We sat at their kitchen table, the three of us, mugs in hand.
Steve’s a specialist, and Judy runs their household like a seasoned COO. Their two teenagers had just disappeared downstairs with snacks, and we were left alone to talk about their financial future—specifically, what to do about the mortgage.
“We recently renovated our home to be more of what we want when Steve retires and the kids move out.” Judy said.
Steve added, “We love what we did with our home, but it’s frustrating to have debt again. It’ll be tight to pay it off before I retire, but we can make it happen.”
And then he said,
“I think I should take money out of my Professional Corp to pay it off. What are your thoughts on this, Adrian?”
I get it.
Debt feels heavy, and paying it off feels good.
But I didn’t want them to make a huge financial mistake because of the warm fuzzies.
When does paying off debt from your Prof Corp make sense?
There’s something almost primal about watching your balance shrink month by month. For many, it’s tied to a sense of control and security.
But when the money to pay it down is coming from your Prof Corp, what feels right doesn’t always work best.
Steve and Judy initially felt they should pay their mortgage off in 10 years, since he wanted to retire in the next 10-15 years.
But I asked them to consider looking at it a different way.
Yes, they could pay off their mortgage in 10 years, rather than something typical like 25 years.
But it would sting.
They’d have to double their monthly payment, pushing close to $8,500 a month. It also meant pulling more money out of the PC, and because it would have to be paid to Steve, who was already in a high tax rate- it would trigger much more personal tax.
We ran the numbers. The extra income required to make those accelerated payments meant he’d have to take out over $85,000 more a year. Of that, almost half would go to taxes.
That’s money they’d never see again.
But when the money to pay it down is coming from your Prof Corp,
what feels right doesn’t always work best.
Ouch!
So, we flipped the script.
Get creative with your mortgage debt
What if, instead, they just made the regular mortgage payments until Steve retired, and THEN accelerated their payments once they could income split and lower their household tax burden?
This would allow them to save an additional $3,800 per month in their Prof Corp.
No tax triggered. Just steady, quiet saving in the background.
What did the plan look like? I did a quick diagram to show Judy and Steve what this plan looked like:
By about year 12, long before the mortgage was actually gone, the balance in their corporate savings would exceed the amount remaining on their mortgage…in their case by over $100,000. On paper, they’re debt-free. And when they do retire, then they can take out those savings in a more even manner, using the additional tax savings to hammer their mortgage rather than give to the CRA.
Judy and Steve sat there stunned.
“I had no idea.” Steve eventually said. “We’ll have enough saved to pay off the rest of our mortgage, only 2 years later than if we’d taken it all out to get it done in 10?”
“And most of which you’re doing with your earnings you’d otherwise have given the government.” I added.
It’s important not to get hung-up on being mortgage free the moment you retire. If you’re flexible and creative – you can keep more of your hard-earned money away from the CRA.
When their mortgage comes up for renewal next? If you listen closely, you’ll hear the tax collector cry a little bit, as we’ve changed how Steve and Judy pay the mortgage to keep more in their pockets instead.
Here’s the takeaway: it’s not always about being debt-free – it’s about feeling debt-free, with a plan that makes sense to you. This was a flexible plan they could practically touch and see it was real. AND it saved them stress, taxes, and wickedly high mortgage payments.
When you’re an incorporated professional, the way you pay down debt can matter more than the fact that you’re paying it down at all.
So we ended the meeting not with a mortgage burning party, but with something better: a plan that got them to the same finish line, only with more left over!
P.S. In my first book “The Doctor’s Handbook”, I mentioned you can be debt free faster by not paying off your debt faster. In my second book “Retire-ish” coming out later this year, I go deeper into this as well as a host of other ideas to put you further ahead, with less stress, and more money in your pocket!
Enjoyed this article? I’d love to hear from you! I’m always interested in hearing about the unique financial situations doctors have. Send me a note! And make sure to check out my Amazon bestseller, The Doctor’s Handbook: 5 principles of wealth you weren’t taught in med school.
