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)

7 Ways to Save You Money

Many Canadian families are working hard to save money and reduce debt.  By saving modest amounts, however, you can reap big rewards over time.  Here are easy ways you can save $100 or more this year!

1) Plug into Bargain Electricity

Are your electricity bills excessive?  Maybe you're using too much power at peak hours.  For instance, try running your dishwasher at night, rather than during the day.  By taking advantage of off-peak rates, most consumers can save about $100 a year.  Also, replace pre-1992 appliances when they break down with new ones with the Energy Star Label.

2) Challenge Your Property Tax

Go to your local assessor's office and find out what property taxes your neighbours are paying.  If your house is similar but your taxes are higher, you may want to challenge your bill.  Also, read the description of your home.  Errors in square footage or the number of bathrooms could mean an overcharge.  The assessor's office or local board of tax review can tell you how to file an appeal.

3) Pay off your Plastic!

If you carry a credit card balance from month to month, pay it back pronto.  A $1,000 balance at 18 percent blows nearly $200 a year in interest charges.  If you can't pay it off in full, transfer your debt to a lower-rate card.

4) Skip the Service Contract

Extended warranties on electronics are rarely a good deal.  Experts say most product breakdowns occur in the first year and are covered by the manufacturer's warranty.

5) Buy in Bulk

Items you may use a lot, such as paper towels and diapers, are often far cheaper when you buy in quantity.  E.g. new parents buy an average of 2400 disposable diapers in their baby's first year alone.  Diapers that cost 20 cents apiece sold at grocery shops might go for 15 cents when bought in bulk at a discount store or warehouse.  Just a nickel a diaper could add up to an annual savings of $120.

6) Rethink Your Vacations

The "staycation" (relaxing at home) is becoming a popular way to save a bundle on a vacation.  But if you still want to travel, consider using discounted accommodation like VRBO.com and through Groupons.

7) Use Online Banking

Online banking can save you time and money.  If you sometimes forget to pay bills, set up automatic payments in order to avoid potential late fees.  It also allows you to monitor your cash flow.

Source: Reader's Digest

Second Mortgage Loans vs. Home Equity Loans

It’s not surprising that some homeowners confuse the terms “second mortgage” and “home equity loan.” After all, a second mortgage is a type of home equity loan. But more often than not, home equity loan is used to describe a home equity line of credit, or HELOC. If you want to take advantage of the equity that you have built up in your home, you will need to decide if a HELOC or a true second mortgage is best for you.

Before discussing which might be better for your purposes, let’s look at some of the basics of each. A second mortgage pays out a fixed sum of money to be repaid on a set schedule, like your initial mortgage. Unlike refinancing, the second mortgage does not supersede the first mortgage. Second mortgages are usually 15 to 30 year loans with a fixed rate of interest. Like the initial loan, the rate of interest and points (if any) will be based on your credit history, the price of the home, and the current interest rate. While the interest rate on a second mortgage may be a little higher, the fees are generally lower.

HELOC, however, is similar to a credit card, and it may even include a credit card to make purchases. Like credit cards, interest is charged, and the amount you can borrow is based on your credit worthiness.

To determine the limit of your HELOC, lenders will look at the appraised value of your home, you may have access to up to 80% of the appraised value or purchase price of your home (whichever is lower), less any prior outstanding mortgage charges. As your mortgage balance decreases, your available rate increases.

Your current financial needs will help to determine which type of loan is right for you. If you need money for a one-time expense, such as building a new deck or paying for a wedding, you would probably opt for the fixed-rate second mortgage.

But if you forecast a recurring need for extra money, such as tuition payments, you may prefer a HELOC. A line of credit allows you to borrow when you need the money and, if you pay back the amounts quickly, you can save money over a second mortgage. You also need to consider your spending habits. If having another credit card in your wallet would temp you to spend more often, then you are not a good candidate for a HELOC.

Once you make an initial determination about which loan might be right for you, you will need to discuss the details with a professional.  We recommend that you speak with an independent mortgage broker with experience in this sector to help you make the most effective decision among the products available.

 

Source: AllBusiness.com

Half of Canadians expect to be debt-free by 2017???

In a Leger Marketing poll, 54% of Canadians said they expect to be debt-free in five years. The average current debt of Canadians is $112,329. Getty Images files

Is it a dream or reality? Half of Canadians now in hock expect to be debt-free by 2017 and that includes their mortgage, a new Bank of Montreal study says.

In a Leger Marketing poll, 54% of Canadians said they expect to be debt-free in five years. The average current debt of Canadians is $112,329.

Men are more likely to carry large debt, with 30% saying they owed more than $100,000, compared to 22% of women. Those in the age group of 35-44 are also the mostly heavily in debt, with 43% saying they owe more than $100,000.

“While debt is a part of life for the majority of Canadians, it doesn’t have to be a permanent fixture,” said Su McVey, vice-president, BMO Bank of Montreal. “While interest rates have likely kept debt loads manageable for many households, that picture may be poised to change in the coming year.”

Once again, the Bank of Canada made no move Tuesday to change its key lending rate, which is tied to the prime lending rate at most financial institutions. “Some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2% inflation target over the medium term,” the bank said. “The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”

Despite the near-record-low rates, Canadians have been encouraged to lower debt levels by both the Bank of Canada and the federal government.

Clearly some Canadians are heeding the call. The BMO survey found 25% of Canadians have no debt. Only 26% of respondents with debt say they have debt load of more than $100,000. The average monthly debt payment for those in the survey is $1,138.49.

BMO cited Statistics Canada data which shows residential mortgages account for 63% of household liabilities, something it described as “good debt.” Consumer credit makes up 28% of liabilities.

While most news appears good, the survey did find 30% of Canadians “appear to be treading water,” in BMO’s words, by paying only the minimum amount they owe. This is despite the fact 70% of Canadians say they can afford to pay more than the minimum.

The online survey was conducted between April 2 to 5 and is considered accurate to within 2.5 percentage points, 19 times out of 20.

 

Author: Garry Marr