Strategies of high net worth Canadians

THINK OUTSIDE THE BOX:  While most Canadians plan to pay off their mortgages before retirement, more than one quarter of wealthy Canadians with mortgages don’t have plans to become mortgage free before retirement.

(Special) – How things can change.

A generation or two ago, for example, people focused on trying to pay off their mortgages as quickly as possible. Now, however, with historically low interest rates and a greater awareness of the need for and benefits of financial planning, many high net worth Canadians actually are using mortgages as part of their strategic financial tool kit and are taking mortgages into their retirement years.

“The notion that a mortgage is used only when funds aren’t available to pay cash for your home doesn’t ring true for many wealthy Canadians,” says Peter Veselinovich, vice-president of banking and mortgage operations at Investors Group.

A recent survey of high net worth Canadians (those with investable assets of $500,000 or more) by Investors Group reveals that having a mortgage may be a deliberate investment strategy. Sixty seven per cent of those who have a mortgage indicated they have the cash available to pay for their home in full.

“When you have mortgage rates at three per cent or below people can invest that money, even in conservative investments like bank stocks, and still get better returns,” says Veselinovich. “In today’s market you can make money by borrowing money.”

Private wealth in Canada, and around the world, is growing.

A recent study by Boston Consulting Group found that private wealth in North America rose by 15.6 per cent in 2013 driven by the strong growth of wealth held in equities and growth of Gross Domestic Product of 3.5 per cent. Wealth grew by 16.3 per cent in the United States but growth was slower in Canada at 8.4 per cent due to weaker stock market returns and a lower share of directly-held equities.

With a projected Compound Annual Growth Rate of 3.3 per cent, private wealth in North America is estimated to reach $59.1 trillion by the end of 2018 with the majority of growth coming from existing assets rather than new wealth.

Globally, private financial wealth grew by 14.6 per cent in 2013 to a total of $152 trillion compared to 8.7 per cent in 2012 due primarily to the performance of equity markets and the creation of new wealth in rapidly developing economies such as such as Brazil, China, India, Mexico and Russia.

The Investors Group survey found that property ownership is a part of the financial planning strategies of high net worth Canadians. Seventy per cent said they would not think of purchasing property without reviewing it as part of their overall financial plan and almost half said they wouldn’t make changes to their mortgage without reviewing it as part of their overall plan.

Thirty-two per cent of this group own additional commercial properties. One in three own three or more properties, 51 per cent have additional properties for recreational use, 42 per cent have investment rental properties and 11 per cent have purchased property for their parents or children to live in.

While most Canadians plan to pay off their mortgages before retirement, more than one quarter of wealthy Canadians with mortgages don’t have plans to become mortgage free before retirement. Cashing in investments to pay off your mortgage could trigger capital gains, which would increase taxes and reduce the amount of money they have to invest.

“Retirees in this financial demographic who are not concerned about meeting their mortgage payments see a tax advantage to maintaining a low-interest mortgage on their homes,” Veselinovich says.

“The real change today is that people have a greater comfort level with debt and know better how to manage it,” Veselinovich adds. “They are more aware of financial planning, are starting to plan earlier and are managing debt more prudently.”

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2014 Talbot Boggs

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