This & That: Home Edition

T Wrote: When we bought our house the bank offered us life insurance otherwise we would be able to get a mortgage. Looking closely I realize it doesn't offer too much benefits for us since our house is getting paid on time the more we put the less it covers for us. Talking to some people suggested me to go for one that pay you back your money in the event nothing happens to you in a certain period of time. I am trying to find the right insurance for us but I do not know where to start there are so many and it gets confusing and the few people I met with where all about selling you something right now. Can you please guide me alittle and please tell me where and how to start.

Gail Says:  First off, the taking out of the mortgage should not have been conditional on buying the lender's mortgage insurance. Unfortunately, if it was only in conversation, you'll have a tough time proving you were coerced. I am not a fan of mortgage life insurance sold through lenders. First off, when you buy the life insurance offered when you take out a mortgage, there's no underwriting done. That doesn't happen until you try to make a claim. So after years of paying premiums and thinking you've protected your family, you could find that you are declared "uninsurable" and your claim denied. Doesn't that sound a little like buying a pig in a poke?  When you buy life insurance from a life insurance specialist, the underwriting is done before they start to take your premiums so you know you will be covered.

Another flaw with the mortgage life insurance sold at the bank or by your mortgage lender is that the lender is the beneficiary.  If the worst does happen, your lender gets paid off. To add insult to injury, while you're paying off your mortgage, your principal goes down, but your premiums never change. So towards the end of your mortgage, you're still paying premiums on your original mortgage balance even though you owe far less. With private life insurance, you get the coverage you need on the mortgage in the early years. As your mortgage balance is paid down, you can use the difference to meet other needs your family may have because your family is the beneficiary of the policy, not the lender.

I don't know of any life insurance that offers a refund of premiums, unless you buy that as a specific add-on to your policy, and it'll come with a price. If you are simply trying to cover your mortgage principal, look at term insurance and make sure the renewal is guaranteed. I would speak to an insurance specialist about this. Don't just go off and done a one-use policy purchase… take all your needs into account.

P wrote: Hello Gail, Currently I'm saving for a down payment for my first home. I was informed that I could take the money for a down payment for my home from my RRSP contribution. Upwards of $25,000 dollars, however I was recently informed that this is not the case. That my $300 dollar bi-weekly contribution into my RRSP will not qualify for a down payment. That is anything that was contributed within the last three months into my RRSP. Can you please advise me, what is the best way to invest my $600 dollars a month to achieve the fastest most productive results for a first time home buyer?

Gail says:  You can take up to $25,000 from your RRSP under the Home Buyer's Plan, but the contribution must have been in the RRSP for 90 days before it is eligible to be withdrawn under the plan. As for how to invest your $600 a month, you must be pretty conservative with that money if you want it to be there when it comes time to make the down payment, so nothing risky. Sadly, interest rates are very low right now, so returns aren't great. But a small return is less painful than losing money just when you want to be able to access the money for the down payment, so be smart and stay safe.

L Wrote: I am a 24 year old, recent university graduate. I am currently renting an apartment with some roommates but I'm looking to buy a place. I've rented for almost four years now and feel like I'd rather own something for myself. I have some money saved, but I know I'll need quite a bit more to put a down payment on something I'd be looking for. My question is about which types of accounts I should open to help me save the most. I already have a TFSA but I was looking into RRSPs, savings accounts and Canada Savings bonds. Which one would you suggest to someone looking to save for a down payment in the next 1-2 years?

Gail Says:  Any of the options you suggest will work. Two t hings to note:

1. You can use the Home Buyers' Plan under the RRSP, but you will have to repay 1/15 of the money (which is interest free) each year to the RRSP.

2. Make sure you're getting as good a return as you can. You're right to stick with safe investments like CSBs and savings accounts but make sure you're getting as high an interest rate as you can find available. Do some research and look at options like ING for higher interest than you may get at a traditional bank.

J Wrote: Gail, love your show (of course, that's why I'm here). I read your post on renting vs owning a home and I am so glad you posted it. My husband and I are still in an apartment after years of marriage and our friends and family are always trying to talk us into buying a home. We enjoy apartment living and feel kind of smug (I know, shameful) when those same friends spend all their free time doing home maintenance and repairs they hate or shelling out tons of dough for a new hot water heater or roof. So, thank you for showing people that owning a house is not always the better financial move.

Still, one thing that makes me nervous about enjoying our apartment living: what happens when we retire? We plan to experience living in a few different cities throughout our life. But I worry: when we retire, will we have trouble still affording monthly rent? Will I end up in the poor house if I don't have a paid off mortgage? Can I buy a home when I'm 60 and afford paying on it until I die?

Please help give me some honest answers about if I can afford to not be homeless if I don't buy a house now. (I am eager to read your new book "Never Too Late," but my local library hasn't purchased it yet.) Thank you for all your help to us all!

Gail Says:  Girl, you've got to stop and take a breath. Home ownership is one way of reducing costs when you retire if — and only if — your mortgage is paid off.  There are still substantial costs associated with home ownership: property taxes, utilities, maintenance and up-keep and insurance. I live in a small home in the country. My taxes run to almost $300 a month, utilities another $225, insurance about $100, maintenance about $300. So even owning the house outright, it's costing me almost $1,000 a month to keep a roof over my head. Home ownership does not mean no housing costs in retirement.

If you're very concerned about whether you'll have enough money, you need to make a budget to compare how much your income vs expenses will be. You may have to get creative: move to a less expensive home or used shared accom modation (think Golden Girls).

Don't get yourself in a knot. Start thinking about where you want to live when you retire and how you're going to get what you want.

W Wrote: My wife and I are both in our 60's. We have rented all our lives. We have four adult children and have lived on one income. My wife had small part time jobs so she could be home with the children. We have no savings and no RRSP's. We have now inherited about $300,000 and don't know if we should invest it to live on when I retire in about 4 years or buy a small house.  All we will have is our CPP and old age pension to live on.

Gail Says:  If you buy a home you will tie up all the money you could be using to live on. Have you done a budget yet to see if you'll be able to live on your CPP and OAS. In all likelihood, your wife will receive very little CPP since she's worked only part-time. This is where you have to start. Then you can look at how you can use the money to bridge any gaps between your income and what you need (and want) to spend. There are a number of ways to use your capital to create an income, from purchasing an annuity to building an investment portfolio of your own that slowly draws down on the principal. You will need to seek some professional advice. Please start with the budget and go from there.

Carlie wrote:  I just bought my first house and I keep hearing that by having weekly mortgage payments can save you money, I don't understand how it saves you money or how you figure out how much money you will save from it.

Gail says:  You can save a smidgeon by making your payments weekly instead of monthly, but where you'll really get the biggest bang for your buck is to go with an accelerated weekly repayment that will not only save you thousands in interest but know about four years off a 25 year amortization. That's because the calculation of the "accelerated" payment option is different, allowing you to make the equivalent of one extra monthly payment a year that goes directly to your principle. But you do so in such small amounts that the extra payment fits easily into cash flow. With a regular monthly payment, the total annual payment is divided by 52 to get your weekly payment amount. But with the accelerated option, it is divided by 48 instead, raising the payment amount ever so slightly. How slightly? Well, if you take out a $100,000 mortgage, amortized for 25 years, for five years at 5%, paying monthly would cost you $581.61 a month and the total interest cost over the life of the mortgage would be $74,890.04. If you did it weekly (dividing your annual payment by 52), your weekly cost would be $134.22 and you'd pay $73,385.56 in interest because you got the money to the bank a little bit faster. But if you went with an accelerated weekly (dividing your annual payment by 48) your weekly payment would be $145.41 and you'd end up paying $61,817.95. So your weekly cost would go up $11.19. Yup, lunch out one day a week. And your total interest savings on your mortgage just from switching from weekly to accelerated weekly would be $11,567.61. Well worth it in my humble opinion.

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