Debt & Frugality

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.”

Retired Money: What to do about falling GIC rates

Posted By |
PWL Capital’s Ben Felix

My latest MoneySense Retired Money column has just been published. It looks at the reversal the past year in interest rates, which impacts seniors who had started to look forward to at least half-decent GIC rates near 3%. You can find the full piece by clicking on the highlighted headline: Are GICs right for retirees looking for Fixed Income? 

Short of embracing high-yielding dividend paying stocks, the more palatable alternative for conservative retirees might be fixed-income ETFs. The article focuses on a recent video by CFA Charterholder Benjamin Felix, an Ottawa-based portfolio manager for PWL Capital. Felix argues that at a minimum such investors should have a mix of both fixed-income ETFs and GIC ladders.

The latter let you sleep at night because they are invariably “in the green” in investment accounts. But while in the short term fixed-income ETFs can be in the red — just like equity ETFs — Felix makes a compelling argument for the higher potential returns of bond ETFs.

Felix believes that what really matters for investors is total return: “Holding a lower-rate GIC after a rate increase still results in an economic loss.” Bond returns consist of principal, interest payments and reinvested interest, so focusing only on return of principal misses the point. Individual bonds are not ideal for individual investors, as they require extensive research, are relatively expensive and tricky to trade.

Short-term GICs miss out on the term premium

But short-term GICs miss out on the term premium, which is substantial over time. Going back to 1985, Felix says short-term bonds returned 6.51% annualized versus 7.97% for the aggregate bond universe (which includes some short-term bonds).  This shows how much mid- and long-term bonds bring up the overall return. To be clear, this period captures one of the greatest bond markets in history but Felix says it is still reasonable to expect a relationship between riskier longer-term bonds and higher expected bond returns. Risk and return should be related.

GICs are also illiquid, so even if an investor chooses to include GICs in a portfolio, they will generally also include bond ETFs, which – like stock ETFs – can be sold any trading day. Nor do GICs provide exposure to global bonds.

Of course, a nice alternative are those asset allocation ETFs we have often discussed on this site. See for example this excellent overview by CutthecrapInvesting’s Dale Roberts: Which All-in-One, One-Ticket Portfolio is right for you? 

The Felix video can be found at his Common Sense Investing YouTube series here.

 

7 tips for speeding up the day you burn your mortgage

Posted By |

By Barry White

Special to the Financial Independence Hub

Mortgage payments can be a huge drain on your budget, particularly if it accounts for a significant part of your income. Apart from the interest you will be paying on the principal, mortgage repayments can be a hindrance to your other long-term financial goals. Not only can paying off a home mortgage early help you save thousands of dollars but it will also help you to gain your financial freedom earlier. If you have made up your mind and eager to pay off your mortgage early, here are seven helpful tips you can implement.

1.) Pay extra on your repayment each month

Making extra payments each month is the easiest way to help lower your debt on the property. Whenever you make your monthly mortgage repayment, most lenders allow borrowers to make an extra payment and mark it as “principal only.”  This implies that the extra payment pays down only the principal instead of both the mortgage principal and the loan interest.

Assuming you have a monthly loan repayment amount of $1,346, you can decide to round it up to $1,400. The extra $54 is dedicated as a repayment on the principal. This simple act of extra payment can save you lots of interest charges as well as helping you clear your loan ahead of schedule (since the principal payments will add up faster than you’d think). Therefore, plan to add as much as possible to these payments to help with the principal plus lower the amount of total payments owed. Looking for ways to find extra cash to put on your mortgage? You can use bonuses or apply raises from your job.

2.) Pay more than Monthly, bi-weekly

A bi-weekly mortgage is when you make a payment that equals exactly half of the total monthly repayment every two weeks. This consequently shortens the time to pay off. For instance, if your normal mortgage repayment per month is $1,000, you would instead pay $500 every two weeks. This has almost a similar impact on your budget as one monthly payment. But with the 52 weeks in one year, a bi-weekly payment schedule will bring about a grand total of 13 full monthly payments each year instead of the usual 12. You’ll conveniently be making an extra payment yearly without scrounging around for the extra money.

3.) Make one big extra payment each year

Another great way to repay your mortgage early is to deliberately make an extra payment in a month every year. This helps you settle your mortgage faster, and chances are you wouldn’t miss it.  You can schedule the payment for a month when you hardly have any larger expenses, like during holidays. Of course, this technique requires extra discipline from you since you will need to save that payment. To be on the safe side, you can automatically transfer a little amount every month into a dedicated account for an extra mortgage payment.

4.) Divert “free” money towards your mortgage

Did you receive a tax refund or Christmas bonus from work? Divert that extra money that cannot be accounted for in your budget to your mortgage pay-off fund. Continue Reading…

Could the First-time Home Buyer Incentive be used in Canada’s largest markets?

Posted By |

By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

When the federal government announced in March that it would be wading into the shared equity mortgage market in efforts to improve home buyer affordability, it stirred up some controversy.

The program, called the First-Time Home Buyer Incentive (FTHBI), was teased in the budget as a ground-breaking approach to helping buyers get into the market by providing interest-free down payment loans of 5% for resale homes, and up to 10% on brand-new builds.

In exchange for the upfront funds, which are designed to reduce the overall size of the mortgage and monthly payments, the Canada Mortgage and Housing Corporation (CMHC) will take an equity percentage the homes’ value, which must be paid off when either the mortgage matures, or the home is sold.

This paid-back amount fluctuates along with appreciation and depreciation in the market. For example, let’s say the CMHC provides a 5% loan of $25,000 for a home purchase of $500,000. The homeowner sells the home several years later, and its value has increased to $550,000. The homeowner would then need to pay the CMHC back $27,500 to reflect 5% of the increased value of the home.

Critics say FTHBI too restrictive to be effective

Mortgage analysts have called the effectiveness of this equity sharing program into question, as the total amount owed to the government could be significantly more than what was loaned in the first place, especially in a market that experiences rapid price growth.

However, the most contested features of the FTHBI are its mortgage and purchase price restrictions, which critics say render the program useless in markets like Toronto and Vancouver where home buyers arguably need the most help. Continue Reading…

Franklin Templeton adds pair of actively managed Fixed Income ETFs

Posted By |
Franklin Templeton staff at opening bell of TSX Monday to launch two more actively managed bond ETFs

Franklin Templeton Canada has announced the launch of two new actively managed fixed income ETFs that will invest directly in two Franklin Bissett mutual funds. Franklin Templeton’s employees rang the Toronto Stock Exchange’s opening bell on Monday morning (July 8) to celebrate the listings of the new funds.

“Investors are looking for actively managed fixed income to provide stability in their portfolios,” said Duane Green, president and CEO, Franklin Templeton Canada in a press release. “Now they can access the compelling, risk-adjusted returns of our Franklin Bissett fixed income mutual funds in either an ETF or mutual fund structure depending on what works best for their portfolio.”

Franklin Liberty Core Plus Bond ETF (FLCP) invests in series O of Franklin Bissett Core Plus Bond Fund, with a management and administration fees totalling 55 bps. It seeks to provide high current income and some long-term capital appreciation through exposure to primarily Canadian fixed income securities, including federal and provincial government and corporate bonds, debentures and short-term notes. The fund is co-managed by Tom O’Gorman, SVP and director of fixed income, Franklin Bissett, and Darcy Briggs, SVP and portfolio manager, Franklin Bissett. They have 29 and 25 years of industry experience, and eight and 14 years with the firm, respectively.

Franklin Liberty Short Duration Bond ETF (FLSD) invests in series O of Franklin Bissett Short Duration Bond Fund.The management and administration fees total 40 bps. The fund seeks to provide income and preservation of capital through exposure to primarily Canadian fixed-income securities, including federal and provincial government and corporate bonds, debentures and short-term notes. The fund is co-managed by Darcy Briggs and Adrienne Young, VP and director of credit research, Franklin Bissett.

You can find more information on the new bond ETFs at Franklin Templeton’s website, here.

Banking shouldn’t be complicated

Posted By |

By Rick Lunny, Manulife Bank

Special to the Financial Independence Hub

 As a father of five with two 20-something daughters who recently moved out, I often hear how the sheer amount of information in this digital age overwhelms those who are entering the workforce and starting their adult lives. Somehow by default, I have become an unofficial mentor for both my kids, and their broad circle of friends, as they regularly seek my advice when facing important financial and career decisions that will shape their future.

They frequently comment how there’s always new, conflicting advice on how best to live life. Especially when it comes to money and how to make the most of it: save more, live for the moment, pay down debt, and yes, even plan for retirement at age 24.

It’s a struggle to find time to break through the noise and choose the best financial options that truly fits their needs.

And it’s not just the younger generation who struggle to make decisions and take control of their finances.

As the head of Manulife Bank, a subsidiary of Manulife which serves seven million Canadians, I know customers of all ages are looking to develop better financial habits and improve their financial wellbeing.

Canadians are looking for clarity, simplicity and value from their bank. This applies equally to technology interfaces. They expect – and deserve – from initial application to ongoing experience, products that have a human-centric design, with intuitive and easy to use interfaces.

That’s what I love about Manulife Bank. I joined five years ago because it was different from other Canadian banks. It had an entrepreneurial reputation for going beyond the status quo with innovative banking products designed in the best interest of Canadians.   Continue Reading…