I've read the advice given here with great interest.

By far the majority of it is sound.

One thing that people should remember is that BEFORE increasing your payments on a mortgage, you SHOULD max out your payments to RRSP.

There are 4 reasons:
1. Your income is taxed at an average of about 26% - that's federal + provincial (some more, some less - see here: http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html) So, if you're paying out your mortgage first, you've already LOST almost 30% of the total payment you made to the bank.

2. Your employer typically matches your contributes to RRSP. Some at +25%, often at +50%, I know of one company that does +100%. THIS IS FREE MONEY! Really, it is! Your max contribution is around $12,000 per year. That means you get another $2,000-$6,000, for free - in addition to the fact that you just snatched away 26% from the government!!!

3. Your mortgage interest rate is typically comparable to average RRSP return rate (or within it, +/- 1-3%). So it's a net-0 in terms of what you should to pay first (no greater benefit in paying out either one). In fact, there are quite a few investments that, over time, overperform the mortgage interest payments.

4. Your RRSP contributions (up to $25,000 I believe) can be used as a down payment towards your first real estate purchase - tax free!!!


The above points can be then boiled down to this financial strategy:
A. Create your own budget. Track it by category every month for 3-6 months. Project your debit/credit into the future. Estimate the amount of "free-to-invest" money you have. Split it between B and C.

B. First, contribute the maximum possible amount to your RRSP. Period. You need to do this. You can choose a safe investment (Government-bond related RRSP) if you're risk averse.

C. When ready, come up with a possible mortgage spending plan that still allows you to keep reasonable payments as above in B. Ideally, at least, you'd still contribute 100% of $12,000 allowed limit, and THEN pay your mortgage... In the less-ideal case, AT LEAST contribute to RRSP enough to take away any employer-matching contributions.

Hope this helps.

(the above assumed your living arrangements are such that the rent is reasonable - or free!) ex: [1000 rent / month] vs [250/month on taxes + 250/month maintenance on condo].. fairly reasonable. If you're living rent free, it's even better. 70K income per year assumed.

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Last edited by Superstring on Nov-24-2009 at 17:36

I was negotiating mortgages at the bank the other day and was recommended I take disability insurance in case I get hurt and cant pay the mortgage. It was being offered to me at a fairly decent price. Anyone know if it is it routine to take out this type of insurance from the bank or would it be smarter for me to be looking for a seperate broker to buy this insurance from?

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^^^ for most people, I'd argue that a good term policy is more cost effective and less risky (as it's underwritten in advance, not afterward in the event of a claim). best to talk to an insurance pro, as there are exceptions.

quote:

Originally posted by Superstring I've read the advice given here with great interest. By far the majority of it is sound. One thing that people should remember is that BEFORE increasing your payments on a mortgage, you SHOULD max out your payments to RRSP. ...

edited for long-winded reply. I think that works at certain times and for certain people...but is not a 'truth' for everyone. age, income, investment horizon and risk tolerance, along with market conditions, are all relevant when determining what is best.

you have to make a good argument for what essentially boils down to accepting the risk of uncertain returns vs. certain, risk-free 'return' from paying down interest-bearing debt...debt that carries a definite interest cost that is 'typically' higher than the return of any truly 'safe' investment option.

IMHO, the following is an interesting read. a good chunk is for serious, hands-on investors (i.e. not me, lol), but a fair bit could benefit anyone, particularly the first section.

http://members.shaw.ca/retailinvestor/saving.html

...

http://members.shaw.ca/retailinvestor/RRSPmodel.html#REdownpayment

I'm not sure where the reference to 'loan interest rates' are coming from with regard to the HBP early on...but in relation to the RRSP vs. pay mortgage:

"The answer always given is "Put it into an RRSP and use the contribution tax credit to pay down the mortgage". This is a beautiful answer. It is short, easy to say, easy to remember. It does not require any knowledge about the questioner. It seems to satisfy everyone no matter what the interest rate of their mortgage, no matter what the return on possible RRSP investments.

It is exactly that universality that should raise red warning flags. Financial decisions are rarely universal,and never regardless of rates of return. Now that you understand the RRSP system (above) you should also be clicking on 'what is the error in logic' of this advice. It is based on the presumption that the contribution tax credit is a 'benefit' you should not forego.

You know now that the tax credit is only the illusion of a benefit. The correct answer to the question is "You put the money where it will earn the highest (risk adjusted) after-tax return. One place will always be better than the other.

Assuming your contribution/withdrawal tax rates are the same, you are not taxed on either option. RRSPs protect savings from tax, and paying down debt does not incur tax because the interest was never deductable to start. The return from paying down the mortgage equals its interest rate. Its risk is zero. The expected return from some investment inside an RRSP is probably only slightly higher but MUCH more risky. How you equate the two is your personal decision. When mortgage rates are normal, it is usually better to pay it off. If you are presuming a change in tax rates on the eventual RRSP withdrawals then you must factor that in as well."

Last edited by MarkT on Nov-25-2009 at 06:13

I keep my payments the same regardless of the rate, just the amortization changes.

But I kinda disagree with the paying off the loan faster when the rates are low, Its a cheap loan then. Why not save that extra money, re-invest it somewhere else (ie TFSA) and then throw it back at the mortgage at a later date.

quote:

Originally posted by Swamper There are probably old glowsticks and vapo rub bottles hiding behind that drywall

It's good for when he gets a cold no???

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quote:

Originally posted by chinamon chinamon is INCH MOAN. LOL so fitting.

quote:

Originally posted by MarkT The return from paying down the mortgage equals its interest rate. Its risk is zero. The expected return from some investment inside an RSP is probably only slightly higher but MUCH more risky.

Most of that seemed to be sound advice except this part. Now, not everybody is an investor, I can understand that, but you should definitely be able to make more than a 5% APR. I mean, hell, you can pay into dividend funds higher than that.

But it's true about the tax credit; if you're putting money into your RSP in the first place then it means you're confident in your ability to get a good return, which means that there's no sense in putting the credit into your mortgage - put it right back into your RSP. Or don't contribute to the RSP in the first place and just pay down the mortgage if you're seriously concerned about the risk associated with securities.

Then again, there is a third angle, which says that using some money to pay down the mortgage (perhaps your RRSP contribution credit) is simply part of maintaining a strategically diverse portfolio of investments. That's not necessarily the right approach for everyone but it is something to think about.

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