• Last week, I was contacted by a new client who lives and works in Richmond Hill. His renewal is up in November but he wanted to put some plans into place because he had just come into some money ($125,000 from an inheritance).

    The balance on his mortgage is approximately $100,000 and he has approximately $500,000 of equity in his property.

    Paying down your mortgage or do investments?

    He and his wife were both employed, they had money in their RRSP’s (still had lots of room to invest) and had their house almost paid off. They had worked very hard over the years and had taken advantage of the prepayment privilege on their mortgage to pay down their 25-year amortization in less than 10 years. Most of us wish we could be in a similar situation.

    His question was should he take the money he had just received and pay down the mortgage or invest?

    To date they had been very conservative with their investments. They had taken out their mortgage with the bank and also invested their RRSP’s with the bank, however even with their discipline with paying down their mortgage they had not put the same discipline into their investments. With that being said, they still had a sizeable balance!

    Now that they were so close to the finish line on their mortgage they were concerned with how to save for their retirement. They were just waking up to the fact that there were more options for investing their RRSP’s, than what was available through the bank. They were also shocked at how little their investments had grown and when I pointed out the fees they were paying to invest they were shocked. I call it the “WTF’” look!

    In this low interest environment it makes sense in my opinion to invest rather than pay down the mortgage. However, due to their specific circumstance they could do many different things:

    • They could pay down the mortgage and then put the amount they previously put towards the mortgage towards their RRSP to the maximum each year and on top open up a TFSA for further savings;
    • They could keep paying the mortgage and take the $125,000 and invest it into their RRSP’s up to the maximum contribution limit for the year;
    • They could refinance up to the maximum (80% LTV but we always suggest going up to a maximum of 70% only so you keep conservative), which means they hold a higher balance on their mortgage but it also means they have more money to invest and the difference between the low rate on their mortgage and the higher interest on their investment could pay down the mortgage and provide extra cash flow to spend or reinvest!

    We spoke about various options in the real estate investing area, as that is what I focus on in my business. They had the following requirements:

    • They wanted low or no fees to invest
    • They did not want to be landlords
    • They were interested in lending their money but felt that it would not suit their conservative outlook and lifestyle

    I spoke to them about investing in Syndicate mortgages vs. Mutual Funds, which they were currently invested in.

    I have spoken about this type of investment before. Syndicated mortgages are investments that are backed against developments on Canadian projects (condo, single family developments, commercial and even hotels to name a few).  The investment is arranged through Fortress Developments (http://fortressrealdevelopments.com/) and guarantees a fixed rate of return of a min. of 8% per annum over a 3-5 year period, depending on the developer and time frame chosen.

    They liked the following fact about investing in Syndicate mortgages as opposed to investing with the bank:

    • They could earn 8% fixed per annum over the term (between 1-5 years)
    • There was the ability for profit participation (not guaranteed)
    • They only needed $30,000 to get started
    • They are registered on title in second position on the land and the project
    • Fortress is the only company that has a successful track record of project exits and have never missed a payment to their investors
    • They could invest with certain developers that would pay their trust fees (all registered funds are held in trust with Olympia Trust and certain lenders that pay on an accrual basis, will pay the yearly fees)
    • The best thing was no fees ever!

    I spoke to them about the options to invest their RRSP’s and why it’s important to choose a developer that pays on an accrual basis. Accrual means you get paid your principal and all interest at the end of the chosen term because your interest accrues or builds during the entire term. All projects that are invested with secured funds are held at Olympia Trust and the interest payments (if not accrued), are held in cash position and do not earn interest. Just something to keep in mind!

    In the end, my clients chose option 3. They chose to refinance their home to a maximum of 50% (still being conservative), which meant their mortgage was a bit higher but they now had $150,000 to invest, which was growing in a RRSP as well as a TFSA, which provides for tax-free growth!

    Contact me today to come to one of our free dinner events (yummy Italian food)!  It could mean the difference between earning higher interest with no fees vs investing with fees and earning interest that does not even beat the rate of inflation!

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