Finance
Frederick Sullivan 0

This section is presented

This section was created by the editors. The client has not been given the opportunity to limit or revise the content prior to publication.

by TD Insurance

Personal Finance Family Finance

Ella is concerned about the impact of interest rate hikes on her mortgage payments

If Ella's mortgage interest doubled, her monthly payment would rise from $2,990 to $3,429. If Ella’s mortgage interest doubled, her monthly payment would rise from $2,990 to $3,429. Photo by National Post photo illustration

Reviews and recommendations are unbiased and products are selected independently. Postmedia may earn an affiliate commission for purchases made through links on this page.

In Ontario, a woman we will call Ella is raising two children, ages 12 and 13. Ella is a sales rep for a building materials company and brings home $8,000 a month, plus an average bonus of $2,500 a month after taxes. She also receives $500 per month in child support per child, for a total of $11,500 per month after tax.

This ad hasn’t loaded yet, but your article continues below.

Ella has a $1.5 million home and investments amounting to $1,305,174, including a $40,000 surrender value life insurance policy. After debt, including her $544,561 home mortgage, her net worth comes in at $2,300,613. She would like to have $55,000 a year after tax when she retires.

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

Ella is now comfortable and worried she could be in a pinch if interest rates rise.

She won’t have to pay off her mortgage for 18 years, well into her retirement, and if the current 1.79 percent interest rate rises as expected, it could take even longer.

If her mortgage rate doubled, her monthly payment would increase from $2,990 to $3,429. That would be 43 percent of her $8,000 monthly income. She fears that her guilt will be difficult to bear.

This ad hasn’t loaded yet, but your article continues below.

Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, BC, to work with Ella.

Pay off mortgage

Ella has options to increase her retirement security.

She has $536,374 in cash that can be used to pay off most of the mortgage very soon, although such a payment could incur a hefty fine, Moran notes. She could instead do the familiar maneuver of paying off the loan up to the annual penalty-free prepayment limit, in her case $110,000, and then borrow that amount back for investment. She would lower the mortgage while maintaining the same level of investment income, plus the interest on the loan would now be tax-deductible.

There’s some risk if the assets she’s buying flop, but if she’s investing conservatively, doing this just once would reduce her amortization period to 14 years, Moran explains. That would make her mortgage-free at 65. She must be mortgage-free by age 60, so she still has a lump sum of $130,000 to earn. Assuming she makes the switch, the $240,000 payments would lower her cash to $296,374.

This ad hasn’t loaded yet, but your article continues below.

Designated Savings

When Ella turns 60, her children will be 21 and 22, but they will go to post-secondary education while still living at home. She deposits $208 per month into a RESP account, $2,500 per year, and adds the Canada Education Savings Grant, which represents $500 or 20 percent of contributions with a maximum lifetime of $7,200 for each beneficiary. Her ex-husband makes the same contributions. The RESP now has $164,000 and will easily add another $50,000 per child with contributions and growth. So there’s no problem with the kids’ post-secondary education costs, Moran notes.

Ella was not a resident of Canada for 15 years after age 18, so her CPP may be as little as $7,225 per year at 65, Moran estimates. At age 65, she has 47 minus 15 of the required 40 years for full benefits. That’s 32/40 or 80 percent of the OAS’s current maximum benefit, $7,707 or $6,166 per year.

This ad hasn’t loaded yet, but your article continues below.

Ella’s TFSA contribution limit is $60,000, adjusted for residency outside of Canada. She doesn’t have TFSA now. She has the money to fill her space and should, Moran advises. Then, if she adds $6,000 per year for nine years, it becomes $141,070 at age 60 and then generates $6,988 tax-free for the next 30 years until age 90.

Ella’s RRSPs add up to $564,800. If she adds $25,000 of her cash plus $25,000 per year of income for nine years, and the balance grows at six percent per year minus three percent before expected inflation, it will become $998,533 at age 60 in 2022 dollars and than $49,461 will generate a pre-tax income stream for the next 30 years up to her age of 90.

If Ella makes these allotments, she should have $221,374 left. If that balance is invested in a taxable account and grows at our assumed three percent, it becomes $288,843 at age 60. That amount would provide taxable income of $14,307 for 30 years to her age of 90.

This ad hasn’t loaded yet, but your article continues below.

From age 60 to 65, assuming Ella has left her job, child support has ended, and she has no income, her income would be $49,461 from her RRSPs, $6,988 from her TFSAs, and $14,307 in unrecorded investment income . That’s a total of $70,756. After tax at an average rate of 18 percent on all cash flow except TFSA, she would have $58,660 per year or $4,888 per month to spend. With the removal of $2,990 in monthly mortgage payments and all debt payments, her spending would drop to $3,719 per month.

At age 65, Ella was able to add $7,225 CPP and $6,166 OAS for a total income of $84,147. After taxing 19 percent on all but $6,988 TFSA cash flow, she would have $70,261 per year to spend or $5,855 per month.

This ad hasn’t loaded yet, but your article continues below.

Budget risks

Inflation and its mortgage interest could rise. That could take a few years in an inflationary environment, but higher debt costs would be less on a lower outstanding mortgage balance she could renegotiate or shop with lenders. Time would reduce this interest.

Finally, in a serious cost crisis, perhaps due to illness, Ella could downsize her $1.5 million home to get $1,425 million after a five percent sales cost, then buy a home in the $1 million range and make the difference. to harvest. $425,000 invested at three percent post-inflation would yield $12,750 per year indefinitely.

“It’s rare for a retirement plan to be bulletproof, but this one comes close,” explains Moran.

Retirement stars: 5 ***** out of 5

Email andrew.allentuck@gmail.com for a free Family Finance analysis.

This ad hasn’t loaded yet, but your article continues below.

By clicking the sign up button, you agree to receive the above newsletter from Postmedia Network Inc. receive. You can unsubscribe at any time by clicking the unsubscribe link at the bottom of our emails. Postmedia Network Inc. † 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300

Comments

Postmedia is committed to maintaining a lively yet civilized discussion forum and encourages all readers to share their thoughts on our articles. It can take up to an hour for comments to be moderated before appearing on the site. We ask that you keep your comments relevant and respectful. We’ve enabled email notifications – you’ll now receive an email when you get a reply to your comment, there’s an update to a comment thread you’re following, or a user follows comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

This post This Ontario woman should use her money to get her mortgage under control on her way to retirement

was original published at “https://financialpost.com/personal-finance/family-finance/this-ontario-woman-should-use-her-cash-to-get-her-mortgage-under-control-heading-into-retirement”

Categories: Finance

Author: Frederick Sullivan

Hannah Sullivan: As a seasoned journalist, Hannah's blog provides hard-hitting analysis and in-depth reporting on major crime stories. Her thorough coverage and fearless reporting make her a trusted voice in the field.