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Posted on November 11, 2010 by Christine Crosby in Mortage, taxes

Mortgage Borrowing vs Tax Consequences

By Tracy McGinnes

Stuart Kruse says, “The line of thinking goes something like this, if you have a mortgage of 6.5% and you have a marginal tax rate of 20% that means, effectively your mortgage is only costing you 6.5% x (1-20%) = 5.2%.  So if you can reasonably expect to earn more than 5.2% on your money, then should take advantage of the government’s generous offer that allows you to borrow money at a low rate while being able to earn more elsewhere.

Said another way, if you were to be faced with the decision of putting money towards paying down your mortgage or investing it, paying down your mortgage guarantees a 5.2% “return” on that money.  If you believe that over a course of the next 10-20 years, that extra cash will earn more than 5.2% on average, then it should be invested.  (5.2% should be a relatively easy bogey to hit during that time frame).

While there may be some short term risk to this strategy, over the long term, it is very likely that this strategy will increase your net worth significantly.(NOTE:  These investments can be made in a segregated account, so that if you ever wanted to put it towards the mortgage, it could be done.)

“So, if you’re paying $1500/month in mortgage payments, $1100 is interest, that means you are getting $13,200 worth of deductions that you aren’t going to get next year.  And if your marginal tax bracket (the rate at which the next dollar is taxed) is 20% then will you be responsible for $2,640 more taxes.  However, since you are earning $10,000 less this year, that’s $2,000 less income tax that you are responsible for.  Net/net you will be out about $640 bucks for the year (around $50 a month).”
A financial advisor can help set up a diversified portfolio for you and Strunk suggests creating a financial plan that includes more than money.   “You need to ask yourself how you want to live. Where do you want to live?  What are your goals?  What do you want to achieve?”


Strunk says get on a plan and a budget with a financial planner that specializes in retirement issues and can include estate planning and power of attorney, among others.


“A financial advisor should be able to help you set up a diversified portfolio,” says Kruse. “A rule of thumb is that you should have a percentage of fixed income (bonds) in your portfolio that is around your age.  So, if you’re 60 years old, about 60% of your portfolio should be in the form of bonds, leaving about 40% in stocks.  Of course, this is only a guideline, which depends on your current situation, needs and risk tolerance.”

Christine Crosby

About the author

Christine is the co-founder and editorial director for GRAND Magazine. She is the grandmother of five and great-grandmom (aka Grandmere) to one. She makes her home in St. Petersburg, Florida.

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