Céline* and David* live in the region with their teenager Mia*. They drive with two vehicles that will give up the ghost in the near future. How should they finance the purchase of their next cars?
Posted at 7:00 a.m.
The situation
It is true that buying a car is not the investment of a lifetime. However, Céline and David have been following their finances closely for a long time and want to continue on this path by opting for the smartest financial solution.
Céline, 43, is a teacher and David, 42, a federal civil servant. In addition to their defined benefit pension plans, they have accumulated money in Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs) and a Registered education savings (RESP) for their daughter in Secondary 1.
“It’s been 15 years since we made a budget and introduced savings,” says Céline over the phone. When we finished our car payments, we chose to put the same amounts in RRSPs and TFSAs. »
In May 2021, during the renegotiation of the mortgage, the small family chose to increase the loan by $40,000 in order to redo the insulation of the house and the coating. The couple signed a five-year contract at a variable rate which is currently 2%. “We make accelerated payments every two weeks,” says Céline.
The annual cost of living for the family, including savings, is about $105,000. It includes $5,000 in tuition for private school, $6,000 for vacation, $6,500 for taxes and hydro, $5,280 in TFSA-RRSP savings for David, $12,720 in TFSA-RRSP savings for Céline and $2,400 for the RESP.
“To replace my spouse’s car, we plan to buy out my in-laws’ car rental this year. It’s a 2017 Rogue with 50,000 km that will cost $12,000. »
“In three years, we want to buy an electric car. We realized that for our long escapades in the remote corners of the United States, using an electric car will be less practical and we would take the gasoline car. Here, a mid-size car will do, like a Nissan Leaf, which costs around $40,000. »
To buy these two vehicles, Céline and David want to know if it is better for them to use TFSA savings or take out personal loans.
Numbers
Celine, 43 years old
Salary: $100,000
RRSP: $122,000
TFSA: $40,000
RESP: $22,200
David, 42 years old
Salary: $92,000
RRSP: $105,000
TFSA: $22,000
House
Appraisal: $335,000
Mortgage: $108,500
The board
Chantal Matos, advisory director at Private Management Funds FMOQ, analyzed the couple’s finances.
From the outset, the financial planner indicates that the personal loan is not advantageous at all. “The rates are 7 to 10% depending on the institution. It’s a product that exists for people who are unable to obtain financing at a better rate and who have no other means of obtaining financing. »
PHOTO HUGO-SÉBASTIEN AUBERT, LA PRESSE ARCHIVES
Chantal Matos, Advisory Director at Private Management Funds FMOQ
“It always works with credit,” she continues. If the person has good credit, he will have a good rate. If the person does not have good credit, the rate will be higher. »
As for a car loan in financial institutions, the rates currently vary from 4.49% to 7.98%.
At a dealership, financing may be lower. However, attention should be paid not to the interest rate offered, but to the total financing costs. They are referred to as the “credit rate”. This credit rate includes the amount of interest and administration costs related to the credit.
After analyzing all these options, Chantal Matos advises the couple to opt without hesitation for a home equity line of credit. “This is the best solution for them. »
The best option
The value of the house is $335,000. The home equity line of credit can be up to 80% of the value of the property, or $268,000. By subtracting the amount of the mortgage from $108,500, Celine and David would have an amount available to borrow of $159,500.
This mortgage margin can be used this year for the purchase of a used car. It could also be used to do work and buy the electric car in three years.
Céline and David don’t have to wait for the mortgage to mature to get financing, but they have to go to the notary. Fees range from $995 to $1495.
“In terms of strategy, it’s better for them to have a home equity line of credit than to use money from TFSAs,” says the financial planner.
“They have a balanced investor profile. If I look at the performance of balanced funds over the past 10 years, the annualized returns are around 7%. Should they take the TFSA, which yields 7% tax-free, or pay the interest on a lower mortgage margin? I strongly advise to pay the amount of the margin and continue to have a return. »
“The couple also affirms that the TFSA is intended for small glitches and for the financing of travel, continues Chantal Matos. So I wouldn’t touch it. Or only as a last resort. »
If the couple did not have access to a home equity line of credit, the planner would advise them to check the rate for a personal line of credit.
“It’s always the same principle. We take the financing with the lowest possible rate before going to tap into investments that give a return. When your loan rate or margin becomes higher than your returns, you change your strategy. »
Additional strategy
Another trick: recover money by changing the accelerated mortgage payments for ordinary payments. The full payment of the mortgage would be extended by one year, estimates Chantal Matos.
“It’s not worth paying off the mortgage faster at the rate they’re paying. They make more return on their investments by putting money aside than by paying the mortgage at 2%. »
Also, in five years, their daughter Mia will finish high school at a private school. The annual $5,000 will then become available to pay off the mortgage, while the RESP will fund Mia’s post-secondary education. Moreover, Chantal Matos suggests that the couple add $100 more per year to the RESP to reach $2,500 and have the maximum subsidies from the two governments. He should even take the opportunity to get unused rights from past years.
In order to maximize Céline and David’s savings strategy, the financial planner suggests that they contribute the maximum RRSP amount to which they are entitled each year, which is approximately $4,000. Although they have defined benefit pension plans, their salaries are high and the tax refund is worth the cost. It can be put in the TFSA.
As for the purchase of the electric car, Chantal Matos recalls that the couple will have to reassess the situation in three years. “Will mortgage margin rates be as advantageous? Will TFSA returns be lower? It will be necessary to check and choose what is more advantageous. »
* Although the case highlighted in this section is real, the first names used are fictitious.
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