Canadian Personal Finance Blog

After last week’s “show and tell” about Mortgage worksheet calculators, the next question to ask yourself is which is more important to pay into your Retirement Fund (RRSP or 401k) or pay off your Mortgage (and debts)? Since the U.S. model has tax implications for paying off your Mortgage, and I do not wish to mention the Smith Manoeuvre for Canada, let’s just concentrate on the Canadian model.

In a lot of cases this question is of no real value since a lot of people can only afford to pay for their living expenses and do not have free money to pay for their retirement or speed up their debt payments, for those folks, the job is hard enough, but I encourage you to find savings somewhere and do something more with your found money than “party” with it.

Arguments For Paying Down Mortgage

Some of the reasons I have heard and espouse for paying down your mortgage first would be:

1. Carrying debt is dangerous no matter what the economic times, and the sooner debt is removed from your plate, the sooner you can relax about your finances.
2. Once your mortgage is paid off then you can start saving for your retirement, knowing that you will not have that expense in your golden years.
3. Paying off your Mortgage is like investing in Real Estate, which is usually a good investment.
   • I don’t view my house as an investment, I view it as an essential of life, as in shelter is somewhere you live, not where you invest.
4. You are increasing your liquidity, by having more credit available to you, in case of emergencies.

Arguments For Retirement Money

The reasons to put money in your retirement funds are many as well:

1. Retirement saving is like Golf, the sooner you start doing it the better you will be at it later. Money saved at age twenty has much longer time to double than money invested at age 50.
2. With current interest rates, you can invest your money and make more with it, than if you pay off your Mortgage (typical Mortgage rate is about 6% whereas the Stock Market’s normal rate of return is about 7%, so you are ahead in the game).
3. You get tax money back for putting money in your RRSP, but you don’t if you put that same money into your mortgage. This is important since the major expense for most of us, is still taxes.

Best Choice?

That would be telling, I’ll write some more about this tomorrow, but I am open to discussion, pointers to good articles, and any other comments folks might have about what the right choice for them was and is (remember at the end of this, it is a personal choice on your part).

Now that we have figured out how to track our Mortgage using this Mortgage Work Sheet with Excel , we can now start doing some interesting tricks to see what we can do with our Mortgages.

The Power of Overpaying

I have some dear friends who paid off the houses they lived in, very quickly each time they moved from house to house (as their family grew). They both had good paying jobs, so they set up a simple goal with their Mortgage, each Mortgage payment they made, they were going to “double up” (i.e. pay a double payment to the bank). They had chosen the type of Mortgage (so there were no penalties to make extra payments) and sure enough they paid off their houses incredibly quickly.

How quickly could this be? If we go back to the model I have been using all week, this is how fast our family could pay off their house if they doubled up on their payments.

That’s amazing, you pay off the house in 8 years (give or take a month or two). Can most people do this? Not very likely, but it is something to think about and play with. Can you pay off your house early if you give up going out as much, and instead pay your Mortgage down? That is the question to ask.

More Mortgage Fun

With this worksheet you can explore the following interesting scenarios:

• Interest rate changes and what that might do to your pay back capabilities
• What happens if you take your tax refund and put it on your Mortgage, instead of into savings.
  • This is an interesting scenario, where you put money in your RRSP, you get money back from your taxes and then put that money on your Mortgage, a Win-Win proposal!
• And other interesting fun games.

Use this worksheet as a tool, and learn about what you can and cannot do when you buy your house.

More statement of the obvious, by Stats Canada that new housing prices year over year are up 6.2% year over year in December. Interesting the Land prices in the housing price is actually up 6.6% year over year. Where was it most expensive to buy a new house?

• Sakatoon
• Regina
• Edmonton

Interestingly in Ottawa/Gatineau it was only up around 0.6% year over year, which might be due to the GLUT of houses in the area. Who is buying all these houses is my question?

Employment and Such

The unemployment and employment numbers came out on Friday. We are back down to 5.8% which is back to the historically low numbers we have been seeing lately, and the seasonally adjusted employment numbers are very good as well.

I like to quote these numbers since I really don’t understand a lot of the other economic indicators that pundits talk about, but I do understand employment and inflation (ok I don’t completely understand their counting, but I at least can grasp these numbers).

These are interesting numbers considering most of the news in Ottawa has been jobs disappearing in the High Tech sector and a few other areas, so I wonder whether the unemployment numbers may move up soon?

Housing Price Increase Drop

That is a confusing way of saying that the increase in new house prices is slowing down. September 2006 to September ‘07 new housing prices increase by 6.2% (down from 6.5% August to August).

Housing prices increased the most where? Can you guess? Starts with a “P”? Yes, the Prairies, where housing prices continue to increase at a startling rate. The praries in general was about 15% however in Alberta the story was:

The Edmonton market remained strong with a 26.6% increase. New housing prices rose 5.9% in Calgary in September, the only Prairie city with a year-over-year increase below 10%. This occurred despite higher development costs, as new lots were released into the market.

How do people buy new houses these day?