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Email this2:18 pm
August 5, 2014
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We received an email from our mortgage broker 15 days ago and after discussing all the pros and cons, we decided to take out $50,000 of equity in our house at 2.25%, 3 year variable rate mortgage.
We have been waiting years for interest rates to increase but we all know that things are getting worse for savers, fixed rate investors. Rates, especially short term are not moving up for maybe for 1 or 2 years.
In my prior posts about GIC laddering, we have $50,000 already came due in the last 20 days. We put all $50,100 in a 2.75% 40 month GIC at Duca C.U. We divided this into 3, $16,700 GIC's.
This way in case we need any money after 6 months, anyone one of these GIC's are redeemable. The rate is 1.75% which is close to most higher interest savings accounts.
We decided to use up all our RRSP and TFSA room locking the rate of a longer term GIC rate. We put $23,000 in RRSP's and $27,000 in TFSA's. All this at Duca C.U. at 3.00% for 7 years and with compound interest, it will be $61,493.69.
We may also get some bonus shares on top of the interest paid and interest earned by us but who knows how much that will be.
I am not advocating or giving advice to anyone to borrow money to invest in anything. I am just telling our personal circumstances and how we don't want to be stuck with anything below 3.00% especially on our RRSP's, TFSA's.
We could afford to do this and have ample financial resources to do this. It has been a busy couple of days to say the least.
2:40 pm
August 5, 2014
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A few other things I want to mention. Our house is currently worth about $375,000 and we have a small mortgage of $40,000 left at 2.75% due in 2016. This will be paid off in 18 months to 2 years.
We will be getting about a $7,000 to $7,500 income tax refund for the 2014 tax year. This will be applied against the $50,000 mortgage. We are setup to pay $1,000 a month in mortgage payments and have a maximum 20% annual prepayment if we have some extra money to put towards the mortgage.
According to our calculations and the mortgage broker's calculations, we will have about $15,000 left on the mortgage in 3 years. $1,700 in total interest was paid but the total interest earned in 7 years will be $11,493.
The remaining $15,000 will be paid off at the end of 3 years from other financial resources, savings account, cashable GIC etc.
The roughly $1,700 interest is not tax deductible because the GIC's are RRSP's, TFSA's. Once again, I am not advocating or advising anyone to borrow money to invest in anything. It just made financial sense for us.
We are not affiliated with any mortgage company, financial institution, Duca C.U. etc. either by working there or family members, friends, colleagues etc. We are just clients and nothing more.
6:27 pm
October 21, 2013
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Congratulations on working it all out!
I can't say that I followed it all, but you're happy with it, and that's what matters.
Redeemability at 1.75 also protects you if there is a significant upsurge in rates, as you could take it out and reinvest it if the math worked out. That was one of the things I liked about the Hubert 1 year GIC, but I now doubt that anything will happen within the year.
Were you able to deal with DUCA online, or did you have to go into an office? I have never dealt with them, and have wondered.
I'm curious, did you have to pay any legal or other fees to set up this new mortgage? I suppose it would count as a second mortgage, which makes it a very low rate indeed.
And, is the variable rate fixed for 3 years? or, when can it change? It's been quite a while since I had a mortgage, so I have forgotten how some of these things work.
7:25 pm
August 5, 2014
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Loonie, the 2.25% is a variable rate for 3 years and it could go up but even if it went up in 1 year or 18 months the mortgage balance would be almost one third paid that it would not cost much more interest.
The only way the mortgage rate could increase if the Bank of Canada raises rates or the prime rate is increased.
We lucked out on this mortgage as it is with the same mortgage company through the same mortgage broker so they just added the $50,000 as another mortgage at 2.25%. There were no mortgage fees, legal fees etc.
They know are past credit history and good, timely payments made to them so it only took a few days to set it all up.
They saw we have almost 90% equity in our house so it is not a big risk for them. They wanted to give us $100,000 but we said no.
We went in person this morning by appointment in one of their Duca branches. Loonie, we are tired of seeing GIC rates going down and down so we decided to stick with this plan.
7:43 pm
August 5, 2014
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Loonie, we where thinking of buying longer term zero coupon bonds in these RRSP's and TFSA's but decided to go for 3.00%, 7 years in GIC's and hopefully rates will be at least at 2010 to 2011 levels.
In 2010 to 2011, zero coupon bonds, provincial and corporate were at least 4.75% to 5.75% for 17 to 18 year maturities. They are now at least 1% point to 1.25% point lower today.
Just to refresh your memory, my wife and I are 39 and 38 years old. We did buy 2, 4.20% and 4.17%, 13 to 14 year zero coupon bonds in 2013 for my 2 daughters RESP's. The good old days.
7:53 pm
October 21, 2013
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thanks for the clarifications. It's a valid plan, and I can see why you went this way. It will enable you to sleep at night!
7:59 pm
August 5, 2014
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Loonie, in 7 years if we see any GIC or longer term government zero coupon bond with a 4.00% in front of it, we will take it and be satisfied.
It makes you think, just like gas prices were $1.44 a liter a few weeks ago and now anything with $1.25 to $1.27 a liter is acceptable. The main difference is interest rates are always lower unlike gas prices. Remember 50 cents a liter gas, 19 to 20 years ago.
8:13 pm
October 21, 2013
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Heck, I remember thirty-something cents per GALLON!
You will probably have more deposits to make to your RRSPs etc over the next 7 years. You can use those opportunities to create your ladder, and take advantage of best rates at that time.
By the way, if your income tax is being deducted at source, you should be able to get it adjusted by submitting a form to your Human Resources Dept to indicate that you have already contributed to your RRSPs. That way, you won't have to wait til next Spring to get your money back as it will be adjusted in your tax deductions between now and end of year. I forget the number or name of the form, but HR will know.
8:46 pm
August 5, 2014
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Loonie, thanks for that information about a form for getting our income taxes reduced so we can get the tax refund from both our employers every week. We did not know this. We thought we had to wait until May to June 2015 to get our income tax refund.
I will ask Human Resources about this but I looked at the CRA's website and I think I found the form called T1213 Request to Reduce Tax Deductions at Source for Years______.
Our minimum income tax refund is about $7,000 so we have almost the same incomes. Since there is only about 4 months or 16 to 17 weeks left for 2014, this means about $206 per week for each of us until December-31-2014.
We have to get it signed and dated by employer so I will make sure we do this as soon as possible.
This $412 per week will come in very handy for the rest of the year and will be put towards the $1,000 a month mortgage payment we have saving us some interest too.
8:52 pm
October 21, 2013
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Yes, I believe that is the correct form.
I hope it works out for you. It should. Worth trying anyway.
10:28 pm
August 5, 2014
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Loonie, we setup everything with our Human Resources at work and the correct form is that above, signed, dated by our employers.
We will be getting $416 a week until the end of this year 2014 starting on September-5-2014. I will be getting $225 a week and my wife will be getting $191 a week.
Thanks again for the tip on getting this money every week instead in probably 10 months from CRA.
3:37 pm
October 21, 2013
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I'm glad it worked out for you and that I was able to provide a solid money-saving idea that you could act on immediately!
thanks for letting me know. I think maybe I'll add this as a handy hint on the RRSP board. might come in handy for someone else down the line.
9:31 pm
August 5, 2014
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Loonie, this is a great idea and I think this will help many people with weekly to monthly cashflow issues either by paying off the mortgage sooner, building up an emergency fund or reserve fund or topping up RRSP, RESP, TFSA contributions sooner.
Please write your comments in the forum.