Getting a tax refund?  Before spending it all, read my suggestions below. 

Not getting any refund or not enough of a refund?  Start a monthly RRSP now!  You now have 12 months ahead of you to make this happen.  It is so easy to save for a comfortable retirement and increase your chances of a refund next year.  Just let us know and we will prepare the required forms for when you pick up your tax return. 

Many of you will be getting a tax refund soon.  Before spending your refund remember that a refund isn’t a gift.  It is the return of an interest free loan you made to the Government for overpaid taxes.  Even if advisors like me tell you that the best tax refund is no refund at all, the truth is that it is for most, the best forced saving.  So, now when it comes back to you, think hard before spending frivolously.  Why not spend some and save the rest!

Here are some thoughts on how you can use the refund to better your financial position.

1. Begin or add to your emergency savings plan: If you don’t have a cash emergency fund set aside, put some of your tax refund in a high interest savings account like ING or Dundee savings.

2. Make a 2010 RRSP contribution: Get a head start toward your 2010 RRSP contribution. This way you will add to your retirement fund, have more to spend later in life and get a tax saving for next year!

3. Invest in a TFSA: You can add $5000 a year to a Tax-Free Savings Account.  You can save it short-term or invest it for wealth accumulation and retirement!

4. Add to your children’s RESP: And get the 20% government Grant! You know this will cost you a bundle and an education is the best investment!

5. Reduce the mortgage: Please remember however that with interest rates this low, you will likely be better off investing your refund. More on that in a future Blog post.  Stay tuned!

Every situation is unique, whenever in doubt, just call us. We will review your situation and help you make an appropriate decision!

In order to forestall the possibility of a housing bubble and subsequent housing market crash the federal government has tightened up mortgage lending regulations. The following changes are to be effective April 19, 2010 but it is expected that most banks and lending institutions will implement the changes effective immediately. These rules apply to all government backed (CMHC) insured mortgages. The new rules are as follows.

-Borrowers are required to meet the standards for a five year fixed rate mortgage even if they actually choose a mortgage with a lower interest rate and a shorter term. For example you may wish to borrow $200,000 amortized over 20 years with a one year fixed rate mortgage at 2.65% which results in a monthly mortgage payment of $1,035. Well under the new rules you will have to prove that you have the finances to afford a $1,260 monthly mortgage payment which is what a fixed five year mortgage would cost at the current 5 year rate of 4.5%.

-The maximum amount that consumers can borrow to refinance their mortgages is being lowered to 90% of the value of their home, down from 95%.

-Investors wishing to buy investment or rental property in which they do not live will now have to have a 20% down payment instead of the current 5% required to get a government backed mortgage.

We feel that these rules make sense. If a person gets in over his head and can’t pay the mortgage he has a big problem.  If many people get in over their heads and can’t pay their mortgages then we all have a big problem. Look what happened in the U.S.

Interest rates are definitely trending up. Each of Canada’s 5 big banks announced a series of rate hikes last week. While there were some differences in the details of changes made by the banks to their mortgage rates, the announced hikes put all their five-year fixed closed rates at about 5.84 per cent. That seems high in relation to what we have seen in the past year however, the average rate if we exclude the early 80s, is about 5%.

How high can the rates go?  Should you lock in a rate now or wait or stay variable?  If you ask the bank, they will likely tell you to lock in because it is good for them but before you do, consider a few facts and research made on the subject.

One of Canada’s foremost authorities on personal finance. Dr. Moshe Milevsky, studied over fifty years of mortgage rate data (1950 to 2001). He concluded that anyone who locked in at a fixed interest rate paid more than they should have for their mortgage. During the above noted period, you would have been better off with a variable rate 88.6% of the time.

Does a variable rate mortgage still make sense? With interest rates expected to head north, the natural instinct is to lock in, but you may be better off over the longer term with a variable rate mortgage.  Dr. Milevsky feels there is no “one-size-fits-all solution” to choosing a fixed or variable rate.  He says it depends mainly one’s risk tolerance. Milevsky’s mortgage research is the best out there. He has shown time and again that regardless of what rates do in 1-2 year periods you are better off in a variable if you can handle the payment risk.

That is key, can you handle the payment risk?  In a financial planning perspective, you need to assess your cash flow situation and personal circumstances.  Locking in a rate may be better for some to provide peace of mind while for most, the variable option may be the less costly alternative.