Comfortable now, Ella worries that she could be caught in a squeeze when interest rates rise.
Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Ella.She has $536,374 cash that could be used to pay off most of the mortgage very soon, though such a payment could incur a hefty penalty, Moran notes. She could instead perform the well-known manoeuvre of paying down the loan to the annual penalty-free prepayment limit, $110,000 in her case, and then borrow that amount back for investment.
Ella’s TFSA contribution limit is $60,000, adjusted for residence outside of Canada. She has no TFSA now. She has the cash to fill her space and should do so, Moran advises. If she then adds $6,000 per year for nine years, it will become $141,070 by age 60 and then generate $6,988 tax free for the following 30 years to her age 90.
If Ella makes these allocations, she should have $221,374 left. If that balance is invested in a taxable account and grows at our assumed three per cent, it will become $288,843 at her age 60. That sum would generate taxable income of $14,307 for 30 years to her age 90.Article content