Advanced Strategies: Cash Damming – Here’s What It Is

Category: Education and Learning, First Time Buyer, Home Purchase,

Good Evening Amazing Partners,

Why is money called dough?! It’s ’cause we all “knead it.”

We’ve had a little bit of a teeter-totter with rates recently. The bond market has been going down, then up, and now most recently down again.

Expect no changes in the variable rate till AT LEAST June.

In Today’s Post

1. Interest Rates

2. Cash Damming

*Please call us! 778-990-8950 We’re willing to help even if the borrower is not our client.

We’re in this for your success!

1. Interest Rates

5 Yr Fixed (insured)4.79%↓ 0.25%3 Yr Fixed (insured)5.14%↓ 0.10%
5 Yr Fixed5.14%3 Yr Fixed 5.54%
5 Yr Variable (insured)6.20%↓ 0.05%2 Yr Fixed (insured)5.99%↓ 0.05%
5 Yr Variable6.59%2 Yr Fixed 6.29%
4 Yr Fixed (insured)5.14%↓ 0.10%1 Yr Fixed (insured)6.64%
4 Yr Fixed5.39%↓ 0.10%1 Yr Fixed 6.79%

2. Cash Damming

Cash damming is a strategy to convert non-tax-deductible personal debt, to tax-deductible investment debt. Basically, it’s a way to convert your personal mortgage, that is not tax deductible, into tax deductible debt.
I personally use this strategy on three of my rental properties and my own personal home. Please don’t hesitate to ask me how I do it if you’re interested. 

*obviously check with a tax professional before you do this. I know I did…

The most simple form of cash damming is from personally owned rental properties and is called Rental Cash Damming: the revenue (rent) from the rental property is used to pay down your personal mortgage, and the expenses for the property are paid for by your HELOC.

What Are The Benefits of Cash Damming

  • Reduced primary residential mortgage by rapidly paying down the outstanding balance through the revenue of your rental property,
  • At the same time as the above, convert the non-deductible mortgage into tax-deductible debt.
  • Lower personal taxes by applying the tax-deductible interest charges against income.
  • Re-invest tax savings into additional wealth or just have tax savings!

I think the most important aspect of rental cash damming is the fact that you’re paying down your personal mortgage much faster while (and) each subsequent mortgage payment is going to pay down more of the principal of your mortgage.

Who Can Take Advantage of Rental Cash Damming

First, you need to have an owner occupied property that has a readvanceable mortgage.

A readvanceable mortgage is one that, as you pay down your principal, line of credit room is released, so you can “reborrow,” or readvance, that money back out.
For example: let’s say you purchase a property with a $400,000 readvanceable mortgage. At the outset, your mortgage is $400,000 with a Home Equity Line of Credit (HELOC) with a $0 balance.

Now let’s say that your normal mortgage payment is $4,000, but half of that goes to pay down your principal. That means you’ve now paid off your mortgage by $2,000. With a readvanceable mortgage, you now have access to that $2,000 using your HELOC below.

Now, just because your HELOC has $2,000 available does not mean that A) you’re charged on that $2,000, and B, you’ve used it. It’s available to you to do whatever you want.

First point five: You need to have a readvanceable mortgage that allows you to do more than one Lump Sum (prepayment). RBC, HSBC, and National Bank only allowed ONE lump sum per year. This is not sufficient. TD, Scotia, CIBC, and BMO are good contenders here.

Second, you need to have a rental property that is in your name. This only works if the property is in your name because if it was in a corporation and you were to funnel the revenue from the property to yourself, you would have to claim this revenue as income.

As an aside, the rental property that you have, the rental income and expenses, are treated as a “silo” or independently on your taxes. Regardless of what you do with your rental income/revenue, it still counts as revenue on your “statement of real estate and rental activities” on your T1.

Third, you must have separate bank accounts for your rental property and for the revenue that’s coming in to pay off your personal mortgage. My advice is to create a specific account for the expenses of your rental property and a specific account for any revenue.

How Does It Work?

OK so there are a few steps involved and it does take about 10 minutes every month for you to do it. But, I personally pay down my non-tax-deductible mortgage by $8,400 and add $8,900 of tax-deductible HELOC every month.

*My cashflow expenses are higher than my income so I actually add more HELOC than I pay down my mortgage by.

Step 1: Revenue from my rental properties hit my “revenue” bank account. 

Step 2: Pay a “lump sum” prepayment to my personal mortgage from my Revenue account.

Step 3: Transfer money from my HELOC into each of my 3 rental property accounts to pay upcoming expenses (mortgage, strata, etc.).

That’s it 🙂

At the end of the day, I’ve been able to reallocate non-tax deductible debt into tax-deductible debt while allowing me to pay off my mortgage much faster with each subsequent mortgage payment, and reduce my overall taxes.

Love this stuff – here to help if you have any questions.

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