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E&Y's Top 10 Tax Filing Tips (pg. 3)
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| rabbitjoker |
| quote: | Originally posted by JRinger
Thirdly, you are assuming you return 10% on your RRSP investments. Nobody uses that for financial planning. NOBODY. It is irresponsible and potentially a major liability issue. |
You can use whatever % return that you want. I'm basing my estimates off of reliable, responsible data:
Market Indices returns (in $cdn) to sept. 30, 2005
S&P/TSX
3 year: 23.5%
5 year: 3.0%
10 year: 11.1%
15 year: 11.0%
25 year: 9.5%
50 year: 10.2%
S&P 500
3 year: 5.2%
5 year: -6.5%
10 year: 7.9%
15 year: 12.1%
25 year: 12.8%
50 year: 12.4%
Most people here on TA have a 25 year+ time horrizon, so I feel completely comfortable with a 10% annual return. |
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| JRinger |
| quote: | Originally posted by rabbitjoker
You can use whatever % return that you want. I'm basing my estimates off of reliable, responsible data |
HISTORICAL data. Not future expecations.
For ONE class of assets. Individuals do not hold 100% US/CDN equities in their personal portfolios.
My advice to you, if you actually do retirement planning for individuals for a living, and are using 10% p.a. with them: make sure you have good professional liability insurance.
If anything, you need to be realistic, but conservative, with individual planning. Unlike corporations, individuals do not have the capacity to make up deficits if they come up short. |
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| rabbitjoker |
| quote: | Originally posted by JRinger
Second, of all, you have only looked at one time horizon (i.e., 25 years). You haven't considered the possibility of refinancing before that period, or that the house may be sold before that period, at which time the increased equity in your home by using the HBP can produce a financial gain when you negotiate a subsequent mortgage and cascade into future wealth accruals. |
I agree - there are an infinite number of variables to form an infinite number of possible senarios. I simplified with the example above - because frankly, I'm not a CFP nor am I interested in being anybody's financial planner - I'm simply offering my opinion (which is to NOT borrow against an RSP to buy a house).
Keep in mind that again I'm simplifying. KISS is generally a good way to deal with one's finances.
Refinancing is an option. 3 years into the mortgage refinance back to $200k mortgage amount and pay off the HBP. Net worth change? $10k (Start position: $10k equity, $190k mortgage, $10k owing on HBP, $0 RSP. End postition: $0 equity, $200k mortgage and $20k RSP). The 3 year difference in end position on your RSP: $53,888.62 (Having the money in your RSP for the extra 3 years nets $50k more).
Selling is an option as well. My question would be - selling into what? Most people in their late 20s, 30s and 40s aren't selling into cheaper properties. I'd expect that most equity held in the property would be transferred into the new purchase. The future market value of the property? More variables, speculation too just add to the possible senarios.
Bottom line - I will not be borrowing from my RSP to finance my house purchase. I do not see the long term value in it. |
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| rabbitjoker |
| quote: | Originally posted by JRinger
Individuals do not hold 100% US/CDN equities in their personal portfolios. |
Even so, the 25 year result is the same.
Market Indices returns (in $cdn) to sept. 30, 2005
MSCI EAFE (International)
3 year: 12.7%
5 year: -1.7%
10 year: 4.6%
15 year: 7.8%
25 year: 11.0%
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"Past performance is no predictor of future success" but a 25 year average of 10+% with both Canadian, American and international indexes makes me pretty damn comfortable that over the LONG TERM (25+ years) I'll have good (better than conservative) results. |
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| AwakenedAddict |
I got my tax return yesterday :)
File electronically and early, people! It took 2 weeks for me to get my cheque after I submitted my tax return.
I already had my accountant at work remove the payroll deductions that which ultimately led to my tax return! I pay like 2% tax on all my paycheques now! That's just CPP and all those other manditory contributions, not a cent of income tax :)
Better to have the money in your pocket than the government's (that is if the money is not supposed to be there in the first place). |
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| JRinger |
rabbitjoker, you still haven't addressed my first issue, which is arguably the most important
| quote: | Originally posted by rabbitjoker
Refinancing is an option. 3 years into the mortgage refinance back to $200k mortgage amount and pay off the HBP. Net worth change? $10k (Start position: $10k equity, $190k mortgage, $10k owing on HBP, $0 RSP. End postition: $0 equity, $200k mortgage and $20k RSP). The 3 year difference in end position on your RSP: $53,888.62 (Having the money in your RSP for the extra 3 years nets $50k more). |
no, this is not what I was getting at
I was referring to the opportunity to negotiate a new mortgage (either through refinancing on your original home, or through selling and purchasing a new home -- both very likely scenarios for first-time home buyers). Your subsequent mortgage payment is substantially lower (and potentially NOT a high-ratio mortgage) when you have built up greater equity in your home. This results in more disposable income with which to make "normal" RRSP contributions -- again, going back to my first point.
| quote: | Originally posted by rabbitjoker Even so, the 25 year result is the same.
Market Indices returns (in $cdn) to sept. 30, 2005
MSCI EAFE (International)
3 year: 12.7%
5 year: -1.7%
10 year: 4.6%
15 year: 7.8%
25 year: 11.0% |
I was not referring to other equity classes. All personal investors hold a portion of their portfolio in non-equity classes (e.g., debt and fixed income instruments). Results are not the same once you factor in other asset classes.
Regardless, I still point out that 10%p.a. is nowhere near the consensus future expecatation on an individual's equity componenent of their portfolio. |
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| rabbitjoker |
| quote: | Originally posted by JRinger
First of all, the right way to look at this scenario is to compare the total equity you have (in Home + RRSP) at the end of a given period, assuming the same total amount of monthly household income is used in both scenarios to pay your mortgage, repay your HBP withdrawal and make "normal" RRSP contributions. |
That is a good way to look at the situation.
I've run some more numbers so tell me if I've neglected to look at something. Assuming that total cash flow impact of the mortgage/HBP/RSP contribution remains constant for the entire amortization period:
$200k mortgage @ 7%, 25 year amortization = $1400 / month
$180k mortgage @ 7%, 25 year amortization = $1260 / month
- Difference: $140 / month.
$20k HBP loan - repaid @ $140 / month is 12 years of payments.
This leaves 13 years of the 25 year amortization with cash flow available for monthly payments of $140 / month. $140 / month @ 10% PA is $44,513.01.
We already know that the 25 year plan with no HBP loan program gives a house with full equity $200,000 plus an RSP of $216,694.12 - total portfolio of $416,694.12.
The 25 year plan with HBP loan and RSP contributions (equal to the HBP loan payment) give a house with full equity $200,000 and an RSP of $44,513.01 - total portfolio of $244,513.01.
The model above does work provided. I do not have the time to go and recalculate the amortization at the end of every mortgage term (1,2,3,4,5,10?? it goes on and on).
I know the model does not take into account a rise in the property value - but that is moot since we're trying to figure out the impact of the RSP value at the end of the 25 years based on borrowing HBP or not. There are numerous techniques to free up cash from the mortgage to contribute even more or less to the HBP repayment or RSP, but again I'm trying to keep things simple
Hell, one could go on and on with senarios. My personal decision would be the same - to maximize long term value I'd rather have my money in my RSP than in my mortgage. |
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| rabbitjoker |
| quote: | Originally posted by JRinger
I was referring to the opportunity to negotiate a new mortgage (either through refinancing on your original home, or through selling and purchasing a new home -- both very likely scenarios for first-time home buyers). Your subsequent mortgage payment is substantially lower (and potentially NOT a high-ratio mortgage) when you have built up greater equity in your home. This results in more disposable income with which to make "normal" RRSP contributions -- again, going back to my first point. |
Please correct me if I am wrong:
If one perpetually re-finances with 25 year amortization periods - the payments become smaller, which does free up money for RSP contributions.
If the objective is pay off your mortgage, free and clear within 25 years - the amortization period needs to be shorted with every re-financing - which keeps the outgoing payments the exact same. |
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| MarkT |
^^^ that depends...if you decrease your am. during a re-fi (re-fi usually meaning adding to the principle), or even leave it the same, your payments will go up (barring an offsetting drop in interest rate).
it also depends on how much the mortgage amount is increased with the refinance and what your amortization was at the time of refinance as well.
e.g. you have 20 yrs. left with a 200k mtg. balance...so let's say 5 years into your initial 25 year am. (assuming a non-accelerated payment schedule). Your find that your property value has skyrocketed, so you want to re-fi to free up some of that equity (investement, car purchase, renos, whatever). The increased mortgage, even stretching the am. back to 25 will still have higher payments if you borrow anything beyond a relatively modest amount (particularly since mortgages are "interest heavy" at the beginning, meaning little priniciple reduction).
from my experience, people *usually* don't re-fi to simply lower their mortgage payments, as many banks, depending upon the terms of your mtg, and for non-high ratio mortgages, will allow cx to stretch out their am without penalty or need to re-fi.
People generally seek to either maintain the same payment (increase the am. to the point where along with their desired increased mtg. amt., the same payment results) or to improve cash flow by consolidating higher interest/higher payment debt (increased consolidated mtg. pmt. < their overall debt payments)
If I was at work, I could provide easy #s (I'm home sick, thanks Guv!)
I'm liking the #s provided...good info for all prospective homebuyers!
I think there's still a group that benefits from using the HBP:
- the more you put down, the easier it is to quaify...so bruised credit, shorter term employment, low net worth, etc. can be mitigated with a higher dp.
- those who are willing to sacrifice long-term wealth accumulation for lower mtg. payments now.
- those who will not be pursuing the RRSP route as their major source of retirement income (i.e. they contribute now for the tax break, but perhaps will look to other forms of investment for long-term growth, such as real estate, rental properties, etc).
I think RJ is on to something with regard to strict wealth accumulation for young people though...perhaps it is "detrimental" to borrow from an RRSP under the HBP if it can be avoided...looking strictly at long-term investment potential? |
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| JRinger |
| quote: | Originally posted by rabbitjoker
This leaves 13 years of the 25 year amortization with cash flow available for monthly payments of $140 / month. $140 / month @ 10% PA is $44,513.01.
We already know that the 25 year plan with no HBP loan program gives a house with full equity $200,000 plus an RSP of $216,694.12 - total portfolio of $416,694.12.
The 25 year plan with HBP loan and RSP contributions (equal to the HBP loan payment) give a house with full equity $200,000 and an RSP of $44,513.01 - total portfolio of $244,513.01. |
this is where your analysis falls apart
that $140/month of savings exists for ALL 25 years, not just after the HBP "loan" is "paid off"....it's $140/month that is getting contributed to your RRSP, regardless of whether it's classified as an HBP repayment or a new RRSP contribution -- the only difference is whether it's eligible for a tax deduction.
Using your assumptions, in the "with HBP" scenario you actually end up with roughly $173k in your RRSP after 25 years, not $44k. Bit of a difference, huh? Yes, you still come out slightly ahead in the "no HBP" scenario here, but try reworking the numbers if you only return 7%p.a. or 8% p.a. on your RRSP. Also, try reworking the numbers assuming you have to refinance in 5 years, and interest rates have rised 200 basis points by then.
The calculations you presented are far too simplistic to be able to make a solid conclusion. There are a multitude of other factors, and the crux of the matter is that you can indeed come out ahead by using the HBP (and in fact, most advisors recommend its use) |
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| TranceGeek |
| heh, i used to work for EY for a while... |
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| Riggz |
| quote: | Originally posted by rabbitjoker
I've just run the numbers - here is what I get:
Assume 25 year mortgage, 7% average interest over term of mortgage.
A $200,000 mortgage nets out to $220,000 in interest payments over the term of the mortgage.
Borrowing $20k from an RSP to get $180,000 mortgage nets out to $198,000 in interest payments - a savings of $22,000 in interest payments.
$20,000 invested over a 25 year time horrizon (period of the mortgage), using TSX average annual return over the last 50 years (10%) nets out to $216,694.12.
Assume you take 10 years to pay back the RSP loan ($166/month in payments) - that leaves 15 years of compounding on the RSP - total balance at the end of the same 25 year period: $83,544.96 ($133k less than if you just left the money in the RSP).
Assume you take the full 15 years to pay back the RSP loan ($110/month in payments) - that leaves 10 years of compounding on the RSP - total bance at the end of the same 25 year priod: $51,874.85 ($165k less than if you just left the money in the RSP).
Even with a 5 year repayment (20 years compounding) on the RSP loan ($333/month in payments) the total RSP value is $134,550.00 - $82,000 LESS than if you just left the money in the RSP.
Even if one was to add in the CHMC premium - the $22,000 savings in interest on the mortgage is not worth the loss in growth on the RSP.
5 year loan repayment - $82,000 growth forgone
10 year loan repayment - $133k growth forgone
15 year loan repayment - $165k growth forgone |
I'm no accountant and I might be missing something here but the one problem I see with these calculations is that you are only compounding the interest once the $20,000 is fully repaid. Interest is still compounded while you are paying back the RSP within the entire 25 year period even though it is not the full $20,000. You will still earn interest on those monthly payments when invested properly. |
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