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GIC's and Borrowing
September 7, 2014
8:38 am
Norman1
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Jack Manning said
Norman1, I don't see what your point is anyway of comparing just the principal and interest portion of the mortgage payment.
....

The comparison explains why one ends up with more interest earned than interest paid, eventhough the interest rate on the strip bond and on the loan are both 3.65% over the identical ten-year period.

One would earn 3.65% on the strip bond balance that grows from $10,000 to $14,357.82. At the same time, one is charged 3.65% interest on a loan balance that declines from $10,000 to zero.

...
The whole point of borrowing money and investing money in the first place is so you know what your interest rate is fixed for a certain period of time.
...

For the certainty of the loan and bond interest rates, you've assumed the risk of being able to make all 120 of those monthly payments on time. The example given was for $10,000. But, the mortgage broker is not hoping you'll agree to a $99.46/month mortgage of just $10,000. The broker is hoping you'll bite and go for a $100,000 ($994.61/month) or $150,000 mortgage ($1,491.91/month).

For me, I would prefer to just invest the $99.46/month myself without a rate commitment. If I get around 2% over the next ten years, I would end up with about $13,200, instead of $14,357.82, for not commiting to the $99.46/month.

If you were to invest any money, no matter what amount it is, on a monthly basis because you did not have the money upfront, you would be at the mercy of what interest rates would be.

This might make sense in a lower interest rate environment when rates would likely rise but this is the exactly the opposite of what happened since 2007.

For sure, no financial institution will commit to an interest rate for monthly investments when the investor does not commit to a certain number of monthly investments.

Didn't Korea Exchange Bank of Canada seem to offer 3.1% for a commitment of 60 monthly investments?

September 7, 2014
2:26 pm
Jack Manning
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Norman1, the way central bank policies are going with the ECB and all other central banks are delaying, extending their 4, 5, 6 years that they will raise interest rates which never comes and government bond rates keep falling for 30 years now, you will be lucky if you get any interest paid to you.

I am talking about a 3.65% rate today, how long are you going to have to wait for rates to rise. When you are about to retire and be broke.

Why don't you follow your financial adviser or other so called financial experts and buy real estate, stocks, foreign securities so they can really pull one over you. Even worse put all your money in a primary residence and have all your money sucked away from property taxes, utilities, H.S.T., insurance, repairs, maintenance, renovations, property tax assessments, lawyer fees, land transfer taxes etc.

If I knew this stuff in 2000 and earlier when I could get zero coupon bond rates of 6% to 9.5%, I would borrowed a whole boat load of money and would of been a millionaire by now.

Do whatever you want Norman1, stick with getting peanuts for interest because you are going to wait a long time before you see anything that will last for decades like the 1970's, 1980's and mid 1990's.

September 7, 2014
2:56 pm
Jack Manning
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Norman1, do yourself a favor, compound interest at 2% versus 3.65% not over only 10 years but 20 years, 30 years, 40 years and see what the difference is. It is a big difference.

$99.46 monthly compounded at 2.00% for 20 years.....$29,177

$99.49 monthly compounded at 3.65% for 20 years.....$34,790

$99.49 monthly compounded at 2.00% for 30 years......$48,715

$99.46 monthly compounded at 3.65% for 30 years......$64,100

$99.46 monthly compounded at 2.00% for 40 years......$72,533

$99.46 monthly compounded at 3.65% for 40 years......$106,048

Norman1, if you are investing only $99.46 per month than it does not matter what you do because you will still not achieve much anyway.

We are maxing out RRSP's, TFSA's, RESP's and we are at least 25 to 28 times this $99.46 monthly amount.

So for us, $33,515*28=$938,420 in lost interest. This is not even including non-registered investments and annual RRSP income tax refunds.

If we got 5%, 6%, 7% GIC, bond rates then $1,500,000 to $2,000,000 more interest is easily achieved. This is the problem with most Canadians today, they don't know about this simple concept called compound interest and time value of money.

September 7, 2014
3:17 pm
Jack Manning
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Norman1, investing a $1,000 a month compounding at 7% versus paying of a mortgage at 7% is much better in decades for the investor.

Actually, the higher the interest rates and the longer the investment and mortgage period, it is better for investors as I will show below.

$163,000 mortgage paid over 40 years at 7% will cost $1,000 a month. The total cost of the mortgage paid in 40 years is $480,547.

The $1,000 a month invested, compounded at 7% for 40 years equals $2,485,516.

$2,485,516 versus $480,547. This is 5.17226 times more than total cost of paying back all of the mortgage, principal and interest.

Norman1, I know you don't want to believe it but that is what it is. This is why they don't raise interest rates or let interest rates, bond rates to even normal levels, 4.5% to 5% to start. It is in their best interest not ours.

If this does happen, it will not stay there for long and rates will come crashing down again. RATES GO DOWN AND STAY LOW=THEY WIN, WE LOSE.

January 3, 2023
12:26 pm
butterflycharm
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Loonie said
I suppose this is for people who locked in to a GIC and then thought better of it? A more profitable alternative to "cashable"? It's hard to imagine the rate would be so favourable that you would want to borrow this simply for re-investing. If so, surely they would have been keen to tell you in the first place.

I suppose the deduction they are referring to is discussed here, but I find the details somewhat confusing
http://www.cra-arc.gc.ca/tx/nd.....u-eng.html

One might be better off with a whole life insurance policy, and borrowing against that, if it is appropriately constructed. I just finished reading a book about how this works. I don't think it will add much to my personal situation so am not likely to pursue it. It's more useful, at least in theory, for younger people. It's a complicated manoeuvre, and I can't claim to know a lot about it. She says it takes a professional about a year to really learn the ins and outs. The book is The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future, by Pamela Yellen (Dallas, TX: BenBella Books, 2014). I got it from my public library. The author has a website, http://www.bankonyourself.com , through which one can get in touch with local experts and buy suitable policies. She warns strongly against buying garden-variety whole life policies, as they will not have the necessary riders. Apparently she has people in Canada as well as US who can set this up, and she is honest enough to admit that she gets a commission for referrals. I do know of people who did this kind of borrowing quite a few years ago when interest rates were very high because their policies were written with a much lower fixed rate of interest at which they could borrow any time during their lives. My hesitation is that I really have no idea how well this would work today, but it might be worth a look for someone who wants to investigate every possible conservative strategy. She makes an interesting historical point that back before investing in the stock market became a common retail activity, whole life insurance was what people bought instead, and it was a much safer investment in several ways. She says that they were very popular from 1920s to 1950s, but after that people were more likely to get into the stock market, for better or worse. She finds the market too risky. As a child of the '50s, I do remember that it was very common for parents to buy these policies for their children. My spouse still has one of those - a small policy but has been borrowed against with a profit. She says that in the 1950s, 30% of families had these policies.
As I said, I really can't say if this is a good strategy or not. One would have to ask a lot of questions of the advisor she sends you too. But I must admit, I did think of you, Jack, when I was reading this, and wondered if it would interest you, but I didn't want to appear to be pushing it, which I'm not. But, then, you have raised this question about State Bank of India, and borrowing against financial assets, and it now seems appropriate to at least mention it.  

If you had to read a book about this product to invest, most likely you are missing some info that is not in your interest 🙂

The gambling system is made complicated so the house has a better chance.

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