Talking Tax

Over the holidays, I discovered a television show on Report on Business TV which has some pretty good tax information. Talking Tax airs twice a week on Tuesdays and Thursday mornings at 11:30am. The half hour show invites a tax expert every day to answer emails and telephone calls from the public.

Various topics are discussed ranging from very basic to intermediate tax issues. Here are a few of the topics discussed over the past week:
- Automobile expenses and what documentation you need to claim them
- When to claim income on option writing and how options are taxed
- Pension splitting for seniors
- Various RRSP contributions questions
- Travel medical expense as an allowable credit

Since the personal tax season is creeping up on us all, it might help you out if you've got a tax question. You can email them at TalkingTax@robtv.com or call them at 1-877-667-6288 or locally at 416-957-8199. You can find the archives for the past couple of weeks here

To Prepay or Not to Prepay?

We've started to look at entering the housing market and my husband and I are both torn on the idea of prepaying our mortgage and the size of our down payment.

With respect to our down payment, we are definitely putting down 25% to avoid mortgage insurance. We are questioning however, whether it's better to put a larger down payment such as 30-35% down. The opportunity cost of the larger down payment are forgone returns from investing. For example, on a house price of $300,000, we could put down $100,000 and benefit from lower monthly carrying costs or put down $75,000 and invest the additional $25,000 in the markets.

We've been pre-approved for a five year, fixed rate mortgage of 5%. From an investment standpoint, as long as we net 7.7% pre-tax, we'll have a better return on our investment with a smaller down payment. The extra down payment would leave us with monthly carrying costs of roughly $150/month, which is not a huge amount to us. Given that the S&P returned approx 15% in 2006 as well as strong historical equity returns, it seems silly to even be pondering a larger down payment. Yet, we are both debt averse, even though I consider the mortgage to be good debt. The idea of having a larger debt hanging over our heads is a bit unnerving.

Then there is the issue of prepaying a mortgage. We have always discussed prepaying a mortgage, being keen on the the idea that if we are aggressive, we could be mortgage free in 8 to 10 years. While this is hugely appealing from an emotional standpoint, we question whether it is in fact a smart financial move given the opportunity for larger equity returns.

The biggest risk I think most people fall into is that without prepaying the mortgage, people just aren't saving and end up spending the money. As long as we "pay ourselves" first, I see little financial benefit in prepaying a mortgage.

We are probably at least a few months away from purchasing a home, so we have some more time to think about it. What are your thoughts?