Many business owners make the common mistake of pulling money out of their corporations to pay down their personal mortgage as fast as possible.
The downside of this is you get heavily taxed on all that money you take from your corporation just to pay down a low-interest rate mortgage! That’s why business owners come to us looking for better ways to structure and pay down their debt.
How Business Owners Can Reduce Interest on a Mortgage
So today, we’ll take you through one of the strategies we use for clients to help reduce their overall cost of borrowing.
It involves structuring your mortgage as part traditional mortgage and part line of credit while using what is known as a shareholder loan.
This strategy is can be quite complex. If you want to be sure you have everything in place to successfully deliver this strategy, we recommend speaking to a Certified Financial Planner before implementation.
(While we are on the subject of business owners and mortgages, don’t miss this post next: Paying Yourself a Salary to Qualify for a Mortgage? Why You Should Stick to Dividends)
Using Shareholder loans
A shareholder loan is an agreement to borrow funds from your corporation for a specific purpose. In essence, it is a form of withdrawing funds from your corporation, similar to salary and dividends, albeit temporarily.
Here is an example of how it all works.
Let’s say you currently have an $800,000 mortgage. You also have $400,000 sitting in your corporation as retained earnings for which you don’t have a long-term use. Instead of having an $800,000 mortgage where you are stuck paying interest on the full amount, there’s a more practical option: restructuring your mortgage with a $400,000 traditional variable rate mortgage and a line of credit with a balance owing of $400,000.
Next is where the shareholder loan strategy comes into play.
You can move that $400,000 of retained earnings inside your corporation onto your line of credit, effectively reducing the interest payments on your mortgage interest by half.
Now your mortgage payments are reduced, there’s more cash to allocate towards living your best life.
The net result is you have reduced the interest owing on your mortgage by 50% for the year.
Watch the video on this strategy
(Take a look at this post to find out more of the common misconceptions around paying down debts as a business owner.)
Other Ways for Business Owners to Save
There are so many tax-saving opportunities that come with owning a corporation. The challenge is knowing which strategies are the best fit for you.
With the right help on your side, you can get innovative strategies based on your full financial picture.
For example, did you know Corporate Class Investments funds are much more tax-efficient than traditional mutual funds? You can also use insurance as an investment strategy to grow your money tax-free and bypass passive income tax rules.
If you are looking for the most tax-efficient use of your corporate dollars, book a call. We would love to help.