# What to do with an inheritance?



## Hodge (Apr 4, 2009)

Hi folks, I'm looking for a bit of input on what to do with an inheritance I'm expecting in the next couple of weeks. It will be at least $30K, but may be more depending on how the estate is settled.

My current financial situation: 

I bought a house 2.5 years ago and took advantage of the Home Buyer's Plan to withdraw $20K from my RRSP in order to make a 20% down-payment. I currently owe $99K on my variable rate mortgage at prime -0.65. My car is paid-off and I have no other consumer debt. I just recently maxed out my TFSA contributions for the year but I have about $20K in unused room in my RRSP.

I'm already planning to set aside $5K for January's TFSA contrib. cool, $1K for oral surgery (no dental plan ) and $2K for completely frivolous home electronics purchases D).

My question is how best to invest the remaining amount? Should I pay down my mortgage? Top up my RRSP? Do a little of both? Also, I'm due to start repaying the $20K from the HBP this spring. Is there any advantage to me paying this back faster than the required 15 years?


----------



## the-royal-mail (Dec 11, 2009)

Could you not simply pay off the RRSP HBP right off the top?

That should eliminate that future recurring expense as well as the wish list you posted.

15 years is the maximum. Paying this back is a liability. It is better to go through life with the fewest liabilities possible.

Good luck.


----------



## kcowan (Jul 1, 2010)

the-royal-mail said:


> Could you not simply pay off the RRSP HBP right off the top?...


+1
Paying off debt should always take precedence. Your TFSA room will be there when you get some real savings.


----------



## MoneyGal (Apr 24, 2009)

Yes, but both the HBP repayment and the mortgage are "debt." How should the original poster divide his contributions to each?


----------



## Hodge (Apr 4, 2009)

Thx for the input, so far.

My first impulse was to do exactly as suggested and pay off the HBP in one lump sum, but then I started second guessing myself. Afterall, it's interest-free and I pay no tax on it as long as I make the $1400 per year payments. Is there an opportunity cost I'm missing by committing that much back to the RRSP at once?

I'm tempted to make at least some pre-payments on the mortgage principal even though I know that, at prime -0.65, I could easily generate greater returns by properly investing the money.

Sigh...decisions, decisions.


----------



## Four Pillars (Apr 5, 2009)

I would suggest maxing out your rrsp before paying any HBP back. You will get more bang for your buck.

Of course, as stated, the HBP is a liability so that is something to consider.

If it were me and assuming you make a decent salary, I would:

Do your planned stuff (TFSA, teeth, electronics).

1) Max out RRSP for this year.
2) Save enough to max out RRSP for next year as well.
3) Pay down the mortgage

And yes I wrote a post on this:

Is it better to pay HBP or contribute to RRSP?

http://www.moneysmartsblog.com/repay-home-buyers-plan-or-contribute-to-rrsp/

and on a related theme:

Is it better to repay HBP or pay down mortgage?

http://www.moneysmartsblog.com/repay-hbp-or-pay-down-mortgage/


----------



## MoneyGal (Apr 24, 2009)

Well, one way to think about it is to consider your mortgage interest rate as the "hurdle rate" you'd need to beat in order to consider investing in equities/your RRSP instead of paying down your mortgage. 

Put another way, if your mortgage was interest-free, would you still want to make a mortgage prepayment? 

From what you've said, you have a very low hurdle (i.e., interest) rate on your mortgage - perhaps that tips the balance towards investing in equities. 

Alternately, depending where you are in the mortgage paydown schedule (likely near the beginning), nearly all of your mortgage payments will be made up of interest. A mortgage prepayment will go directly to the principal, and will reduce the overall length of the mortgage. 

If you use a mortgage calculator (such as those at dinkytown.net), you can get a schedule to see the impact of a mortgage prepayment. For example, a $10,000 prepayment at the outset of a $100,000 mortgage at 3% will save nearly $10K in interest and knock 3.5 years off the total amortization of the mortgage (assuming rates stay the same through those 25 years). 

I think ultimately the reason why you will often see recommendations to "do both" in these kinds of situations are that (1) paying down debt, however you do it, is always good...so you "can't go wrong" here in a sense, and (2) trying to figure out which is the "best" path can be a confusing, difficult task (what's "best" will depend very heavily on your assumptions and how you choose to model the problem - there are lots of other variables you could consider other than the SINGLE one I've thrown in, which is interest rates). 

I think the advice to "split the difference" between two alternatives is designed to capture the possible benefits of both. Make sense? 

So, in your shoes I might be tempted to just divide the available funds between repaying my HBP/investing in my RRSP and paying down my mortgage.


----------



## patmanz (Jul 26, 2010)

kcowan said:


> +1
> Paying off debt should always take precedence. Your TFSA room will be there when you get some real savings.


i have to disagree here.

with the rate we are having on mortgage right now, it does not always make sense to overpay mortgage when you an make more with investing.

I would personally opt for a 50/50 strategy, depending of your rate 

Go here for some math: http://www.efficientmarket.ca/article/RRSP_vs_NON_REGISTERED


----------



## OhGreatGuru (May 24, 2009)

Hodge said:


> My first impulse was to do exactly as suggested and pay off the HBP in one lump sum, but then I started second guessing myself. Afterall, it's interest-free and I pay no tax on it as long as I make the $1400 per year payments. Is there an opportunity cost I'm missing by committing that much back to the RRSP at once?
> 
> ...


The HBP may be interest-free but it is not cost-free. You are foregoing earnings on any outstanding balance. This substantially impacts your future RRSP value. Re-pay the HBP. Then use your improved cashflow to either prepay mortgage or increase RRSP contributions. (Paying down debt is usually the best strategy.) Whether or not you should put more in TFSA at this time depends on how much you have in emergency funds now; and whether you foresee a short-term need for the TFSA savings.


----------



## kcowan (Jul 1, 2010)

You have to run scenarios in your financial plan. Keeping the HBP will only make sense if your after tax returns on other investments beats it. If there is any uncertainty (like there is now), then your investment returns invevitably involve risks in order to generate such returns.

But my approach is to keep it simple. That kept me out of flow-through shares and labour-sponsored venture funds. No one ever lost money by keeping it simple. JMHO


----------



## crazyjackcsa (Aug 8, 2010)

Little secret? It doesn't really matter. As long as you do one of them, that's good enough. Maybe you invest it all, maybe you put it all down on the house, maybe you split it right down the centre. As long as you do something constructive with it, that's fine.

People like to discuss the difference between the two strategies, invest or pay down debt, but it's really the same thing: Increasing your wealth. Maybe one will work out better than the other, maybe it won't, But neither would work out badly.


----------



## houska (Feb 6, 2010)

If you generally run your finances as a tight ship, I would use up the RRSP room first (tax deferred investing plus tax deduction now), then pay back the HBP (tax deferred investing but no tax deduction now), then pay back the mortgage (which is at a very advantageous rate right now). 

However, mortgage rates will rise in the future, and if prime increases 4-5%, the numbers would look a fair bit different. So if you expect otherwise to be paying back your mortgage very slowly, you might instead dump it all there as a risk reduction measure.


----------



## Four Pillars (Apr 5, 2009)

crazyjackcsa said:


> Little secret? It doesn't really matter. As long as you do one of them, that's good enough. Maybe you invest it all, maybe you put it all down on the house, maybe you split it right down the centre. As long as you do something constructive with it, that's fine.
> 
> People like to discuss the difference between the two strategies, invest or pay down debt, but it's really the same thing: Increasing your wealth. Maybe one will work out better than the other, maybe it won't, But neither would work out badly.


+1

It's still fun to discuss the options however.


----------

