Articles for April 2010
Make sure mortgage features fit your circumstances
Posted by Admin on April 28, 2010
Ensuring you have the right type of mortgage for your circumstances, budget and lifestyle is the first step in managing this important piece of your overall financial picture.
Below is a quick overview of some of the more common types of mortgages on the market today.
Conventional mortgage:
Under a conventional mortgage, a lender will normally provide up to 75 per cent of the appraised value or purchase price of the property, whichever is less. You must be able to provide the balance of the purchase price.
High-ratio or insured mortgage:
Here the lender finances up to 95 per cent of appraised value or purchase price, whichever is less. This type of mortgage must, by law, be insured against non-payment by either Canada Mortgage and Housing Corporation or Genworth Financial Mortgage Insurance Company of Canada. You will normally have to pay a slightly higher interest rate than a conventional mortgage to cover the insurance fee.
Open mortgage:
An open mortgage allows payment of the principal, in part or in full, at any time without penalty. Open mortgages tend to be for a short term, usually a year or less. They typically have a higher interest rate than a closed mortgage because they offer greater flexibility.
Open mortgages are worth considering when interest rates are declining or if you have a short-term need.
Closed mortgage:
A closed mortgage features regular payments for the term you select. A penalty usually applies if you repay the loan in full prior to the end of the term.
Closed mortgages are available for short or long terms and are worth considering when interest rates are rising.
Convertible mortgage:
A convertible mortgage allows you to convert your mortgage to another mortgage type at any time without penalty. Often a convertible mortgage will specify what type(s) of mortgage can be selected.
Fixed-rate mortgage:
A fixed-rate mortgage has a set or fixed interest rate that does not change during the term of the mortgage.
Fixed rate mortgages are ideal for individuals who want their payments to stay the same and want to know the amount that will remain owing at the end of the term.
Variable rate mortgage:
Variable rate mortgages generally have a lower interest rate than fixed-rate mortgages with the potential to accelerate the reduction of the outstanding balance and, as a result, reduce your interest costs. The interest rate will fluctuate and may increase depending on market conditions.
Some variable rate mortgages offer a fixed payment for the full mortgage term. The portion of the payment that is applied to the principal fluctuates with changes in interest rates. This may either shorten or lengthen the amortization period.
Other variable rate mortgages have payments that fluctuate depending on the then-current interest rate.
Variable rate mortgages are worth considering if you’re comfortable with, and can manage, changing interest rates and/or changing payments.
Determining the right mortgage and options for your situation can be confusing. I can connect you with a London Life mortgage planning specialist who can answer all your mortgage questions.
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of the writer’s knowledge as of the date submitted for publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.
How to protect your RRSP savings
Posted by Admin on April 28, 2010
Another registered retirement savings plan (RRSP) season has come and gone. If you’re like many Canadians, you’ve probably squirreled away some hard-earned dollars in hopes of a comfortable retirement.
However, your retirement planning shouldn’t stop there. Your RRSP savings are vulnerable to many different risks.
Events that can cut into your RRSP savings
While it’s only human nature to look forward to the positive, it’s important to remind ourselves that serious health problems and an early death are also a part of life. Unforeseen events can derail your carefully thought-out plans and have a devastating impact on your family finances.
Imagine having to dip into your RRSP savings, due to the sudden loss of your spouse, in order to make the mortgage payments and help with your children’s education. Situations like this not only expose you to greater taxes, but can also threaten your retirement income – especially if you have to sell investments when markets are down.
However, what if you have to withdraw cash from your RRSP? What if you just stop contributing to it during hard times? Unfortunately, that can also shortchange your retirement nest egg, as shown in the following example.
Example: The Campbells
At age 40, Bill and Amanda Campbell begin contributing $500 a month to their RRSPs. Five years later, a car accident leaves Bill disabled. The Campbells decide to postpone RRSP contributions until Bill has fewer medical expenses and can work again.
Four years pass before Bill fully recovers and finds a new job. The Campbells now feel financially comfortable again and resume their RRSP contributions.
By age 65, they have saved $270,964 1 for their retirement. However, if they hadn’t interrupted their RRSP contributions, their savings would be $339,790. That’s 25 per cent or $68,826 more than the current value of their RRSP.
In hindsight, the Campbells would be better off if they had made disability insurance part of their financial security plan. Now they’ll probably have to adjust their standard of living during retirement to make their reduced savings last longer. If this example involved early death or critical illness, their financial loss could have been much larger.
The benefits of having insurance
As we’ve seen, your financial security depends on more than RRSP contributions alone. That’s why, as you continue to pursue your financial goals, you need insurance to help protect your family and your retirement dreams.
For example, if you’re faced with a serious illness, premature death or disability, you may need cash quickly. Cashing out your RRSP savings in a hurry can negatively impact your investment portfolio. However, permanent insurance has a cash value component that can provide you with cash when you need it most, without interrupting the long-term growth of your retirement savings.
The cash value of permanent insurance can help protect you and your family by providing income during difficult times. You can use insurance cash value funds to:
- Pay the mortgage so your family can stay in your home
- Pay off debts and lines of credit
- Protect your family’s standard of living
- Ensure your children can afford college or university
- Help keep your business running
- Cover unforeseen funeral and medical expenses
Why start with insurance today?
As you get older, insurance available to you today may become more difficult to obtain and it’s likely to cost more. If a health problem arises before the policy is in place, your application could be declined, rated or issued with an exclusion. Therefore, it’s best not to delay.
Some people put off purchasing insurance, because they think they can’t afford it. They also don’t want to reduce the amount they can save for retirement. However, you don’t have to shortchange your retirement savings to buy the insurance protection you need. You can choose from many types of insurance, each with different levels of coverage, at prices to suit almost any budget.
I can help you determine how much coverage you need to meet your goals and stay within your budget.
1 Assumes monthly growth rate of 0.5 per cent (6 per cent per year). No contributions or withdrawals made from age 45 to 49. Initial balance continues to grow to age 65.
This article is for information purposes only and shouldn’t be construed as legal or tax advice. Every effort has been made to ensure its accuracy. However, laws and interpretations may change, so errors and omissions are possible. All comments related to taxation are general in nature and are based on current Canadian tax legislation for Canadian residents, which is subject to change. For implications as they relate to individual circumstances, consult with legal or tax professionals. Information is provided by London Life Insurance Company and is current as of December 2009.