Tag Archives: financial planning
I heart my home
Condo buildings offer the option of buying a unit or renting one from an investor, depending on your lifestyle preferences
Helen Morris, National Post
Whether we own our own homes or pay rent, living costs make up a large portion of our monthly outgoings. The decision whether to rent or own a home may be as much to do with the kind of life you wish to lead as how your finances line up.
“When all parts are equal from an investment side of things, home ownership has to be more of a lifestyle decision,” says Trevor Le Drew, financial planning expert and regional director at Investors Group in Windsor. “Before I even get into the financial side, I always make sure that [ownership] is a good fit.”
Mr. Le Drew says location and facilities are key.
“Is it something that you get emotional joy from? Is your career going to accommodate it?” Mr. Le Drew asks clients. “Are you gardeners, do you like to have a workshop? Those are things you’ll have more control over if you actually own as opposed to rent.”
For those who like to travel a fair bit, Mr. Le Drew suggests that renting a small place and investing the money that would have gone toward a more expensive mortgage may be more practical than owning a home. Of course, regular voluntary cash investing probably takes more discipline than making a mortgage payment.
“There are still traditional values associated with owning a home. It’s forced savings, it’s tax-free growth. Just by going through life we end up creating a tremendous asset,” says Mr. Le Drew. “However, if measured over time, home ownership or property is not one of the best performing asset classes.”
Many of us are changing jobs, cities and even countries more often than in the past. The costs involved in buying and selling a home mean that, if we move frequently, any tax-free gain in the value of our home could be wiped out by real estate, legal fees and other moving costs.
With the decision that your lifestyle and financial plan favour homeownership, there may be some hard choices ahead.
“In Toronto, it’s not easy to purchase for [the same monthly outflow] you’re renting for,” says Lois Volk, mortgage broker with Invis. “If you’ve got a rent of, say, $1,600 a month, it could be very hard to keep it at that level and buy.”
A number of Ms. Volk’s clients are looking to buy a home prior to having children.
“Generally, they have to move out of the downtown core area anyway, depending on their income,” Ms. Volk says. “A lot of them want to start a family, so they’ll be down to one income for a while.”
Moving out of the downtown may allow for cheaper housing but there will be new costs.
“Living in downtown Toronto is a different lifestyle from commuting, for sure,” says Ben Melick, a mortgage broker with Mortgage Intelligence in Kitchener-Waterloo. “The biggest sacrifice that most people have to realize, if they plan on moving out this way, getting back and forth to the city [for work] is going to be a little bit of a stress and a demand on their time.”
Back to the lifestyle question: Does the time, money and stress of commuting balance owning versus renting?
“The problem is that a house in Toronto is probably double the price of a house here, if not more. It’s a huge difference,” Mr. Melick says. “You’d have to have dual incomes to purchase a property downtown whereas here you could at least get away with one income. It boils down to affordability and lifestyle really.”
If moving out of town is not for you, downsizing may be a way to move from being a renter to a homeowner.
“I’m finding a lot of people are being forced into buying condos if they want to live centrally because it’s all they can afford, or all they want to afford,” Ms. Volk says. “Weighing the difference in the value versus the time travelling and the travel costs is something to consider.”
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Contact the Jeffrey Team for more information - 416-388-1960
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Five simple ways to start saving for a down payment in 2010
By Parmida Modiri
Accredited Mortgage Professional
Signature Service Financial
Saving up for a home isn’t easy. It takes dedication and some financial planning to be able to afford a property. In order to obtain the best available interest rates Canadian mortgage lenders require at least 5% down payment. With recent comments by Jim Flaherty, Finance Minister, we may even start seeing 10% down payment requirements in future. This means that saving money for a down payment is crucial.
Here are 5 ways to help you start saving towards a down payment:
1. Aim towards stability
Being in the working world isn’t easy, especially contending with competition from other prospective employees. To qualify for a mortgage, it is important to have a stable job, making a sustainable income. Individuals that jump from job to job are more likely to appear risky, so whenever possible, try and keep a consistent job history.
If you find yourself having trouble putting money away, there are few options. You can always start searching for another job with a better pay rate. As well, you can ask your employer for a pay raise. Both can be intimidating situations to be in, but if you find yourself struggling to keep up with household costs, it will be much more difficult to save up for a down payment.
2. Gifts are lovely!
This cannot apply to everyone, but having a family member give a gift of money can greatly help with a down payment of a home. Gifts of money are typically most commonly seen in newlywed couples, who are just starting their lives together looking for a home. Of course, this is not always the case.
Just remember there are some stipulations on gift letters and getting approved for a mortgage. The gift must come from a direct relative (mother, father, sister, etc) and must be deposited in your own bank account prior to closing date of your home purchase.
3. Open a savings account
One of the best ways to save money is to open a savings account and if possible, label it “DOWN PAYMENT”. By depositing regular installments of some extra money into that account, you start saving without even really realizing it. Banks even offer automatic deposit; therefore you don’t even have to think about the money being set aside. As well, you can adjust the amount of money going into this account. For example, if you recently got a raise at work and can afford to put in $100/week, you can find yourself with $5,200 by the end of 2010.
The Government of Canada has recently introduced a new Tax Free Savings Account, which allows Canadian residents to put in up to $5,000 per year. The money withdrawn is tax free and does not need to be repaid into the account (which is different from the Home Buyer’s Plan). For more information on the Tax Free Savings Account, please click here.
4. RRSPs are not just for retirement
Well, actually they are – but the Home Buyer’s plan allows you to use your RRSPs towards your first home purchase. The Home Buyer’s plan is a good way for those first time home buyers with RRSPs to be able to put money down without any income tax deduction. From RRSPs, one is allowed to withdraw up to $25,000 towards the purchase of a home. This money has to be paid back into the RRSP over an extended period of time. If you pay the entire withdrawn amount within 15 years, the original withdrawn amount is tax free.
If you are not a first time home buyer, you can still deduct from your RRSP, up to your deduction limit. The limit is different for every individual. A quick way to find out what your deduction limit is can be done by looking at your latest Notice of Assessment. For 2010, the maximum deduction limit is $22,000. Some individuals may find that they have a larger limit due to the fact that they have not withdrawn any amount from their RRSPs in the last 20 years.
5. Mutual Funds/GICS/Canada Savings Bonds
Putting some of your hard earned money away so you can’t touch it makes it harder for you to spend it. For example, a high interest savings account typically has high charges associated with taking out money. This savings account can even allow automatic deposits to be made on a specific schedule. It makes it less tempting to take out that money for other things.
Other types of bonds have different options as to whether they are lockable or not. But again, these offer sure ways of investing your money and keeping it safe. Although interest rates are low right now, even gaining a small amount of extra money on them are beneficial ways to save up more.
Having sufficient down payment is one of the most important ways of being approved for obtaining a mortgage. With the possibility of stricter requirements, including a 10% down payment requirement, it is important to start planning ahead this year.
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Contact the Jeffrey Team for more information - 416-388-1960
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The best investment? Paying off your mortgage
For the highest – and safest – return, look no further than that roof over your head
John Heinzl – Globe and Mail
What if I told you there was an ultrasafe investment that paid 6 or 7 per cent annually, guaranteed? Would you be interested?
No, it’s not a Ponzi scheme. It’s not a stock, either. Neither is guaranteed, in case you needed any reminders after the past year.
And it’s definitely not a guaranteed investment certificate. These days, you’d be lucky to earn half of that on a five-year GIC.
So what is this fabulous investment opportunity I’m talking about? It’s paying off your mortgage.
I believe – and I know some of you will scoff at the notion, but hear me out – that paying off your mortgage is the best investment you could make. Period.
Why? Because, even with today’s ultralow mortgage rates, it’s almost impossible to find an investment that is guaranteed to yield a higher after-tax return than you’d get by paying your mortgage down – the key words here being guaranteed and after-tax .
Let’s look at an example.
Suppose you have a fixed-rate mortgage at 4 per cent, which is about the lowest rate you can get right now on a popular five-year term. So, for every $100 in principal, you’d be paying $4 in interest annually.
Now, let’s say you make a lump-sum payment of $100. You’d be saving yourself $4 in interest, for an effective after-tax return of 4 per cent.
That’s pretty good, right? But it’s even better when you consider what you’d have to make on a taxable investment to generate the same return.
If you’re in a 40-per-cent tax bracket, for example, you’d have to earn 6.7 per cent on a GIC to end up with 4 per cent after Ottawa takes its pound of flesh. If you can find a GIC that pays anything close to 6.7 per cent, let me know.
Remember, we’re talking here about guaranteed returns. Sure, you might do better in the stock market. You could also do a lot worse. The beauty of paying off your mortgage is that the return is risk-free.
(True, inside an RRSP interest income isn’t taxable, but you’d still have to find a guaranteed 4-per-cent return to match the benefit of paying down your mortgage. But the highest five-year GIC rate now is about 3.3 per cent. You’ll always encounter such a spread, which is how banks make money.)
That raises the question: If the math is so favourable, why don’t more people focus on paying off their mortgages early? David Trahair, an accountant and author of Enough Bull , says the wealth management industry has a vested interest in encouraging clients to accumulate financial assets. After all, the more assets a client has, the more the adviser makes in fees and commissions.
“If you pay your mortgage off [aggressively], you have no money to invest with them,” he says.
He adds that, unlike in the United States, mortgage interest in Canada is not tax-deductible, which is another reason it makes sense to focus on becoming mortgage-free as early as possible.
Of course, by fiddling with the assumptions, one can make paying off the mortgage look like a terrible idea. If one assumes, for example, that the stock market will generate returns of 10 per cent annually, then investing in stocks is the way to go. But that’s all it is – an assumption – and if you’re prepared to take the risk, then go for it.
Let me be clear: I am not against owning stocks. I own some myself. A few are even higher than they were a year ago.
On the other hand, in these uncertain times – with the recovery still fragile and stocks having already had a big run – a guaranteed return counts for a lot.
That’s one reason Derek Moran, president of Smarter Financial Planning Ltd. in Kelowna, B.C., puts “every extra cent we get” into his mortgage, even though he has a very low variable-rate mortgage.
“I’m a big fan of paying it down because I don’t think interest rates are going to be this cheap for that long, I really don’t,” he says. “The after-tax return on paying off debt is quite good … and you’re taking risk off the table.”
Once your mortgage is paid off, you can always borrow against your home and invest the money, he says. In that case, as long as you’re earning investment income, the interest would then be tax-deductible. As for emergencies, a credit line should suffice.
Focusing on paying off the mortgage has other benefits, both financial and emotional. It’s a forced savings plan, and it gives you a goal to work toward. When you finally pay the mortgage off, you’ll have far more financial flexibility – to invest, save for your kids’ education, cut back to part-time work, live on one salary instead of two, take a vacation, or countless other things.
So the next time you’re sweating about where to invest for the highest – and safest – return, look no further than that roof over your head.
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Contact the Jeffrey Team for more information - 416-388-1960
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Related posts:
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