There are many non-traditional ways to save money for a house other than budgeting, using government funding or inheritance money. Have you considered using a tontine to help pay for a new home? Working with a reputable financial advisor is the best way to invest your money if you are thinking of exploring tontine options.
But, what is a tontine?
Tontines are a type of financial product where a group of people pool their money together and then receive regular payments from the pool based on the number of participants.
In Canada, tontines are not commonly used as a financial product and are generally not available for purchase through financial institutions like banks which is why you need to work with a financial advisor.
Historically, tontines were more popular in Europe and North America in the 18th and 19th centuries as a way for individuals to pool their resources and receive regular income during retirement. However, due to concerns about their potential for abuse, tontines fell out of favour and are no longer widely used as a financial product.
If done correctly though, it could be a financial tool to help you save for the downpayment you need overtime, assist you as an income stream to help pay down your mortgage or could allow you to start investing in real estate with a collective group of like-minded investors.
How do tontines work?
- A group of investors contribute money to a tontine, which is typically managed by a financial institution or other professional.
- The money contributed to the tontine is invested in a variety of financial instruments, such as stocks, bonds, or other assets.
- The tontine is set up to pay out regular income payments to the investors based on their age and life expectancy. The longer an investor lives, the more income payments they are likely to receive.
- As investors pass on, their share of the tontine is divided among the remaining investors. This means that the income payments for the surviving investors can increase over time, as the number of investors in the tontine decreases.
- Once all the investors in the tontine have passed on, the remaining assets are typically distributed to the investors’ heirs or beneficiaries.
While tontines may be an interesting concept for some individuals, it is important to carefully consider the potential risks and benefits of any financial product before investing money into them. It is also important to work with a licensed financial advisor or other qualified professionals to ensure that any investment decisions align with your financial goals, risk tolerance and to ensure the proper paperwork is completed to protect your financial investment along the way.
The pros of having tontines:
Regular Income: Tontines can provide a regular stream of income over time, which can be particularly appealing for individuals who are retired or who have other sources of passive income.
Potential for Higher Returns: Tontines may provide higher returns than traditional financial products, such as bonds or certificates of deposit (CDs). This is because tontines are based on the principle of sharing risk among a group of investors, which can result in higher returns for those who live longer than expected.
Shared Risk: Tontines allows investors to share risk with a group of other investors. This can help to reduce the impact of unexpected events, such as a sudden decline in the stock market or unexpected medical expenses.
Long-Term Planning: Tontines can be used as a tool for long-term financial planning, particularly for individuals who are concerned about outliving their retirement savings.
The cons of having tontines:
Limited Flexibility: Tontines can be inflexible in terms of investment duration and contribution amounts. Once you have contributed to the tontine, it can be difficult to withdraw your funds or change the terms of the agreement.
Limited Transparency: Tontines can be complex financial products, and it can be difficult to fully understand how the investment works, particularly if it is not well-managed or if the terms of the agreement are not clear.
Risk of Fraud: Tontines can be vulnerable to fraud or mismanagement, particularly if the investment is not regulated or if the individuals managing the tontine are not reputable.
Risk of Not Receiving Payments: In some cases, tontines may not pay out to investors if they die earlier than expected or if the tontine is not well-managed. This can result in a loss of the initial investment.
Lack of Liquidity: Tontines can be illiquid, meaning that it can be difficult to access your funds until the investment reaches maturity. This lack of liquidity can make it difficult to access your funds in the event of an emergency or unexpected financial need.
Setting up a tontine can be a complex process that typically involves the participation of a financial institution or other professional.
Generally speaking, these are the steps involved in setting up a tontine:
- Determine the purpose and structure of the tontine: This might involve deciding on the minimum investment amount, the duration of the tontine, and the rules for making payments to investors.
- Work with Darren Robinson to help set up your tontine: Tontines are typically managed by financial institutions or other professionals who have experience in managing investment products. It is important to find a reputable institution or professional to manage the tontine.
- Draft the tontine agreement: The next step in setting up a tontine is to draft the agreement that outlines the terms of the investment. The agreement should include details such as the minimum investment amount, the payment schedule, and the rules for distributing the assets of the tontine once all the investors have passed away.
- Promote the tontine to potential investors: Once the tontine is established, it is important to promote it to potential investors who may be interested in participating. This might involve advertising the tontine through various marketing channels or reaching out to specific groups of investors who may be interested in the investment.
- Manage the tontine: Once the tontine is established and investors have contributed to the investment, it is important to manage the tontine effectively. This might involve making regular income payments to investors, managing the assets of the tontine, and distributing the assets of the tontine once all the investors have passed away.
Get started today. Give me, Darren Robinson, a call to learn if contributing to a tontine is a good financial strategy for you to look at. As a reputable financial advisor and mortgage broker, I can help steer you in the right direction and provide you with many other options to help you save money. Call me at 705-315-0516 or book a free consultation today.