Tag Archives: pre-paying mortgage

Pre-Pay Mortgage Or Park the Money?

Hello George: We are at the renewal of our mortgage and are debating what would be the best move: prepay the mortgage or invest in our TFSA the amount of $12,000.00. We want to keep our monthly payment the same rather than taking the $130 lower payment.

We are both at or near retirement age and may want to sell our house in a couple of years to possibly be able to buy a family members’ house.

Part of my reply: You might get to buy that house and you might sell yours…that’s two BIG “if” questions without a today answer!

That means the $12k goes into the TFSA, or any savings account, to park it for the time being with easy access to it. There’s a saying that you can’t eat your home. In other words, when you need the money – for whatever reason – remortgaging takes time and is expensive. Even a home equity line of credit now has way more restrictions imposed by federal regulators.

If you put the money on the mortgage, you won’t have the down payment to buy the other one and will be forced to see yours super quickly (no matter what the price or market is at the time) to have the money for the 2nd purchase.

That’s assuming you don’t have the full amount in the TFSA to just write a cheque for the other home purchase and don’t have the massive income it’d take to get a mortgage on the 2nd one AND still have yours for a number of months until it sells. Likely zero chance of that with the Trudeau stress test restrictions! Besides, the $12k would “only” be a $50 principal reduction. $12,000/240 months plus a tiny bit of interest savings at such a low rate…Best have it ready and available!

Secondly, if you may be able to buy it and may or have to sell yours to make that work, you will have massive mortgage prepayment penalties to get out of your mortgage in year two or three out of five! It’d be over $10,000!

So I’d take a 3 year mortgage today to get to the point where the potential home purchase issue is resolved. Sure, I may cost you a little more on the renewal in three years, but it’d be way less than the massive penalties!

Thirdly, if you do get to buy it, do not NOY start at your bank. You’ll be turned down due to the Trudeau stress test. Immediately go to a good independent mortgage broker! You can find one by asking two of the top realtors in town who they use. They all do because their income depends on one that’s super sharp!

An E-mail From a Listener:

I’ve freed up an extra $100 in my budget. Do I put it in RRSPs or against the house? Our family income is $90,000, we’re putting $600 into RRSPs, an extra $450 on the house right now.

The listener, let’s call him Greg, is in a 40% tax bracket and in his late 40s. What he didn’t put in his first e-mail is that he’s got a car payment of $250 for 2 more years, a snowmobile owing $2,000 and a boat at $3,000.

Becoming debt free is ALWAYS ahead of savings. In a leaky boat, fix the leak or all the bailing in the world won’t get you anywhere. Greg’s on track to be debt free in two years or so.

If he takes the $100 extra, stops the $600 RRSPs and diverts the $450 from the extra house payments, that’s $1150 a month. The debts get listed smallest to largest, then make minimum payments on all but the smallest debt. Does that make sense?

That pays off the snowmobile in two months. The $1150 and now the freed-up snowmobile money of $200 a month goes onto the boat. That’s now a $1350 payment and clears it off in two more months. Now the boat payment is gone and that $200 a month is added to the $1350, making it $1550 towards the car and it’s gone in three months.

Seven months from now, or February 09 he’s debt free but the house and has $1550 freed up. THAT is some serious money. Now we’re not talking about a spare $100, and $1550 now gets broken down into retirement savings and paid on the mortgage.

A half a step back has jumped Greg tons of steps forward, saved about $4,000 in interest and got him debt free a year and a half ahead of schedule.

A big section of the debt chapter in the It’s Your Money book walks you through this process very simply. Smallest debt to largest, minimum payments on all but the smallest and every one that’s paid off gets rolled into the next one.

Think of Greg in February when he’s got almost $1,600 a month going to pre-pay his mortgage or freed up that $20,000 a year into savings! Oh, and Greg got one more piece of advice: Never buy toys or cars again unless you can afford to pay cash for them.