“In life there are only two guarantees: death and taxes”
So you’ve made it through the crunch and finally handed in your taxes. Whew! Now what? Assuming you’re expecting a decent sized return – there are a couple of options available for you at your fingertips. It’s tempting to see a cheque with dollar signs next to your name and think of the wants. You know exactly which wants I’m referring to. A nice vacation in the Caribbean, those shiny new heels you’ve been eyeing for the past six months, or maybe you like the prospect of doubling your money at the casino. Feeling lucky? Lucky is good, but smart is better.
Mortgage prepayment provisions outlined by lenders allow the borrower to reduce some or all of their mortgage debt at an accelerated pace. A monthly prepayment condition permits the borrower to increase their monthly payments by a set percentage while the lump sum condition, more relevant to this discussion, allows you, the borrower, to make a lump sum payment every year, as a percentage of your total mortgage. Note that both options will reduce the amortization period of your mortgage, thereby reducing the amount of interest you’ll have to pay.
And who likes paying interest?
According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), only 28% of Canadians took advantage of their prepayment privileges last year.
Why don’t more Canadians take advantage of this?
With the lump sum option, you have the advantage of paying an amount you choose, at the time you choose. It works on your schedule.
What about first time home buyers?
Investing your tax refund into RRSPs would benefit you down the line when you go to purchase your first home. The Canadian government allows first time home buyers to use their RRSPs as a down payment* – tax-free! The more you contribute to your RRSP for the purpose of your pending down payment, the more you save on taxes. The process is very fluid:
Contribute to your RRSP -> Receive a big tax break -> Invest back into RRSP -> Use RRSP to purchase your first home
You can continue to repeat the first three steps until you feel you are ready to take the plunge.
Money doesn’t always fall conveniently in our lap. So it takes discipline to be able to avoid our wants and invest it in our future instead. Using your tax refund to reduce your mortgage or help with your down payment is always a wise move.
*up to $25,000 with a repayment term for 15 years