The must-have accessory for all homeowners will never be featured in a TV series or in magazines about decorating.
Having at least a few thousand dollars safely parked in a savings account makes both financial and emotional sense. It’s a better use of your money than any piece of furniture, window treatment, rug, paint job or electronic device. It also beats paying down your mortgage, which can feel like a top priority if you’re keen to dispatch your mortgage debt as soon as possible.
House prices in many cities across the country have soared over the past 10 years and the mortgages people are taking on have grown as well, even though interest rates have been exceptionally low. With big mortgages come increased anxiety about paying them off.
That’s an issue for Montreal-based Megan Folkins, 36, and her husband, 34, who recently bought a larger house for their growing family. The purchase was structured in a way in which they will need to dip into their maxed out tax-free savings accounts for the down payment. After the sale of their current home, they’ll generate some cash that will give them the choice of repaying what was taken out of the TFSAs or paying down their mortgage.
Ms. Folkins wants to put the money back in TFSAs, while her husband is focused on the mortgage. “He was thinking that instead of reimbursing the TFSAs, he’d like to put it directly on the mortgage principal,” she said.
Fair enough – by reducing the principal outstanding early on in a mortgage, you reduce total interest paid over the life of the loan. But that’s not the best use of your money if you take an integrated financial/emotional view on this.
Ms. Folkins sums up this argument nicely: “If I use the money for a down payment, I can’t get it back if I need it. I don’t anticipate I’ll need it, but I would sleep better at night knowing the money is there.”
When you own a home, the pilot light of anxiety about both expected and unexpected costs is never off. The best way to ease this worry is to have financial resources you can draw on.
Ms. Folkins has her TFSA money currently invested in mutual funds. After the home sale, it makes sense to put a big chunk of the money she’ll be returning to her TFSA in a high-rate savings account for safety, with interest rates of as much as 2.3 per cent at various banks. (Laurentian Bank of Canada offers 3.3 per cent for those who can handle the balky process of opening an online account there.)
With a baby expected this summer, some of this money could be used to supplement parental benefits for Ms. Folkins and her husband. The remainder of the cash going into a savings account could cover the expenses that inevitably crop up when you own a house.
The total amount Ms. Folkins and her husband will have to repay their TFSAs would be $75,000 each. There should be enough left over after covering off emergency and parental costs to invest for the long term. For this money, exchange-traded funds, mutual funds or stocks make sense on the basis that the risk of losing money is offset by the potential to make much more than a savings account.
One of the questions to consider in deciding whether to pay down debt or save/invest is which option offers the best return on your money. Here, it’s a complex comparison. The rate Ms. Folkins and her husband are paying on their mortgage is about 2.5 per cent, which is close to the interest rate on the savings accounts with the best returns and roughly half what you could reasonably expect after fees from a diversified investment portfolio held for 10 or more years.
People who ask questions about topics such as paying down debt versus saving and investing tend to be good money managers who will end up doing fine, whatever decisions they make. So it seems with Ms. Folkins and her husband. She says that whatever happens, she fully expects to be able to make periodic extra mortgage payments and put money away for the future. “We’re avid savers, anyway.”
PERSONAL FINANCE COLUMNIST
The Globe and Mail, January 16, 2020