Bank of Canada cuts key rate by 0.25%

[DoubleK]

I have no debt and/or liabilities outside of my mortgage.

I am maxing TFSA contributions annually. I do not maximize my RRSP contributions, I am increasing them year over year, but have significant headroom to the limit and that will take a few years to narrow.

My question is to increase RRSP contribution or increase mortgage payments. My tax refund goes back to RRSPs.

[DownhillGoat]

Originally Posted by chemgear

From the numbers I've seen, roughly a quarter or a third of half of Canadians carry a credit card balance.

That to me seems insane. It's one thing to carry debt, but I can't/don't believe there's no way a large percentage of those can't consolidate to an LOC or some other loan vehicle.

Originally Posted by squiggs96

So mortgage money is the cheapest it's been in 4 years, and you want people to keep the payment the same? I don't get it. Why not lower your payments and use this money to invest?

I've mentioned this in other threads on the topic, but I'm not reducing my payments with rates being lower and am actually looking at increasing my lump sum payments. For me it's piece of mind. I'd rather hammer away at it now near the front end of the mortgage, so if rates are 10% next time I renew, it doesn't affect me as much because I've been hammering away at the principle while rates are low.

Reducing debt is a guarantee. While it's possible or even likely I can make/beat the interest I'm paying on a decent investment, it's not a guarantee.

Does it make the most financial sense? No, and I understand over the long run I will likely be further behind.

Do I sleep a lot easier at night? Yup.

[Mortgage Made Easy]

Originally Posted by DoubleK

I have no debt and/or liabilities outside of my mortgage.

I am maxing TFSA contributions annually. I do not maximize my RRSP contributions, I am increasing them year over year, but have significant headroom to the limit and that will take a few years to narrow.

My question is to increase RRSP contribution or increase mortgage payments. My tax refund goes back to RRSPs.

Again it is personal preference.

There is an argument to maximize your RRSP's and get the maximum tax refund.

But I like a balance of both. Increasing mortgage payments and take advantage of the low rates and protect myself from higher rates in the future and build wealth.

[automaton 3]

Just in time to re-inflate the residential real estate and consumer debt bubbles.

Wonder what their game plan is for when the US starts raising rates later this year (although I'll believe it when I see it).

[chemgear]

Originally Posted by kunkstyle

That to me seems insane. It's one thing to carry debt, but I can't/don't believe there's no way a large percentage of those can't consolidate to an LOC or some other loan vehicle.

I'd imagine they are doing that and it's maxed out already. Spillover of growing debt.

[DownhillGoat]

Originally Posted by chemgear

I'd imagine they are doing that and it's maxed out already. Spillover of growing debt.

Eh, maybe. I know enough people that carry credit-card debt that don't have an LOC and easily could, for various reasons that boggle my mind.

[MillerTime GFG]

To back what Mortgage Made Easy stated in one of his posts...while it does technically make most sense to pay high interest debts if you have them, there's the psychological impact of making noticeable headway on paying down large chunks in principal, even if it's at a low interest rate. Not to mention that a mortgage is generally one's largest debt and would have the highest impact on your monthly cash flow.

For some, the psychological factor outweighs the logical method. It can be a savvy strategy for some.

[nik-]

Originally Posted by MillerTime GFG

To back what Mortgage Made Easy stated in one of his posts...while it does technically make most sense to pay high interest debts if you have them, there's the psychological impact of making noticeable headway on paying down large chunks in principal, even if it's at a low interest rate. Not to mention that a mortgage is generally one's largest debt and would have the highest impact on your monthly cash flow.

For some, the psychological factor outweighs the logical method. It's a savvy strategy for those that maybe aren't as financially savvy.

Yeah, there's the feel good aspect for sure. When my mortgage rate dropped 2% I left the payment the same. I was used to it and it was nice to see the principal going down faster. I wouldn't be putting extra cash on it though.

You're putting that extra cash to shrink something instead of putting it into something that grows (and at a higher rate). Seeing a saving or investment account grow is just as nice psychologically as reducing your mortgage imo. Even if rates were even, which they're not.

[MillerTime GFG]

Originally Posted by nik-

Yeah, there's the feel good aspect for sure. When my mortgage rate dropped 2% I left the payment the same. I was used to it and it was nice to see the principal going down faster. I wouldn't be putting extra cash on it though.

You're putting that extra cash to shrink something instead of putting it into something that grows (and at a higher rate). Seeing a saving or investment account grow is just as nice psychologically as reducing your mortgage imo. Even if rates were even, which they're not.

That's the thing...people are so hellbent on paying down their mortgage at all costs, even if their money can do better elsewhere. It's as much financial literacy as it is preference imo. People are terrified when they see their monthly statement, as they tend to look at the six figure debt rather than the monthly payment.

While the increased monthly cash flow could/should be utilized in growing your assets, some people will buy the RV trailer they've always wanted instead, financed at 6.9%. At least setting your payments higher creates structure for those that don't have the discipline.

[Red]

Your best bet is to HELOC your current residence and with those proceeds buy a condo as an investment. There was never a better time to buy, inventory is up 100% percent (yup, that is one.hundred.percent) and sales are way down so not only do you have a great selection, but you can also take your time to choose as everyone else is out there doing stupid things like paying off their debts instead of buying the new great condo in east village.

Pretty sure the BOC had to lower the interest rate because people just don't have enough debts. We need to support this PC government by holding this economy together for just a little bit longer. Say, next elections?
And what better way to boost the TSX but borrow money and buy in at these bargain prices. The TSX has never been this low, you'd be stupid to pass that opportunity. Buy now before you are priced out, the overall economy is great as seen by this morning's announcement so it's noting but up, up , up.

Where's that green text?

[OldDutch]

Originally Posted by MillerTime GFG

That's the thing...people are so hellbent on paying down their mortgage at all costs, even if their money can do better elsewhere.

We talked about this, and you provided very good advice. I think for my situation we want to pay down debt quickly on our house right now. I am not sure it is because we are not financially savvy, but part of a plan based on risk.

To me debt is slavery, in the way it forces decisions to be made that are not in your best interest. For example, knowing that you need to pay your mortgage forces you to take a job you may not want to work, perhaps at a lower wage. Or sell items you don't want to part with. It also causes you to not have the ability to amass capital to buy assets when the time is right, since you are steadily paying after tax income into partial interest payments (even at a low rate right now).

To address the making more money in the market. That is not a guarantee unless you are buying bonds which are low return (or negative) anyways. Outside of that all stocks carry risk. Meaning you can sink money into it with nothing to show for it. At least with a house you own, even if the value is less than what you purchased you have a tangible asset. Something you need that no one can take from you.

Last, I believe protecting yourself against future hikes is prudent. 25 years or more is a long time to think rates will be low. 10 years from now it could be 5%+ which is a massive bump from today. Again, insurance against future volatility.

My point being, conservative investing is one form of investment strategy. It has worked well for me in the past, having the capital readily available to purchase and finance our home for a steal in 2009 when many portfolios were in the negative.

I am not against the philosophy of invest now you will get a greater return. If you can make it work with this volatility good for you. I just think there is no harm (not saying you mean this, I know you don't) in playing it safe, paying down debt, amassing wealth and preparing to buy assets for lesser value when downturns like this hit.

Most non-savvy people should follow this advice, instead of taking on more risky debt. I know it is not the way to get rich quick, but I do know it is one of the best ways to secure a comfortable living.

[Sylvanfan]

My death mortgage is up for renewal in August, I wonder if these low rates can hold out till than. Even with only 6 months to go my payout penalty is astronomical. I just don't think saving 1.25% for the next 6 months is going to equal 16 grand out of pocket today. I know the first thing I'll be after is a mortgage I can GTF out of without hanging myself.

In a prime example of stupid people doing stupid things and being idiots with their money and putting themselves in situations where they are perpetually poor due to their own doing......I will be renewing my mortgage with my wife on Mat leave having to use a lower income figure. As a result I'll likely get bent over again as most lenders will want to avoid me.

My life lessons for people in dealing with real estate....Don't own pets, and don't have kids. You will have a lot more flexibility. It should help you avoid the stupid decisions with mortgages and real estate that I have made. I got the ever living shat kicked out of me by this last mortgage to the point where renting would have been a better option...but thanks to kids and pets....it really wasn't an option.

[Mortgage Made Easy]

Originally Posted by Sylvanfan

My death mortgage is up for renewal in August, I wonder if these low rates can hold out till than. Even with only 6 months to go my payout penalty is astronomical. I just don't think saving 1.25% for the next 6 months is going to equal 16 grand out of pocket today. I know the first thing I'll be after is a mortgage I can GTF out of without hanging myself.

In a prime example of stupid people doing stupid things and being idiots with their money and putting themselves in situations where they are perpetually poor due to their own doing......I will be renewing my mortgage with my wife on Mat leave having to use a lower income figure. As a result I'll likely get bent over again as most lenders will want to avoid me.

My life lessons for people in dealing with real estate....Don't own pets, and don't have kids. You will have a lot more flexibility. It should help you avoid the stupid decisions with mortgages and real estate that I have made. I got the ever living shat kicked out of me by this last mortgage to the point where renting would have been a better option...but thanks to kids and pets....it really wasn't an option.

First -- there is rate protection for up to 6 months (180 days) at a slightly higher rate today = 3.14%. Keep in mind this is worse case. Then when you get close to the 4 months (120 days) to renewal, you will get a significant discount to 2.89% and this gives you great protection once again.

Second -- if you wife is on maternity, there are lenders that will still use her full income for qualifying (if it is needed). All that is needed is a letter of employment indicating maternity leave and approximate return date to work. So the question is, will she be returning to work?

Third -- I doubt the numbers make sense to pay the penalty to lower your monthly payments. Hang in there...

[MillerTime GFG]

Originally Posted by OldDutch

We talked about this, and you provided very good advice. I think for my situation we want to pay down debt quickly on our house right now. I am not sure it is because we are not financially savvy, but part of a plan based on risk.

Your was a different situation though, and you guys are far from financially illiterate. Your situation was different because it made sense to get your cash flow working for you to drive down that debt, and it aligned with your goals. Your interest savings will most likely exceed what your returns would be in investing.

The method I would recommend for those that maybe aren't as financially disciplined would be to consolidate debts into a traditional mortgage (fixed or variable). I would never recommend the type of product you are in for those that aren't very disciplined.

EDIT: I realize there may have been some poor verbiage in there that carried some unintended negative connotations. What I was trying to say is that financial planning needs to be adjusted to the individual, and comes down to personal preference. There have actually been studies, to which I can't find the article right now, where it shows some people get better results by paying down lower interest debts because they see a tangible difference made very quickly. And like you said, paying down principal while interest rates are low hedges against having to pay it down when interest rates are much higher.

[The Yen Man]

Oh man, my renewal is in June, so I get to lock it in after next week. I went from last summer hoping rates hold out until I renew to now hoping it goes down even more. I guess you really can never predict what the market does.

[Matata]

Originally Posted by automaton 3

Just in time to re-inflate the residential real estate and consumer debt bubbles.

Wonder what their game plan is for when the US starts raising rates later this year (although I'll believe it when I see it).

I'd imagine it's the same strategy bankers have successfully employed for hundreds of years:

1) Create fake money based on tangible assets (or in the case of the federal reserve, make it up entirely)
2) Low rates so everyone borrows your fake money
3) Devalue the markets and increase rates
4) Exchange fake money for real estate and tangible assets.
5) Create more fake money based on their new assets.

[Calgary14]

Originally Posted by DoubleK

I have no debt and/or liabilities outside of my mortgage.

I am maxing TFSA contributions annually. I do not maximize my RRSP contributions, I am increasing them year over year, but have significant headroom to the limit and that will take a few years to narrow.

My question is to increase RRSP contribution or increase mortgage payments. My tax refund goes back to RRSPs.

That would depend on a few factors.

If your marginal tax rate upon retirement is expected to be lower than your current rate, it would make sense to max your RRSP now.

With that being said it also depends on your mortgage interest rate.

Basically you'd want to calculate the total interest savings by contributing towards your mortgage versus the tax savings of contributing towards your RRSP.

Don't forget to include the monthly cash flow savings (ie. lower monthly payment) for the mortgage paydown.

If the interest savings on the mortgage paydown is greater than the tax savings on the RRSP - put the money towards the mortgage.

[Yappin Tappin]

Hey guys,

With this drop in the interest rate, I was wondering what some of your thoughts are on going for a fixed rate for a mortgage? I know the common thought process is over the long run a variable rate is the better way to go, but with the rate being so low now would choosing a fixed rate be a smart move or would variable still be better?

Also, do you think now would be a good time to purchase my first home or should I wait a bit more? I've read a few articles after the oil prices dropped saying they expect housing prices will stay roughly the same in Alberta this year. I currently would be close to affording 20% down for a house around 400-450k, so should I strike soon?

Sorry, I'm not the most knowledgeable when it comes this stuff so I'd love to hear everyone's thoughts.

Thanks!

[Slava]

^ to me there's more to it than just the interest rate vs. the tax rate though. If I think that I can average a better return than the mortgage amount going forward, then investing it makes more sense. That might mean the RRSP, might be non-registered or some combination of the two. You could also invest today while rates are low, and then take the accumulated savings in the future to pay the mortgage when rates rise.

[Mortgage Made Easy]

TD Bank (TSX:TD) was quick to announce Wednesday it will maintain its prime interest rate at three per cent, noting that factors beyond the central bank influence its rates.

"Not only do we operate in a competitive environment, but our prime rate is influenced by the broader economic environment, and its impact on credit," the bank said in a statement.