According to Canadian tax law the interest on loans used for investment purposes is tax deductible while interest on personal mortgage loans is not. One way of transforming from non‐tax deductible to tax deductible interest expenses is to borrow against home equity to make investments. A re‐advanceable mortgage is a product specifically designed to take advantage of this tax discrepancy. Using simulation we study the risk associated with the re‐advanceable mortgage strategy to provide a better description of the mortgagor's position. We assume that the mortgagor invests the borrowings secured by home equity into a single risky asset (e.g., stock or mutual fund) whose evolution is described by geometric Brownian motion (GBM). With a re‐advanceable mortgage we find that the average mortgage payoff time is less than the original mortgage term. However, there is considerable variation in the payoff times with a significant probability of a payoff time exceeding the original mortgage term. Higher income homeowners enjoy a payoff time distribution with both a lower average and a lower standard deviation than low‐income homeowners. Thus this strategy is most beneficial to those with the highest income. We also find this strategy protects the homeowner in the event of job loss. This work is important to lenders, financial planners and homeowners to more fully understand the benefits and risk associated with this strategy.
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30 November 2011
ADVANCES IN MATHEMATICAL AND COMPUTATIONAL METHODS: ADDRESSING MODERN CHALLENGES OF SCIENCE, TECHNOLOGY, AND SOCIETY
25–29 July 2011
Waterloo, (Canada)
Research Article|
November 30 2011
Analysis of Tax‐deductible Interest Payments for Re‐advanceable Canadian Mortgages
Almas Naseem;
Almas Naseem
The University of Western Ontario, Department of Applied Mathematics, 1151 Richmond Street North, London, Ontario Canada N6A 5B7
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Mark Reesor
Mark Reesor
The University of Western Ontario, Department of Applied Mathematics, 1151 Richmond Street North, London, Ontario Canada N6A 5B7
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AIP Conf. Proc. 1368, 221–224 (2011)
Citation
Almas Naseem, Mark Reesor; Analysis of Tax‐deductible Interest Payments for Re‐advanceable Canadian Mortgages. AIP Conf. Proc. 30 November 2011; 1368 (1): 221–224. https://doi.org/10.1063/1.3663499
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