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I've a liquid net worth of 400k, generally invested in a diversified
group of equities, bonds, and PM funds (fully paid for; ie. no margin
used yet). I am planning on purchasing a $150k propert, putting 25% as
a downpayment, and was originally considering putting the rest on a
25-year mortgage without touching my investment portfolio - basically
I would pay ~690 per month @4.8% for a 25year mortgage (interest payments
would originally cost roughly $475/month). In Canada, the mortgage
interest payments aren't tax-deductible, but the interest payments on
one's investment account (nonRSP) are deductible. So I thought of an
alternate strategy, which would be to take out roughly 120k as borrowed
cash from my investment portfolio (ie. not sell any of my securities)
and thus use that as a margin loan for the remainder of the portfolio,
and apply the 120k towards the house. This way, instead of paying
interest on a mortgage loan, I would pay margin interest instead, which
should be fully deductible. The current margin interest rate is 4.72%.
Does this strategy make sense? I do not think I would be taking on extra
risk, since the net cash and equity position would remain the same,
except the the loan would be coming from the brokerage firm instead of
a mortgage lender. I calculated that the net savings would be roughly
2300 in the first year (assuming 40% tax rate).
One concern would be interest rate risk; if rates were to rise, the
margin interest paymetns would go up. But would it be possible to
hedge that by buying or selling an interest rate futures contract?
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Canadian real estate purchasing strategy to deduct interest costs
