Is Paying off Mortgage a Safer Investment for Your Cash?

Study after study suggests that Canadians are having a tough time paying off their mortgages, as debt levels continue to hit record levels year after year. Why?

Could it be that there are more opportunities to spend? Could it be that some people don't want to pay off their mortgages faster?

Or are some professionals advising alternate investment strategies, suggesting that paying off the mortgage is not the best financial strategy?

BIG MORTGAGES AFFECT RETIREMENT
Rebecca and Darcy are in their mid-50s and are starting to think about retirement planning; they would like to retire in the next five years.

One of their biggest hurdles is a $225,000 mortgage. Currently, their $2,200 monthly payment would have the mortgage paid off in 10 years.

Rebecca and Darcy recently both received increases in pay at work, allowing them to increase their mortgage payments by $1,000 per month and pay off their mortgage in just under seven years.

Just as they were working with the banker to renew their mortgage, Darcy also got news that he is going to receive a significant inheritance, which he could use to pay off the mortgage all at once.

When they asked the banker what they should do, the advice concerned them.

ADVICE FROM THE BANK
The banker suggested that in a low-interest-rate environment, paying off the mortgage might not be the best thing to do with the $225,000 inheritance.

Instead, they could invest it into a mutual fund that made over six per cent over the past year and over five per cent compounded over the last five years. With mortgage rates at 2.5 to three per cent, higher investment returns would mean more money in their pocket.

The banker put together a nice graph showing Rebecca and Darcy that investing the $225,000 would give them over $315,000 in seven years at five per cent, and that their $3,000 monthly payment would mean the mortgage would be paid off at the same time.

The bank's conclusion? Keep the mortgage and invest the lump sum for a higher return.

WHAT WOULD YOU DO?
The banker is mathematically correct, but the big "if" lies in the rate of return, which cannot be controlled or predicted. The five-per-cent return is not guaranteed; what if the next five years aren't as generous?

I ran some numbers at two per cent for the couple, and in that scenario, $225,000 would only grow to $258,000 after seven years. Alternatively, paying off the mortgage and investing the $3,000 per month mortgage payment at the same two per cent would give them $274,000 after the same period.

Basically, if the return on investment is greater than the interest cost on the mortgage, then the math would tip toward investing money. If the return on the investment is lower than the interest rate on the mortgage, then the math would tip toward paying off the mortgage.

We could complicate the calculation with after-tax returns, but we'll keep things simple for this column.

The bottom line is paying down the debt is a more conservative option. It puts more control, flexibility and security in the hands of Rebecca and Darcy. Investing is always great when the returns come, but a good return is not guaranteed.

The banks make money when you keep a mortgage and they also make money when you invest in their mutual funds. Could that have any influence over the banker's advice here?
There is no right or wrong solution here. Both investing and paying down a mortgage are financially responsible.

I tend to err on the conservative side, so if I were in Rebecca and Darcy's shoes, I would pay off the mortgage, then invest the $3,000 per month for retirement. What would you do?



Jim Yih is a financial expert. Visit his award-winning blog, RetireHappyBlog.ca

© Copyright (c) The Edmonton Journal

Overbuilt Condo Market May Put CAD Economy at Risk

OTTAWA — An overbuilt and overpriced condominium market is posing a risk to Canadian households, banks and the economy in general, the Bank of Canada warned Thursday in its latest review of the health of the country’s financial system.

New housing already purchased and in the pipeline continues to propel the Canadian real estate market but worries persist about what happens when that tap turns off.

For now, the industry got another bit of good news Monday with Canada Mortgage and Housing Corp. saying new home construction or starts reached the lofty 200,000 level in May on a seasonally adjusted annualized basis.

The central bank particularly singles out the Toronto condo market, which it notes continues to carry a high level of unsold high-rise units in the pre-construction or under construction phases.
Overall, the bank says it believes both global and Canada financial conditions have improved somewhat despite the subdued pace of the economic recovery.

In Canada, the growth in household credit has continued to slow and has fallen broadly in line with growth in disposable income, and overall activity in the housing market has moderated.

But it is still worried about the housing market, and particularly condos in Toronto.

“If the upcoming supply of units is not absorbed by demand as they are completed over the next 12 to 30 months, the supply-demand discrepancy would become more apparent, increasing the risk of an abrupt correction in prices and residential construction activity,” it says.

“Any correction in condominium prices could spread to other segments of the housing market as buyers and sellers adjust their expectations.”

That could start what it terms a negative feed-back loop. A plunge in house prices bites into net household worth, shatters confidence and consumer spending, impacting income and job creation.

“These adverse effects would weaken the credit quality of bank’s loan portfolios and could lead to tighter lending conditions for households and businesses. This chain of events could then feed back to the housing market, causing the drop in house prices to overshoot.”

The warning comes as Statistics Canada reported the price of new homes nationally rose 0.2% in April from the previous month. Economists had expected an a 0.1 increase.

The bank cautions that its unravelling scenario is not what it is predicting. In fact, it still expects the correction in the housing market to go smoothly.

“Nevertheless, simple indicators continue to suggest some overvaluation in the housing market; house prices are high relative to income and housing affordability could become a concern when interest rates begin to normalize,” it adds.

The continuing highlighting of household imbalances, despite noting that the risks have in fact lessened somewhat in the past six months, suggests the central bank remains worried that with interest rates likely to continue at near emergency low levels, the dangers of something going off the rails intensifies.

 

Last week, the OECD singled out Canada as one of three nations in the advanced economies with the most overvalued housing market, adding that despite that elevated status, prices continue to rise.
Any number of shocks could send Canada’s house of cards tumbling, the bank says, particularly higher borrowing costs that pinches households already carrying record high levels of debt.

Even an intensifying of the ongoing euro-area financial crisis, which could occur, the bank says, because there are signs Europeans are becoming weary of austerity and reforms.

“If the situation were to occur … trade and financial linkages could spread the shock to other regions, leading to a more severe and protracted reduction in global demand. This in turn could trigger a sharper correction in Canada’s housing market.”

The bank says even if the worse does not happen, it will take years for Canada’s housing imbalances to right themselves.

The report is the first published under Governor Stephen Poloz who took the post June 3 as Mark Carney left to head the Bank of England. Poloz told lawmakers last week he is concerned about the risks posed by consumer debts that grew through the housing boom as banks increased mortgage lending. He also said the limits of domestic-demand led growth have become clear.

Household debt reached a record 165% of disposable income in the fourth quarter, and Finance Minister Jim Flaherty tightened mortgage rules last year to avoid what he called signs of overheated condominium markets in Toronto and Vancouver. Statistics Canada will publish first-quarter debt figures later this month.

The central bank forecast Thursday that the debt to disposable income ratio will stabilize this year. Other signs of “constructive evolution” of household imbalances include slowing housing starts and resales since mid-2012, according to the report.

Julian Beltrame, Canadian Press | 13/06/13 | Last Updated: 13/06/13 11:45 AM ET

Five Most Important Things to Know BEFORE You Reno!

Home renovations rarely go as planned. The job always takes longer, costs more and makes you waaay crazier than your HGTV-fueled dreams can ever account for. Maybe that explains why, according to a recent TD poll, many homeowners forget one very important thing. No, we’re not talking about the latest fixtures or low VOC paint. What most of us are actually forgetting is how renovations will affect our home insurance policy.

Research from TD Insurance found that only 6 percent of homeowners checked their policies before pulling out their toolkits. Unfortunately, this means you may be putting yourself at risk if you have to file an insurance claim. So, in honor of renovation season, let’s take a look at some of the insurance issues homeowners should be aware of – and what can go wrong if you get too focused on design and forget about the bottom line.

From renovation dream to financial nightmare

According to Dave Minor, a vice president at TD Insurance, homeowners should contact their insurance provider before they start swinging a hammer. Why? Because if you hit something you shouldn’t (ahem, a pipe), you might not be covered.

Here are a few things you need to know about insurance when you’re looking to renovate…

1) Beware of exclusions

Most of us probably don’t read our insurance policy, but if you did (and should), you’d find a few clauses about renovations. Exclusionary clauses. To be specific, your policy is likely to exclude certain kinds of coverage when your home is under construction.

“Insurance is all about risk. When a home is under renovation, that risk will change or increase depending on the magnitude of those renovations,” Minor said. “Many companies will change the coverage during the course of the renovations and may exclude certain perils, such as glass breakage or water damage.”

What that means is if you’re demolishing your bathroom and hit a pipe in the process, it might just be your problem. The same thing can happen if you leave your house vacant while having the work done; not being home can negate some of your coverage. To avoid this, consult with your insurance provider before you dig in, to ensure you’re covered.

2) It won’t cover you for amateur mistakes

We’re all for DIY. Putting in a little sweat equity can be a great way to cut your renovation costs and boost the value of your home. But some things are better left to licensed professionals. This is most important for tasks where building codes apply - think plumbing, electrical and construction. Not only are these jobs often technical and complicated, but the stakes are high: Do them yourself and you may end up in a scene from the “The Money Pit” – with no insurance coverage to take care of the damage (and no Tom Hanks to hold you tight and tell you everything will be okay). If you want to get your hands dirty in your own house, choose something where the consequences will be less catastrophic (say, with a paintbrush).

3) You should be concerned about contractor injuries

Speaking of professionals, you should look for one when it comes to any kind of contractor you hire, preferably one with liability insurance, Minor said.

“If they or one of their employees gets hurt while working on your property, their insurance should cover any liability,” Minor said. “If they don’t have that, you as a homeowner may be responsible for the liability costs associated with a contractor’s injury.”

Don’t leave this to chance, Minor said. Ask to see your contractor’s certificate of coverage.

4) A fresh look may require a fresh insurance policy

We often renovate our homes for the thrill of tossing ugly old decor away in favor of something we love, but there’s often a financial motivation as well. A more updated, better maintained home can be worth a lot more when you go to sell. But what many people forget is that when their homes are worth more, this can mean they need more insurance coverage too. When you ditch linoleum in favor of hardwood and replace laminate with granite, the value of your home increases, which means any insurance claim you may have to make is likely to be higher as well. This is especially true with major renovations, like additions. You may not have to pay higher premiums, but it’s a good idea to check with your insurance provider to ensure your home’s fresh new look has a policy to match.

5) Some renos can cut your premiums

While many home improvements have the potential to boost your insurance premiums, there are some that can reduce them. These may include installing a security system, waterproofing the basement, replacing your roof, or updating outdated plumbing or wiring.

“Insurance premiums are related to risk, so think about the things that will reduce that risk,” Minor said. “Every company is a bit different, but wherever you can reduce the probability of having to make a claim, there’s a good chance that will help reduce your premiums.”

Go forth and renovate

Whether you’re looking to take on a small update or a major renovation, add insurance to the list of things you need to tackle. It might not be as exciting as drafting plans and picking out paint colors, but if there’s anything a home renovation doesn’t need, it’s an unpleasant surprise. Renovating provides enough of those as it is.

 

By Noel Hulsman | GoldenGirlFinance.com – Fri, 17 May, 2013 4:29 PM EDT

4 Tips for a Stress-Free Summer Move!

The majority of Canadians prefer to make their big move during the

summer season. There are a variety of reasons for choosing this time of

year: it is easier to transport boxes in non-icy conditions, no need to

worry about your belongings freezing during transport, and children's

lives are not disrupted by the transition since they are on summer

holidays. Minimize potential moving chaos by asking yourself the

following questions:

• Do you need to keep everything?

Moving offers a good

opportunity to reorganize your life by giving away, donating or

recycling items that you no longer need. You'll thank yourself later

when there is less to pack and transport.

• How well do you know your moving company?

The Office of

Consumer Affairs drafted a Consumer Checklist for choosing a moving

company and it reminds Canadians to request their moving estimate in

advance and be mindful of seasonal rates (a summer move can be

pricier). Will your items be held in the transport vehicle overnight or a

secure facility? Consider purchasing Replacement Value Protection,

which will ensure the company is liable if your possessions are

damaged.

• Do you have enough boxes and packing materials?

Start

collecting boxes and newspapers in advance; ideally you should begin

packing non-essential items a month in advance. Pack and clearly label

a couple boxes with important first day arrival items, such as

toothbrushes, remote controls, medication, and pet food, which could

otherwise become lost in the shuffle.

• Once you step in the door, what are your top priorities?

After

the bed is set up, most people are eager to get connected by hooking up

their TV, internet and home phone. Rogers introduced a free concierge

service which makes this process easier by setting you up with a

personal concierge agent. The agent proactively connects with

customers throughout the transition, reviews order details, answers

billing questions, and can assist with any changes to your order if your

moving date needs to shift. Entering the next chapter of your life can be

a thrilling time, but like any significant life change, the process can be

quite overwhelming. Control potential

moving chaos by jotting down

questions and tracking their completion on your personal checklist.



Source: News Canada

The Skinny on Monthly vs. Bi-weekly Payments

With all the headlines in the media these days about housing bubbles, we need to take a look to find the silver lining.  We truly believe there is a silver lining for those people who really understand how to manage their mortgage.

If you want to pay off your mortgage in a specific time frame or buy that larger home for your expanding family, you need to have a plan and understand the options you have available to you.  In the past many people have relied on house prices increasing to build equity which will allow them to make that next purchase or to upgrade their current home.  Since so many people took those 30 or 40 year amortized mortgages, building equity can be a challenge when house prices are not climbing.

There are a few simple things you can do that will help you build equity so that you can buy that bigger house, condo at the ski hill, or even better, payoff your existing mortgage sooner.

Purchase Price	$400,000
Down Payment	$20,000
	$380,000
CMHC Premium	$10,450
Mortgage	$390,450
	Monthly	Bi-weekly Accelerated	Round up payment
Payment 3.19%	$1886	$943	$1,000
25 yr Amortization
Balance after 5 Yrs	$334,945	$324,646	$316,627
Equity	$55,505	$65,804	$73,823

As you can see in the example above, by making some small changes to when and how much you pay, you can create a lot of equity in even 5 years, regardless of what is happening to house prices.  These numbers grow even faster if you bump up the payments annually or put that tax return down as a lump sum.

The key is to first decide what truly drives or motivates you, and then work with us to build the plan that will help you achieve your goals. An accountability partner can be a huge asset when trying to stay on track and no one knows more about mortgages than we do, so let us know if we can be your accountability partner and let's start developing your plan today

10 Tips for Hiritng a House Cleaning Service

Ever hire a home cleaning service? Have you been disappointed with the results? Or, would you like to get a little more out of the cleaning service that comes to your home? Here are 10 tips for hiring a house cleaning service that I have learned over the years:

• Interview more than one potential service. If you are interviewing individuals, you need to be comfortable with that person (people). If you are hiring from a large company, ask if they will send the same person consistently, or if they rotate staff. There are pros and cons to both: the same person is familiar with your house, but I have noticed the longer the same person cleans for me, the more places that should be cleaned, are missed. The downside to a new crew weekly: there is a learning curve that I am paying for as they familiarize themselves with my home.

• Make certain the individual or agency (and their employees) are licensed and insured. If they break something, will it be replaced? Repaired? If someone if hurt in your home, who will pay the medical bills?

• Define the scope. Are you looking for a weekly, bi-weekly, monthly or a one-time clean. Make certain that everything you want done, will be done. If the cleaning crew needs to use a stepladder to get to the top shelf and dust, are they willing to do so? Will your furniture and lampshades regularly be vacuumed? What about under cushions? Is cleaning out the refrigerator extra? Are baseboards regularly dusted? Door and window casements? Will the dog-snot be washed from the front door? Are nicknacks dusted? How much to clean a finished-basement? How is the kitchen floor washed? Mop or hands and knees? Ask about OSHA restrictions. I once had a cleaning service tell me it was against OSHA rules for them to use ammonia in my house.

• Make sure pricing is explicit! If you are hiring an agency, make certain that there are no hidden fees. If you are hiring an individual, make certain they are paying their taxes and social security. Definitely consult an accountant to make certain you are not hiring that person as an employee, but as an independent contractor. The tax implications for you of one versus the other are great, so make certain your accountant fully explains the ramifications of hiring an individual to you.

• Don’t forget to inform the agency/individual of any pets you may have for allergy and phobia considerations. You may think a white rat allowed to roam loose about the house is perfectly normal. The house cleaner may freak and beat Whitey with a broom. The cleaning service may also schedule more time for a dog that sheds copious amounts of fur, may not be willing to change the litter box or the lining of a bird cage. Or, those services may come with an additional cost.

• Who supplies the cleaning products? I have steered away from the ultra green companies that will not use a swiffer on my furniture, but would rather wants spray everything down and wipe away the dust. Regardless of how gentle, I don’t want anything sprayed on my furnishings. And, while vinegar may be an excellent cleaner, it will destroy my marble floor. I have found very few products that don’t leave streaks on my stainless steel appliances, so I want to be certain that the cleaning company is happy to some/all of my products.

• Discuss with the service how many people will be coming to your home. You have cleaned your house and know how long (or short) it takes to clean. If it takes 6 hours for you to clean, do not expect a cleaning service to be able to accomplish the same task in 4 man-hours. I prefer one person in my house for every 2 man-hours of labor. I truly do not want a cleaning service here all day, and cleaning is hard work! That means one person will take longer to clean your 6 man-hour house than 3 people at 2 hours each. Fatigue sets in and people slow down. Not only that, but do you really want one house cleaner in your home all day long?

• Decide if you need to be home when the cleaning is conducted. Most companies/individuals give an arrival time-frame. Only first service of the day will be “on time”. If you expect a service “between 10 and 12″, and then they clean for the next 2 hours, you need to block out that time to be home. However, if you are willing to give a service a key to your house (or a code if you have coded locks and security system), you are not tied to the house during that time-frame.

• Do not clean your house before the cleaning service arrives. Believe me, you will not be the messiest/dirtiest/most disgusting house a seasoned house cleaner has ever seen, especially if they do trash-outs.

• Do pick-up and put away the clutter. The more services that are clear of clutter the better the job in the shortest possible time the cleaners can perform. Moving clutter takes time, and some agencies will not do it. I cannot stress the importance of: put away your junk! Also, don’t forget to put away jewelry, prescription medications and cash. Yes, you have checked for licensing and bonding, but better safe than tempted. I have never had a cleaning person snoop or take anything. Ever. But, there is always a first time.

Source: www.annsentitledlife.com/

Surprising Item's Buyers Look For in a Home

Apart from a gorgeous place on a great street, that is. Here’s what’s getting

the attention from potential buyers these days.

1. Energy efficiency features

– With fossil fuel prices headed skyward,

buyers now want homes that will save them money on energy bills every

day. Think beyond programmable thermostats and Energy Star

appliances: buyers are getting excited about unsexy features like heat

recovery, ventilators, ground source heat pumps, tankless water heaters,

solar panels, and low emissivity, argon-filled windows.

2. Luxurious Bathrooms

– Coveted bathroom features include: whirlpool

tubs, separate shower enclosures, multiple showerheads, generous linen

closets, dressing areas, and double sinks. Buyers also expect multiple

bathrooms, and Jack & Jill bathrooms are popular with families.

3. Built-in closet organization systems

– Whether your closets are

massive or minute, make the most of them with built-in organization

systems. Several companies offer many different closet systems,

allowing you to customize your closets. For maximum return on

investment, plan flexibility into the design. Buyers will want to configure

their own storage areas.

4. Specialty rooms

– The living room is practically passé, but mention a

well-outfitted media room/home theatre and buyers’ wallets start to pop

open. Exercise rooms are also a trendy feature. And in certain

neighbourhoods, a dedicated yoga/meditation space could seal the deal.

5. Environmentally friendly finishes and materials

– Hardwood floors

are perennially popular, but some buyers prefer eco-friendly alternatives

to traditional hardwoods. Bamboo is one of the trendiest new flooring

options, because it’s considered a renewable and sustainable resource.

Cork and natural linoleum are also appealing; heritage hardwood

reclaimed from old buildings offers both patina and eco-panache.

Likewise, concerns about both health and the environment are leading

lots of buyers to look for homes decorated with natural, environmentally

responsible materials and finishes. Paints that are low in VOCs (volatile

organic compounds) are a healthier alternative to conventional paints,

which release toxic emissions for years. Window coverings made of

cotton, hemp, linen, wood or other natural materials are preferable to

petrochemical products. Avoid installing anything made of particleboard.

6. Wired home

– Each year, there are more techno-gadgets and

appliances we just can’t live without. Buyers expect a house to have

plenty of well-located phone jacks, electrical outlets, and cable/internet

connections. We want flexibility and portability, so a house that’s wired

for maximum connectivity is a hot property.

Other items to consider are luxurious touches around the home, spacious

and stylish utility rooms, and high-end finishes for appliances.

(Source: www.hgtv.ca)