In the 6 months since I met Monica, I was able to arrange a mortgage for student rental purchase, reduce the interest costs on her mortgage renewal on her primary residence, save Monica thousands in mutual funds fees, and reduced her taxes – ultimately saving Monica over $25,416.04/year (after tax).

Monica approached me for help securing a mortgage for a student rental she was purchasing in Waterloo in 2018. At this time, she had been declined by her bank for the mortgage and many lenders were not interested in financing student rental properties.

Monica has a 15-year relationship with a ‘financial advisor’ from her bank who wore nice suits, had a nice office, and worked for one of the most profitable companies in Canada. In addition to her home in Mississauga and another rental property in Toronto, Monica had over $500,000 in unregistered investments, from an inheritance, and $500,000 in RRSP’s.

After closing the mortgage for her student rental purchase through another Canadian bank, the mortgage on her primary residence in Mississauga was quickly coming up for renewal. Monica wanted to ensure that she was getting the best rate on her renewal, not waste time on paperwork, and improve her cash flow.

Monica’s was a busy single mother, with two kids that would soon both be at university, she believed it would be challenging to manage the post secondary expenses on her own. Monica was also thinking about selling her house and downsizing.

Upon a review of Monica’s finances and goals, it became very clear that her existing financial advisor was really a mutual fund sales person working for a Canadian bank. Monica was paying 2.5% ($25,000) annually to her investment advisor through high MER (management expense ratio) bank mutual funds that had been underperforming the market for at least 10 years.

As a fee only investment advisor, I was able to offer Monica index funds where the management fees would be one tenth (10%) of what she was paying her financial advisor, saving her $22,500 in annual mutual fund fees.

In addition to lower fees, Monica’s index funds were more tax efficient and outperformed her existing mutual fund portfolio over any investment horizon (in almost all cases, when we run this type of analysis clients are underperforming market benchmarks and index funds by roughly the fees they are paying).

As a fee only investment advisor, my investment management fee is tax deductible, unlike Monica’s mutual fund fees where the fees were embedded into the returns and not transparently disclosed. Monica had no idea that she was paying $25,000 in mutual fund fees until I reviewed her portfolio.

Back to the $500,000 mortgage on her primary residence, Monica wanted to know the best rates available for her mortgage as her bank had offered her 3.69% for a 5-year fixed rate on her renewal. Better rates were available elsewhere (3.49%), but Monica needed to avoid the interest rate differential (IRD) penalty that comes with her financial advisor’s fixed rate mortgage suggestion, in the event she eventually decided to sell her property.

By getting a more flexible mortgage, at a better interest, with a well-known insurance company, Monica was able to save $1000 in annual interest costs.

Something that her financial advisor had also not mentioned, was that the best way to deal with her mortgage renewal was to first use her unregistered investments to pay off her mortgage. Monica could then re-borrow the money, using her home equity as security, repurchase the investments, and her mortgage would now be considered an investment loan by CRA.

By taking these steps, Monica could deduct the interest from that entire investment loan (mortgage secured by her primary residence) from her taxes. Since Monica was making just over $100,000 her marginal tax rate was 43.41%, by writing off the interest on her investment loan of $17,450 each year Monica would save $7,575.05 on her taxes each year going forward.

In addition to being able to close the purchase of her student rental and avoid her bank’s IRD penalty, here’s how much Monica benefitted by using my services compared to her bank advisor.

$500,000 mortgage/investment loan at 3.49% instead of 3.69% ($1,000 year)

2.25% reduction in annual mutual fund fees ($22,500/year)

Tax savings from structuring mortgage on primary as investment loan ($7,575.04)

Tax deductible investment management fee ($10,000 or 1% of investment assets) $5,659 after tax cost

Monica new plan resulting in annual after-tax savings of $25,416.04 (mortgages, investments, and taxes) going forward. Despite collecting substantial fees from Monica, her bank’s ‘financial advisor’ had never offered any real financial advice, other than investing money in high fee mutual funds and getting a mortgage with a huge penalty if she sold her property.

Sadly, this is not an unusual or atypical situation, but representative of situations I see regularly. How much could Monica have saved by taking these simple steps 5, 10, or 15 years sooner? More importantly how much can you save in interest, investment management fees, and taxes by getting a free no obligation second opinion.

I can put together an illustration for how these strategies can be used to lower your after-tax interest costs, reduce the investment management fees you pay, and greatly reduce your taxes.

Give me a call to discuss how I can help with your personal situation.


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