If you already own stocks or equity mutual funds outside of an RRSP portfolio, and also have equity in your home, you can effectively convert your "bad" mortgage debt to good debt through an asset swap.
Here's a simple scenario
Let's say you happen to owe $60,000 on your mortgage, and you also happen to own $60,000 worth of shares in a Canadian corporation. To execute the asset swap, take the following steps:
- 1. Sell the shares.
- 2. Use the proceeds to pay off your mortgage.
- 3. Borrow $60,000 based on the equity in your home.
- 4. Re-deploy the $60,000 in an eligible investment (i.e. stocks or equity mutual funds). If the shares you sold look good, you can make a similar investment.
Your debt situation hasn't changed, but your loan is now for the stock, not for your home, and your interest payments, are therefore tax deductible. This is effectively the same as having a tax-free mortgage.
Of course, in real life, the numbers won't work out this perfectly. You might owe $80,000 on your mortgage, and own a $25,000 matching asset. In this case, you can use this method to convert $25,000 of your "bad" mortgage debt to "good" tax-free debt. The interest on the remaining $55,000 would still be taxable.
Tips To Turn Bad Debt Into Good Debt
Convert Mortgage Debt into Tax-Free Debt Over Time
Transfer Mortgage Debt to a Business or Rental Property
Use an RRSP Loan to Reduce Your Taxes
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