Wednesday, October 29, 2014
You’ve finally saved up the downpayment for your first home. But be warned: purchasing your dream home could become a nightmare if you’re not prepared.
“Buying a home, some would say, is the largest purchase you’ll ever make in your life so it does justify a large amount of research and rigour before jumping in full throttle,” says Michelle Snow, associate vice-president of retail products at TD Canada Trust.
Here are some potential pitfalls to be aware of so that your purchase doesn’t come back to haunt you.
Phantom cash: You have the money to buy a home; but is it ready to go and in one place?
With e-transfers and cashless transactions being the norm, buyers could take for granted the time it might take to move money from one account to another or to turn immaterial numbers into a tangible cheque or bank draft.
Mike, a 37-year-old Torontonian, spent 24 hours in panic when he and his wife bought their first home together last month. They put in a bully bid on a house and were surprised when the sellers accepted. This meant that they needed to put down a $30,000 deposit within 24 hours to seal the deal.
Mike’s plan was to take half of the money out of his PC Financial savings account and borrow half from his credit card. PC Financial told him that it would take 24 hours to move his money from his savings account to his chequing account and then one to three days to produce a cashier’s cheque.
“It was this total panic because you forget how much time it takes actually to turn that money into a piece of paper,” he says. Luckily, his bank was able to produce a cashier’s cheque for 3 p.m. the next day, two hours ahead of his deadline. “If you are looking for a house you’ve got to have your deposit ready to go.”
If you deposit a personal cheque in your account, it can take anywhere from four to five business days to process and appear in your account, a TD representative says. An electronic money transfer takes one to two business days.
Closing nightmares: The same rules apply when your closing date is approaching. If you don’t have the money ready, you could be in default, forfeit your deposit and face a lawsuit.
A lot of first-time homebuyers use the Home Buyers’ Plan to take money out of their registered retirement savings plan so speak to your financial institution to ensure timely access to your money, advises Mark Weisleader, a Toronto real estate lawyer and author.
My husband and I foolishly waited too long to transfer money from different accounts into one account when we bought our first home. We brought a certified cheque from one of our banks to another financial institution and were told that there would be a hold on the funds for 15 business days because it was in U.S. currency. If our parents had not lent us the difference so we could close on time, we would have needed to ask the seller for an extension.
An extension would have cost us at least $250 to cover the seller’s lawyer fees and any mortgage interest on the property that the seller would pay during the extended period. The seller might have also asked for an additional deposit that would be forfeited if we couldn’t close on the new extended closing date.
Pre-approval perils: In bidding wars, buyers sometimes do not include a condition on financing, hoping their pre-approval will be enough. But a pre-approval is not a full approval. Even if a lender pre-approves you, if it believes upon appraisal that the house is not worth what you’ve paid, the lender could just cancel the loan.
“Let’s say you went to a bank and you got approved for $300,000 then bought a house based on that approval. The bank is not going to give you $300,000 if they think you overpaid for the house,” Mr. Weisleder says. “I’ve seen cases where on the day before closing, an appraiser goes out there for a lender and they say, ‘Sorry, we’re not satisfied. We’re not giving you the money.’”
If you’re working with a mortgage broker, make sure you have satisfied all of the lender conditions as soon as possible. Also, find out when the lender does its appraisal. Mr. Weisleder recommends having a cushion of up to 5% of your purchasing price available in case the lender decides to loan you less money.
Unexpected frights: Buyers in hot markets are also waiving home inspections in desperate bids to win homes. However, unseen problems could be lurking in the walls, the attic or basement, etc. “It’s a terrible risk to buy a house without an inspection,” Mr. Weisleder says.
There could be costly issues such as worn-out shingles, water seepage in the basement, dying furnace or water heaters, termite damage and asbestos in the insulation.
A family that moves into a new home in the summer could get a nasty surprise in the winter when the furnace doesn’t work. “A furnace replacement is anywhere from $3,500 to $5,000 and there’s a health issue there because if a furnace is not working, it produces carbon monoxide,” says Don Ruggles, owner of Sherlock Inspection Service in Victoria.
He’s seen the owner of a small house pay $15,000 to get asbestos removed. He’s seen people have to re-shingle the roof of their three-bedroom bungalow for at least $7,000.
Meanwhile, a home inspection can start at about $400. “Are you going to put your whole investment at risk for $500?” He adds.
If you think you’re going to enter into a few bidding wars, consider working out a deal with a home inspector to inspect a number of homes for a discount, Mr. Weisleder suggests. If you’re going to rely on the seller’s pre-existing home inspection report, make sure that it’s from a reputable home inspector.
At the very least, go and walk around the house with a knowledgeable or handy friend before you put in the offer. Peek under the area rug to check for cracks. Lift the microwave to look for holes. Open and close all of the windows. “When there are recent renovations, sometimes they’re just covering up problems,” Mr. Weisleder says.
Talk to the neighbours and ask them: “Did you see any repair trucks here in the last year?” Then ask about the neighbours on either side of the property because you can’t easily exorcise a horrific neighbor.
If something goes wrong after you’ve purchased the home, you could sue the seller if you believe he’s deliberately concealed defects; but you want to avoid that nightmare if you can.
Disappearing acts: “Some people are wonderful when they sell a house and some people are just terrible,” Mr. Weisleder says. “Some sellers take out all of the light bulbs. I’ve had someone take out the shed from the backyard. The funniest one I ever had was a lawyer was buying a house and they took the toilets out.”
The lesson? Mark everything down that you expect to receive and include it in the contract under the fixtures and chattels clause. “I’ve seen people argue about closet organizers, TV brackets, window coverings, chandeliers.”
The chill of closing costs: Don’t let yourself get shocked by closing costs that you didn’t budget such as the home inspection ($400), lawyer fees ($1,500) and land-transfer tax (for a $300,000 home in Toronto, the provincial and municipal land transfer tax could be more than $5,000 — but you could be eligible for a rebate as a first-time homebuyer). Also consider moving costs, property tax adjustments and property insurance (maybe $450 a year).
A first-time homebuyer might understandably be caught off guard by the extra costs associated with buying a home, Ms. Snow says. “Most people are trying to save as much as they possibly can and load it into their downpayment to save on default insurance.”
If you’ve under-budgeted for these costs, she suggests that you speak to your lender or financial institution about the possibility of getting an unsecured line of credit to help cover the extra fees for a short time.
Castles of doom: Just because a bank representative or online calculator has told you what you can afford to buy, it doesn’t mean that you should max out your borrowing. You don’t want to ever struggle to make your mortgage payments. As a general rule, the total monthly housing costs (mortgage payments, condo fees, utilities, etc.) should be no more than 32% of gross household monthly income.
Sit down yourself or with a planner and create a projected household budget; try creating a few budgets for different scenarios. Consider your other plans: how much do you want to contribute to retirement or have set aside for vacations?
“You have to ask yourself: how much will you have left over of your paycheque on a monthly basis to live the life you want to live,” Ms. Snow says. “It’s unique for each individual but asking yourself the questions will help you make the right decision.”
You should also consider the ramifications of rates rising in the future. Make sure you have contingency plans in place in case of emergency: loss of job, illness, etc. A friend of mine purchased a condo and when maintenance fees suddenly spiked, she could no longer afford her monthly bills and is now looking to sell.
February 5th, 2014 by Pamela Plick, CFP®
9 tips to help you measure your financial goals
Typically, the beginning of the year is a time when we sit down and plan our expenses for the year. You have probably made some New Year’s resolutions related to your health or other areas of your life. Why not make a resolution to also become financially fit?
Here are a few tips to help you achieve this year's financial goals.
9 tips to measure your financial goals
1. Know your finances
Before you can put a plan in place, you need to organize and understand your expenses, savings, debt, etc. You should know exactly how much is coming in…how much is going out… and how much is left over. Not only is it important to take the time to create these cash management statements so you have a starting point, it is also important to include your spouse or significant other in this process. For various reasons, sometimes we have a tendency of not wanting to talk with our significant other about financial matters. It is important that you both have an understanding of the family finances and be able to set goals as a couple. Either of you should be able to step in and be knowledgeable about everything from the monthly budget to insurance and investments.
2. Create a monthly spending plan
Do you know where your money goes? Do you have a positive cash flow? If your answer is 'no' to either of these questions (or I don’t know!), you need to create a spending plan (budget). We all know how important it is to live within our means, but it is equally important to identify where your money is being spent. Creating a spending plan also helps you identify areas where you can potentially reallocate to fund your goals.
3. Examine your credit history and insurance coverage
Making sure that you maintain a good credit history is one of the most important steps you can take. Take steps to reduce credit card and other high interest debt. Questions you need to answer:
- Do you have credit in your own name? You should have at least one credit card solely in your name.
- Are you using credit wisely? Do you pay off your balances monthly or carry them from month to month?
- Is your credit report accurate? You don’t want to wait until you apply for credit to find out your credit report is inaccurate. A good practice is to request a copy of your credit report at least annually. In the U.S., go to: AnnualCreditReport.com. In Canada, visit TransUnion or Equifax.
- Car, home, personal articles
- Long-term care
4. Set clear financial goals
As you start thinking about your goals, there are three factors you want to consider: your priorities (values and beliefs), your responsibilities (items that may be part of your monthly cash flow) and your dreams (vision and aspirations).You should go through the process of setting and prioritizing your goals by utilizing all three factors. It is also important that your goals be specific, measurable and realistic.
5. Organize your recordkeeping
Most of us find it a chore to organize our financial documents and other important papers, but it is critical to be able to locate documents in the event of a disaster or death. You should be able to answer these questions:
- Do you have all the records you should?
- What documents should you keep and for how long?
- How should the records be organized?
- Where should you keep the records?
6. Work with a financial planning professional
A financial planning professional can help you translate your information into realistic goals so that they can develop strategies that make sense for you. It is important to work with an advisor you trust and that truly understands you, your goals and your situation. When choosing an advisor make sure that you:
- Get advice based on what’s best for you
- Partner with your investment advisor
- Understand what you are paying for
Based on your goals and priorities, your Certified Financial Planner™ professional will take all your finances into account and determine how to meet your goals. Their analysis may cover your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.
8. Protect your assets
If you don’t have a strategy for your estate, the government will. Here are some key actions you should take:
- Meet with your attorney regularly
- Prepare estate planning documents
- Review and update beneficiary designations
- Make sure investments are titled appropriately
Just like an annual trip to the doctor can provide vital health information and help identify issues before they become serious, the same can be said for annual financial reviews. In addition, goals and priorities sometimes change, so it is important that you review your financial plan on an annual basis to make sure you are on track to meet your long term financial goals.
Bonus: Time to celebrate!
If you follow the above tips throughout the year, rest assured you’ll have worked hard and made tremendous progress towards becoming financially fit. Feel free to give yourself a pat on the back - you earned it.
Tuesday, October 14, 2014
By Gail Johnson | Pay Day – Fri, 10 Oct, 2014
Landing a job is one of the biggest hurdles that newcomers to Canada face. Establishing a financial footprint is another one.
More than 80 per cent of new Chinese-Canadians and South Asian-Canadians in particular cite having enough money to cover daily expenses as their key priority, according to a new BMO Wealth Insitute report called Finding the Path to Financial Prosperity for Newcomers to Canada found.
Canada welcomes about 257,000 newcomers each year from more than 190 countries, according to Citizenship and Immigration Canada.
Without any credit history in their newly adopted country, tasks that mainstream Canadians may take for granted — such as renting an apartment, acquiring a credit card or being approved for a mortgage — may be that much harder.
“Credit history from the country or origin is not going to be accessible, so it’s important to start achieving credit when coming into a new country,” explains Wade Stayzer, vice president of retail and investment services at Meridian Credit Union. “It’s about being proactive.”
Applying for a credit card is a good place to start
“Whether it’s a low-limit or fully guaranteed credit card where you put $1,000 down on deposit, once you apply you can build it so you’re credit-worthy,” Stayzer says. “Establishing a credit history takes time.”
Some institutions have products targeted specifically to immigrants, such as BMO’s NewStart program, RBC’s Landed Immigrant package, CIBC’s Newcomer to Canada offer, and TD’s New to Canada package, to name a few.
Of course, once a source of credit has been secured, there’s nothing more important than making payments on time, every time.
It helps to have a strong co-signer for things like personal loans in the early days too, Stayzer notes.
The importance of budgeting and taxes
To maintain their financial stability, just like established Canadians, newcomers are advised to begin budgeting right away.
“When new Canadians come to Canada, once of the challenges may be seeking employment and so income or cash flow may be tight,” says Chris Buttigieg, BMO Financial Group‘s senior manager of wealth planning. “Having a budget and tracking spending will certainly help.”
Knowing their tax obligations from the get-go is vital for immigrants as well, Buttigieg says.
“Filing a tax return every year is especially important for new Canadians, filing even when income is low or non-existent, because by filing you become entitled to the GST credit and the child-tax credit,” he says.
Plus, new residents are required to pay taxes on their worldwide income, and the Canada Revenue Agency will want to know the status of any foreign-owned property.
Planning for the future
Having a financial plan can help Canadians, new or not, reach their financial goals. among Chinese-Canadians and new South Asian-Canadians, aside from having enough money to cover daily expenses, top priorities were identified as saving for their children’s education, for illness, for retirement, and for their parents’ retirement.
Whether it’s through tax-deferred plans such as Registered Retirement Savings Plans (RRSPs) or vehicles like Tax Free Savings Accounts (TFSAs), minimizing the amount of tax payable on income earned each year can make a big difference in people’s bank balances.
“It can be challenging for everyone to follow through with financial goals,” Buttigieg says. “A financial plan helps you with priorities like saving for children’s education and saving for retirement and is a great tool to allocate resources to achieve those goals.
To develop a financial plan, Stayzer urges newcomers find a financial institution that’s willing and able to hear their story to best suit their needs.
“Find one that’s consistent with your values,” he says. “With all of complexity of being a newcomer, when there are language barriers and everything’s new, that’s when relationships become even more important. If a financial institution says no to you, you’re at the wrong institution.”
Thursday, October 9, 2014
Jeremy Warner, The Telegraph | September 30, 2014
As if the fast degenerating geo-political situation isn’t bad enough, here’s another lorry load of concerns to add to the pile.
The UK and U.S. economies may be on the mend at last, but that’s not the pattern elsewhere. On a global level, growth is being steadily drowned under a rising tide of debt, threatening renewed financial crisis, a continued squeeze to living standards, and eventual mass default.
I exaggerate only a little in depicting this apocalyptic view of the future as the conclusion of the latest “Geneva Report”, an annual assessment informed by a top drawer conference of leading decision makers and economic thinkers of the big challenges facing the global economy.
The only way the world can keep growing, it would appear, is by piling on debt
Aptly titled “Deleveraging? What Deleveraging?”, the report points out that, far from paying down debt since the financial crisis of 2008/9, the world economy as a whole has in fact geared up even further. The raw numbers make explosive reading.
Contrary to widely held assumptions, the world has not yet begun to de-lever. In fact global debt-to-GDP – public and private non financial debt — is still growing, breaking new highs by the month.
There was a brief pause at the height of the crisis, but then the rise in the global debt-GDP ratio resumed, reaching nearly 220% of global GDP over the past year. Much of the more recent growth in this headline figure has been driven by China, which in response to the crisis, unleashed a massive expansion in credit.
However, even developed market economies have struggled to make progress, with rising public debt cancelling out any headway being made in reducing household and corporate indebtedness.
Reduced mortgage finance during the banking crisis temporarily succeeded in capping and partially reversing the growth in UK household debt. Yet with a reviving housing market, these reductions may have come to an end, with the Office for Budget Responsibility expecting household debt to income ratios to start climbing again shortly.
In the meantime, the government has been piling on borrowings like topsy, not withstanding attempts by the Chancellor, George Osborne, to bring the deficit under control. Total national non-financial indebtedness has therefore barely budged since the start of the crisis.
The UK remains the fourth most highly indebted major economy in the world after Japan, Sweden and Canada, with total non financial debt of 276% of GDP. The US is not far behind with debt of 264% of GDP.
However, the real stand-out is China, which since the crisis began has seen debt spiral from a very manageable 140% of GDP to 220% and rising. This is obviously still lower than many developed economies, but the speed of the increase, combined with the fact that it is largely private sector debt, makes a hard landing virtually inevitable.
The only way the world can keep growing, it would appear, is by piling on debt. Not good, not good at all.
There are those that say it doesn’t matter, or that rising debt is merely a manifestation of economic growth. And in the sense that all debt is notionally backed by assets, this may be partially true. But when rising asset prices are merely the flip side of rising levels of debt, it becomes highly problematic. Eventually, it dawns on the creditors that the debtors cannot keep up with the payments. That’s when you get a financial crisis.
Crisis or no crisis, the Geneva Report’s authors – Luigi Buttiglione of Brevan Howard, Philip Lane of Trinity College Dublin, Lucrezia Reichlin of the London Business School and Vincent Reinhart of Morgan Stanley – argue that rising indebtedness in developed economies has been crimping potential output growth ever since the 1980s.
The crisis has made an already bad situation worse, caused a further, permanent decline in both the level and growth rate of output. This in turn makes it much harder to work off debt; when economies are not growing, debt to GDP tends to rise automatically.
We now see much the same thing happening in emerging markets with output growth slowing markedly since 2008, particularly in China. Buying growth with debt is reaching the limits of its viability.
It is possibly the case that Anglo-Saxon economies, the US and UK, have done better in managing the trade off between deleveraging and output than others. However, this may be largely a conjuring trick.
To the extent that meaningful reductions in private and financial sector debt have been achieved without greater damage to output, it is only because there has been a parallel and very substantial increase in public indebtedness.
Despite the deficit reduction rhetoric, George Osborne, the UK Chancellor, has in fact been doing the bare minimum to keep the markets off his back. He’s also had plenty of help from the Bank of England, which itself has become leveraged to the gunnels with government debt to ease the path back to fiscal sustainability. None the less, this is plainly a much better place to be than the eurozone, which has imposed entirely counterproductive debt controls on governments and thus far at least, denied them the luxury of debt monetization by the European Central Bank. The result is a crushing depression for much of the single currency bloc.
Historically, big debt overhangs have tended to be dealt with via inflation and currency adjustment, the natural, market based way of haircutting creditors. Both these options are denied to the eurozone economies, and when everyone is in the same high debt boat may in any case no long work as they once did.
There is no sign of the inflation you might expect after such an unprecedented phase of central bank money printing, and judging by still historically low government bond yields, very little prospect of it.
The world economy may have entered a vicious circle where excessive debt constrains demand to such a degree that both interest rates and inflation, and therefore growth too, remain permanently low. This way of thinking may be unduly pessimistic, but it is also worryingly plausible.
And in conditions where excessive debt cannot be worked off through growth, restraint and inflation, adjustment will eventually be forced much more divisively through default. It’s a toss-up who is going to breach the dam first, but unless the European Central Bank rides to the rescue with debt monetization soon, the betting has to be on Italy, where debt dynamics already seem to have entered a death spiral. That this is not yet reflected in bond yields is down only to the assumption that the ECB will eventually oblige. Perhaps it will, but even if it does, it will only buy time.