How much liquid money should I have availible?

[Electricute]

I recently bought a house a got a 35 year amortization mortgage. The current mortgage payments are only $1100/mnth, but I have the choice to make up to double the payment 2200. also have option of paying 15% of mortgage amount every year.

my question is: how much money should i keep in my savings account, and then put the rest to paying off my mortgage faster. is $5k sound about right? or is that too little?

i would like to try and pay off as much as the principle i can, because the mortgage is front loaded

[CSR]

Happy reading: http://www.redflagdeals.com/forums/showthread.php?t=771996&highlight=emergency

[pitz]

How much of a downpayment did you put on that thing?

CMHC-insured?

If your equity is minimal, I think you need to be cognizant of the very real possibility that Canadian housing will follow the same path as is currently seen in the United States, and that, a 50%+ loss in price may occur.

If a 50% loss in price occurred, your position would be greatly enhanced by having a lot of cash (or investments) on the sidelines (in a different bank!!), while having minimal equity in the house.

In which case, you'd want to pay only the legal minimum amount, and stuff the rest into a RRSP (w/creditor exemption), and/or a TFSA.

Right now, in the USA -- the fools are not the people who did 0% down, long-term loans a few years ago, who are now severely underwater. The fools are the people who put 20%-30% down.

[MoreMiles]

There we go again... it's so subjective. If you belive in a socialist system, not much. You can live on EI, ODSP, CPP, Food Bank, etc. If you belive in a capitalist system, you need lots of money to maintain your gadgets. So what do you belive, that is the question.

[VivienM]

How much of a downpayment did you put on that thing?

CMHC-insured?

If your equity is minimal, I think you need to be cognizant of the very real possibility that Canadian housing will follow the same path as is currently seen in the United States, and that, a 50%+ loss in price may occur.

If a 50% loss in price occurred, your position would be greatly enhanced by having a lot of cash (or investments) on the sidelines (in a different bank!!), while having minimal equity in the house.

In which case, you'd want to pay only the legal minimum amount, and stuff the rest into a RRSP (w/creditor exemption), and/or a TFSA.

Right now, in the USA -- the fools are not the people who did 0% down, long-term loans a few years ago, who are now severely underwater. The fools are the people who put 20%-30% down.

Given US mortgages are no-recourse, I agree with you there.

But Canadian mortgages aren't. So, let's say you have a mortgage for $500K on a house worth $300K and $100K in savings. Compare that to a $400K mortgage with no savings on the same house.

If you default your mortgage, in scenario #1, the bank is out $200K, then they go after you and get your $100K... and push you into bankruptcy trying to collect the missing $100K. In scenario #2, the bank is out $100K, and... they'll go after you to collect it, and well, you're still bankrupt.

(Yes, this is a little simplistic - most importantly because I assume the bank is the only creditor. But I think the point remains.)

[Electricute]

How much of a downpayment did you put on that thing?

CMHC-insured?

If your equity is minimal, I think you need to be cognizant of the very real possibility that Canadian housing will follow the same path as is currently seen in the United States, and that, a 50%+ loss in price may occur.

If a 50% loss in price occurred, your position would be greatly enhanced by having a lot of cash (or investments) on the sidelines (in a different bank!!), while having minimal equity in the house.

In which case, you'd want to pay only the legal minimum amount, and stuff the rest into a RRSP (w/creditor exemption), and/or a TFSA.

Right now, in the USA -- the fools are not the people who did 0% down, long-term loans a few years ago, who are now severely underwater. The fools are the people who put 20%-30% down.


45k DP, CMHC, no other debts/investments. make about 75k. house was 300k
i'm getting raped by interest cost for mortgage, so i'd like to put as much money towards principal as i can.

i don't plan on having many more expenses than i already have (ie car)

50% loss in price? and yes, equity is very low right now, so cant get a loan for now,

[pitz]

Given US mortgages are no-recourse, I agree with you there.


The 'non-recourse' exemption in the USA is limited to 'purchase money' -- which means, practically nobody, since everyone refinanced. And only in certain states.


But Canadian mortgages aren't. So, let's say you have a mortgage for $500K on a house worth $300K and $100K in savings. Compare that to a $400K mortgage with no savings on the same house.

If you default your mortgage, in scenario #1, the bank is out $200K, then they go after you and get your $100K... and push you into bankruptcy trying to collect the missing $100K. In scenario #2, the bank is out $100K, and... they'll go after you to collect it, and well, you're still bankrupt.


But let's say that he stashes that $100k in a RRSP, which cannot be seized by creditors. The house drops by 50%, so its worth $200k.

Declares bankruptcy and is foreclosed on. A first-timer, so discharge is automatic in 6 months (unless there was fraud involved), and payments into the estate would likely be minimal. Gets to keep his RRSP. Cashes the RRSP out the day after bankruptcy, buys a new house with the 50% downpayment, and wham, instantly has 50% equity, and can have the other 50% paid off in the next 10 years as most of his payments go straight to equity.

Even if the bankruptcy scenario doesn't pan out -- someone with no equity has a lot of leverage against the banks right now, that a person with equity doesn't. And government programs, at least in the USA, tend to be concentrated on preventing immediate foreclosure, not helping those who were 'smart' enough to put large 20%+ downpayments.

Kinda see what I'm saying? I know you can't live your life expecting the ability to scam banks, or the government, but someone who did no-money-down could clearly come out quite ahead.

[pitz]

45k DP, CMHC, no other debts/investments. make about 75k. house was 300k
i'm getting raped by interest cost for mortgage, so i'd like to put as much money towards principal as i can.


Yeah well, basically, figure out what it would take to live a year (ontop of the EI you'd receive), put that aside, and throw the rest, as fast as possible against the house.

[VivienM]

But let's say that he stashes that $100k in a RRSP, which cannot be seized by creditors. The house drops by 50%, so its worth $200k.

Declares bankruptcy and is foreclosed on. A first-timer, so discharge is automatic in 6 months (unless there was fraud involved), and payments into the estate would likely be minimal. Gets to keep his RRSP. Cashes the RRSP out the day after bankruptcy, buys a new house with the 50% downpayment, and wham, instantly has 50% equity, and can have the other 50% paid off in the next 10 years as most of his payments go straight to equity.

Even if the bankruptcy scenario doesn't pan out -- someone with no equity has a lot of leverage against the banks right now, that a person with equity doesn't. And government programs, at least in the USA, tend to be concentrated on preventing immediate foreclosure, not helping those who were 'smart' enough to put large 20%+ downpayments.

Kinda see what I'm saying? I know you can't live your life expecting the ability to scam banks, or the government, but someone who did no-money-down could clearly come out quite ahead.

I haven't got an annotated copy of the bankruptcy statutes floating around right now (sadly), but... assuming the transfer to the RRSP was done close to the date of bankruptcy, couldn't the trustee nonetheless go after the money in the RRSP? (as a preference or fraudulent conveyance or something?)

Maybe I'm not up to date on the recent case law, but I have difficulty believing that the banks would just accept the situation you've described without fighting it in the courts.

And more importantly, if there are no time restrictions on this, couldn't this 'scheme' technically work with a HELOC? Max out the HELOC before the bank reduces it to a reduction in the property value, put the money into an RRSP, and boom, more money after your bankruptcy. I guess the difference is state of mind: my scheme would clearly be intended to defraud creditors, while one can certainly argue that NOT prepaying your mortgage isn't fraudulent at all...

[pitz]

I haven't got an annotated copy of the bankruptcy statutes floating around right now (sadly), but... assuming the transfer to the RRSP was done close to the date of bankruptcy, couldn't the trustee nonetheless go after the money in the RRSP? (as a preference or fraudulent conveyance or something?)


I believe money that is in a RRSP for a period of 12 months is pretty much locked up solid in there insofar as bankruptcy is concerned.

You're right -- an insolvent debtor is not permitted to 'prefer' a creditor. But is a solvent debtor able to prefer a creditor? Definitely. The question becomes, when exactly does insolvency occur, when the (non-exempt) asset base of a debtor isn't liquid, and isn't 'marked-to-market'?


Maybe I'm not up to date on the recent case law, but I have difficulty believing that the banks would just accept the situation you've described without fighting it in the courts.

Well the circumstances of RRSP exemption have been well-established and well-articulated by the bankruptcy courts, where such exemption exists. Hard to know whether the courts would permit a 'strategic' use of bankruptcy (the Stelco case was a real eye-opener on the corporate side!).

Another possible scenario though is that, if house prices decline by 50%, its likely that the value of the mortgages that are backing the houses, will also decline by an equal or greater amount, either because of high default risk (likely), or higher interest rates (also likely). Someone with liquid cash could approach their banker offering to 'buy' their mortgage back at a highly discounted rate.

In the Canadian context, however, this scenario isn't as likely, as Canadian mortgages, being only for 5 years, aren't all that interest-rate sensitive. But in the USA, with the 30-year mortgages, in the late 1970s, it was common to be able to walk into a bank with cash, and buy mortgages straight off their portfolios, as investments, heavily discounted.

[frugalguy]

As far as how much money you should have in 'liquid assets', my understanding is that the experts say you should have at least 6 months of expenses saved. However, I've operated for a good number of years with much less and gotten away with it.

Essentially, what are you comfortable with having in the bank? Only you can answer that question.

[randomthoughts]

In another thread, someone recently pointed out that with some mortgage providers, each doubled payment allows you to skip a later payment (RBC, for instance).

So if you have doubled a lot of payments, you can reduce the cash on hand in your emergency fund to exclude mortgage payments - assuming that there's a low probability of losing your job.

[EugW]

In another thread, someone recently pointed out that with some mortgage providers, each doubled payment allows you to skip a later payment (RBC, for instance).

So if you have doubled a lot of payments, you can reduce the cash on hand in your emergency fund to exclude mortgage payments - assuming that there's a low probability of losing your job.
Yes. Double up payments are definite good, but just be aware of the limitations. ie. They are only good until the mortgage term ends, so let's say you renew 5 years later, you won't have any "saved" double up payments anymore. It's a complete reset. Furthermore, it doesn't help if you need the cash to fix the car or whatever either.

Personally, I do pre-payments but I am also gradually increasing my reserve fund, so that I can have several months worth of expenses in cash or equivalents should I need it.

Cash TFSAs are great for this purpose. You can contribute up to $5000 every year. I also think it's reasonable to have some money in the stock market for reserve funds (even within a TFSA), but one must be aware of the fact that often when you need emergency money that will also be the time when the stock market is down in the dumps. You don't really want to be in the situation where you're forced to cash out when the market is at rock bottom.

I also don't think a line of credit is a good reserve fund for reasons that have been mentioned over and over in various threads, but I still think it's quite useful as a secondary backup. It's also useful in the context of say when you need extra money, and you actually have it in a TFSA, but don't actually want to withdraw the money from the TFSA until you absolutely have to. This way you can use your line of credit for quick short term loans using your TFSA to back that up, without screwing up your TFSA contribution room.

eg.

You have $5000 in your TFSA, which you contributed in March, after you got your income tax refund back. Suddenly, in April, you need $1000 for an unexpected expense. You expect to be able to pay it back over the next three months. You could take it out of the TFSA directly, but that means it will have to stay out of the TFSA for the rest of the year, since the maximum contribution room is $5000 which you've already used up. However, if you take it out of a line of credit, you can pay that back over the next three months, while still getting interest on the entire $5000 in the TFSA tax free for the rest of the year.

And finally, a last resort is your RRSP.

[i6s1]

You have $5000 in your TFSA, which you contributed in March, after you got your income tax refund back. Suddenly, in April, you need $1000 for an unexpected expense. You expect to be able to pay it back over the next three months. You could take it out of the TFSA directly, but that means it will have to stay out of the TFSA for the rest of the year, since the maximum contribution room is $5000 which you've already used up. However, if you take it out of a line of credit, you can pay that back over the next three months, while still getting interest on the entire $5000 in the TFSA tax free for the rest of the year.



I don't think that's the way the TFSA works. If you take out $1000, you can put back in $1000 whenever you want.

Someone correct me if I'm wrong.

[YYC27]

I don't think that's the way the TFSA works. If you take out $1000, you can put back in $1000 whenever you want.

Someone correct me if I'm wrong.

You don't get your contribution room back until the next year.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/ctbtn/rm-eng.html

Withdrawals, excluding qualifying transfers, made from your TFSA in the year will be added back to your TFSA contribution room at the beginning of the following year.

[EugW]

You don't get your contribution room back until the next year.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/ctbtn/rm-eng.html

YYC27's CRA link has a similar example to mine:

In 2009, Sarah invests $5,000 in a TFSA. Later that year, she withdraws $3,000 for a trip to Europe. Unfortunately, her plans change and she cannot go. Since Sarah has no unused TFSA contribution room left, she will have to wait until the beginning of 2010 to deposit the $3,000 in her TFSA. If she does so earlier, she will have overcontributed to her TFSA and will be charged a monthly tax of 1% on the overcontributed amount.