So which rate is better?
A fixed rate is where the interest rate is fixed for a specific period of time. Generally known as the mortgage term, the average term is 5 years. As time goes on, more of the mortgage payment goes towards the principal and less of the payment goes to the interest. A variable rate is where the interest rate fluctuates with any changes in the prime rate. The prime rate is set by each lender independently, and typically follows the pattern of the prime rate set at The Bank of Canada. The variable rate will always be based on prime plus or minus a discount. For example, prime minus 50 would be whatever the prime rate is minus 0.50%. If prime is 3.00%, then this variable rate would be 3.00 - 0.50 = 2.50%. This rate is always subject to change, and will fluctuate.
Determining which one is better is as simple as looking at your ability to handle risk, if you dont like to take risk then you should take the fixed rate. This will give you the peace of mind of knowing what your payments will be over the term of the the mortgage.
Here’s an easy test…
If you loose sleep worrying about the possibility of a .25% increase in the interest rate or get stressed thinking about the impact on your monthly budget if your mortgage payment changes, then a fixed rate mortgage is for you.
Another point to keep in mind is that most mortgages will allow you to choose a variable rate, and will let you lock in to a fixed rate at any time throughout the mortgage. There is no cost to do this.
Currently the variable rate is low, however so are the fixed rates. Granted the variable rate is lower, but the fixed rate is even more attractive to those risk adverse clients who will still get a good deal compare to previous fixed rates in the past.
The decision to choose a Fixed or Variable Rate mortgage is as personal as choosing the home that's right for you. Feel free to ask us for more details and we can help you make the right decision.
Do you have something to say? Feel like leaving your two cents on this topic? We would like to hear your opinion, please comment below.
Thursday, July 28, 2011
Tuesday, July 26, 2011
The best way to save for a house
The Globe and Mail - What’s the best way to save for a house: RRSPs or TFSAs?
ROB CARRICK,From Tuesday's Globe and Mail
Published Monday, Jul. 18, 2011 6:23PM EDT
Add RRSPs versus TFSAs to the list of decisions you have to make as a prospective home buyer.
Some serious saving is going to be required to meet the minimum 5-per-cent down payment for buying a home, not to mention the 20-per-cent threshold for avoiding costly mortgage default insurance. Two ideal vehicles for saving are registered retirement savings plans and tax-free savings accounts. Which is best?
Tax-free accounts make saving a snap for Canadians
The great rent-versus-buy debate: Readers weigh in
Watchlist: You ask, we answer
Here’s the case for the TFSA. It lacks one of the flashy benefits of using an RRSP to save for a home, but it compensates by offering more real-life flexibility.
RRSPs have been the go-to source of money for house down payments since the early 1990s, when the federal government introduced the Home Buyers’ Plan. Today, the plan allows first-time buyers to withdraw up to $25,000 from their RRSPs to put toward the cost of a house.
TFSAs have only been around since 2009, which means the thinking on how best to use them is still evolving. The general principal with a TFSA is that people 18 and older can contribute $5,000 annually and pay no taxes on whatever type of investment or savings gains they generate.
Money invested in RRSPs compounds tax-free as well, but you have to pay taxes on money withdrawn from a plan. Not with the Home Buyer’s Plan, however. A $25,000 withdrawal under the plan is $25,000 in cash for your down payment.
The best argument of all for using RRSPs to save for a home? It’s the tax deduction you get when you contribute to a plan. Invest the tax deduction in your RRSP and you’ve got an extra savings boost.
No, you don’t get a tax deduction when you contribute money to a TFSA. What you do get is freedom from the rigid requirements for repaying money withdrawn from an RRSP to pay for a house.
“You have to pay yourself back when you use the Home Buyers’ Plan,” said Carol Bezaire, vice-president of tax and estate planning at Mackenzie Financial. “But with the TFSA you don’t.”
The point of the Home Buyers’ Plan is to help people afford to buy homes without permanently damaging their retirement savings. That’s why you have to start repaying what you withdrew through the plan in the second year after the year you made your withdrawals.
The default repayment schedule is one-fifteenth of the withdrawn amount for 15 years. Ms. Bezaire said your annual RRSP contribution is automatically reduced by the amount of your required repayment. This means your tax deduction will be for the net amount of money you put in your RRSP.
You can take money out of a TFSA at any time and pay it back if and when you want, subject to certain restrictions. It’s also a lot quicker and simpler to withdraw money from a TFSA as opposed to using the Home Buyers’ Plan. There’s little or no paperwork to fill out with the TFSA – in many cases you can just go online and transfer money from your TFSA to your chequing account.
Using a TFSA to save for a home has another more subtle benefit as well. It allows the money in your RRSP to more effectively do what it’s supposed to do, which is grow into a source of income you can use when you leave the work force.
The big benefit of contributing to an RRSP early on in your adult years is that you put your money to work generating compound growth over the decades ahead. By withdrawing money to buy a home, you’re giving your retirement savings a vacation that could last as long as 15 years.
The biggest flaw with TFSAs right now is that you’re limited to contributions of no more than $5,000 per year. You can carry unused room forward, which means the most you can now put in a TFSA if you haven’t used one before is $15,000. Remember, you can withdraw up to $25,000 through the Home Buyers’ Plan.
If you’ve got a three- or five-year plan to save for a home, TFSAs could still serve you well because of the additional contributions you’ll make. If you’ve got a shorter timeframe, you’ll likely have to augment your TFSA home savings plan with other savings or an RRSP withdrawal using the Home Buyers’ Plan.
The Home Buyers’ Plan is a nice, neat program that you’re going to hear a lot about if you’re getting into the housing market because it’s a major factor in helping people afford homes. TFSAs are a better way to go, though.
The Globe and Mail
ROB CARRICK
Monday, Jul. 18, 2011
ROB CARRICK,From Tuesday's Globe and Mail
Published Monday, Jul. 18, 2011 6:23PM EDT
Add RRSPs versus TFSAs to the list of decisions you have to make as a prospective home buyer.
Some serious saving is going to be required to meet the minimum 5-per-cent down payment for buying a home, not to mention the 20-per-cent threshold for avoiding costly mortgage default insurance. Two ideal vehicles for saving are registered retirement savings plans and tax-free savings accounts. Which is best?
Tax-free accounts make saving a snap for Canadians
The great rent-versus-buy debate: Readers weigh in
Watchlist: You ask, we answer
Here’s the case for the TFSA. It lacks one of the flashy benefits of using an RRSP to save for a home, but it compensates by offering more real-life flexibility.
RRSPs have been the go-to source of money for house down payments since the early 1990s, when the federal government introduced the Home Buyers’ Plan. Today, the plan allows first-time buyers to withdraw up to $25,000 from their RRSPs to put toward the cost of a house.
TFSAs have only been around since 2009, which means the thinking on how best to use them is still evolving. The general principal with a TFSA is that people 18 and older can contribute $5,000 annually and pay no taxes on whatever type of investment or savings gains they generate.
Money invested in RRSPs compounds tax-free as well, but you have to pay taxes on money withdrawn from a plan. Not with the Home Buyer’s Plan, however. A $25,000 withdrawal under the plan is $25,000 in cash for your down payment.
The best argument of all for using RRSPs to save for a home? It’s the tax deduction you get when you contribute to a plan. Invest the tax deduction in your RRSP and you’ve got an extra savings boost.
No, you don’t get a tax deduction when you contribute money to a TFSA. What you do get is freedom from the rigid requirements for repaying money withdrawn from an RRSP to pay for a house.
“You have to pay yourself back when you use the Home Buyers’ Plan,” said Carol Bezaire, vice-president of tax and estate planning at Mackenzie Financial. “But with the TFSA you don’t.”
The point of the Home Buyers’ Plan is to help people afford to buy homes without permanently damaging their retirement savings. That’s why you have to start repaying what you withdrew through the plan in the second year after the year you made your withdrawals.
The default repayment schedule is one-fifteenth of the withdrawn amount for 15 years. Ms. Bezaire said your annual RRSP contribution is automatically reduced by the amount of your required repayment. This means your tax deduction will be for the net amount of money you put in your RRSP.
You can take money out of a TFSA at any time and pay it back if and when you want, subject to certain restrictions. It’s also a lot quicker and simpler to withdraw money from a TFSA as opposed to using the Home Buyers’ Plan. There’s little or no paperwork to fill out with the TFSA – in many cases you can just go online and transfer money from your TFSA to your chequing account.
Using a TFSA to save for a home has another more subtle benefit as well. It allows the money in your RRSP to more effectively do what it’s supposed to do, which is grow into a source of income you can use when you leave the work force.
The big benefit of contributing to an RRSP early on in your adult years is that you put your money to work generating compound growth over the decades ahead. By withdrawing money to buy a home, you’re giving your retirement savings a vacation that could last as long as 15 years.
The biggest flaw with TFSAs right now is that you’re limited to contributions of no more than $5,000 per year. You can carry unused room forward, which means the most you can now put in a TFSA if you haven’t used one before is $15,000. Remember, you can withdraw up to $25,000 through the Home Buyers’ Plan.
If you’ve got a three- or five-year plan to save for a home, TFSAs could still serve you well because of the additional contributions you’ll make. If you’ve got a shorter timeframe, you’ll likely have to augment your TFSA home savings plan with other savings or an RRSP withdrawal using the Home Buyers’ Plan.
The Home Buyers’ Plan is a nice, neat program that you’re going to hear a lot about if you’re getting into the housing market because it’s a major factor in helping people afford homes. TFSAs are a better way to go, though.
The Globe and Mail
ROB CARRICK
Monday, Jul. 18, 2011
Subscribe to:
Posts (Atom)