Douglas's Thoughts.....................

 

 

As we enter the new year it fills us with excitement and optimism as we look forward to the year ahead.  There are lots of things that we want to accomplish in this year.  You might have personal goals or educational goals or financial goal.  I have found in the past in order to be successful in meeting my goals I have do 3 things. 

1. The first is that my goal needs to be attainable.  It can't be so far out of reach that I am discouraged before I even begin
2. The Goal needs to be documented.  In other words, I need to write it down and put it in obvious places.  It might mean putting it on your bulletin board or Fridge, it might be your Desktop Background or smart phone.  Just make sure it is in a place that you see it often and that you are reminded often
3. The third thing is the difference between success and failure.  I need accountability and I am sure you do too.  This might be a coach or a business associate, a friend or a pastor.  Anyone that can hold you to what you say that you are going to do.  Usually a spouse is a bad idea because the relationship is too close.  Hayley set out on a journey of losing weight this fall.  She has engaged with a program that requires her to weigh in every week.  This weigh in provides her with accountability as well as advice and ideas of how to overcome some of the obstacles that she is facing.  The result is that she has succeeded in losing 2/3's of her goal to date. 

When it comes to your finances, goals are important as well.  You might need to set a budget and work to stay within that budget.  You may want to pay off more of your mortgage this year, you may want to invest money or save more money or reduce your debts.  All of these goals are great but I want to suggest that if you don't implement the previous 3 principles you will have trouble reaching those goals.  There might be ways that we can help you with these goals. 

1. Maybe it is time to restructure your debt so that you can get it paid off faster.  Your mortgage is a tool in which we might be able to use in order to do that. 
2. It might be an opportunity to review your mortgage statement that you should be receiving in the mail shortly. We can look at it with you so that we can make some small adjustments that will help you pay off your mortgage quicker.
3. With the markets soft right now and interest rates low this might be a time to free up some of your home equity to invest.  This could be in different investments or even in another piece of Real Estate (Vacation Property, rental property, home for your children or parents to live in).

Whatever your goals might be, take the time to work them through, make them attainable, then write them down and finally take the biggest step and be accountable.

One last note......Thank you for subsrcibing to our newsletter and I hope that it is informative and helpful.  We are always working on ways to improve it both in format and content.  If you have any suggestions, we would welcome them.  If you find this helpful please pass it on to your friends and they can subscribe to it very easily just by letting us know and we will add them to our subscriber list.  Join us on Facebook and like us as well.  There is always things happening so keep informed it may save you thousands of dollars

RRSP Loans vs Cash Back Mortgages

Cash Back mortgages give you anywhere from 1-7% of your mortgage in cash on closing. You can take that cash and immediately make an RRSP contribution with it.

RRSP loans are a little different. They’re basically just straight loans secured against your investments instead of your house.

Each has its relative benefits…

Cash Back Mortgage Advantages

• Monthly payments are typically lower on the funds borrowed for your RRSP contribution (That’s because the amortization period of a mortgage is usually longer than an RRSP loan.)
• Most, but not all, mortgages compound semi-annually. RRSP loans often compound monthly, which is slightly more costly (Albeit, the difference is far from enormous.)

RRSP Loan Advantages

• You can sometimes borrow more for your RRSP with an RRSP loan than with a cash back mortgage, depending on the mortgage amount and lender.
• Unlike a cash back mortgage, there is no clawback of cash to worry about (If you break a cash back mortgage early, you typically must pay back a pro rata portion of the cash you received. Beware that some lenders make you pay it all back, even if you’re just a few days until  maturity.)

Another key differentiator between these two options is the interest rate.

Rates on RRSP loans currently range from roughly 3-7% depending on institution, loan size, qualifications, term, etc. That means you’ll pay roughly $200-$550 interest per year for every $10,000 borrowed.

Cash back interest rates are usually 0.40% to 2.00% more than a regular fixed mortgage. That translates to about 3.60% to 5.29% today. The actual rate depends on the mortgage term, lender and cash back amount, among other things.

Despite the higher-than-normal mortgage rate, people often forget that the effective rate of a cash back mortgage is substantially lower. That’s because the lender is handing you cash up front, which reduces your overall borrowing cost.

In fact, for large mortgage amounts and shorter terms, you’ll occasionally find effective rates that are actually lower than a regular mortgage.

Once you solidify your interest rate, you’ll need to determine your payback period. In other words, how long will it take you to repay the money borrowed for your RRSP contribution?

Key Point:  RRSP loans are meant to be short-term. That can’t be stressed enough. Otherwise, the borrowing costs eat up the gains.

Even if you’ve used a cash back mortgage and amortized your RRSP contribution over 25 years, you absolutely and unequivocally need the discipline to pay back the RRSP portion quickly (usually within 1-3 years, depending on the rate, RRSP return, amount of tax refund, etc.).

With the interest rate and payback period determined, you can then compare the interest cost to your gain. That gain includes both the RRSP tax deduction and your projected investment growth. This, in part, will confirm if borrowing for your RRSP is worth it.

Assuming you do borrow to contribute, you can generally expect a tax refund. Use that refund wisely. Financial advisers often recommend one of three things:

• Prepaying your RRSP loan with it (Doing so lowers your interest expense, which is not tax deductible)
• Using it to pay off high-interest debt
• Using it to make an RRSP contribution for the current year

Before we wrap things up, it’s worth mentioning one other alternative to a cash back mortgage: a regular refinance.

Rates on a regular refinance are generally (but not always) less than the effective rate of a cash back mortgage. But a refinance comes with issues of its own.

You will:

• Need enough home equity to refinance.
• Face default insurance premiums if your loan-to-value (LTV) is over 80% (85% LTV is the limit if you want the best rates.)
• Pay a penalty if you have to break a closed mortgage early. (Mortgage penalties often ruin the math and make borrowing for an RRSP contribution uneconomical via a mortgage.)
• Pay legal fees to refinance. (By comparison, legals are often paid by the lender when you “switch” into a cashback mortgage at maturity. Lenders occasionally cover legals on regular refinances as well. (Just watch out that they don’t charge you an offsetting rate premium in return.)

Whether RRSP borrowing (of any kind) is right for you depends on your tax bracket, contribution room, ability to handle more debt (even if short term), risk tolerance, time till retirement, and likely payback period, among other things. An independent financial advisor or accountant are good sources to help you sort it out.

Rob McLister, CMT

Posted at 04:47 AM in Mortgage Tips & Advice | Permalink

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