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.”

Smart ways to divvy up your tax refund

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Situation: The income tax refund is a welcome sight for many taxpayers.

My View: Park it temporarily to reflect on its best use before allocating it.

Solution: Evaluate family needs and options that provide lasting benefits.

Income tax filing season is under way once again. Accordingly, I examine some smart ways to apply your tax refund. First, a little trivia:

For what year did Canadians last file a 1-page Federal income tax return?
It was the 1949 tax year.

I think of allocating the income tax refund loosely within these categories. For example, you can spend it, save it, invest it, reduce debt and help others.

Start by parking the refund into a saving account to resist impulse, say for 30 to 60 days. That provides you sufficient time to reflect and evaluate your needs and best options that apply.

Try your utmost to arrange lasting usefulness from this source of cash. Many of the allocations you will make are not reversible.

Everyone can reap benefits from these simple best practices. I summarize some sensible ideas in dealing with tax refunds:

Reduce debt

  • Repaying credit card balances are top notch, risk-free allocations.
  • Trimming a line of credit, mortgage or student loan is very desirable.

Invest it

  • Contributing to the RRSP boosts the retirement nest egg.
  • Adding to the TFSA generates tax-free investment income.

Help others

  • Donating to a charity of your choice is a noble cause.
  • Helping out someone less fortunate than you is generous.
  • Making RESP deposits helps pay the rising costs of education.
  • Funding the RDSP for a special needs family member is unselfish.
  • Lending it at the prescribed rate to the lower tax bracket spouse.
  • Assisting an adult child to purchase a vehicle or residence.

Save it

  • Leaving it in your saving account is a worthy choice.
  • Supplementing your family business capital is worthwhile.
  • Adding to your investment plan is productive strategy.
  • Improving your career or education fulfills goals and dreams.
  • Rebuilding the family emergency account is beneficial.
  • Setting funds aside for the next income tax instalment.

Spend it

  • Replacing an aging vehicle and appliance helps.

A beginner’s guide to Fixed Rate Mortgages

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By Rebecca Hills

Special to the Financial Independence Hub

Fixed rate mortgages are very popular in Canada. In fact, of the 6 million mortgages that have been taken out by Canadians, 60% are fixed rate mortgages. A fixed rate mortgage agreement stipulates that the borrower will be required to pay interest on their mortgage that will not fluctuate for a set period of time. Presently, the most popular mortgage in Canada is a three-year fixed rate mortgage.

In addition, interest rates for fixed mortgages will differ, depending on the province that you are living in, as well as the number of years on the term, and also the financial institution that you borrow from. Different mortgage brokers will also offer different rates, so doing your homework beforehand, while understanding your unique financial goals and situation, will help you avoid any headaches down the line. Here, our goal is to provide you with a beginner’s guide to the fixed rate mortgage scheme.

What is meant by Fixed Rate Mortgage?

As mentioned, roughly two thirds of Canadians opt for a fixed rate mortgage over a variable rate mortgage. A fixed rate mortgage is designed for people who are averse to risk, as having a set interest rate will eliminate the risk of interest rates suddenly skyrocketing in the future. Imagine a situation where interest rates increase exponentially and you are unable to afford the sudden spike in rates. Such a possibility would not be an issue when you lock in an interest rate for the entire term of your loan.

Also, please note that you don’t have to stick with a fixed rate mortgage forever. For instance, if you receive a job promotion or inherit some money then you may be more comfortable taking a risk and switching to a variable rate mortgage. Once your mortgage has reached the end of its term you can consult with your broker in order to determine if switching to a variable rate mortgage may be the better option when it comes time to refinance your home.

Evidently, in some cases a variable rate mortgage may be the better option, if interest rates happen to be low when you sign, and remain relatively low throughout the term of your mortgage. As can be seen, both fixed rate and variable rate mortgages have their pros and cons, so if you are not sure with which to go with speaking to a financial advisor or broker may help with your dilemma.

Should I choose a fixed or variable rate mortgage?

There are many advantages to fixed rate mortgages. For instance, you won’t have to worry about your payments increasing over the duration of the mortgage term. There are also many options to choose from, from 2- or 3-year terms, to 5- or 10-year terms. In some cases you may also have the option to sign a 6-month fixed rate mortgage or one as long as 25 years. There is also the matter of certainty, as you will know exactly what your mortgage will cost at all times. Knowing exactly how much you will be required to pay will also streamline your billing, and also help you create a budget that is safe and secure. Continue Reading…

What do home buyers want from the Federal Budget?

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

The Federal government’s budget reveal is tomorrow, and all eyes  are on what kinds of goodies will be included for beleaguered first-time home buyers.

While Finance Minister Bill Morneau has strongly hinted that some sort of measure would be unveiled to alleviate the home affordability challenges facing Canadians, it remains to be seen what that will entail. In the meantime, the government has been on the receiving end of proposals from various members of the housing industry, including local and regional real estate boards as well as Mortgage Professionals Canada, as to what would best address the issue.

Industry wants Stress Test, Amortizations, reeled back

Much of the focus has been placed on two key areas: the federal mortgage stress test, which was implemented just over a year ago in January 2018, as well as the length of maximum amortizations for first-time buyers.

Relaxing the criteria around both would improve buyers’ chances of qualifying for a mortgage, experts argue, and therefore should be the priority of the feds when implementing change. The result of the stricter threshold has effectively cooled demand in even the largest Canadian markets, and has pushed a greater percentage of buyers to high-rise living across the nation, from Vancouver condos for sale, to Hamilton and Ottawa condos, rather than single-family detached options.

Survey results yield other priorities

However, home buyers aren’t necessarily in agreeance with that approach. According to a recent survey conducted by Zoocasa, while 82% of Canadians feel that housing affordability continues to be a major issue, they’re not so sure the government is in a position to improve the situation. A total of 55% of respondents do not believe that affordability can be fixed via government measures alone, while 21% don’t feel it’s possible for new policies to exact change within the next five years.

Respondents also had different opinions about what measures would be of biggest help to their pocket books. When asked specifically about the mortgage stress test, for instance, only 57% said they were aware of what it was – and of that group, just half felt reducing the test’s rate threshold (currently the Bank of Canada’s five-year rate of 5.34% or 2% on top of the borrower’s contract rate, whichever is higher) would be of help. Only 15% of all respondents felt such a measure would be effective.

They also weren’t sold that extending maximum amortizations for high-ratio borrowers (those paying less than 20% down) or first-time buyers would be of service either; doing so would reduce monthly mortgage payments, making home financing easier on household budgets, and also ease the stress test’s affordability criteria. Continue Reading…

How federal housing policies could impact first-time homebuyers

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By Jordan Lavin, Ratehub.ca

Special to the Financial Independence Hub

For a little more than a decade, the Federal Government has been making policies that make it harder to buy your first home in Canada.

It’s hard to blame them. The great recession of 2008-09 was principally caused by a crash in the U.S. housing market which, in turn, had been caused by lax mortgage lending standards. Hundreds of thousands of people bought homes they couldn’t really afford, and were later foreclosed on or forced to sell. Left behind was a glut of housing inventory and an equal glut of people who had lost everything. The ripple effect was felt throughout the world, including here in Canada.

Fortunately, the mortgage problem was isolated to the United States. But the repercussions hit Canada hard, and interest rates fell to unprecedented lows as a response to the worsening economic situation. During the recovery, mortgage rates in Canada continued to fall and house prices quickly rose. In hot markets like Vancouver and Toronto, the average price of a home nearly doubled between 2010 and 2016.

All this left government officials on this side of the border wondering if it was possible for the mortgage and housing market to fail here. With the compounding worry of a housing market crash – what if prices went back down as quickly as they had gone up? – they began making new policies with the goal of making it more difficult for Canadians to qualify for a mortgage, especially if that mortgage were to be insured by the Canada Mortgage and Housing Corporation (CMHC).

Among the changes: Limiting amortization length for insured mortgages to 25 years; Limiting CHMC insurance to homes purchased for under $1-million only; Establishing a minimum down payment of 5% and then increasing the minimum for homes over $500,000; and expanding a “stress test” to eventually force all mortgage borrowers to qualify at a higher interest rate than they would actually pay.

This cocktail proved poisonous for first-time homebuyers. High house prices, harder qualification criteria and lower earning potential forced first-time homebuyers to get creative, finding new ways to afford homes.

Today, the government is looking at two new policy changes that could have an impact on first-time homebuyers.

A return to 30-year insured mortgages for first-time homebuyers

Currently, the longest you can take to pay back an insured mortgage (mortgage insurance is usually required when you have a down payment of less than 20%) is 25 years. But one policy change the government says they’re looking at is increasing that limit to 30 years.

This is a boon to affordability, at least at the qualification level. Ratehub’s mortgage payment calculator shows that the monthly payment on a $500,000 mortgage at today’s best rate of 3.29% will be $2,441 when amortized over 25 years, or $2,181 when amortized over 30 years. Since mortgage affordability is based on a fraction of your income, a lower payment equals a higher purchase price you can qualify for.

But there’s a significant downside. The obvious is the additional 5 years of mortgage payments later in life. If you’re over 35, signing a new 30-year mortgage could keep you making payments into retirement. Continue Reading…

Are current beliefs about RRSPs costing Canadians money in the long term?

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By Edward Kholodenko

Special to the Financial Independence Hub

A recent study we conducted with Leger (www.leger360.com) asking what Canadians wanted in relation to their RRSP investments unearthed some compelling findings demonstrating that many Canadians have misconceptions that could be costing them money, especially in the long term.

Our research confirmed 78 per cent would be willing to switch to a lower-fee RRSP investment, if the lower fees could ensure a superior rate of return.  When we asked if they were able to move their RRSP easily, which factors would be most important, 66 per cent once again said they would move accounts for lower fees and better returns.

In addition to lower fees and higher returns, 31 per cent of people we talked to identified the ability to easily manage their RRSPs and make contributions online as a factor to consider in a switch (highest in those between the ages of 25 – 44 years), speaking perhaps to the rising appeal of newer fintech companies who offer the ability to do everything online.

When asked for other reasons they might consider switching their RRSPs, respondents cited frustrations including feeling like they’re being upsold (28 per cent), having to book an appointment and visit their financial institution in person (27 per cent) and not knowing what their RRSP is invested in (26 per cent).

This strongly suggests Canadians are far from content with their current RRSP contribution process and provider and would be willing to switch; however, there are misconceptions that are holding people back.  Most interesting — only 50 per cent believe their RRSPs can easily be transferred between financial institutions.

Common misconceptions

Why? Common misconceptions included high transfer fees (32 per cent), incurring a tax penalty (24 per cent) and even the fear of an uncomfortable conversation with their current advisor or financial institution (16 per cent).  While only 50 per cent of Canadians told us that they believe their RRSP can be easily moved between financial institutions, the reality is that RRSPs are easy to transfer.  There are no tax penalties incurred when an account is transferred and furthermore, most institutions would cover the cost of any transfer fee that may be charged and by consolidating your RRSPs at an institution with lower fees, you may reach your retirement goals faster. Continue Reading…