Should I Pay Down My Mortgage or Invest in the Market (Part 2 of 2)

In my last post, I discussed my perspective of whether to pay down your mortgage sooner with your extra cash flow, or whether to invest that money in the market. In this post, I thought I would share an alternative reason as to why I choose to invest in my RSP’s with extra cash flow rather then pay off my mortgage with that same amount of money. 

The strategy I’m referring too is to invest your extra cash flow into an RRSP on a monthly basis. Each deposit will go towards your total RRSP contribution for that year and thus create an annual tax deduction. If you are like most Canadians, you will then receive a tax refund sometime in the early part of the following year that you can then put directly against the principal of your mortgage. This strategy allows you to grow your RRSP and also pay down your mortgage sooner.

Your Take-Away:  Think of it this way. If you have $10,000 to put against your mortgage, why not put that into your RSP and create a tax deduction of $10,000? If you are in the highest tax bracket of 46%, you would receive a tax refund of $4,600 which you could then put directly into your mortgage. Right off the top you have turned your $10,000 into $14,600 and have both grown your RRSP and also reduced your mortgage debt.

In the end, sticking to your regular mortgage payment plan or paying it off sooner becomes a matter of preference and a decision based on “Opportunity Costs”. Only you can make that decision, but if you can handle a bit of debt and stay with your original plan, why not take advantage of a market that is largely “on sale” today?!?

Until next time, have a Fantastic Friday.

Chris

Should I Pay Down My Mortgage or Invest in the Market (Part 1 of 2)

One question I deal with on a regular basis is “Should I pay down my mortgage with excess cash flow or invest that money into the market?” There are definitely different schools of thoughts on this topic, so I thought I’d share my personal perspective.

With the cost of borrowing being so low today (call it 5.45% for a 5 year fixed mortgage), I’m confident that it is quite possible to earn a larger rate of return in the market then to pay off my mortgage sooner. Lately that doesn’t seem to be the case, however I’m still confident that I will earn a better return by investing in the market over a five year window, which is a typical term for most mortgage owners. A general rule of thumb for me is to ask myself if I can earn more then it costs me to borrow. If so, then I’ll take as much debt as I can.

Your Take-Away: This is clearly not a strategy that works for everyone, especially if you invest in GIC’s or Money Market accounts, because you won’t be returning a greater percentage then what you are paying for your mortgage. The other factor to consider is that if you are tremendously opposed to debt, there is no point holding extra debt if it’s going to bother you and always be in the back of your mind.

Until next time, have a Terrific Tuesday!

Chris

What’s Happening with Fannie Mae and Freddie Mac

The U.S. credit crisis is well under way, and two of the biggest names in asset backed securities are Fannie Mae and Freddie Mac.

When these two institutions make the news because of their risk of insolvency, there is no question that they spark some interest and in turn, some fears. In fact, these two company’s are now being referred to as the “epicenter” of the U.S. financial crisis, and dominate the market for U.S. housing finance. Consider them a much larger company similar to that of CMHC and GE. If they did not exist, housing prices would continue to fall at a much larger rate then we’ve seen even to date.

What most are not aware of however, is the fact that Mae and Mac are no longer simply a ”too big to fail” American financial institution. Over the years, these two institutions have become central to what has turned U.S. mortgages into securities held by the world’s central banks. In fact, statistics show that these central bank’s hold up to $925 billion in these types of securities around the world.

Your Take-Away: It is impossible to predict the future of our economy considering the recent volatility we have all seen over the past 12 months. What we can say however is that although both of these institutions are definitely in a financial crisis, the fact remains that we are confident that the U.S. Goverment will be forced to inevitably step in and provide a possible solution for what has and is happening. If they don’t, they would be solely responsible for a further global economy slow down to the tune of multi billions of dollars.

Again, there is no way of predicting with absolute certainty that Fannie Mae and Freddie Mac will eventually get themselves out of their current financial situation. If they don’t however, we will be dealing with a possible global catastrophe that no one in the world would want to see. Better yet, the last country that would want to allow that to happen would be the U.S. based on the fact that they would be the primary reason for a further decline in global economies.

Until next time, have a Terrific Thursday!

P.S. For a far more in depth read of this story and the details involved, please visit http://blogs.cfr.org/setser/2008/07/12/too-chinese-and-russian-to-fail/

Chris & Elisseos

40 Year Mortgages and 100% Financing No More

Earlier this week, the Department of Finance announced that they were going to put a halt on 40 year mortgages and 100% financing.

As is usually the case with a decision of this nature, many are wondering whether this will be a good or bad thing for both the end user and the economy. According to Pascal Gauthier, a TD Bank Economist, “The five-year reduction in amortizations is expected to have a minimal impact — but the 5% minimum down payment could cut into the number of first-time homebuyers in the market.” Clearly the biggest concern is will the economy suffer with fewer people being able to purchase a home who would have otherwise been forced to take advantage of the 100% financing option?

Your Take-Away: Although this decision could slow down the economy in terms of first time home buyers, I personally can’t help but agree with the direction the Department is heading. After all, the credit crisis we are seeing in the US is due in large part to the very liberal mortgage financing American banks were offering, and we all know how much of an impact that has had. We may see a slow down in new new home buyers jupming into the market and thus even new home starts, but I’d rather deal with that smaller pain now then the potentially devestating pain we could experience if we were to ever fall into the same traps that the US is currently dealing with.

The long and short, a 40 year mortgage is not tremendously more different or dangerous then a 35 year mortgage. However, I am confident that 100% financing can bring with it the potential of catastrophic results and I’m confident that this will be the right decision in the years to come.

Until next time, have a Wonderful Weekend!

Chris & Elisseos

Bank of Canada Leaves Rate Unchanged - Now What?

This is somewhat old news by now, but it could provide some interesting changes.

As you already know, the Bank of Canada (BoC) shocked many Canadians yesterday by leaving the overnight lending rate unchanged at 3%. This was especially surprising because most, if not all, Analysts were expecting a 0.25% rate cut with fairly strong confidence. To top it off, they also made it clear that there is currently no need for “further monetary stimulus” which says they don’t really feel it is necessary to continue the downward trend of cutting rates moving forward.

Your Take-Away: With the BoC focusing on curbing or slowing down inflation rather then stimulating the economy, there is a very good chance that we will start to see fixed mortgage rates begin to climb over the course of the next six months. If you currently have a mortgage in place, it would be a great time to revaluate your terms in regards to staying with or changing too a fixed or variable rate mortgage. On the other hand, if you are looking to buy your first home or structure a new mortgage, a simple pre-approval could save you literally thousands of dollars over the next five years.

With the recent volatility we have seen, now is a great time to talk to your Mortgage Advisor…it could save you some very real money!

Until next time, have a Wonderful Wednesday!

 Chris & Elisseos

Interest Rates set to Rise or Fall?

Are interest rates on the rise in Canada, or are they set to continue to decline based on the US economy?

That seems to be a fair question, especially considering the shaky economy in the US and the question mark that looms over our Canadian Economy. To make matters worse, TD released a report yesterday saying that they “expect another 100 basis points in rate cuts out of the Bank of Canada to help fend off any fallout north of the border”. Ironically, on the very same day, CIBC World Markets released a report stating “Higher prices for food and energy will reverse the direction of interest rates in the next 12 months, and lift energy and materials stocks to new record highs”.

Your Take-Away: With drastic contradiction like these two reports create, it is very difficult to know just what is happening and more importantly, what to expect. If I were to be forced to make a decision of whether to choose a variable or fixed rate mortgage in this economy, I would make the same one as though the economy was strong and fruitful. Don’t let yourself get caught up in the hype and try to time the market, and definitely don’t step too far outside of your comfort zone and make a decision you would not normally make because of one report or the other.

 At the end of the day, do your research and do what you are most comfortable with for yourself and your family. It is impossible to know what the future holds, which is why sticking to your guns and your core values (otherwise known as gut instinct) is key in this environment.

Good luck with your decision making, and until next time, have a Terrific Tuesday.

Chris & Elisseos

is Now a Good Time for a Variable Rate Mortgage?

One of the most common questions we are asked when it comes to choosing a mortgage is “Should I go with a fixed rate or variable rate mortgage?”

With what he have seen over the last six months, and specifically on Tuesday of this week, a variable rate mortgage seems to continue to make more and more sense. I can say in my own personal experience that my mortgage payment has decreased by over $200 since November and prior to Tuesday’s Bank of Canada decision, and will drop yet again based on my choice to choose a variable mortgage. The question remains however, is it right for you?

Your Take-Away: Before you decide one way or the other as to which type of mortgage you will choose, it is important to explore more then just your cash flow needs today. It would be worth your time to seriously consider the following questions:

Although these questions won’t necessarily give you an exact answer in terms of what type of mortgage to choose, they will help you to explore some of the issues you may be forced to deal with if the current rates were to change abruptly. We believe that a variable rate mortgage can make a lot of sense for a lot of people, but by no means is it a one size fits all product.

Until next time, have a Terrific Tuesday.

Chris & Elisseos

Creative Home Buying for 20 Somethings

The Ottawa Citizen just released an article saying that more and more “20 Somethings” are getting creative when it comes to buying their first or subsequent property.

Real Estate has been on the rise in Canada for quite some time, and many Canadians have been looking for ways to get into the housing market despite their luming student loans and other debts. One strategy that many people have used is to buy a home with a finished basement or separate unit and then rent that to someone they know, or even someone they don’t. This has proven to very succesful for many “20 Somethings” as the article states “About one-quarter of Canadians aged 18 to 34 are homeowners, according to a recent survey by the Canadian Association of Accredited Mortgage Professionals (CAAMP).”

Your Take-Away: If you are currently single and would prefer to own rather then rent, the door to your goal is by no means closed. With longer amortization periods on mortgages, your mortgage payment can be reduced substantially allowing you to buy something for close to the same price you’d pay to rent. This is just one idea to help you get into your home sooner rather then later, but there are a number of other ways you can get creative if you are serious about buying instead of renting.

One caution however is to not make a hasty decision and go bigger then you should just because it feels more affordable based on smaller payments or our low interest rate market. This can come back to bite you if you are not careful to “stay within your means” on this decision.

Until next time, have a Terrific Thursday!

Chris & Elisseos

CBC Exposes Bank Mortgage Insurance

VIDEO: The CBC Reports on Mortgage Insurance

The above video was put together by CBC is a tremendous example of the downfalls of purchasing ortgage Insurance through your bank.

As a Mortgage provider, we have done our research and are well versed on the difference between opting for the mortgage insurance provided through your lender and owning personal life insurance for the purpose of your mortgage. In fact, that is why we recommend that each of our mortgage clients purchase personally owned life insurance for this purpose. We know that almost all individuals will save money on the premium, but that is only one part of the many benefits that exist.

Your Take-Away: As a home owner, it is 100% in your best interest to explore your options. If you choose to own personal life insurance for your mortgage over the lenders mortgage insurance, you will benefit in the following ways:

  1. Ownership: You will own the policy and thus choose your beneficiary as opposed to having the bank as your beneficiary
  2. Portability: Your mortgage insurance will go with you whether you buy a new home or change lenders as opposed to having to reapply if you change lenders
  3. Level Benefit: You will receive the benefit you apply for at claim time as opposed to simply having your mortgage paid off at whatever value it is
  4. Underwriting: We underwrite at the time of application which means you are approved once you receive your policy as opposed to doing the bulk of the underwriting at claim time

Enjoy the video, and don’t forget that it is well worth your time to do a bit of research before simply “signing off”.

Until next time, have a Terrific Tueday.

Chris & Elisseos

How do Lower BOC Rates Effect Canada

As you know, the Bank of Canada dropped the overnight lending rate by 0.25% on January 22nd.

The drop in the overnight rate by the Bank of Canada presents a mixed picture for the economic outlook. While the Bank acknowledged that “the 2008 outlook for the U.S. economy is now significantly weaker than at the time of the October Monetary Policy Report” and that this “will lead to additional downward pressure on export growth,” policymakers presented an optimistic outlook for Canada’s domestic economy as “domestic demand in Canada is projected to remain strong.” Still, the Bank concluded that “further monetary stimulus is likely to be required in the near term.”

 Your Take-Away: The potential for yet another cut in interest rate later in 2008 is a very real possibility. What this means for you is that we also expect to see the chartered banks decreasing their prime rates by similar amounts. This in turn will make mortgage rates, and more specifically, the variable rate products very attractive. This is something to seriously consider if you find your self purchasing a new house or refinancing an existing mortgage.

Until next time, have a Fantasic Friday!

Chris & Elisseos

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