Mortgages and Loans
The purpose of this section is to provide basic information on two items which are very common for every household. The information presented in this section may not be applicable to everyone, therefore we suggest you either contact us or any professional.
Mortgages
We take mortgage based on our situation. However, if possible take bi-weekly payment option since it allows to payment to be made against the principal amount. Weekly payments also make only 2 payments against the principle so there is no advantage in paying on weekly basis. It is also better to take 10-10 or 15-15 or even 20-20 option. These option allows one to increase the payment by the option amount once in a year and also allow reducing the principal amount by the option amount. Combination of these 2 factors expedites the discharging of the mortgage loan very fast.
It is not recommended but one must also consider this option as well. When interest rates go down then try to renegotiate the mortgage payment even there may be some penalty involved. Most institutions reduce the penalty in order to keep the mortgage loan with them. As mentioned earlier this is just a thought but one must keep it mind.
The majority of people take mortgage insurance from a financial institution. This definitely is not a good option for following reasons:
- The insurance policy that financial institutions provide is in reality is just a piece of paper. The real policy is written when the claim is made. Therefore, there are chances when policy may be denied because of pre-existing conditions. In this case one may get the premiums back but not receive the money to write off the mortgage.
- The premiums paid either go up or remain the same though mortgage amount keeps on getting reduced every year. Therefore, when claim is made one only receives the amount to pay off the remaining mortgage loan. This just does not make sense.
There are other reasons as well but based on the above reasons one should not take mortgage insurance from the financial institutions. Always insure the mortgage by taking a regular policy, usually the Term.
Loans
We all have debts which in fact are loans. Some loans like car loans, educational loans can not be paid in full soon but some loans like credit card loans can be by controlling spending habits or reviewing the situation carefully.
Credit card loans have to be managed properly since they carry very big interest. Majority of the cards have close 20% interest rate. Therefore, if one is carrying a credit card loan then interest payments itself will be significant. In essence one is carrying a loan at 20% interest rate. If one has credit card loan then we suggest taking a personal loan to pay it off as most of the time personal loan is given at prime plus 1. Line of credit can also be used to pay it off. The best vehicle to discharge this type of loan is to borrow from TFSA and then top TFSA off next year if maximum contribution has been made in the current year. TFSA is a very good vehicle to manage personal debts.
If one has loans that carry low interest rate then still it is better to pay the loan first however, one should weigh the consequences of foregoing making investment in future over paying off the loan. Check the Ideas section of the web site for the explanation.
People take loan to invest. This practice is good as long as income or interest earned from the investment is greater or at least equal to the interest being paid on the loan. Interest payment reduces the taxes. We think it is a good idea to take loan for making RRSP contributions since financial institutions give loan for RRSP at prime or sometimes less. Again we suggest look in the Ideas section of the site for explanation.