As Didi says in the novel (Findependence Day), “There’s no point climbing the Tower of Wealth when you’re still mired in the basement of debt.” If you owe credit-card debt still charging an usurous 20% per annum, forget about building wealth: focus on eliminating that debt. And once done, focus on paying off your mortgage. As Theo says in the novel, “The foundation of financial independence is a paid-for house.”
With higher rates arriving sooner than expected, Canadian’s finances are certainly being stress tested. In this article we’ll look at the history of the mortgage stress test and how higher rates are impacted it.
History of the Mortgage Stress Test
The mortgage stress test was introduced by the federal government several years back to stop homebuyers from overextending themselves. Previously, Canadians homebuyers only had to qualify based on the mortgage rate at the time of application. This was problematic for a couple of reasons.
First of all, mortgage rates could be higher when your mortgage came up for renewal. This could mean that you could face a much higher payment at renewal if mortgage rates were a lot higher then.
Most Canadians choose a five-year mortgage term. However, for those who chose a shorter mortgage term, that means the payment shock can be that much more if your mortgage comes up for renewal sooner.
The second reason it was a problem is that if someone chooses a variable rate mortgage, there’s really no limit to how high mortgage rates can go. You’re only asked to prove that you can qualify at the date that you applied. You’re not being asked to qualify again later on if and when rates rise.
What is the Mortgage Stress Test?
To avoid a similar meltdown as Americans experienced in the real estate market, the mortgage stress test came to be.
With the mortgage stress test, the borrower must prove that they can qualify at the greater of the stress test rate or your mortgage rate at application time plus 2%. The idea was to better protect homebuyers, but this came at a cost. Homebuyers saw their home purchasing power drop by 15% to 20% overnight. This is a direct result of having to qualify at a much higher rate.
Where we are Today
We’re in an interesting situation today. The mortgage stress test is still here. We’re seeing it put to good use, as interest rates are increasing faster than expected. Continue Reading…
When you live a salaried life, money is always on your mind. No matter how meticulously you plan your monthly expenses, unexpected expenses may crop up anytime. It could be repairs for your home, a medical expense, a veterinary bill, or a loss in business. In such cases, it is wise to maintain an emergency fund that you can dip into to meet the unexpected expense. But sometimes, savings may not be enough to meet the emergency expenses.
Thankfully, with advanced fintech, it is possible to avail of a loan: big and small. Not only that, you can get the funds quickly in your account.
If you ever face a financial crunch, here are some options you can explore to get funds in a short time.
Ways to pay for Unexpected Expenses
1.) Credit Card
Financial experts usually don’t recommend using a credit card to fund a sizeable emergency expense. A significant expenditure can land you in substantial credit card debt with rising interest rates. However, if your expense is something you can pay back within the interest-free period or your emergency fund is falling short by a small amount, using your credit card can help.
It is also wise to scan the market for other options in such cases. You could explore new financial instruments such as a virtual credit card. Virtual credit cards are digital cards available online. The usage is similar to a conventional credit card with a card number, CVV, and validity. But it works like a flexible personal loan wherein a predetermined amount is transferred to your account, and you pay interest only on the amount you spend using your card. You may use your virtual credit card for limited purposes.
2.) Personal Loan
A personal loan is a valuable financial instrument to tide you over an unexpected financial crunch. Personal loans usually have high interest rates, but depending on your credit score, repayment records, and the loan amount you may find personal loans affordable compared to other financial instruments. Flexible personal loans with shorter repayment cycles allow you to take a loan but only pay for the amount that you use. Flexi personal loans are also available for amounts as small as one thousand, and with affordable interest rates. Salaried people can opt for other kinds of personal loans that enable you to repay the amount in convenient monthly instalments.
3.) Line of Credit
A line of credit enables you to borrow money with a predetermined credit limit. In times of emergency, lines of credit can be valuable financial instruments. A line of credit allows you to borrow as much as needed within a predetermined credit limit. Even if you are unsure of the total amount, you need to meet your emergency expense. The exact repayment plan you get for your line of credit depends on your lender. You may pay back in instalments, or your lender may ask for a lump sum repayment.
4.) Salary Advance
Employers usually support their employees by giving them the option of a salary advance. A salary advance implies that your employer gives you an amount you can repay with small deductions in your future pay-cheques. Usually, payroll advance is convenient and a quick way to get some funds in an emergency. Every company has its own salary advance policy and a specific period for repaying the advance amount. Talk to your finance department to understand the policy and interest rates better. Continue Reading…
Lately, the talk of the town seems to be rising interest rates. In April, the Bank of Canada raised the benchmark interest rate by a whopping 0.5% to 1%, making it the biggest rate hike since 2000. Given the high inflation rate, it is almost a given that these rate hikes will continue throughout 2022 and beyond. [On July 13, 2022, the BOC hiked a further 1%: editor.]
But before you freak out, let’s step back and look at the big picture. At 1%, the benchmark interest rate is still relatively low compared to the past interest rates.
I still remember years ago before the financial crisis, being able to get GIC rates at around 5%. And some people may remember +10% interest rates in the 80s or early 90s. Back then, interest rates were much much higher than measly below 1% rates we’ve been seeing the last decade.
Historical BoC overnight rates
What’s going to happen to the stock market? Well the general rule is that when Bank of Canada or the Federal Reserve cuts interest rates, the stock market goes up. When Bank of Canada or the Federal Reserve raises interest rates, the stock market goes down.
It’s been awhile since I reviewed any political books here on the Hub. The last time was this time a year ago when I surveyed what were then the latest books on the Trump presidency (at one point in 2021, 3 of the top 6 New York Times bestselling books were on Trump: see here).
I occasionally wade in on this topic on the grounds that investors need to be on top of this seemingly unique political situation. That’s despite the fact that when Trump first won his shock victory in 2016, markets briefly cratered, only to quickly recover.
The particular pair of mini-reviews below has no real financial angle but you can see I explicitly covered that a few years ago in a MoneySense column that evaluated the implications of the Trump presidency for the Boomers’ collective retirements: see here.
Over the long weekend, I finished reading two recently published books that some may find of interest, whose covers are illustrated on this blog. One is Thank You for Your Servitude, Mark Leibovich’s entertaining summary of all the Republican enablers who made the Trump presidency possible in the first place, and may yet facilitate a dreaded second term. The other is This Will Not Pass [Simon & Schuster) by Jonathan Martin and Alexander Burns, subtitled Trump, Biden, and the Battle for America’s Future. The co-authors are both New York Times writers and CNN political analysts, neither known as MAGA-friendly outlets.
Save your money and borrow these from the library
I might add that, despite being an author myself, I generally refuse to buy any of these US political books: I either read ebooks from the Toronto Library’s excellent Libby app, or download ebooks or audio books from the paid SCRIBD service. Libby often involves waiting a few weeks or months for popular bestsellers; however, if you can read quickly, you may be able to luck into the occasional Skip the Line service, which lasts only a single week. SCRIBD sometimes has books not yet on Libby, often in audio format, and unlike the library, you can keep them beyond the normal three-week limit.
There’s been a fair bit of press and YouTube clips on both these books. Formerly with the New York Times, Leibovich is perhaps best known for his bestselling This Town, about 21st century Washington. Thank You for Your Servitude [Penguin Press, New York, 2022] is subtitled Donald Trump’s Washington and the Price of Submission. While the author admits that many of the anecdotes will be all too familiar to anyone following the daily press, he manages to provide a fresh perspective on them while simultaneously apologizing for making readers relive the worst of these moments. Many of them center around Trump’s Washington-based Trump Hotel, which is where the book begins and ends. There you meet such familiar characters as Rudy Giuliani, Reince Priebus, Kevin McCarthy, Mitch O’Connell, William Barr, Jeff Sessions, Lindsay Graham, Marjorie Taylor Greene, Kellyanne Conway and the whole sordid collection of Trump toadies and sycophants, or the so-called MAGAts.
One early chapter is entitled “The Joke,” which apparently is how even how Trump’s closest enablers seem to view his rise to the top of the political pyramid:
It would be risky, obviously, for a Republican member of Congress to declare, explicitly, that “Donald Trump is a complete ignoramus,” even though that’s what they really believed. But none of this had to be spoken because the truth of this scam, or “joke,” was fully evident inside the club …. Everyone … got the joke.
Covers Ukraine invasion but not January 6th hearings
The book is recent enough that it includes an epilogue about the Russian invasion of Ukraine in February. The book ends on a despairing note of pessimism about the prospects of anyone stopping Trump in 2024. Of course, it was published months before this summer’s high-profile January 6th hearings, nor does he spend much time addressing any of the other multiple investigations into Trump’s businesses and political shenanigans.
The following telling snippet is one of many that may not be widely known. I was struck by the revelation in the epilogue that within a day of Trump’s “Be there, will be wild” tweet promoting the January 6 rally, the cheapest room in the Trump Hotel immediately jumped from US$476 to US$1,999.
Donald Trump didn’t just inspire the Jan. 6 riot … He seems to have made money off it.
That pretty much says it all. Leibovich ends with an ominous foreshadowing of Trump’s possible triumphant return in 2024. His final sentence is “And who’s going to stop him?” A few sentences earlier, he quotes a former Republican congressman who confessed that the party’s only real plan for dealing with Trump in 2024 involved a darkly divine intervention: “We’re just waiting for him to die .. That was it, that was the plan. He was 100 percent serious.”
Can Joe Biden extract the US from its “political emergency?”
Simon & Schuster
Those who are thoroughly sick of Trump — as I am — may find This Will Not Pass more to their liking, as roughly half the content is devoted to Trump’s successor, Joe Biden. The focus is what it describes as the “political emergency in the United States: the story of how the country reached and survived a moment when carrying out the basic process of certifying an election became a mortally dangerous task.”
It recounts how the country “sort of” survived but like Leibovich, leaves readers pretty nervous about what may yet occur in the 2022 mid terms this fall and ultimately in 2024. As Martin and Burns remind us (as if we needed it!):
Donald Trump has not been banished from national life, but instead remains the dominant force in his party and is bent on purging those few Republicans who won’t bow to him … The former president’s delusions about a stolen election … have lingered with corrosive force, warping his own party and catalyzing a wave of red-state voting restrictions aimed at cracking down on election fraud that did not happen. The fantasies of a Trump restoration have only deepened since his departure from the White House.
The book is arranged in three parts: the year before the 2020 election and Trump’s mismanagement of Covid; the tumultuous months between the contested 2020 election and Inauguration Day, and everything that has transpired since:
… As President Biden attempted an acrobatic feat of leadership: pushing a liberal policy agenda of titanic ambition with the thinnest of majorities … Far from quickly erasing the Trump era, leaders in both parties have found the shadow of the last presidency has been longer and darker than they anticipated, colouring every major political decision and legislative negotiation of the Biden administration and shaping even the perceptions of American democracy overseas.
Ambitious, yes: One chapter nicely summarizes the dominant question before Biden as “How Big Can We Go?”
Unlike Servitude, This Will Not Pass was published too soon to cover much of the events of 2022. Oddly, for an American book, it closes with an observation by a Canadian, Bob Rae (at one point Canada’s ambassador to the United Nations.) He calls Trump an “authoritarian … I don’t believe the Republican Party believes in democracy.” And he warned that the threat to American democracy was far from defeated: “America,” he said, “is a very important battleground.”
They Want to Kill Americans
(Added subsequently). There’s a third and even scarier book that I only began to read the day this blog initially was published. They Want to Kill Americans by Malcolm Nance, describes Trump’s brownshirts and the ongoing assault on American democracies by Americans. Here’s a link to Goodreads’ entry on it. And here’s a Kirkus review.
Jonathan Chevreau is Chief Financial Officer of the Financial Independence Hub, author of the financial novel, Findependence Day, co-author of the non-fiction Victory Lap Retirement, and columnist and Investing Editor at Large for MoneySense.ca.
With rising inflation driving up the costs of goods and services, a Scotiabank survey released Monday reveals over half [53%] of Canadians are worried about their ability to pay for day-to-day expenses. The majority (78%)of expect to be spending more on basic necessities like groceries and food, or gas (71%), and 53% expect to spend more on utilities (53%). 47% say these issues are impacting their ability to save for longer-term financial goals and 37% feel it’s impacting their current standard of living. Scotia Economics expects inflation to peak later this summer before starting a slow descent to 3.6% in 2023 and back to target by 2024.
“Canadians are feeling heightened levels of anxiety as a result of inflation: especially younger people and women who were also hardest hit by the pandemic,” said D’Arcy McDonald, Senior Vice President of Retail Payments and Unsecured Lending at Scotiabank via a press release. “The cost of everything is on the rise and Canadians are worried about their ability to afford the essentials such as food and gas. At the same time, there have never been so many jobs in the Canadian economy, wages are picking up, and inflation will come down over time.”
Financial stress hits differently across the country
Where Canadians live dictates how much they believe rising costs will impact their finances and ability to pay their bills. 49% of residents in the Atlantic think inflation is having a major impact on their ability to set and stick to a budget, compared to 36% of residents of British Columbia and Quebec.
When it comes to feeling financial anxiety, 57% of Quebecers are least likely to be concerned about their ability to pay for day-to-day expenses, compared to residents of Alberta (45%), Manitoba/Saskatchewan (44%), Ontario (43%), and the Atlantic (39%).
The young are most impacted and most concerned
Women, younger Canadians, and those with lower household incomes are significantly more concerned about their financial situation over the next few months. Women (44%) are more likely than men (35%) to say inflation and the rising costs of goods and services is having a major impact on their ability to set and stick to a budget.
Canadians between the ages of 18-34 (45%) and 35-54 (46%) say inflation and the rising costs of goods and services is having a major impact on their ability to set and stick to a budget, compared to Canadians 55+ (30%). Continue Reading…
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