What would you do if you suddenly won the lottery? Would you save the money? Would you spend it on the things you desire?
The most basic option is to spend it, pay your debt, give the money away or invest it. However, there are even more ways in which you can use the money available to you – you can pay down a mortgage, contribute to a retirement savings plan or a tax-free savings account.
Mortgage or RRSP
People often wonder if they need to pay their mortgage down or increase their RRSP savings. The method commonly used is to increase the RRSP, which promotes some tax savings, usually in the form of a tax refund. This refund can then be applied to your mortgage. It’s a win-win.
Paying the mortgage down will ensure savings while there is no guarantee of a favorable return from an RRSP. It’s also wise to pay off the mortgage before your children are ready for college as it’ll be easier to pay university fees. You should always pay high-interest debt and credit cards off before you contribute money to an RRSP.
TFSA or RRSP
The marginal tax rate (MTR) today and the possible MTR rate you may get in retirement is what you need to consider when deciding between a TFSA or an RRSP. If the MTR is higher now than you feel it’ll be in retirement, it’s time to contribute to the RRSP. This will allow you to benefit from the tax savings at the high rate now and pay at a reduced rate later on when you need to make withdrawals.
However, if the MTR is low now and is projected to increase during retirement, it’ll be more beneficial to go with the TFSA. You won’t get the tax deduction now, but you could save more in taxes during retirement.
Mortgage or TFSA
When it comes to the option of supplementing your TFSA or paying the mortgage down, they are quite similar, as they both offer a tax-free return rate. If you have a 4% mortgage rate, then paying the mortgage down means getting a 4% guaranteed return rate after taxes. If you attain a larger rate of return in the TFSA than the mortgage interest, then go with the TFSA option.
There are other considerations to take into account. If your mortgage is fully paid off, are you likely to invest the same payments you were submitting to the mortgage? If not, then paying the mortgage down first doesn’t make a lot of sense.
After years of frugality, you’ve saved enough money up to put a down payment on a house. Perhaps a congratulations is in order since you’re about to become a homeowner! Well, not quite yet…
You see, you may have enough for a down payment, but you still need at least 80% to purchase a home. That means you need to be approved for a mortgage. However, how can you be sure you get a deal that’s the best for your financial situation? You can haggle for your mortgage, it’s just a little different.
1/You can Negotiate the Rate
According to RateSpy founder Rob McLister, posted rates are not final rates. In fact, there are very few lenders that have inflexible rates. And, even these lenders will bend the rules for those who demonstrate themselves financially stable.
2/Rates are Not the Be-All and End-All
While you do save money on a low mortgage interest rate, there are also hidden costs in a contract. With lenders posting rates on websites, prospective borrowers are far more likely to check out the advertised rate. This has resulted in many lenders adding clauses to their contract. For instance, a lender may demand that a mortgage must be completed within 30 years or the borrower may be subjected to penalty fees.
Prospective borrowers need to look at the rate of each institution to realize what they’re getting into.
3/Extend Negotiations Beyond The Rate
The rate isn’t the only thing to contend with in a mortgage. You must also address transfer fees, discharge fees, deed fees, appraisal fees and legal fees. There is a host of fees that you can negotiate that will help you to save a little money.
4/Have Leverage to Negotiate with
The bigger your mortgage is, the more likely lenders will negotiate with you. If you use a mortgage broker, you can negotiate with them to reduce their commission if you’re requesting a large sum of money for the mortgage.
5/Do Your Research before Negotiations
Before you even step into the negotiation ring, you need to do some research. Find out how the lender works and what the rates are like. Big banks and online-only lenders don’t offer the same kinds of services, which means negotiations will differ. Don’t try to use an online lending rate with a traditional bank.
6/Realize You Can’t Negotiate Everything
You need to understand that breaking a mortgage with your lender such as refinancing to another lender or selling your home can lead to a penalty fee. If you decide you want to break the mortgage, you give them no kind of incentive to negotiate with you.
What You Need to Remember
It’s not difficult to negotiate your mortgage, but you may have to compromise on a few things – fees, services and rate. The more money you’re asking for in a mortgage, the more you should learn about the various lenders, their rates and the fine print. Do this, and you have the power to negotiate yourself a good deal.
Preparing ahead financially can ease the cumbersome aspects of purchasing a home later on. Doing your research beforehand will allow you to go into the housing market with a clear head, side-stepping many common problems home buyers face. There are five key things to remember in order to buy your home responsibly:
Create a Budget
Figure out what your monthly expenses are, and then your annual expenses. Now compare that to your monthly income. The money left over can be used to determine the house price. While you’re doing this, use a mortgage calculator to figure out what the acceptable monthly amount is for the home. If you have no money left at the end of the month, ask yourself if this is the time for you to buy a home.
Pay Debt Off
If you have debt – credit card, student loan, auto loan, etc. – make sure you start paying it off or reduce it. Lenders won’t give people mortgages who can’t effectively manage their debt. You don’t need to be debt-free, but you do need to owe less than what you actually earn. Lenders will use a debt ratio to determine your monthly debt payments to the gross monthly income.
Most lenders will want you to put some money down before they give you a loan – usually 10 to 20 percent. Saving money through an RRSP can stimulate your finances. You can reduce your monthly expenses, putting the extra money into a savings account. If you can handle it, work a second job for the extra money.
Know and Increase Your Credit Score
Lenders are going to look at your credit to determine just how creditworthy you are. They want to see if you’re financially responsible. A strong credit score means you’re consistent in paying the bills and you can manage your money effectively. The better your score is, the better the interest rate on the loan.
Make sure you review your credit report to ensure it’s accurate. If you find any inaccuracies, get in touch with the credit bureaus to address them.
Talk to a Mortgage Professional
After you’ve done all this, it’s time to talk to a mortgage professional about the processes in buying a home. Get a pre-approval and find out how much they’ll loan you for a home. From that, you can find a realtor who can work within that budget and fulfill your desires.
Before you know it, you’ll have the home you want with a mortgage rate you can feel comfortable with and you won’t feel overburdened by debt when you develop a financial plan.
Before you go jump the gun and re-sign with your current mortgage lender, it’s always important to consider shopping around to see if you can get a better deal. The biggest monthly expense for most people is their mortgage payment, yet a shocking amount of households just automatically renew their mortgages when the term is up. Shopping around is always a good idea, because you may be able to negotiate a better deal. Here are three tips to help you lower your mortgage payments come renewal time:
1. Get a head start
What you definitely don’t want to do it wait until the last minute (i.e., when your mortgage is actually up for renewal) to start shopping around for new terms. Give yourself a little time and start shopping around for a better rate a couple months before your mortgage is up for renewal. This way, you’ll have plenty of time to search for and compare different renewal options.
2. It’s not all about interest rates
Please don’t just fixate on interest rates – there are plenty of other factors that determine a good mortgage rate. Remember to factor in the amortization period, rate types (fixed rate or variable rate) and the flexibility of the payment schedule. These are all crucial factors in lowering the cost of your mortgage payments.
3. Shop around
Before trying to negotiate a lower rate from your bank, find out what other banks and lenders are offering. There are quite a few websites that post current mortgage rates from banks, which can vary widely.
Research has shown that more than half of Canadians aged 50 and older have collided with unexpected events that have impacted their finances and/or retirement plans. Whether you’re planning on selling your home or staying, here are four ways to tap into your home for added security during retirement.
1. Sell and Rent
An easy way to get money out of your home is to sell it and put the cash into an investment that will boost your yearly income. But before you do so, factor in expenses (real estate agent fees, lawyer fees, moving costs, etc.). It’s also important to decide on the volume of risk you’re willing to take in investing.
2. Sell and Downsize
Another effective way to boost your retirement security is to sell and downsize — it’s easy logic. However keep in mind that your needs might change as you age. For example, you might decide it’s absolutely necessary to avoid homes with a steep set of stairs. It’s imperative that you think strategically about your next destination.
3. Become a Landlord
Ever thought of converting a portion of your home into an apartment? Well, doing so can increase your monthly income substantially. However you need to decide you’re cut out to be a landlord – that means being available all hours of the day and being able to find the right tenant.
4. Get a Reverse Mortgage
This is a mortgage that is given to people who own property at 55 years or older. The borrower doesn’t pay back the loan until he or she sells the home.The loan is tax free and any interest you pay is deductible. But there are some drawbacks to this approach – you have to pay interest on the loan and the penalties can be heavy if you decide to cancel.
Wealth Management is a carefully designed strategy to help you meet your financial needs and goals, one of them being financial independence. The ability to live your life as you choose with a secure financial backing for you and your family is considered, by many, the ultimate success.
1. Financial Literacy
Research has shown that people who are financially literate end up with more wealth than those who are not. There is a strong monetary incentive for becoming financially sophisticated. Taking the time and effort to become knowledgeable in the areas of personal finance and investing will pay off throughout your life. Make use of the knowledge your financial advisor provides. Financial learning and financial independence are lifelong endeavors.
2. Think Long Term
The level of your wealth should be measured by the length of time you could maintain your standard of living without an additional pay check. In other words, if you had to stop working right now, how long could you maintain your current lifestyle needs? The principles of gaining financial independence seem simple, although we all know it is in the application that we occasionally stumble. Spend less than you earn. Keep investing. It is important to take a long-view focus as you work towards your financial goals. It takes more than a few weeks to achieve financial independence.
3. Good Debt vs. Bad Debt
Consumer debt is the bane of financial independence. Borrowed money should only be used for investing, not to finance lifestyle needs. ‘Bad debt’ is used to finance consumables and other lifestyle preferences. ‘Good debt’ could be termed as strategic loans used to invest, or money used to make more money. Your gains need to be greater than your borrowing costs; borrowing to meet short-term desires is counterproductive.