Buying vs renting a home

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Don’t roll your eyes just yet. This is not another debate as to whether renting is better than buying or conversely. I am actually not advocating for either option. I have been both a renter and a homeowner. In fact, I have rented more than I have owned.

I noticed there is a lot of calculators out there to help people determine which option would make the most sense financially.

Most of these calculators are flawed for various reasons; the biggest one being that they calculate based on gross income instead of net. They also don’t take into account non-financial factors, which could have a huge impact on your decision.

So, I have come up with my own analysis: non-financial factors and financial ones.

buying a home is a long-term project

Where do you see yourself in five years? As a rule of thumbs, five years is the minimum amount of time you need to stay in a property to break even or be ahead financially.

During the first five years, you pay more interests than principal on your mortgage. You also need to recoup the closing costs you paid.

Don’t get fooled by crazy real-estate markets like Toronto or Vancouver. It can be tempting to sell  after a year or two, but you would actually be losing money by doing so.

if you need to buy a car or two, keep renting

Transportation costs in Canada are very high. They can -and will- eat-up a huge chunk of your income.

if you have student loans or credit card debt, keep renting…

…at least for the time being. Pay-off your debt or significantly lower it before looking at buying. Debt repayments are a huge financial burden.

A lot of recent graduates seem to be obsessed with becoming homeowners as soon as they receive their degrees. It sounds a little bit crazy to me.

So, you have determined the above first point applies to you and the second and third don’t. Let’s do some basic math.

35% of your net income is the maximum for housing costs

Lenders always use gross income to qualify people for mortgages and other loans. The problem with that is your gross income is not what is deposited in your bank account.

Always use your net income and really avoid going over 35%.

compare apples with apples

Compare the cost of renting and buying based on similar properties in similar neighborhoods. Renting or buying a two bedroom apartment will cost more than a one bedroom or a bachelor. You can find rental info on Craigslist or Kijiji.

include very comprehensive costs

Buying costs do not stop at the mortgage payment. Unfortunately, too many people can’t seem to look past this.

If you are buying a condo or townhouse, include: mortgage, strata/condo fees, monthly portion of property tax & any other municipal taxes, monthly portion of home insurance, monthly portion of Hydro and monthly portion of maintenance.

If you are buying a single, detached home, include: mortgage, monthly portion of property tax & any other municipal taxes, monthly portion of home insurance, monthly portion of maintenance and monthly portion of all utilities: hydro, gas, water….

a word on maintenance costs

As a homeowner, the biggest difference from being a tenant is that you are responsible for repairs and maintenance. And yes, you will encounter these! The costs will be different if you own a condo or a single detached house.

In a condo building, most of the maintenance costs such as landscaping, snow removal, elevator etc…are usually included in your strata/condo fees. Big ticket items, such as the roof, are shared costs. You are only responsible for repairs inside your unit. Costs are overall lower. Take 0.5% to 1% of the proposed purchase price. That’s your yearly costs. Divide by 12.

For a single dwelling, you are 100% responsible for all the costs and they are usually higher. Use 1.5 % to 2% of the proposed purchase price.

You may not spend the amount in a given month or year, but it is best to err on the side of caution.

final word

If the number you end up with is lower than the renting cost AND does not exceed 35% of your net income, happy house-hunting! Otherwise, keep renting and invest the difference.

If home ownership is important to you, you owe it to yourself to do the above basic calculations.

There will always be opportunity costs whether you own or rent. The answer to this old age question is not so clear-cut anymore.

 

Book review: The Wealthy Renter by Alex Avery

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Please note I did not receive compensation to review this book.

The home ownership dream is very alive and well in Canada. The Federal government estimates about 70% of Canadians own their homes. It seems like the remaining 30% is obsessed with joining-in.

If you do some internet search, there aren’t that many articles, posts or books advocating for renting. This book does exactly that and it is geared towards Canada.

Alex Avery is a CFA® and holds an MBA in Finance. He currently is the Managing Director of Institutional Equities at CIBC. This division provides research and analysis on real-estate companies.

the wealthy renter definitely presents a different point of view….

I like that Avery dispels a few common myths surrounding home ownership and tries to best address the unhealthy obsession Canadians have with it.

There absolutely are benefits to renting, particularly in Canada when tenants are not responsible for home maintenance and repairs. Renting is overall, more flexible….but don’t we all know this already?!

The biggest financial benefit of renting presented in the book is when the tenant actually invests the difference between the cost renting and the cost of owning. I wholeheartedly agree with this…provided renting is cheaper than owning.

….but is overall too pushy

The whole point of this book is to advocate for renting, so I get that Avery would really push for it. Unfortunately, at times, his arguments do not make sense. One of his biggest points is that home owners do not know about the actual costs of their properties. He gives the impression owners are naive and think the only cost is their mortgage….unreal.

Avery also claims repairs costs are not known in advance, which is not exactly true either. A home owner can ask for estimates on various items; a strata corporation can obtain a depreciation report.

unfortunately, the answer to renting vs buying is not so clear cut

And even more so if you live in Vancouver or Toronto, where rents are extraordinary high, including in the suburbs.

Anyone contemplating buying a home must do some serious calculations and look at their personal circumstances as well. Renting is more than OK too!

final verdict: pass

Although the book has the merit of presenting a different point of view, it does not do a good job at it.

Instead of aligning numbers and somewhat confusing analysis, it should have focused more on addressing the stigma around renting.

No fee banking in Canada

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Banks and credit unions in North America have the right to charge all sorts of fees on both business and individual accounts. And boy, they do!

Monthly fees on chequing accounts can as high as to $ 30.00. Many financial institutions will waive the fee if you maintain a daily minimum balance in the account.

Said minimum balance has been on the rise and can easily reach $ 3 000.00. Yes, you are reading right, leaving $ 3 000.00 in accounts that usually don’t earn any interest. Ridiculous!

Monthly fees can and will add-up after an extended period of time. I recently changed banks. My ex credit-union charged me $ 7.00/month for 8 years. It adds up to $ 672.00.

I have done some research to find alternatives to monthly banking fees. I have looked for accounts offering unlimited transactions, not under any age requirement, and of course, with no minimum balance.

“NATIONAL” NO FEE CHEQUING ACCOUNTS

ALBERTA NO FEE CHEQUING ACCOUNT

BRITISH COLUMBIA NO FEE CHEQUING ACCOUNTS

MANITOBA NO FEE CHEQUING ACCOUNT

  • Cambrian unfee : this credit union will refund all banking fees with a recurring deposit such as payroll or pension

ONTARIO NO FEE CHEQUING ACCOUNTS

SASKATCHEWAN NO FEE CHEQUING ACCOUNTS

FINAL WORD

I am sure there are other financial institutions offering no fee chequing accounts. The above list is not exhaustive. Feel free to comment if you know of any other no fee chequing accounts in Canada.

Please keep in mind the mentioned institutions do charge other type of fees such as overdraft or cheques orders.

Another important reason your mortgage is denied

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Please note I am not a mortgage broker. The below is for information purposes only.

You decided to become a home owner, saved for a down payment, got pre-approved for a mortgage, found your dream home and made an offer.

Then, to your surprise and dismay, your mortgage application is denied. Hopefully, your offer was subject to mortgage approval!

yes, it is still possible for a mortgage to be denied after pre-approval

And it is not necessarily for the reason you think. A mortgage pre-approval is the maximum amount a lender would loan you, based on your income, down-payment and credit history.

Once you made an offer, the documents go through an Underwriter. The role of the Underwriter is to assess whether your loan request is an acceptable risk to the lender….or not.

Besides income and down payment, there is a crucial detail the Underwriter will focus on: the property itself.

a mortgage can be denied if there is an issue with the property

Lenders  want to ensure their “investment” will provide a handsome return for as long as possible. They also want to make sure they are not overpaying and that the collateral – i.e. the property- is safe and sound.

In order to determine this, a lender will look at both the physical life and the remaining economic life of a property.

To simplify, it means the current state of the property and how repairs can extend its life. An appraiser is usually used to determine the above points.

If the appraisal doesn’t check out, the application is usually denied. For example, most lenders are wary about financing foreclosures, even if you do and pay for any repair.

the type of property can also cause problems

In Canada, most lenders ask for an appraisal for single, detached houses. If you are buying a condo, you are not necessarily off the hook either.

The underwriter will definitely take a look at the building history, finances and current conditions.

Too many tenants? Your application could be denied. Tenants do not have a personal stake in the building and can be perceived as detrimental by some lenders.

Building needs major repairs? Your application could be also be denied, particularly if the strata corporation does not have the money to pay for them.

Buying on plan? Potentially denied. A lot of lenders won’t finance “non-existent” properties, or will only finance if at least 70% of units are sold.

final word

Mortgage underwriting is a complex process. Different lenders have different criteria. The industry is also heavily regulated and constantly changing.

If one lender denies you, try another one. If it fails, you will have to look at other properties, and although disappointing, it may not be a bad thing in the long run.

Book review: Pound Foolish by Helaine Olen

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Please note I did not receive any compensation for reviewing this book.

As a personal finance aficionado, I always enjoy reading blogs and books on the subject.

this week, I will review Pound Foolish by Helaine olen

Helaine Olen is a journalist, writer and columnist. As she admitted in her book, she did not know anything about personal finances when she started writing about the subject. She does not have academic qualifications in Finance, nor is she a CFP®.

pound foolish does not give financial advice

And it is refreshing. Olen actually challenges some of the conventional, financial wisdom we have been reading and hearing for decades such as the Latte factor or the fact that owning a house is automatically a sound financial plan.

Most of all she challenges the concept of financial literacy, particularly when those who wants to teach it are banks, credit card companies and other financial entities making profits on our hard earned money.

the book was written just after the 2008 economic downturn

It makes its content even more relevant, as it is backed-up by actual events and facts.

even if it is primarily geared towards the US, you can still relate to it

Helaine Olen primarily focuses on the personal finance industry in the US. That being said, some of the concepts she talks about are fairly common in many countries, such as gender inequality, wages stagnation, rising costs of housing, education and healthcare.

final verdict: buy

I gave this book a definite buy. I really like the way Olen challenges and shakes up the personal finance world. Not too mention what she writes is very true.

 

The problem with personal finance blogs

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I totally understand the post you are about to read may confuse you, and even more so since I am a personal finance blogger who has been blogging about personal finances for over 3 years.

That being said, I believe it is also important to have perspective.

PF blogs are either too generic or too specific

A lot of blogs out there are either about extreme frugality, early retirement, stock investing or becoming debt-free. If you don’t fit in any of these categories, it is hard to relate to these blogs and the bloggers behind them.

Same goes with geographic location. A lot of blogs are written by US residents. Well, I live in Canada so that does not necessarily help me.

It is one of the reasons most people create their own blogs in the first place. I was no exception.

most pf blogs are written by non-specialists

This is a highly sensitive area I am coming to. The majority of people blogging about personal finances have no background in it whatsoever. Quite a few are writers trying to cash in on the popularity of the subject.

Writing is also influenced by personal experience. Bloggers are sharing tips and advice because it worked for them. By extension, it should work for everybody else, right? Wrong!

In order to work, financial advice has to be personalized. You don’t get this in PF blogs. It is crucial for readers to always check facts and not take the advice too literally.

PF blogs are repetitive

How many times have you read that you need to save money for retirement or have a budget?

Don’t get me wrong, basic financial advice is and will always be needed. It is a foundation to build on. But we also need different takes and perspectives in order to progress.

So, that what my blog will be aiming to do from now on. Readers will still see basic advice from time to time, as it allows for a broader audience. But, there is some conventional wisdom that can and needs to be challenged.

 

Book review: Burn your mortgage by Sean Cooper

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Please note I did not receive any compensation for reviewing this book.

As a personal finance aficionado, I always enjoy reading blogs and books on the subject. I decided to start reviewing what I read.

This post will talk about “Burn your mortgage” by Sean Cooper

Let’s start by briefly telling who Sean Cooper is. He is a pension analyst and freelance writer based in Toronto. Most of all, he is an expert at personal branding and self-marketing.

A couple of years ago (2015), he made the last payment on a mortgage he had taken 3 years before.  Cooper managed to grab the attention of a few medias in North America and one in England, after massive campaigns on social medias. He, of course, also caused quite a commotion in the Personal Finance blogosphere.

Since then, he has been surfing the (media) wave and cashing in by writing the above-mentioned book. He also provides fee-only financial advice, without being a CFP® or having any formal qualifications in Finance, at least according his LinkedIn profile and Google search.

his book should have been titled “getting ready for your mortgage” instead

It really is all there is to it, quite frankly. Chapters after chapters of very basic, rehashed financial advice such as how to budget, use a credit card, save for a down-payment, packing your lunch and use public transit whenever possible….!

Some of the advice presented is actually not that great, such as making a free-subject offer on a property. This could end-up being very costly, if things don’t go as planned. Also, being “pre-approved” for a mortgage does not mean being “fully approved”.

there is only one chapter on how to actually “burn your mortgage”

To save you time and money, it all boils down to:

  • Making accelerated payments
  • Using prepayment privileges to the maximum
  • Taking a shorter amortization period
  • Refinancing if interest rates are too high
  • Becoming a landlord if possible

Boom!

final verdict: pass

Don’t waste your money on this book. If your knowledge of Personal Finance is intermediate or advanced, you won’t learn anything new.

If you are a total beginner, you can find all the information presented in the book online for free, including on this blog.

I personally found this book to be very boring. A definite pass!

 

How I increased my savings by 850% in 4 years

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I have been in both contemplating and calculating modes lately. I realized I have come a long way financially, since my old days of  being in denial about my monetary situation  crisis.

It took 2 major events to really galvanize me into action: realizing I had hit 25K of consumer debt & student loans and becoming a home owner. These did not happen simultaneously.

When I bought my first condo in 2013, I became house rich but also cash poor. Pretty much all my savings went towards the down-payment and closing costs. On top of that, I had to spend an extra $ 1 400 to replace 2 appliances that died within 3 weeks of me moving in. And, I still had debt to pay off….yikes!

But, I did it.

No, it was not always easy, and yes, I also had a little help from the sale of my first condo. That being said, only a tiny portion of the proceeds went towards my savings. Most of them were used to buy my current condo and pay-off my consolidation loan.

Before I start explaining how I accomplished this, let me clarify and be honest on a couple of points:

  • 850% is a big percentage. However, in 2013, the balance of my various savings’vehicles was very low. I did not become a millionaire.
  • As indicated above, the majority of the proceeds from the sale of my condo is not included in that figure.

i drastically increased my income

This is the number one reason I was able to increase my savings while paying-off debt and being a home owner. If you were hoping for a get-rich-quickly scheme, sorry to disappoint you! Only a very few personal finance blogs insist on this, but earning more is actually the best way to achieve your goals and dreams.

I didn’t buy too much house

Living in the Lower Mainland, I had to adjust my expectations. Owning in the city Vancouver will never be a possibility, and I am fine with it. That being said, with the amount that my mortgage broker qualified me for, I could have bought a bigger place. I didn’t, as my housing costs would have been way too high. Right now, they are sitting at 34% of my net income.

i didn’t buy too much car

Quite frankly, I don’t understand people spending an astronomical amount of money on a depreciating asset. A car looses value the moment it leaves the dealership. I also don’t understand people trading-in cars every 2 or 3 years thus staying trapped in a perpetual monthly payment cycle. Did I mention anything about people taking on 7-8 year long car loans? Or rolling old car loans into a new one, therefore owning more than the vehicle is worth?

My subcompact car will be paid off in 13 months. I plan on keeping it for at least 5 to 7 years afterwards.

i was -and still am-very disciplined

I always pay myself first. I have automatic withdrawals from my chequing account to both my TFSA and RRSP aligned with each paycheck. I am paid on bi-weekly basis, meaning I receive 26 paychecks per year instead of 24. Over the last 4 years, I was also blessed with work bonuses and tax refunds. I have reinvested the huge majority of these easy financial boosters. Many times, I was tempted to blow these away. I am glad I didn’t.

but wait, what about your other expenses?

You might ask. It is a legitimate question. I definitely do my best to keep them at reasonable levels. That being said, with all the above points, I don’t sweat that much over them.

final word

It was not always easy to simultaneously save and pay-off debt and pay for regular expenses. But, I am proof it is doable. Now I am almost debt free, I feel like the best is yet to come, financially speaking.

 

Buying a foreclosed property

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Note: I am neither a Realtor® nor a Lawyer. This post is for information purposes only. It also focuses on the province of British-Columbia, where I live. 

A property is considered in foreclosure when a lender obtains  an order of sale from a Court and the owner is unable to redeem the property. In plain terms, this happens when an owner is behind on their mortgage payments.

Let’s take an overview of the process for buying a foreclosed property, as it differs from buying a traditional property.

the price on a foreclosure will be close to market value

Unlike in the United States for example, Canada’s Courts protect the owner, not the lender or the buyer. The sale price is as to be close to market value as possible. You won’t be able to buy a property at a deep discount. Lenders work with a Realtor® and the property is listed on the MLS®.

That being said, the listing price will usually be lower. There are a few reasons for this: the property is usually sold to the highest bidder in court, the property is sold “as is”, and if after all fees are deducted there is a profit, the lender has to write a check to the owner….most lenders don’t want to do this.

the only subject you can include is “subject to court approval”

That’s right, you are reading correctly. Unlike a regular purchase, you cannot include the usual subjects like financing, home inspection, review of documents etc…in your offer. This is a legal requirement. The offer presented in Court has to be free of subjects. When the lender/trustee approves your offer, you have five business days to get your affairs in order, i.e. obtaining financing, do a home inspection if you can etc…

This can be a bit tricky, which brings me to the very important next point.

YOU ARE BUYING THE PROPERTY “AS IS, WHERE IS”

Neither the lender or the Court makes any representations or warranties as to the condition of the property. Many documents may not be available to review. There will be no property disclosure statement. Chattels are not included in the sale, as the lender does not own them. A chattel is an item that is removable from the property, such as appliances. In an nutshell, you assume all the risks related to the condition of the property.

A lot of lenders will also not finance foreclosures.

once accepted, your offer becomes public

When the lender accepts your offer, a date in Court is set. Your offer is part of the public court filing for everyone to see.

be prepared for court

On the set date, you need to be present. You also need to have a deposit in hand. Unlike, a regular purchase, the deposit needs to be included with your offer.

The Judge -or Master-  will ask if the owner can redeem the property. If not, they will ask if they are any other parties interested. If yes, this is when the bidding war occurs. You only have one shot at this. All bids are presented in sealed envelopes. Usually, the property is sold to the highest bidder and/or the bidder with the highest deposit.

If the judge approves your offer, it becomes legally binding as the only subject is removed. You also need to pay close attention to details like spelling, names and legal description of the property, as there is no title transfer in a foreclosure. Instead the Order Approving Sale is filed at the Land Title Office. If there are mistakes, the Office could refuse it.

final words

Buying a foreclosed property is definitely not for the faint-of-heart. Should you decide to take this route, you will need to leave your emotions at the door. You will also need to be patient, as the process takes more time.

Don’t be lured by the perceived lower price. Since you are buying “as is”, you have no idea of the actual condition of the property. You could face big costs upon possession.

 

 

 

Segregated funds explained

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Please note I am not a financial adviser or an insurance broker. This post is for information purpose only. 

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Segregated funds have always been a highly debated product. After years of stagnation, they are making a come-back. In 2015, the total amount of money held in segregated funds in Canada rose by close to 17%.

But, what is a segregated fund?

A segregated fund or -seg- is a product combining both investment and insurance. To sum it up, it works like an “insured mutual fund”. The insurance portion guarantees 75% to 100% of the principal invested. Monies are invested in stocks or bonds.

Segs are considered an insurance product and are usually sold by insurance companies. That’s it for the basics.

what are the advantages?

The main perk of this product is that you are guaranteed to receive the majority of your money back. If the investment portion performs well, you could actually end-up with a lot more money.

The insurance portion also offers a death benefit that is not subject to probate. The money held is also protected from creditors. Should you file for bankruptcy, your seg is off-limit.

what are the DISADVANTAGES?

Segregated funds are very expensive. The management expense ratio -MER-on these products can be easily over 3%. As a reminder, the MER is deducted from the fund’s return.

Your money is also locked-in for 10 or 15 years, depending on the contract. If you decide to cash out before the term, you will be paying a hefty penalty and deferred sales charges. They are very few “no load” segregated funds. “No load” means you are not paying any fees for buying or selling.

Because segregated funds are insurance products, they do not have to comply with the new CRM2 rules on investments. Holders are largely kept in the dark as to the actual costs of their segs.

who are segregated funds for?

They could be of interest for:

  • Self-employed people or small business owners mainly to protect their assets from creditors
  • People who are really, really terrified of market risk and close to retirement
  • People who are in very poor health and at a very high risk of dying soon

final word

To be honest, there aren’t that many people who actually benefit from having segregated funds. Better and cheaper results can usually be achieved by purchasing a separate life insurance policy and investments.

Just like any financial product, you need to do your own research and cost-benefit analysis to see if a segregated fund makes sense for you.