Excellent advice from our friends at Home Trust

Every November, a spotlight is shone on financial literacy in Canada, encouraging consumers to take charge of their finances. Financial Literacy Month is an ideal time for people to consider their financial health and educate themselves about such topics as creating a budget, borrowing responsibly and avoiding overextending their credit.

Begin with budgeting

The Financial Consumer Agency of Canada recommends that everyone start with a budget, which is a plan that keeps you on track in terms of how much you’re spending versus how much you’re earning. A budget is key to making sure you don’t overspend and gives you a roadmap for developing a savings plan. It’s especially important for people who have trouble paying off debts, who want to plan for big purchases such as a car or house, or those needing to save for retirement.

Before you develop a budget, it’s a good idea to first track your expenses for a couple of months to see where your money is going. Separate these expenditures into items that you need, such as groceries, mortgage payments or rent, and items you want, such as dinner out or a new pair of shoes.

Once you have an idea of what you’re spending, see if you’re covering your expenses and have something left over. Budget calculators are handy tools to help track spending. If more money is going out than coming in, you need to look where you can cut expenses and/or increase your income, otherwise, you’ll be well on your way to accumulating debt.

Have a plan to pay down debt

Despite best intentions, Canadians spend more than they earn. Household debt levels are up and the debt-to-disposable-income ratio is on the rise, according to Statistics Canada. The average Canadian owes nearly $1.79 for every $1 of household disposable income.

High debt has many side effects. One of them is stress. According to a survey by the Canadian Payroll Association, 40 percent of respondents said they felt “overwhelmed” by the amount of money they owe. Financial stress can also lead to serious health issues, such as heart disease and high blood pressure, as well as anxiety and depression.

Having a plan to pay down debt is important. Once you have a list of all your debts, how much your payments are and interest rates on each, decide on how you will pay them down. Look at your budget and see what time frame is possible and decide what debts to pay off first. Some people choose to start with the highest interest debt first. Others might choose to start with the smallest debt, to establish a sense of accomplishment and motivate them to tackle the rest.

It’s also important to talk to your creditors to discuss your financial situation. You might be able to get lower interest rates, extend your repayment terms so that your monthly payments are smaller or consolidate your debts, which lets you pay off more, high-interest debts with one regular payment at a better rate.

Understanding credit scores

The amount of debt people have and how well they manage it directly impacts their credit rating and ability to borrow at good rates. Creditworthiness is what traditional financial institutions weigh when considering a mortgage or loan application. One of the first things they do is look at credit scores and credit history. The better these two are, the lower your interest on any debt you do incur will be, and the sooner you can pay off your debt.

Your credit score is a number that ranges from 300 up to 900 and it is based on such criteria as:

• Payment history (Do you pay on time? Are you periodically or always late?)
• Credit utilization ratio (This refers to how much of your available credit you are using, and experts recommend less than 30 percent)
• Length and history of accounts (Do you have a variety of credit accounts?)

Over time, you want to build and maintain a good credit score. Some tips to get that score up include paying bills on time, paying more than the minimum amount, getting your balance down and having a variety of credit. You can learn more about rebuilding your credit history here.

If you have no credit history at all, or have weaker credit, you can opt for a secured credit card, which is a credit card that’s backed with a cash deposit as security. Using it can help raise that credit score.

Commit to financial fitness

Financial health affects all aspects of life, so it’s important that you’re able to manage your money instead of it managing you. The federal government has many educational tools and information sheets to help you improve your financial literacy.

Whatever your personal situation is, there is likely help to be found. For instance, while lenders use credit scores to assess your creditworthiness, that score is just a guide so it’s important to investigate solutions for your unique debt or credit concerns.

Some great insight into Canada’s interest rate environment from our friends at FNat!

The Bank of Canada has remained – somewhat defiantly – on the sidelines yet again, but it is feeling the pressure to get back into the game and one obstacle has now been removed.

The bank held its benchmark rate at 1.75% for an eighth straight setting.  At the same time it has clearly signalled it may not be able to hold that line much longer.  In its quarterly Monetary Policy Report (MPR) the bank pointed directly at trade conflicts (such as the U.S. – China tariff war) as the key cause of a global economic slowdown.  Growth has fallen to its lowest level since the financial collapse in 2007.  Around the world more than 35 other central banks have already cut rates in an effort to keep growth from stopping altogether.

The U.S. Federal Reserve has made three cuts in the past several months.  That has boosted the strength of the Canadian dollar which makes the country’s exports more expensive on the world market.  Given that the central bank has been counting on more business investment and spending to pick up the economic slack as debt-burdened consumers switch from spending to saving and repaying their loans, headwinds for exports and business are unwelcome.

The BoC, however, is not concerned that a drop in interest rates will trigger a renewed frenzy of debt-funded consumer spending.  It is satisfied that the biggest component of household debt – mortgages – have been stabilized by the B-20 regulations.  And another big obstruction has been removed.  The federal election is over so the bank can operate without risking the appearance of political favouritism.

Some food for thought from our friends at First National. 

Canadians put a high priority on paying off their mortgage debt – sometimes maybe a little too high.

Paying off debt is always a good move.  Wanting to be mortgage free is a laudable goal.  Making it your only goal may not be as sound.

Traditionally paying off your mortgage as quickly as possible has been seen as one of the best routes to financial success.  Interest rates used to be higher.  Some will remember that nasty period in the ‘80s and ‘90s when they were in double digits.  Even the 5% and 6% rates in place just before the Great Recession make today’s rates seem cheap.  So it can make more sense to take your focus off of your home and mortgage and view them as part of a more diversified investment strategy.

Over the past 10 years stock markets have tended to deliver rates of return that are markedly higher than mortgage interest rates.  By diverting some money away from your mortgage you could invest through RSPs or TFSAs.  It has been shown that people who start investing when they are young end up wealthier later in life.

Of course markets do fluctuate and some people prefer the stability of the “guaranteed return” that comes with paying down a mortgage.  It is a form of enforced saving.  There is also a sense of security that comes with mortgage free home ownership in the case of job loss or a sudden drop in income.

There is also protection in diversification.  Because you have expenses that go beyond your mortgage, having a collection of smaller assets can be useful.  If money gets tight you could sell a lesser investment in order to pay other bills.

While it is never a bad plan to pay down your mortgage faster, it is always a good plan to diversify and spread around your assets and your risks.  As the old expression says, “Don’t put all your eggs in one basket.”

Nov 4, 2019
First National Financial LP

The Bank of Canada has opted to hold its trendsetting interest rate at 1.75% in its October announcement. It is the eighth month in a row the central bank has chosen to leave its rate untouched, making it increasingly an outlier among developed nations; as global economic uncertainties have escalated, many other central banks have slashed their national cost of borrowing, including the U.S. Federal Reserve, which is expected to cut its rate once again later today.

These ongoing trade conflicts – mainly due to tensions between the U.S. and China – have indeed put a damper on the Canadian economy, especially its export sector and commodity prices. However, while it acknowledges “a growing number of countries have responded with monetary and other policy measures to support their economies,” the BoC is resisting the urge to cut rates, despite the strength holding out will lend to the loonie.

Leaving Room for Future Cuts

Much of the motivation behind the Bank’s inaction is to hedge its bets against an economic downswing in the near future. Talks of an impending recession grow louder, and it is anticipated that Canada’s economy will slow throughout the end of 2019 due to pain in the energy sector, and a fading of other factors that have temporarily boosted GDP. By keeping its rate untouched, the BoC has built in some padding should it need to counter these factors later on.

BoC Remains Optimistic About Canadian Economy

However, it remains optimistic that any slump should be temporary; business investment and exports are expected to rebound in 2020 and 2021 after contracting late this year, while government spending and a low cost of borrowing will keep consumer spending humming along. Employment and wage growth continue to strengthen and the housing market, which is a major economic contributor, continues to rebound across the nation, with an influx of new MLS listings and sales in most urban centres.

However, the BoC will keep an eye on whether today’s low-interest rate environment pose a risk to stable borrowing practices, as well as the fallout from the federal mortgage stress test, which was put in place at the beginning of last year to cool too-hot markets.

In all, the BoC projects GDP to grow 1.5% in 2019, and by 1.7% and 1.8% in 2020 and 2021, respectively. Inflation remains close to its 2% target, though will dip temporarily next year as softening energy prices trickle through the economy. With this in mind, the BoC believes holding its rate remains the appropriate course of action for the time being, but will observe how global conflicts impact our nation’s bottom line.

“Governing council is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist,” it states. “In considering the appropriate path for monetary policy, the Bank will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment. In this context, it will pay close attention to the sources of resilience in the Canadian economy – notably consumer spending and housing activity – as well as to fiscal policy developments.”

What Does This Mean for My Mortgage Rate?

The Bank of Canada trend-setting interest rate – also known as its Overnight Lending Rate – is used by the nation’s consumer banks to set their own variable cost of borrowing. This means, when the BoC cuts or hikes its rate, the banks will do the same regarding their variable mortgage and line of credit rates. As there was no change announced in today’s rate announcement, those holding variable mortgages will see no change in the near term to their monthly payments. As well, the pricing environment will remain stable for borrowers looking to apply for brand new variable mortgages, as well as those looking to renew or refinance their existing home financing.

While the Bank of Canada’s rate has no direct impact on fixed mortgage rates, its decision does influence them via its impact on the bond market; keeping the rate stable, and the loonie strong, signals that the Canadian economy is in good shape, which in turn makes government of Canada bonds fairly low risk investments. This keeps the price of bonds, as well as their pay-out yield, lower, which is a metric used by the banks in setting their fixed cost of borrowing. As a result, those looking to apply for a new fixed-rate mortgage, renew, or refinance, will likely enjoy well-discounted rates to choose from.

The next Bank of Canada announcement is set for December 4, 2019.

Some great tips for choosing the neighbourhood that’s right for you & your family when you’re buying a home,  from our friends at Zoocasa.

It’s tough to know which neighbourhood you should settle down in. In large cities, you might have dozens of options, each with their own pros and cons.

Before considering a number of factors, which we list below, ask yourself this question:

What do you want to do in your downtime?

Zoo Tip!

You might be the type of person who doesn’t care about their neighbourhood. If you’re single and spend a lot of time at home, the physical house or condo will be what’s important. Use your day-to-day and week-to-week activities as a launching point and go from there.

As obvious as it seems, your neighbourhood’s features exist for the time you’re not at work. When you wake up Saturday morning, what do you want to do? If you have small kids or a dog, you might want to live near a park. If you want to meet with friends, maybe you want nearby cafes and restaurants. If you spend a lot of time with your family, you night consider a neighbourhood close to them.

As much as you may like a certain street or the reputation a neighbourhood has, you need to think about what you actually do on your downtime and situate yourself in the midst of that.

Before you decide on an area, here are some things to consider.

How you get around

While you might like a large home on the outskirts of the city, and you could save money by living further away from downtown, if you walk or take public transit to get everywhere, that wouldn’t be the best decision.

Think about how often you walk, bike, and drive, and use that information when you’re shopping around for a home. Be honest with yourself when deciding if you’re willing to change your transportation habits for a neighbourhood.

Cost trade-offs

Consider a cost-benefit analysis when discussing neighbourhoods. For example, would you rather live in a two-bedroom, semi-detached home in Summerhill, or a four-bedroom, detached house in The Beach? You’ll get more space if you’re removed from the core, but the neighbourhood may be more desirable.

If you work in central Toronto, you know that commuting can take a good chunk of time out of your day. But living in Scarborough or Ajax will save you a ton of money, if you’re willing to spend extra time on the train or in your car each day.

Weigh time versus cost to determine which is more important to you, then work with your agent to choose the right area.

Outdoor space and recreation

While you can jog anywhere, other physical activities, like spin class or Crossfit, require specific facilities. If you have small children or a dog, a park is good for health and exercise. Think about pools, tennis courts, skating rinks, community centres, and other recreational resources.

And, like so many of the points on this list, be realistic—if you don’t swim already, you might be choosing a location based on something you’ll never use.

Zoo Tip!

If you have a certain church or place of worship and you don’t want to transfer to another, limit yourself to a reasonable distance.

Family and friends

If you have small kids and need regular babysitting help from your parents, you probably don’t want to be across town from them. If you see your friends often, buying a home in the same neighbourhood will make visits easier. But, in both situations, if you’re buying solely to be near the people closest to you, be sure they aren’t moving in the very near future, and that they actually want you to live nearby. (If you live beside your best friends, it could cause more problems than solutions.)

The bottom line, when choosing the neighbourhood you want to live in, is to weigh these factors with many others—type of home, school zones, home prices, etc. Don’t base your entire move on one factor or you could regret neglecting the others in due time.

School Zones

The quality of education your children receive should be at the top of your list. Read our article on the importance of school zones for a breakdown of what you should consider.

Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres

Some great insight on the realities of renting out part of your home to help with your mortgage from our friends at FNAT.

With high prices and tougher qualifying requirements home buyers continue to explore the viability of renting out part of their home as a way to boost income or subsidize mortgage costs. It is not uncommon and it is growing in popularity with younger buyers.

A survey conducted by one of Canada’s big banks found that 26% of home owners are, or are planning to rent out space. Of that group nearly one-third are renting out space in their primary residence. Among millennials nearly half are, or intend to be, landlords. Among those who are looking for a home right now, 54% of millennials says they would pick a property with a source of rental income, compared to just 25% of baby boomers.

But is it worth the trouble? The answer to that depends on attitude and expectations. The bank survey found that 80% of homeowners agree that renting out space in their home makes financial sense, but they value their time and privacy more.

Being a landlord is a 24/7 occupation. It may be called “passive income”, but you have to be willing to respond to tenant concerns on short notice and you have to be prepared for unexpected costs and maintenance. There can be financial stress.

Even those who have the temperament, though, need to give careful consideration to the financial benefits and legal responsibilities. The survey found that nearly three-quarters of landlord believe the tax advantages are worth it, even if the rental is losing money. This can be a misconception. It is important to know what you can deduct and what your tax obligations will be. Many fledgling landlords get a nasty surprise come tax time.

Using part of your home to generate income to help qualify for a mortgage can also be a tricky business. Lenders have varying criteria for how much real, or potential, rental income can be used in the loan application. By one common calculation, unknown as rental addback, a $1,000 a month suite in your home will net you just $195 a month in income on your mortgage application.

Oct 14, 2019
First National Financial LP

Some great advice from our family at DLC lending centres.

If you’re credit challenged but want to get into the housing market, it can be a tough road to hoe. But improving your credit to a point where a lender will give you chance, is very doable.

First, I won’t bore you with the detailed minutia of credit scores. Basically, what you need to know is a score above 680 puts you in a good position to get financing, while below will make it tough and improvement is needed.

Your credit score tells lenders some basic stuff about your credit: How long you’ve had credit, your ability to pay back that credit and how much you owe. And so your credit score is affected by how much debt you’re carrying in regards to limit, how many cards or tradelines you have and your history of repayment.

If you’re a young person and new to the world of credit, consider the 2-2-2 rule to help build up your credit. Lenders want to see two forms or revolving credit, like credit cards, with limits no less than $2,000 and a clean history of payment for two years. It’s also good to note, a great credit score will also include keeping a balance on all those cards at any given time below 30 per cent of the limit.and correct any old or incorrect reporting on your credit score by contacting Equifax to have it removed. Some people also forget their credit cards have an annual fee and fail to pay them off too.

This cannot be stressed enough, if you want to keep or attain a good credit score, you have to pay your credit cards or tradelines on time regardless of whether you owe $1 or $1 million.

There is a tendency when things get really bad to consider declaring bankruptcy or a consumer proposal. A consumer proposal is a formal, legally binding process to pay creditors a percentage of what is owed to them.

You really want to avoid these two options. Instead, there are companies out there that will perform the same function and negotiate your debts, but it won’t impact your credit or carry the stigma of bankruptcy or a consumer proposal.

Lastly, if you already own a home and have some equity, but you’re still drowning in credit debt, consider refinancing your mortgage. Sure, you might not get the great rate you have now or you might get dinged for breaking your mortgage early, but using the equity in your home to get rid of high interest credit payments could keep more money in your pocket at the end of the day.

Valuable insight regarding the future direction of interest rates from our friends at FNAT.

In the rising tide of interest-rate-cut expectations, the Bank of Canada is treading water.  The central bank did meet expectations by holding its policy rate at 1.75% for a seventh consecutive setting, last week.

The reasons are fairly apparent: inflation is on target, GDP growth is good (Q2 was far better than expected even if it was based on some one-off stats), job growth is steady and unemployment is at a generational low of 5.7%.

It seems pretty clear that the BoC really does not want to trim its trend setting rate.  The economic numbers do not warrant it and we are in a federal election cycle.  The Bank has a long history of stepping to the sidelines during elections in an effort to preserve its reputation for political neutrality.

But the BoC is under a lot of external pressure to cut its rate.  Canada is one of just a handful of developed economies with a policy rate above zero.  Of course, the United States is one of the others and it is already making cuts.

The U.S. Fed says it is trying to ensure the economy does not stall in the months ahead.  Being as the U.S. is the biggest economy in the world, others – including Canada – will likely have to take out some insurance of their own.

The next BoC setting is October 30^th.  That is close to, but after, the October 21^st election so it is politically doable.  The next opportunity is December 4^th, just in time for Christmas.

Sep 9, 2019
First National Financial LP