Question at bottom, this is background to explain why I am asking it.
Background: like many Canadians I have been wanting to pay down my mortgage ASAP since the interest is not tax deductible, as it is in the US. And like many who posted in the "Divorce as a weapon of mass financial destruction" thread, I went into debt big time after the separation. Now that the divorce is final, and I am not bleeding money to lawyers, I am actually paying down debt, and the mortgage was planned to be next. Seriously, personal line of credit, from over $40,000 to $0, car loan, $0, credit cards, $0 (paid off weekly), only thing left is a small RRSP loan (only took it out because the interest rate was lower than the LOC and it will be gone by June) and the mortgage (at 3.65%, which is pretty good for Canada).
I did my taxes yesterday and realized that this may not be a good idea after all. To buy this house I had to cash in investments that I had wanted to keep, so once I owned the house I took out a mortgage and bought similar investments. That means the interest on the mortgage is an "investment expense" for tax purposes. The difference in my taxes with and without the interest cost is about 15% of the interest (i.e. for every $1000 of interest I had a tax refund of about $150).
So, I am seriously rethinking the mortgage payment acceleration. At the moment it is not an issue, since I have maybe an extra $750-$1000/month freed up, and I have major maintenance on the house to do this summer that is a better use of the money. But when ex-DH and I eventually sell the matrimonial home (it is about to go on the market) there will be a big chunk of cash available, enough to pay about 1/2 to 2/3 the mortgage on my house. That is what I had planned to do. But now? Maybe not.
Question: For the big chunk of money I will eventually have from selling the matrimonial home - from a financial analysis viewpoint, is it more effective to:
Option 1. put the money into the mortgage, pay less mortgage interest over the long term, but have a smaller investment interest deduction for taxes, or
Option 2. invest it (max out my TFSA, then other investments, maybe a small amount to the mortgage), pay more interest on the mortgage over the long term but have a larger tax benefit?
This is similar to the tax situation in the US, but not totally, since my income has no effect on how useful the "interest as an investment expense" is. I am in the middle of my tax bracket, so any extra income from investments won't bump me. However, the interest expense comes before the calculation of net income, so it does affect how much my future OAS will be clawed back (the more interest, the lower my net income, and the less clawback). Also, at least some of any extra income would be tax sheltered (whatever goes in the TFSA).
My gut reaction is to still put it into the mortgage, since I am retired, but gut reactions are not always reliable.
I haven't put in dollar values since 1. this is as much detail as I am willing to put out into the ether, and 2. I don't think it would affect the principle of the analysis.
