Canadians have many reasons for refinancing their mortgages. Renovations, emergencies, paying for your children to go to college: these are all viable scenarios that regularly influence homeowners to take the equity out of their mortgage and put it somewhere else. However, strategic refinancing can also be a great financial planning tool.
One of the most popular reasons to refinance is to do so with the intention of reducing your monthly payments by taking advantage of the lower rates in the market right now. After calculating all of the penalties and refinancing fees into the cost of your new mortgage – You may even shave off a couple of hundred dollars a month. That extra cash can go a long way towards different kinds of purchases; but a wise way to spend that extra money – and any equity you take out of your home when you refinance – would be to add a significant amount to your RRSPs.
One of the benefits of taking equity out of your property and using it to top up your RRSPs is that it could help to reduce your taxable income. In other words, if you refinance your mortgage to take cash equity out to buy RRSPs, it can help offset the income tax that you owe at the end of the year, giving you a bit more of a financial break opposed to paying out a larger sum if you don’t invest in your RRSPs. In order to do this, you need to refinance, take out the equity, and then make your RRSP contribution before the deadline (February 29, 2016 is the last day for 2015 RRSP contributions), which will allow you to get a rebate at income tax time.
Depending on your tax bracket, you can save anywhere from $270 to $440 in tax for every $1,000 that you sink into your RRSPs. “Slow and steady wins the race” is a very apt cliché when you contribute to your RRSPs with regular dedication. Also, your investment stays “tax sheltered,” which means that it grows quickly inside that RRSP – and with Canadians living longer than ever before, you need every penny to span a retirement that might last for 30 years or longer! Essentially, you can refinance your home to take equity out right now, enjoy lower monthly payments, and use the extra cash to make a solid, long-term investment that will increase the comfort of your golden years.
The most important thing to remember is that when you refinance to take equity out of your home and put it into RRSPs, you are essentially borrowing to invest. This only makes sense if you will earn more on your investments than you will pay on your loan or if you are in a pinch needing more cash than you have on hand, to pay down the amount of income tax you owe right now.
Paying less taxes and gathering up more savings is a great idea, if you have the equity needed in your home! Give me a call at 705-315-0516 to discuss your options. I can help you create a strategic refinancing plan that best suits your specific needs and helps you grow your bottom line.