Comments on: This & That: Crazy House Edition

By: DanielC

DanielC — Tue, 07 Jul 2009 11:57:57 +0000

Excerpt from above article:

Most of the internet sites discussing the question of RRSP contributions vs. mortgage paydown are written or sponsored by organizations or investment advisers who earn their income on commissions from RRSP contributions. Nobody earns a fee when a homeowner pays down his or her mortgage.

As a result, it is good to take the advice from some sources with a grain or two of salt.

I found one of the best unbiased pieces of advice on the web site of investment guru Gordon Pape, http://www.gordonpape.com. The question and answer portion of the site asks, “Is it better to pay down your mortgage while the interest rates are low or is it wiser to take the extra cash and put it into mutuals or some other investment vehicle?”

The answer, which overflows with common sense, is, “Consider it in terms of after-tax return. Say you’re paying an interest rate of seven per cent on your mortgage. If your marginal tax rate is 40 per cent, you have to earn more than 11.7 per cent a year on your investments, every year, to come out ahead.”

“If you use a lower marginal rate, say 30 per cent,” it continues, “and invest in securities that pay mainly dividends and capital gains, you still have to realize better than 10 per cent annually. Perhaps you can achieve that. But the mortgage paydown is a sure thing.”

By: DanielC

DanielC — Mon, 29 Jun 2009 15:26:06 +0000

I thought I would post this advice on the controversial subject of paying off mortgage. “Smart investors skip RRSPs to pay down mortgage now”

http://www.aaron.ca/columns/2003-02-01.htm

By: Milan

Milan — Sat, 27 Jun 2009 21:39:35 +0000

I agree: racking up credit card or LOC debt just to knock down your mortgage principal is crazy under most circumstances.

However, I will also say this. I personally have found that the key to money management is to set goals and to stick to those goals. One of my goals was to get my mortgage principal below $100,000 this summer. Even though I have other debts I elected to make a couple of extra mortgage payments now, then get to work on my other debts. I don’t see the harm, because my mortgage rate is 5.9% and I have a LOC at 5.0% and credit card at 5.8%. My mortgage agreement allows me to skip a payment for every extra payment I have made, so I can always redirect that money to my LOC if it becomes a problem.

By: DanielC

DanielC — Fri, 26 Jun 2009 01:12:43 +0000

My and me GF have a good amount of spare money left, after all the fixed+variable monthly expenses are paid for. I still think paying down the mortgage agressively and the LOC more slowly makes sense for our scenario. The reason is that our mortgage is too large for my confort level, and I want to be mortgage free about 5 years before my pension. Furthermore, my LOC rate is 2.41% and mortgage is 5.22% for 5+ years. We have no credit card debt, car payments, or furniture payments, but a $25K LOC and $308K mortgage.

By: Gail

Gail — Thu, 25 Jun 2009 10:52:14 +0000

Catherine, I’m not sure the see the benefit being offered. If your TFSA pays 1% and your loan costs 2.5% you’re paying 1.5 times more interest than you’re earning. How is that in your best interest? Since you already have access to your line of credit, moving it to your TFSA simply activates the interest clock. I can see what’s in it for the lender: profit. What’s in it for you?

By: pligg.com

pligg.com — Thu, 25 Jun 2009 07:12:09 +0000

This & That: Crazy House Edition…

Getting your mortgage paid off at all costs while racking up debt on your line of credit or credit cards is one of those Stupid Debt Tricks I sometimes talk about. So is taking on so much house you can’t afford to eat.

A wrote:

I am a stay at…

By: Marie

Marie — Thu, 25 Jun 2009 03:57:57 +0000

Catherine:
Is your EF for both emergencies and pre-planned home spending?
Can you pay off your LOC using 15% of your take-home and balance the budget?
Personal belief: NEVER less than 3-months in EF and save towards 6-months. The less the jobs are secure, the greater the need for a 6-mo EF.

By: Catherine

Catherine — Thu, 25 Jun 2009 00:32:36 +0000

KK says: “should I use my TFSA and any extra money I have saved (outside of RRSP/Emerg) to pay down my mortgage? I figure I can pay down the mortgage, which would reduce the bi-weekly accelerated payments and save on interest payments. I also figure the rate difference (4.2 vs. 1.2%) would also mean the money is better utilized to pay down debt than leave it sitting in a bank”
Interesting. Our financial advisor says we should take our TFSA $$ and put it on our LOC. The interest is 1% on the TFSA and 2.5% on the LOC.
I have two minds about this. I like knowing I have the cash if we need it. My TFSA is an emergency fund and hubby’s is for our next new to us car in about 3-4 years. On the other hand, I’d love to lower the LOC. We meet with our advisor on July 20th so will decide then.
Any comments or suggestions here????

By: Jenna

Jenna — Wed, 24 Jun 2009 18:09:15 +0000

I like the distinction between good and bad debt. I know at least two people who are scared to death of buying a house, even though they’re VERY fed-up with renting, because they’re terrified of any kind of debt (their parents had to declare bankruptcy when they were just old enough to start to understand how really scary that is). I don’t disagree that debt stinks, but I really think it’s worthwhile when it comes to owning your own home, so long as (like you said) the mortgage isn’t eating you up. That said, of course, I’m not about to push them into buying a house when they’re not comfortable with it (I just kinda wish they’d come to terms with renting if they’re that set on not buying, since the only other option I can think of is moving into a cardboard box under a bridge somewhere).

The one thing I wish people would consider (as opposed to taking on more mortgage than they can handle) is maybe waiting a couple years longer and building up a bigger downpayment than is strictly necessary (and without borrowing to have that downpayment!) In five years, God willing, we’ll a downpayment worth 30%-35% (as opposed to the 20% recommended) of the house value we’re looking at, which will save us interest without adding to our monthly mortgage payments. If you don’t mind waiting a bit longer before owning, I think it’s well worth it!

By: *pol

*pol — Wed, 24 Jun 2009 16:11:31 +0000

Nice, clear answers!
Mortgages hit “close to home” (pun intended) for so many people.
My sister and I are like night and day on this front. She has no problem maxing out with the highest mortgage they qualify for 35 years so they can get more house. That’s their preference, and hey they have a nice house that they will be paying towards for the longest possible term. If the value appreciates and they keep making 2 decent incomes, and the interest rates stay sane, and there are no major repairs, and they are happy there, then hooray for them, they will be fine!
My comfort zone is nowhere near theirs! I want a mortgage that can be easily maintained on ONE income, and I need to know that if anything happens we have the safety net in place that we won’t be homeless. Our home is small, modest and frumpy (in comparison), but by staying satisfied with what we have for the last 10 years, we have only about 7 years left to pay! And I might add that unlike my sis starting with zero equity right now, my smaller home is today worth almost 3 times what we bought it for (thanks to making repairs and improvements as needed to keep up it’s maximum value — without needing to add debt)!

By: Steve Heath

Steve Heath — Wed, 24 Jun 2009 14:55:25 +0000

KK – another good reason to pay off the car loan first is that you have eliminated a minimum monthly payment… right off that bat, that automatically extends the length of time your emergency fund can support you, which is a nice security bonus. And, if times are good, you can just take those car payments you were making and make extra mortgage payments, and overall you’ll be way ahead.

By: Jessie

Jessie — Wed, 24 Jun 2009 13:19:00 +0000

I love these ’round-up’ posts Gail! Its great that you answer so many similar questions at once. I think it must also help people feel like they are not alone.

Thanks!

By: Sparky

Sparky — Wed, 24 Jun 2009 11:52:02 +0000

I should cut out this article and frame it in my office!!!!!!!….I have met several people in my job who are crippled with astronomical credit card debt because they are putting every penny they have on their mortgage in order to be mortgage “free”…soooo crazy…I have even met folks that are in collections because of the consumer debt but their mortgage is fast tracked….crazy….a good conversation with some good calculation tools and I have been able to help some folks get on the right track…paying down the 19% debt before the 3% mortgage…having some savings…then when the consumer debt is gone they can focus on putting those dollars against the mortgage…that way when the mortgage is paid off you won’t be looking for another one just to pay off all the consumer debt!…talk to your banker…we have a brain and can help:)…especially if we read Gail each day..lol…:)