Suburban life ain’t cheaper

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Extraordinary real-estate costs in cities like Vancouver and Toronto are pushing people further and further away from said cities.

A single detached house in Vancouver costs close to 1.5 millions. A townhouse costs  about 500K and a condo 350K. No wonder people rush to the suburbs in hopes of snapping-up properties at a somewhat lower price.

The problem with this approach is two-fold: first, it drives prices up in the suburbs as well. Bidding wars and no-subject offers have become the norm there too. Second, it will cost you more if you have to buy a car or two.

A recent study compared the costs of housing in Langley with the costs of commuting Downtown Vancouver for 25 years. There are very few properties assessed at over a million  in Langley. However, the transportation costs would be close to 565K over the course of a quarter century. Staggering! On the other hand, someone living in Vancouver would spend “only” 298K in transportation costs, over the same period of time.

The choice of Langley is not random. Public transit is fairly limited in this city, making a car a necessity. Technically, one could go Downtown Vancouver from Langley with bus/skytrain but it would take them close to 2 hours. There are also fewer job opportunities.

Case in point with my own story: before buying my first condo in Surrey, I rented in North Vancouver and New Westminster. I worked mainly Downtown Vancouver and have been calling New West my workplace for close to 5 years. I never rented Downtown Vancouver, as I simply couldn’t afford it and didn’t want to. Rents are a waste of money in this part of the city!

With some previous salaries I made, I simply couldn’t afford a car, but I also didn’t need one. When I was in North Van and worked Downtown, I would simply take the Seabus. It took me 15 minutes to get to work. The best was when I moved to New West and also found a job there. I would walk to work.

If I needed a car, I was member of a couple of car-share organizations. It was way cheaper than owning one. I would also claim the monthly bus pass as a tax credit. Financially, it looked like an idyllic situation, when it was not necessarily the case.

The black point is that I was renting when it no longer made sense for me to do so, both financially and personally. I am not getting into the rent vs.buy debate here!

Back to my own story, I didn’t qualify for anything in Vancouver or closer suburbs, so I turned to further suburbs, namely Surrey and Langley. With public transit more limited, I had to buy a car, which added $ 800 to my monthly budget. Buying was cheaper than renting, but when I factored in that extra $ 800, I wasn’t so ahead anymore!

The yearly cost of a compact car in Canada is just under $ 10 000. If you have a bigger car or a truck, that amount will be higher. If you have 2 cars, it will be double.

Living in the suburbs used to be a no-brainer. It is definitely no longer the case. Nowadays, suburban vs. urban living is a trade-off between housing and transportation costs. Before deciding to move to the suburbs, whether as a renter or owner, take a look at your transportation costs and commute time.

As for me, I do not regret buying in the suburbs and getting a car, despite the extra expense. My car will be paid off next year and I anticipate my transportation costs to actually be lower for a few years after.

Most importantly, I enjoy my suburban life.

BC home equity partnership, friend of foe?

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Last month, the BC liberal government announced a initiative to “help” first-time home-buyers enter the increasingly expensive real-estate market. The province consistently sees the highest prices when it comes to housing.

You can find all the details about this program here.

Of course, the announcement sent quite a shock wave across the personal finance and banking communities, as basically the program is a loan up to $ 37 500.00 to help with the down-payment requirements. The loan is registered as a second mortgage on the property.

The first five years are both payment and interest-free, but if you sell you will have to pay the full amount back at the time of conveyance. After the five year period, you will have to make payments both on your mortgage and this loan. This is the element that can set people up for a financial disaster, depending on their circumstances. A lot can happen in 5 years, including a raise in interest rates.

Living in British-Columbia is very expensive, not just housing-wise. British-Columbians pay the highest amounts on car insurance, gas and daycare fees. Groceries aren’t cheap either. Unfortunately, salaries don’t always match these high living costs.

Genworth, one of the mortgage-default insurers in Canada, announced this loan would be treated as a non-traditional, borrowed down-payment -which it is- and included into the debt service calculations, effectively lowering the mortgage amount one would qualify for. On top of this, the mortgage default insurance rate will be higher. No doubt CHMC will follow suit as well as a lot of lenders.

So long for improving accessibility and affordability, particularly in Metro Vancouver!

The only tiny advantage I see in this program is that it technically allows homeowners to have a higher equity in their property, as it boosts their initial down-payment. But the equity will never be higher than 19.90%, thus mortgage-default insurance will still be required.

As most people in the PF blogosphere, I don’t think this program is a good idea. Luckily, it is limited to first-time home buyers and also in time.

If you need to borrow money to fund the minimum down-payment requirement and closing costs, you can’t afford to buy a property, period. It also applies to the bank of Mom and Dad.

2017 plans

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Hello Blog and Readers, I am back!

It has been a month since I last wrote, but boy I needed a break. My holidays were quiet and relaxing. I spent $ 227 for Christmas, including food, booze and gifts. I will definitely have a Merry January!

As customary, here is what I want to accomplish this year. I found out that writing plans for the whole world to see kept me accountable.

Finances

  • Save $ 500/month in my RRSP: The calculator from the federal government estimated this is the amount I need to save if I want to retire comfortably. So, here I am!
  • Completely pay-off one of my 2 consumer debts: I currently have a car loan and a consolidation loan. I want to get rid of one of these, which one is to be determined. I want 2018 to be the year of becoming consumer debt-free.

Career

  • Keep moving towards new career: I finally figured out what I want to do and I am moving towards this goal. Sorry, I am not saying more.

Personal

  • Keep taking good care of myself: exercising, eating right, getting enough sleep, not putting off medical appointments etc…This is something I will always need to pay attention to.
  • Date more: as previously mentioned, I am single and no longer want to be.

Update on 2016 plans

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I can’t believe it is already December and 2016 is almost over. I am actually glad this year is coming to an end, as it was insane as far I am concerned. Life always has a way of unfolding when you least expect it and despite the best laid plans. As John Lennon perfectly summed it up: “life is what happens to you when you are busy making other plans.”

Some of you readers know that back in April I decided to sell my condo, which I hadn’t initially planned to do just yet. Unfortunately, the building I used to live in could have pretty much been considered a “leaky condo building“. It necessitated tons of repairs and there was no money to do them, meaning that, as a homeowner, I would have been on the hook for close to 29K of special levies….No way that was going to happen. So, I put it for sale in June and sold at over-asking in less than a week thanks to red hot Vancouver real-estate market.

I was able to buy another condo in another city. Luckily, I didn’t get involved into a bidding war and was able to have a home inspection done, a scarcity in the Lower Mainland. That being said, I had to increase my initial budget by $ 10 000. To all the naysayers, including in the PF community, yes, I did the math before buying, and yes I can afford to live in my condo and save money and pay for my bills and live a little bit!

I actually contemplated going back to renting, but after further calculations and personal considerations, it did not make sense for me.

Work was also crazy-busy. The company I work in has been steadily growing over the last 2 years. Although it is a good thing, as I am not concerned about losing my job, I barely have time to catch my breath. It is definitely not how I want to live. I have been thinking about my career for a couple of years now and it is definitely time for a new direction.

Without further ado, let’s see where I am at with the plans I made earlier on this year:

Finances

  • Save $ 5 000: exceeded. Got a nice boost from the sale of my condo.
  • Keep paying down my debt and not incur any new one: I did not incur any consumer debt, but I did get a new mortgage…so technically not done.
  • Increase debt repayment by $ 100 per month: done. Put $ 1 200 to my consolidation loan, and it is now under 10K! 2018 will be the year of becoming consumer debt-free.
  • Learn more about stock and dividend investing: done and still in progress. It was not rocket-science! As usual, I let fear get the best of me instead of educating myself. I liquidated all the mutual fund losers I had had for a few years and started building my stock portfolio instead. My accounts are finally back in the black in terms of return.

Career

  • Explore career options: I have been in administration and accounting for 15 years. This is no longer “talking” to me. Time to figure out my next move: in progress. I have explored other career options, mostly in the corporate world, but nothing really appealed to me. I also thought about obtaining an MBA which would have been a huge, costly mistake, as I simply don’t need/want one. There was one particular option I kept dismissing but it kept coming back and gnawing at me. I decided to listen and take a closer look. It actually makes perfect sense to me…and this is what I intend pursuing. I am not sharing more at this stage, sorry! Nothing is done yet, and my employer or coworkers might be reading my blog.

Personal life

  • Take better care of myself, i.e. getting enough sleep, exercising regularly etc…sometimes it is challenging for me to do these seemingly simple things: in progress. I definitely made efforts, but I need to constantly pay attention, otherwise I will right back into bad habits. My job is making things difficult, giving me further reasons to get things moving on the career front.
  • Date more! Pass. This year was simply too busy and I just didn’t have and didn’t make the time. This will be next year’s priority. I am single and don’t want to be. Time to change that!

I have also decided it will be my last post for 2016. I chose to say “yes” to other things instead, namely resting and taking time for myself. On top of all the above, I also traveled to France and had family over in my new dwellings. No wonder I feel close to burn-out!

This blog is a labor of love at the moment, i.e. it is not generating any money. I have already started brainstorming on my 2017 plans, and one of them is deciding what to do with this blog.

In the meantime, have a wonderful holiday season and thanks for your readership and support!!

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It is not just the latte (factor)

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David Bach popularized the “latte factor” term. The concept emphasizes the long-term cost of small, everyday purchases such as coffee, cigarettes, magazines and so on. There are lots of debates in the PF community as to whether this concept is valid. I personally believe it is, to some extent.

The very first post I wrote was about the cost of eating-out. I had estimated that someone eating 3 meals out five days a week will spend over $ 8 000 per year on food. For simplicity, let’s say this amount never changes for a period of 25 years. The cost will be $ 200 000. I sure could find a lot of better uses for that amount of money!

For simplicity again, let’s say that half of it is invested, i.e. $ 100 000, for 25 years at a conservative 5% interest rate. At the end of the 25 years, it would turn into close to $ 194 000. I don’t know many people who can pass up $94 000. Do you?

No, the latte factor won’t make you a millionaire, but it can certainly help your financial goals. That being said, in order for this to work, you need to actually save and invest the money. If you spend it somewhere else, it will get you nowhere financially.

You also need to look at bigger expenses, namely house and car. Don’t buy too much of these, they can drain your accounts in no time and prevent you from replenishing them. It is also a good idea to review and compare insurance quotes or call your cable to company and ask for a discount. You will be surprised at how much money you could save by doing all the aforementioned.

To put together a successful financial plan, you need to look at the bigger picture and at other elements such as your income – does it exceeds your expenses?-.

Spending an occasional $ 4.00 on a fancy latte will not derail your retirement plans. Spending $ 8 000/year on take-out or taking on a too large mortgage might.

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Financial things to do (and not to do) in your 30’s

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The 30’s are definitely an interesting decade. Chances are they are a mixed bag for most people in them, including myself: wedding, kids, house, career…etc. This decade is probably the most taxing on hard-earned dollars.

The good news is that your 30’s are also your top-earning decade. Without further ado, here is what you should – and shouldn’t- be doing in your 30’s:

  • become established in your career. You probably have a few years of experience under your belt by now. Make the most of them to negotiate your salary and promotion or to find a better job. If you are considering a career change or want to become self-employed, you will need to plan for this. Keep reading.
  • make use of work benefits: benefits are basically free-money, and even more so when they are employer-paid. If your employer offers extended health and/or disability insurance, please enroll. Same goes for a pension or a group RRSP plan.
  • track your expenses and income. There is no way you can budget and set goals if you don’t do this.
  • have a sufficient emergency fund. Whether you want to call it a back-up fund or an opportunity fund, it is all the same. It needs to be adequately funded. Chances are $ 1 000 are not going to cut it anymore, particularly if you have dependents. Most people aim for 3 to 6 months of living expenses. Aim for what is right for you, given your circumstances.
  • have adequate insurance coverage. Unless you are loaded with cash you need insurance. Check my previous entry on this subject.
  • plan and save for items: whether it is car repairs, your wedding or your annual vacation, these are neither emergency nor a surprise. If you are unable to save the money, then you may have to postpone or consider other options.
  • don’t keep-up with Joneses. You should be way past this.
  • you are really saving for your retirement. This should be the top-priority, before your kids’ education, if you have them. Ultimately, your children won’t pay for your retirement.
  • you are investing in the stock market. You still have a few decades before retiring. The stock market has always provided the highest returns. Educate yourself and invest your money. Do not let it sit in your savings account earning 0.5% interest.
  • you have your debt under control. It is unlikely you will be able to completely avoid debt in your 30’s. Your student loans should be on their way out, if not paid off. You are not racking-up credit card debt to buy stuff or to pay for living expenses. When borrowing, it should be to buy an appreciating asset, when the cost of the loan does not impact other saving goals and will be paid off before retirement. Anything not under that category should be off-limit.
  • Don’t buy too much house. If you decide that home ownership is for you, do not become cash poor over it. Too many Canadians make their home their entire financial plan, including to retire. This is a mistake. You also need highly-liquid, easily disposable assets.
  • have your legal affairs in order. You need a will, even more so if you are married and/or with children. Ensure you designate a beneficiary for your life insurance and other registered accounts.

 

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RRSP myths debunked

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As 2016 is slowly but surely coming to a close, it will soon be tax season again.

I want to broach on the biggest RRSP myths that are still circulating around.

  • A contribution equals a tax refund. Sorry to disappoint you here, but this is simply not true. A contribution will lower your income tax payable, but does not necessarily trigger a refund. It depends on your income and situation in general. Also, your refund will never be for the full amount you contributed.
  • RRSPs are tax free. No, they are not. An RRSP is a tax-deferred account. It is like “contribute now, pay later”. You only pay taxes when you withdraw from the account. The only 2 exceptions when you won’t pay taxes is within the Home-Buyer Plan or the Lifelong Learning Plan. That being said, under these 2 programs, you have designate a minimum repayment amount each year when filing your tax return. If you don’t, you will be taxed accordingly.
  • Dividends and capital gains within an RRSP are not taxable. This is by far the biggest myth around. If you have stocks, ETFs or mutual funds, you may be paying taxes on any dividends or capital gains. It all depends on the country the stock/ETF/mutual fund is from. If Canadian, then yes, you will not pay taxes on any dividend or capital gain. Canada also has an agreement with the United States regarding dividend-paying US stocks held in a Canadian RRSP. These are not subject to taxes either. For the rest, the area can definitely be more gray. Many countries levy a tax on dividends paid to non-residents. If there is no tax treaty with Canada, CRA will levy additional taxes. Because an RRSP is a registered account, you won’t be able to claim the Foreign Tax Credit.
  • Everyone needs an RRSP. If you are in a low tax bracket or have a pension plan at work, you won’t benefit from an RRSP. If you are in a high tax bracket, you need to figure out what your tax bracket will be when you retire. If it is expected to remain the same, the RRSP is probably not the way to go either. With the clawback on the Guaranteed Income Supplement, you may end-up paying more income taxes! The RRSP is best suited for medium or high earners whose tax bracket will be lower upon retirement, and who don’t have an employer pension plan.
  • An RRSP loan is a good idea. Not necessarily. As I indicated above, your refund will never equate the amount you contributed. Unless you can reimburse your loan in full quickly, you will pay interests on said loan. You also can’t deduct the interests paid on the loan, because you can’t do so on registered accounts. Your RRSP also needs to return quite a bit more than the interest rate on your loan.

There are plenty of other misconceptions about RRSPs, but these 4 are probably the most common ones.

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Back to life and financial basics

I can’t believe it is already Thanksgiving here, in Canada. As always, I do my best to practice gratitude on a regular basis, and not just on a particular day.

Recently, I have been thinking that, when I was younger, life was much simpler and cheaper.

I am probably dating myself but, back then:

  • We didn’t have cell phones or Internet
  • We didn’t have cable or Netflix
  • We didn’t have a dishwasher, at least for a good portion of my childhood
  • We didn’t have a dryer for our clothes; we air-dried them
  • We only had one bathroom for the whole family
  • We only ate out for special occasions, such as birthdays
  • We lived in the same house for decades
  • We didn’t trade cars every other year
  • We only replaced items when they could no longer be fixed or no longer worked at all
  • We didn’t throw away clothes just because a button went missing or because they had a tiny hole; my Mother would mend them
  • We only bought things that we could actually afford to pay for right away

And you know what the best part is? I am alive and well.

I have also kept quite a few of the above for my life as it is today. It wasn’t always that way.

It can be very challenging in these times of instant consumption and gratification, “must have & must be”, where bigger is perceived as better and each kid “needs” their own bathroom. I used to be in that line. Not anymore.

By doing most of the above, I have saved a lot of money over the last few years and I was able to do what really matters to me.

Perhaps, you can do so too. It can be a good starting point for anyone trying to get their finances back on track.

Happy Thanksgiving to all my Canadian friends and compatriots!

 

Mortgage penalty explained

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It has been over a month since my last entry. My life has been crazy-busy this year and I really needed a break. I took time-off work and I also had family visiting, which was exactly what I needed. I realized I also needed a break from my daily routine.

I am definitely more settled in my condo and new city. I enjoy living there and I know I made the right move by selling my previous condo.

Going through the madness that is real-estate in Vancouver, I have to write another post on the subject of mortgage penalty.

In Canada, when you pay-off your mortgage early, lenders have the right to charge you a penalty for doing so. Mortgages are a huge business here, and even with low-interest rates, lenders are turning massive profits.

The penalty you will be assessed depends on whether you have a fixed rate or a variable rate mortgage. As indicated in their names, the interest rate on a fixed rate mortgage will remain the same during the term of the mortgage. A variable rate, on the other hand will fluctuate.

This is because the interest rate on a fixed mortgage is determined by the bond market whereas the variable rate is determined by the prime rate set by the Bank of Canada.

This also explains why there are 2 different penalties: 3-month interest or Interest Rate differential -IRD-.

For a variable rate mortgage, the penalty will always be 3-month interest, as mandated by the National Housing Act.

For simplicity, let’s say you have $ 100 000 left on your mortgage with an interest rate of 4.00%. The penalty would be:

4.00  X  100 000  X  (3/12)  = $ 1 000.00.  Pretty straightforward.

There are 2 different ways of calculating the IRD. One could impact you in a significant way.

Once again, for simplicity, we will assume  a $ 100 000 mortgage at 4.00 % with 24 months remaining on the term.

With a standard IRD calculation, the lender will take the current interest rate for a 2-year term fixed rate mortgage, matching the 24 months left on your mortgage.

Let’s say the rate on this is 2.75%. The lender will the calculate the difference between this rate and your mortgage rate. i.e 4.00 – 2.75 = 1 .25.

The penalty is then calculated as follow:

100 000  X (1.25 /12)  X  24  = $ 2 500.00.  More than double the 3-month penalty!

A few lenders use a loophole in the Interest Act for the second way to calculate the IRD. The Act does not specify which rate should be used to calculate the penalty.

Let’s keep the same numbers as above. Some lenders use the posted rates instead of the contract/discounted rates, i.e. the rates you actually pay or would pay.

You obtained a rate of 4.00% but the posted rate on the day you got your mortgage was 5.25 %. The lender gave you a discount of 1.25 %.

The posted rate for a 2-year mortgage is now 3. 00%.

The lender will use an IRD factor of 2.25, i.e. 4.00 – (3.00 -1.25).

In terms of penalty, it amounts to:

100 000 X (2.25 /12) X 24 = $ 4 500.00, more than quadruple the 3-month penalty!

I know all these calculations look boring but it is crucial to understand how your lender calculates your mortgage penalty if you have a fixed rate mortgage.

I was lucky that my previous lender did not use the posted rate. They charged me a 3-month penalty as it was higher than the IRD. Had they used the posted rate, I would have paid over $ 4 000 in penalty. When I signed the documents, I did not pay attention to this.

Most people don’t, unfortunately.

For my second mortgage, I went with a variable rate.

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Closing costs in real-estate

I am finally all moved-in in my new home sweet home. I am glad this whole “real-estate thing” is finally over. I decided to sell my previous condo in mid-April. By the time it was ready for sale, it was the end of May.

It was listed early June and sold on the 14th at over-asking. I was lucky to be able to buy my current home shortly after. That being said, the completion and possession dates were mid-August for both condos.

I had been living in boxes and more or less camping since the end of June. I was happy to take all my belongings out of those boxes.

Closing costs are payment for all the necessary items to conclude or “close” a real-estate deal. These fees are paid by both sellers and buyers but are different.

For the 2 transactions, I had budgeted $ 29K in closing costs….they came in at just above $ 25K. Staggering, isn’t it?

These fees creep-up very easily and add-up to big dollar amounts. They are always a surprise for most people, including myself. Here is a non-exhaustive breakdown of them:

When selling

  • Realtor commission:  in BC, it is usually 7% on the first $ 100K and 2.5% on the remaining balance
  • Legal fees: to clear the title. The fees are lower when selling as there isn’t much involved.
  • Mortgage penalty, if applicable: if you break your mortgage before term, lenders will charge you a penalty, either 3-month interest or Interest Rate Differential -IRD-
  • Mortgage discharge fee, if applicable: most lenders will also charge you an administrative fee to discharge the mortgage

Upon selling, the buyer will usually reimburse you for your share of the property tax and strata fees -if you buy a condo-.

When buying

  • Legal fees: these will be higher for purchasing, as more work is involved
  • Property transfer tax: cash grab from most governments. In BC, the rates are: 1% on the first $200K, 2% on the remaining balance up to $ 2 millions, 3% up to $ 3 millions. If you are a first-time home-buyer and your property is under $475K, you are exempt from this tax in BC.
  • Down-payment
  • Mortgage default insurance: if you buy with less than 20% down
  • Mortgage application fee: most lenders will waive this, but some will charge you an administrative fee to process your application
  • Title insurance: most lenders will require this. It is to insure you are the rightful owner of the property
  • Appraisal fees: if you buy a detached house, the lender will ask for an assessment of its value to insure you are not overpaying. It is less common for a condo
  • Land survey: for detached houses only. A lender may require a detailed plan of the land showing property limits, easements and rights of way.
  • Interest adjustment: You need to pay the interests on the mortgage for the month you close
  • Other adjustments: you will most likely have to reimburse the seller  for their share of the property taxes and strata fees
  • Fire insurance: lenders require to be first payee in case of a fire. Insurance companies will charge a fee to prepare the applicable document

Other fees that are not included in the statement prepared by lawyers/notaries:

  • Home inspection: if you can do one, that is great but it costs around $ 500.00
  • Moving company: unless you have willing friends, you will need people to move your belongings to your new place
  • Home insurance 
  • Utility hook-up & transfer: BC hydro charges $ 12.50 to transfer your account. Your cable company may also charge you fees
  • Locksmith: it is probably a good idea to have the locks of your new place re-keyed

As you can see the list is pretty long! When it comes to closing costs, you are better off thinking “high” than “low”. They will always be higher than what you think.

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