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If it is subject to tax and your marginal rate in 31% then you gic is only giving an after tax return of 2.07

If it is subject to tax and your marginal rate in 31% then you gic is only giving an after tax return of 2.07

It would be in a TFSA

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355 Posts

What do you mean lump sum payments don't affect current interest payments? Who is your mortgage with? While I haven't had a mortgage in some time my lump sum payments started reducing interest immediately. I'll go out on a limb and suggest that you're wrong about it not affecting current interest; and in my opinion you should apply the 20K to the mortgage immediately.

It is through CIBC,my 5 year mortgage came with a set payment amount and schedule.Every payment pays more principle and less interest,making lump sum payments does not change this.Is this a weird format?I can also only pay a max of 20% per year in lump sum.What do you mean lump sum payments don't affect current interest payments? Who is your mortgage with? While I haven't had a mortgage in some time my lump sum payments started reducing interest immediately. I'll go out on a limb and suggest that you're wrong about it not affecting current interest; and in my opinion you should apply the 20K to the mortgage immediately.

Thank you for this.Upon you saying this i buried out my payment schedule and im actually paying 2 dollars less towards interest this upcoming payment and I assume it is because of my biweekly lump sum payments added a few months ago.I imagine my best option will be to pay off my mortgage?If I end up remortgaging next spring for lets say 4.5% can i consider my 20k payment now saving interest at that rate as well?Sorry I know I probably don't even make sense but I'm trying to stop hording my money and actually put it to work and it is taking a lot of convincing lol.What do you mean lump sum payments don't affect current interest payments? Who is your mortgage with? While I haven't had a mortgage in some time my lump sum payments started reducing interest immediately. I'll go out on a limb and suggest that you're wrong about it not affecting current interest; and in my opinion you should apply the 20K to the mortgage immediately.

And the 'return' on the lump sum payment is not your current mortgage rate, it's essentially the average rate of your next term, and the one after, and the one after, etc until you've paid it off since it's 20K you wouldn't have to remortgage each term.

You can play around with a calculator like this one that allows the option to make a lumpsum payment at a specific time and you can see how the interest changes (it does)

https://www.superbrokers.ca/tools/mortgage-calculator/

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10,880 Posts

If the 20K is going into a TFSA at a different FI ... then you are likely going to need available TFSA contribution room in 2019 of $20K. One can transfer the $8K, keeping it sheltered (i.e. don't need TFSA contribution room) but most don't do this due to the transfer fees and/or waiting time for the funds to show up.It would be in a TFSAOne thing to consider is will the GIC be inside a TFSA or non registered and subject to tax ...... I have 15k sitting in my chequings account and 8k in a cheesy lowest interest ever TFSA.

I have seen GIC ads for 3% interest for a one year term and am curious if I would be better off putting 20k(the amount I am comfortable not having access to) into that for one year and then when remortgaging comes around ...

A couple of weeks ago in Dec would have been ideal as the Dec withdrawal is converted to TFSA contribution room in the same amount Jan 1st of the following year. For example, taking out $8K in Dec 2018 means that likely at minimum, there is $14K TFSA contribution room available in Jan (the $8K withdrawal + the $6K annual allotment).

http://www.canadiancapitalist.com/the-tfsa-december-transfer-strategy/

Cheers

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10,880 Posts

This is not the way it works.

Assuming you were 18+ in 2009 and have qualified for TFSA contribution from from 2009 to present, the total granted is $63,500.

https://www.taxtips.ca/tfsa/contributions.htm

The TFSA has been been reported to be paying low amounts so something under $8K was contributed ... say $7K (probably low but it is for illustration purposes). Where there are no other contributions or withdrawals in this or any other TFSA you might have, then the available TFSA contribution room = total granted - contributions made = $63,500 - $7,000 = $56,500.

As each contribution is made, it should be subtracted from the available amount. As each withdrawal is made, make a note to yourself to add back that amount the following year, as well as add in the next yearly allotment earned.

The formula is:

Jan 1st TFSA contribution room = unused TFSA contribution room + annual allotment ($6K for 2019) + last years withdrawals - contributions as they are made.

If you keep a spreadsheet that is updated as the transactions happen, you will always now the exact amount with minimal work (like balancing a cheque book). Being sure to be up to date helps avoid the TFSA over-contribution penalty. The "honest mistake" penalty is bad enough at 1% per month until the earlier of a withdrawal fixing the issue or fresh contribution room doing the same. The "intentional breaking the rules" penalty is 100% of any gains.

Another place you can check your TFSA contribution room is if you have a "My Account" with CRA. They will list all the transactions sent to them as well as the Jan 1st amount for each year. The main issue is that the financial institutions report the transactions end of Feb so their number may or may not be accurate and will be quickly outdated.

Cheers

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3,571 Posts

The only reason your payment does not get adjusted is because, you signed a mortgage document agreeing to pay that exact payment. They cannot adjust it without you signing some more amendments and hence if you don't need such a concession, they certainly are not going to offer it or do it automatically.

It does have the same benefit of saving interest whether the payment is adjusted or not. The only difference, as already pointed out, is that the fixed payment is now paying more towards principle then it did before the payment, reducing how long your mortgage will be outstanding.

Bottom line, a payment towards your mortgage is the equivalent of you earning 2.69% AFTER TAX, interest on this money.

Few things....

Your payment that you make every 2 weeks/monthly/etc, is calculated based on no principal payments, so outstanding principal payment and interest combined in one payment. By paying onto principal like you are planning, you decrease the owed amount of interest. Your payment stays the same, but now, the decreased interest payment portion will be routed into paying down principal..... so now every time you make a normal mortgage payment you will be making a small extra principal payment too.... this over time will expedite the repayment schedule and cut the number of your payments down.

Say your principal payment cuts 3 yrs off your mortgage..... well 3x yrs (x) payments is what you converted that principal payment into. You won’t really benefit until the end of the mortgage, but the ‘Mortgage Advantage’ that you create is ‘Tax Free’ where if your GIC interest is taxable is really not gonna be worth as much to you over time. If it’s in a TFSA, yes it’s tax free, great, it just look at the rates. Your decision should be simple..... 3% mortgage, or a 2.5% GIC (made those numbers up), the mortgage payment is clearly a 0.5% advantage to you, but you won’t see it until your mortgage is payed off....

- Do you need the cash / liquidity ?

- The highest rate is where you should park your cash....

- In the end, neither is wrong..... it’s all still your cash, L hand or R hand, still your hand....

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355 Posts

Here's a link to mortgage interest calculations in Canada. www.yorku.ca/amarshal/mortgage.htmThank you for this.Upon you saying this i buried out my payment schedule and im actually paying 2 dollars less towards interest this upcoming payment and I assume it is because of my biweekly lump sum payments added a few months ago.I imagine my best option will be to pay off my mortgage?If I end up remortgaging next spring for lets say 4.5% can i consider my 20k payment now saving interest at that rate as well?Sorry I know I probably don't even make sense but I'm trying to stop hording my money and actually put it to work and it is taking a lot of convincing lol.

It also confirms that a lump sum payment immediately is applied to reduce your balance owing and therefore your interest paid each month.

A 20000 payment to your mortgage will reduce your principal owing and therefore your monthly interest by 44.58. Meaning whatever your monthly payment is, 44.58 more of it goes to principal rather than interest. If when it comes time to renew your mortgage the rate is up, your 20000 payment now will also automatically be saving you more interest per month, if the renewed rate goes down (unlikely) it will save you less interest per month.

If when you renew they try to get you to extend the amortization period. DON"T do it. By making a payment 20k payment now you will reduce substantially, depending on the size of your mortgage, the remaining amortization of it. (Amortization being how many years you have left to pay off the mortgage.) At renewal time Banks will often try to get you to extend the amortization period and reduce your monthly payments. That just keeps you in debt to them longer.

www.yorku.ca/amarshal/mortgage.htm

Hopes this helps.

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915 Posts

Unless a prepayment is really large in relation to the principal; you are not likely to see much movement in monthly (or biweekly) interest charges, but it will reduce them. Your interest cost per period is just the remaining principal times the annual effective rate; adjusted for the payment period length (monthly, biweekly, weekly, etc). The benefit is immediate as a larger proportion of your fixed payment goes towards principal, ultimately reducing the term.

The one thing I really don't like about large mortgage prepayments or GICs is the loss of liquidity. I'd probably keep a bit more cash around even it if isn't the most efficient asset class.

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355 Posts

Unless a prepayment is really large in relation to the principal; you are not likely to see much movement in monthly (or biweekly) interest charges, but it will reduce them. Your interest cost per period is just the remaining principal times the annual effective rate; adjusted for the payment period length (monthly, biweekly, weekly, etc). The benefit is immediate as a larger proportion of your fixed payment goes towards principal, ultimately reducing the term.

The one thing I really don't like about large mortgage prepayments or GICs is the loss of liquidity. I'd probably keep a bit more cash around even it if isn't the most efficient asset class.

When I was aggressively paying down my mortgage one of the feelings I liked was the loss of liquidity. Knowing it was "spent" well and I was then not going to be tempted with some non appreciating expenditure..... trip car new piece of furniture etc.

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