One of the first questions most people have about Tax Deductible Mortgages is risk. The main risks are:
- Investment Risk
- Interest Rate Risk
- CRA Risk
- Income Disruption Risk
Investment Risk – whenever there are investments there is risk. Investment Risk is greatly reduced over the long-term. This can be addressed depending on the individual situation.
Interest Rate Risk – is usually related to the risk of rates going up. With the Tax Deductible Mortgage strategy, an increase in interest rates may be partially offset by an increase in interest deductibility.
CRA Risk – this is perhaps the most serious risk when setting up a Tax Deductible Mortgage. If at some point Canada Revenue Agency determines your plan is not deductible, you could be faced with returning thousands of dollars in refunds as well as penalties and interest. However, CRA has issued guidelines on interest deductions and how to do this properly and if followed you should have no problems.
Income Disruption Risk – what if you cannot earn income and pay the mortgage. You have that problem with any mortgage, but with a tax deductible mortgage you may have more “financial cushion” than with a traditional mortgage and as such could go much longer without income.
Any financial strategy involves some level of risk. Most of the time it is whether or not the financial strategy is appropriate and how well the strategy is administrated. Competent professional advice should be obtained before implementing a Tax Deductible Mortgage as well as any financial strategy.