Tuesday, August 17, 2010

Pay Down Your Mortgage or Contribute to Your RRSP?

A fantastic question and like most in the world of finances, the answer won’t be the same for everyone. An old friend of my parents once told me, “keep your mortgage and your RRSP separate, don’t focus on one or the other but rather on both”. Very good advice but not necessarily for everyone or every economic climate. At the time, GIC’s were paying about 10% and mortgage rates were in the area of 6-7% over five years. Makes sense that if you can get a guaranteed return that exceeds your mortgage rate by 3-4% that you max out your RRSP contribution, take the tax deduction and the return on your investment and run. However, fast forward to 2010 when GIC’s are paying 2-3% and mortgage rates are around 4% over five years. The same approach doesn’t seem so appealing anymore. Aversion to investment risk and debt will be the determining of which approach is best.

There was an excellent article in the Toronto Star last week that discusses this topic in great detail. I strongly encourage taking a few minutes to read it to help you decide which approach is best for you http://www.thestar.com/business/personalfinance/article/844358--paying-down-debt-makes-sense

Tuesday, August 3, 2010

Mortgage Life Insurance Explained

As part of my licensing requirements, I must offer every client a mortgage life insurance policy.

Mortgage life insurance is simply a life insurance policy on the homeowner which will allow their family or dependents to pay off the mortgage on their home should something tragic happen to them. This is not to be confused with mortgage default insurance, which lenders require to cover their own assets if you have less than 20% equity in your home. Mortgage life insurance is meant to protect the family of a homeowner and not the mortgage lender itself.

While it is nice to think that if you were to pass away your mortgage would be paid off, is it really necessary for you to pay for this service? My wife will tell you that insurance is something I often complain about as I think as a society we are over-insured. Different little bits of insurance here and there that essentially overlap each other because the big picture is not considered.

If you are the primary breadwinner in your home and your death would leave your family without the means to pay for the mortgage, then mortgage life insurance might be a good option. However, take a look at all of your insurance requirements to see what is already being met. Do you already have a life insurance policy? Are you covered through your work benefits? What would be required should there be an untimely death in the family? These are all questions that need to be answered before deciding whether or not you need mortgage life insurance.

Trust me when I say I know what it’s like when you’re at your bank (been there, done that) and they go down their checklist of all the products to try to cross-sell you and they treat you like you’re making a huge mistake if you say “no” to the insurance. If you’ve done your analysis and don’t think you need it, be confident that you’re making the right decision for your family. I have many clients that I deal with that have had their mortgage with a bank with mortgage life insurance and when I ask them why they accepted it, more often than not they don’t have an answer aside from “my banker told me I should have it”. One recent client stands out...she’s single, no dependents, no extended family to speak of, she has about $200k of insurance through her work benefits and she was paying over $100 for mortgage life insurance because her banker told her she should have it. When I asked her who her beneficiary was she didn’t even know.

One of the issues I have with mortgage life insurance specifically is that you’re paying a constant premium to insure a declining sum. As your outstanding mortgage balance drops with your regular payments, you continue to make the same payments to insure it. Does this make sense? While I’m not able to sway clients’ decisions and can explain the pros and cons of mortgage life insurance compared to topping up or taking out a life insurance policy, I always recommend looking at the big picture to ensure that needs are being met on a whole instead of just when it comes to a mortgage.

As always, when in doubt, consult a professional. Just like me, the services of an insurance professional are no cost to you. If you’re not absolutely certain your insurance needs are being met or don’t really know what they are, I strongly recommend consulting a professional.