User Tag List

Page 1 of 2 1 2 LastLast
Results 1 to 15 of 22
Like Tree4Likes

Thread: Need Financial Advice - Investing vs. Paying Down House (Or Both?)

  1. #1
    KanewtZ kanewtz's Avatar
    Join Date
    Dec 2010
    Location
    The Great Northern Ontario
    Posts
    653
    Likes Received
    121
    Trading Score
    2 (100%)



    0
    Back Story

    Own a house. Mortgaged at 2.25% currently. Have so far been doubling up my payments (I have an entire month's payment going right to the principle each month) plus I make my 10% annual principle payment.

    I was starting to think about what I am doing...and it seems I might be going down the road of being House Rich but Cash Poor.

    Because my mortgage rate is so low, should I be investing instead of paying down my house quicker? I have a very generous retirement plan through my employer, but haven't been contributing to my RRSP as much as I could.

    Perhaps this is something to discuss with a Financial Planner?

    Thanks!
    This thread is currently associated with: N/A
    Matt


  2. #2
    Mastermind Shwa Girl's Avatar
    Join Date
    Dec 2010
    Location
    Ontario
    Posts
    23,899
    Likes Received
    39933
    Trading Score
    7 (100%)




    I am not a financial advisor.
    But, from what you wrote, if you take the annual 10% extra payment, and start investing that money on a monthly basis, would that work for you? Since you are already doubling up payments each month, you are already reducing the number of years on your mortgage.

    Having the good company pension is good. But don't rely on the company alone. We have seen really big companies goes through financial trouble and then don't complete their pension obligations.

    By the way, WTG on the 2.25% mortgage!

  3. #3
    Contradiction in progress sweet sparrow's Avatar
    Join Date
    May 2011
    Posts
    4,158
    Likes Received
    12947
    Trading Score
    46 (100%)




    If you make a good salary, you might think about maxing out your RRSPs and putting your refund towards your mortgage. That way, you can do both. If you have a lower salary, consider investing through TFSA instead.

    If you put extra money towards your mortgage, you're guaranteed a 2.25% savings on that money. I don't think there are too many investments that can guarantee a 2.25% annual return (after management fees).

    There are many factors to consider, like how savvy is your investment knowledge? Do you trust your financial advisor? How many more years do you realistically have until the end of your mortgage? (That question probably won't matter to your advisor, but I think of it as how many more years until you can redirect your mortgage funds to your investment portfolio.)

    If you'll be mortgage free within a few years, you can take this time now and start researching what you would like to invest in and be more knowledgeable about your decisions.

    (and I'm not a financial advisor either )
    matrix82 likes this.

  4. #4
    KanewtZ kanewtz's Avatar
    Join Date
    Dec 2010
    Location
    The Great Northern Ontario
    Posts
    653
    Likes Received
    121
    Trading Score
    2 (100%)



    To answer some questions.
    1) I want to be mortgage free by 2020...however going at the rate I am right now...it will be more like 2016/2017. I factored in having kids and probably cancelling my double up payment as my wife would be on MatLeave for a year and her salary would take a hit.

    2) My investment knowledge isn't that savvy. I have a self directed RRSP that I have bought stocks here and there. I used to read about it a lot and got quite into it...now I think I would much prefer to have a Financial Advisor tell me what to do.

    3) I do trust a Financial Advisor (well known in our family/community).
    Matt

  5. #5
    Financial Advisor ashedfc's Avatar
    Join Date
    Mar 2010
    Location
    GTA
    Posts
    1,207
    Likes Received
    128
    Trading Score
    0 (0%)



    Quote Originally Posted by kanewtz View Post
    Back Story

    Own a house. Mortgaged at 2.25% currently. Have so far been doubling up my payments (I have an entire month's payment going right to the principle each month) plus I make my 10% annual principle payment.

    I was starting to think about what I am doing...and it seems I might be going down the road of being House Rich but Cash Poor.

    Because my mortgage rate is so low, should I be investing instead of paying down my house quicker? I have a very generous retirement plan through my employer, but haven't been contributing to my RRSP as much as I could.

    Perhaps this is something to discuss with a Financial Planner?

    Thanks!
    Finally, Now you realize the actual importance of money management..
    Yes; based on the info you mentioned, I don't see any reason to panic & rush to pay down a 2.25% mortgage (I know this forum is loaded with guys who are frugal & want to be debt free; & I have no problem with that; but every situation & every individual is different; so we cannot generalize all of them as one)..
    To sum up your above description: this is where you stand:
    a. You income is stable.. (so your present is taken care off)
    b. You have a generous retirement plan.. (so your future is also taken care off)
    c. You are already making double payment.. (although there is no need to do this; but I can understand you want to be mortgage debt free early).
    d. You also pay extra 10% towards your principal (although its not needed, but you have done it in the past)
    &
    e. No RRSP contribution (means who are not getting the tax benefit upto the allowable limit from CRA)..

    Now, consider these probabilities:
    1. The biggest risk you have is all your assets are in the housing basket (what if the housing market crashes & major portion of your equity is gone?)
    2. Your employer goes into trouble & your job gets into jeopardy making your stable source of income unstable..
    3. A sickness or accident makes you incapable of earning your true potential
    4. there are several other factors; which I don't want to mention here..

    Lets put it this way: By adding into your mortgage; you are saving 2.25% on the money; but this money what you are paying extra towards your mortgage is after tax money. It means, from your gross income there is income tax deduction, & then you get your net income; & you use your net income to pay towards your mortgage.

    What if you pay the same extra amount (double up & 10% both) towards an RRSP account; an receive a substantial tax deduction from your income tax. This will give you a tax refund; & then use the tax refund to pay down extra towards the mortgage. This way your hitting 3 targets with one bullet.
    a. Paying down mortgage
    b. Saving on taxes, which wasn't happening before.
    c. Having an RRSP account which means you are house rich & cash rich (both at the same time; without costing an extra dime)..

    Now for your RRSP account; you don't have to aggressive and buy penny stock/junk bonds/etc. & try to hit home run every year........ rather, all you need to do is allocate the RRSP account money into a conservative built-in portfolio allocation where the risk is negligible & even in a downturn, you make more than 2.25% the interest you pay on your mortgage..

    This way you have both money in the account (RRSP) & the house which will become mortgage free eventually (what's the hurry) if the Canadian housing collapses in the future, you still have your RRSP.
    Over a couple of years, your RRSP account will outgrow much faster & in your golden years it will be more than the value of your house..
    You will end up having 2 assets a debt free home & an RRSP account (CASH RICH & HOUSE RICH)

    I am a licensed financial planner (If you have any specific questions you may ask here or via PM)
    [email protected]
    matrix82, i_forget and Carlotta like this.

  6. #6
    Smart Canuck
    Join Date
    Sep 2011
    Location
    Sask
    Posts
    1,945
    Likes Received
    2439
    Trading Score
    1 (100%)




    Some pensions are so "good" that there is hardly any contribution room left for an RSP. If this is the case, I would buy what I could to avoid having to pay more to the government.

    If your priority is to pay off your mortgage, I don't see a problem with that...you and your wife are still young and you have a good steady income. I know people say to invest early to take advantage of compound earnings, but in recent years, the stock markets and fixed investments haven't yielded anything near the "historical" average. It's better to put more into the principle now rather than near the end of your mortgage. You need to have some flexibility later on, when you decide to start a family. Children can be expensive.

    Whether you need to speak to a financial adviser is really a matter of personal choice. I have self-directed investments, but I did my research first.

  7. #7
    Canadian Guru
    Join Date
    Mar 2010
    Location
    Canada
    Posts
    11,031
    Likes Received
    6134
    Trading Score
    46 (100%)




    Pay down your mortgage faster..once its paid off , you will have lot of disposable income as the money is no longer going towards mortgage..so you won't be necessarily cash poor and house rich, you will be both.

    My parents their house is paid off , both of them get a pension. The pension itself is not that great but since they have no mtg or rent payment they still live very comfortably on that pension as utilities , groceries , property tax are pretty much their only expenses.

    Ofcourse the yr your wife is on mat leave you can cut down on the double mtg payments and 10 % pre payment . Even on mat leave she should get about 55 % of her income through EI etc , so your household income will still be decent. But for the time being continue doing what you are doing , like paying of your mtg faster.

    Its hard to get a good return on investments thesedays ..after MER etc you don't get much and plus stocks and mutual funds are too risky , there are no guarantees. GIC's pay next to nothing.

    If you really need money for an emergency you can get a HELOC on your house for as low as 3.5 %.

  8. #8
    Financial Advisor ashedfc's Avatar
    Join Date
    Mar 2010
    Location
    GTA
    Posts
    1,207
    Likes Received
    128
    Trading Score
    0 (0%)



    Only problem is "what if the housing market collapses"... the equity may disappear (we are a the peak of housing & is overdue for a serious correction).

    Regarding the less than average return on investments "yes, I agree"; but even the mortgage interest payment is also less than average (its very negligible interest rate)..

    again I would repeat "there's no such thing as one size fits all".... specially in financial planning..

  9. #9
    KanewtZ kanewtz's Avatar
    Join Date
    Dec 2010
    Location
    The Great Northern Ontario
    Posts
    653
    Likes Received
    121
    Trading Score
    2 (100%)



    Quote Originally Posted by ashedfc View Post
    Finally, Now you realize the actual importance of money management..
    Yes; based on the info you mentioned, I don't see any reason to panic & rush to pay down a 2.25% mortgage (I know this forum is loaded with guys who are frugal & want to be debt free; & I have no problem with that; but every situation & every individual is different; so we cannot generalize all of them as one)..
    To sum up your above description: this is where you stand:
    a. You income is stable.. (so your present is taken care off)
    b. You have a generous retirement plan.. (so your future is also taken care off)
    c. You are already making double payment.. (although there is no need to do this; but I can understand you want to be mortgage debt free early).
    d. You also pay extra 10% towards your principal (although its not needed, but you have done it in the past)
    &
    e. No RRSP contribution (means who are not getting the tax benefit upto the allowable limit from CRA)..

    Now, consider these probabilities:
    1. The biggest risk you have is all your assets are in the housing basket (what if the housing market crashes & major portion of your equity is gone?)
    2. Your employer goes into trouble & your job gets into jeopardy making your stable source of income unstable..
    3. A sickness or accident makes you incapable of earning your true potential
    4. there are several other factors; which I don't want to mention here..

    Lets put it this way: By adding into your mortgage; you are saving 2.25% on the money; but this money what you are paying extra towards your mortgage is after tax money. It means, from your gross income there is income tax deduction, & then you get your net income; & you use your net income to pay towards your mortgage.

    What if you pay the same extra amount (double up & 10% both) towards an RRSP account; an receive a substantial tax deduction from your income tax. This will give you a tax refund; & then use the tax refund to pay down extra towards the mortgage. This way your hitting 3 targets with one bullet.
    a. Paying down mortgage
    b. Saving on taxes, which wasn't happening before.
    c. Having an RRSP account which means you are house rich & cash rich (both at the same time; without costing an extra dime)..

    Now for your RRSP account; you don't have to aggressive and buy penny stock/junk bonds/etc. & try to hit home run every year........ rather, all you need to do is allocate the RRSP account money into a conservative built-in portfolio allocation where the risk is negligible & even in a downturn, you make more than 2.25% the interest you pay on your mortgage..

    This way you have both money in the account (RRSP) & the house which will become mortgage free eventually (what's the hurry) if the Canadian housing collapses in the future, you still have your RRSP.
    Over a couple of years, your RRSP account will outgrow much faster & in your golden years it will be more than the value of your house..
    You will end up having 2 assets a debt free home & an RRSP account (CASH RICH & HOUSE RICH)

    I am a licensed financial planner (If you have any specific questions you may ask here or via PM)
    [email protected]
    Excellent information! Thanks!
    Matt

  10. #10
    Luv Saving People Money MortgageQueen's Avatar
    Join Date
    Mar 2010
    Posts
    3,406
    Likes Received
    6230
    Trading Score
    0 (0%)




    I agree with Ash. As far as I'm concerned, it's a MUST for you to talk to a financial planner. They can also create some tax free shelters for later in life. (i.e. RRSP's you are taxed on when you withdraw)

  11. #11
    CaLoonie
    Join Date
    Aug 2011
    Posts
    148
    Likes Received
    117
    Trading Score
    0 (0%)



    I agree wth Ash as well, except for two points. I would build up a non-registered account or a TFSA at the same time. You don't want to have ALL of your retirement income as taxable income. The second point would be to make sure you and your wife are insured.

    And tjthemanto : I think the point we are all trying to make is that waiting until your house is paid off can quite often be too late to start worrying and saving for retirement.

    If you need money, you can't go out and pull a brick off the wall and use it to buy groceries. Your home is just not a liquid asset. Your RRSP is.

  12. #12
    Contradiction in progress sweet sparrow's Avatar
    Join Date
    May 2011
    Posts
    4,158
    Likes Received
    12947
    Trading Score
    46 (100%)




    Even if your home will soon be worth 50% of what it is today, I imagine you won't have to worry about being house rich unless you need to sell or tap into your home equity. If you're not going to move out of your house for the next 45 years, I wouldn't worry about the housing market until then. If paying off your mortgage is comfortable within the next 4 - 5 years, that's pretty good. When children come, you'll have their RESPs to consider, plus extra expenses.

    Have a look at how much you have in your RRSPs, TFSAs, pension, savings, emergency fund, etc. It may be worthwhile to have a chat with your financial advisor but you'll ultimately have to decide how comfortable you are with your numbers.

  13. #13
    KanewtZ kanewtz's Avatar
    Join Date
    Dec 2010
    Location
    The Great Northern Ontario
    Posts
    653
    Likes Received
    121
    Trading Score
    2 (100%)



    I made an appointment with a Financial Advisor....hopefully I get a better understanding of where I stand!
    Matt

  14. #14
    Frosh Canuck
    Join Date
    Apr 2011
    Location
    Winnipeg
    Posts
    390
    Likes Received
    21
    Trading Score
    29 (100%)



    Keep us posted! I'm very interested by your story. I love seeing someone in such a great positition financially. I dont have extra money that i'm struggling to decide where to invest...but i like observing your search for "the best way to invest"!

  15. #15
    KanewtZ kanewtz's Avatar
    Join Date
    Dec 2010
    Location
    The Great Northern Ontario
    Posts
    653
    Likes Received
    121
    Trading Score
    2 (100%)



    Quote Originally Posted by croman7 View Post
    Keep us posted! I'm very interested by your story. I love seeing someone in such a great positition financially. I dont have extra money that i'm struggling to decide where to invest...but i like observing your search for "the best way to invest"!
    It's not easy...I made a few sacrifices along the way. When I bought my house...my main focus was "pay off the mortgage as fast as possible". That however, might change as I am looking towards investing and such.

    Of course...I want to buy toys and reward myself....but in reality...I would rather plan my future.
    Matt

Page 1 of 2 1 2 LastLast

Thread Information

Users Browsing this Thread

There are currently 1 users browsing this thread. (0 members and 1 guests)

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •