Mortgages and RRSPs: big business for your bank
December 23, 2013 by Editor, InvestingForMe
Most likely your banker or investment advisor is a likeable person and you may have a great working relationship with either or both of them. But when it comes to looking out for your own savings in the form of your mortgage and RRSPs, you need to remember what’s really going on in your relationship to these figures. Contrary to their seemingly interested conversations with you and their pleasant enough ways, these people are not your BFFs, trusted allies, or unbiased advisors, and the sooner you remember that fact the better off you’ll be financially.
You see, in reality your relationship is all about business. And if you don’t recognize and accept this simple truth, it’s going to cost you big time! That’s not to say you can’t like your advisors and have a great working relationship with them, but you need to recognize that business is business and if it weren’t for your mortgage and your investments, it’s doubtful your banker and investment advisor would be very interested in seeing you.
While the image above may seem a little on the sinister side, it’s just a good image to keep in mind so that you have a more clear picture of what’s really going on in these relationships and know what’s really best for your hard earned savings.
Business 101: your bank’s #1 job is to make a profit
For most of us, the two largest financial assets we will acquire during our lifetime are our homes and our retirement savings. And when it comes to these two assets, most of us will need to buy our home with the help of a mortgage and we’ll need to open accounts (RESPs, RRSPs, TFSAs, etc.) to hold our savings.
To help drive home for you just how big the mortgage and investment industries are in Canada, let’s look at some of their numbers:
- The amount of money Canadians owe in residential mortgages was over $1.112 trillion in 2012 (that’s up 114% from $518.9 in 2003).
- Canadians have socked away over $971 billion of their hard earned savings in mutual funds (that’s up 132% from $420 billion in 2003).
- Combined, that’s over $2.0 trillion in assets that financial institutions are managing for us. That’s huge!
- And if we simply apply the current average annual mortgage interest rate (5.34%) and investment management fees (2.06%) the financial institutions charge Canadians, we can see just how big mortgages and your hard earned savings really are to your bank and investment firm.
- Combined, financial institutions generate almost $80 billion in revenue, each and every year – $59.4 billion on mortgages and over $20.0 billion in mutual fund fees – from Canadians like you and me.
All this is to say that when it comes to your family’s mortgage and investments, your banker and investment advisor relationships are seriously about big business – not about being your buddy, trusted ally, unbiased advisor, etc.
Let’s compare goals: you want financial security – they want job security
So, when it comes to the time that you’re in the market to get a mortgage or RRSP, there are a few basic points you should remember when sitting down across from your banker or financial advisor. Simply put, your goals and their goals are different. Here’s how:
- From your perspective, your goals are fairly simple – work hard, save and invest wisely, and pay off your mortgage.
- From your banker’s and investment advisor’s perspective, their goals are also fairly simple – work hard, make the monthly sales targets and, of course, make more money.
- From your perspective, you simply want to receive unbiased advice that helps you to achieve your financial goals. You expect your banker and investment advisor to give you advice that’s for your sole benefit, without regard for their company’s revenue and profit margins.
- From your banker’s and investment advisor’s perspective, they have hard sales targets to make. If they want to keep their jobs, they’re required to grow the amount of money they lend out in mortgages and sell more and more investment products. In other words, they need you to borrow more money (not pay it down), and they need you to buy more investments (not less) if they’re to make their sales targets. Their job security depends upon it!
So what to do about contributing to your RRSP vs. paying down your mortgage?
In our previous article we illustrated how much average Canadians can save if they had simply ignored the financial industry’s advice and did not contribute to an RRSP but focused instead on paying down their mortgage. We did some math around average Canadian households and their savings and saw that they would have been mortgage free in 16 years if they decided to pay off their 25-year mortgage instead of buying RRSPs. (That’s a whopping 9 years earlier than originally planned!) Now, while that figure in itself is wonderful, the best part was the actual figure of $95,154.40 ($79,084.49 in mortgage interest expense and $16,069.91 in investment costs) in out-of-pocket expenses they would have saved by choosing this route. That’s a lot of money!
But remember, what’s good for you (like saving $95,154.40) is not so good for your banker or investment advisor - where your savings are their losses! When you would have saved $79,084.49 in mortgage interest expense, the bank would have lost $79,084.49. When you would have saved $16,069.91 in investment costs, your poor old advisor and their firm would have lost $16,069.91.
So, next time when you naively ask them for their advice about whether you should use your savings to pay down your mortgage or contribute to your RRSP, remember that your gain is their loss. Using what we know today about mortgage rates and investment returns over the past 16 years, we now have the stats to show you what’s really best for the average investor. And that means we can now all take a little more responsibility for knowing what’s best for our own financial well being.
Next week: Remember in our first article in this series how we looked over the stats from the past 16 years and figured out that contrary to the investment industry experts' opinions, it really would have been better to pay off our mortgage instead of investing in RRSPs? And remember how fun it was to see how much money we all could have saved by doing so? Well, unfortunately as the wise old saying goes, the past does not necessarily predict the future, and now we're all left wondering so what do I do now? Well, watch for our next article when we’ll try to gaze into the crystal ball and discuss a mortgage vs. RRSP strategy for the future.
(This artricle published by Troy Media)
Read the next article in the series - What does the future say… pay off the mortgage or build up the RRSP?
Read the 1st article in this series - What to do … contribute to your RRSP or pay down your mortgage?