Larry Bates is an independent investor advocate, author of Beat the Bank: The Canadian Guide to Simply Successful Investing, consultant and speaker. Larry enjoyed a 35-year banking career with several major financial institutions in both Canada and the U.K. including as Global Head of Debt Capital Markets for RBC. Over the course of his career, Larry both collaborated with and advised many of the world’s most sophisticated investors and financial institutions.
Larry is currently on the board of FAIR Canada and is an Ambassador of the Transparency Task Force. He is a graduate of Dalhousie University.
In my interview with Larry, we discuss:
•The high cost of investment fees
•How to better investment your down payment and keep more of your
hard earned money.
•The RRSP Home Buyers’ Plan
•The First Home Savings Account (FHSA)
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Full Transcript
Sean Cooper
Hi, Larry, how are you doing today?
Larry Bates
Hey, Sean, I'm great. Thanks for having me.
Sean Cooper
It's a pleasure to have you on the podcast. I don't speak with fellow authors every single day here. So thanks for taking some time out of your day to speak with me today.
Larry Bates
My pleasure.
Sean Cooper
Yes, so you said you're in sunny Naples, Florida. So yeah, I'm sure you'd rather be laying on the beach here. But what better way to take some time to talk about finance and real estate and mortgages. So I'll definitely try to make it worth your while.
Larry Bates
Well, I'm always happy to talk about these subjects. So yeah, let's do it.
Sean Cooper
Okay, sounds great. So why don't you tell the listeners a bit about your book here for anyone who hasn't heard about it? Like, you definitely hammer home the point about Canadians paying the highest investment fees in the world there. And yeah, your book was definitely very insightful on that. But why don't you talk a bit about your background and what your book talks about in terms of investment fees? I guess we're in the context of somebody like saving towards their downpayment to buy a house.
Larry Bates
Well, I spent a few decades in the investment business, dealing with large companies, governments and financial institutions. I didn't deal with individuals, but I had a great career in the investment business, and a few years ago, my book came out five years ago, by the way, it's called Beat the bank. Two or three years before I wrote the book, I had a call from my sister, who lives in New Brunswick.
And she said to me, Larry, all we hear about is how well the stock market's doing. But our mutual fund that we've owned for 15 years, just hasn't done very well. We don't know, why can you have a look?
Larry Bates
So I googled the fund, which was a bank mutual fund, and said to my sister well, do you realize you're paying 2.3% in fees, and she said, we're paying fees? And I said, Yeah, you're paying 2.3%. She said, Oh, you mean 2.3% of our gains, and I said no, no 2.3% of the total amount you'd have invested, you pay that every year whether the market goes up or down. And if you've owned that fund for 50 years, paying that amount every year, you've lost about 35 plus percent of your money to fees.
Sean Cooper
I guess the compounding really works against you in that case there.
Larry Bates
Yeah, compounding works both ways. Penalty is great when it's in your favor. And with fees, it really works against you in a nasty way. Anyway, my sister was a smart woman, and she really did not understand. And most Canadians don't understand how much they're paying in costs for mutual funds. And most people and if you go on my website, LarryBates.ca, you can find a little calculator. Most people are losing about 50% of their total returns.
Sean Cooper
Wow, 50%. That's five 0%. That's yeah, a big amount of money.
Larry Bates
Over time, the compounding effect of the fees really destroys half your returns. And that's sort of a shocking statistic. But that's how most Canadians invest. They do what their banks tell them and their advisors tell them that they end up buying these really terrible investment products.
Larry Bates
So anyway, that got me sort of fired up and got me on this track of writing the book. As I mentioned, it's called Beat the Bank. And the point of it is that there are great investment products, and also, not just newcomers providers, but also the banks themselves, offer great low cost products and great ways to invest. And if you can figure out how to do it, which is not that hard. It's very simple. You can beat the returns of bank mutual funds and insurance, mutual funds, etc.
Larry Bates
And do much, much better. And that's whether you're saving for a down payment or saving for retirement or whatever. And so the book is really two parts, the first section of the book is, you're probably getting shafted with fees. And here's how. And the second part of the book is, here's how to do it a lot smarter, and ended up with a lot more money at the end of the day.
Sean Cooper
Well, you definitely shared some very surprising things, especially with that half year returns, potentially being eaten up by the bank there with their fees, like 2.3%, may not seem like a lot. But definitely when you have compounding working against you, as you showed there demonstrated it can definitely add up a lot there.
Sean Cooper
So I guess the whole idea is that the bank, maybe you can comment on this, but the bank just basically wants you to take out all your financial products with them, like ever since you're younger, you have a savings account with them, and then you eventually get to a checking account. And yeah, I'm sure they make some money off the fees. But I would imagine they're trying to really get people to buy those investments, because that's probably where they make the lion's share of their money.
Sean Cooper
And same with the mortgages there. Heard that the banks make quite a lot off the penalties that people pay. And the big banks have very costly penalties. I mean, similar to the investment fees, the penalties, the big banks can be astronomical, I mean, rarely see penalty, not in the five fingers in terms of when people opt to break their mortgage, so I guess the idea is that they want you to always come back to them for everything. And I would imagine, like the investments are probably where they make most of their money off of people there that don't really know that they're losing all that potential money to the banks.
Larry Bates
Yeah, I think the banks in many ways provide a lot of good services. I mean, the one, that very valuable service they have is pretty well safe, putting your money in. That's not always the case in other countries in the world. So, but the banks are out there to make money. And like I said, they want to sell you the high fee products. But if you figured it out. And again, it's not that hard. The banks themselves offer super low cost products that are, you know, if you do a little investigation you can take advantage of.
Larry Bates
So, you know, I'll just say that the three principles of my book are, number one, take a little time to learn investment basics. And you know the financial basics that would apply to mortgages as well. But really, the other two are to take a long term perspective and make sure you don't pay too much in fees. But the main point is, if you take some time to learn investment basics, mortgage basics, it's gonna pay off in spades.
Sean Cooper
Now, definitely, you've convinced me about that there. And before we move on to our next topics here, you touched on it here, but I just want to make sure that we spoke about it specifically here. But yeah, let's say that somebody is saving towards the downpayment on a property there several years away from reaching their downpayment goals. So instead of just buying Jessie's or putting a savings account, they decide to invest the money in the market. I would think that many people would just go to their bank and ask for a mutual fund and buy it that way.
Sean Cooper
But as you mentioned, there are other options out there, there are other low cost options out there, like index funds and ETFs. Maybe you can just talk a bit about the lower cost options out there, besides the big bank mutual funds with the typical 2.3% fee?
Larry Bates
Yeah, well, you need to learn a little bit of investing in order to get into these lower cost products. Again, it can be super simple. You know, there's my book, there's other sources, but you can open an online brokerage account and the banks provide this. There are other providers as well, they all do a pretty good job. And you can open a TFSA account, first home savings account or whatever, and put your investments in super low cost ETFs that mimic the stock market.
Larry Bates
And the fees on those ETFs would be a tiny, tiny fraction of what the fees would be for bank mutual funds. And that savings goes right back into your account. You know, I think one thing though, Seean, If somebody's saving for a home purchase 234 years from now, I would think for most people, it would make sense to invest conservatively, and not necessarily, you know, put all your money in the stock market because the market can be in the short term and be lots of downs.
Larry Bates
I think if you're investing for a longer period of time, then it makes more sense to put some money in the stock market because that likely over time the stock market is going to generate a higher return than, say GICs. But you know, it's important to understand these things and make the right investment choice. And not just low fees, but the right balance of really safe investments like GICs, or bond ETFs versus investing in the stock market.
Sean Cooper
No, I agree completely. And for listeners, this isn't investment advice or anything like that. But yeah, definitely the time horizon is important. So if you're planning to buy a house in the next six months, it's probably not a good idea to do 100% equities or something like that. You definitely need to make sure you have your time horizon in mind there. But yeah, thanks for sharing your insight on that there, Larry.
Sean Cooper
So why don't we jump into a couple ways that many first time homebuyers save towards the purchase of their first home there? So yeah, they figured out let's say, a first time homebuyer has figured out that he or she wants to own a house, maybe in the next like four years or so. So they decide on the right type of investments. And the last decision is what type of account to hold it in there.
Sean Cooper
So I would say most people will use both accounts because the RRSP Home Buyer's plan only has a limit of 35,000. And the First Home Savings Account only has a limited 40,000. So I'd say many people use these together. But if you could talk about the two main ways the RRSP home buyer plan, and first home savings account, that would be great.
Larry Bates
Sure, well, the first home savings account is brand new this year, and is a fantastic tool for first time homebuyers to get some free money. As you know, Sean, the individual can put up to $1,000 per year into one of these accounts, first home savings accounts. And when that money is deposited in that account, that creates a tax benefit in that if you put $8,000 in that account, that $8,000 is deducted from your taxable income, and therefore reduces your tax payment and would likely result in all things being equal resulting in a tax refund in April.
Larry Bates
So it's something that an account that every person who is considering, or as like was planning to buy a home in the next few years, should take advantage of, that is, as long as you're paying taxable income. Right now, if you're not paying taxable income, you're not earning income right now, there's no point in investing, or in claiming the tax deduction because you're not paying tax, you're not getting any benefit. But one thing that's really important is to get that account open, ideally, before year end, because this ability to put in the $8,000 per year starts the day that you open that account.
Larry Bates
Even if you don't put $8,000 in before year end, as long as you open the account, you can put in $8,000, that roll that $8,000 From this year rolls over to next year, as an individual, you could put in $16,000, next year, as long as you open that account before the end of the year. And as you mentioned, Sean, that there's a maximum amount that you can put in that first home savings account, and that is $40,000.
Larry Bates
So you could put in $1,000 a year for five years. So could your spouse, so that's $40,000 each, so $80,000, potentially, for a couple over a five year period. And obviously that's a big chunk of money. And, again, the benefit is you get a tax deduction, when you put the money in, and when you take the money out and buy a home, there's no tax at the backend.
Larry Bates
So it's kind of like the best features of TFSA and RRSP. So it really is, you know, in a way free money. For example, if you and your spouse are going around $70,000 a year, you're paying your marginal tax rate of about 30%. Roughly, in other words, the last dollar that you earn, you're paying three sets of tax on that. So if you put $8,000 in one of these accounts, your taxable income is going to drop by $8,000. And 30% of that will come back to you. So that's $2,400.
Sean Cooper
And then you can use it to contribute that to the F HSA the next year as well to get a head start.
Larry Bates
Exactly. And if your spouse does it as well, that's close to $5,000. And if you both do that for five years, that's $24,000 tax savings.
Sean Cooper
Wow, that's a big amount. I mean, we're not talking about pennies or anything. This is 1000s of dollars.
Larry Bates
Yeah, it's huge. I mean this is a fantastic tool for those that are saving for a home. And if your marginal tax rate is 50%, your savings is $4,000 a product to do it, it's $8,000. And over five years, if you put the maximum in, it's a $40,000 savings. So it's a lot of money. And also the benefit is, the money that is in that account is the money that you earn, either through stocks or interest on GICs, or whatever it might be, that's tax free, as well.
Larry Bates
So it's a tremendous opportunity. Everyone who's considering buying it should take as much advantage of this first savings account as possible. And again, get your account set up before year end, your bank will set up this account for your online broker, if that's what you're going for, will do it. Most financial institutions will provide or set up these accounts for you. Again, the main benefit is the tax savings, which is why the numbers are large. So make sure you take advantage of it.
Sean Cooper
No very well said thanks for sharing all those great tips there, Larry. And one that I really like as well is that when I first heard about the first home savings account, I just assumed Oh, you can only take $40,000 out, similar to the RRSP home buyer plan, you're only able to take like $35,000 out of that account. But that's actually not true. If you invest your money, let's say you're only able to contribute 40,000. But that doesn't mean that you can only take 40,000 out of the account, let's say you contributed 40,000. And then you grew your money to $50,000. That means you can actually take 50,000, like whatever the account grows to you can withdraw the full amount there. And that's again, tax free and you don't have to pay it back. Like the RRSP home buyer plan. So that's why I really liked the FHSa as well.
Larry Bates
Yeah, if you invest $1,000 a year in putting $1,000 A year into this account, and you earn 5% interest over five years, that kicks in an extra $13,000. So you'd have some $40,000 to have $54,000.
Sean Cooper
Wow, that's amazing. Yeah, many people don't realize that they think they could just pull 40,000 out. But yeah, if you invest your money well and beat the bank, like your book is called there, then you can use all those investment gains to have an even bigger down payment there.
Larry Bates
Yeah, exactly.
Sean Cooper
Well, thank you for sharing all of your insight on the first home savings account there. Larry and I also mentioned that you want to talk about the RRSP home buyer plan there. So yeah, it's not like the RSP homebuyer plan is obsolete now, as mentioned, the first savings account has limited 40,000. So it's not going to be enough for most people there depending on what real estate market that they are buying. And so yeah, maybe you could give people a bit of a refresher on the RRSP home buyer plan and why it's still useful today.
Larry Bates
Yeah, I would say that, if possible, those that are looking at buying a home in the next few years should take advantage of both of these opportunities, including the home buyers plan. So the home buyers plan is a feature that allows Canadians to withdraw money from their RRSPs without any tax penalty in order to buy a first home. And the maximum that a person can take out is $35,000. If it's a couple and both couples have 35,000, plus in their RRSPs, they can take in combination $70,000. So it can be a big chunk of money.
Larry Bates
So your RRSP can fund a good portion of your down payment. And it's interest free, right. So that's a huge benefit. Now, let's say you don't have $35,000 in your RRSP, but you have a contribution room that's available. Well, you could take some of your savings, and put those savings in the RSP to build up the amount, and then simply withdraw the money that you've just put in plus whatever was in there to begin with up to a maximum of 35,000, withdraw the money and use that money for buying a home.
And you will get a tax deduction for them for the amount of money that you put into your RRSP. And again, you can use that to top up your RRSP or use it to add to your TFSA or your first home savings plan. So there's flexibility and again, if you have the opportunity to use it if you have funds in your RRSP or you can put funds in your RRSP it's a great way to help with the downpayment and it's very tax effective.
Sean Cooper
Yes, those are awesome great points there, Larry. I guess just keep in mind the RRSP home buyer plan. It's not as flexible as the first home savings account. A feature I really like is with the first home savings account, you can contribute money and pretty much withdraw it immediately whereas with the RSP home buyer plan and the contributions you have to wait at least 90 days to withdraw, which can be a bit of a pain in the neck.
Sean Cooper
If you are planning to look for a property, that means having to wait three months there. So yeah, as long as you educate yourself, which has been the topic of this podcast, taking the time to educate yourself by listening to podcasts like this and reading my book in Larry's book, then you could really be a lot more financially savvy and take full advantage of these accounts here and not make any costly mistakes along the way.
Larry Bates
Well said.
Sean Cooper
Perfect. Well, that's a wrap. I think we've had a good discussion here. So yeah, thanks so much for being on the podcast today. Larry, it was a pleasure speaking with you.
Larry Bates
My pleasure was a lot of fun. Thanks, Sean.
Sean Cooper
Thanks for listening to another episode of the Burn Your Mortgage podcast. Besides being a podcast host, I'm also an independent mortgage broker. If you or anyone you know, family, friends, co workers or neighbors could ever use any unbiased mortgage advice or a second opinion, feel free to reach out. Email me at Sean that's sean@burnyourmortgage.ca or call or text me at 647-867-3711 for a free mortgage consultation.
Sean Cooper
Also, be sure to head on over to www.burnyourmortgage.ca and sign up for my free weekly newsletter. As a small token of my appreciation, you'll be able to download my ultimate mortgage checklist on choosing the perfect mortgage. I look forward to hearing from you and helping you with all your mortgage needs. Once again, thanks for listening.