Last week I shared the benefits of the cash flow profit centre. This week, let’s talk about a profit centre that’s often misunderstood: mortgage paydown. I believe the reason comes down to a natural aversion to debt. Most of us grew up hearing some version of “get a job, buy a house, and pay off your mortgage as fast as you can,” and that adage still rings in a lot of ears. So people work hard to eliminate mortgage debt as quickly as possible — without realizing that debt, used properly, is actually doing work for them.
Profit Centre - Mortgage Paydown
Here are three reasons to reframe how you think about mortgage debt:
- Rent. You are not servicing the debt payment with earned after-tax dollars — your tenants are.
- Refinancing. In Canada, borrowing money is not a taxable event. So every dollar you pay down on your mortgage is building a future where you can borrow against that equity, tax-free.
- Less tax. The interest portion of your mortgage payment is tax-deductible. If you owned the property free and clear, your cash flow would be higher — but so would your tax bill.
"Real estate is buying 100% of an asset for 20% of the price"
— Don R. Campbell
I get asked often whether it’s better to buy a property free and clear or with a mortgage. The shiny object is always the higher cash flow you get without a mortgage payment. But to really compare the two, you have to think in percentages, not dollars. Using numbers from my own portfolio and looking only at cash flow, mortgage paydown, and appreciation:
- Without a mortgage: return on investment is ~9%
- With a mortgage: return on investment is ~27%
That’s 3x higher returns with a mortgage. Here’s the real trick, though: financing that property only took about a quarter of the capital that buying it outright would have. That means the same capital could buy four mortgaged properties instead of one unmortgaged one — pushing the return toward ~108%.
There’s more to the mortgage paydown story than this, but that’s a topic for another newsletter.
If you’d like the full calculation behind this example, send an email to info@weekendwealth.ca and I’ll send it over.