RRSP at Oaken and First time home buyer program | Page 2 | RRSPs and RRIFs | Discussion forum

While it's true that many of us on this forum are financially cautious, I think we are trying to be as objective as possible for your sake.

I am quite conservative and probably won't invest in the stock market. But , then, I'm in my mid-70s and I have little confidence in the near future of the markets based on the analysis I am able to do.

While it's true that everyone is unique and that your decision must fit your particular situation and your risk tolerance, beware of letting it come down to "personality" and what you are "comfortable" with.

We tend to go after the shiny balls because they make us feel good when we look at them. But the level-headed assembling of the details and your knowledge base must come before you let your personality weigh in and mess you up.

Here's what I would say at this point:

Read what Norman1 has written again. I have no idea who he is in real life but he is nothing if not the master of numbers. Almost everything he writes is based on taking a cold hard look at the numbers. And he's 99.9% correct except when his assumptions are problematic.

Second, you didn't answer some key questions I left for you. Do you have a nest egg now which won't go into the down payment? If not, I think you really have no practical choice but to put the money into the nest egg or rainy day fund. As I said earlier and Norman has reiterated, house maintenance costs more money than most people expect, one way or another, and you need to be ready for it. You also need to have six months of income available to you in these times. You haven't said how secure your job is. This matters, and sometimes people think it's secure but then it turns out it's not because of unexpected circumstances. NOw could very well be one of those times.

And perhaps this is the place to add that you shouldn't be misled by the fact that you have met the 20% criterion. The purpose of this criterion is not primarily to help YOU. It's to help the BANKS. It's the amount you need to put down in order for the banks to be reasonably sure that they won't lose money on their mortgage book, which is s combination of all the mortgages they issue. If they issue 100 mortgages and 1 of them defaults, the profit on the other 99 and the value of the house which they will foreclose on will keep them happy. But if you are the one who defaulted, you are just plain stuck. So, while it's great that you have managed to save this much, you can't yet rest on your laurels.
I have spoken to mortgage lenders in some financial institutions who tell their clients they basically won't give them 80% in a mortgage because they believe it leaves the individual too strapped. These people don't work in the Big Banks. They have a point. The 20% is only a minimum. We put down 35% on ours. although we didn't have to. We also had additional savings and rental potential if needed. You don't need to do what we did, but 20% remains a minimum. And don't assume that you should buy a bigger or more expensive house because you can "afford" it. Just buy what you actually need. Bigger isn't always better, and a bigger home cost more to heat, cool and roof.

Check your emotions. It's clear you like the shiny ball of the 5% thing. Throw it away and replace it with a smaller ball of zero. See how that feels. Like Norman says, in five years, zero is certainly possible. Then try replacing it with -10% and see how that feels. This too is also possible . These things have to do with our risk tolerance. If cab laugh it off if your five year investment loses both income and capital over that period, then perhaps you have a high risk tolerance and the mutual fund is right for you. But the fact that 5% is not guaranteed means it effectively doesn't exist. You might get +10%, but you might get -10%.

I am trying to be objective about your possible investment in the markets. I have said that it could make good sense for you, but not necessarily now.

Bill reflects that he might have made more cash if he'd not paid off his house so quickly and had invested more earlier. This could well be true, but that's because the stock market has been on basically an extraordinarily long roll, with a few bumps along the way. Don't assume it's going to last indefinitely or even for five more years. What you can assume is that you will owe money on that house until your mortgage is paid, period, whether the stock market sinks or swims. Bill made the decision that was right for him at the time because he knew that he didn't know which way the stock market might go in the short term and he valued being debt free - and interest rates were higher then. It worked out fine for him. He got his house paid off early. He then invested in the market and did very well at that, so all is good.

The spread between the 2% that you are paying on the mortgage and what you will get if you invest in the market instead is not 3%. It's actually a question mark, a crap shoot if you will.

As I said earlier, you need to learn more before you take on this kind of investing. Talking to people you don't know on a forum is not a substitute for your own learning. We may be nice people and trying to help you (or not), but we can only in the end provide things for you to think about. This is not a course in investing.

At a very basic minimum, and this is not sufficient,
do you know the cost of these funds? ("there is no cost" is the wrong answer);
which funds are being recommended to you or is it just one fund?;
what is/are the fund(s) invested in?;
who manages the fund? what is the track record of the manager(s) compared to other funds of the same type?;
How long has this team been managing the fund?
how does it compare to other funds in its class, and how would you find out?
how does it compare to ETFs in its class?
what are the advantages of any mutual fund vs an ETF, and vice versa?

Be aware that if you decline to invest in this fund or funds, your RBC rep will then try to sell you index-linked or market-linked mutual funds. That may even be what is now on offer. That is another kettle of worms, which Norman has hinted at in his comments.

Correction: the market-linked investments I referred to at the end of my last post are not mutual funds. They are GICs, technically.

In addition, are you working with a realtor? Do you have a lawyer lined up to handle your transaction?
Get these people lined up now. They know things you need to know. Ask about al the fees that will be involved with closing the deal, especially the legal fees. Since it's your first house, you will be spared realtor fees.

You said you are a recent immigrant, but your English is native. If you are from the US, bear in mind that Canada does not offer mortgage interest deductibility as the US does.

dwdrajesh said
Hi Guys, sorry if this created some confusion. What I meant originally was ETFs, and I understand the brokers charge a certain percentage as fee for the service too. I know Manulife does.  

When you get around to reading up on all this, you will understand more about the different kinds of fees and who charges for what.

The fees I had in mind were the fees that are embedded in the funds themselves. All funds charge some kind of management fee, and they vary significantly. It's hidden, so you may not realize its impact. They are required to tell you what it is, but an RBC rep will not likely mention it unless you ask.

If fund A has an MER of .5% and fund B has an MER of .2%, and all other things are equal, you will obviously be better off with fund B, at .3% annually. This adds up over the years as it is there regardless of how well the fund does or doesn't do. In some cases, the discrepancies are much higher, particularly with mutual funds.
A bank rep may tell you there is no fee, but what they mean is that the bank will sell you the fund without an additional service fee such as a broker might charge. There will still be a management fee embedded in the fund's value.

Yes, termites are nasty - and prevalent in certain parts of Toronto. It's those little wee bugs and insects that get us! - like, say, covid. Termites can actually destroy houses, left to their own devices.

It's good to hear you are looking for a home with rental potential. You sound like a sensible guy.

Back to the interest problem...
Yes, the rates are nasty and could go lower. In some places in Europe, you actually have to pay the bank to keep your money (negative rates), and that could potentially happen here. You might find this video from German DeutscheWelle interesting - and possibly scary.

ab_channel=DWDocumentary

It was made before the covid crisis.
Everyone on this forum is having to deal with that the best we can and I think it's fair to say we are all taking a cut.
But I think it's also fair to say that we are doing it because, for that portion of our assets that are in savings, there is no real alternative. We are not going to change our overall strategy or take additional risks just because interest rates are low.

Those who can will do some tweaking. They will, for example, perhaps put a bit more into GICs than before. They might put a bit more into equities if they think those are going to do well. They will look harder for HISA short term deals.
But you are at a stage in life where you don't have flexibility because any flexibility would either risk depleting your cash or taking greater risk with it. I think you just have to accept the situation as it's one nobody is keen on, and hope for better days ahead.
If it's any comfort, inflation is practically zero at the moment, so you can even make money with a return of 1.5% after inflation and taxes, depending on your tax rate.

I have 3 other suggestions which might soften the blow slightly.
The first is that you could put some of your cash (let's say half) into a one year GIC at Hubert. These are cashable at any time, but the interest is tiered so that you only get the interest up to the most recent quarter, and the rate gradually increases so that you lose a bit if you don't keep it the whole year. Still, you can divide up the money and buy many smaller GICs and just cash as many as you might need, hoping you don't need any. It only protects you for one year at a time but it's something.
Second, as soon as you are eligible, start putting money into a Tax Free Savings Account. This is a registered account in the same way that an RSP is a registered account but with different rules. You will not have to pay income tax on any interest earned in that account. I am not sure what the rule is for new immigrants in terms of eligibility, but Canadians will be able to put in 6000 this year and 6000 next year. Don't let any bank employee try to talk you into contributions for past years that you missed. You can't make contributions based on years that you were not yet here. Hopefully you could put in 6000 this year and 6000 in January. It's not hard to get the money out again if you keep it in cash. Try to avoid banks that charge a withdrawal fee.
And the third suggestion is to keep watching this forum for further developments. Most deals are posted here.

There may be better solutions out there, but I have to admit I don't know what they are, especially for someone just starting out, with a large mortgage to service on one salary.
There is always risk, no matter what you do. Keeping your money in savings carries currency risk and the risk of ever-decreasing rates, for example. Investing in property on margin, which is essentially what a mortgage is although not normally called unless you fail to pay, has its own risks. The real estate market might fall. Your land may turn out to have toxins in it. Your ceiling tiles might be asbestos. Not to mention the termites! LOL Most people still feel real estate is a good investment because values have gone up over the long term and it gives you a roof over your head at worst. But very few people can buy with cash or have the patience to wait for that. The problem is in identifying which alternative is best for you at this time. There are admittedly many problems in the world's economies, and they are worrisome.

If someone has a better idea for you, I'm sure they will post it.

I want to be sure I understand you properly before I reply.

You have enough cash in total that you could put 30% down payment. Correct?
If you put down 25%, you would have about 30K left over for nest egg?
At the moment you do not have a TFSA but you have room for a 60K contribution, which will rise to 66K in January?
Did you deduct closing costs and moving costs when you calculated the 60K? (This would be lawyer's fees, any relevant taxes, oil in an oil tank if any, purchase of insurance for your house, etc. I don't know where you live or what taxes would apply. If you don't know, ask your lawyer and/or realtor for an estimate.)
After paying your necessary expenses including mortgage, property taxes, utilities and everything else, how much do you think you could save per month? You seem to have been doing a good job of saving, so it is relevant to future plans. Or will the mortgage payments eat up what you might have put aside?

Let me know, and I'll tell you what I would suggest.

You asked earlier if a five year term on your mortgage would be what you would get for the 2% rate. You should ask your banker that question because I don't know what you were quoted. It's possible to get shorter terms, and the rates will differ for shorter terms. If it were me, I would stick with the five year term for the first five years because that is the time when you are likely to be most stretched financially and don't want any nasty surprises. Yes, I'm happily a financial coward! LOL Rates might go down and you might wish you'd taken a shorter term. That is an option.

Your English is excellent by the way!

Thanks for the replies.

I realize I am missing one piece that I forgot to ask.
How much would you have left over if you put down only 20%?

I'm a bit rusty on the subject of closing costs, but your estimate seems generous to me, so that's fine.

Are you sure? That doesn't seem to make sense to me based on what I know of the cost of houses and what you've said earlier. I would expect the difference between 20 and 25% to be significantly more than 6k. Or did I misunderstand something?

I'm just trying to understand how much difference the extra 5% would make to your situation.