Dear CD Folks,
Given the bleak financial outlook and fears of recession, what do you feel you would prefer to do on the Mortgage / RRSP stand.
From what ever the monthly savings you could afford to,
1. Would you consider paydown your mortgage principal ?
2. Continue to increase your cash balance in Bank (on GIC ofcourse).
3. Invest in RRSP (Market condition ???)
4. Invest in Stock.
As we all know, if the principal continue to remain high then you will be paying considerably higher interest which might even outcast the interest you could receive from GIC if that additional amount was even deposited, not to rule out there will be tax on the interest you have earned.
Unlike American's we do not get a tax break on the interest we pay on our mortgage but again the Smith M couldn't be my cup of tea (possibly for many as the bellwethers going belly up).
Cheers..
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The cowards never started,
The weak died on the way,
Only the strong arrived.
http://www.youtube.com/watch?v=_yK1i9cLAMM
Location: carl sagan's universe
Posted on: 20-10-08 20:59:24
1 11/20/2008 1,384 455 929 249,545
2 12/20/2008 1,384 457 927 249,089
3 01/20/2009 1,384 458 925 248,630
4 02/20/2009 1,384 460 924 248,170
5 03/20/2009 1,384 462 922 247,709
6 04/20/2009 1,384 463 920 247,245
7 05/20/2009 1,384 465 919 246,780
8 06/20/2009 1,384 467 917 246,314
9 07/20/2009 1,384 469 915 245,845
10 08/20/2009 1,384 470 913 245,375
11 09/20/2009 1,384 472 912 244,903
12 10/20/2009 4,384 3,485 899 241,418
13 11/20/2009 1,384 487 897 240,931
14 12/20/2009 1,384 489 895 240,442
15 01/20/2010 1,384 490 893 239,952
16 02/20/2010 1,384 492 891 239,460
17 03/20/2010 1,384 494 890 238,966
18 04/20/2010 1,384 496 888 238,470
19 05/20/2010 1,384 498 886 237,972
20 06/20/2010 1,384 500 884 237,473
21 07/20/2010 1,384 501 882 236,971
22 08/20/2010 1,384 503 880 236,468
23 09/20/2010 1,384 505 879 235,963
24 10/20/2010 4,384 3,518 866 232,445
25 11/20/2010 1,384 520 864 231,925
26 12/20/2010 1,384 522 862 231,403
27 01/20/2011 1,384 524 860 230,879
28 02/20/2011 1,384 526 858 230,353
29 03/20/2011 1,384 528 856 229,825
30 04/20/2011 1,384 530 854 229,295
31 05/20/2011 1,384 532 852 228,763
32 06/20/2011 1,384 534 850 228,230
33 07/20/2011 1,384 536 848 227,694
34 08/20/2011 1,384 538 846 227,156
35 09/20/2011 1,384 540 844 226,617
36 10/20/2011 4,384 3,553 831 223,064
37 11/20/2011 1,384 555 829 222,509
38 12/20/2011 1,384 557 827 221,952
39 01/20/2012 1,384 559 825 221,393
40 02/20/2012 1,384 561 823 220,832
41 03/20/2012 1,384 563 820 220,268
42 04/20/2012 1,384 565 818 219,703
43 05/20/2012 1,384 567 816 219,136
44 06/20/2012 1,384 570 814 218,566
45 07/20/2012 1,384 572 812 217,994
46 08/20/2012 1,384 574 810 217,421
47 09/20/2012 1,384 576 808 216,845
48 10/20/2012 4,384 3,589 795 213,256
49 11/20/2012 1,384 591 792 212,664
50 12/20/2012 1,384 594 790 212,071
51 01/20/2013 1,384 596 788 211,475
52 02/20/2013 1,384 598 786 210,877
53 03/20/2013 1,384 600 783 210,277
54 04/20/2013 1,384 602 781 209,674
55 05/20/2013 1,384 605 779 209,070
56 06/20/2013 1,384 607 777 208,463
57 07/20/2013 1,384 609 775 207,853
58 08/20/2013 1,384 611 772 207,242
59 09/20/2013 1,384 614 770 206,628
60 10/20/2013 4,384 3,627 757 203,001
________________________________________________________
1 11/20/2008 1,384 455 929 249,545
2 12/20/2008 1,384 457 927 249,089
3 01/20/2009 1,384 458 925 248,630
4 02/20/2009 1,384 460 924 248,170
5 03/20/2009 1,384 462 922 247,709
6 04/20/2009 1,384 463 920 247,245
7 05/20/2009 1,384 465 919 246,780
8 06/20/2009 1,384 467 917 246,314
9 07/20/2009 1,384 469 915 245,845
10 08/20/2009 1,384 470 913 245,375
11 09/20/2009 1,384 472 912 244,903
12 10/20/2009 1,384 474 910 244,429
13 11/20/2009 1,384 476 908 243,953
14 12/20/2009 1,384 477 906 243,476
15 01/20/2010 1,384 479 905 242,997
16 02/20/2010 1,384 481 903 242,516
17 03/20/2010 1,384 483 901 242,033
18 04/20/2010 1,384 484 899 241,549
19 05/20/2010 1,384 486 897 241,063
20 06/20/2010 1,384 488 896 240,575
21 07/20/2010 1,384 490 894 240,085
22 08/20/2010 1,384 492 892 239,593
23 09/20/2010 1,384 494 890 239,100
24 10/20/2010 1,384 495 888 238,604
25 11/20/2010 1,384 497 886 238,107
26 12/20/2010 1,384 499 885 237,608
27 01/20/2011 1,384 501 883 237,107
28 02/20/2011 1,384 503 881 236,604
29 03/20/2011 1,384 505 879 236,100
30 04/20/2011 1,384 506 877 235,593
31 05/20/2011 1,384 508 875 235,085
32 06/20/2011 1,384 510 873 234,575
33 07/20/2011 1,384 512 872 234,062
34 08/20/2011 1,384 514 870 233,548
35 09/20/2011 1,384 516 868 233,032
36 10/20/2011 1,384 518 866 232,514
37 11/20/2011 1,384 520 864 231,995
38 12/20/2011 1,384 522 862 231,473
39 01/20/2012 1,384 524 860 230,949
40 02/20/2012 1,384 526 858 230,424
41 03/20/2012 1,384 528 856 229,896
42 04/20/2012 1,384 530 854 229,366
43 05/20/2012 1,384 532 852 228,835
44 06/20/2012 1,384 533 850 228,301
45 07/20/2012 1,384 535 848 227,766
46 08/20/2012 1,384 537 846 227,228
47 09/20/2012 1,384 539 844 226,689
48 10/20/2012 1,384 541 842 226,148
49 11/20/2012 1,384 543 840 225,604
50 12/20/2012 1,384 545 838 225,059
51 01/20/2013 1,384 548 836 224,511
52 02/20/2013 1,384 550 834 223,962
53 03/20/2013 1,384 552 832 223,410
54 04/20/2013 1,384 554 830 222,856
55 05/20/2013 1,384 556 828 222,301
56 06/20/2013 1,384 558 826 221,743
57 07/20/2013 1,384 560 824 221,183
58 08/20/2013 1,384 562 822 220,621
59 09/20/2013 1,384 564 820 220,057
60 10/20/2013 1,384 566 818 219,491
__________________________________________________________
Assumptions
Periodic Contribution Amount $3000
Marginal Tax Rate 31.15
%
Contribution Frequency --annual
Annual Rate of Return
12 %
Years to Retirement
Registered
Plan Tax Refund
re-invested Non-Registered
Plan
Annual Contribution Amount $ 3,000
$ 935
$ 3,000
Annual Tax Refund $ 935
Annual After Tax Growth $ 360
$ 77
$ 248
Total Value After 1 Year $ 3,360
$ 1,012
$ 3,248
Plan Value at Retirement $ 21,346
$ 5,966
$ 19,154
Total RRSP Value Including Reinvested Tax Refund $ 27,312
_________________________________________________________
Hi JRF,
Please see above calculations.
Mortgage taken at 4.5% fixed 5 years ago- very reasonable rate in 2003.
After 5 years if you pay an extra amount of $3000 (approx. value of yearly RRSP contribution) towards your mortgage you will wind up with a pending mortgage of $203,001. (Table 1).
If you do not pay the extra $3000 every year then you will wind up with a balance mortgage of $219, 491. (Table 2)
This gives a difference of $16,490 but you have paid $15,000 on your mortgage extra so by doing that you have gained only an edge of $1,690.
If however you invested $3000 in Fidelity funds True North or Canadian disciplined or other (note these are normal funds that any advisor would recommend to their clients) the rate of return in the last 5 years has been around 12% ( in spite of the current downturn-please see link below) so you end up with $27, 312.
If however you had invested in GIC's at an average of 3% then you would still wind up with $21,375
Assumptions
Periodic Contribution Amount $3000 Marginal Tax Rate 31.15%
Contribution Frequency Annual Rate of Return 3 %
Years to Retirement 5
Registered
Plan Tax Refund
re-invested Non-Registered
Plan
Annual Contribution Amount $ 3,000
$ 935
$ 3,000
Annual Tax Refund $ 935
Annual After Tax Growth $ 90
$ 19
$ 62
Total Value After 1 Year $ 3,090
$ 954
$ 3,062
Plan Value at Retirement $ 16,405
$ 4,970
$ 15,955
Total RRSP Value Including Reinvested Tax Refund $ 21,375
So you decide which is better.
Please note this is a general picture. I do not know how much your mortgage is, nor if you plan to pay every month extra on your mortgage or every year nor how much- nothing.
This is a totally general picture, but armed with this you can at least confront your advisor to give you specifics rather than talk in generalities
If there are any mortgage pros or real estate pros who can point out something wrong or make corrections to my illustrations, I would highly appreciate it.
Anybody who wishes to pose questions also are welcome anything to ameliorate the illustration.
Link for Fidelity funds.
http://www.morningstar.ca/globalhome/industry/fundtable.asp?currview=4&quick=finder&page=2&sort=R5y&order=descending&Fund_Type=66&rrsp=Y&sort1=R5y&top=50&selection=&selected=&action=&csvfile=&nodata=0&aspredirect=
Thanks investpro. I am going to digest this information slowly and share my views.
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The cowards never started,
The weak died on the way,
Only the strong arrived.
http://www.youtube.com/watch?v=_yK1i9cLAMM
I always pay down debt before investing in GIC/Stocks. (They are taxed )
I would also invest in RRSP to the max and use the refund i get towards mortgage principal. If i still have money left then i would pay the principal.
Thank god i was not convinced to go smith manouvere (someone from the site tried to) while shopping for mortgage early this year i would have been in deep shit
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Live and Let Live
There is also the classical question of whether past investment performance can be used to make future investment decisions.
Just because a particular fund has returned 12% in past 5 years doesn't mean it will continue doing so.
That data can easily be manipulated by picking a start year just before the big bull rally of last (well) 5 years.
In the last 5 years, a monkey picking stocks with a dart could have earned 12%.
OTOH, if you play the same numbers and scenario with 2000 as the start year investing in a typical North American equity fund, guess where your portfolio would be in 2005.
To quote chittesh, "in deep shit" 
Under such scenario, you would have been way better off paying down your mortgage.
Hindsight is 20/20 of course.
It's easy to run numbers from the past, question is about the future.
Will equity funds return 12% average over next 5 years?
Will interest rates stay this low?
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
In Investpro’s calculation, the sum paid towards principle was just about $3000 annually. It could work quite different for someone who has added additional principle monthly and then also from the yearly bonuses to pay the anniversary payment. Let us say, over a year one could manage about 20% her total mortgage principle in a year, her interest payment reduces substantially. Well, the need here is apparent to switch to a frugal lifestyle and cut corners where possible till a stable position (again not for all). From one side you build your equity which could always act as a collateral if any adversary and on the other side you shed your commitments (mortgage interest).
Every individual might have their own principles in investing, some might not want to risk investments which could be influenced heavily on the condition of market while remaining in debts for their basic needs even (car loans and mortgage is strictly a debt from my perspective). There are few other folks who manage to juggle between debts and risky investment despite varying financial scenarios. Collectively, when the foundation is firm, you could play your part much better than otherwise.
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The cowards never started,
The weak died on the way,
Only the strong arrived.
http://www.youtube.com/watch?v=_yK1i9cLAMM
Here is my calculation:
Mortgage: 250K
Amortization: 25yrs
Monthly Payment: 1398.58
For 5 years term:
Interest Paid: 53019.63
Remaining Balance: 219,644.76
For 25 years:
Interest Paid: 166874
Remaining Balance: 0
Additional money available per year 3600 = 300$ in extra monthly payments
At 300$ extra payments per year:
For 5 years term:
Interest Paid: 50,875.96
Remaining Balance: 199,501.09
For 18.1 (mortgage is paid off 7 yrs 11 months in advance) :
Interest Paid: 115,359.37
Remaining Balance: 0
So over a 5 year period you would have paid
$ 2143 less in interest and paid down an additional 20144 in mortgage so you gain approx 22000$ which you have had to pay later. This is all taxed already so thats equal to 44000$ of income from investment before tax .
I would not put this money in stock market as they are extremely volatile.
Even if you manage a 12% investment you pay 6% tax (capital gains) so 3600 for 5 years over a 5 year period is 23000.
Also your mortgage is over in 18 years so you save whatever you pay for 7 years and 11 months. (you would ahve paid the principal but you will save tons of money in interest and the gains are all tax free)
The way mortgages are amortized is such that for the first 11-12 years you keep paying more interest than principal.
If possible, i would first:
1) Increase my payments so that the amortization has come down to 11-12 years
AND i find investment that will provide me twice the return of my mortgage rate (7% if my mortgage is at 3.5)
and if i believe it is secure then i would invest in it.
RRSP should be done before downpayment:
you get immediate 25%-50% return depending on your tax bracket.
Its will remain useful for your future (as long as you don't make very risky investments)
You decide
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Live and Let Live
