Understanding mortgage terms

Key in door of home

Sometimes mortgage terms can be confusing. That’s why we’ve come up with this list of common mortgage terms to help you out.

Principal

The original amount of a loan, before interest.

Prepayment penalty

A fee charged by the lender when the borrower prepays all or part of a mortgage over and above the amount agreed upon.

Closed mortgage

A mortgage that cannot be prepaid or renegotiated for a set period of time without penalties.

Open mortgage

A mortgage that can be repaid at any time during the term without any penalty. For this convenience, the interest rate is between 0.75-1.00% higher than a closed mortgage. This is a good option if you are planning to sell your property or pay-off the mortgage entirely.

Questions marks in orange

Fixed rate mortgage

A mortgage where the interest is set for the term of the mortgage.

Variable rate mortgage

A mortgage for which the interest rate fluctuates based on changes in the prime interest rate.

High ratio mortgage

A mortgage that exceeds 80% of the purchase price or appraised value of the property. This type of mortgage must be insured. 

Conventional mortgage

A mortgage up to 80% of the purchase price or the value of the property. 

Mortgage insurance

If your down payment is less than 20% of the purchase price of the property, the lender is going to require mortgage insurance.

Spend your tax refund wisely

Sometimes spending money wisely can be a challenge – especially tax refunds, which can seem like free money. If you’re lucky enough to get a tax refund this year, take a moment to consider how you could put that money to work for you instead of squandering it on a big screen TV, new wardrobe or beach holiday.

 

Here are some smart ways to spend your refund:

  1. Add to your emergency fund. Set aside enough cash to cover six months of expenses — just in case the unexpected happens
  2. Pay down credit cards and other high interest debt. You’ll save money on interest charges and increase your monthly cash flow
  3. Jump start next year’s RRSP. Contributing early allows you to take advantage of all those extra months of tax-free growth. At retirement time this can mean thousands more in your pocket.
  4. Invest in a Tax-Free Savings Account. Growth or earnings in a TFSA are 100% tax-free, and you’re allowed to contribute up to $5,000 per year
  5. Pay down your mortgage. Lump sum payments on your outstanding principal will save significant dollars in interest charges over the long term. It also means you’ll own your home mortgage-free that much sooner
  6. Save for a child’s education. Invest in a Registered Education Savings Plan on behalf of a child or grandchild and you’ll qualify for a government-sponsored Canada Education Savings Grant of between 20-24% of the contribution (to a maximum of $600).
  7. Take care of outstanding RRSP loans. Some loans have three or four month grace periods during which time you’re not required to make any payments towards the interest or principal. Remember that the interest owed still continues to accumulate until the loan is completely paid off.

Remember, how you spend your money today will have a significant impact on your future. For advice on how to get your tax refund working for you, talk to a Credential Asset Management Inc. Mutual Funds Investment Specialist

 

<CAM Disclaimer>

The information contained in this newsletter is provided as a general source of information and should not be considered personal tax advice, investment advice or solicitation to buy or sell any mutual funds. ®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.

Six tips for spending your tax refund

A wide-screen TV might entice you. A tropical beach might beckon. But if you can resist the temptations, there are ways to get a bigger bang for your tax refund buck.

 

1. Pay down debt

Especially that high interest, non-deductible credit card debt. A $5,000 credit card balance at 18% compounded monthly costs you $978 per year. Ouch!

 

2. Pay off RRSP loans

Your RRSP loan was a smart strategy, and it created a larger tax refund. Now apply that refund to the balance of your loan. You’ll save on interest charges and free up money that would otherwise go toward monthly loan payments. Channel that freed-up money into your RRSP by setting up a monthly Pre-Authorized Contribution (PAC) Plan.

 

3. Make a lump sum RRSP contribution for the current tax year

The sooner you contribute, the sooner your investments start to compound and the more you end up with when you cash out.

 

4. Create a rainy day fund

Are you prepared to cope with emergency purchases or unexpected interruptions to your household income? It’s not a good idea to dip into your RRSP, especially if it contains the kind of investments that should be held for the long run. Instead, set up a separate rainy day fund. It should contain three to six months living expenses in secure, liquid assets. Start building your rainy day fund the stress-free way using monthly Pre-Authorized Contributions.

 

5. Save for a child’s education

Drop your refund into a Registered Education Savings Plan on behalf of a child or grandchild. The federal government kicks in a 20% bonus to the plan, to a maximum of $500 every year. Then, make sure that your child’s education nest egg continues to grow by setting up monthly Pre-Authorized Contributions.

 

6. Avoid getting a tax refund in the first place

After all, what’s a tax refund? It’s really an interest-free loan that you’ve made to the government as a result of paying too much tax. Solution? Set up a Pre-Authorized Contribution Plan so you can make regular monthly payments to your RRSP. Your PAC Plan entitles you to request a reduction of tax at source. You won’t get a fat refund cheque in the spring, but you’ll have more cash in your pocket each month. Contact your local Canada Revenue Agency office for more information or speak to your investment professional.

 

A word about PAC Plans

Did you notice that Pre-Authorized Contribution Plans are recommended in four of the refund tips? Contribute as little as $50 per month, or as much as your budget allows.

 

When financial markets are volatile, your PAC Plan acts like a shock absorber, thanks to the advantages of dollar cost averaging. Since you invest the same amount every month, your money naturally buys more fund units when prices are lower, and fewer fund units when prices are higher. Over the long term, this simple strategy tends to reduce the average price you pay for fund units, so you can enjoy higher potential gains.

 

This article is courtesy of Credential Asset Management Inc. your credit union’s partner in providing you with wealth management services.

 

 

<CAM Disclaimer>

Mutual funds are offered through Credential Asset Management Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated. The information contained in this newsletter is provided as a general source of information and should not be considered personal tax advice, investment advice or solicitation to buy or sell any mutual funds. ®Credential is a registered mark owned by Credential Financial Inc. and is used under license.

 

Beat the taxman

If you’re like most Canadians, taxes take a big bite out of your wallet every year. For many of us they’re our single largest expense. But fortunately there are a few ways to beat the taxman and keep more of your hard earned money.

 

Here are a few strategies to lighten your tax bill:

 

  • Contribute to your RRSP. Then claim the deduction at tax time. Your annual allowable contribution is 18% of your previous year’s earned income (minus pension adjustments) to a maximum amount determined by the government. For your personal RRSP deduction limit, check the Notice of Assessment sent to you by the Canada Revenue Agency after you’ve filed your tax return.

 

  • Give to charity. Charitable donations made by December 31st are eligible for this tax year. Instead of cash, you may be able to donate certain securities you own “in-kind”, to avoid paying capital gains tax. Your charitable receipt will be based on the current market value on the donated securities. Talk to us about which securities qualify.

 

  • Consider tax-loss selling. By selling non-registered assets that have dropped below their purchase value you can generate a capital loss and use it to offset any capitalized gains you’ve realized in either the three previous years, this year, or in the future. To claim the loss, your trade must be settled before the annual government imposed deadline. Talk to a Credential Asset Management Inc. Mutual Funds Investment Specialist for this year’s settlement deadline.

 

  • Make RESP contributions. Invest up to $2,500 in a Registered Education Savings Plan (RESP) before December 31st and you’ll qualify to receive a government-sponsored Canada Education Savings Grant of between 20-24% of your contribution (to a maximum of $600).

 

  • Split your pension income. Transfer up to 50% of qualifying pension earnings to a lower income earning spouse or common-law partner. The transferred money will be taxed at their lower income tax rate.

 

  • Pay your tax deductible expenses. To claim them for this tax year pay tax deductible expenses like alimony, professional fees, union dues, eligible accounting/legal fees, and medical bills by December 31st.

 

For advice on how to take advantage of these tax savings strategies, and a few others, drop by the investment area for CAM of your branch and talk with your Credential Asset Management Mutual Funds Investment Specialist. They’re here to help.

 

 

<CAM Disclaimer>

Mutual funds are offered through Credential Asset Management Inc. The information contained in this newsletter is provided as a general source of information and should not be considered personal tax advice, investment advice or solicitation to buy or sell any mutual funds. ®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.

Borrowing to contribute to your RRSP still makes sense

What do you do if the RRSP deadline is fast approaching and you don’t have the money to make a contribution? Simple. Borrow it.

 

Your RRSP contribution is an important part of ensuring a secure financial future. While it’s preferable to use existing savings to contribute to an RRSP, if you’re strapped for cash it may be better to borrow than to not make a contribution at all. If you skip just one $5,000 contribution, you could reduce the value of your RRSP by almost $17,000 over 25 years assuming a 5% average rate of return.

 

Putting off your RRSP contribution can impact your future cash flow and your retirement lifestyle. For starters, forgoing your RRSP contribution could reduce the tax refund you receive. It could also impede your ability to build a comfortable tax-sheltered retirement portfolio. Finally, it’s more difficult to save thousands of extra dollars to top up your RRSP years down the road – using the carry forward provision – than it is to make regular RRSP contributions now.

 

Even if money is tight, borrowing to make an RRSP contribution may make good financial sense – provided you pay down the loan quickly.

 

Keep in mind that interest on RRSP loans is not tax deductible. However, RRSPs have enough tax advantages to make carrying short-term debt worthwhile. Not only will you receive an immediate tax deduction for your contribution, but your RRSP investment compounds on a tax-deferred basis for as long as it remains in the plan. In most cases the immediate tax saving, plus the tax-deferred growth inside an RRSP will far outweigh the short-term interest costs of the loan.

 

In addition, you can use any tax refund you get on your 2008 taxes to help pay off your RRSP loan or to make an early RRSP contribution for the 2009 tax year. However, it may be prudent to pay off higher interest-bearing debts, such as an outstanding credit card balance, before you pay down your loan.

 

Contact us today and make an appointment to discuss your RRSP loan options.

 

This article is courtesy of Credential Asset Management Inc your credit union’s partner in providing you with wealth management services. ®Credential is a registered mark owned by Credential Financial Inc. and is used under license.

 

<CAM Disclaimer>

Mutual funds are offered through Credential Asset Management Inc. Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated. The information contained in this newsletter is provided as a general source of information and should not be considered personal tax advice, investment advice or solicitation to buy or sell any mutual funds. ®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.