Canadian Personal Finance Blog

Archive for the ‘Mortgage Rates’ Category

As Lent begins today, we now have a different world for Mortgages and lending.

The rules seem to be that you must meet the standards for a 5 year fixed term mortgage, even though you might be getting a variable rate mortgage. Rule 2 is the maximum you can refinance your home is now 90% down from 95%, and finally you’ll need a minimum of 20% down payment for your non-primary home, to make it harder to speculate on homes.

This set of rules may be a good thing, but I am kind of torn.

The bleeding heart liberal side of me thinks this is a great idea, stopping folks from getting in over their heads and then having to give up there homes when (note I say when not if)interest rates go up 3-4% this summer. The banks tend to try to get you to buy more house than you can afford normally, but with micro interest rates, this is a very dangerous thing, so I applaud Count Floyd (Jim Flaherty) the Finance Minister for bringing in these new rules (including an actual formula for figuring out whether someone can afford a mortgage, wow, not just a heuristic that no one will follow, an actual rule).

My Civil Libertarian side is worried about yet another Government intervention into our lives. In the immortal words of Pierre Elliot Trudeau:

“…there’s no place for the state in the bedrooms of the nation…”

Yes Mr. Trudeau was talking about Homosexuality laws at the time, but whenever a government agency comes up with yet another rule to help us live happy lives, I get worried. The business side of the argument is, that with more folks able to buy houses by having easier rules for getting mortgages, the market thrives and there is real value set for properties.

I think in the end this will be a good thing, but I am curious, dear reader, what your opinion of these rules are?

Remember Lent begins today too!

Earl Jones only 11 Years?

Earl Jones received an 11 year sentence for his shady financial dealings, defrauding over $50 Million. The down side of the sentence is that he could be out of prison Autumn of next year? Wow, that does not really seem to be a fair term, if that is the case. Spend a year in prison for a $50 Million fraud, and ruin countless retirements?

For two days week we had been talking about where Risk fits in our day to day financial decision points, and I have been adding in examples of Risky Business in my life, today (finally) we wrap this whole thing up.

Previous Posts: Risks in Life I and Risks in Life II

When to Sell?

Yup this one is the big risky one that, I can assure you, I have no idea of when the best time to sell a security is, blind luck has been my best methodology. Most of my “great” financial decisions have been forced upon me (i.e. I needed to sell to get the money in question), so deciding that a security should be sold is something I am not very good at prognosticating.

I have read many books who state unequivocally that if your investment decisions are made emotionally, you will lose in the long run. Going with your “gut” is a dangerous game to play in poker and also in investing, the danger is that if your “gut” is right once, you may rely on it far too much in the future.

Take your profits is the best methodology I have heard (e.g. re-balance your portfolio) in the world of investing. If your portfolio has one area that is doing great, maybe it is time to take your profits and lock them in, instead of “letting it ride”? Maybe you are very risk averse like me (i.e. burned so many times, I have very little nerve left), if that is the case taking your profits, when you see them might be your best decision point.

Am I espousing a specific investment methodology? No, my regular readers know me better than that, you need to find a methodology that fits your needs and I am NOT in any way shape or form advising you on what to buy, what to sell and when to do either, I am simply pointing out in my case, “Take the Money” has worked. I’ll let the REAL investment blogs talk about that kind of stuff.

The risks in this scenario is obvious, take your money now, or will you have more later?

RRSP or Mortgage?

Is this a risk area? That’s a good question, I don’t think it is a high risk area, unless you are doing something whacky like the Smith Manoeuvre or something like that, if you do either of these (pay down mortgage or build up RRSP), you are doing OK.

I have seen a few different models done about the optimal model for paying down debt/mortgage and RRSP contributions, but I am very debt averse right now, and also am in a relatively stable pension situation, so my decision has been to attack debt as much as possible (with a little success).

The risk again comes down to present money value vs. possible future gains. Get a plan for how you want to deal with it and then stick to it.

So What About Risk?

As we have seen the past few days, risk comes into most major (and a lot of minor) financial decisions but you need to weigh risk against the benefits and make your decision in a calm and rational manner.

Analyze the risks, weigh them in your decision, and you should do just fine.

On Sunday NFL Coach Bill Belichick (of the New England Patriots) took a calculated risk and instead of punting on a 4th down late in the game he tried to make the 1st down. This in itself is not that risky a play in Football, however there were circumstances around this choice that made the decision very risky:

1. His team was leading at the time by 6 points (more than a field goal, less than a converted touchdown)
2. The ball was on the Patriots 28 yard line
3. There was 2:08 left in the game
4. His team needed to get 2 yards on the play (not a small amount).

If he punts the ball to his opponent he leaves the game in the hands of his defense, and his opponents most likely have to cover over 80 yards to score (and must score a touchdown not just a field goal).

The risk (in my opinion) was far too high for the decision made, and in hindsight the decision was proven wrong, as his team failed to get first down and left their opponents only 28 yards to score a game winning touchdown (which they did), but it is easy to second guess that kind of decision after it has been proven wrong (i.e. Monday Morning Quarterback club, which I am a charter member)

So What?

So what does this have to do with Personal Finance you might well ask?

Do you take into consideration all the risks that are part of your financial decisions? Do you look before you leap, or do you just roll the dice and let the fates take care of things for you?

Risk is involved in all decisions, and you can paralyze yourself worrying about risks, especially in personal finance, but with larger financial decisions it is imperative to think about what you are about to do, and what risks are involved in the decision.

Let me run through a few personal experiences with major decisions and risk.

Example 1: Lock In or Float?

With folks buying their first home, the question always arises, should you lock in your interest rate, or should you go with a lower but floating interest rate? Back when I was looking at houses for the first time, I locked in at 11% thinking I was getting a great deal (given interest rates had been at 18% previously), so I locked in for 5 years. The decision was made because we could afford the payments at that rate and didn’t want any surprise increases in our budget.

The decision was wrong in hindsight because interest rates dropped to much lower rates after that, but I don’t view that as a wrong decision, more a conservative decision.

I now live on a floating interest rate loan vehicle, because I can withstand a sudden sharp interest rate increase.

The risk here is, can I withstand catastrophic interest rate increases?

Tomorrow: More examples…

Busy week again, here is a piece from last year asking that ever present question:

RRSP or Mortgage?

After last week’s “show and tell” about Mortgage worksheet calculators, the next question to ask yourself is which is more important to pay into your Retirement Fund (RRSP or 401k) or pay off your Mortgage (and debts)? Since the U.S. model has tax implications for paying off your Mortgage, and I do not wish to mention the Smith Manoeuvre for Canada, let’s just concentrate on the Canadian model.

In a lot of cases this question is of no real value since a lot of people can only afford to pay for their living expenses and do not have free money to pay for their retirement or speed up their debt payments, for those folks, the job is hard enough, but I encourage you to find savings somewhere and do something more with your found money than “party” with it.

Arguments For Paying Down Mortgage

Some of the reasons I have heard and espouse for paying down your mortgage first would be:

1. Carrying debt is dangerous no matter what the economic times, and the sooner debt is removed from your plate, the sooner you can relax about your finances.
2. Once your mortgage is paid off then you can start saving for your retirement, knowing that you will not have that expense in your golden years.
3. Paying off your Mortgage is like investing in Real Estate, which is usually a good investment.
   • I don’t view my house as an investment, I view it as an essential of life, as in shelter is somewhere you live, not where you invest.
4. You are increasing your liquidity, by having more credit available to you, in case of emergencies.

Arguments For Retirement Money

The reasons to put money in your retirement funds are many as well:

1. Retirement saving is like Golf, the sooner you start doing it the better you will be at it later. Money saved at age twenty has much longer time to double than money invested at age 50.
2. With current interest rates, you can invest your money and make more with it, than if you pay off your Mortgage (typical Mortgage rate is about 6% whereas the Stock Market’s normal rate of return is about 7%, so you are ahead in the game).
3. You get tax money back for putting money in your RRSP, but you don’t if you put that same money into your mortgage. This is important since the major expense for most of us, is still taxes.

Best Choice?

That would be telling, I’ll write some more about this tomorrow, but I am open to discussion, pointers to good articles, and any other comments folks might have about what the right choice for them was and is (remember at the end of this, it is a personal choice on your part).

How Many Mortgages Do I have to Buy?

Interesting things you can buy at Costco are aplenty, however, my wife informs me that on Saturday she and a friend saw that you can get a Mortgage from Costco (kind of).

My wife and Michael James‘ wife actually went to Costco to see what the Portable Massage Tables (another interesting thing that Costco sells) looked like (they don’t keep them in stock evidently, not a high number of sales of that product, but you can order it on line). Given that part of their shopping expedition was fruitless they looked around and after picking up Pizza on the way out (another interesting thing sold at the commisary at Costco), they saw a young man advertising Mortgages.

I have checked on the Costco web site, and you can’t seem to order your Mortgage on line, you must go to Costco to get it (the kiosk may not really be associated with Costco, since Primus sells their wares the same way (and they are selling Internet, Cell and home phone something else to check I guess)), but my wife was unable to get any more information on it, as the young man at the Kiosk was busy with another potential customer.

Does anybody know about this “Mortgage”? Do I get points with it? Do I have to get 10 Mortgages since it is Costco? Do I get free food samples? Do I have to buy a trailer home? Anybody has any info on this “mortgage” or on the Primus Internet stuff, please comment.