Most Canadians would balk at paying more interest and nothing in principal. And while this product doesn’t make sense for most people, there are select cases where paying just the mortgage interest can boost one’s net worth.
What’s it good for?
An I/O mortgage increases a borrower’s cash flow. The idea is to use that cash, when appropriate, for purposes other than paying off a mortgage. Examples include paying down a large credit-card balance that you can’t consolidate into the mortgage, exploiting unused room in a registered retirement savings plan or investing in an income-generating business.
A savings tool
By diverting mortgage payments to higher-earning investments, an I/O mortgage can pad your retirement savings. A case in point is the following strategy for disciplined long-term investors with no high-interest debt, at least 20-per-cent equity and RRSP contribution room.
Step 1: Get a low-cost, interest-only mortgage to slash your monthly payments.
Step 2: Invest that payment savings in your RRSP.
Step 3: Use the tax refunds resulting from these RRSP contributions to make a prepayment on your mortgage each year.
Keep in mind an RRSP introduces deferred tax liabilities. For risk-tolerant mortgagors looking to augment their retirement nest egg, this is a tactic worth considering. But tax and investment nuances can make or break the gains.
Surrey / Langley Mortgage Broker
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