Family Formation & Housing

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.

 How to improve the financial wellness of the Canadian workforce 

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By Jean-Philippe Provost, Mercer Canada 

Special to the Financial Independence Hub

For Canadians, wealth management and financial decisions can represent an endless source of stress: whether putting money aside for an important purchase, paying off debt, or saving for retirement. Increasingly, this stress is interfering with workplace health and productivity. 

A company’s most productive asset is their people: when employees are unhealthy, financially or physically, the organization as a whole suffers. Helping employees feel confident about wealth management matters and guiding them towards financial wellness is not just a nice to have: it is a need to have. A healthy workforce means a healthy company: and a healthy bottom line. 

The impacts of financial stress on the workforce 

At Mercer, we have spent years studying the workplace trends, the evolving realities and the challenges faced by workers in Canada. Our most recent research into Canadians’ financial wellness found that if employers help employees achieve financial wellness, they too will reap the rewards, in terms of increased productivity, reduced absenteeism and improved morale. 

For example, our study showed that financial and physical health are tightly intertwined. With only 39% of employees with a low level of financial wellness reporting being in excellent or very good health (compared to 81% at the highest level), it is easy to see how this impacts entire organizations. 

Additionally, employees who don’t feel financially confident also often spend much of their time worrying, including while at work and are also less likely to pay attention to the features of their workplace benefits and the importance of their employee compensation package. 

Employers can and should help their employees successfully manage the steps towards achieving financial confidence. Providing easy-to-access resources to help to their workforce secure retirement savings and manage investments can lead to greater employee satisfaction. It can also strengthen their employee value proposition and help to attract and retain talents. 

Reducing employees’ financial stresses 

The most effective resources should be flexible enough to help all levels of employees meet their financial goals and milestones throughout their careers. Continue Reading…

Can home buyers hope to use the First-Time Home Buyer’s incentive (FTHBI)?

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

The brand-new First-Time Home Buyer’s Incentive will hit the real estate scene on September 2nd, but will it be useful in your local market?

The federal mortgage equity sharing program was initially announced in the March 2019 budget as a new Canada Mortgage and Housing Corporation (CMHC) initiative. Under the new program, qualifying first-time home buyers can receive an interest-free loan from the agency to go toward the purchase of a new home (5% for a resale property, and either 5% or 10% for a brand-new build).

In exchange, the CMHC retains the same percentage of equity in your property, which the homeowner must pay back as a lump sum when either the home is sold, or the 25-year mortgage amortizes.

Qualifying purchase price too low in some markets

However, the income and mortgage-to-income ratio (MTI) restrictions the FTHBI requires reduces its effectiveness in many markets, particularly where home prices are high and arguably where first-timers would need its help most. Under its criteria, home buyers cannot have a combined household income that exceeds $120,000, and their MTI cannot be more than four times their income. This means, for a home buyer earning the maximum and putting 5% down on a resale home, the largest home purchase they can make is limited to $505,000.

As well, it’s important to understand how the equity sharing portion of the FTHBI will work. Basically, the amount provided by the CMHC is added onto the home as a second mortgage, which won’t bear interest, and must be paid back all at once when the loan is due. However, as the CMHC retains 5% of the home’s equity, the amount they pay back will reflect how the property has appreciated or depreciated over that time frame.

For example, let’s say they receive a 5% loan of $25,000 through the FTHBI 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. However, if the home loses value over that time period, only the original amount of $25,000 would be due to the CMHC upon its sale. Continue Reading…

Adding Canadian and international REIT ETFs to your portfolio

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

You’ll notice that in the ETF Model Portfolio page on Cut The Crap Investing I first offer up the core portfolios with the traditional building blocks of Canadian, US and International stocks supported by a broad basket of Canadian bonds.

That’s a core approach embraced by many self-directed investors. You’ll even see that simple asset allocation embraced by Dan Bortolotti of Canadian Couch Potato. In fact, Dan will argue that any additions or ‘complications’ are not necessary.

Many will suggest that we do not need to spice things up much beyond that core ‘meat and potatoes’ asset allocation. A Canadian investor can certainly put together a sensible portfolio with those assets and that investor would have been rewarded with some very solid returns.

There are assets that can deliver the potential of greater returns and greater diversification. REITs and foreign bonds and emerging market equity funds would fall into that camp. You’ll see those holdings in the portfolios of many of the Canadian Robo Advisors. In the game-changing asset allocation portfolios from Vanguard you’ll find US bonds and emerging market stocks.

One Canadian Robo Advisor that employs REITs and foreign bonds is ModernAdvisor. I am a big fan of that firm and I am a fan of their asset allocation moves. Please have a read of ModernAdvisor. A Better Way For Canadians To Invest. The Canadian Robos can also be a great source of education by way of their blogs. Here’s a wonderful REIT primer from ModernAdvisor: Diversify With A REIT ETF.

In that post we’ll find the chart that strongly suggest why we should include REITs for greater portfolio diversification.

From that blog post …

In addition to the income aspect of REITs, real estate also provides strong diversification benefits for a portfolio already holds stocks and bonds. Since 2002, the 5-year correlation between the S&P/TSX Capped REIT Index with the S&P/TSX Composite Index has ranged between 0.23 and 0.76, averaging 0.55. The correlation with Canadian bonds is even more attractive, ranging between -0.02 and 0.34, and averaging 0.12.

Correlation of 1.0 indicates perfect positive correlation; that is, the two investments move in the same direction. Correlation of -1.0 indicates perfect negative correlation, that is, the two investments move in the opposite direction. Correlation of 0.0 indicates that there is no relationship between the two investments.

From the chart we can see that we do gain additional diversification.

Canadian REIT exposure is quite easy. The core Canadian REIT approach is covered by Vanguard with VRE, iShares with XRE and BMO offers ZRE.

  • For more on 2019 ETF performance including those REITs you can have a read of this recent post on Cut The Crap Investing.

US and International REIT exposure

Things get a little more tricky when we leave Canada due to withholding taxes and the potential of currency conversion charges. The go-to Canadian dollar International REIT is iShares CGR. That is a US and Global REIT.

Given that CGR is a Canadian dollar REIT ETF with US and International assets you will face those withholding taxes on income. On that, the folks at ModernAdvisor suggest that you hold that ETF in a taxable account whenever possible as you can claim the tax credit. That said, if you are only investing in registered accounts such as an RRSP and TFSA you might not let the tax considerations drive the bus. The additional diversification and potential of greater returns might rule the day for your portfolio.

Hold US REITs in a US Dollar Account

This is a good practice or portfolio approach for your entire equity assets. Continue Reading…

Flipping Homes: One way young adults can achieve Financial Freedom

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By Donna Johnson

Special to the Financial Independence Hub

One of the top ways to make money historically has involved investing in real estate. Buying distressed houses at a good price and then selling them for a profit, known as flipping, is a great option for making money in housing. For those who are young adults, there is time to take risks and recover if they don’t pan out. Flipping houses is one of those calculated risks that could help younger American or Canadian adults achieve financial freedom in relatively short order. Here is how the flipping process works.

Find a house

In order to flip a house, it’s necessary to first own the house. A house that’s ripe for flipping might be a very distressed house in a great neighborhood. With tens of thousands of dollars of work, flippers could theoretically earn a profit that equals or exceeds their initial investment. Even a home that’s merely a bit dated in its decor could provide a good opportunity in the right location.

It’s important to know the market before purchasing a house to flip. It will be difficult to sell a house for a profit in a bad neighborhood no matter how impressive the renovations are. Additionally, comps in the local market will need to be high enough to provide a gap between what the flip initially costs and what you can sell it for. Otherwise, it will be difficult to make a profit.

Have money available

It’s important to have quite a bit of cash on hand before beginning a house flip. Those 3.5% down payments associated with FHA loans [in the U.S.] are only available for homes that will be occupied by the owner. Banks consider flips investment properties. Therefore, a flipper can expect a bank to require a 20% down payment as security for a loan. Continue Reading…

Renting in Retirement

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By Benjamin Felix, for Boomer & Echo

Special to the Financial Independence Hub

Canadians value few things more than a home that is owned outright. This might be especially true for retirees. The thinking seems to be that once your mortgage is paid off, your housing expenses evaporate. Unfortunately, this could not be further from the truth.

The alternative, renting, is often frowned upon. Renting is seen as throwing money away. The reality is that renting in retirement can make a lot of sense, both financially and psychologically, when it is properly understood.

The first step to accepting renting as a sensible housing choice is understanding the financial aspect of the decision. To compare the financial implications of renting and owning we need a common ground. That common ground is unrecoverable costs.

Unrecoverable Costs

Rent is an unrecoverable cost. It is paid in exchange for a place to live, and there is no equity or other residual value afterward. That is easy to grasp.

Owning also has unrecoverable costs. They are less obvious and usually get missed in the renting versus owning discussion. An owner of a mortgage-free home still has to pay property taxes and maintenance costs, both unrecoverable, to maintain their home. Each of these costs can be estimated at 1% of the value of the home per year on average.

In addition, an owner absorbs an economic cost for keeping their capital in their home as opposed to investing it in stocks and bonds. This economic cost, or opportunity cost, is a real cost that an owner needs to consider. Estimating this portion of the cost of owning is harder to do. It requires estimating expected returns for stocks, bonds, and real estate for comparison with each other.

Expected Returns

Estimating expected returns is not an easy task; it starts with understanding historical risk premiums. The market will demand more expected return for riskier assets, and this relationship is visible in historical returns.

For stocks, bonds, and real estate, the Credit Suisse Global Investment Returns Yearbook offers data going back to 1900. Globally, the real return for real estate, that’s net of inflation, from 1900 through 2017 was 1.3%, while stocks returned 5% after inflation, and bonds returned 1.9%. If we assume inflation at 1.7%, then we would be thinking about a 3% nominal return for real estate, a 6.7% nominal return for global stocks, and a 3.6% nominal return for global bonds.

To keep things simple and conservative, we will assume that real estate continues to return a nominal 3%, while stocks return an average of 6%, and bonds return 3%.

The Cost of Capital

With a set of expected returns, we can now start thinking about the cost of capital. Every dollar that a home owner has in home equity is a dollar that they could be investing in a portfolio of stocks and bonds. A retiree is unlikely to have an aggressive portfolio of 100% stocks, so we will use the 5.10% expected return for a 70% stock and 30% bond portfolio. The 2.10% difference in expected returns between the portfolio and real estate is the opportunity cost carried by the owner.

It is important to note that asset allocation, which is a big driver of these numbers, will depend on many factors including other sources of income like pensions, tolerance for risk, and portfolio withdrawal rate.

Comparing Apples to Apples

Adding up the unrecoverable costs, we now have 4.10% of the home value between property tax, maintenance costs, and the cost of capital. This is the figure that we can compare to rent.

A $500,000 home would have an estimated annual unrecoverable cost of $20,500 ($500,000 X 4.10%), or $1,708 per month. If a suitable rental could be found for that amount, then renting would be an equivalent financial decision in terms of the expected economic impact.

Other Financial Considerations

So far, we have looked at pre-tax returns. Taxes could play an important role in this decision. Increases in the value of a principal residence are not taxed. Income and capital returns on an investment portfolio are taxed. Continue Reading…