Adrian Mastracci, president of KCM Wealth Management says, "Minimizing the impact of non-deductible interest builds your nest egg sooner."

For Immediate Release

Vancouver, BC (March 4, 2002): Incurring non-deductible loan interest can slow down your financial progress.

Adrian Mastracci, president and fee-only investment counsel at Vancouver based KCM Wealth Management comments, "Thankfully, many loan interest rates have been significantly reduced since early 2001. This is a wonderful problem for borrowers, but the deductibility of interest paid is still an important planning opportunity."

"As we turn our attention to income tax season, it's appropriate to review borrowing strategies," says Mastracci, "Especially the interest deductibility issue."

Mastracci continues, "We've seen the prime loan rate charged by lending institutions cut in half from 7.5% in January 2001 to a recent 3.75%. That alone is a significant saving, but there is more."

"Whenever possible, borrowers are far better off to incur deductible loan interest," notes Mastracci, "And to pay off non-deductible loans as quickly as possible."

Mastracci illustrates the impact of loan interest deductibility with the following table. It demonstrates the effective costs of a 6% loan rate, for both deductible and non-deductible interest, calculated for three income tax rates:

"Let's understand the implications of interest deductibility in the 45% tax rate. If the 6% loan rate is non-deductible, you'll first have to earn 10.9% and pay the income taxes to have the 6% to pay the loan interest," explains Mastracci, "If it's deductible, the real cost is 3.3% after the saving on income taxes."

"The 7.6% cost difference is a significant spread to pass up in the 45% tax rate," remarks Mastracci, "Incurring non-deductible interest is costly. Even in the lower tax rates."

"But are you sitting down? A non-deductible 18% credit card rate really costs about 32.7% in the 45% tax rate," says Mastracci, "Ouch!"

Mastracci offers these suggestions to assist your interest deductibility strategy:

• Don't get in over your head with debt of any type.
• Incurring debts beyond your comfort zone is an easy ways of digging yourself into a never-ending stream of loan payments. Perhaps, even flirting with financial ruin.
• If you have only one loan, and the interest is not deductible, establish a repayment plan so that all interest costs can be minimized by repaying the loan as soon as possible.
• If you have more than one of loan, segregate each loan so that there is no confusion if any of the interest is considered deductible.
• If you have both non-deductible and deductible loans, make "interest-only" payments on the deductible loans. Then direct all saving capacity to the repayment of the non-deductible loans, starting with the highest rate one.
• Business owners are advised to also segregate the business loans from the personal loans. Repay the personal non-deductible ones first and leave all others at interest-only.
• Be extra careful if you have an investment loan where the asset you purchased has been sold. The interest cost on any remaining outstanding balance is no longer deductible.
• If your interest payments are non-deductible, review your situation with your trusted investment advisor to determine what you can do to achieve at least some deductibility.
• Remember that any borrowing incurred for your RRSP is no longer deductible.
• Applying a tax rebate to the repayment of a non-deductible loan makes good sense.
• Obtain an amortization schedule for your house mortgage along with some "what if" scenarios, such as how to pay it off in one-half the time.
• If your finances permit, reduce the mortgage amortization from the usual 25 years to the 10 to 15 year ballpark. You'll save a bundle of interest.
• Make inquiries to determine if consolidation of existing loans reduces the interest costs.
• Transfer credit card loans to a line of credit and allocate the interest savings to the repayment of non-deductible debt, or to building your emergency fund.
• Don't take no for an answer. Shop around if your institution is not receptive to your needs. Many of the posted loan rates are flexible.

"Clearly, it's wise to review the interest deductibility for each loan," summarizes Mastracci, "You can improve your finances dramatically by accelerating the repayment of non-deductible loans."

"Minimizing the impact of non-deductible interest builds your nest egg sooner," concludes Mastracci, "That's a real bonus."
 

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.