Many Canadian homeowners are about to face the big fixed rate reset. Of the $2 trillion in outstanding mortgage debt, only 5% came up for renewal in 2023. The bulk of the rate reset will arrive in 2025, 2026 and 2027. The popular 5-year fixed rate mortgages will come up for renewal. Many households will add thousands of dollars to their monthly debt servicing costs. That said, these homeowners know what’s coming, and they’ve had time to pay down mortgages and build mortgage emergency funds. They might even ‘raid’ their TFSA to pay down, or pay off the mortgage.
Use your TFSA to pay off the mortgage?
Rob Carrick delivered an interesting question – should you use your TFSA (for subs) to pay off your mortgage? It might make sense if one has the discipline to replenish the TFSA with the enhanced free cash flow.
First, today’s mortgage rates are on par with average annual returns for a balanced portfolio at 5 to 6.5 per cent. Second, the TFSA withdrawal is tax-free. Every dollar of the withdrawal can be used against the mortgage. Third, the money withdrawn from the TFSA can be replaced.
Rob Carrick
The post offers a fascinating comment thread as well. It appears some Globe readers have already paid off the mortgage in advance of higher rate resets.
And many more are preparing to use TFSA and taxable accounts to go mortgage free. The big mortgage reset years are coming for Canadians.
I have long suggested that mortgage holders who’ve had 5-year fixed from 2020 and 2021 have had years to build a mortgage reset emergency fund. The economic distruption might not be as bad as the raw numbers suggest. That said, there will be a segment that did not have the free cash flow to create that safety net.
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One main consisderation would be your emergency fund. If the TFSA was (or is part of) your emergency fund, ensure that you keep that rainy day fund at a suitable level.
Hedging inflation and higher rates
If you opt to take on a mortgage at those higher rates, the risk becomes ongoing higher inflation. That could mean that rates don’t come down over time. Rates could move higher if inflation reignites. You can hold some cash, short term GICs or ultra short bonds (CBIL) that will likely move higher with higher rates.
For more torque you can hold more robust inflation fighters such as the Purpose Real Asset (PRA) or oil and gas stocks (XEG), the most reliable equity sector for inflation.
We can see that the inflation-friendly assets responded to the recent ‘stickiness’ of inflation in Canada and the U.S. in 2024.
Rates moved higher for many GICs at EQ Bank as well. It felt like every week I was tweaking the charts adjusting the GIC rates higher. I moved 3 rates higher this past week. Rates top out at 5.35%, with 4 rates at 5% or higher from 1-year to 27 month terms.
Keep in mind that PRA and XEG might perform poorly if disinflation ‘accelerates’ or when we move into a period of greater economic weakness. But that’s good news if you’re a mortgage holder, rates are likely to fall as the Bank of Canada will attempt to stimulate the economy. And that’s the nature of a hedge; you might be better off not needing that insurance. But you’re protected on the inflation side/higher rates, depending on your exposure level to inflation-fighting assets.
More Sunday Reads
At My Own Advisor Mark looks at two methods to tackle and potentially eliminate your debt.
On the debt avalanche strategy …
… you would kill debt generally in this order: credit card debt at 20%, then your car loan at 7%, then your mortgage payments at 5%.
The main benefit of the debt avalanche approach is that it should save you money long-term by targeting the most expensive debt first: by focusing on the debt with the highest interest rate, mathematically, you’re tackling your highest interest burdens first.
Eliminating your debt can be one of the most beneficial moves, to state the obvious. And perhaps it’s a must for retirees.
It’s possible that I forgot to share the performance update for BMO’s Low Volatility ETF. That may be the best core ETF for Canadian equities.
Tax efficient total return ETFs
Many Canadians will considerable taxable investments and free cash flow will face massive taxes in the accumulation phase. If they slant to the big Canadian dividends they could face annual and ongoing taxes above 50%. Million Dollar Journey takes a look at Horizons total return ETFs. Thanks to a corporate class structure and the use of swaps, there are only capital gains to manage.
Instead of being at the mercy of the dividends, investors can delay taxes and then manage the investments in a tax-efficient manner in retirement. At that time it’s possible that Canadian dividends and the use of the dividend tax credit might be beneficial. One would transition part of the portfolio. Once again, it is so important to separate the accumulation and decumulation stages.
And speaking of dividends, Bob at Tawcan offers another dividend/portfolio update for March. While Bob tracks dividends he does take a total return approach announcing (at times) that it’s …
Total return for the win.
Yes, more money creates more retirement income.
With earnings season in full flight we check in with Dividend Hawk. My Pepsico and RTX delivered some very good numbers.
The weekly reads and podcasts at Banker On Wheels begins with this wonderful quote …
The function of economic forecasting is to make astrology look respectable.
Kenneth Galbraith
In the mix, Vanguard offers their returns projections for assets over the next decade. They see international stocks outperforming U.S. stocks. Keep in mind that their economists were likely consulted – so take that with a truckload of salt. All said, equities do have a good track record of delivering solid returns over 10 years – but there is no guarantee.
As always, there is a prolific mix in the BOW post.
Double your CPP and protect against inflation
Now there’s a big win – win. At Findependence Hub Jonathan Chevreau shows how we can double our CPP while we protect against inflation and longevity risk.
For the majority of Canadians delaying CPP for the payment boost is a major benefit. Of course, get ahold of a cash flow plan to discover your optimal order of accounts, pension plans and government sources income harvesting.
Kyle makes sense of the markets for MoneySense. U.S. telcos appeared to be in better shape than our struggling oligopolies. Mega tech offered some mixed results. But I was happy to see our Microsoft (it’s in my wife’s U.S. RRSP) performing very well. In the same account is Texas Instruments, and that popped over 10% for the week. Also in that RRSP account is consumer staple Colgate Palmolive. In February I posted how I was freshening up that Colgate Palmolive weighting in the portfolio. CL is up over 23% over the last 6 months and 13% in 2024. It’s expensive now, so I’ll hold off on new buys, but will not trim.
The Canadian railways that you’ll find in the Canadian Wide Moat Portfolio had a bumpy ride.
My tweets of the week
Bell continued to slide after being the lead topic of last week’s Sunday Reads.
I sent a follow up note to subscribers mid week. You can follow this blog, it’s free. Simply enter your email address in the Subscribe area.
And I shared the comparison chart – Justwealth vs big bank funds.
Here’s my review of Justwealth. Canadians can get advice, financial planning and low-fee ETF portfolios all in one shop.
Thanks for reading and sharing the Sunday Reads with friends and family. Have a great Sunday, and week. Feel free to reach out via that Contact Dale button.
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OUR SAVINGS ACCOUNTS
Make your cash work a lot harder at EQ Bank. RRSP and TFSA account savings rates are at 2.5% and 3.0%. You’ll find some higher rates on GICs up to 5.35%. They also offer U.S. dollar accounts. We use EQ Bank, they have been awesome.
OUR CASHBACK CREDIT CARD
We make between $40 to $70 every month! And that’s on everyday spending. There are no fees with …
The Tangerine Cash Back Credit Card
For March we received $80 in cash back. There was a boost thanks to my trip to Florida. I invest my cash back in a TFSA account at Wealthsimple.
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