Give your rich uncle a raise. (And let him help you pay off your house sooner!)

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Please understand that when I do an article like this, it is purely conceptual.  The numbers are very rough calculations.

I don’t know your situation and I’m no longer a financial advisor.  You need to see a professional to determine if this would work for you.  Don’t try this trick without a net!

Assumptions:  You live in Canada and “Uncle George” won’t likely ever need the money.  You have a high risk tolerance and understand market risk.  Average home value increase 3% annually.  Average return on investments of 7%.

Let’s say “Uncle George” has done well financially and has a million dollars in cash type securities in his portfolio making a whopping 1-2%.  You have a 250,000 mortgage and pay over 5%.  Now, you aren’t asking “Uncle George” to give you anything.  But, you would like to give him a raise.

You borrow $500,000 from “Uncle George” at 3%.  He’s making almost 50% more than he was.  You pay off your mortgage and put the rest into investments.  The two amounts need to be separate loans.  One for the house, the second for investing.

Now the interest on the investment loan is tax deductible because “there is a reasonable expectation of profit” and you have paid the minimum prescribed interest rate under Canadian law.

Fast forward 10 years.  You have only been paying interest on the “mortgage” and still owe $250,000.  Your investment has made an average rate of return of 7%.

Now this part of your balance sheet looks like this:

Assets                        2011                               2022

Home                         300,000                        415,000

Investment               250,000                        526,000

______________________________________

2011   Total:  550,000 – 500,000  = 50,000 net

2022  Total:  941,000 – 500,000 = 441,000         

Now, if you had a mortgage just over 5% today and just continued paying the mortgage:

Home         2011                   300,000 (Mortgage 250,000 @ 5.04%)  Asset Value:  50,000

Home         2022                  415,000  (Mortgage 176,000 @ 5.04%)  Asset Value:  239,000

So, the difference in the two strategies could be 441,000 – 239,000 = 202,000  plus the annual tax refund based on the 250,000 investment loan.  This creates an annual deduction against your income of 7,500.  The refund value would depend on your particular income level.  Keep in mind there is tax on the income from the investments.

The bottom line is “Uncle George” could help you pay off your house in just over 11 years and you actually gave him a raise!

Just a thought!

Want to throw a real curve?  What if you insured your liability to “Uncle George” against his life and he had a massive coronary two years in?  Your house would be paid off and you would still have the assets!  How’s that for risk management!

Have a great day,

Barry

P.S.  What am I thankful for today?  I’m thankful for all of my life experiences.  I’m thankful for a full tummy!  I’m thankful for my health.

What are you thankful for  today?

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Barry Clermont
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