[stretchermonkey]

Hi all,

Novice question coming up,

I have recently started a good job and have bought a house with my girlfriend.

I have been killing the loans off ASAP.

$8000 left on the car

$13,000 in student loans

$500,000 mortgage. - I can make two extra monthly payments a year or 1 lump sum with no charge - fixed interest rate 3.8% 5 yrs

I have $5000 in my TFSA and have another $5000 ready to be put to work in the New year. (kill loan, start to invest, or as a couple of extra payments on the mortgage.

Now I have been reading all the information I can find, about starting to invest for the future but have a few questions I hope some one can point me in the right direction.

My question is...

Should i forget the investing until the student loan and car is completely paid off.... should i pull the $5k from the TSFA and with the other 5k kill 50% of my debt?


Should I be killing the loan AND using the TFSA and/or RRSP to the yearly limit ? remembering that i am only going to index track markets, no crazy strategies at work.

if i am just looking to start with the 10k and add 1k month to it contributing monthly to a couch potato. Should i just do this to the TFSA limit and RRSP and then look to taking chunks out of my mortgage ?

or forget about investing and pay down the principal off the mortgage ASAP - the saving in interest will beat investing...

Say I kill the loans off - where do i stand in lowering the mortgage principal versus investing ?

Finally

My priorities on all this now i have written it down is

1)kill loans, - but I am unsure whether I should pull the 5k TFSA money out.
2)lower mortgage principal, to Max yearly amount.
3)contribute TFSA RRSP couch

But do i do one of these at a time or try to do all of these at once?


can someone set me on the right course please



Thanks for your time !

 

[FrugalTrader]

What are the rates on the car and student loan?

 

[Dr_V]

1)kill loans, - but I am unsure whether I should pull the 5k TFSA money out.
2)lower mortgage principal, to Max yearly amount.
3)contribute TFSA RRSP couch

The best answer would involve modeling these scenarios using the interest rates that you're paying, your cash flow, your risk tolerance, and the expected rates of return on your investments. Without knowing these, I think that the best anyone can do is offer you some general guidelines, so with that in mind ... I'll give you a general idea of how I might tackle the question.

First, I'd look at the interest rate being paid on the car/student loans, and compare them to my rate of return in my TFSA. Am I going to save more money taking the $5k out of my TFSA and paying the loans off faster? My guess is, probably; but this is really a key point, and what you answer here could alter the rest of the advice.

On the assumption that the interest rate on those loans is pretty high, my priority would be to eliminate them, not only because paying them off is a guaranteed "return on investment", but also because it would give a sense of accomplishment to get rid them.

Once those loans are done, you can make a decision about what to do next. The general advice that I was once given -- and which my wife and I try to stick to -- is that, from the perspective of risk, you should treat your house/mortgage like any other investment. A balanced approach is to consider maxing out your RRSP contribution, and then applying the resultant tax refund that you get as a lump-sum payment toward the mortgage.

You should also weigh how much money to put toward your TFSA versus your RRSP -- use this calculator to help determine which is best for you.

 

[OhGreatGuru]

There are numerous other threads on this topic of "which do I pay first" - debt (whether mortgage or other loans), RRSP, or non-registered savings. Do a quick search and read what others have said.

You should have some money tucked away in liquid assets in a TFSA or other account as an emergency fund. This is is not really for investment but for security in case you become injured or ill or have some other interruption in your regular income. There is no magic number - it has to be whatever you are comfortable with. But a minimum of 2 mos. income is one rule of thumb.

Beyond that, I am a great fan of debt retirement as your best "investment", and I think you will find the majority of posters on this subject feel the same way. Paying down debt is a guaranteeed return-on-investment in after-tax dollars, and it is usually hard to beat the numbers by investing in anything else with a sure return. It also gives you peace of mind to get out from under that debt load.

 

[Dana]

Kill the Debt

This is a question of personal comfort level...I hate debt. I would keep a few thousand aside for emergency and use the remainder of my available cash to KILL the DEBT. You can carry unused TFSA room forward and replace what you take out. Is the car loan at 0% interest? What rate of interest are you paying on the student loans?

With your freed up cash flow, you will build an investment portfolio more quickly anyway.

 

[stretchermonkey]

Hello all,

Many thanks for the response's already posted. Thank you for taking time out to help !


To answer a few of the questions.
- the honda is $8000 left at 5.9%
- student loan at $13000 at 4.75%
- Mortgage $500,000 at 3.8%


OGG - your term - debt retirement - should i be applying that to my mortgage, are you inferring that after the loans are gone I should be maxing the mortgage payments before other options, as this will be my only other debt?

I am getting the consensus that I may have been getting ahead of myself with the TFSA and that, I should pull this for now and kill off the car.

edit: to say i will research the previous "what should I do threads" today!

 

[leslie]

1) Create an emergency fund of cash that is NOT tied up in investments. I think 'a few $thousand' or 'a few months worth' is nuts. Especially when you have all those debt commitments. I would keep all $10,000 as emergency fund.... at least 6 months of living expenses plus mortgage payments.

2) Only then use savings to pay off car debt and decide to never borrow for a car again. Cars do not earn a return, they are consumption goods.

3) Then pay off student loan.

4) Then max out the allowable prepayments on the mortgage.

I don't believe any of this depends on the rates of interest being charged.

 

[Dr_V]

I don't believe any of this depends on the rates of interest being charged.

Keeping money on the side for an emergency doesn't depend on the rate of interest, and is good advice.

But determining whether you should pay off the short-term debt now (by withdrawing from the TFSA) or later absolutely depends on the rate of interest. Consider the hypothetical example: If his student and car loans were, say, 0% interest, there would be no impetus to pay them off early. In that scenario, I would advocate keeping the money in the TFSA as part of the emergency funds.

I'm also not sure that I agree with your advice about maxing out the allowable prepayments on the mortgage. In my view, it's a question of concentration of assets -- contributing to the RRSP versus the house. I think that a more balanced approach is to contribute in equally between them.

 

[FrugalTrader]

1) Create an emergency fund of cash that is NOT tied up in investments. I think 'a few $thousand' or 'a few months worth' is nuts. Especially when you have all those debt commitments. I would keep all $10,000 as emergency fund.... at least 6 months of living expenses plus mortgage payments.

2) Only then use savings to pay off car debt and decide to never borrow for a car again. Cars do not earn a return, they are consumption goods.

3) Then pay off student loan.

4) Then max out the allowable prepayments on the mortgage.

+1

 

[Four Pillars]

I'm also not sure that I agree with your advice about maxing out the allowable prepayments on the mortgage. In my view, it's a question of concentration of assets -- if you put everything that you have in life into one asset (your house), you raise your level of risk exposure. Sure, we have home insurance, but insurance isn't perfect -- it doesn't guard against many potential disasters. I think that a lower-risk, more balanced approach is to contribute in more equal amounts between the RRSP and mortgage "fast-tracking".

Your statement doesn't make sense. When you pay extra on your mortgage you are not "investing more in your house" but are just retiring debt on parts of the house that you already own.

Your real estate exposure is the same whether you own the entire house or 0% of it.

That said, I don't see anything wrong with splitting up extra payments between mortgage and rrsp.

 

[Ben]

1) Create an emergency fund of cash that is NOT tied up in investments. I think 'a few $thousand' or 'a few months worth' is nuts. Especially when you have all those debt commitments. I would keep all $10,000 as emergency fund.... at least 6 months of living expenses plus mortgage payments.

2) Only then use savings to pay off car debt and decide to never borrow for a car again. Cars do not earn a return, they are consumption goods.

3) Then pay off student loan.

4) Then max out the allowable prepayments on the mortgage.

I don't believe any of this depends on the rates of interest being charged.

+2.

 

[Sampson]

+1

+3

Emergency fund - If things go sour, you'll need a lot of money to maintain the mortgage payments on $500k.

 

[stretchermonkey]

Whilst I realize the importance of the emergency fund, being that my girlfriend as a teacher - I have a buffer, a second income steam coming into the house. Is it reckless of me to think that having the $10,000 sitting in cash doing nothing is slightly wasteful, and that it be actually working for me inside the TSFA, whilst keeping in mind this first 10K has to be drawn upon quickly should the need arise and therefore not be locked into a product that will cost me to free it up quickly should the need arise?


* in defense of the car loan - whilst as a student i drove a old second hand car that over the years became a clunker. Yet I could only buy something else with the sale price of what i could get for it. (sold for $1000). In its last year it cost me $3000 bucks to keep it going. $800 here and there etc. yet I could not afford to buy anything better - i was flat broke - and being an immigrant -with no family for any support.

I bought a four year old honda with 35,000kms on it - you cant get 0% finance on a 2nd hand car and I needed a car that would get me to anywhere in alberta - fort McMurray to lethbridge in a snow storm or where ever the work was and whatever the time of year.

Whilst I appreciate the wisdom of never getting a car loan and i might never do it again. It was a necessary evil at the time and one that within 2 years has taken me from borrowing money from my girlfriend to pay the rent to 100k a year and a rather nice house.

Without the car = no job. it was a requirement of the time. This car wasnt about looking good whilst going down the pub of an evening.

edit : i get an income from renting a room out to ease mortgage, also as stated we are double income no kids!

- I also note that some of you consider the mortgage payments and the investing to go hand in hand rather than one before the other.

 

[Dr_V]

Your statement doesn't make sense. When you pay extra on your mortgage you are not "investing more in your house" but are just retiring debt on parts of the house that you already own.

Meh, you caught my message before I had edited it to clarify what I meant.

When you pay money toward your mortgage, the very act of "debt retirement" can be viewed as a process of transferring ownership from the bank to you, subject to a portion of that money (the interest) being paid to the bank as "compensation".

Where the "risk" comes into play, from a portfolio standpoint, is in the allocation of all of one's money into the house's mortgage (versus contributing in a balanced fashion to both an RRSP and ownership of the house). In the scenario advocated by some posters, the OP may not possess any other investment assets -- other than his house -- for another decade or two, and that seems awfully non-diversified to me.


K.

 

[Four Pillars]

Where the "risk" comes into play, from a portfolio standpoint, is in the allocation of all of one's money into the house's mortgage (versus contributing in a balanced fashion to both an RRSP and ownership of the house). In the scenario advocated by some posters, the OP may not possess any other investment assets -- other than his house -- for another decade or two, and that seems awfully non-diversified to me.
K.

Dr. V - I see what you mean - by adding additional investments outside the house (and have a larger mortgage) you can diversify things a bit rather than just own the house with a smaller mortgage.

The only problem is that with a house that is (hopefully) worth more than $500k - it will take a lot of rrsp contributions before he is even close to diversified.

On the other hand - a good thing about having a larger rrsp is the extreme emergency fund factor. As was noted earlier - you need a huge emergency fund to support a $500k mortgage. If you have a significant rrsp then that can act as an emergency fund of last resort if necessary.

 

[stretchermonkey]

I am thinking that Dr V and FPillars, have got down to the crux of the issue...

The student loan and the Car are short term issues which will be gone within the year.

The assumption is correct that I have no other investments other than the house.

The 10K is a starter for the emergency fund that needs the obvious degree of accessibility.

The issue comes up that i have a 30 year horizon for retirement. And need to plan accordingly. As I am at a starting point, both financially and investment knowledge.

Now should I being looking to "invest in the principal of the mortgage" or start a diversified couch potato, or again a ratio of both of these hand in hand to spread the risk out?

I will be entering the shallow end so to speak and will be able to contribute a thousand a month for sure, with 1 or two other 5 k lump sums in a year as cash flow allows.

(we already pay weekly on the mortgage)

*thanks for taking the time for all the contributions !!!

 

[Dr_V]

The only problem is that with a house that is (hopefully) worth more than $500k - it will take a lot of rrsp contributions before he is even close to diversified.

Agreed.

On the other hand - a good thing about having a larger rrsp is the extreme emergency fund factor. As was noted earlier - you need a huge emergency fund to support a $500k mortgage. If you have a significant rrsp then that can act as an emergency fund of last resort if necessary.

I agree.


K.

 

[leslie]

I don't agree with any of the discussion about concentrating wealth with a $500T house. Your only investment in the house is the net equity you have paid for, not the market value. You may only have paid $25 or $50K.

Even at Vancouver prices $500T is a lot of house, so you has made a conscious decision to over-weight real-estate. That is done.

The reason most Canadians correctly overweight their wealth in their principal residence is because it is the safest, most stable investment going, other than government debt.

Starting you life with $500K of debt is positively scary. I cannot conceive of it. What I am hearing between the lines in an optimism that investments always go up in value and great jobs will always be available, and real-estate prices will always be higher when you have to sell. Forgive my cynicism but s... happens.

Regarding the car. You talked about 0% financing as if it was a 'real' thing. There is no such thing. They simply adjust the price on which the 0% is calculated.

 

[Four Pillars]

I don't agree with any of the discussion about concentrating wealth with a $500T house. Your only investment in the house is the net equity you have paid for, not the market value. You may only have paid $25 or $50K.

But it is a leveraged investment so you are responsible for a lot more than the equity in the house.

Starting you life with $500K of debt is positively scary. I cannot conceive of it.

If I owed $500k on a house then I would sell it. I also can't conceive of this kind of mortgage.

That said, I don't know how much money the OP + girlfriend make so perhaps $500k is ok for their situation?

 

[stretchermonkey]

I am happy with the "overwieght" on the house, yes it was alot, - however, the rental suite covers just under HALF of our mortgage payment. The demand for rental suites here is ridiculous.

We have the added safety that the if the times were tough - the previous owner had both the house and suite rented for more than the sum of our mortgage. We could down size and have the house take care of itself. (Yes I realize there is tax on the income).

The house was bought in May at the bottom of the market, in one of the most in demand towns of Western Canada. with 60,000 taken from the asking price and 100,000 from when it was first listed. The market is already on the rise here.

We will make 150K pre tax. Our share of the mortgage comes in at $1600 , we split that.

(I was paying more rent when I was living on my own, than my share of the mortgage now).


However I do see the value in both decreasing the principal ASAP - hence the option of extra payments or lump sum per year as part of the mortgage.

Also in increasing in the value of the house before selling it, of which there are many things that we can do to upgrade - for the cost of a reno'ing the 1994 bathrooms, kitchen, hardwood, and the addition of a stand alone double garage of which there is room and planning in place - you would see good value in the new asking price. $50,000 in cost adding 150,000 in value. Though as we have no plans to flip the house in the short term these things will just be done as need dictates.


Those of you that think I am crazy for paying a crazy mortgage - i guess you are lucky enough not to know the cost of housing in the oil sands. Believe me when I tell you what an absolute bargain and great investment I have. (and nailed the bottom of the market through sheer luck)!