My $0.02 -

If paying for the house 100% in cash is going to empty out your bank account, then don't do it.
You will be living hand to mouth for several months, until your savings build up again.
In this meantime, if there is a need or emergency that requires cash, you will be forced to borrow money (either through HELOC or outside of it).
Regardless, the fact is that you will be using borrowed money to pay for expenses (whatever they may be).

The only purpose borrowed money is good for is investing (because you can write off the interest), and that too only under certain circumstances (for example, when you are making more than the interest you are paying).

Under present market circumstances, there is a good chance you will not make more money investing in the market than what you will paying by way of interest to make it your worthwhile.
Also, it appears you are new in Canada.
What is your investment knowledge/experience?
Unless you are a seasoned expert, you may end up losing money in such a volatile market.
Losing cash is worse enough, but losing borrowed money is even worse.

If you needed money to buy a new car or new appliances or furnishing, you will be using borrowed money to do that.
That is a completely losing deal - you will be using borrowed money to finance lifestyle.

It is normally recommended to have a few months of living expenses available to you as cash - some say 3 months, some say 6.
Decide what you are comfortable with.
Then set that money aside in a high-interest savings account and put everything else as payment on the house.
Note - when estimating living expenses, make sure you take into account new home ownership expenses too, such as taxes, utilities, regular maintenance and repair, landscaping, etc.
Also, it's better to overestimate rather than underestimate living expenses.
I can't think of any situation where having some extra cash handy is not helpful

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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."

-- Rhett Butler in "Gone with the Wind"

Thanks to all the contributors, Its really helpful. I got some more Q which confused me a lil bit after going through all the threads.


*HELOC is similar to having own cash in the bank.

Does that means in case if you need some money in emergency you can get it using HELOC, and when you have sufficient balance repay it and you will ONLY PAY THE INTEREST for the amount you get and the time you used.


* Interest on your mortgage can be deducted from taxable income if you are using the property for business purposes. Interest on HELOC can be deducted from taxable income if the purpose is for business.

That means only if one use the property for business , he can deduct the Mortgage interest from Income Tax, residential mortgages can not be deductible from Income tax.



*If paying for the house 100% in cash is going to empty out your bank account, then don't do it.You will be living hand to mouth for several months, until your savings build up again.In this meantime, if there is a need or emergency that requires cash, you will be forced to borrow money

HELOC is similar to having own cash in the bank, is that correct.

I will start this by saying things in a layman's language, so that we all will understand it and will not need any more explanations.

If you want to buy a house by paying for it with all cash the house is fully paid off. It is yours.You live in it by paying the City Taxes and the whatever the utilities you you use.

What is so great? Any body can do it and everyone knows it. Then what am I saying?

It is nice to know that you have a lot of cash and all of it is tied into the house. Now let us see how we go about using it for our betterment!

First thing is, we know that you own the house. The Banks will extend or loan to you, some money, based on the fact it is fully paid for. Let us say up to a limit of 75%. of the value in the house. Now we ask the Bank to let you use it as and when you want it. They will work out the papers called Household Equity Line Of Credit. It will be at the PRIME Rate and they will take your home as security. This becomes a secured line of credit.

To do the papers, they do not charge you anything for it, except some legal fees. Even that will be waived if you are a good customer. Inits usage, Even if they want you to pay all of what you take out for your 'use' from time to time, you can do it. You just take your cheque book, issued to you with the HELOC and write the full amount that they ask for.

For an example, if you use $1,000 for one month @ 4% and in the next month's statement they say you owe them 1,003.33, you pay them back. So, you only paid them 3.33 for the 'use' of it for that 'month', instead of a high interest rate the other Cards and Department Stores charge. In effect you only pay the just the interest portion of the amount borrowed. Which means interest only..

Here you are using part of the available amount for a charge of 3.33 (333 cents for it) for the use of it. That is not bad. What you use for the personal expenses are not tax deductible. For business use the interest portion is separated out as deductible portion. The other one is non deductible. Now you know the difference.

If say you are using this amount for business, then start a company and put the money into it. Keep the statements that the banks provide you with. The interest portion is the one that you are paying to the Bank and is the cost to the company. The Tax Department will accept it as your expenditure of that company for that month. HENCE "You are paying only the interest portion of of it and for the duration of the time". If you are doing business and the cash and the cheques keep coming in, you can deposit it back into the HELOC from time to time. Even daily, they only charge you for the "number of days that the money is used". There might be a period of hold on the cheques and clearing charges for it.

Since the house is paid for in cash and fully, there is no mortgage and no interest to pay. BUT if you take all or most of the money out and pay for the use of it, the interest portion of the money that you pay is for Business use. It could be for buying and selling any widgets, commodities, Stocks and Bonds or even a GIC.

Everyone hopes to make money when he does some business, some times you start making right away and some times after a short period and some times after a Very very long period. It all depends upon your skills and how well the business thrives.

Now you are living in the house for FREE. The money you are borrowing is for the business and hence, the interest portion of the Heloc or the mortgage is not to your account. It goes to the business account as expenses. Hence the statement, you are living there for FREE and the mortgage interest is tax deductible.

You are correct, HELOC is like having your own cash in the Bank. This Heloc is good for your life, as long as you keep paying the interest.

Some GIC's pay 4.3% p/a so you can make 0,3% on it and you report this as your income. (You borrow the sum at 4.0$ and put it in 4.3% GIC) Since it is just the interest money you make for that year, you report ALL of it.

There are other instruments, or means of investing it to get better gains, if the money you make happens that it is a 'capital gain',(As we say Gain in the Capital) then you only report one half of the gain in the capital. The other half is free of tax and it is yours to keep. The tax is only on the other half. You have to seek able help from professional people to achieve this. Some one will show you a better method. Do your own investigation in a thorough manner before you entrust the capital to any one. It is called doing your own due diligence. (DD)

I am not a Financial Planner. That is why I pointed to you the right direction in which to proceed and look for able help in this matter. May be they will respond to you after this.

You must have heard of "KamaDhenu". You can call this the same and will provide you with delightful things in life.

Hope this helps.

Freddie.

Here is a small article on compounding. It is interesting and worth a read.
http://www.banned-books.com/truth-seeker/1995archive/122_3/11miraclegro.html
http://www.cjpf.org/blogweblinks/cbn_moneyandprayer.htm

duplicate - deleted

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Originally posted by gags
*If paying for the house 100% in cash is going to empty out your bank account, then don't do it.You will be living hand to mouth for several months, until your savings build up again.In this meantime, if there is a need or emergency that requires cash, you will be forced to borrow money

HELOC is similar to having own cash in the bank, is that correct.

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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."

-- Rhett Butler in "Gone with the Wind"

Freddie you are genious, your detailed explaination make it much more easier for a layman without any financial or mortgae knowledge to understand all the concepts and thanks to Mr Pramod & Mr. Kalia for there inputs.

1- market is lower and so is my interest rate on my mortgage, best time to buy mutual funds etc so I kept the cash and invested it. Draw back, Nothing is tax deductible in Canada this way and I have to pay tax on income I generate form the cash.
A better way will be to borrow form line of credit, which will make it tax deductible but the interest rate is not guaranteed.
A loan is a loan either way if taken form LOC or mortgage. LOH could be closed anytime but morgage may carry penalty. Also LOH only have interest when you draw on it but mortgage is with interest always.
I would prefer to pay off my house and then have LOH for now since you will be new and will have to deal with many things when you arrive so best bet, for nwo invest it in your house worry free and sit on the side till you get clear about things and then decide. You can always get a mortgage on your house with terms you prefer at a later stage if you decided to go that route.
Again I am not a lawyer or mortgage broker.