Debt swaps entail replacing non-deductible debt with deductible debt. Let's look at an example to see how it works: Jason has non-registered investments worth $50,000. He also has a house worth $400,000 and a $200,000 mortgage. He has an unused home equity line of credit (HELOC) secured by the house with available credit of $100,000. A debt swap consists of selling the non-registered investments, using the proceeds to pay down the non-deductible mortgage, and then borrowing the same amount using the line of credit and making new (or even the same) investments in a non-registered account. The line of credit interest…
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DEBT SWAPS
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LEVERAGE AS AN ALTERNATIVE TO SAVINGS
Imagine you have the ability to save $200 per month. After 12 months, if you earn a return of 6%, you will accumulate $2,467. Now, if instead, you borrow $60,000 at 4%, you will pay the same amount in interest as you were previously saving ($200 per month) but at the end of the year, assuming the same return, your investment return will be $60,000 times 6% = $3,600. And on top of this return, your interest is tax deductible, so your actual out of pocket cost is less than $200 per month, depending on what your marginal tax rate…
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THE SMITH MANOEUVRE
risk
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