“Homeowners with variable mortgage rates have seen their rates rise over the past year as the Bank of Canada has raised its key interest rate target four times,” says the CBC.
If you have a variable-rate mortgage you may be considering making the switch to a fixed-rate mortgage. However, a current fixed-rate mortgage will probably have a higher rate than your current one and if you make the switch and rates don’t continue to rise, you could end up paying more in interest.
The CBC quotes, “You shouldn’t be making your decision based on the outlook for interest rates that you’re reading in the newspaper, you should be making it on your own situation, your own personality, how it works with your overall financial plan.” – Scott Evans, financial planner at BlueShore Financial in North Vancouver, B.C.
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A question I am often asked by my clients, friends and family, is whether it is a better use of funds to invest money in a RRSP/TFSA, or pay down ones mortgage. Since this is a pretty complicated subject, I have decided to see if I can break it down in my blog post today!
Right off the bat, if you have high interest-rate debt, paying that down first will probably be the most beneficial option for you. Additionally, if you don’t have high interest debt and are trying to decide where your money will do the most – You can immediately scratch a non-registered account off the list. With those options out of the way, the question now becomes – What option is the most beneficial place to put your money when investing in your future:
- Paying down the mortgage.
- In your Registered Retirement Savings Plan, (RRSP).
- In your Tax-Free Savings Account, (TFSA).
All of the above options are fantastic ways to put your money to good use. However, which option is the most useful will depend on a number of varying factors (and your personal circumstance), all of which should be weighed and considered before a final call can be made. Here are some of the factors you should consider when deciding whether paying down your mortgage, or investing your money in a RRSP/TFSA, is the best option for you:
- Length of your amortization and risk of default – If you have a longer amortization period left and you don’t have a lot of equity in your home, making extra payments in case of an emergency may be the best course of action to consider. This is especially true for new homebuyers that spent big when buying their home. Putting extra money into your home will help to ensure that if a negative event occurs, you will still be able to stay in your home.
- Interest rates are rising – Whatever your current rate is it’s likely it won’t always be at that percent. The Bank of Canada and other central banks around the world are slowly hiking their interest rates up, which means borrowing money will be more expensive in the future, no matter what. On that basis, you (typically) would need to be earning a return of more than 5 percent on your TFSA to be better off investing it there, instead of putting it towards repaying your mortgage. Investing in a RRSP changes the game a little – Since, you will also be getting a tax refund. However, (in most cases) you would still need to be earning a return of around 4 percent before being better off than if you had put your money towards repaying your mortgage.
- RRSP money is not completely tax-free – Money put into an RRSP will be taxable when the funds are taken out. On flip side, withdrawals from a TFSA are tax-free. The tax advantages of using an RRSP will be most beneficial if you’re in a high tax bracket when making the contributions and in a low/lower tax bracket when you are taking the money out. It is important to remember that if you’re reinvesting your tax refund into your RRSP, the longer the time between contributing and withdrawing, the longer your money will have to grow tax-free. Additionally, if you’re personal income level is high, RRSP contributions can be greatly beneficial, especially if you are amongst the highest tax bracket. If this applies to you, one strategy worth your consideration is to put as much as allowable into an RRSP and then use your tax refund to apply as a prepayment on your mortgage. This will increase your assets and decrease your debt at a much higher rate.
- Low risk tolerance – If you are someone that identifies as a low-risk investor, paying down your mortgage, which offers a guaranteed payoff, is probably the safest bet. This is because repaying your mortgage has a high guaranteed rate of return, even if your interest rate is only three percent.
In addition to some of the factors I have now outlined above (and your personal circumstances), the answer will generally come down to your asset allocation, or your mix between equity (stocks) and fixed income (bonds). If you would like to discuss which option would be best for your personal situation, or what other factors to consider before paying down your mortgage/investing in a RRSP or TFSA, Reach out & connect with me today!
– Ron Lefebvre, AMP
780.756.7457 | firstname.lastname@example.org
The Bank Canada raises its key interest rate target by a quarter of a percentage point.
The central bank’s target for the overnight rate is now set at 1.75 per cent.
The Bank of Canada is hiking its trend-setting interest rate as the resilient economy hums along and a big source of trade uncertainty is finally out of the way.
The central bank delivered a quarter-point rate increase for the fifth time since the summer of 2017 _ and first time since July _ to bring the benchmark to 1.75 per cent.
It was the bank’s first rate decision since Canada agreed with the United States and Mexico earlier this month on an updated North American free trade deal.
What does this mean for you? Rates are rising – ‘gradually raising rates’ is no longer in their vocabulary. If you are not willing to absorb any volatility, you might want to consider locking in. It’s important to note that variable rates are still considerably lower than fixed rates and this should indeed impact your decision. The lock-in rate will likely continue to trend upward, and as always, I am here to answer any questions you might have. If you would like to take a look at your mortgage to see what makes the most sense for you at this time, please connect with me.
Globe and Mail reports that the Canadian Real Estate Association said national home sales dropped 0.4 percent in September compared to August. This is the first month-over-month decline since April of this year.
“Home sales moved lower in more than half of all local markets, led by Vancouver Island and Edmonton, along with several markets in Ontario’s Greater Golden Horseshoe region,” the Globe and Mail reports.
The Canadian Real Estate Association said that the national average price for a home sold in September was just under $487,000, up 0.2 percent compared with a year ago.
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