A Great Product for Seniors to Access Home Equity without increased Payments

CHIP is rapidly gaining popularity across Canada, and it is easy to understand why. The senior population is the fastest growing group in the country and they are living longer than ever before. CHIP offers secure and flexible access to an otherwise illiquid asset. Plus, since becoming a schedule 1 bank the provider of CHIP, HomEquity Bank, is able to offer increasingly competitive rates.

CHIP is often used to help seniors stay in their homes, but you can also use it to provide your clients with creative solutions when they are moving. Here are some ideas of ways CHIP could benefit you
:
1. Downsizing


Many seniors choose to downsize to pay off debt and increase retirement income. Unfortunately, this often means relocating to a different neighborhood or an inferior house. CHIP can help you help your clients down size financially, without harming their quality of life.

Example: You help clients sell their $500,000 home, which leaves them with $300,000 after paying off their debt.

They want $100,000 for retirement income, which only leaves $200,000 to buy their new property and limits them to a small apartment. So, you suggest a CHIP for $100,000 which would allow them to buy a townhouse. They have no payments, keep their $100,000 in cash, and you sell a higher priced home.
2. Upgrading


You can help clients who want to upgrade but cannot with their current income level. By applying the proceeds of their sale as a down payment, and using CHIP to complete the purchase, your clients can have the upgrad e they did not think was possible without ever having to make monthly payments.

Example: Your clients own a $600,000 home that is becoming too much work. They want to move to a Vancouver water front condo, but the price is $1,000,000 and they cannot afford a $400,000 mortgage. After selling the house, they put $600,000 on the condo and use CHIP for the remaining $400,000. You help your clients upgrade their lifestyle without increasing their expenses.
3. Purchasing a Vacation Property
 
Retirees may rent a vacation home because their income is not high enough to qualify for a mortgage on a second property. You can use CHIP to help them buy the vacation property of their dreams by using some of the equity in their primary home.

Example: Your clients own a $950,000 home and want to buy a $275,000 cottage. You help them utilize CHIP to unlock just under 30% of their home’s equity and use it to buy the cottage. They have improved their quality of life and you have gained a sale.


4. Providing a Down Payment for Children Buying a Home
 Often, parents would like to help their children financially but cannot do so without decreasing their quality of life or incurring debt with monthly payments. CHIP can be a great way for parents to assist their children, without making sacrifices, when it will be the most beneficial.

Example: A 30 year old couple wants to buy a rental income property worth $400,000 but they need a 20%

down payment. Their parents have a $450,000 house, so you help them use CHIP to access $80,000 to give to

their children for a down payment. This helps the couple purchase the property, and gives you a purchase that

may have had to wait until when, or if, they have more money.

For more information on the CHIP Program contact me elwells@telus.net

  

Low-rate pledge revives fears of hard reckoning for Canada’s housing market

Andrea Hopkins, Reuters | 28/10/13 | Last Updated: 28/10/13 1:50 PM ET

TORONTO — The Bank of Canada’s surprising signal last week that it will not raise interest rates any time soon will lift the housing market and give indebted households breathing room, but it leaves many apprehensive there will be a hard reckoning.

Canada sidestepped the worst of the financial crisis because it avoided the real estate excesses of its U.S. neighbour, and a post-recession housing boom helped it recover more quickly than its Group of Seven peers.

But the housing market began to cool last year after Prime Minister Stephen Harper’s Conservative government, worried about a potential property bubble, tightened mortgage rules.

Debt is at record levels, and we know consumers are biting off more than they can chew

The prospect of lower-for-longer interest rates, needed to help a struggling economy, has revived those bubble fears.

“This is a double-edged sword,” said Laurie Campbell, chief executive at Credit Canada, a nonprofit credit counselling agency that is funded by banks and other lenders.

“It’s going to keep more home buyers in the market, but … I worry. Because, fine, interest rates are going to be stable and (home buyers) can get a good rate, but are they getting into the market only because of that? Debt is at record levels, and we know consumers are biting off more than they can chew financially, so does this lead to more problems down the road?”

Finance Minister Jim Flaherty said Monday he intends to get more directly involved with players in the housing sector to ensure the market doesn’t over heat.

Flaherty says the responsibility of keeping the market stable falls on his department.

The central bank’s position comes amid signs home sales and prices are regaining momentum after cooling last year when Flaherty clamped down on mortgage rules.

Flaherty says he speaks regularly with market players, but is going to do more of it now to ensure the recent pick-up in sales and prices is a temporary phenomenon, and not the early signs of a housing bubble.

He says at the present time he has no intention of intervening by clamping down on borrowing.

Most analysts say he could take the steam out of the market by increasing the minimum requirement for a down payment to buy a new home.

BROKERS SEE FRESH BOOM

The Bank of Canada has underpinned the housing market by holding its key policy rate at a near-record low of 1% since 2010. But early last year, worried by soaring household debt levels, it began warning its next move would be a rate hike and that Canadians should plan accordingly.

But even as it continued to acknowledge the problem of soaring debt levels in its latest report on Wednesday, it dropped that language, putting more emphasis on the risks of weak inflation and an economy still operating well below potential,

The bank’s omission of the rate warning left players in the housing market anticipating a renewed surge of strength.

“What is going to happen is rates are going to be lower for longer, and that means it is more appealing for buyers to get into the market,” said Kim Gibbons, a mortgage broker in Toronto.

Already, brokers are seeing borrowers shifting back to variable rate mortgages as home buyers bet rates will stay at ultra-low levels for a few more years. When rates had looked like they were on the rise, fixed-rate mortgages seemed the safer bet, locking in a low rate before costs rise.

I would suspect that we’ll see a significant trend away from longer-term fixed into shorter-term variable rates

A five-year variable rate mortgage at 2.5% allows a borrower to lower the early cost of a loan, compared with a five-year fixed rate at 3.5 or 4 %. Effectively, that allows them to borrow more and buy a more expensive house.

A Reuters poll published on Thursday showed primary bond dealers, who work directly with the central bank, now expect interest rates to stay on hold until the second quarter of 2015.

“With the BOC keeping rates low for a long period of time, I would suspect that we’ll see a significant trend away from longer-term fixed into shorter-term variable rates,” said Toronto broker Calum Ross.

“What we know in the housing sector is people don’t buy prices, they buy payments. So if the payment shock isn’t there … they’ll buy a payment today not having realistic expectations about what the long-term budget implications are.”

The long-term implications of Canada’s huge household debt burden is part of what had driven Bank of Canada policymakers, along with officials at the Finance Department, to repeatedly warn Canadians that their debt burden will become harder to bear when interest rates rise eventually.

Canada’s debt-to-income ratio reached a historical high of 163.4% in the second quarter, meaning Canadians owed C$1.63 for every C$1.00 they were bringing home.

Low interest rates were partly to blame as Canadians reached for ever-larger mortgages in a booming market for residential real estate.

The federal government has tightened mortgage lending rules four times in the past five years in a bid to cool the market and prevent home buyers from taking on too much debt. And the Bank of Canada did its bit by using the threat of rising interest rates to remind consumers that cheap money would not last.

No longer. Having dropped the threat of raising interest rates, analysts said the central bank has pushed the consequences of higher levels of borrowing well into the future.

“(In the parlance of) Monopoly, we picked up a ‘Get out of jail free’ card, and managed kick that can down the road several months and probably not before 2015,” said David Rosenberg, chief economist at Gluskin Sheff, who famously predicted the last U.S. housing crash.

“Household debt ratios are problematic, and the central bank knows it, but … the good news out of bank is we’ve been told we have a little more time to get our finances in order before the debt to service ratio starts to play some catch-up.”

© Thomson Reuters 2013, with files from the Canadian Press

Canada Won't Interfere in Housing Market - For Now: Flaherty

 Louise Egan, Reuters | 28/10/13 | Last Updated: 28/10/13 3:52 PM ET

OTTAWA — The Canadian government has no plans for now to clamp down on the housing market even though prices are rising again, Finance Minister Jim Flaherty said on Monday, but he pledged to investigate whether the price uptick looks to be more than temporary.

Finance Minister Jim Flaherty says he will not only balance the budget in 2015, but the surplus will be significant.

Speaking to reporters after meeting economists in Ottawa Monday, Flaherty said the surplus that year won’t be “tiny.”

Flaherty said that it would be his department’s responsibility to act on housing prices since the Bank of Canada has “basically no room to move,” but added: “I have no intention of interfering in the market for the time being.”

In its latest report last week, the central bank removed any reference to raising interest rates, saying the economy has too much slack and inflation is too low.

Flaherty, addressing reporters after meeting private-sector economists to get their views, also repeated his pledge to balance the 2015/16 fiscal-year budget, and said he would deliver “not a tiny surplus.”

I want to ensure that this isn’t just a temporary bubble

The minister has intervened in the mortgage market four times since 2008 to cool the housing sector, and had expressed some satisfaction that his moves had worked.

Some of the economists he met on Monday suggested that he have some more conversations with people in the building industry, Flaherty said, “because of what we’re seeing in certain parts of the country, a reacceleration of housing prices.”

One theory put forward for the recent rise in housing prices is that people who perhaps should have been waiting to buy a house have been rushing to purchase to lock in low interest rates.

“But this is speculation and we’re going to have to look into it more, but I have no intention of interfering in the market for the time being,” Flaherty said.

He said the projections of economists he spoke to on Monday  were close to those released by his department in July, forecasting modest but real economic growth over the next few years.

Flaherty said he sees some pressure on government revenues, but added this will be offset by the government’s plans to freeze its operating budget.

Canada’s independent parliamentary budget office said on Monday that by its calculations the government will meet its target of eliminating the deficit in 2015, but subsequent surpluses will likely be smaller than it projected in April.

Flaherty said the parliamentary budget officer did not take into account the government’s planned operating budget freeze.

He has ruled out balancing the budget earlier than 2015, and some economists told reporters that such a move would be unwarranted, given the substantial fiscal drag it would impose.

“It could happen earlier if the minister really wanted it,” said Carlos Leitao, chief economist at Laurentian Bank.

“I don’t think that is desirable, nor do I think it is the government’s plan. So 2015/16 the budget will be balanced, and as the minister said, not only balanced but in surplus territory.”

Bank of Canada cuts Economic Outlook, Drops Rate Hike Signal

BARRIE MCKENNA

OTTAWA — The Globe and Mail

Published Wednesday, Oct. 23 2013, 10:02 AM EDT

 

The Bank of Canada has abruptly abandoned an explicit warning that its key interest rate is headed higher in the face of a much gloomier economic outlook.

Cautioning that Canada is likely to grow much more slowly than it thought in the summer, the central bank now acknowledges that its next move is just as likely to be a rate cut, as an increase.

The surprise decision Wednesday to drop its so-called tightening bias – in place since April 2012 – coincides with a significant downgrade of the bank’s forecast for GDP growth in Canada.

The bank is cutting its forecast for both the Canadian and U.S. economies – not just for this year, but for 2014 and 2015 as well.

The bank pointed to an economic environment that is now “less favourable for Canada” – most notably, the painfully slow recovery from recession in the United States, Canada’s main trading partner.

“Uncertain global and domestic economic conditions are delaying the pick-up in exports and business investment, leaving the level of economic activity lower than the bank had been expecting,” the Bank of Canada said in a statement.

For the moment, Canada’s export problem is that it is still far too dependent on the U.S., which is grappling with a sluggish recovery and poisoned budget politics in Washington.

The bank left its overnight interest rate unchanged at the one per cent, where it’s now been since September 2010. The bank’s next rate-setting decision is Dec. 4.

Many economists now don’t expect a Bank of Canada rate hike until late 2015, or even 2016.

The Bank of Canada has been anticipating that exports and business investment would pick as the consumer-driven domestic economy cooled, along with the housing market.

But that isn’t happening. Business confidence remains weak and exports are still weak, failing to regain pre-recession levels.

That means the economy isn’t likely to return to “full production capacity” until the end of 2015, according to the bank, or six years after the recession ended. The bank had previously estimated that the so-called output gap would close in mid-2015.

The bank slashed its closely watched forecast of annual GDP growth in Canada to 1.6 per cent this year, down from the 1.8 per cent it forecast in July, and to 2.3 per cent in 2014, down from its earlier forecast of 2.7 per cent. In 2015, it expects growth of 2.6 per cent, versus 2.7 per cent previously.

The bank also said it expects the U.S. economy will grow just 1.5 per cent this year and 2.5 per cent in 2014. That’s down from its earlier forecasts of 1.7 per cent and 3.1 per cent respectively.

Bank of Canada deputy governor Tiff Macklem previewed the GDP downgrade in an Oct. 1 speech in which he highlighted the country’s declining share of global trade.

Dating back to April of last year, former Bank of Canada Mark Carney and his successor Stephen Poloz have insisted the bank would raise the overnight rate to a more normal level “over time.”

That important caveat has now been stricken from the bank’s statement.

“The fact that inflation has been persistently below target means that the downside risks to inflation assume increasing importance,” the bank said Wednesday.

Inflation has been consistently below the bank’s 2 per cent target since early 2012.

Beyond the U.S. and Canada, the economy is generally doing better than expected. In its statement, the bank said the nascent European recovery, “while modest, has surprised to the upside.” And China’s economy is showing “renewed momentum,” the bank said. And the Japanese economy is also doing better.

At home, the bank said consumer spending is holding up better than expected and remains “solid.” The Bank of Canada also continues to expect a “gradual unwinding of household imbalances.”

Many economists have fretted about Canadians’ soaring level of debt to income as low interest rates spurred a long housing price boom in much of the country. Higher mortgage rates could put many homeowners under pressure. But it’s the export sector that really worries the bank.

In its quarterly monetary policy report, also released Wednesday, the bank said the export sector has been “lackluster” in the second and third quarter, with the exception of autos and forest products.

“The recent weakness in exports is indicative of a broader trend of slower-than-expected export growth that began in early 2012,” the bank. It said this is due to “shifts in trade linkages” and ongoing competitive challenges.”

Former CMHC competitor petitions for mortgage insurance fees to drop

http://business.financialpost.com/2013/10/18/former-cmhc-competitor-petitions-for-mortage-insurance-fees-to-drop/

Garry Marr | 18/10/13 | Last Updated: 21/10/13 8:51 AM ET

A former senior executive at one of Canada Mortgage and Housing Corp.’s competitors says it’s time for mortgage default insurance premiums to drop because the Crown corporation doesn’t have the same percentage of risky clients due to tighter loan regulations.

Brian Bell, who used to be vice-president of private insurer Canada Guaranty and now runs his own real estate brokerage, is calling for a 15% reduction in fees that can easily top $13,000 on a $500,000 home — a move he says will provide much needed relief to the beleaguered first-time home buyer.

“The risk has been lowered, the mortgage insurance industry has been so profitable and they haven’t done a review in…I can’t remember the last time they reviewed their rates,” said Mr. Bell, who is now president of iPro Realty Ltd. and runs a website called townhouses.ca. He used to work for CMHC where he learned about the mortgage default insurance industry.

By law, any consumer with a downpayment of less than 20% and borrowing from a financial institution regulated by the Bank Act must get mortgage default insurance. CMHC controls about three quarters of the market with Genworth Financial and Canada Guaranty splitting the rest.

All insured mortgages are backed by the federal government, in the case of CMHC for 100% of the value of the loan and 90% for private players. Ultimately the government could be on the hook for close to $1-trillion, a price tag that makes some think there should not be a shrinking of fees.

“They have room to do it,” said Mr. Bell, about lowering fees. “Insurance is all about risk and losses. If you’ve changed your risk and underwriting criteria and made it tighter, you’ll have lower loan losses.”

He points out the Crown corporation has averaged $1.1-billion annually in net income over the last five years and estimates a 15% reduction in fees would have amounted to $194-million in 2013.

“I work with first-time home buyers every day and that’s the group that has been hurt,” said Mr. Bell. “I’m putting my name and reputation on the line after being in the industry for so long. I’m not going to be getting any friendly emails [mortgage insurers].”

Not everybody is convinced it’s time to lower fees.

“To the extent that it assists first-time buyers it is a good thing,” said Jim Murphy, chief executive of the Canadian Association of Accredited Mortgage Professionals. But he wouldn’t endorse the petition.

Rob McLister, editor of Canadian Mortgage Trends, said he doesn’t think a petition to lower fees will gain much traction in the marketplace.

“The risk has gone down but the fact is I don’t think [fees] are egregiously priced. I’d rather see them higher than lower and CMHC have a buffer in case things go bad,” said Mr. McLister. “If you don’t like the fees, put 20% down.”

Financial Post

No Bank of Canada rate hike till 2016?

John Shmuel | 08/10/13 | Last Updated: 08/10/13 2:19 PM ET

In the span of a week, two banks have pushed back their forecasts of a Bank of Canada rate hike to 2016.

The latest one comes from Joshua Dennerlein, economist with the Bank of America Merrill Lynch. Mr. Dennerlein said he now predicts the Bank of Canada will hike its benchmark rate sometime in the first half of 2016, more than a year later from his earlier forecast of a hike in the fourth quarter of 2014.

“We continue to doubt the BoC view that the return to export led growth is right around the corner,” he said. “With domestic sources of growth tapped out, we expect only a limited acceleration in Canada’s growth rate over the next several years.”

Most economists at the moment forecast a late 2014 or early 2015 rate hike, but 2016 is becoming an increasingly discussed target year.

Last week, economists at Scotia bank pushed back their own target to 2016, saying a recent speech by senior deputy governor Tiff Macklem hinted the central bank was disappointed with recent economic trends.

“The Bank of Canada probably now envisages spare capacity remaining into 2016,” Scotiabank said last week, referring to Canada’s actual economic capacity versus the level of production being seen right now.

“Against the conventional thinking that the Bank of Canada would want to hike before spare capacity closes, we continue to think that very easy money will be required even as spare capacity shuts,” Scotiabank added.

Mr. Dennerlein cited that data as well in pushing back his hike forecast. He also downgraded his outlook for Canadian economic growth in 2014, saying he now sees growth of 1.8% versus his earlier 2.2% call.

“We see little upside to the main driver of Canada’s economy – the consumer,” he said. “High household leverage, a low savings rate, and slowing income growth are a recipe for soft consumer spending.”

Mr. Dennerlein said that his previous forecast had assumed a pickup in economic growth in the second half of 2014, but that he no longer sees that occurring.  He also doesn’t expect the output gap to close in Canada until late 2016, keeping downward pressure on inflation.

“The bottom line is that the Bank of Canada is  a long way off from increasing its monetary policy rate,” he said.

Is Mounting Mortgage Debt Putting Our National Economy "At Risk"?

OTTAWA — We have been warned before, and often. The federal government and the Bank of Canada, in particular, have lectured us about the evils of sky-high consumer debt and still-creeping house prices — and the mounting threat to the economy — as rock-bottom interest rates inevitably begin to rise.

Now, municipal leaders are weighing in — and in a big way. They are calling on Ottawa to urgently address the issue of home construction, in general, and what they see as a depleting stock of affordable places to live.

“The federal government has a limited but critical role to play, in partnership with other orders of government, in restoring balance to our housing system,” said Claude Dauphin, the president of the Federation of Canadian Municipalities [FCM], in letter to Prime Minister Stephen Harper.

“Federal actions, aligned with provincial, territorial, and local initiatives, can be a catalyst for a stronger and more balanced housing system, which will attract investment and create jobs, support new growth, and increase labour mobility,” Mr. Dauphin said in the Oct. 1 letter.

“As it stands, for those who cannot afford to purchase a home, the short supply of rental units is driving up rental costs and making it hard to house workers in regions experiencing strong economic activity.”

The FCM is making its case ahead of the Conservative government’s Speech from the Throne on Oct. 16. “Housing costs and, as the Bank of Canada notes, household debt, are undermining Canadians personal financial security, while putting our national economy at risk,” said Mr. Dauphin, the mayor of the Montreal borough of Lachine, noting that mortgage debt held by Canadians now stands at $1.1-trillion.

Canada Housing and Mortgage Corp., the Crown agency responsible for insuring mortgages to approved buyers, uses a 30% threshold of total household income going to housing. Anything above that, and consumers could end up over their heads.

Dallas Alderson, director of policy and program at the Canadian Housing and Renewal Association, said one-quarter of Canadian are over that limit. Of those, 40% are renters, while 18.5% own their homes.

“So that’s the situation we have. In the last 15 years, only 10% of housing starts have been for rental, even though 30% of us rent,” she said.

“But a more shocking number is 20% of [private] renters are paying half of their income for their rent, which is incredible because you have very little left over.”

Mr. Dauphin, in an emailed statement to the Financial Post, said municipalities “support the federal government’s commitment to jobs, growth, and Canadians’ financial security.”

“For that reason, we believe that as the government sets its priorities for the next two years, it should address the high-cost of housing in Canada, the most urgent bread-and-butter issue facing Canadians today,” he said.

“We’re not expecting the Speech from the Throne to include specific new policy proposals, but it should recognize the strain housing costs are putting on Canadians, and set the stage for concrete action in at least two areas: protecting and expanding rental housing; and protecting communities from the impact of expiring operating federal housing agreements.”

But Finn Poschmann, vice-president of research at the think-tank C.D. Howe Institute, said Ottawa has “little jurisdiction and almost no practical capacity to deliver housing.”

“Past attempts to do so, through CMHC for example, have produced financial disasters for the people who participated and put CMHC in grave financial situation.” he said.

“We wouldn’t want to see that again, nor the federal mortgage agency deeply underwater and as similar U.S. agencies have been, through the course of much more recent financial disasters.”

Still, those close to the ground see federal involvement as crucial in heading off the very crisis Ottawa has been cautioning Canadians about.

“I think FCM is certainly on the mark to say that housing is really the key piece that may be under threat if all players don’t act to ensure its stability,” said Ms. Alderson.

“In terms of the federal role, there are a variety of incentives that the federal government could put in place to really push the private sector towards the development of more rental housing,” she said.

“Whether that’s an instrument through CMHC or whether that’s an instrument through the taxation system, there are a whole variety of options available to the federal government but none are being utilized right now.”

http://business.financialpost.com/2013/10/07/mounting-mortgage-debt-is-puttingour-national-economy-at-risk-cities-tell-stephen-harper/

 Source: Gordon Isfeld

5 Tips to Help 40-Somethings Save for a Rainy Day

If you're in your 40s, your main financial goals might be paying your children's college bills and funding your retirement accounts. There's another important financial goal you need to meet, too, though -– building an emergency fund.

It's easy to assume that disasters won't strike you, or to simply hope for the best. But disaster do happen to lots of people who are also not expecting them -- things like job loss, an expensive medical crisis, or a major home repair emergency.

An emergency fund will protect you from being wiped out or left in financial dire straits. It should be stocked with at least a few months' worth of living expenses (think food, rent, insurance payments, utilities, gas money, etc.). If you're risk-averse, have dependents, or are in a field where it would take a long time to land a job, you might want to sock away as much as nine months' or a year's worth of living expenses.

Here are some tips to get your fund started and well under way:

1. Establish your fund in a sensible place. A savings account, money market account, or short-term CD is a good idea. Long-term CDs will levy penalties if you need to withdraw funds early, and the stock market can be risky because stocks can plunge over the short term.

That said, though, if you're willing to take on a little risk, you might keep a few months' worth of emergency money in a safe place such as a savings account, and keep the remainder somewhere that will offer a little more growth.

2. Make saving easier through automation. You might, for example, set up automatic withdrawals from your bank account into your emergency account. Your employer might be able to automatically deduct a set sum from your paycheck, too, and plunk it into your emergency fund. The point here is to set it and forget it, since you've likely got a lot of other things going on.

3. Be strategically aggressive in funding your fund. The most obvious strategies, such as getting a second job, can be quite effective. It doesn't have to be forever, but if you spend a year working 10 extra hours a week and netting just $10 an hour, that will amount to $100 a week, or $5,200 a year.

4. Lower some small expenses to free up money to set aside. A money-saving strategy you'll often run across is cutting out or cutting back on costly habits such as jumbo mocha lattes or cigarettes. If you spend just $5 less a day on such items, that will total more than $1,800 by the end of the year.

5. Lower some big expenses to free up money to set aside. There are myriad ways to rein in your large-item spending. Spend a little time shopping around for the best deal on your home insurance and car insurance, and you might surprise yourself by saving hundreds of dollars. Consider canceling or postponing a big expense, such as a fancy vacation or a large-screen TV, until your rainy-day fund is fully funded. And instead of using windfalls like tax refunds to splurge, earmark them for your emergency stash.

Also, remember those budgeting rules you followed in your younger days? Perhaps it's time to revisit them. Take a close look at lots of your expenses, and you may find more ways to save, such as switching to a generic form of a medication, switching from your $40-per-month gym membership to a $10-per-month one, or eating less frequently at restaurants.

We all need to be prepared for a financial disaster. Don't leave your fortune to fate -- protect yourself via an emergency fund.

 

Source: by Selena Maranjian at DailyFinance.com

High House Prices Do Not Derail Retirement Plans for Most.....

Some people claim that rising house prices are preventing Canadians from saving for retirement. Not much money is left over after mortgage payments, they say. But there is little factual evidence to support this view.

According to the National Household Survey released in early September by Statistics Canada, few Canadians are overspending on mortgages. It found that 59 per cent of homeowners have a mortgage and just 26 per cent of them spend more than 30 per cent of gross household income on housing (Statistics Canada’s threshold for affordability).

 

Doing the math, only 15 per cent of homeowners are paying too much for housing. Moreover, Finance Minister Jim Flaherty’s tightening of mortgage-lending rules will likely bring this percentage down. Overall, this doesn’t seem to be a crisis situation.

Interestingly, the National Household Survey found that 40 per cent of renters spend more than 30 per cent of gross household income on housing. Perhaps we should be more concerned about rents being too high?

More likely, however, this overspending represents a lifestyle choice. And probably the same could be said of the homeowners whose mortgage payments are too high. Instead of living in a dwelling within their means, they reached for a fancier house or neighbourhood.

It could be that many of the “spendthrifts” are in occupations where they are confident of receiving good-sized salary increases. Yet others may be funding pension plans through payroll deductions at work, or prefer to do the bulk of their retirement saving later in life.

Whatever the motivation, it hardly seems rising house prices are endangering retirements. Quite the contrary: equity in a house can provide income for retirement through downsizing to rental accommodations (among other ways).

Indeed, a recent Statistics Canada study, The Adequacy of Household Savings, found that when financial and property assets are included in wealth, two-thirds of Canadians exceed optimal savings for retirement. For those below, most are low-income earners who can enjoy a retirement lifestyle substantially the same as their working-age years thanks to public pensions and benefits.

All this is not to argue in favour of higher house prices. A period of stable or much slower rising prices, as policymakers are attempting to engineer, would be welcome given the extent of past increases. But it would be misleading to suggest the price increases have put retirements at risk.

(Source: Larry MacDonald Globe and Mail)

Larry MacDonald is a retired economist who manages his own portfolio and writes on investing topics. He tweets at @Larry_MacDonald

Canadians aren't getting the whole story on the economy!

Here’s a headline you probably didn’t see: Canadians Have Never Been Richer. Or this one: Household Net Worth Rises To All-Time High. Or this: Canadians Are Twice As Wealthy, After Inflation, As They Were Twenty Years Ago.

No, the headline you did see was something like this: Canadian Household Debt-To-Income Ratio Hits Record High. Canadian Household Debt Climbs. Canadians Go Deeper Into Debt.

It’s not that the latter headlines aren’t true. In fact, the ratio of household debt to disposable income did reach an all-time high in the second quarter, at 165.6%, bettering the previous records that had themselves inspired a thousand heavy-breathing headlines.

It’s just that they’re not the whole story. Merely reporting how much debt we are carrying, even relative to disposable income, tells us little. Without knowing how much we have in the way of assets, we have a very incomplete picture.

Anyone who’s ever bought a house knows this. If you take out a $300,000 mortgage to buy a $500,000 house, your debt may have gone up, but your financial position is unchanged: it’s the difference between the two, your net worth, that counts.

True, taking on debt puts you at some risk. Even with a fixed mortgage, your net worth can rise or fall, depending on whether your house appreciates or depreciates in value. But you’d think you’d at least want to know what it was. If you had to depend on the media, you’d be out of luck. Your house could have doubled in value, and all you’d know is that you had $300,000 in debt.

It’s not that these numbers are hard to find. Statistics Canada reports them at the same time and on the same page as the figures on household debt. What do they show? They show that in addition to liabilities of about $1.75-trillion, Canadian households also had assets worth roughly $9-trillion — more than five times as much.

All told, Canadians’ net worth stood at $7.263-trillion, or $207,300 per capita. Adjusted for inflation, that’s a new record. A decade ago, it was less than $150,000 per capita, in 2012 dollars. A decade before that, it was less than $100,000. That’s right: over the last two decades, Canadians’ per capita net worth has more than doubled, after inflation. Bet you didn’t read that story.

Of course, even if your assets exceed your debts, you still have to make the payments. But here again, debt-to-income doesn’t tell the whole story. You also need to know what interest rate you’re paying on the debt: it’s the combination of the two that dictates how much you pay every month. These figures, too, are readily available: the Bank of Canada calculates a “housing affordability index,” measuring mortgage payments, principal and interest combined, against disposable income. What does it show? At a ratio of less than 26% (as of the first quarter of this year) it is lower than it has been at virtually any time over the last 30 years — half what it was in the early 1990s, a third of its level in the early 1980s. But no, you haven’t read that anywhere, either, have you?

I wish I could say this was unusual. But it’s more or less a constant. It isn’t just the well-known observation known as Easterbrook’s Law — “all economic news is bad” — which holds that any economic development is bad news for somebody, and will be reported as such, even if it’s good news for everyone else. It’s that the good news as often as not gets flat out ignored. It just seems more compelling, more concerned, more responsible, to report that everything is getting worse, even if the facts show that at least some things are getting better.

Elsewhere I’ve pointed out that, contrary to everything you’ve read lately, poverty is declining in Canada, median incomes are rising, while inequality is steady or even falling. Again: these figures are easily available. But the same applies to a range of other data. How many stories have you read about youth unemployment (“Canada’s Youth Face Job Crunch” ), now at 14%? How many told you that that is in fact rather lower than it’s been at most times in the last 40 years?

Of course it would be better if it were zero, but numbers only have meaning relative to some benchmark. Indeed, the reason we say 14% is bad is because it’s worse than the overall rate of 7% — or because it’s worse than it was a few years ago, at the height of the expansion. But it’s at least as significant that it is better than it was in almost any year in the four decades before that.

Another example: the Canadian Centre for Policy Alternatives has just put out a study on tuition fees and student debt. Spoiler alert: it shows both are rising, as they have been for several years. In fact, Canada now has the fifth-highest post-secondary tuition fees in the OECD. That’s worth knowing, and raises legitimate fears that it might reduce accessibility.

But wouldn’t it also be worth knowing whether it has in fact, reduced accessibility? And would you be surprised to learn that, in fact, rates of enrollment have been climbing throughout this period: that, from 2000 to 2010, while the population aged 18-21 increased by 12%, enrollment in post-secondary education increased by 38%?

Yes, I’m guessing you would.

  (Source: Andrew Coyne | 13/09/13 | Last Updated: 13/09/13 8:54 PM ET)

6 Months to a Better Budget

One of the challenges with proper budgeting is that it has to become habitual in
order to be effective. You can survive without knowing how to budget if you manage
to keep more money coming in rather than going out or have credit cards to cover
the gap, but this won't last forever.

Emergency Fund
The crux of this six-month plan is the emergency fund. Ideally, everyone should have at least one or two months' wages sitting in a money market account for any
unpleasant surprises. This emergency fund acts as a buffer as the rest of the budget is put in place, and should replace the use of credit cards for emergency situations. You will want to build your emergency fund as quickly as possible. The key is to build
the fund at regular intervals, consistently devoting a certain percentage of each
paycheck toward it and, if possible, putting in whatever you can spare on top.

What's an Emergency?
You should only use the emergency money for true emergencies: like when you drive
to work but your muffler stays at home. Covering regular purchases like clothes and
food do not count, even if you used your credit card to buy them.

Downsize and Substitute
Now that you have a buffer between you and more high-interest debt, it is time to
start the process of downsizing.It’s odd that the natural solution to "not enough
money" seems to be increasing income rather than decreasing spending, but this
backwards approach is very familiar to debt counselors. The more space you can
create between your expenses and your income, the more income you will have to
pay down debt and invest. This can be a process of substitution as much as
elimination. For example, if you buy coffee from a fancy coffee shop every morning,
you could just as easily purchase a coffee maker with a grinder and make your own,
saving more money over the long term.

Focus on Rewards
Another trick that will help your budget come together faster is to focus on the
rewards. A mixture of long-and short-term goals will help keep you motivated. This
can be as simple as saving for a small luxury, or even something bigger like buying a
car with cash. Watching these goals slowly but surely become a reality can be very
satisfying and provide further motivation to work harder at your budget.

Find New Sources of Income
Why isn't this the first step? If you simply increase your income without a budget to
handle the extra cash properly, the gains tend to slip through the cracks and vanish.
Once you have your budget in place and have more money coming in than going out,
you can start investing to create more income.

Now, it is possible that it will take you more than six months to get your budget
balanced out as it all depends on your situation, including how much or what kind of
debt you have. But, even if it does take you longer than six months to get your
budget turned around, it is time well spent.

(Source: Investopedia.com)

10 Worst First-Time Homebuyer Mistakes

Are you gearing up to buy your first place? Arm yourself with these tips to get the most out of your purchase and avoid making 10 of the most costly mistakes that could put a hold on that sold sign.

1. Not Knowing What You Can Afford. 
As we’ve all learned from the subprime mortgage mess, what the banks says you can afford and what you know you can afford or are comfortable with paying are not necessarily the same. If you don’t already have a budget, make a list of all your monthly expenses (excluding rent). Subtract this total from your take-home pay and you’ll know how much you can spend on your new home each month.

2. Skipping Mortgage Qualification
What you think you can afford and what the bank is willing to lend you may not match up, so make sure to talk to your mortgage broker and get pre-approved for a loan before placing an offer on a home. Beware that even if you have been pre-approved for a mortgage, your loan can fall through at the last minute if you do something to alter your credit score, like finance a car purchase.

3. Failing to Consider Additional Expenses
Once you’re a homeowner, you’ll have additional expenses on top of your monthly payment. You’ll be responsible for paying property taxes, insuring your home against disasters and making any repairs the house needs. If you’re purchasing a condo, you’ll have to pay maintenance costs monthly regardless of whether anything needs fixing because you’ll be part of a building strata.

4. Being Too Picky
Go ahead and put everything you can think of on your new home wish list, but don’t be so inflexible that you end up continuing to rent for significantly longer than you really want to. First-time homebuyers often have to compromise on something because their funds are limited.

5. Lacking Vision
Even if you can’t afford to replace the hideous wallpaper in the bathroom now, it might be worth it to live with the ugliness for a while in exchange for getting into a house you can afford. If the home meets your needs in terms of the big things that are difficult to change, such as location and size, don’t let physical imperfections turn you away.

6. Being Swept Away
Minor upgrades and cosmetic fixes are inexpensive tricks that are a seller’s dream for playing on your emotions and eliciting a much higher price tag. If you’re on a budget, look for homes whose full potential have yet to be realized. First-time homebuyers should always look for a house they can add value to, as this ensures a bump in equity to help you up the property ladder.

7. Compromising on the Important Things
Don’t get a two-bedroom home when you know you’re planning to have kids and will want three bedrooms. Don’t make a compromise that will be a major strain.

8. Neglecting to Inspect
Before you close on the sale, you need to know what kind of shape the house is in. You don’t want to get stuck with a money pit or with the headache of performing a lot of unexpected repairs.

9. Not Choosing to Hire an Agent or Using the Seller's Agent
Once you're seriously shopping for a home, don't walk into an open house without having an agent. Agents are held to the ethical rule that they must act in both the seller and the buyer parties' best interests.

10. Not Thinking About the Future
It's impossible to perfectly predict the future of your chosen neighbourhood, but paying attention to the information that is available to you now can help you avoid unpleasant surprises down the road.


(Source: Globe & Mail)