Before I define it however, a bit of background. Investing has a variety of things called asset classes. These are ‘types’ of investments and cover such things as stocks, gold, money market funds (GIC’s and the like), real estate, even art.

Index funds are normally associated with stocks. Over time the popularity of stock index funds has grown wildly in the public consciousness and so other asset classes. So now you can find index fund looking investments in money markets, bonds, even real estate.

What is a stock?

A stock is representation of partial ownership in a company, and is often comingled with the term ‘share’. Lets say you own a company. Part of the incorporation process is setting up a number of shares, and determining who owns those shares.

As companies grow, eventually they want to raise money for growth purposes, and want to sell some of their company ownership or shares. If the company qualifies, they can sell their shares to the public through a stock exchange. This means the company has ‘gone public’. Generally when discussing index funds, we are referencing shares only of publicly traded companies shares.

Initial theory behind index funds

So, you’re going to invest in ‘stocks’ or shares, i.e. the ‘stock market’. Lets start with you buying shares from a single company.

Now, there’s two generally accepted factors used to evaluate such a share; the risk (often called the Beta), and the reward – the potential rate of return. The risk refers to the potential for not getting the return. You can think of it as the volatility – the return jumping up and down, maybe higher, but also maybe way lower.

So you choose a company with an expected rate of return of 15% because, hey, 15%. But that comes with a wild risk that maybe you earn -15% instead of +15%. We want to mitigate the risk, stop the wild possible swings in return.

So, what to do? We’re going to buy a second stock in something nice and stable, maybe a bank. For the bank stock maybe we expect 6%, but that return is fairly certain.

Now our overall investment is partly going to earn 15% with high volatility, and 6% with low volatility. Our total investment now earns say 10% with acceptable volatility.

Now lets optimize this process. We’re going to continue to add stocks with the intention of keeping our investment returns high, while lowering the possible volatility or swings from year to year.

Mathematically, it’s been shown that the blend of company shares that achieves the highest rate of return, at the lowest risk (over long periods of time) is ‘all companies’.

And that’s what an index fund is – it’s an investment where you’ve selected all companies on a stock market. Note that changing the balance of all companies (maybe you get rid of one or two) will result in likely having lower rates of return, or higher risk of not achieving your target rates of return. So mathematically, ‘all companies on the stock exchange’ is an index fund.

So mathematically, an index fund should be your best buy for investing in stocks. But there are other reasons why it’s a good investment. Since you’re not trading stocks, you’re not paying to trade stocks (obviously). Which keeps expenses on index funds low, and that contributes to higher returns. Fees on index funds are generally amongst the lowest available for any type of long term investment.

Variations on index funds

Investment firms have created variations on index funds. Some have large cap index funds, which would be all companies, but only of a certain size. Others have created industry specific index funds, maybe all tech firms, or all oil and gas firms. While not technically index funds, they’re often billed as such.

Investment firms have also created index funds that attempt to invest in companies internationally – i.e. US. or Europe, or Asia. If you’re getting into these, more research is required because changing these variables can be better, and they can be worse.

And as I mentioned earlier, investment companies have also created index funds in other asset classes, i.e. you can get a bond index which is an investment in a wide variety of bonds.

Index funds in Canada

It is possible to invest in a ‘raw’ index fund. Most of the Canadian banks have one available, you can set them up inside your RRSP or TFSA. Perhaps the most popular and oldest is the TD Bank TSX index fund, which covers all stocks on the Toronto Stock Exchange, but other banks have similiar offerings.

Index funds are also often combined with other asset classes inside a mutual fund, so you might have a mutual fund with 90% index fund, and 10% cash (some liquid cash is required to maintain the index fund).

Summary

So there you have it. An index fund is an investment with ‘all’ companies on a stock exchange. The intention is to get the highest possible rate of return, at the lowest risk possible, over a long period of time. They’re available at most investment companies and banks, and are often available inside mutual funds and inside RRSP’s and TFSA’s.

Savings before university

Both kids had to get summer jobs in high school. We’re pretty committed that we didn’t want them working while in school, but for the summer? Get to work for sure. We then drew up a budget for their summer income, an amount for spending for themselves, and an amount they had to save towards school. Our splitting amongst those things was somewhat arbitrary, we mostly wanted them to contribute something towards their university education rather than just counting on their parents.

Secondly, we contributed to an RESP (check my next article on RESP’s). This helped a lot. First off, saving a bit each month is a lot easier than coming up with all the money each year when they start school. Plus, the government grants that come with RESP’s really helped top things off. Between RESP’s and their savings, they had enough to get well started into their education.

During University

There’s two primary expenses when they go to university – tuition/books/school related costs, and living expenses. Our key was to minimize the second one.

Their RESP and savings handily paid their early tuition costs and gave them a monthly living allowance.

We also gave them the choice – they could live at home and attend a local university. Or they could go elsewhere and we’d help with living expenses. But, if they lived at home we’d get them into a beater car to drive back and forth to school. If they lived away, they got a bus pass lol.

Both kids chose to live at home during their undergrad. With tuition and books and a small allowance coming out of the savings, our costs were actually lowered when they went to school. Our ongoing costs; food, phones, etc, didn’t change, but we no longer had RESP contributions.

So their living expenses didn’t cost us any more than they were already. School related costs weren’t unbearable (because, Canada!), and were paid for by savings.

There was still a bit of a shortfall over the 4 years, but once again we expected them to work for their four months of summer. And once again, they were put on a budget, so much for living expenses, so much saved for their next year’s costs.

I think they may have also received a small amount of grants, I don’t recall for sure. If they did, it was minimal, and we didn’t have them take loans.

The end result? Both kids made it through their undergrad without any debt.

Post graduate expenses and savings

Both kids finished their undergrads/bachelors basically running on empty. Both wanted to get a masters degree (and both did get a masters degree). But, one took an out of country course based masters and the other did a research masters.

Masters, Child 1

Our oldest wanted to get into a specific area of science. Their chosen program only had about 4 (!) openings in Canada but there were a few larger programs in the U.S. So they ended up going to New York City for their masters. Because it was course based (i.e. they just attend classes), it was all fee based – we paid to go to school. And because it was an American program, costs were pretty damn excessive. Like $30k in tuition a year, plus living expenses.

In their case, we cosigned for a student line of credit. They then used the line of credit to fund their tuition and living expenses. Two years later, they had a degree, a great paying job, and are slowly paying off the loan. It was well worth it as they did land a six figure job, so they can afford to pay back the loan. Aside, if your children are going into a variety of masters programs, have a look at student lines of credit at the bank.

Because we cosigned for the loan, I didn’t want to be saddled with a six figure loan myself if they couldn’t complete their education. So we also made sure child 1 had life and critical illness insurance so in the worst case we had funds to pay off the debt. We couldn’t get long term disability insurance on them because they weren’t earning an income.

Masters Child 2

The second one did a research based masters. They were working in a lab, doing….I dunno, researchy type stuff I guess. They also continued to live at home, so that kept expenses low.

So with a research based masters, they did have to pay some tuition. But there’s no textbooks or any other real expenses. Plus, they get paid a nominal amount for doing the research. It’s poverty level, but hey, they’re students. So for this one, their funding from the research payed most of their expenses. In addition, they also worked each summer and again, we had them save from that income.

Child 2 graduated their masters with no debt.

Post Graduation

Child 1 got a six figure job almost right away and has carried on with their life. They’re paying off their student line of credit from their masters, but it’s quite manageable.

Child 2 is suffering from failure to launch. They moved into a PhD program while still living at home, but hated it so they quit school at that point. They now have a technical/stem masters, and have decided they don’t like the field they studied for. They’re still at home and have no debt. They’re working part time as a waiter and working substitute teaching whenever they can. That gives them a bit of income, but is hardly a career. So they’ve recently decided to go back to school and become a firefighter. OK, I guess, they’re too old for me to tell them much. But that’s another year of schooling that they’ll be starting in the fall. They’ll be funding that on their own through their savings (though we will help as necessary, we don’t want them stressed while in school). And firefighting is a decent paying job so hopefully that wraps up their career aspirations about a year and a half from now.

Summary of all this? For many Canadians, putting your kids through university is achievable. Get started on an RESP now! Make the kids work through the summers and contribute to their savings. Have them live at home so you’re not paying for two households, two utilities, two internet services, etc. And if necessary, have them take out some student loans that they can pay off post-graduation. Do all of that and you should find that it’s actually affordable, and your lifestyle won’t have to change.

And that’s pretty much what the state of the industry was. Financial planners and/or financial advisors (the terms were used interchangeably) could be a life insurance salesperson selling you life insurance and seggregated funds. Or they could be your clerk at the bank. Or they could be a mutual fund salesperson who just sold investments. Most/many of them didn’t do any planning they mostly did sales of whatever they were pushing.

Well, the sales part hasn’t change – you should be aware of how your financial person makes their money. Nobody’s providing you free advice without the expectation of making some money and since most (but not all) don’t charge for their advice, they’re making money when you purchase a product or service from them.

The good news is that the government regulators have stepped in recently to regulate the two terms ‘Financial Planner’ and ‘Financial Advisor’. There are now requirements for anyone to use those titles. My dog is now no longer a financial planner, and neither is the life insurance agent selling life insurance plus seggregated funds (or anyone else for that matter).

The new requirements still allow anyone to call themselves either Financial Planner or Financial Advisor – IF they meet some minimum educational requirements and expertise.

Financial Planners

Anyone using the title financial planner must be knowledgeable (both in breadth and depth) of a variety of areas including estate planning, taxes, retirement & investment planning, financial management and insurance/risk management.

Financial Advisors

Financial advisors need only have technical knowledge of a single investment product type such as mutual funds or stocks. Plus, they need to be able to develop suitable financial recommendations for consumers.

I don’t really understand why a financial advisor needs to be able to develop financial recommendations but only needs to be expert in a single type of investment product, but them’s the rules.

Actual Requirements to use Financial Planner or Financial Advisors Title

So, the government dictates you need to be knowledgeable, but they’re not going to define specifically what those requirements are. Instead, they’ve hoisted that responsibility off onto the industry, and in particular a variety of educational organizations that provide industry education and credentials. Basically, as long as you qualify for one of the designated credentials (which requires education) then you meet the government requirements and can then use the title Financial Advisor or Financial Planner.

In the past, as I mentioned earlier, even someone with a life insurance agent license could call themselves a financial planner. And the requirements to get licensed as a life insurance agent are a pretty low bar, you hardly even need to understand life insurance. But that’s changed – the new requirements for Financial Planner are not erroneous. They’re going to take some serious work for someone to qualify.

To use the term Financial Planner, you’ll now need to have a CFP, CLU, and a few other options. These credentials are not inconsequential, people can take a few years to gain the credentials, and they cover a pretty exhaustive list of educations topics. These credentials have long been the top tier credentials in the industry, and generally only obtained by long term senior advisors.

There are other routes available, but they all require substantial investment in education.For example, a 2 year diploma centered on the financial industry plus an exam will qualify you for the title of Financial Planner.

Long story short, the term financial planner is now going to require some serious credentials and education. I’d suggest that if you see someone using that credential, they’re likely well qualified.

Not so much with the term Financial Advisor. This credential/title can be obtained with much lower requirements, i.e about the same as the traditional requirements for a mutual fund dealer rep licensing.

So no longer does a simple license for life insurance or mutual funds allow you to use the term Financial Planner. People in the industry can likely obtain the title Financial Advisor without much work, but Financial Planner – that’s going to take some substantial work and experience. The title Financial Planner is now going to really set some advisors apart from the crowd.

Other financial terms

So that’s just financial advisor and financial planner. There are other terms and modifiers.

Fee based ‘financial planner/financial advisor’: These people charge a flat fee – generally a percent of your investments – for their services. i.e. a fee based financial planner might charge 1%/year. These people are generally advising on and handling your investments and savings.

Flat fee based ‘financial planner/financial advisor’: These people charge a flat dollar fee to provide advice – say $3000. This is intended to suggest that they’re unbiased, as they don’t make money on how big your account is, the performance, or any specific investment type. Again, these people are typically advising on investments.

Financial Coaches: When people think financial advisors or planners, this is likely to be what they’re actually thinking of. Financial coaches provide unbiased holistic overall advice, for a flat fee. i.e. they’ll take you through budgeting, investing strategies, retirement and tax planning, all sorts of stuff. And it’s done for a flat dollar fee. They don’t make commissions, often aren’t licensed to sell products and as a result often won’t advise on specific investments. i.e they might say ‘you should consider index funds for investments’, but they won’t say ‘you should consider TD index funds specifically’.

The term financial coaches remains unregulated. I suspect many financial coaches were previously using the terms financial planner or financial advisor, but they’ll be walking away from that. Ironically, financial coaches are often highly educated and experienced and many of them already meet the requirements to actually use the financial planner term – often you’ll see these folks with CFP’s and CLU’s.

There’s the vegetable soup of designations going forward, I hope I’ve cleared up some of your confusion.

I’m the new admin here on BTI. We’ve got a somewhat refreshed look, hopefully much cleaner. And we’re going to be pumping out new, high quality posts again, as often as we can.

To that end, I’ve copied most of the previous articles on the site and archived them under the pre-2013 category. The posts are there if you want to read them, but they’re all pretty old so no guarantee as to accuracy or relevance.

Going forward we’ll be moving from a focus on O&G to more of a Canadian personal finance blog orientation. Budgeting, investing, insurance, banking, savings, etc. will be the theme of the day here.

Thanks for visiting, and take a drive by once in while to see what’s new!

2017 could see up to 850,000 bopd pipelined from Alberta to Quebec and New Brunswick resulting in a triple win scenario for oil producers, refiners and consumers. White this oil is expected to eliminate imports, surplus volume might even end up getting exported to buyers overseas at world pricing.

While Ottawa and the Alberta governments are committed to investing in the oilsands which could reduce gas prices, there is little government incentive towards reducing car insurance rates for drivers.  The cost to fill up gas at the pumps nearly doubled in comparison to the average cost a decade ago, and there appears to be no relief in sight.

At the same time, drivers were forced to accept higher insurance rates alongside accelerating gas prices.  Canadians are protesting to their political representatives and their insurance companies that the cost of car insurance is too unaffordable.  In Ontario for example, a proposal to reduce car insurance rates by 15 percent nearly took the province into its second election in less than two years.

Many drivers are turning to online insurance comparison sites to find more affordable insurance options than their current providers.  These websites function as convenient one-stop shop comparison pages, where drivers can compare the best advertised insurance rates from companies all across Canada.  Some of these companies are smaller, less-known businesses yet offer better insurance rates than their larger counterparts.  As a result, drivers can often find a more affordable car insurance plan by spending only a few minutes on the internet.

The cost to drive in Canada is growing year over year, and more people today are focused on reducing the cost to travel than ever before.  The government is right to invest in streamlined oilsands development, but should also commit to reducing the cost for Canadians to legally drive.

Regardless of the amount you want to invest, the basics remain the same. Investing can reward you with financial freedom in the future if done right. The following tips and tricks will help you make smart choices in the fabulous world of investing.

1. Do not waste time contemplating if you should invest or not, this is called wasting time. Start your investment journey as soon as possible because time is money in the long run.
2. Get educated; take the time to read books written by successful investors. Discover how the market functions. If you are truly committed, you will have to invest time in yourself. Focus on the basics of investing initially; there is no need to learn about complex products.
3. Investing requires an online brokerage account so take your time in choosing the right broker. Consider ANZ Online Trading, they offer investors a wide variety of investment products. You can trade stocks, options, funds, ETFs or invest in managed funds, IPOs or structured products online.
4. Take it slow! If you decide to go the stock picking way, you might want to invest very small amounts. Try to gauge your level of risk and your emotions in the face of volatility.
5. Remember that it takes time for your money to grow. There is no easy money in the stock market. You need to be patient, rushing into high risk sectors might end up costing you heavy losses.
6. Consider index funds and ETFs. There is a huge line of products to choose from. There’s no need to hurry into stock picking. Start by buying a dividend paying ETF for example and watch your monthly income roll in.
7. Set a Strategy in place, dollar cost average your way into the market. This means investing a small amount on a monthly basis. There’s no need to invest one big lump sum at once. A major advantage here is taking advantage of the market’s volatility. At the same time, iot is easier emotionally to ride the wild swings the market throws at you especially when you’re invested in index funds.
8. Last but not least, make sure you invest through tax advantaged accounts. You get to save a lot of paperwork tracking income, profits or losses every year. Better yet, your profits are protected and get to grow in the safety of these registered accounts.

So you took the time to search for your dream property and fell in love with a prestigious Montreal condo in the heart of Old Montreal. You made sure you’re at a walking distance from Arts, culture, leisure and entertainment. You picked an urban chic street with quick access to trendy boutiques and restaurants.  You knew what you were looking for and found it! Now however is the time to work on funding your purchase through a mortgage.  While the cheapest monthly payments might seem like the easiest option, this isn’t true because an offer that seems great is probably offset by fine print. Here we will look through some hidden risks to help you identify the perfect mortgage.

• Refinancing – The turmoil that the whole globe is still trying to come to terms with gives you great options with the housing markets – high competition. This means hundreds can be taken off your monthly mortgage bill, but not without problems. First off, this choice will mean that you are basically getting a fresh loan and stretching out the problems you have – it may not save a huge amount long-term. Refinance fees are a second problem that not many people speak about but you better believe they’re there and don’t forget that the more you do it, the more risky it becomes.
• Prepayment penalty – Linked to refinancing is the cheeky little addition of a prepayment penalty. What this means is that there’s a clause which effectively stops you refinancing or paying off your full loan within the first five years in order to protect the lender’s interests.
• What about the long-term? – One of the scariest options within this highly competitive industry is how banks and lenders can deal with mortgages in the long-term. With so many banks letting people enter based solely on low initial payment, they give families the illusion of security before turning into the monsters that lead so many people to lose their homes each and every year. What tends to happen is that you get two or three years fixed before adjustable rates are imposed and because of this payments balloon as much as 70%.
• Not using the right lender – Ultimately, the fine print is always going to be there but whether you take the time to read and understand is up to you – not the bank. So, you either read up on terms and conditions or you could use experienced mortgage brokers to compare the best mortgage rates. Finding the correct lender is absolutely crucial so that you know your finances are protected and you can budget into the long-term.
• Acceleration clause and foreclosure – You may be pretty confident that you’ll be able to make each payment, but how do we know that this will still be the case in a few years? If this is hidden in the fine print then any missed payments could lead to the bank calling in the loan, and if you can’t adhere to this then a foreclosure may be requested and your home sold at auction.
• Adjustable rate mortgage – This is a big, big risk for anyone taking out a mortgage. It’s more about luck than judgement, and if the market works in your favour you can save thousands. If it doesn’t you can lose your home. What an adjustable rate means is that it changes with the market and you can be paying different amounts each month.

There are so many turns that a mortgage can take that it can get too much to know if you have the right deal. Avoid signing up for the lowest mortgage rate without knowing what that entails, mortgages can be a crazy maze. But if you keep your wits about you, you’ll come out with money in your pocket and the property of your dreams.

Fortunately, if you are looking for the best deal on your home insurance coverage, you do not need to look any further than the homeownersinsurance-quotes.org website. There, they specialize in obtaining quotes from a number of different local insurance companies based on your specific preferences and allowing you to easily compare them side-by-side. This saves you a lot of time and hassle in the sense that you will no longer have to worry about contacting each home insurance company individually to request a quote. Furthermore, by being able to compare policies and coverage amounts on your computer screen side by side, it will be easier for you to make the right choice regarding which policy to go with.

Of course, you may be wondering how to go about using a website to obtain multiple free quotes at once. This is especially true if you have never used such a service before. Fortunately, this is a very user-friendly website and the process simply could not be any easier for those who are looking for quick and accurate insurance quotes. To get started, all you need to do is call a licensed agent using the phone number provided on the home page.

From there, you will be asked some questions regarding your home insurance preferences. This can include anything from the type of damages you want to have covered to the monthly insurance cost that you have budgeted for. Furthermore, you will also be asked to provide some basic information about yourself and your home, such as your name, address, the home’s square footage, and other related information that is needed in order to obtain quotes from insurance companies that are as accurate as possible.

Once all of your information has been entered into the system, it will then be sent out to a variety of local insurance companies and you can receive an instant, free quote from each one. Then, you should take the time to carefully review each quote before choosing one that is right for you. Furthermore, it is generally recommended that you take the time to research any home insurance company before you decide to become a customer of theirs.

By doing such research, you can find customer reviews and get a better idea as to what kind of claims service and customer service you should be able to expect from that particular company. A lot of times, reading these reviews can either solidify your decision to go with a certain insurance company or will lead you to think twice. Regardless, taking the time to do this research will ultimately help you to reach the decision that is right for you, so be sure to take full advantage of the resources that are out there when it comes to helping you choose the right home insurance policy.

Home insurance

If you are a homeowner, home insurance is one of the most important types of insurance you’ll need. This is split into two main types: buildings insurance and contents insurance and it is important that you have both to make sure you are covered for your possessions as well as the house itself. You have the option of buying these two insurance components separately, but many people find that it is more cost effective for them to buy them together as quite a few insurers offer special deals or discounts if you get them as part of a package.

Funeral insurance

While we all hate to think about the inevitable, we will face it sooner or later. Losing a loved one is a very stressful event both emotionally and financially. Funeral insurance is designed to to help cover funeral costs and other final expenses. Best pick one that does not demand medical tests offering Guaranteed acceptance. This is one of those insurance types that takes minutes to fill out if you’re with the right provider. For more information check out the GIO funeral insurance page.

Car insurance

Another really important type of personal insurance is car insurance, and as you are probably aware, everyone who drives a car needs to have it. Car insurance will typically cover you for things such as if you get into an accident and subsequently need medical care or to pay for repairs to your car. Depending on your specific car insurance policy, it can also pay for things such as legal costs associated with your car and roadside recovery if you break down; it’s always a good idea to check with your insurer exactly what is included in your policy as it does vary.

A range of factors play a part in how much you pay for your auto insurance, so it’s worth taking action wherever possible in order to keep your costs to a minimum. For instance, just as making your house more secure can minimize the costs of your home insurance, adding security measures (such as an alarm and steering lock) to your car can also help.

You can also help to reduce the cost of your car insurance by ensuring you drive safely, reducing the amount you drive, driving a car that isn’t too powerful and raising your deductible. These are all things that can help you get cheap car insurance and so should be borne in mind when you’re looking to renew your policy; doing an online price comparison can also help you save cash.

Travel insurance

Travel insurance is another type of personal insurance that you need to have if you are going to be traveling anywhere – especially if you will be going out of the country. As with other types of insurance, the chances are you’ll never need to make a claim on your travel insurance but you should always take out a policy just in case.

Holiday insurance will cover you for things such as if your holiday gets delayed, cancelled or finishes early due to a range of circumstances outside your control. It can also pay for healthcare while you’re away and cover your money and personal items, making it a must-have for anyone going on a trip.

This post will not go over detailed economic analysis or complex mathematical equations on variable and fixed mortgages. This post will present some common sense options to consider if you are part of the following 2 groups:

Real Estate Buyers:

If you’re looking to buy property, borrow strictly the amount you will need and not what the amount the bank is able to lend you. It might be overwhelming to see the amount you can borrow and distracting in the same time where you go on looking for more house than you need. Keep both feet firmly on the ground as such decisions have long term consequences on your finances. Buy only what you need and borrow the strict minimum in consequence. Make sure you have some free cash flow after your monthly expenses in case you end up with higher interest rates after refinancing or in the event you decide to put some lump sum payments in order to reduce the loan duration.

Wondering about variable or fixed mortgage rates? If you believe the economy will be slow to recover, there is a chance variable rate makes more sense than a fixed one over the course of the next 3 years. If not, go with the fixed rate. I will not present a case for either point of views; it will be up to you based on your perception of the economy. Do not believe anyone pretending to know where the economy will be in the next 6 or 12 months, no one knows the future. We can only expect the rates to rise gradually and not in leaps and bounds over the next months.

Going with a variable rate can result in sleepless nights if you will keep on wondering when the next rate increase is coming. If you cannot stomach the risk you can go with a fixed rate and keep your normal sleep hours. On the other hand, if you can handle a little bit of risk, you can divide your mortgage into 50/50 fixed/variable combination which is more bearable since the risk is being balanced out. Take note that the variable rate should still be considered low even when the prime gets closer to 4%.

Real Estate Owners

If you currently own a house and your mortgage is due to be renewed consider the following scenarios:

If you can afford lump sums on your mortgage and the amount remaining is not huge relative to your income, it makes sense to go with a variable rate because you will be able to reduce your debt or potentially close it off within the next 3 to 5 years depending on the amount.

Example: I currently have a 155k variable rate mortgage set for renewal in 2013; I plan to pump a total of 30k into my mortgage each year based on a lump sum payment of 20k plus the principal payments. I intend to keep my rate variable for the next 3 years. If I execute my plan properly I would be ending with less than a 60k mortgage which is no longer a danger on my finances if rates were to shoot up subsequently to 8% for example.

By taking advantage of the low rate period, you would save tons of money in interest and potentially the taxes on this interest since the money you are using to pay your mortgage is after tax money.

Example: You have a 200k mortgage with an amortization period of 25 years and a 5% interest rate. You decide to pay a lump sum of 20k for 3 years in a row. The end result is reducing the amount of time by 10 years and saving 84k in interest payments. You can contribute those 84k to your RRSP and recover their taxes or use this money for anything you wish. Anything you do with this money is better than giving it for free to the banks. You can run your own scenario using a mortgage calculator.

For those who would argue for investing the lump sum payments instead will agree that the sense of security provided by lowering or closing the mortgage off is priceless. It’s also nice to know that your house is a piggy bank worth tens of thousands of dollars as a plan B.

If you fear for your job security or cannot afford to divert lump sums on your mortgage, it is best to stick with a fixed rate. If you still decide to go with a variable rate keep in mind that higher mortgage payments later on will increasingly limit your free cash flow and your ability to carry other debts. Whichever type of mortgage you choose to go with, compare mortgage rates before signing up.

I strongly encourage you to throw lump sum payments at your mortgage whether you have a variable or a fixed rate. It’s a win win situation.

How are you preparing for higher interest rates?