Continueing in the same vein as yesterdays new financial products post, another product I’d like to see is “segmented” loans. Basically these would be exactly the same as regular loans, except that you would be able ot “tag” part of them for specific uses, and those tagged parts would each be individually tracked.
e.g. say you qualified for a 80% (under new CMHC rules to avoid mortgage insurance) loan on a principle residence. But say you’d been saving for a while, and actually had a 25% down-payment. You take out the 80% loan, and tag 5% of it as “borrowed for investment purposed” and buy some dividend stocks with it. You also specify that all payments are to go towards the “non-investment” 75%. At the end of each year, they report your mortgage information, and give you a breakdown on the different “tagged” amounts. Each year you’d get a deduction for the investment portion of the mortgage, which would increase as time went on (since it would be accumulating interest as you paid down the other portion).
HOWEVER, from both your perspective and the banks, the mortgage is being paid EXACTLY the same as if it was all one amount (same payments, same amortization, same rate, etc), its just some automated book-keeping to help your with your taxes.
Eventually you’d pay off the “non-investment” part (especially if you kept refinancing, and borrowing more for investment purchases against your primary residence) and then would start paying off the tax-deductible portion.
I realize this is quite similar to a readvanceable mortgage, but the big difference is that this would ONLY require bookkeeping, in terms of movement of money, nothing would be different from a traditional mortgage (I could write a simple on-line application that would take any mortgage and break it up to provide this information). Therefore, anyone who offers mortgages could add this as a free additional service.
Another useful feature of this would be if two people were buying property together (say a couple or business partners), but they wanted to keep their contributions separate. If one of them prepaid on their portion, it’d be possible to keep a record of the difference (and that would help to split it fairly when they decide to sell)
What you’re trying to do is sometimes called “Smith Manoeuvre”. You pay 25% downpayment and take a 75% mortgage, then get a HELOC secured by your equity and invest 5% with money borrowed from that HELOC. You can check Manulife One, which combines a mortgage, a HELOC and a few (5?) checking accounts (you can use them for “tagging” different kinds of expenses, e.g. investments), all managed together. It has it’s own price: the mortgage rate is quite high, at prime, if I remember correctly.
Hi Vasile, yes as I mentioned in the posting: “this is quite similar to a readvanceable mortgage” (the readvanceable mortgage is the core of the Smith Maneuver).
There are many ways to build on this idea (paying down your non-deductible mortgage and replacing it with tax-deductible investing debt). Fraser Smith has been the only person bold enough to slap his own name on it.
Manulife One sounds good, although you’re right that prime is quite expensive for a mortgage :-(.
“Tracking specific debts (sub-accounts)
Sometimes, you may want the option of segregating some of your borrowings to track them separately. You can set up sub-accounts with your Manulife One account. For example, if you wanted to borrow from the account for investment purposes and track the interest on those borrowings separately (to deduct for tax purposes), you could set up a sub-account to do that. ” from their website http://www.manulifebank.ca/canada/mBank.nsf/Public/mone_day-to-day is exactly what I was thinking of.