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December 8, 2016 | The no brainer

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Another day, another stock market record. More Chicken Littles saying it’ll all blow up. And other day closer to higher interest rates. (Already Americans are facing an average of $16,000 more to buy the typical house since the Trumpster was elected as mortgage costs jump. Wonder how many voted for that?)

Before we get to Brad, it’s worth clarifying yesterday’s pathetic post. Just because equities have added about $1 trillion in the past month is no reason to buy in now. You should already have been fully invested – that’s the point. People who try to time markets are fools or (if they’re paid to do it) cons. You cannot tell when the next tsunami, terrorist act, weird political event or Kardashian moment may occur. So just build the right portfolio with the correct weightings and go walk the dog. Never exit an asset class. Never chase returns. Never sell into a storm. Never read the zero guy. Or watch BNN. Lethal.

Remember to always be balanced, diversified and liquid. No stocks. No mutuals. No commissioned salesguys masquerading as advisors. And be especially wary of insurance dudes who sell guilt, along with baby vultures who peddle the wrong kind of RESPs. The [email protected] is a little sketchy, too.

In short, hone your common sense. Have confidence the world’s expanding, not contracting. Don’t take too much risk reaching for big gains. Don’t eschew risk and turn into a saver trying to avoid every danger. Never concentrate your wealth in a single thing, like one house. Learn all about tax avoidance. Be aware that running out of money will be the outcome for so many people. But that doesn’t need to include you.

So this brings us to Brad. By most standards, he’s doing okay for a 40-something.

“I’ve been reading your blog for a couple of years now and enjoy it immensely,” he begins, with the mandatory, genuflecting, suck-up salutation I require.

“I have a question about mortgage payoff versus investments. As a family we make $240k (me $170k my wife $70k) a year and own a house worth $500k ish and owe about $265k on it. We have $100k in RRSP, $10k in RESP (for our 2 year old) and expecting a second next year.

“Our mortgage is up next year and I’ve been debating borrowing an extra $100k to put into a spousal/personal and the $100k would get me a $45k tax refund. So $100k in RRSP @ 6% over 25 years would end up around $400k, the $45k refund in a TFSA would plump up to around $200k. From what I can tell the extra $100k would cost me anywhere from 50-100k in interest depending on interest rates end up over the years. This seems to be a no brainer … am I missing something here or is this really a good idea?

Brad and his squeeze, by income, are in the top 2% of Canadian families. But they’re lagging in assets – $235,000 equity in the house and just $110,000 in financial stuff. Obviously they’re better at spending than saving, and things are about to get worse as the second kid arrives and a maternity leave looms.

Don’t know if there are pensions involved, but because 70% of us don’t have one waiting, probably not. No TFSAs – bad. All financial net worth in RRSPs, taxable in retirement – not great. No joint non-registered account to earn tax-advantaged income and income-split – a failing.

But Brad has the desire, obviously, to do better. He reads this trashy site. He writes me. So what’s the answer to his question?

No. Don’t do it.

Increasing the mortgage by $100,000 upon renewal means the additional amount will be amortized along with the rest of the principal. Thus, the amount to be repaid is higher than would be the case with simple interest (such as with a line of credit). Second, borrowing for an RRSP contribution means the interest is not deductible from taxable income. Bummer.

A better option might be to set up a secured line of credit (HELOC) against the house. Bankers will give you up to 65% of your equity ($150,000 in this case) at prime plus a half (3.2% these days), and allow you to make interest-only payments ($400 a month on this amount). Since Brad is in the 33% tax bracket, this is effectively reduced to $270 (just over 2%). Borrowing at 2% and investing for 6% or better is not a bad gig.

He could also take an RRSP loan in a month or two when they become available. A banker would happily fork over $100,000, then wait for the refund to roll in, applying that to the outstanding amount. In this case Brad would end up with $100,000 in assets that cost him $55,000. He could still set up a HELOC, put the money in a taxable account, deduct interest and use some of the funds to repay the RRSP loan.

Or, he and his partner could craft a budget, spend way less money, concentrate on topping up their TFSAs, stop wasting time on soul-sucking blogs and research baby modelling agencies.

Look at Justin Bieber.

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December 8th, 2016

Posted In: The Greater Fool

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