RRSP/Mortgage/Investment Question

[superflychief]

Hey guys. Need some opinions. I am currently 3 yrs into a 3.49% 5 yr mortgage. Broker called me offering me 2.89% for 3 yrs to remortgage and he suggested a couple of options. He said since I have so much equity in my house, I could remortgage for an additional 20-30k at the lower rate. My payments would remain the same, but I'd have the cash to do something with. He suggested putting it into and RRSP. I'd put it into my work one which over the past yr did 17%. Putting the money into the RRSP would also give me a large $6000+ return on my taxes, which I could then invest in something else. He also said I could put the money into a TFSA and collect the interest monthly and put it right back on the mortgage. Or obviously I can just ride out the mortgage till the end. Any suggestions would be appreciated.

[dezmarez]

Does he happen to work at WFG?

[TimLacroix]

Originally posted by superflychief
Hey guys. Need some opinions. I am currently 3 yrs into a 3.49% 5 yr mortgage. Broker called me offering me 2.89% for 3 yrs to remortgage and he suggested a couple of options. He said since I have so much equity in my house, I could remortgage for an additional 20-30k at the lower rate. My payments would remain the same, but I'd have the cash to do something with. He suggested putting it into and RRSP. I'd put it into my work one which over the past yr did 17%. Putting the money into the RRSP would also give me a large $6000+ return on my taxes, which I could then invest in something else. He also said I could put the money into a TFSA and collect the interest monthly and put it right back on the mortgage. Or obviously I can just ride out the mortgage till the end. Any suggestions would be appreciated.

What is the penalty to break the mortgage? Contact the lender to get an idea… each lender is different…

Then you would need to figure out how long it will take to recover the penalty. I might suggest increasing your payment depending on your situation.

Do you have any other debts? Credit cards, etc…

If you were to invest into an RRSP, I would probably consider taking the refund from CRA and dump it onto your mortgage…

There are a number of ways to take advantage of the equity. The next question is do you really need to refinance now?

If you have a financing advisor, I might consider sitting down with him/ her and discussing the option of investing, paying down debt etc.

If you do decide to refinance and use the equity for something…you may want to consider a Variable rate and putting a strategy in place to manage rates over a 3-5 year time frame to balance out the penalty and save thousands of dollars while making money on your investment.

PM if you would like to know more about our strategy and potentially save you more $$$$$$$.

[Feruk]

Originally posted by TimLacroix
you may want to consider a Variable rate and putting a strategy in place to manage rates over a 3-5 year time frame to balance out the penalty and save thousands of dollars while making money on your investment.

I'm just curious why you'd suggest a variable rate over a 3-5 year period when everything I've read says interest rates are going up over that time period.

[ExtraSlow]

I've been doing some thinking about vriable vs fixed, so here's my perspective.
Since variable are 0.84% lower than fixed, if interest rates rise 0.5% over your term, you come out ahead. My opinion is that Bank of Cnaada will raise rates over the next few years, but likely in very small incrments, probably 0.25% at a time. so if they do that two or three times, you are golden, if they do taht more times, you may come out behind.

Still, if you get a few years of lower interest rate at the beginning, then you are higher at the end, it's still possible to win.

[TimLacroix]

Originally posted by ExtraSlow
I've been doing some thinking about vriable vs fixed, so here's my perspective.
Since variable are 0.84% lower than fixed, if interest rates rise 0.5% over your term, you come out ahead. My opinion is that Bank of Cnaada will raise rates over the next few years, but likely in very small incrments, probably 0.25% at a time. so if they do that two or three times, you are golden, if they do taht more times, you may come out behind.

Still, if you get a few years of lower interest rate at the beginning, then you are higher at the end, it's still possible to win.

Very good assumption. Typically Bank of Canada only raises rates by a 0.25% at any given time… the BoC meets 8 times a year to decide on key lending rate. Next meeting is Jan 22 (this week)… STAY TUNED.

However, taking a variable rate does not mean you should stay with the lower payment. We have a strategy that helps clients pay more towards principal, take years off their mortgage and save thousands of $$$ in interest.

The basic principal is to set payments higher!

However, there is more to the strategy than just setting a higher payment. We assist in managing your mortgage over the term and hopefully till it is paid off!

This strategy assists in off-setting the potential rise in the Prime Rate and also prepares you for potentially higher rates in the future (payment shock)!!

NOTE: Even if you have a fixed rate, this strategy still applies!

[Xtrema]

^ did that math last year on 2.6% variable vs 3.1% fixed. Unless BoC raising rate to save the dropping loonies (doesn't seems to be the case so far), if you can hold on for 2.5 years and BoC raise less than 1% over the remaining 2.5 years, you are still ahead.

As for OP, it's not a bad idea if you want to access equity without HELOC. Given if they will waive penalty for breaking current contract. I assume the deal they offer is amortization go back to 25 years, bigger mortgage, lower rate. Hence payment is the same but you will actually pay more interest for the amortization period.

Otherwise, if you are are doing RRSP, HELOC is cheaper in the sense that interest is not amortized. So you know there is refund coming, you can pay off a big chunk of it right the way.

[TimLacroix]

Originally posted by Feruk

I'm just curious why you'd suggest a variable rate over a 3-5 year period when everything I've read says interest rates are going up over that time period.

Hi Feruk,

Variable is not for everyone. If your situation permits the strategy, you can save money even if rates rise.

Where most fail with variable rates is leaving the payments low and therefore never do take advantage of the low rate to pay down the mortgage.

Again, not all people can take variable rates as qualifying for it is different. Must qualify overall risk at 5.34% which is the Bank of Canada qualifying rate.

Note that whether you take a 5 year fixed rate at 3.29% or a variable at 2.5% (random numbers), our strategy works to save you money and prepares you for potential higher rates in 5 years (possibly in the 5% range)… which will have a payment shock for most.