For young couples starting families, buying their first home and/or other real estate. Covers mortgages, credit cards, interest rates, children’s education savings plans, joint accounts for couples and the like.
Collateral and conventional mortgages may sound similar, but they’re actually two separate and distinct things. In this article we’ll look at the difference between the two.
What is a Conventional Mortgage?
A conventional mortgage is the mortgage type most Canadians are familiar with. When you make at least a 20% down payment on a property, you can take out a conventional mortgage. This differs from an insured mortgage, where you can put down as little as 5% on a home.
With a conventional mortgage, the lender will let you borrow up to 80% of the property’s value. The property value is the lesser of the purchase price or the appraised value. Usually the purchase price and appraised value are the same, but sometimes they differ.
If the home is appraised higher than the purchase price, that’s a good thing. That means that you’re getting a good deal on the home. However, if the home is appraised at less than the purchase price, you’ll need to make up the difference if you still want to put at least 20% down.
With conventional mortgages, you get to choose the length of the mortgage. The most popular lengths or amortization periods are 25 and 30 years. If you’re looking for the lowest mortgage rate, a 25 year amortization usually offers that. However, if you’re looking for lower mortgage payments, the 30 year amortization is the best option.
What is a Collateral Mortgage?
Not to be confused with a conventional mortgage, a collateral mortgage is a lot like a conventional mortgage, but with a key difference. Unlike a conventional mortgage, a collateral mortgage re-advances. This means that a mortgage lender is able to loan out more funds as the value of the property goes up, without needing to refinance your mortgage. Continue Reading…
Never heard of the Rule of 30? Neither had I, nor Fred himself until he invented it.
In a nutshell, it’s a rule of thumb financial planners can use to guestimate how much young couples starting off on their financial journeys need to save for Retirement. Rather than flatly state something like save 10 or 12 or 15% of your gross (pre tax) income each and every year, the Rule of 30 sees retirement saving as occurring in tandem to Daycare and Mortgage Repayment.
From the get go Vettese suggests young couples allocate 30% of their gross or after-tax income to the three expenses of Retirement saving, Daycare and Mortgage paydown. However, in the early years they may save less in order to handle Daycare and the mortgage. Since daycare expenses usually fall away after a few years (depending on how many children a couple has), once it has gone you can ramp up the mortgage paydown and/or retirement savings. And if – ideally five years before retirement – the home mortgage is paid off, then couples can kick their retirement saving into overdrive by allocating a full 30% or more solely to building their nest egg.
Wealthy Barber style fictional format
In a departure from his previous books — Retirement Income for Life and The Essential Retirement Guide among them — The Rule of 30 uses the tried-and-true quasi-fictional “story” pioneered by David Chilton’s The Wealthy Barber. That road has been ploughed by many subsequent financial authors, including Yours Truly in Findependence Day.
As Vettese told me in an interview mentioned in the column, he didn’t plan it that way initially. “I did a first chapter using that format and then realized it’s a lot easier to write this way and it’s not as dry: it’s somewhat easier to read and to write. When you get a problem, a character chimes in.”
The main characters are a couple, X and Y, and — conveniently — the neighbour next door who happens to be an actuary with time on his hands.
No doubt it would have worked either way, but Vettese’s dialogs are readable enough and he even works in a minor subplot involving the actuary and his estranged daughter.
One of the people acknowledged by Vettese at the back of the book is fellow actuary and retiree Malcolm Hamilton. In an email, Hamilton said “I have always believed that middle class Canadians who marry, buy a house and have children cannot reasonably expect to save much for retirement until after the age of 45,” Hamilton told me via email, “There just isn’t enough income to cover mortgage payments, the cost of raising children and Canada’s heavy tax burden (with child care expenses and mortgage payments generally non deductible for those with incomes that suggest they need to save.”
All in all, a useful rule of thumb for young couples setting out on family formation, home ownership and ultimately Retirement. Note that Vettese says that once you are within five years of your hoped-for Retirement age, you should strive to be mortgage free. And around 55, you should move from the Rule of 30 to using a Retirement calculator like the free one Vettese developed for Morneau Shepell: PERC, or the Personal Enhanced Retirement Calculator.
PS: I am now Investing Editor at Large for MoneySense
Alert readers who got to the bottom of the column and read the author blurb will see a slight change in my status at MoneySense. In addition to writing the monthly Retired Money column I am now also the Investing Editor at Large for the site, a fact that’s also divulged in my Twitter profile. I will continue to publish Hub blogs every business day: so much for Retirement!
My latest MoneySense Retired Money column looks at the question of whether almost-retired or already-retired Baby Boomer parents should provide financial assistance to their Millennial children seeking to get their first steps on the increasingly expensive housing ladder.
That is, is it wise for parents to cut into their own Retirement savings in order to become the BOMAD: the Bank of Mum and Dad?
It’s been said that 50 to 75% of millennials expect to tap the BOMAD for help coming up with a down payment.Click on the highlighted headline to retrieve the whole column: Should you help your adult children to buy Real Estate?
Francey is a seasoned entrepreneur and real estate investor who is CEO of REIN of the Real Estate Investment Network (REIN). These days, most REIN members who have at least one “door” (real estate investment property above and beyond a principal residence) are almost by definition millionaires. I appeared despite the fact our family owns no investment real estate, apart from REIT ETFs in a purely electronic portfolio: “clicks instead of bricks,” as I explained on the show.
REIN’s Patrick Francey, host of The Everyday Millionaire podcast
Interestingly, while he has helped his own kids with housing, Francey does not necessarily think parents should provide financial assistance to kids trying to break into the housing market: not if it jeopardizes their own retirement, and not if it means the kids will miss out on the character-building exercise of doing it on their own.
A similar stance came from retired mortgage broker and author Calum Ross, who also recently appeared on the podcast. Ross, of Toronto-based The Mortgage Management Group, has some experience with BOMAD as it relates to his two daughters. “As a divorced Dad, BOMAD was restructured and now runs as a privately held entity BOD [Bank of Dad.],” Ross quips.
Ross says his parenting priorities are identical to how his parents raised him: 1) I taught them to be thoughtful, 2) I raised them with a work ethic, and 3) I taught them to save money and not spend it.
Adrian Mastracci, portfolio manager with Vancouver-based Lycos Asset Management, says BOMAD may be a great deal for the kids but Mum and Dad need to first ensure they have sufficient funding to see them through their retirement years. “Ensure that they can incur all expenses, health costs, effects of inflation, rising costs of providing for in-home services, a retirement home facility and rehabilitation costs of the current home.” Continue Reading…
One thing that many economic historians often overlook is that one’s worldview is shaped by life experiences. That includes matters like love, marriage and divorce, money and savings and attitudes toward political risk – to name a few. If our values, likes and dislikes are shaped by our experiences, it stands to reason that our perceptions of what the future might hold could be largely informed by what we have already experienced. That’s especially true of the things we experience in our formative years.
In the summer of 2021, for the first time in over a generation, there’s been some talk of inflation being a going concern. Inflation was wrestled to the ground in the 1980s and hasn’t been heard from since – until now. As the debate rages about the degree to which we should be concerned (if at all) about inflation coming back in a meaningful way, it is noteworthy that while there are credible economists on both sides of the debate, virtually everyone in the “inflation will be a problem” camp is at least 70 years old. Stated differently, those people who experienced inflation in their adult lives are concerned and those who did not are not.
Transitory inflation?
For about 30 years now, the goal of central banks in the west has been one of price stability, which they define as inflation at 2%, give or take 1%. Basically, anything between 1% and 3% is okay. Now, we’ve experienced inflation above 3% for a couple of quarters and people naturally wonder what that might mean. Central Bankers have been assuring us that the uptick is “transitory,” that it is just a situation where awful data from the early days of the COVID crisis is working its way through the system. Nothing to see here. Move along.
Although I am technically old enough to remember inflation, I never had to deal with it personally or directly. I was a teenager when my parents built the family home on their property in 1979. I heard about their astronomical, double-digit mortgage rates, but never had to experience anything of the sort as the payor. My sense is that young people – especially millennials – cannot relate to anything close to what I’m about to say: the inflation rates, and therefore the mortgage rates and interest rates you have experienced throughout your entire lives, may not be around for much longer. Furthermore, if that is true, the consequences could be enormous.
5% constitutes “Real inflation”
As mentioned, there are competing views on inflation. I have not come down on either side, but I enjoy the exchange of ideas. If the doves are right and the inflation we’re seeing now is little more than a passing phase, there’s not much to say because little will change. If, however, real inflation is coming sooner than later and for longer than just a phase, we need to prepare. What constitutes ‘real inflation’, you may ask. My guess is something like 5%. At that level, no one can pretend that the inflation rate is not a concern and does not need to be dealt with. For this discussion to be meaningful, inflation needs to be at least 2% above the high end of the traditional range and to stay there for at least a year. At that point, both the logic behind it being transitory and the facile dismissal of it being above the target by an inconsequential amount disappear. At that level, something needs to give. Continue Reading…
The podcast has been going since 2017, and sports the slogan “Ordinary people doing extraordinary things.”
It was a wide-ranging and surprisingly personal interview. Most of Francey’s guests are real estate millionaires: given the bull market in Canadian residential real estate it’s not surprising that most of Francey’s guests are technically millionaires: even starter homes in Toronto are going for a million dollars.
REIN’s Patrick Francey
Patrick Francey is the CEO of REIN, the Real Estate Investment Network, with which I have long been familiar: my daughter Helen once worked there. Sadly, as you will discover on the podcast, I confess that our family never made the plunge into investment real estate beyond owning a principal residence in Toronto. We discuss the fact that while real estate is an excellent way to achieve Financial Independence, some of us are more comfortable with investing in financial assets like stocks and bonds: in so-called “clicks” rather than “bricks.”
The foundation of Financial Independence
As I say in the interview as well as the recently updated US edition of my financial novel, Findependence Day, job one is to purchase a principal residence and pay down the mortgage as soon as possible; hence the saying “The Foundation of Financial Independence is a paid-for home.” Continue Reading…
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By Sean Cooper
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