more down payment or more cash-in-hand

[zaindo]

We have a new condo coming up in the next year for closing and we have made approx 25% down payment for the unit (pre-construction instalments), While I might have some bandwidth to pay another 50K on top of that but I am a bit double minded on if i should ?

What are some of UT reader suggestions. Would it be better off for me to put another 50K down and reduce my monthly mortgage to a couple hundred dollars or would i better (safer) to have it invested in another avenue with limited or no risk (such as GICs).

Reason why i am a bit double minded at this time is i was thinking it would be safer for me to have access to some funds should the market crash so on and was going with the old saying of not to put all my eggs in one basket. Just want some opinions if i am not thinking in the right direction. All suggestions are much appreciated.

Thank You

 

[Eug]

Both keep cash on hand and pay down the mortgage. By the sounds of it, $50000 is way more than you need for say six months of emergency fund. Would $15000 be enough for your emergency fund? If so max out your TFSA (and if applicable, your partner's TFSA too), if necessary, with relatively safe investments, including say money market funds or whatever. Get a HELOC too for a secondary backup.

Then set aside say $10000 for extra closing costs like lawyers' fees and the two land transfer taxes - damn you Toronto - plus things like property tax and insurance, as well as costs for stuff like furniture, paint, and light fixtures, etc.

And then put the other $20000 into the mortgage. If you're not sure how much your closing costs are going to be then you can simply keep the money in the bank until all the expenses are paid, and then put the remainder of the money (minus the emergency fund) into the mortgage later as a lump sum. Just make sure you don't have a no-frills mortgage that doesn't have good pre-payment options.

 

[zaindo]

Both keep cash on hand and pay down the mortgage. By the sounds of it, $50000 is way more than you need for say six months of emergency fund. Would $15000 be enough for your emergency fund? If so max out your TFSA (and if applicable, your partner's TFSA too), if necessary, with relatively safe investments, including say money market funds or whatever. Get a HELOC too for a secondary backup.

Then set aside say $10000 for extra closing costs like lawyers' fees and the two land transfer taxes - damn you Toronto - plus things like property tax and insurance, as well as costs for stuff like furniture, paint, and light fixtures, etc.

And then put the other $20000 into the mortgage. If you're not sure how much your closing costs are going to be then you can simply keep the money in the bank until all the expenses are paid, and then put the remainder of the money (minus the emergency fund) into the mortgage later as a lump sum. Just make sure you don't have a no-frills mortgage that doesn't have good pre-payment options.

EUG, thanks for the detailed much response, much appreciate it. Sorry for not clarifying it earlier, the 50 k i mentioned above are over and above the closing costs and emergency funds. Is it wise to to put them all in DP as the amount of savings i would do on current mortgage rates by doing so is the same that i can do by putting them in GIC etc.

I am thinking if it by any strech it would be smart thing to spread this out somewhere else as i wont really have something like this saved for a long time from now since my financial situation has changed and currently there is no saving happening on a monthly basis

 

[interested]

I believe the answer lies in your last statement above. Your financial situation has changed. Eug has given you excellent advise.
I would keep a $25K emergency fund personally and I would put the max in TFSA (if you have not placed money yet that would be 4 years or 20K for both you and your spouse/partner. I would do this "because your situation has changed" and there is no monthly saving expected. That said, I believe I would point out that I would not be doing this for the reason in your first post...not to have all your eggs in one basket.

The reality is unless you can invest at a better rate than the mortgage, the say 3% mortgage is after tax so depending on your tax bracket let's say cost you 4% pretax. GIC's bring in 2% pretax. So you are better off paying the mortgage but for the reason in my first paragraph.

Even if you have everything in your home, unless you really think prices would drop more than 20% AND you will sell/strategically default on your mortgage, this is really not an option. Further in Canada, you can still be held responsible for the difference between your equity and the value if you "walk away".

 

[neubilder]

Look into a floating equity line of credit. The rates are as good or better than a standard mortgage, there is no penalty if you need to pay out the mortgage, and you can deposit all of your cash on hand, thus benefiting from reduced debt while still having the flexibility to pull out money whenever you need it. The only caveat is you must be good at managing you finances and not be impulsive with your spending.

 

[Polkaroo]

I would also research into investments other than GICs. There are other investments that are very low risk (not no-risk like GICs, but still very low) that pay significantly better than GICs. A portfolio of several dividend-paying stocks (for example a telecom, a bank, a pipeline, and a REIT) would pay 5-7% per year, plus capital appreciation.

 

[interested]

I would also research into investments other than GICs. There are other investments that are very low risk (not no-risk like GICs, but still very low) that pay significantly better than GICs. A portfolio of several dividend-paying stocks (for example a telecom, a bank, a pipeline, and a REIT) would pay 5-7% per year, plus capital appreciation.

Or capital depreciation. Reits are trading at high multiples. Banks are felt to be under pressure going forward. Pipelines probably good. Telecoms... pricey as well.

Everyone is chasing yield. I think the issue depends on time frame. If you have a long horizon...5 years or more...fine. Otherwise, if you need the money (capital) as opposed to the yield, you may get caught out.

I think the answer is individual but probably both GIC's and dividend producing stocks
and even some bonds possibly though they are at risk with increasing interest rates.

 

[apom]

Your already avoiding the CHMC fees. If you can handle the monthly carrying costs than invest the extra money in something that will earn you more then what the interest on the mortgage is. Shouldn't be that hard!