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Average Consumer Debt in Canada Rises to $25,597

 

As per a recent study, the debt load for the first quarter of 2011, in Canada, shows a growth of 4.5% over the last year. This is a clear indication that there is no respite in the demand for debt. And, the bureau conducting the study further reported that the debt for each consumer amounts to $25,597 for the quarter as compared to $24,497 for the last year.

The most significant increase was found in Newfoundland & Labrador and Quebec, where debt has seen a growth of 7.8% in both the provinces. The growth in consumer spending for the first quarter is just 0.1%. Experts have attributed this very small growth to the efforts of the consumers to consolidate their debt that had been taken during the period of recession.

As compared to the fourth quarter, the average debt on credit card for consumers fell by 4%, from $3,688 in the fourth quarter to $3,539 in the first quarter. The fourth quarter is the peak period for Canadian shopping market. However, it was comparatively same to that of the first quarter of the previous year. This report has been based on the credit files of the Canadians who are credit-active; however, the identities are all anonymous.

The quarter also witnessed an increase in the auto loan debt. The average debt grew by 12.4% from $14,402 last year to $16,189 in 2011. And, the delinquency rate fell by a small margin from 0.13% last year to 0.1% this year.

Excluding mortgages, the most common type of consumer debt are the lines of credit. And, at the end of the first quarter they account for as much as 41% of the outstanding debt. The average debt on lines of credit stands at $33,981 against the figure of $31,867 last year in the first quarter. This is a growth of 5.9%.

In addition, warnings have been released from different quarters including the leading central banker of Canada for consumers to restrain borrowing. It has been noted by leading Canadian banks that borrowing has seen a little slowdown in the first quarter. But, this includes the mortgage market, which is slowing down because of the slowdown in the housing market. A weak consumer spending capacity also means that the higher cost of energy will have a larger bite from the household budget. This means there will be fewer amounts left for meeting expenses. Share

Gurmit Singh, MBA


Homeowner’s Insurance and the Major Five Myths Surrounding it

 

One of the most commonly found kind of insurance is the homeowner’s insurance, but at the same time people don’t understand it completely. People are of the view that their policy will provide coverage for any damage caused to their home or its contents. However, there are lots of restrictions and exclusions in the coverage provided by homeowner insurances. The main five myths about this insurance are discussed here in brief.

The first myth is that when you are repairing your home and it has borne severe damage that makes it inhabitable, you would consider your insurance company to help you to stay in a hotel. But, that is not always true. Loss-of-use coverage is not provided by all the insurances. And, if this is covered, it needs to be stated clearly in your policy.

The second myth is about replacement cost. This refers to evaluating the loss amount at the cost of replacing items. A replacement cost for example can help you to buy a computer lost in fire with same features. But, most of the policies don’t have this clause. And, in this case, the computer can be valued at a price that is equal to the worth of the old computer, and not at a price equal to that of a new one.

The third myth associated with a homeowner’s insurance is related to flood coverage. Natural disasters like floods and earthquakes are not always included in your homeowner insurance. Floods can arise out of different reasons – hurricane, or burst pipes. And, homes are mostly damaged due to this single reason. If you are living in a flood-prone area it is important that you get an exclusive flood policy.

Termite damages are not covered in most of the homeowner’s insurance. Termites can cause great harm to structures in homes, and sometimes they can even eat up supports. And, repairing such damages can cost thousands of dollars. Make sure that you get your house checked regularly for termite damages, and also get it included in your policy.

When it comes to valuation of loss, most homeowners take the minimum value assessed by the appraiser. However, it is possible to contest and prove that your loss needs to be valued higher. You must keep all the pictures and receipts of valuable items in order to support your claim. This is the fifth myth, and you should make sure that you are getting the best price for your loss. Share

Gurmit Singh, MBA


RRSP or Mortgage: There’s Only One Choice

 

Time and again the eternal question pops up in financial forums: Should I pay down my mortgage or contribute to my RRSP? While both tasks are desirable, sometimes you really have just enough money to do one of them. Banks and financial gurus all sing the same refrain: Contribute to your RRSP first. Then, pay down the mortgage with the tax refund that you get. Is this the most apt advice for one and all? Probably not.

This is not to deny the obvious benefits of RRSPs and saving for your retirement. However, when one is carrying a mortgage as well, it is important to focus on where your hard-earned dollars will benefit you the most.

For those who are making mortgage payments on their first house, their choice should be to get rid of the mortgage debt as soon as possible, before thinking of contributing to their RRSP. When you increase your mortgage payment, the excess goes straight towards your outstanding principal. This cuts down the time that you take to pay off your mortgage. This reduction in term can save thousands of dollars you’d have paid as interest. Of course, there is a limit to how much over payment you can make every year. But generally, there is a generous allowance given by lenders for making excess payments.

It’s easy to see why banks would like you to follow the advice of keeping both your RRSP and mortgage going. They are able to sell you mutual funds for your RRSP on one hand, and on the other, keep earning interest on your mortgage for longer. It’s a win-win situation for them.

If you follow the advice of bankers, and contribute the same amount to your RRSP, you get a tax refund. Of course, the refund is only a small percentage of your contribution, based on your marginal tax rate. Once you apply this to your mortgage, it will reduce the principal as well. But with the previous method, you would be able to slash your mortgage off in much less time.

You will be much better off when you’re mortgage free, and then you can invest all the amounts now freed up from paying the mortgage into your RRSP. Most people will tell you that with mortgage rates of 5% over the longer term, it is more prudent to carry this debt and invest in an RRSP. They say that you could average around 6% in your retirement plan. However, you need to note that when you pay off that mortgage, you are getting a real saving of 5%, whereas there is no guarantee that your retirement funds will make 6% every year.

With the current economic climate, it is not easy getting this kind of return in an assured investment. Plus with mutual fund fees and other expenses, the returns on RRSPs are further diminished. You cannot get a better risk-adjusted return than by getting rid of your mortgage. Share

Gurmit Singh, MBA


The Right Way to Become a Real Estate Investor

 Many new-found millionaires credit their wealth to real estate. With the marching uptrend in property prices in many cities over the past ten years, their investments in real estate have made them look like stars. This area has attracted a lot of media attention lately and potential property magnates are looking for money-making opportunities.

Real Estate Investing is a Business

While there are many success stories in this industry, many investors find the going tough. It is not an easy business to get into. And that is exactly what it is: a business. You must look at it not as an easy way to make money but an ongoing business proposition. You must devise a business plan and analyze its financial aspects.

Many investors get into this market by buying one or two condos to rent out. They crunch the basic numbers. They get an estimate of what rents are being commanded by similar units in the neighbourhood. Then, they deduct the cost of carrying and maintaining the property. Costs such as mortgage interest, condo fees, taxes, etc. are accounted for. A contingency amount is set aside for those periods when you are between tenants, and also to account for any dodgy tenants who skip.

Investing in condos is an excellent way to get your feet wet, while receiving a nominal stream of monthly income. However, the risks are higher when you only own one or two properties. One bad tenant can send your plan to be a real estate magnate out the window.

Learn the Ropes to Succeed in Real Estate

In order to make this business your sole earning vehicle, you have to spread the risk. Many investors will deal with multi unit dwellings, such as duplexes, four-plexes and six-plexes. They need not be in the downtown areas, and can even be in outlying towns. You need to take great care to find good, creditworthy tenants. The benefit of having many tenants spreads the risk of any shady tenants that slip past.

Checking the potential tenants’ backgrounds is vital as well. You must verify not only their employment and income status, but also their credit history. Further, check their references, especially previous landlords for renting history.

A good, solid, regular paying tenant is a golden acquisition. When you have good tenants, make sure that they are well treated. Attend to any problems at your earliest opportunity. It is far cheaper to keep the good tenant than look for new ones.

Tenancy laws are very complex in Canada, and landlords must understand and uphold their legal responsibilities. Getting a lawyer on board and vetting all contracts is a key to a good real estate business. Share

Gurmit Singh, MBA

 

Going Variable, Paying Fixed

 Research has shown that Canadians would save more money on their mortgages if they chose to go with variable rates. Yet not many of us have walked down this path. The reason is not far to seek: Fear. Of course, variable rates tend to be lower than fixed rates, even the best ones. Variable rates are latched on to the Prime rate and track it within a few points above or below it.

We’re afraid of the unknown. Who knows where the Prime rate will be six months from now or a year from now? Not even the Bank of Canada that fixes the Prime rate. They too have to look at the prevailing economic conditions and decide on what the rate should be. Not many of us are financial gurus to anticipate this movement in Prime rates.

This is exactly why most people choose the fixed rate route. Yes, you may end up paying a higher rate, but at least you’re not riding a yoyo of uncertainty. Variable rates will fluctuate and so will your monthly mortgage payments. We want stability and we want to be able to budget for our families’ future.

Yet, variable rates offer the best opportunities to save big bucks, says the oft-touted and much respected research. Actually, there are some ways to get the advantage of a variable rate and the stability of a fixed rate. Many lenders offer what are called hybrid mortgages, where a part of the loan is attached to the variable rate and another part to the fixed rate. You can decide how much of the loan should be allocated to each for your own comfort.

There is another great method that will save you even more than the hybrid mortgage. You can take the variable rate on the entire mortgage amount, but structure your payments to match what you would pay on, say, a five year fixed mortgage. The beauty of this method is that every dollar that you pay in excess of the amount required for the variable mortgage, goes directly towards your principal. This helps to pay down your mortgage faster.

In today’s environment, everyone agrees that variable rates are the way to go. The Prime rate is at historic lows and the variable mortgage rates are going at a discount to Prime. Chances are that these rock-bottom rates have nowhere to go but up. However, with the current economic malaise affecting the globe, the rates may not go shooting up any time soon.

A smart move is to select a variable rate mortgage, at current insane rates of 2.2% or thereabouts. Then, make your monthly payments as if you were paying for a five year fixed mortgage. Check with your lender if these amounts of regular pre-payments are possible. This is the best way to enjoy low variable rates and get mortgage free sooner as well. Share

Gurmit Singh, MBA

 


Buying a New Condo

 

You look at all those glossy ads in new home and condo magazines and you begin to drool. You imagine you’re one of those glamorous couples cavorting on the exquisite verandahs and you wish you were there right now. The views of the city at night time jump out of the page and entice you to enter the world of your dreams. You walk into the builder’s office ready to sign up for a new home in the clouds. But, wait. Take off your rose colored glasses and see the deal for what it really is.

Buying a condo for you and your family to live in is not a frivolous decision. You need to be fully aware of what you’re getting into. Make sure you understand what condo living is all about. If indeed you are comfortable with what it entails, and are happily looking forward to this lifestyle, then by all means venture forth.

Check Out the Builder

The first thing is to do is research the builder. It is vital to deal with a reputable builder, preferably one with several successful and appealing projects in your city. You want a builder who has considered the wishes of condo owners and incorporated them into the details of his buildings. Do some research online and see if the builder has the approval of provincial bodies. Look for any complaints against the builder that may be floating around. There may be issues with workmanship or delayed constructions that you should be aware of.

Most reputed builders have excellent customer service. Call and speak with them to get a sense of how good they are to work with. Check out the plans and models at their showrooms. Ask a question to your heart’s content, until you’re satisfied that this is the right builder to go with.

Read the Fine Print

Once you have chosen your desired plan off the builder’s sketches, inspect its location on the model and the floor of your choice. Then you can go ahead and sign on the dotted line. The agreement for purchase and sale is an important and binding document, so make sure that you have your legal advisor explain to you its intricate clauses.

Anything that you agree with your builder must be in written form and included into the contract to be effective. In Ontario, you are given a ten day cooling off period after you sign a deal for a pre-construction condo. If for whatever reason, you change your mind about your condo purchase within this period, you can walk out on this deal. You can get back your deposit from the builder, if you had given one. Once this date passes, you are legally bound by the contract. Share

Gurmit Singh, MBA

 

May 20, 2011

Getting Home Mortgages

 

Having a place where you can go home to after a long days work is very rewarding especially if that place is your own. There are a lot of people who are only renting apartments and places to live in. Most of them are afraid to buy a new home because it is very costly. It is costly for a fact but one can get a home with help from financial institutions. There are a lot of companies that offer financial aid so that you can get your own house. There are companies that can provide you loans and mortgages.

Your standing and good credit score is one of the things that you should worry about when it comes to get someone to loan you money. Your score is inversely proportional to the risk you are going to be. The sky rocketing your credit score, the more chance of getting a higher amount of loan because you are not that risky compared to those who has lower credit ratings. Maintaining a great credit score has another perk, and that is the flexibility in the terms given to you.

You can bargain for a lower interest rate. In case you are not in a pretty good standing, there is still a chance for you to get your own home financing. Businesses are all over catering to the undeserved market. The most visible factor though from the ones with higher standing is the rate of interest – it is higher compared to those with good records. The higher the risk is involved the higher the interest rate is going to go.

How to get the loan giver’s approval?

Institutions that are giving out mortgages first look at the credit rating of the person. Sometimes, people get pre approved because they have maintained a very good credit score. Lenders lend you more the higher your FICO or your credit score is. Credit score is sort of your test results in you SATs or your final examination grade. You cannot get it high over night. It takes years of good paying record to get a high score. Lenders favor those who have the good ratings because these are the people who make sure that they pay their debts. So if you want to get approved for a good amount of home loan, start building your credit early.

What type of mortgage should I choose?

There are different types of that one can choose from. The fixed rate is one of them; this will have the same interest rate from start to finish. Another is the adjustable rate mortgage. Normally has a lower interest compared to fixed rate but it would vary due to the market condition. It may go up or down depending on the market. Balloon rate is another type. It makes you minimal payments for a specific period of time and will ask you to pay in full after the time given. So choose wisely among these mortgages and make sure you can pay them. Share

Gurmit Singh, MBA



RRSP or Mortgage: There’s Only One Choice

 Time and again the eternal question pops up in financial forums: Should I pay down my mortgage or contribute to my RRSP? While both tasks are desirable, sometimes you really have just enough money to do one of them. Banks and financial gurus all sing the same refrain: Contribute to your RRSP first. Then, pay down the mortgage with the tax refund that you get. Is this the most apt advice for one and all? Probably not.

This is not to deny the obvious benefits of RRSPs and saving for your retirement. However, when one is carrying a mortgage as well, it is important to focus on where your hard-earned dollars will benefit you the most.

For those who are making mortgage payments on their first house, their choice should be to get rid of the mortgage debt as soon as possible, before thinking of contributing to their RRSP. When you increase your mortgage payment, the excess goes straight towards your outstanding principal. This cuts down the time that you take to pay off your mortgage. This reduction in term can save thousands of dollars you’d have paid as interest. Of course, there is a limit to how much over payment you can make every year. But generally, there is a generous allowance given by lenders for making excess payments.

It’s easy to see why banks would like you to follow the advice of keeping both your RRSP and mortgage going. They are able to sell you mutual funds for your RRSP on one hand, and on the other, keep earning interest on your mortgage for longer. It’s a win-win situation for them.

If you follow the advice of bankers, and contribute the same amount to your RRSP, you get a tax refund. Of course, the refund is only a small percentage of your contribution, based on your marginal tax rate. Once you apply this to your mortgage, it will reduce the principal as well. But with the previous method, you would be able to slash your mortgage off in much less time.

You will be much better off when you’re mortgage free, and then you can invest all the amounts now freed up from paying the mortgage into your RRSP. Most people will tell you that with mortgage rates of 5% over the longer term, it is more prudent to carry this debt and invest in an RRSP. They say that you could average around 6% in your retirement plan. However, you need to note that when you pay off that mortgage, you are getting a real saving of 5%, whereas there is no guarantee that your retirement funds will make 6% every year.

With the current economic climate, it is not easy getting this kind of return in an assured investment. Plus with mutual fund fees and other expenses, the returns on RRSPs are further diminished. You cannot get a better risk-adjusted return than by getting rid of your mortgage. Share

Gurmit Singh, MBA

 

Raising the Minimum Down Payment Threshold

 

Lately, there has been a lot of debate online and offline about whether the 5% minimum down payment for buying a house should be raised. There is some concern in financial and journalistic circles that such mortgages are riskier. Some are of the opinion that this minimum should be scrapped and replaced by a minimum of 10% down payment, or even higher.

It is important to study the potential implications of such a policy, if these opinions were to be taken seriously. Raising the minimum down payment will remove a large chunk of first time home buyers from the market. This will hurt the realty business and have a negative impact on the housing market overall. Generally, first time home buyers do not have great amount of saving and in many cases all they can afford is a 5% down payment.

It is for this very specific reason that our erstwhile policy makers created the CMHC. It has the specific mandate to underwrite low down payment mortgages, so that lenders are not exposed to the financial risk that such home buyers represent. The objective of acquiring a first home is a time honored and accepted principle of Canadian life.

The CMHC is in the business of evaluating and predicting risk and return. It imposes severe restrictions and premiums to cover its perceived default risk. CMHC-insured mortgages have several stricter regulations than regular mortgages to ensure that the risk of default is minimized. They have conditions such as having a TDS ratio of less than 42% and other clauses.

For Canadians, especially first time home buyers, buying a home is not a spur of the moment decision. They intend to live in their homes for a long time. Even if the property prices were to fall and reduce their equity further, they would not be looking to default on their mortgages. The housing situation in Canada is much more stable than in the U.S., and we have not seen homeowners having negative equity in their homes. It is very unlikely that homeowners would walk away from their mortgages.

Raising the down payment bar to 10% or higher would have a negative impact not only on the hopes and dreams of many first time home buyers, but on other aspects of the economy as well. It would not only depress home sales and prices, but also affect employment and

consumer spending that is related to the housing industry. Let us not forget that housing makes up almost 20% of the country’s GDP. So, any hasty decision about raising down payment requirements would have far reaching consequences. Share

Gurmit Singh, MBA

 

First time Home Buyers Face Tougher Rules

 

The Federal government in Ottawa continues to tinker with the regulations pertaining to mortgages in the country. Their desire is to ensure that Canadians borrow within their means and have the capacity to repay their debt obligations. The government is no doubt worried that with the rising property values and depressed mortgage rates, Canadians are taking on more debt than they can afford.  When rates start to rise again, as they inevitably will, most homeowners will have a tough time with their mortgages.

While the government’s intentions are laudable, frequent revisions in the policies have led to confusion and uncertainty in the market. The government has fiddled with the maximum amortization period as well as rules governing insured mortgages. These new rules are especially impact many first time home buyers.

With the ongoing changes to the mortgage rules, first time home buyers are at a loss as to how much to save up for their down payment. Those who had saved only 5% of the property price as down payment, and were hoping to get qualified by using a 35-year amortization period, are now out of luck.

The government has instituted new guidelines for borrowers who require CMHC insurance when they have low amounts of down payment. If a borrower has less than 20% down payment, then the maximum amortization period available to them has been reduced from 35 to 30 years. This change results in increasing monthly mortgage payments. On the other hand, it also saves the borrower a lot of money which they would have ended up paying.

However, borrowers are qualified by lenders based on their monthly income and their debt to income ratios. The increased monthly payments will make it harder for those with lower incomes to qualify for these mortgages.

The government has also reduced the amount that can be refinanced, from 90% of the property value to 85%. This is to curb the excessive home line of credit exposure. The government does not want lenders to become exposed to threats of delinquency as witnessed in the real estate meltdown in the US.

Some mortgage brokers feel that the new rules will negatively impact the Canadian real estate market. With the already weak supply and rising inflation, buyers are having a hard time finding good properties. Some buyers rushed their purchases to beat the deadline for these changes to take effect.

With economic conditions that  are still fragile, it makes sense to be more  prudent when taking on more  debt. The government's new rules will restrain some flexibility but will  protect both the borrowers and lenders  in the long run. Share

Gurmit Singh, MBA

Choosing the Right Term

Mortgage hunters are so fixated on interest rates that they tend to ignore the term. While choosing the right interest rate will save them a few dollars, they will lose a lot if they end up with the wrong term. Term determines the period of time that you will be bound to your lender at a particular mortgage rate.

Terms popularly range from one to ten years, and you can choose either a fixed rate or variable rate to go with any term. Keep in mind that you will be bound by the rate and payment structure according to your contract.

If you choose a fixed rate and interest rates change during your term, then there is nothing much you can do about it. You may end up over-paying, if interest rates have gone down, or under-paying, if the rates have gone up.  You may have the option of breaking your mortgage and refinancing your mortgage with another lender at the prevailing lower rate. But the penalty for breaking a mortgage mid-term can be quite high.

In the event that you have opted for a variable rate mortgage, you are at the mercy of fluctuating rates. Since your rate is connected with Prime, any revision to the Prime rate will affect your mortgage payments as well. You are tied to this fluctuation for the duration of your term. Therefore, choosing the right term is extremely important in both cases.

It is vital to get good professional advice and have a sense of where mortgage rates will be headed during the term of your mortgage. If you believe rates are headed higher in the next few years, you should look for a low fixed rate for a medium to long term. If you are of the opinion that rates could stay where they are or even go a bit lower within the next year or so, then a variable rate mortgage with a term of one or two years may be your solution.

You will need to renew your mortgage when your term with the lender ends. If you’ve taken a shorter term mortgage then you will be faced with a decision of choosing a new term sooner. Most people do not want to deal with this frequent hassle, so they prefer to opt for medium or even long terms. No wonder, the most popular term in Canada is the five year term. This is a medium term outlook and generally nothing major will affect the economy in this medium term.

Of course, not even the professionals can predict how rates will be affected in any term. But, given the implications of this decision, do give a serious thought to which term is right for you financially and emotionally. Share

Gurmit Singh, MBA

 Reality Check: Can You Really Afford Your Dream Home?

If you’re in the market for a new home, then the timing couldn’t be better. With mortgage rates at historic lows and variable rate mortgages going under Prime, getting cheap financing was never easier. But it is never a wise move to take on debt just because it is easily available. A mortgage is a long term debt and an ongoing obligation. One key question to ask yourself is, are you really capable to servicing this debt?

Lately, many buyers are rushing into buying larger properties than they would otherwise consider. They reckon that with low monthly payments, they can acquire a property with a potential for greater returns on their investment. In today’s environment that would be a smart move. However, consider that the rates are today the lowest they have ever been. The only way for them is to go up and when they do, how will it impact your debt situation?

With the current low rates, you may be tempted to buy a bigger house, simply because your lender tells you that you can qualify for it. Of course, the lender would like you to take the maximum loan that you qualify for. This guarantees the most interest for them, but it may not be best decision for you. Resist the temptation to overstretch yourself. While it looks good today, it may become a nightmare if rates were to jump up or property values were to fall rapidly. These are not unforeseen circumstances. Such scenarios happened in many cities across Canada and in every decade.

The first step before taking on a mortgage is to consider your capacity for paying the monthly housing expenses. These obviously include your loan principal and mortgage interest, as well as heating, hydro, municipal taxes and condo fees, if any. The total housing related costs should not be more than 40% of your monthly net income. Less, if you are prudent.

If you are taking a variable rate mortgage because the rates are really great, consider that these rates can go up with Prime. Will you be able to service the monthly payment, if the rate were to go up one, two or more percentage points?

Before you even consider purchasing, have a deep look at your household budget. Be diligent and note every single current and prospective expense into a spreadsheet and track that for a few months. This will give you a good idea of what you can really afford to pay for your house. With growing families and changing situations, many households will be faced with unexpected expenses. It is wise to account for such situations.

Buying a new home is one of the most important decisions that you will make. It should be one that gives you happiness and peace of mind for a long time to come.Share

Gurmit Singh, MBA

 

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