelihood of coming out of ahead instead of doing nothing (i.e. just pay down the traditional mortgage). Just because there is a better way to achieve a better result doesn’t always mean that less effective paths should be dismissed.
If you check out the articles here and on redflagdeals.com on the Smith Manoeuvre, there are still many people who don’t understand the basics in spite of the copious posts. If the TDMP can provide a real and appropriate benefit to those unsophisticated investors then it can be a good thing. Hopefully, over time, those investors will accumulate more knowledge and graduate to becoming more self-sufficient.
Jul 7th, 2009 @ 11:29 am
7. Brian Poncelet,CFP
I think when the market was doing well this idea seemed to be OK on paper. Where it really falls apart is when you have 2008 returns,have an investment loan that distributes 8% so now the fund is down 30% and you still have to pay the loan. From a math standpoint is is difficult to recover. To add to the trouble fund companies have cut the distributions! So now to fund this loan to support a fund that is down, out of pocket money comes to play.
As far as dividends are concerned you still have to pay taxes on it. As the dividends grow so does your tax bill!
So you lost not only the taxes you paid, but also the opportunity cost. Had you not paid the taxes out your pocket what you have earned over the years at a modest rate of return over time. The amount may be large!
Jul 14th, 2009 @ 11:58 pm
8. pete
hey all I guess i am one of those foolish people that got into the tdmp. I did not go with the company (but attended the lecture) so i don’ thave to pay these ridiculous fees but did use one of there financial planners. I am not the most informed person these topics (bad me) but it does sound good in theory i think. After reading this i talked to my advisor and he told me that yes we are getting roc from the distributions but my HELOC portion increases so i still will get a tax return from my investment loan. The scenario and spreadsheet they gave us also indicate this. I am second guessing myself now but so far it seems to be working well. I have only been in it since the beginning of this year but have knocked off over 10000$ from my mortgage. I know you say that this appears good because it gets rid of my mortgage (ie bad debt) but leaves me with another debt (ie ILOC & HELOC). but with the smith manuever isn’t it the same because u will eventually get rid of the mortgage but have the HELOC/ILOC still needing to be dealt with? I will still have Interest that can be claimed just like the smith manuever aswell but will have my bad debt paid off much quicker. Also how would this approach (TDMP) differ from the rempel maximum other then the roc? Also my financial planner did indicate he would do my taxes aswell because of the calculations needed at tax time. Any feed pro or con would be greatly appreciated.
Jul 16th, 2009 @ 12:18 am
9. Brian Poncelet,CFP
Pete,
You got lucky and missed some down turn but the ROC is still the same. If the fund company cuts the distribution (which they will) the pain may return.
It seems like you are using two different advisors…just stick with one! The whole idea of the ROC is great using your own money but if this market comes down again or stays flat you may be in trouble (remember, distribution cuts means more money out of your pants to pay for the loan!). As far as Ed goes he has made some good comments about ROC. Are you doing this yourself and using different advisors, or is the other TDMP advisor out of the picture or are getting two different view points?
The other things you need to do (maybe you have done them) is review the risk management (life, disability, criticall illness insurance etc.) if something happens to you and you have a loan on top of a mortgage are you covered? Do you have a will? You know the drill!
Selling investments is easy the other stuff is boring and no one likes talking about it! But ask yourself why do banks tell business owners to buy insurance? To cover the debt if they can’t pay!
I hope this helps.
Ps. what city was the seminar in and when?
cheers.
Jul 16th, 2009 @ 3:02 am
10. pete
hello brian and thanks for the quick feedback. I am only using one advisor and he was at the seminar i was at but didn’t talk. The seminar i went to was in oakville and i attended it last spring. After talking to the mortgage guy and the financial advisor a few times and when we had a follow up meeting about 6 months later we found out that the tdmp people jacked up all of there prices but these 2 guys (esp the financial planner) have been great with us and help us set eveything up with none of these fees. the mortgage guy was ok (he did get us prime) but the financial advisor has been fantastic in my opinion coaching us since day one and making sure everything is going smoothly and correcting things very quickly when it hasn’t. It looks to me that he has chosen good funds and the distributions will be the same until next year and then we will see if they change or not. As for risk management i believe i am covered. My wife and myself have upped our insurance to cover both the loans and the mortgage with a couple hundred thousand to spare if god forbid something happens. I am also covered thru my work 2x my annual salary a good pension and my job is fairly secure. We have been a little lax on our will but that is the next thing on our to do list. Our next step is getting all this extra money from the redistributions into the wealth fund and get that building up aswell. As i said earlier i think i got in at the right time (ie after the markets really tanked so my losses won’t be that huge) except for the mortgage rates not being prime-x%. Things are working smoothly and the way they indicated. so far i am really pleased but who knows what the future holds. take care.
Jul 17th, 2009 @ 2:57 am
11. Brian Poncelet,CFP
Hi Pete,
I am going to give you some homework. First call the fund company yourself and ask if they have ever cut the distribution. They will most likely tell you yes, last year or this year ask them if they will cut it in the future they will tell you maybe. Unless the fund does toward the 8% you will see distribution cuts! Next see if they have a tax department, ask how the ROC fund (borrowed money) works on your tax return. They will tell you it must be prorated down! This means over time this will not be tax deductible!
Once you done that I will give you some more home work on why (assuming you have kids) the term insurance is too little and how it’s going to cost you a lot of money over time.
If you have any questions, drop me an e-mail.
regards,
Brian
Jul 17th, 2009 @ 7:50 pm
12. Ed Rempel
Hi Pete,
You may have paid $10,000 off your mortgage, but if you have done this with ROC distributions from a fund, than $10,000 of your investment loan is now NON-deductible.
The mortgage paydown looks good, but there is actually no benefit to it whatsoever. You have not reduce your non-deductible debt. All you have done is reduced your mortgage by $10,000 and made $10,000 of your investment loan non-deductible. In total, you have the same amount of non-deductible debt.
The Smith/Snyder version of the SM (that has the ROC payments) has what we call “4 Meaningless Transactions”:
1. Take ROC distribution.
2. Pay it onto your mortgage as an extra peyment.
3. Reborrow the extra amount to invest from the SM credit line.
4. Do the calculation at tax time to only claim interest on the amount of the investment loan that is still tax deductible (essentially the amount of the investment loan less the total of all ROC distirbutions).
These 4 transactions in total accumulate absoluately nothing. If you just reinvest the distribution and skip these 4 steps, you will have:
1. The same amount of non-deductible debt.
2. The same amount of deductible debt.
3. The same amount of investments (although probably invested more effectively than in an income fund).
4. A lot less work.
Just so you are clear now it works, if you borrow to invest, but then cash in the investment and spend the money, then obviously you can no longer deduct the interst on the investment loan. This is the principle with the ROC payment. It is not taxable for the first few years, because it is considered that you are getting your principal back (return of your capital). Paying it onto your mortgage means it is no longer invested, so that amount of the loan is obviously not deductible.
For example, if you take a $100,000 investment loan and take payments of $8,000/year, after 1 year, only the interest on $92,000 of the investment loan is still deductible. After about 12 years, none of the interest is deductible.
What’s more is that it is up to you to do this calculation. CRA does not do it. They just look at your calculations and if they are not correct, CRA can deny everything. It is up to you to prove your claim for the interest deduction.
What to do with your investment loan after the 12 years? After 12 years, NONE of your investment loan is tax deductible. Now what do you do to get rid of this loan, since you cannot deduct any of the interest (and it is probably at a higher rate than your mortgage).
There is also a “ticking time bomb” with the ROC strategy, since the ROC payments become fully taxable after 8-12 years, once your cost base reaches zero. Also, when you sell the fund, most for all of the proceeds will be a capital gain, since your cost base is reduce by the ROC payments.
So, just when the loan interest is 100% NON-deductible, then the ROC payments start to be fully taxed as received (as a capital gain).
The process is complicated and makes people think they are paying their mortgage down more quickly. It is a good “sales technique”, but not an effective financial strategy.
The difference between this and the regular SM or the Rempel Maximum is that, in these latter 2 strategies, 100% of the investment credit line and investment loan (if you use one) remain fully tax deductible.
These strategies are much simpler, since they don’t involve all the “Meaningless Trasnactions”, – and they follow all the tax rules. They have all the benefits of the ROC strategy (assuming you leverage the same amount), with 1/3 the work, no “ticking time bombs”, and your tax return is easy because all the interest remains fully tax deductible.
Ed
Jul 19th, 2009 @ 2:01 am
13. pete
hello ed good to hear from you. I have read your scenario a few times before and this is what got me concerned. I might of jumped into this a little quickly but 10000$ has not all come from the roc (actually about 7000$) and my tax returns (from interest) do go up for the first few years and then does decrease later on (i assume from the roc) but it actually never gets to zero ever and stays consistent after the 8yr mark (in the 2000’s) as i wont be using the roc anymore for my mortgage so i will have some tax deductible debt throughout this process until i decide to pay of the loans. I do have my financial planner doing the reurn so this will not be a concern in regards to the calculation. It also seems that the income fund will theoretically pay off all my investment loans (if i wish to sell) in about 11yrs but may take a little longer aswell depending on the investments (but i assume this applies to the sm/rempel aswell). I know this may not be ideal but i don’t lose my tax deduction fully ever and mortgage will be payed off quicker aswell as the income fund will increase very rapidly once the mortgage is paid off as i will be able to put much more into it on a monthly basis. My one question for everyone is it better to pay off my heloc/iloc loan once my mortgage is done or aggressively put my money into the income fund to build this up much more quickly. Thanks for any feedback.
Jul 23rd, 2009 @ 11:40 am
14. Brian Poncelet,CFP
Hi Pete,
Did you ever call the fund company and ask about the ROC and distribution cuts? The key is you have do some research yourself then once you get some facts you take your next steps.
Brian
Jul 26th, 2009 @ 6:13 pm
15. Ed Rempel
Hi Pete,
Are you sure that you have done the Snyder interest calculation correctly (calculating the amount of interest that is still deductible)? Would you be able to pass a CRA audit?
I would suggest that, after your mortgage is gone, you start paying off the rest of your non-deductible debt. Most of your investment loan will not be deductible. It is not easy to fix this since the loan is partly deductible and partly non-deductible. Payments to pay down the loan are assumed to be prorated.
You always retain some tax deductible interest because the credit line you are reborrowing from remains tax deductible. However, the investment loan becomes 100% non-deductible once you have received enough ROC payments.
At that point, the best strategy is often to create a new mortgage to pay off the investment loan, since it is not deductible and a mortgage will be at a lower rate.
If you look at your non-deductible debt as a new mortgage or loan you need to pay down, you will realize that all the transactions did absolutely nothing. They are the “4 Meaningless Transactions”.
If you had reinvested the distributions from the beginning (leaving them in the fund) and never paid extra on your mortgage and not reborrowed the extra amount, you would still be in exactly the same position as now. It all looks cool, but does not change a thing – you still have the same amount of non-deductible debt, the same amount of deductible debt and the same amount invested (except that you probably will receive a lower investment return because you are focussed on income).
The one other question I have for you is what rate of return are you assuming for the income fund? Remember, the ROC distributions you receive are NOT the return – they are just giving you some of your principal back.
If your “income fund” is a balanced fund, a long term reasonable return expectation would be about 6%. If the fund is paying out 8%, you should expect the fund to decline by 2%/year on average.
If this process pays off your mortgage and investment loan faster than your original mortgage amortization, then you are probably assuming an unrealistic return.
Ed
Jul 26th, 2009 @ 9:27 pm
16. Dan
Ed , Pete and/or Brian,
I am currently at the mortgage application stage of the TDMP process to convert my standard mortgage to a reinvestable mortgage with the LOC component. What I have read has made me second guess my next steps.
Ed, what is it that you offer through your services that differs from TDMP other than the rates. I am not well informed in the investment world and during my initial meeting with the investment side of the house, I felt very re-assured that the funds would be invested in a pension fund type portfolio. The investor showed me various printouts of what I could expect to see based on a 5 – 8% market return.
I do not want to simply pay off the mortgage and be left with an equal outstanding debt. My understanding is that the LOC is payed out from the investment portfolio after the mortgage is done….or you can continue the process to continue to build wealth.
Why is this being sold by the local Mortgage Brokers and Banks if it has so many pitt falls?
Pete, you seem to be pleased with the process thus far. I would be very interested in picking your brain as I not been able to speak with anyone directly who has “pulled the trigger” on this yet.
Aug 11th, 2009 @ 4:50 pm
17. pete
hey dan i am pleased with the process so far but i wished i researched a little bit more about it as i am not very financial savy and didn’t realize that the distributions were roc and would count against my tax deductibility. I have addressed this with my financial planner who is helping us and he did indicate that this was true but also said that we would not lose all of it in the process so to me its a good thing as (a)my mortgage is paid off in approx. 6.5 yrs with the extra money per month and the lump sum with the tax return on my investment loan and heloc loan, and i could pay off my heloc and iloc in aprox 9 years if i cash in my investments (b) i never lose the my tax deductiblility at all It eventaully increase to the low to mid 3000$ and then decreases to the mid 2000$ and stays stable from then on untill i pay off the loans. I believe this occurs because the heloc investment loan is increasing as distributions come out of it. I believe eds is pretty much the same but he doesn’t use the roc so u keep the full amount of tax deductibility thus keeping the returns the same always but doesnt pay off the mortgage as quick because of the non extra payments. So i don’t know what the big deal is as we never actually lose our tax deductibility of the loans. For claiming ed is right that u do have to do a calculation to figure it out but my financial planner will do this for me so i will not have to worry about cra and as ed has said in the past if roc is being used make your financial planner do your return and sign it aswell if he is sure of the proccess and the rules of cra so i am covered there aswell. I am second guessing myself a bit after reading some comments but it seems some of them do apply to my situation and some do not. My brother in law got me onto this method and is doing it aswell and has a better business sense then me as he graduated from uwo ivey institute and is more familiar with these things. All in all i am very happy so far, i didn’t have to pay all those stupid fees that the ask as i am doing it on my own with some help, the funds my financial advisor picked seem solid and doing fairly well. As u said the income fund can be cashed in at any time to pay off the loans whenever i want and my mortgage payments that i would have been making will go into the income fund to build it up quickly and compound even quicker thus building up faster than waiting for my mortgage to be paid off. I get rid off my “bad debt” and never actually lose all of my good debt. Sorry for the ramble and i have to go but would love to here other people thoughts.
Aug 11th, 2009 @ 10:08 pm
18. Dan
Pete,
Thanks for the trply. I believe that I may have you beat in the lack of financial savy. My portfolio currently is used only for photographs. I agree that the suggested set up and on going monthy fees charged by TDMP are high however, what cost does one put on piece of mind when dealing with this amount of money, investing in this market and the potential of having the CRA knocking on the door if it is set up or maitained poorly. I’m 46 and would like to retire without a mortgage in 12-13 years…this seems like an attainable goal based on the numbers I been presented with.
I will have to check into the ROC situation and have forwarded a request for info from Ed so I can do a 1 to 1 evaluation of his solution vs TDMP’s.
It seems you may have found the solution in going with a financial advisor that was at the TDMP seminar. The one I have met operates out of TO but is up in Ottawa enough to hold my hand through the process until I become comfortable.
I would also like to hear from others on both side of the coin.
Aug 11th, 2009 @ 10:54 pm
19. cannon_fodder
Dan,
For whatever it is worth, both FT and I decided (independently) to construct an SM portfolio heavily laden with blue chip dividend paying companies. My reason was that I could create a portfolio that, with my high marginal tax rate, would deliver a dividend stream that would more than cover the interest payments. Now, 1 of my 12 stocks has suspended its dividends and another has cut it in half. Yet, I’m still in good shape and my SM portfolio is positive in spite of being invested in September of last year.
If you are not able to ‘jump start’ your SM portfolio (e.g. possible if you have a lot of untapped equity in your home that can be released through the HELOC) then perhaps you should look at a couch potato portfolio (there are articles here about that) and find some TD eseries mutual funds that come close to it.
Why take that approach? Because if you have periodic small investments to make, you don’t want the commissions of buying stocks directly to constantly depress your returns. Mutual funds like the TD eSeries are low MER funds with no cost to purchase. You may decide, perhaps when they achieve a certain size, to sell them and then buy couch potato ETFs for an even lower way to participate in our stock markets.
Look for an investment club (or clubs) in your city. You may find that really helpful to be amongst a group of people with various opinions but no conflict of interest. Hopefully you can find one that welcomes the inexperienced to gently guide them through the field of investing.
Aug 11th, 2009 @ 11:33 pm
20. Dan
Cannon_fodder,
Excellent information…to show you just how little I know about the investment game…when you refer to 12 stocks the deliver a didvidend stream, is this different from the ROC returns?
My plan as of today is to put my faith in my investment planner and follow his instructions/directions. As I had indicated previously, he has advised that my portfolio will mirror the big pension funds ( Ont. Teachers, RCMP….). He has advised that the exposure will be diverse in risk elements however, nothing at the high end of the scale.
I will check into the investment clubs in the Ottawa area, if nothing else, I can learn the language to better understand.
Just to be clear, you do not support the TDMP process based on the fees what exactly? but do support the SM process as it can be self administered with a litle help setting it up?
Aug 12th, 2009 @ 9:04 am
21. cannon_fodder
Dan,
Yes, the dividends do not include any ROC returns. It is pure dividend income which, you may well know, is the preferred type of income from a tax point of view except at the highest of marginal tax rates (capital gains income wins out at the highest levels). For example, in Ontario you can make around $35k in just dividend income without paying tax – in BC it is more than $60k!!!
I would not support the TDMP process because of its high expenses. I’d always council people to don’t bother getting into something this sophisticated until they understand to a good degree leveraged investing and all of the risks/rewards. Of course, once you do, then it should be relatively straightforward to do everything yourself.
Even if you took out an SM friendly mortgage and then just borrowed once per year to invest, how much more difficult is that than coming up with those lump sum RRSP contributions? I have only once worked with a financial advisor that I knew had my best interests at heart. He ended up quitting the industry because of the conflict of interest he would have to live with every day.
Aug 12th, 2009 @ 12:18 pm
22. Ed Rempel
Hi Dan & Pete,
Just so you are clear, the ROC distributions do NOT pay off your non-deductible debt any quicker. When you take the ROC distribution and pay it down on your mortgage, the amount of your investment loan that remains deductible is reduced dollar for dollar for the extra amount you pay on your mortgage.
If you receive a $1 distribution and make an extra $1 mortgage payment, then your mortgage is $1 less but $1 of your investment loan is no longer deductible. So, your total non-deductible debt is still exactly the same.
This is why we call this process the “4 Meaningless Transactions”.
You receive the ROC distribution, pay it onto your mortgage, reborrow the same amount to invest and then do the Snyder tax calculation to see how much of your investment loan is still deductble.
At the end of that, nothing at all has changed. You have the same amount of deductible debt, the same amount of non-deductible debt, the same amount invested – the only difference is that you did a bunch of work.
If the projections you are seeing show your total non-deductible debt being paid down more quickly then if you reinvested all distributions, then you should question the assumptions.
For example, the distribution is not related to the return of the fund – it is only getting some of your own money back.If the fund is a pension style, which means a balanced fund, then you can probably only expect long term returns of 6-7%, so if it is paying out 8%, the projection should show the “income” fund declining every year.
This is especiallly true now when interest rates are so low and expected to rise, so the bond portion of your balanced fund will likely make hardly anything. Bonds decline when rates rise.
You asked why the mortgage brokers and banks are recommending this. They all just do the mortgage. A ploy that that appears to pay off your mortgage more quickly is a good selling feature that helps sell mortgages.
You can find details of our service on our web site or by calling or emailing us. This is not an appropriate forum for talking about our sevice, but since your asked, in short, we are a comprehensive planning firm that focus on helping our clients figure out and achieve what they really want in life. We believe that the planning is what most people need most – not investment A vs. investment B. This includes advice in all financial areas, doing tax returns, etc., all of which is done for no fee. However, we are selective and only work with clients that are serious about their goals and work 100% with us.
With the Smith Manoeuvre, we do a few things differently all to get the best and cheapest mortgage, most effective investments and maximize tax savings. Our clients don’t normally pay any fees related to the mortgage or SM, since we are the advisor setting it up, not the mortgage broker. (TDMP needs to charge fees becauses they are a mortgage broker firm that is administering the SM.)
We are not restricted to only the 3 SM mortgages available to mortgage brokers. We have access to all SM mortgages, especially the ones with a few banks that tend to have the best products and rates. We also save money for our clients by sticking with 1-year terms (the best now) or variable (the best in normal environemnts) that are proven to save money.
The real key to the SM is the investments, so we focus on finding the best investments based on quality of fund manager and risk/return, instead of looking for funds that pay high distributions.
Ed
Aug 20th, 2009 @ 1:52 am
23. twp
I am 28 years old, so very green in regards to investing. From my perspective i would not be concentrating on getting rid of my mortgage. I would always have the same mortgage to use for building a portfolio rather than paying off my mortgage. Isn’t that what this stragtegy is all about? Also what better tax is there to pay than capital gains? I guess it comes down to wheather you want to build a retirement portfolio or get rid of mortgage.
Oct 28th, 2009 @ 2:57 pm
24. Dan
twp,
Since my last posting here back in August, I have pulled the trigger and started the TDMP process, converted my mortgage, pulled the equity out of my house and invested it for growth. I am not suggesting that you get rid of your mortgage….quit the opposite.
If I were 28 again (18 years ago ) and had this as an option, I would not have hesitated. It is not that I am only paying off my mortgage much faster with the additional $800 per month principal only payments that are now being made on top of my regualr mortgage payment as a result of my investments, I am freeing up that $800 equity PLUS the principal portion amount of my regular mortgage payments every month (an additional approx. $400) for continued investment. As the principal continues to get hammered down monthly, that $400 grows because the interest amount on the mortgage payment is calculated on the outstanding principal balance, thus increasing the available equity amount for investing every month.
At the end of the process, I can keep my existing mortgage open and continue to funnel all of the money (regular monthly mortgage payments that I no longer need to make ) through it and build wealth at an accelorated rate with the continued tax deductions annually or, cash out some of the investment equal to the outstanding balance of the Line of Credit and pay it off. I am then mortgage free years early, the LOC is payed off and closed and I have the ‘growth’ portion of the investments for my retirement and I can continue to invest my freed up cash flow (without the tax deductable advantages….not the way I’m planning to go!).
The bottom line is, if I started this 18 years ago, I would be at the end stage of having the house payed off, funnelling the full mortgage payment amount through the system and have many more years to build the wealth at the accelorated rate. Of course, this process was not available 18 years ago so you have a significant advantage.
Really something to think about if you have some equity just sitting in the walls of the house not doing anything.
Let me know if you have any questions and good luck!
Dan
Oct 28th, 2009 @ 4:32 pm
25. Brian Poncelet, CFP
Dan,
My concern is fees ($40 per month) and the mutual fund ROC (the fund that is distributing the money).
A number of funds had to cut the distribution beacuse of poor market returns in 2008 leaving anybody doing what you are doing short money every month. If we have a correction (after the market hit the lows in march) which I think is overdue then expect new cuts to start to happen sometime in 2010.
The other problem I see is taxes on the ROC fund you may be using. I hope this works out for you but unless fees are covered for you and you get lucky with the funds I see this as a sad story…money wise.
Oct 28th, 2009 @ 5:26 pm
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