The Frugal Canadian

A frugal spender seeks to find new ways to save money and increase her net worth.

Thursday, January 04, 2007

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

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Tuesday, January 02, 2007

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?