# Save Cash VS Paying down the Mortgage



## Paramedic416 (Jan 6, 2010)

I'm having trouble deciding on the best method to save money over the next 5 - 8 years to buy a house. I currently have two rental properties which bring in 1,300/month and 1,350/month. 

Which is better? pay the mortgage down, or save Cash for a down payment?

Currently I have two Rental properties.

1. Mortgage left $140,000 (Purchased at $185,000) 5.15% Locked 7yr
2. Mortgage left $150,000 (Purchased at $234,000) 5.03% Locked 10yr


*Option 1:* Pay down the $140,000 Mortgage making lump sum payments over 5 to 8 years . I currently have an interest rate of 5.03% which was a 7 year locked in rate. Maturity date is 2011. After the 5 -8 years, get a HELOC on the equity of the rental property and put a down payment on a new home, which I plan to live in and not use as rental property.

*Option 2:* Save money in a TFSA for 5 - 8 years, Then after 5 - 8 years use the money to put a down payment on a house to live in.

*Option 3:* Same as Option 1, But sell one of the rental properties, use the money for a down payment. Then take out a HELOC on the new house that I will live in and buy another rental property with the HELOC. The interest on the HELOC would then be tax deductable.


What would you do? What suggestions do you have?

Thank you

Steve


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## Berubeland (Sep 6, 2009)

Don't pay off your rental properties the interest is tax deductible.

Right now your property is appreciating in value as the value of money goes down as someone else pays off a property for you. Why interrupt such a beautiful cycle? 

Save in your TFSA and max out your RRSP (I'm assuming it isn't it could very well be) 

When you go to buy your own property pay it off ASAP because the mortgage interest is not tax deductible.


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## FrugalTrader (Oct 13, 2008)

I agree with Berubeland, with rental properties, providing that they are cash flow positive, I tend to pay as little as possible towards the mortgage balance. Save the cash towards a down payment.


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## Paramedic416 (Jan 6, 2010)

*Saving money*

I agree that there are benefits having a Tax deductable interest on a mortgage, but really what is the actual dollar amount saved.


For example, Say I have a $100,000 mortgage at 5% interest.



Interest for the year is $5,000.



How much money would I save on my Taxes at a marginal tax rate of 35% ?



Not a lot, I would think. Maybe $300-700, I don't know for sure.



If the rental property was paid off, I would not have to spend 5,000 a year in tax, is that not worth more than a deduction on the mortgage interest ? 



Your right I would lose the tax deduction on the interest if the house was paid off, But what exactly is the dollar amount of that tax deduction?


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## Berubeland (Sep 6, 2009)

My understanding is that the entire $5000 is deductible. 

Income properties are considered a small business. So as I understand it you can claim reasonable business expenses for them. 

So lets say your income is $1000.00 per month or 

$12000.00 per year
less taxes
less mortgage interest 
less office expenses (home office and percentage of housing expenses)
less accounting expenses
less cell phone expenses
less computer expenses
less some gas expenses and car expenses 
less renovation expenses
less advertising expenses
utility expenses 
% of what you eat when you go to the property if you eat out

if you aren't claiming a loss you need to try harder or get a better accountant.


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## Paramedic416 (Jan 6, 2010)

*Saving Money*

Yes I agree the total $5,000 in mortgage interest is tax deductable on a rental property.

Does that mean if I collect $12,000 in rental income I would only have to pay Tax on $7,000? (12,000 - $5,000).

I currently use all of the deductions that you mentioned in the previous post.


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## Berubeland (Sep 6, 2009)

Right the mortgage interest is a deduction. So good news for you


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## Dana (Nov 17, 2009)

Option 3 sounds good initially, but you would incur a lot of costs selling one of your rentals, taking out a HELOC on your primary residence and purchasing a new rental. Real Estate fees, mortgage discharge fees, closing cost, legals, etc., etc. 

I am with the other posters, don't pay down the rental mortgages, save separately for your primary residence.


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## leslie (May 25, 2009)

Option 3: Forget. This is letting the tax tail wag the investment dog.

Option 1: Any paydown of the mortgage over the next few years will have the effect of reducing the tax-deductable part of your leverage FOR THE REST OF THE MORTGAGE AMORTIZATION PERIOD. Not just for the next few years.

Option 2: This would be the KISS recommendation - which is my moto. I do not believe people get ahead by whealing / dealing. No flipping properties. No loss of tax-deductable interest. No taxes paid on investment income because inside TFSA. And really, where you put $5,000 a year is not going to make a heck of a lot of difference over a 3-5 year time span.


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## heyjude (May 16, 2009)

I agree with everyone's input so far. Paramedic's current debt is good debt. It's all set up to make money over the long term, in a tax efficient manner. Leave it alone. 

I definitely vote for Option 2. Then pay down the home mortgage or HELOC as fast as you can!


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