Debra Williams BBA
Build retirement savings with home equityFinding it difficult to save for retirement? You might be surprised to learn that there’s a simple way to save big without earning more or changing your spending habits.
Canadians are definitely not saving enough for retirement, but according to the Certified General Accountants association of Canada (CGA), how we save may be every bit as important as how much. Low interest rates make home equity the best lending vehicle ever
A recent CGA study shows that the Canada Pension Plan has a limited ability to provide for Canadians in retirement, while workplace pension coverage has been declining steadily. That makes tax-assisted savings vehicles like RRSPs and Tax Free Savings Accounts (TFSAs) all the more important.
One strategy used by some home owners to build retirement capital includes leveraging home equity. The fact is borrowing from your home equity to make an RRSP contribution may reduce your taxes and your combined monthly payments without the need for any belt-tightening; especially when mortgage interest rates have reached an all-time low.
In essence, a new mortgage will allow you to pay off any high interest debts like car and credit card payments, plus make a sizable RRSP contribution… and set you up to save even more, year after year.
Advanced savings, applied
Here’s an example of how a new mortgage could help simplify your finances:
Say your current mortgage of $180,000 is at 5% interest, giving you a monthly payment of $1,047*. In addition to your mortgage you have a car loan of $20,000 and credit cards maxed out at $23,000, resulting in a combined monthly loan payment of $950. You also have an uncontributed RRSP allowance of $25,000.
You’re feeling financially stressed with a monthly payment of nearly $2,000, so you meet with a qualified mortgage planner to assess your situation.
Your mortgage planner presents a scenario in which you cancel your existing mortgage and obtain a new one. Increasing your mortgage from $180,000 to $255,000 will cover the $43,000 in credit cards and car loan, a $7,000 fee your bank charges to break your mortgage (for example), and $25,000 for your Retirement
Thanks to today’s low mortgage rate of 3.5% you now have a much lower overall monthly payment of $1,273. So despite making a big RRSP contribution, you’ve still reduced your monthly payments by $724 per month—a great improvement in cash flow!
Assuming you are at the 40% marginal tax bracket, you will receive a tax refund of $10,000 from your RRSP contribution of $25,000. If you put this tax refund and the $724 that you are saving on interest each month into your mortgage, you will pay off the $25,000 RRSP ‘loan’ that you added to your mortgage in approximately 21 months.
Alternatively, if you put your $10,000 tax refund but only $500 of your $724 monthly interest savings into your mortgage payment, it will shorten the time required to pay off your entire mortgage by 9.7 years** and earn you additional mortgage interest savings of $50,800** over the lifetime of your mortgage.
See how easy it is to save more and pay less? Today’s low mortgage rates are a fantastic vehicle for saving. Not only do they make mortgage payments smaller; they are also a great vehicle for eliminating high-interest debt and saving for retirement—all in one!
Take advantage of low mortgage rates to save more for retirement, manage your debt wisely—and enjoy your life. To review all your options, talk to a mortgage planner today.
* Based on 25 year amortization
** Assuming that the interest rate does not change during the amortization
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