The big push is on to convince Canadians to load their extra cash into registered retirement savings plan (RRSP) investments before the Mar. 3 deadline. But though it may seem as though contributing is the only option when it comes time to decide what to do with the money, it’s not.
Many financial planners, accountants and other experts suggest there’s an even better way to work toward a well-heeled retirement down the road: Pay off the mortgage first. And do it as fast as you comfortably can.
That’s exactly what Rock Lefebvre, vice-president of research and standards for the Certified General Accountants Association of Canada, in Ottawa, did when he was younger. Rather than invest in stocks, bonds or mutual funds, he developed a financial strategy that meant paying off his mortgage early. To this day he still advises that most people eliminate consumer debt and then go on to tackle mortgage debt before investing.
“Some people might argue that’s not the most strategic approach, but my defence is that any unused RRSP contribution room can always be used in the future. It’s never lost,” he says.
For homeowners, it pays to ask a few questions before deciding how to use that money.
Q. What gets a better return?
Anyone looking at their mortgage today might be wondering, “Why make pre-payments? My mortgage rate is so low, it’s costing me next to nothing to borrow this money.” That’s the wrong way to look at it, says Cynthia Kett, a chartered professional accountant with Stewart & Kett Financial Advisors Inc., in Toronto.
“If you have a mortgage balance that will need to be renewed upon maturity, think about the interest savings based on the renewal rate, not the current rate,” she explains.
If mortgage rates climb to 5 per cent in the coming years – a definite possibility – and you’re in the 35-per-cent marginal tax bracket, paying off the mortgage faster means you’ll be getting a guaranteed pre-tax rate of return equivalent to 7.69 per cent, says Ms. Kett. (Extra mortgage payments reduce the principal amount so you’re actually saving not just future interest, but the tax on that interest because you pay the mortgage with after-tax dollars.) Not too shabby, especially since the rate is guaranteed.
Even if your RRSP investments make 9 per cent, a typical mutual fund charges fees, which could actually knock down the return by a couple of percentage points. Suddenly that return isn’t looking so good, nor is it a sure thing.
Q. What gives me the tax advantage?
RRSPs are a good option for people who are in a high tax bracket now and expect to be in a much lower one when they retire. But paying off a mortgage early has tax benefits, too.
“An RRSP is a tax deferral. It’s not actually free money,” Ms. Kett says. “You’re just paying it later instead of now, whereas the capital gains on your principal residence are going to be tax sheltered permanently.”
Q. Can I afford to take a risk?
Risk tolerance is going to be different for everyone. On one hand, a younger investor with a growing family or unsteady job prospects might think twice before investing in anything that even hints of risk. On the other, someone who has amassed some wealth and can afford to take a hit without going to the poorhouse, might decide to max out that RRSP. Risk tolerance often changes many times over a person’s lifetime.
“If you’re affluent and can afford to pay that investment game, that’s okay, but if you don’t have the money, you probably want to be more conservative and pay off your mortgage,” Mr. Lefebvre says.
Q. How much financial flexibility do I need?
Once funds are deposited in an RRSP investment, forget withdrawing them before retirement without incurring some expensive fees and fines. Indeed, RRSPs were created to be that way so investors would be less likely to dip into their long-term savings.
Paying off a mortgage, however, offers huge advantages in terms of financial flexibility, both today and tomorrow. Not only does it reduce your fixed monthly costs (leaving more money in the bank to pay for kids’ educations or vacations), but you can then dip into your home’s equity to borrow at preferred rates with a homeowner’s line of credit. Once that debt is paid off, you can borrow again.
Q. Does the idea of having a mortgage burning party make me deliriously happy?
If you answered yes, start making those pre-payments now. Becoming mortgage-free is an emotional relief for many Canadians – and offers more bang for the happiness buck than any bullish market.
“I can forgo a 9-per-cent return if I’m getting up this morning and I don’t owe anybody money,” Mr. Lefebvre says. “That’s much more liberating than knowing you made 5 per cent that you might be able to withdraw in 25 years.”
The bottom line? No matter which way you lean – mortgage or RRSP – you will almost certainly come out ahead in the long run compared with doing nothing to prepare for retirement.
“There’s not really a wrong answer,” Ms. Kett says. “Either option will improve your financial security and is better than leaving the cash in a bank account.”
SOURCE: The Globe & Mail
It's January again, time to ring in a new year and with that come the annual BC property assessments. Below are illustrations showing changes in some of the Major cities in The Greater Vancouver and Fraser Valley.
Source: BC Assessment. Properties shown are examples provided by BC Assessment to illustrate market trends. They are not actual assessments and not averages.
For most people, buying or selling a home is one of the most important and highest-value purchases they will make, and potentially the most challenging. November is Financial Literacy Month, an opportunity for the Real Estate Council of Ontario* (RECO) to put consumers on alert for 10 major home buying and selling mistakes that can lead to an unsatisfying experience or even serious complications.
“RECO is responsible for protecting home buyers and sellers. We’ve seen too many people encounter these pitfalls,” says RECO’s Registrar Joseph Richer. “Being mindful of these 10 considerations can help the buying and selling process go a lot smoother.”
Here are the most common buying and selling hazards, and how to avoid them:
1. Allowing emotions to overtake common sense
When you fall in love with a property it can be hard to walk away. Know your budget and don’t overpay. Don’t forgo a home inspection just to win a bidding war.
2. Hiring the first salesperson you meet
Brokers and salespersons have a broad range of approaches to the buying and selling process. Meet with a few different representatives before settling on one, and make sure you feel comfortable with them and their approach to the process. Also be sure to get references and contact them to learn about their experience with the salesperson.
3. Not making your expectations clear with your real estate professional
It’s important that you and your representative have a mutual understanding about what you’re looking for, and what services the brokerage will be responsible for. Make sure you talk to your broker or salesperson about the services you expect them to provide, and get it in writing.
4. Failing to read and understand forms and contracts
It can be tempting to speed the process along by signing forms that you haven’t read. But taking the time to understand what you’re signing can avoid a lot of problems later on. For example, you don’t want to find out that you’re on the hook for a six month listing agreement to sell your home if you only want your house on the market for three months. In addition, a holdover clause could mean that if you sell your property during a specified period without the assistance of the broker or salesperson, you would still owe them commission. Make sure all the blanks on the form are filled in before you sign it, and make sure you get a copy of whatever you sign.
5. Assuming everything is included
Don’t assume that the fridge, dishwasher or other items are included with the property. The sellers may want to take the appliances with them to their new home, and the security system might be under a rental contract that you’ll be required to take over. Before making an offer, detail all items, known as chattels, in writing. Your offer can also include a clause stating that the seller will pay out any outstanding leases on the home’s major systems.
6. Forgetting about what’s within the walls
Granite countertops and new hardwood floors are appealing, but the insulation, wiring and plumbing are just as important when you’re evaluating a property. Ask your real estate representative to look into the age of the home’s systems and if there have been any upgrades. If extensive renovations have been done, your real estate professional can determine if the appropriate permits were issued.
7. Forgetting about what’s outside the walls
When you buy a house you’re also buying a place in a community. Some places are lively, others are quiet. Some places are filled with kids while others are not. Visit the neighbourhood at different times of the day to see if it fits your lifestyle. Talk to the neighbours about the community and the locations of various amenities like grocery stores and banks.
8. Not doing your research
If you’re concerned about buying a home with a troubled past, a simple Internet search for the address can go a long way. This is also something you can ask the neighbours about.
9. Making verbal agreements
Verbal agreements aren’t a problem, until they’re a problem. Putting everything in writing forces both parties to be clear about their expectations and provides a record that can prevent disputes later on.
10. Underestimating closing costs
From land transfer taxes to title insurance to a home inspection, the costs of a real estate transaction can add up quickly. Take the time to include estimates and other expenses in the full cost of buying or selling a property.
While all of these tips are essential, the most important advice is to work with a registered real estate professional. ”Registered brokers and salespersons provide a great deal of knowledge and expertise about the buying and selling process, along with specific knowledge about neighbourhoods and local issues,” says Richer. “They can also provide crucial help in avoiding these hazards.”