Managing Debt ~ The mortgage difference.

The least expensive way to borrow money, if you own a home, is through your mortgage.  When your mortgage term is up you may want to look at some of the higher interest rate debt and lump it in with your mortgage.  With the amorization spread out over a longer period of time this would mean that if you are making regular payments (to your credit card, for example) that you can continue to make those same payments on the mortgage and pay down the principle that much sooner.  The reason why your mortgage is offered at a lower interest rate is because it is secured by your house.  Some clients tell me they have no mortgage but when I dig in deeper I realize they have a secured line of credit.  Folks....that IS a mortgage.  Any debt secured by your home is a mortgage.  The difference is that a term-oriented mortgage (fixed mortgage) is non-revolving.  What this means is that you have an outstanding balance and you make payments to it but you cannot re-advance the difference.  Also in a fixed mortgage your interest rate is known for whatever term you have selected.   In a secured line of credit your payment fluctuates with the interest rate environment. You can also re-advance your line of credit so it is considered to be revolving debt.  For example, if my secured line of credit is $100,000 and my balance is $25,000 then I can still advance $75,000.  The fixed mortgage does not have that ability.  Of course, one major difference I have not discussed is payment options.  With a fixed rate mortgage you may be able to increase your payments by a certain percentage and also make a lump sum payment on the anniversary date but if you win the lottery you cannot payout that mortgage without penalty....and if you are in the early part of your term, maybe not at all.  With the secured line of credit you can pay whatever you wish so if you win the LottoMax $50,000,000 this Friday you can pay off your secured line of credit with no problem!!!

Tax-Effective Investing

Not all investments are created equal.  Some investments promise rates of return by the issuer (of the debt) and some have the promise of potential lofty returns (equities or stocks) but neither are they treated the same way by Canada Revenue Agency (CRA).  Marginal tax rates in Ontario dictate that income, dividends and capital gains be treated differently, from a tax perspective.  Income, like your salary is at your highest marginal tax rate and dividends and capital gains are taxed less.  Capital gains applies to properties that are bought and then sold for a profit, such as real estate, stocks and even sometimes, bonds.  Primary residences are excluded from capital gains tax but secondary residences and investment properties are not.  Dividends are payable quarterly by larger corporations if you hold their stock on the dividend date.

In order to effectively utilize a tax strategy I put all my clients fixed income (bonds, coupons, bond funds) in their registered plans as much as possible.  Why?  Because any income generated in a registered plan, such as a registered pension plan or a registered retirement savings plan shelters any income from tax.  Therefore, by placing the highest taxable investments inside the RRSP's where the income is not subject to tax, for example, the client gets to keep more of what she or he earned.  By placing the growth investments that generate capital gains and dividends in their non-registered investments clients enjoy paying at a lower tax rate. 

So if you live in Ontario your combined federal and provincial tax rates have you paying 31.15% on any interest income received (that's $0.31 on every dollar that you earn), 15.58% on capital gains and 9.76% on dividends.  So why not shelter your interest income as much as possible?

(Of course, your asset allocation and geographical allocation should not be compromised when adhering to a tax strategy but it should be considered in the appropriate fashion.)

For your marginal tax rate, here is a link:

Marginal Tax Rates in Ontario