11 Jul Cash-rich Canadians hanging on to mortgages
Mortgages are typically something people can’t wait to get rid of, the kind of burden that keeps lottery-ticket sales going strong. But for some, it seems that taking on a mortgage is a good thing.
High net-worth Canadians — those with investable assets of $500,000 or more — are using mortgages as a deliberate investment strategy, according to a new Investors Group survey.
Sixty-seven per cent of those surveyed who have cash available to pay for their home in full still have a mortgage. About one quarter of wealthy Canadians with mortgages aren’t planning on becoming mortgage-free before retirement.
“The notion that a mortgage is used only when funds aren’t available to pay cash for your home doesn’t ring true for many wealthy Canadians,” says Peter Veselinovich, vice president of banking and mortgage operations at Investors Group. “Cashing in investments to pay off your mortgage before retirement could trigger capital gains. That would mean additional taxes and less money to invest.
“Retirees in this financial demographic who are not concerned about meeting their mortgage payments see a tax advantage to maintaining a low-interest mortgage on their homes,” he adds.
Historically low interest rates are driving the trend, and so is the concept of good debt, something that didn’t exist decades past.
“A generation ago, you would always pay your debt off first, all debt was bad debt, and you focused on paying everything down,” Veselinovich says. “There’s been a bit of an evolution. In the mindset of high net-worth Canadians and even retirees, there are no concerns about carrying a mortgage into retirement.
“We’ve moved into a situation where people have become more comfortable with the concept of debt, the utilization of credit cards and clearing off monthly car loans and mortgages and the like,” he adds.
Whether people should pay down their mortgage faster or altogether is a question certified financial planner Kelly Ho says she gets asked all the time. In response, she’ll run the numbers. Typically, people are better off putting money aside in investments than by throwing it at the mortgage.
“Let’s say you have a variable rate mortgage at 3 per cent, and that’s high, and say you allocate money via an investment or savings vehicle that yields 5 to 6 percent over time; you’re already ahead,” says Ho, who’s with Vancouver’s DLD Financial Group.
There’s always the option to do lump-sum mortgage payments in addition to putting money in investments or savings, she notes. Liquidity is another key consideration when it comes to financial planning.
“If you put all the money into the house, it’s not very liquid,” Ho says. “The money is locked in unless you sell the house. Or, in order for you to access money, you need to go to a lending institution for a home-equity line of credit. When you’re talking about investments, many types you could liquidate pretty quickly if you needed to.
“Flexibility and fluidity are very important, as long as you have a written plan and have someone helping you,” she adds. “The worst thing you can do is say ‘I got this great stock tip.’ You need to run all the scenarios so that you’re making informed decision.”
Still, not even the looming inevitability of interest rates rising has high net-worth Canadians concerned about clinging to those mortgages. When asked in the Investors Group survey if they were worried about rates going up in the next year, only 8 per cent had any concern. Fourteen per cent said they’re worried about rates rising in the next three years and 18 per cent worried about what rates will look like in five.
Thirty-two per cent of high-net-worth Canadians own additional commercial or residential properties, with one in 10 owning three or more. Fifty-one per cent have additional properties for recreational use, 42 per cent have investment rental properties, and 11 per cent have purchased property for their parents or children.