COVID and the housing market

[Lightcycle]

So you're paying heloc interest out of conventional income? Your plan seems ok. I havent done enough research on cra's view on a perpetual loan for an investment. You dont want cra to argue with you.

It shouldn't be an issue. I carried a perpetual balance on my HELOC for well over half a decade while trying to crawl out of a badly leveraged investment after the DotCom bust.

Also the banks push loans for investment all the time. Of course, the investments they are pushing are the bank's own mutual funds.

High MER on the fund + collecting interest on the loan - win win for them, they are eating the customer's sub sandwich from both ends...

 

[Lightcycle]

Time for a Viper!

 

[mimico_polak]

So you're paying heloc interest out of conventional income? Your plan seems ok. I havent done enough research on cra's view on a perpetual loan for an investment. You dont want cra to argue with you.

First question I get from Tangerine when I dump more $ into the RSP...'did you borrow money for this transaction?'

 

[GreyGhost]

First question I get from Tangerine when I dump more $ into the RSP...'did you borrow money for this transaction?'

I'm not sure if that's an issue related to taxes/regulations or of that's just a marketing opportunity. Why is rsp money going near tangerine these days? I have a small pot left there and it was convenient but damn are the returns ever substandard.

 

[Mad Mike]

That's roughly what I'm doing. With crazy house price runup, my max approved loan (Heloc+mortgage) is <40% of current market value of house. TDS will limit us long before percentage of house value.

A bunch of the money I pulled out of the heloc is at 1.5% for six months as the bank wants me on the treadmill. I didn't buy a car or consumer electronics with it though so I can get off at any time. I pulled more than I wanted and by sending the money between banks, paid off some of the normal heloc loan with the special rate loan. Bank doesn't really care what I do with the money but to qualify for special promotions they want you to send the money to an external location (presumably to turn into smoke and then you are hooked).

Your example has 54% appreciation in five years not 35% but the concept is valid. ($65 went up by $35).

Depending on where you bank you might be able to convert all or part of your HELOC back into an installment loan (mortgage) at a lower interest rate. The upside is lower interest and a predictable principal paydown, the downside is the payments are higher as you're not just servicing the interest.

 

[Lightcycle]

Depending on where you bank you might be able to convert all or part of your HELOC back into an installment loan (mortgage) at a lower interest rate. The upside is lower interest and a predictable principal paydown, the downside is the payments are higher as you're not just servicing the interest.

It's an option, but another downside of a loan vs HELOC is that you lose the flexibility of paying back the loan in full if you liquidate the investment or catch a windfall in some other way. Not without incurring some kind of penalty.

If you feel the investment is long-term, or that you'll move the proceeds to another investment, then a fixed-rate, fixed-term loan is the way to go.

 

[Mad Mike]

I just started this as well with my HELOC a few months ago. I'm not planning on paying down the line. Instead I'm going to reinvest the dividends. There is a lot of room to go in my RRSP so how I see it for taxes is deduct HELOC interest from regular income, pay taxes on the dividend but put those dividends into my RRSP for that deduction. The tax advantages help justify it to me.

In terms of risk my comfort level is for every $1 I have invested I will use up to 40 cents of the banks money. This should give me enough of a buffer that if markets crash I won't panic over the borrowed funds.

Can't say I follow this. If you pay $1 in interest, you can deduct that $1 so long as your investment generates income. Today that $1 of interest paid would generate about $1.75 in income - so your net income would be .75 cents. You can pay tax on that or defer paying tax by putting it into an RRSP.

Personally I'd put everything into a TFSA as the income and capital gain are both tax free, whereas the RRSP is simply deferring today's taxes AND you're building tax liability inside your RRSP on the dividend gains AND capital gain on the dividend stock.

Unless we're talking six-zeros, I can't see a situation where the RRSP would get you ahead.

 

[Mad Mike]

It's an option, but another downside of a loan vs HELOC is that you lose the flexibility of paying back the loan in full if you liquidate the investment or catch a windfall in some other way. Not without incurring some kind of penalty.

If you feel the investment is long-term, or that you'll move the proceeds to another investment, then a fixed-rate, fixed-term loan is the way to go.

That's true, however that has a relatively short horizon for most people -- max 5 years less whatever time you went by before your windfall. The solution is simply to invest the windfall in a conservative product untill the mortgage term expires -- you're still ahead!

 

[GreyGhost]

Depending on where you bank you might be able to convert all or part of your HELOC back into an installment loan (mortgage) at a lower interest rate. The upside is lower interest and a predictable principal paydown, the downside is the payments are higher as you're not just servicing the interest.

Mortgage renewal is in two years. I will see how things looks closer to the date. The plan is to maintain mortgage plus heloc at roughly the level of initial mortgage. It muddies the financial waters if I merge mortgage and investment loan. Right now it's clean and cra would have no problem following the money. Dividends from current holdings pay off the initial loan in approximately nine years.

 

[blackcamaro]

So you're paying heloc interest out of conventional income? Your plan seems ok. I havent done enough research on cra's view on a perpetual loan for an investment. You dont want cra to argue with you.

Correct, I’m paying the interest out of my regular income. It is all income producing so as I understand it I meet CRA criteria. I do not believe there is any type of payment schedule or how you use the income that the CRA requires.

 

[GreyGhost]

It's an option, but another downside of a loan vs HELOC is that you lose the flexibility of paying back the loan in full if you liquidate the investment or catch a windfall in some other way. Not without incurring some kind of penalty.

If you feel the investment is long-term, or that you'll move the proceeds to another investment, then a fixed-rate, fixed-term loan is the way to go.

I can pay up to 20% of initial loan in a year without penalty. That would easily cover liquidating leveraged investments.

 

[blackcamaro]

Can't say I follow this. If you pay $1 in interest, you can deduct that $1 so long as your investment generates income. Today that $1 of interest paid would generate about $1.75 in income - so your net income would be .75 cents. You can pay tax on that or defer paying tax by putting it into an RRSP.

Personally I'd put everything into a TFSA as the income and capital gain are both tax free, whereas the RRSP is simply deferring today's taxes AND you're building tax liability inside your RRSP on the dividend gains AND capital gain on the dividend stock.

Unless we're talking six-zeros, I can't see a situation where the RRSP would get you ahead.

TFSA is basically full. That was one of my first goals and it’s checked off. Otherwise I would probably do the same.

 

[Mad Mike]

Correct, I’m paying the interest out of my regular income. It is all income producing so as I understand it I meet CRA criteria. I do not believe there is any type of payment schedule or how you use the income that the CRA requires.

Your interest can only be deducted from money borrowed to fund investments that generate regular interest or dividends. You can use the proceeds dividends and interest as you see fit however they are to be included in your annual income.

Since the tax on income should be considerably higher than the interest -- you're scheme doesn't make sense to me. I'd rather pay the small amount of interest on the loan and funnel everything back into a TFSA where there is absolutely zero tax on the income or capital gain. You can even use the income from a TFSA to pay the interest on your HELOC without penalty.

 

[mimico_polak]

I'm not sure if that's an issue related to taxes/regulations or of that's just a marketing opportunity. Why is rsp money going near tangerine these days? I have a small pot left there and it was convenient but damn are the returns ever substandard.

Cause I'm a fool! LoL

I loved the set it and forget setup of it...but time to move it to QT as that's def better overall.

 

[GreyGhost]

Your interest can only be deducted from money borrowed to fund investments that generate regular interest or dividends. You can use the proceeds dividends and interest as you see fit however they are to be included in your annual income.

Since the tax on income should be considerably higher than the interest -- you're scheme doesn't make sense to me. I'd rather pay the small amount of interest on the loan and funnel everything back into a TFSA where there is absolutely zero tax on the income or capital gain. You can even use the income from a TFSA to pay the interest on your HELOC without penalty.

If you borrow to invest in tfsa, loan interest is after tax dollars. If possible, it is better to put non-leveraged money in tfsa and borrowed money in non-registered.

 

[blackcamaro]

Your interest can only be deducted from money borrowed to fund investments that generate regular interest or dividends. You can use the proceeds dividends and interest as you see fit however they are to be included in your annual income.

Since the tax on income should be considerably higher than the interest -- you're scheme doesn't make sense to me. I'd rather pay the small amount of interest on the loan and funnel everything back into a TFSA where there is absolutely zero tax on the income or capital gain. You can even use the income from a TFSA to pay the interest on your HELOC without penalty.

I responded to you before. TFSA is full I can’t contribute more. So that is right out of play. Next January it will be full again once new contribution room is opened up.

 

[Lightcycle]

I can pay up to 20% of initial loan in a year without penalty. That would easily cover liquidating leveraged investments.

Still, 5 years is a long time paying interest if you're sitting out the market with cash on hand.

To each their own, but I've always favored the flexibility of a HELOC. Despite the rates being slightly higher, it's always worked out cheaper for me in the long run with my investing style.

In and out. No mess, no fuss. No breakfast in the morning, and no illiterate kids I don't know anything about...

 

[Mad Mike]

I responded to you before. TFSA is full I can’t contribute more. So that is right out of play. Next January it will be full again once new contribution room is opened up.

Sorry, didn't see your TFSA is full. Did your banker tell you a maxed-out TFSA is a strong indication you need another new bike?

 

[GreyGhost]

Still, 5 years is a long time paying interest if you're sitting out the market with cash on hand.

To each their own, but I've always favored the flexibility of a HELOC. Despite the rates being slightly higher, it's always worked out cheaper for me in the long run with my investing style.

In and out. No mess, no fuss. No breakfast in the morning, and no illiterate kids I don't know anything about...

It's 20% of the initial mortgage. That number is far higher than the amount I borrowed to invest.

 

[Mad Mike]

If you borrow to invest in tfsa, loan interest is after tax dollars. If possible, it is better to put non-leveraged money in tfsa and borrowed money in non-registered.

Not when money is as cheap as it is. Non-registered has tax payable on all gains and dividends, with a tradeoff of deducting the interest.

If I make $100K in 5 years off a div and capx on a $200K unregistered investment, I'd pay over $30K in taxes. The tax deduction on 15K worth of interest is at best $7.5K. I'm behind $22.5K.