Bigger cash down or retirement savings?

[thekid]

Thanks for the reply Scanner, it's well appreciated.

I really didn't anticipate dying! That would put a damper on my day! We do need to think this out some more in detail. Thanks for the advise. In my mind, though, we are "as if" married. It's really just a question of putting energy by priority and planning the actual celebration hasn't been a priority. Should I die, I'd want her to get my half. I do have to check if it's ditto for her (we really didn't look at this). Should we break up, which we have discussed, she would buy me out. She has the means for it and this is what we agreed to. Should she feel more comfortable matching my cash down and being 50/50 on the debt, that is fine too. This is her choice and so far she wants to clear her half so that is what I'm going with. It may be more simple to simply go 50/50 on the cash down, however this is not great for her as she doesn't want to invest in the market and she would pay more interest on her half of the loan than she would gain interest on CDs. I don't agree with the thinking, but she has a particular familly situation and her familly is very conservative on how they invest and it has brushed up on her. How she invests however is little of my concern.

With regards to the financials of the downpayment/mortgage payment discussion (which is the advise I am seeking), I understand that markets don't return 10% a year, every year. This is where my dilemma comes in and the reason for this thread. Being somewhat risk adverse, I am more inclined to take a guaranteed 5% after tax return (saved interest) than to try to beat that by investing in the market in a tax deffered account. I suspect that I am being too conservative however and wanted feedback from people here. Basically, can I really anticipate 8%-9% average long term returns on the market (or what would be a realistic anticipated return). This would help me decide whether I'm out to lunch taking the 5% saved interest over anticipated market returns. Alot of the answers so far have provided me basic feedback on what people think and I appreciate that.

[safari]

Let's look at a specific example with numbers. For instance, let's say, your share of the purchase price is $150,000 and you got $70,000 that you can use as a downpayment.

Scenario 1. You pay down 20% ($30,000) and invest the rest ($40,000). You get a 20-year loan at 6% for $120,000. Your monthly payment would be $860. Your $40,000 that you invested in 20 years will grow to $186,000, assuming 8% average yearly return (which is a reasonable return with a mixture of mutual funds, stocks and bonds).

Scenario 2. You pay down $70,000 and get a similar loan, but for $80,000. Your monthly payment will be $573. The difference in mothly payments between scenarios 1 and 2 is $287, which you can invest every month. In 20 years with the same 8% return, you're going to have $164,353 in your investment account. This is $21,647 less than in scenario 1.

Conclusion. It's clear that scenario 1 is more beneficial. If you're able to get a better return, the difference will be even greater. For example, at 9% yearly return in scenario 1 you will have $224,176 in 20 years, while in scenario 2 you will only have $184,672. Considering the fact that mortgage interest is tax-deductible, scenario 1 looks even better.

[humandraydel]

Basically, can I really anticipate 8%-9% average long term returns on the market

If history is any guide. Of course, you know what they say: past performance is no guarantee of future results. And of course, long term is 10-20 years.

If I were you I'd figure out how much of a payment I could afford even if I downshifted to a 70k salary. Then I'd back calculate the loan amount that would be. I'd then put down the difference between the loan amount and your half of the house. Then I'd invest the rest.

[thekid]

Let's look at a specific example with numbers. For instance, let's say, your share of the purchase price is $150,000 and you got $70,000 that you can use as a downpayment.

Scenario 1. You pay down 20% ($30,000) and invest the rest ($40,000). You get a 20-year loan at 6% for $120,000. Your monthly payment would be $860. Your $40,000 that you invested in 20 years will grow to $186,000, assuming 8% average yearly return (which is a reasonable return with a mixture of mutual funds, stocks and bonds).

Scenario 2. You pay down $70,000 and get a similar loan, but for $80,000. Your monthly payment will be $573. The difference in mothly payments between scenarios 1 and 2 is $287, which you can invest every month. In 20 years with the same 8% return, you're going to have $164,353 in your investment account. This is $21,647 more than in scenario 1.

Conclusion. It's clear that scenario 1 is more beneficial. If you're able to get a better return, the difference will be even greater. For example, at 9% yearly return in scenario 1 you will have $224,176 in 20 years, while in scenario 2 you will only have $184,672. Considering the fact that mortgage interest is tax-deductible, scenario 1 looks even better.

Thank you for this Safari. I really appreciate you taking the time.

However, I would also have to include additional saved interest into scenario 2 (I can make the loan period shorter (15 vs 20 and hence "contributing" the full mortgage payment for the last 5 years...albeit the difference in mortgage payments for years 1-15 will be smaller).

Also, my max 2007 Canadian "IRA" contribution will only be of 22k-25k (taking into account unused portions of prior years). Should I max that, 2008 max contribution will only be circa 10K (from my budget calculations, I will have yearly savings around 6K marked for my "IRA" equivalent account...leaving only 4K a year space to use the 15K-18K "leftover"...so it would take a little less than 5 years to fully invest the 40K in a tax differed account, meanwhile "leftover" returns would be taxed until they can be put into IRA). This will affect the numbers some. Also, mortgage interest is not tax deductable in Canada.

If I take into account that the 8% return will not be linear (and therefore, should the first years have returns significantly lower), this could significantly affect the amount accrued in 20 years.

But I do get the point. Basically, 8% starting now on a larger sum is better than 5% starting now on the same sum, plus 8% on the mortgage payment difference.

If I trust the 8% (or higher) return, I should limit my cash down to 20%. Plus, I have to stop thinking that lower mortgage = greater flexibility as greater flexibility is obtained from cash on hand (or where it could be reached). This is finally sinking into my thick head. Thanks!

[thekid]

If history is any guide. Of course, you know what they say: past performance is no guarantee of future results. And of course, long term is 10-20 years.

If I were you I'd figure out how much of a payment I could afford even if I downshifted to a 70k salary. Then I'd back calculate the loan amount that would be. I'd then put down the difference between the loan amount and your half of the house. Then I'd invest the rest.

That is what I did. I would love 650$/month payments. What I have to play with is the lenght of the loan. At 70K down, 650$/month is a 15 yr loan. At a lower downpayment, I would take a lenghtier loan.

[disneysteve]

I would definitely take long-term market risk over a guaranteed 5% return. But that's me and my risk tolerance. Yours may differ. I just happen to think it isn't very difficult to outperform 5% over 10 or 15 years, and I've been investing for about 15 years now so I've seen some ups and downs.

Back to the mortgage, you mentioned a 15-year loan but also mentioned a 5-year fixed period. That suggests to me you are looking at some type of ARM, correct? At least here in the US right now, the gap between 5/1 ARMs and fixed-rate loans is pretty narrow and most are recommending taking a the very slightly higher rate on the fixed-rate loan and locking that in for the life of the loan.

[thekid]

Thanks DS. I'm finally starting to warm to long term market risk over lower guaranteed returns. It's just not how I was brought up or how my gf was brought up, so there is a lot of ingrained reflexes in there. I do see the point and am realizing how risk adverse my reflexes seem to be. I gotta balance myself out

As for the ARM, that's all I can get here in Canada. Highest I've seen is 10 yr fixed term. The 10yr fixed is offered at about 5.4% or so whereas the 5yr is at 5%. I should give more consideration to the 10yr!

[TBH]

I just wanted to insert a comment about co-owning real estate outside marriage.

It sounds to me like thekid and his GF are just as committed as most married couples, and they have just as much of a chance of staying together.

However, you do have to protect yourself legally as an unmarried couple because you don't have the built in suite of legal obligations and rights that come with marriage. I know common law is much stronger in Canada in the US, but in the US, you would really have to think about what happens if you own property together and one of you dies. My partner and I bought a house together with rights of survivorship, so if one of us kicks the bucket the other one inherits and becomes owner of the whole house. However, the survivor has to pay inheritance taxes on the value of the inherited portion of the house. Our solution? Getting a lot more life insurance than we would need if we were married.

[thekid]

I just wanted to insert a comment about co-owning real estate outside marriage.

It sounds to me like thekid and his GF are just as committed as most married couples, and they have just as much of a chance of staying together.

However, you do have to protect yourself legally as an unmarried couple because you don't have the built in suite of legal obligations and rights that come with marriage. I know common law is much stronger in Canada in the US, but in the US, you would really have to think about what happens if you own property together and one of you dies. My partner and I bought a house together with rights of survivorship, so if one of us kicks the bucket the other one inherits and becomes owner of the whole house. However, the survivor has to pay inheritance taxes on the value of the inherited portion of the house. Our solution? Getting a lot more life insurance than we would need if we were married.

These are great points. There is no inheritance tax (or gift tax) in Canada, so that isn't a problem. However, I actually never had this discussion with her (we are both under 30 and actually never thought of it, as ridiculous as that sounds). I will have to find out how she feels. (she does have quite an affection for the dog, I would hate to co-own with him though, seeing how territorial he is with his toys and all).

[LivingAlmostLarge]

I bought a house with DH before we were married, so I know how wrong it can go. I don't want you to think I'm suggesting that you aren't committed, but sometimes it's a lot easier to just get married. I've heard every horror story after we bought our condo together from people who have done it. And no one we knew had successfully navigated getting married after buying a house together, in real life that is. We repeated our incident a second time, but by that point we had set a wedding date which was technically 1 month after the close.

Second point is that I married a Canuck so I understand more than you can imagine. First canadians typically only have 5 year arms and renegotiate with the bank every 5 years. MIL yelled at me for getting a 30 year fixed, not understanding in the US that's how it's done. She's like how do you know you're getting the absolutely best rate. "How do you know that it won't drop, you are crazy." You should only be getting 5 year arms. Literally that is what she said to me last summer. I showed her the graph and she was so upset that people would lock in rates for 30 years. She kept repeating it was stupid. So say la vie.

So ignore us when we talk mortgages it's different based on what your country norms are, we're not trying to be rude and imply Arms are wrong, we just understand what is our norm.

But in Canada I've heard that it can get messy without being married though there are common law marriages, it depends on the province. Plus it makes it more difficult to get the loan doesn't it? And buying the RRSP sounds great.

I think I wouldn't put more down on the house than necessary. The RRSP can be cashed out without too heavy penalties.