You get what you save for.

Mortgage Matters: Calculating a Down Payment

May 12, 2013 – 9:00 am

As a result of the recent financial crises, high-risk zero-down mortgages are history. This protects both the Canadian banking system and homebuyers by reducing the risk of loss.

Newly tightened mortgage lending rules now dictate that a minimum of 5 percent down payment is required to make a purchase. A down payment simply calculated by taking a percentage of the cost of the home.

Today, to qualify for an uninsured mortgage, a borrow must have a 20 percent down payment.

But, for many people, saving 20 percent is out of reach. Thankfully through Canada Mortgage and Housing Corporation (CMHC), buyer’s can secure an insured mortgage with a 5 percent down payment.

CMHC charges a fee for the insurance and publishes a table of premiums allowing borrowers to calculate the added costs. (If math freaks you out, use CMHC’s premium calculator). On a $300,000 home for example, a 5 percent down payment translates into a $7,840 CMHC premium.

The more you put down, the less insurance you’ll pay; so try to save as large a down payment as possible. Note that long-term, CMHC fees are lower than the value gained through building equity in your home.

Rent-to-own options are home ownership solutions for individuals with poor or limited credit history that wouldn’t otherwise qualify for a typical mortgage. Effectively, this is a lease combined with an exclusive option to purchase the home within a pre-specified period of time at a guaranteed purchase price.

At the beginning of the lease, a non-refundable initial option fee (down payment) is paid by the buyer – typically 1 or 2 percent of the home’s value. As the buyer pays rent, they earn lease option credits that are put towards the purchase price of the home when the buyer decides to exercise the option to purchase the property.

If you’re a first time home buyer, take advantage of the Government of Canada’s First Time Home Buyers’ (FTHB) tax credit for eligible individuals. The credit will provide up to $750 in federal tax relief.

Sidebar: Pros and Cons of Rent-to-Own

Rent-to-own is great when a buyer wants to test out the house and neighbourhood or if they need time to rebuild credit and save money. The drawbacks are that the rent paid is typically at a premium, the initial option deposit is non-refundable and bank financing isn’t guaranteed at the end of the process.

Still wondering if you should keep renting? Do the math using the buy or rent calculator on getsmarteraboutmoney.com.

Published by Metro News March 18th, 2013.

By LesleyScorgie | Posted in Debt, Homes, Real Estate, Uncategorized, financial goals, personal finance |

Mortgage Matters: Choosing a Mortgage

May 12, 2013 – 8:58 am

Your monthly mortgage payment is just one small part of home financing. There are several other elements to consider.

The amortization period is how long it will take to pay off the total loan, which typically ranges from five to twenty-five years for insured mortgages through CMHC. The longer you take to pay off your loan, the lower the payments, but you’ll pay more in accumulated interest.

The term of the mortgage is how long it lasts. It typically ranges from six months to ten years. When the term expires, you can renegotiate certain terms of the loan, transfer your loan to another institution, pay it off, or renew it for another term. The term is essentially the total amortization period broken into smaller chunks.

The interest rate on a mortgage is the premium you pay to the lender for lending you money. Shop around for competitive rates and terms. Check out all the big bank websites as well as www.ratehub.ca, www.ratebot.ca, and www.canadamortgage.com.

A fixed interest rate means that the lender can’t change the rate and your payment is set for the full term; great when rates are low.

A variable rate fluctuates with prime rate, and is typically lower than the current posted fixed rate allowing you to pay more principle. But the rates can fluctuate. This option is great when rates are high but declining.

Next, choose between an open or closed mortgage. Open mortgages costs more because you can, at any time throughout the term, pay any portion of the loan off without penalty and can negotiate almost any term of the mortgage at almost any time.

A closed mortgage means you are committed to the terms and conditions of the mortgage until your term is up.

Many lenders allow offer pre-payment options; lump-sum payments of 10 or 20 percent of the original amount each year, “double-up” payments, increased regular payments or accelerated weekly or bi-weekly payments.

Sidebar

There are two hybrid mortgages. A capped-rate mortgage takes advantage of a variable rate. If the rate increases to a certain level, the mortgage locks in for the remainder of the term (thus capping the rate). You pay a premium for this mortgage structure. A convertible mortgage allows for the existing terms to be converted to new terms (hopefully more favourable) after a certain period of time.

Published by Metro News March 18, 2013.

By LesleyScorgie | Posted in Debt, Homes, Real Estate, budget, financial goals, frugal living, how to save money |

Mortgage Matters: How much can you afford?

April 14, 2013 – 9:04 am

Picture this; you meet with a mortgage broker and after a series of questions related to your income, assets and liabilities, you’re pre-approved for a $400,000 mortgage. You grin ear-to-ear because this is $100,000 higher than you were expecting. You race out, purchase a home for your maximum limit, and for the next three years you can barely afford groceries. You’re house poor.

Just because you’re pre-approved for a large mortgage doesn’t mean you should take it. Avoid home poverty by determining what you can actually afford.

Start by running budget scenarios for various mortgage and housing expenses. Compare how a $1,200 monthly mortgage payment combined with $250 in condo fees and property taxes affects your bottom line relative to a $1,400 monthly mortgage payment, no condo fees, but increased tax and utility expenses.

Once you’ve got a ballpark idea of what you can comfortable afford each month, use online mortgage calculators to determine how this translates into a home price. Free calculators are available at Canadamortgage.com, CMHC’s home buying tools or from any major bank’s website.

Next, speak with at least three mortgage lenders to get a mortgage pre-approval; competitive offers will save you money.

Mortgage lenders use ratios to determine what you can afford, which translates into your pre-approval amount.

Your gross-debt-service ratio, which typically can’t be more than 30 to 32 percent of your gross monthly income, is comprised of your mortgage payment + house insurance + property tax + heat bill. If you have a condo, you must include half of the monthly condo fee.

Your total debt-service ratio, which can’t be more than 40 percent of your gross income, adds your other monthly debt obligations (credit card payments, line of credit payments, vehicle loans, etc.) to the gross-debt-service ratio.

If you’re blowing through those ratios, you’ll need to pay down your existing debt or re-think your home buying expectations.

Sidebar

Home poverty is stressful because there’s little money left over for things like RRSP contributions or fun activities. It’s also cited as one of the leading causes of spousal spats. If you’re running a negative bank balance for more than three months because of your home, you must increase cash flow by cutting out unnecessary expenses, making more money and taking advantage of available government support and tax breaks.

Published by Metro News March 18th, 2013

By LesleyScorgie | Posted in Homes, Uncategorized, frugal living, how to save money, personal finance |

Mortgage Matters: Saving for a downpayment is worth the effort

April 14, 2013 – 9:02 am

Saving a down payment is hard work, but it’s worth the effort. Home ownership enables you to build equity in an asset rather than throwing money away in rent.

Think about how much you’ll need for a down payment and the impact that saving will have on your budget – YES, you need a budget.

Using a spreadsheet, list all monthly income and subtract expenses. If you’re broke each month, you’ll have to cut out unnecessary expenses like iTunes and car payments. Google docs offer free budget templates.

Experts recommend a 20 percent down payment of the home’s value. But, financial institutions will often accept less. In exchange for the bank’s extra risk, you pay a premium for an insured mortgage through Canada Mortgage and Housing Corporation (CMHC).

There are three approaches to saving a down payment; first, if you’re a first-time homebuyer, using the Home Buyers’ Plan (HBP); second, saving outside the HBP; or third, borrowing from family.

You and your partner can borrow up to $25,000 each, tax-free from your RRSP, through the HBP. You’ll have fifteen years to repay the funds, but there are drawbacks (see sidebar).

The best approach to saving outside the HBP is using accounts that allow you to contribute regularly (on payday or in lump sums), earn interest, aren’t easily accessible (reduced temptation), and don’t put your funds at risk. The safest interest-earning accounts are high-interest savings accounts, Guaranteed Investment Certificates and money-market mutual funds.

Saving monthly works best when you’ve got a fixed budget. Saving in lump sums works well when you receive bonuses, tax refunds or money from other sources.

If you borrowing from family, sign a written agreement that protects both parties and hopefully prevents a family feud.

Besides winning the lottery, there’s no magically way to save for a down payment. It takes hard work and frugal living. But, the act of saving helps form healthy financial habits, which you’ll need once you’re a homeowner.

Sidebar:

The Home Buyers’ Plan (HBP)has drawbacks. First, when you take money out of your RRSP, you lose the power of compounded interest and re-invested returns. Second, your repayments don’t benefit from tax write-offs because they aren’t new money. Third, if you can’t repay the minimum, you’ll be taxed on the difference between what you still owe and what you paid.

Published by Metro News March 18th, 2013

By LesleyScorgie | Posted in Homes, Uncategorized, budget, frugal living, how to save money |

How expensive is your lineage?

February 26, 2013 – 7:28 pm

While working on my column last week, I started fiddling around with the retirement savings calculator on getsmarteraboutmoney.ca. One of the inputs required to generate a personalized RRSP savings scenario, is the number of years a person plans to be retired for.

Though random things like accidents or disease can shorten life, lineage is a good predictor of how long you’ll live. (It’s also incredibly important to understand when trying to mitigate genetic health concerns).

For example, in my family this year, on my mother’s side, my grandmother will turn 91 years old, my great aunt will turn 96 and great uncle will turn 97. On my father’s side, my grandmother and grandfather will turn 91 and 90 years old. Barring an unforeseen circumstance, I expect to live long.

On one hand, living a long and full life is a gift. But, the financial implications of a long life are enormous; significantly more savings are required to support a more expensive retirement.

If the life expectancy of your ancestors has been shorter, don’t underestimate the impact that medical advances will have on increasing your life expectancy.

When in doubt, turn to statistics to help you plan. Many experts believe that today’s 20 to 30 something crowd will now live to over 100 years old. Whereas according to Statistics Canada, Canadians currently live to 82 years.

This means that younger people today need to save more than previous generations to support a comfortable retirement….YES – it truly is more expensive to live in this day-and-age than decades before us.

So, you might want to downsize that $5 Vente Vanilla Frappuccino to a $2 tea, and put that $3 savings into your RRSP.

If you’re unfamiliar with your lineage, check out ancestry.ca to track down your biological family members.

This Friday is the 2012 RRSP deadline to have your contributions count towards the 2012 tax year. As you sit down with your financial advisor talk about your RRSP, discuss your lineage and the implications it will have on your retirement savings program.

Published by Metro News February 26, 2013: http://metronews.ca/voices/fun-and-frugal-2/574025/living-longer-and-paying-for-retirement-how-expensive-is-your-lineage/

By LesleyScorgie | Posted in Uncategorized |

RRSP: The season for saving

February 26, 2013 – 7:13 pm

If you haven’t already noticed from all the chipper television commercials lately, it’s Registered Retirement Savings Program (RRSP) season! Now is the time to rush to your financial advisor’s office and make a contribution for the 2012 tax year.

What’s the big rush? Each year you have until March 1 to contribute to your RRSP and have it count towards the previous tax year.

Contributions are fully tax deductible and they grow tax-deferred until withdrawal; typically when you retire. The greater the amount you contribute, the more income you get to deduct from your tax return. Rather than forking over thousands of dollars in taxes to Revenue Canada, you can invest these saved dollars within your RRSP.

AND, the benefits of contributing to an RRSP don’t stop there.

The law of reinvested returns states that more money grows larger and faster than less money; when invested in a portfolio that is properly allocated based on your personal needs. Thus, keeping more of your money, rather than paying it out in taxes, significantly increases your nest egg.

If you’re over the age of 18 and have current government issued identification, you can open an RRSP account through your local bank or financial advisor. Often times employers will provide RRSPs or an equivalent tax-advantaged retirement savings program.

Once your account is opened, individuals can contribute up to 18 percent of their income, up to $22,970 for tax year 2012, and the limit can sometimes vary depending on your pension program at work[1]. If you can’t maximize your RRSP limit, you can carry-forward the contribution room indefinitely.

For most young people, contributing the maximum is nearly impossible. But, don’t fret.

Build RRSP savings over the long term by contributing regularly on pay-day and increasing your contributions annually until you reach your maximum limits. Sometimes employer retirement savings programs will even have a matching component. So sign up and take advantage of free money!

The RRSP is the single most powerful tool Canadians have to save money for retirement. Though your cash flow might be tight, saving even $10 a week (the equivalent of two lattes) can add up to over a hundred thousand dollars in retirement.

Published by Metro News February 19, 2013: http://metronews.ca/voices/fun-and-frugal-2/565241/rrsp-the-season-for-saving/

[1] http://www.rbcroyalbank.com/products/rrsp/rrsp-rules.html

By LesleyScorgie | Posted in Uncategorized |

What are you waiting for? It’s time to tackle those holiday credit card bills

January 23, 2013 – 8:28 pm

Still reeling from your holiday spending hangover? Brace yourself – the worst is yet to come. Inch your way towards the mailbox and retrieve your credit card statement. Look at your balance and take ten deep breaths of fresh air.

You need a plan to clear your balance as quickly and efficiently as possible.

Start by knowing the facts. First, from today, you have approximately one week until the minimum payment on your credit card statement is due. Second, if you don’t clear your balance, you’ll start paying interest on your new purchases (plus the existing balance if one exists) to the tune of 19 percent. Third, because credit card companies accrue interest charges by the day, the cost to carry credit card debt is outrageous.

Now, raise your right hand, place it over your heart and vow to go on a spending hiatus until the balance is paid off. Accruing more debt while paying off the existing will destroy your chances of becoming debt-free.

Check how much you have in your bank account and if you’ve got the cash, pay off your credit card.

If not, determine the full extent of your holiday spending damage. Then put your game face on, pick up the phone and start negotiating. Call your lender and ask for a lower interest rate. By presenting a competitive offer, you can persuade the lender. But, if they won’t reduce the rate, transfer your business elsewhere.

Next, make more than the minimum payment otherwise you’ll barely cover the interest charges. Making minimum payments on a $1000 balance would cost $1000 in interest charges and take 115 months to pay off at 19% interest (interest plus 1 percent of the balance). If instead you paid a regular amount of $50 per month, you’d clear the balance in 25 months and pay $200 in interest. (Check out www.getsmarteraboutmoney.com to see how much your credit card is costing you).

Be resourceful and find ways to pay more. Cut out unnecessary expenses like dinners at restaurants and sell unused household items like televisions or bookshelves on Kijiji.

Because interest accrues daily on credit cards, break the interest rate cycle with more frequent payments in bi-weekly or weekly intervals.

If you’re in way to deep, call a credit counsellor.

Get excited. You have the power to rid yourself of credit card debt.

Published by Metro News January 22nd, 2013: http://metronews.ca/voices/fun-and-frugal-2/518651/what-are-you-waiting-for-its-time-to-tackle-those-holiday-credit-card-bills/

By LesleyScorgie | Posted in Debt, consumer, financial goals, frugal living, personal finance |

To consolidate debt or grin and bear it?

January 23, 2013 – 8:24 pm

Besides goals of better eating and weight loss, debt is top of mind for most North Americans this January. Make debt repayment a 2013 goal!

How much do you owe? To whom? What interest rate? Can you afford the payments?

The choice is yours; should you tough debt repayment out the old-fashioned way (regular payments to multiple lenders) or apply for a consolidation loan (one consolidated payment to one lender).

The benefits of a consolidation loan are that the interest rates are typically lower than the combined interest rates of multiple debts, which often consist of high interest credit cards. As such, the monthly payments can be lower.

However, many experts rail against consolidations loans because they don’t teach a valuable lesson; taking full responsibility for debt accumulation. The act of having to pay off expensive debts the old-fashioned way often imposes enough financial hardship on a person that they change their spending habits. Canadian statistics show that the majority of individuals with consolidation loans never learn their lesson and are first in line for another one when the previous is finished.

You’re a good candidate for a consolidation loan if you are paying too much in interest or if you can’t keep up with regular payments. The first caveat however, is that you must be financially disciplined and commit to making payments on time, in full and not accumulating additional debts. The second is that these loans are difficult to qualify for as most people that are ‘maxed out’ are considered high risk.

Many Canadians turn to lines of credit as sudo-consolidation loans. SCAREY! Though interest rates are attractive, lines of credit are revolving, thus the available borrowing room never decreases. Rarely do Canadians pay off their lines of credit. Rather, they continue to overspend using their line of credit, often decreasing home equity. If you use a line of credit to consolidate, reduce the borrowing limit as you pay it down.

If the temptation to spend is too great or you can’t qualify for a lower interest loan repay your debt the old-fashioned way.

On a spreadsheet, list whom you owe money to, the interest rate and balance. Call each lender and negotiate a better rate. Each month, pay a little extra on the highest interest debt until it’s paid off. Then pay extra on to the next highest interest debt; remember you’ll have extra money from your previous debt’s regular payment.

Published by Metro News January 14th, 2013: http://metronews.ca/voices/fun-and-frugal-2/509594/to-consolidate-debt-or-grin-and-bear-it/

By LesleyScorgie | Posted in Debt, consumer, financial goals, frugal living, how to save money, personal finance |

New year’s resolutions of the financial variety

January 9, 2013 – 5:45 am

Exhale a sigh of temporary fiscal relief – the holidays are finally over! Now it’s time to deal with the financial aftermath of such a joyous, fun-filled and financially catastrophic holiday season.

If you’re feeling maxed out and are dreading the delivery of your January credit card and bank account statements, you’ll benefit from a New Year’s Resolution which will save you thousands: a 2013 frugality diet.

Before you sell your worldly possessions to pay off your Best Buy loan, go Zen for just a moment. Take ten deep breaths and know that YOU have the ability to reduce your monetary stress and grow your financial security. Join the ranks of thousands of North Americans that report feeling financially optimistic about 2013.

Start by determining your bottom line. Once you know where you stand, you can create a plan to grow your net worth. Download your favourite net worth tracking tool to determine what you own and owe. ALL major banks have free online calculators, but if you want to build your own, simply total up your assets (own) and subtract your liabilities (owe).

Focus on the highest impact savings opportunities. If you’ve got two cars and could get by with one, sell the other. Rent out unoccupied space in your house. Start eating at home rather than buying food from restaurants. Become a smarter shopper using coupons, cutting back, and buying items on sale. Sell household or personal items you could live without like an extra television.

Face your debts head-on. On a spreadsheet, list who you owe money to, the interest rate and balance.  Each month, pay a little extra on the highest interest debt until it’s paid off. Then pay extra on to the next highest interest debt; remember you’ll have extra money from your previous debt’s regular payment. DO NOT rack up additional debt while paying off the existing.

Retirement approaches fast and growing funds for the future is critical. Take advantage of employer sponsored retirement savings programs like pensions and RRSPs. These programs allow you to contribute right from your paycheque and often have a matching component.

Prepare for emergencies by having three to six months worth of salary on reserve. Build savings through automatic bank contributions to a high-interest savings account.

Make more money by adding value to your organization or starting a small business that turns a hobby into extra income.

Live lean in 2013.

Published by Metro News January 8th, 2013: http://metronews.ca/voices/fun-and-frugal-2/499689/new-years-resolutions-of-the-financial-variety-or-how-to-beat-your-credit-card-bill/

By LesleyScorgie | Posted in Debt, consumer, financial goals, frugal living, personal finance |

Gift buying for awkward people

December 18, 2012 – 5:56 am

So, you’re dad has a new girlfriend and you’re still warming up to her. Sure, she seems nice enough, but without knowing much about her personal tastes, what should you buy her for the holidays when your budget is already tight?

We’ve all been faced with the ‘what to buy for the awkward person in your life’ dilemma. You don’t want to waste your money or offend your boss, co-worker, a not-too-close friend, or someone your friend or family member is dating. You may even want to impress the person with something useful or miraculously thoughtful.

Before you hit up the mall for the latest infomercial gadget, understand the relationship of the person to you; what they mean to you today and in the future. If you and your brother-in-law are off to a rocky start, you may want to extend a thoughtful ‘olive branch’ that could help mend a bridge or two. If it’s your boss, watch what you spend so that you don’t come off looking like a suck-up, especially if your coworkers find out.

Determine the appropriate price point for the person. Have an open discussion with friends and family members in advance and set limits. This might be an opportune time to introduce the idea of a frugal ‘Secret Santa’ gift exchange where you’re only responsible for buying one gift for one person.

Be resourceful. Investigate what the person would want or need. Listen carefully when in conversation to see if they give away any hints. Ask someone who knows them well what they’d enjoy. Are they a coffee coinsure or movie buff? If so, perhaps a travel mug, which reduces waste and saves a few pennies at the till, or a gift card to the movies, would be appropriate.

Cash in your loyalty rewards towards the gift so you don’t have to dig deeper into your wallet. Better yet, forget buying a gift and make a donation on behalf of your coworkers to a well-known charity.

Overall, stop while you’re ahead. You don’t need to buy gifts for everyone in your life. This results in overspending or spreading out your budget so thin that you’ll end up buying junk for people rather than something useful or thoughtful. If you’ve got loads of people you’d like to please with presents, try baking or making something small and thoughtful.

A frugal gift of appreciation for that awkward person might go a long ways towards making the relationship more pleasant. But if you really don’t like the person, forget a gift and simply save your money.

Published by Metro News December 18, 2012: http://metronews.ca/voices/fun-and-frugal-2/482073/gift-buying-for-awkward-people/

By LesleyScorgie | Posted in budget, consumer, financial goals, frugal living, how to save money, personal finance |

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