Spring will soon arrive and with it will come the mortgage renewal season.
I offer this idea: if the size of your TFSA gives you complexes, there may be an opportunity here to give you back some pride.
You could borrow against the value of your home to invest in your TFSA. The transaction will be profitable if you get more returns than the interest on the mortgage. As current mortgage rates are at historic lows (less than 2% fixed for five years), you don’t have to look for dramatic gains to win on the exchange.
Success is not guaranteed, but unless you succumb to the temptation to squander the contents of the TFSA or to speculate with that money, the risk is minimal.
Conditions
To do this, a good part of the house must be debt free. Second, there must be some financial leeway, as the strategy will increase the monthly mortgage payments (unless you stretch the amortization period of the mortgage). Obviously, you must also have accumulated unused TFSA contribution room.
On a personal level, you have to be disciplined. A minimum tolerance for risk is required, without being a cowboy. If the prospect of investing elsewhere than in Quebec savings bonds worries you, forget it.
How to do ?
The strategy can be implemented very easily. When renewing your mortgage, apply for refinancing for a loan that is greater than the mortgage balance. If you still owe $ 100,000 on your house, apply for a new mortgage for $ 150,000, for example.
Refinancing will incur notary fees, around $ 800. Put the $ 50,000 in the TFSA and invest it to earn more returns than the interest on the loan. The success of the strategy rests entirely on this. Yes, it’s easier to write than to do. Over a period of 5 years, which is relatively short, we can be played tricks.
What does it give ?
I did some calculations with a conservative return assumption: 4% per year.
As a starting point, I used a $ 100,000 fixed rate 2% mortgage over 5 years with amortization over 15 years. I compared this to a loan of $ 150,000 with the same terms.
In the latter case, the monthly payments are obviously higher. The borrower who uses the strategy will pay $ 965 per month compared to $ 643 in the other case. However, whoever takes more money out of their pockets starts with $ 50,000 growing tax-free in the TFSA.
To get a fair comparison, anyone who ignores this strategy will gradually invest in their TFSA the difference that is advantageous in terms of monthly payments ($ 965 – $ 643 = $ 322 / month).
To find out who is richer at the next mortgage renewal in 5 years, all you have to do is take each person’s loan balance and subtract from these amounts the value of their respective TFSAs. As easy as that.
Whoever started with a mortgage of $ 150,000 ends up after 5 years with a balance of $ 104,885. Next to it, his TFSA is worth $ 60,833. By subtracting the value of the TFSA from the loan, we end up with a debt of $ 44,052.
The other ends up at the end of the year with a much smaller mortgage balance, at $ 69,924. And he accumulated $ 21,350 in his TFSA during the period. Balance sheet: a liability of $ 48,674.
We don’t know who will have the most complexes, but we know the richest.
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