Dianne Nice
Tom Tabor has three words to describe the state of his retirement fund: “It’s not good.”
The 64-year-old Toronto retiree, a former director of the Canadian Standards Association, watched his portfolio drop 50 per cent by the time the market bottomed in March of 2009, but has seen it recover about 30 per cent since then.
Mr. Tabor is not ready to stick his money under a mattress, however. Instead he’s sticking to his guns, patiently waiting for a market recovery, which he expects within the next three to four years.
According to his financial adviser, Scott Ward of Edward Jones, Mr. Tabor is doing the right thing.
“It always makes sense to stick to your plan and don’t let your emotions make you make a decision,” says Mr. Ward, who has fielded calls from many anxious clients since the recession began.
According to a recent Leger Marketing survey of 1,000 Canadians, those who are saving for retirement are less confident that their retirement savings will recover in short order than they were this time last year.
In 2009, 31 per cent of Canadians said they expected it to take three years or less to recover their retirement savings losses of the previous year. Now, a year later, only 19 per cent feel they will recover their losses within the next two to three years.
“People are definitely concerned about the recovery, definitely concerned about retirement,” Mr. Ward said.
Kate Warne, Canadian market strategist for Edward Jones, which commissioned the survey, says Canadians need to be patient like Mr. Tabor and realize that the economy is actually recovering quite quickly.
“People are still a bit traumatized by the magnitude of the downturn and they have not paid a lot of attention to how well things have been performing since then,” Ms. Warne said.
“We saw a severe recession, both in Canada and in the U.S., and the rest of the world, but the North American economies are actually coming back quite quickly, with more than 6-per-cent growth in the first quarter in Canada. That’s a very positive sign.”
Edward Jones offers the following tips for investors trying to get on the path to recovery:
Choose high-quality, long-term investments. Invest in long-term opportunities instead of playing the guessing game. It's hard to guess which countries, companies or industries are likely to lead or lag in the short term.
Diversify your portfolio. Owning a few different investments doesn't mean your portfolio is properly diversified. You could be missing out on opportunities for growth. While having fixed-income vehicles is one part of a balanced portfolio, being too heavily weighted in fixed-income products can significantly impede recovery.
Avoid taking risky shortcuts. Don’t look at the market downturn as such a fantastic buying opportunity that you risk too much trying to make up for losses. Aggressive investments are much more volatile.
Be patient. Since nobody can say with certainty that the current market downturn has ended for good, investors need to be patient and take any necessary steps to improve their portfolios.
Don’t be too safe. Some investors may have turned to short-term GICs to avoid risks, but putting too much money in this kind of investment may mean facing risks that are less visible. Not only will your portfolio be slow to recover, your returns may not be enough to meet your financial goals in the future.
Understand the risks. Look at your current investments and assess how risky they are. Ask yourself if you’re comfortable with the level of risk in your portfolio.
Tuesday, June 29, 2010
Monday, June 28, 2010
Risk & Reality
Helen Morris, National Post · Saturday, Jun. 26, 2010
There is a lot to consider when deciding whether to go for a fixed or variable rate mortgage -- not least, your tolerance of risk and your ability to sleep at night. Generally, fixed rate mortgages charge a higher rate and cost more, but payments are fixed for the term of the mortgage so you know what amount is coming off your principal. Variable rate deals, on the other hand, have generally cost less over the term of a mortgage but payments rise -- and fall -- with rate changes, so while your payment stays the same, the amount that goes toward the principle could vary.
In recent years, a number of lenders have begun offering mortgages that feature a fixed and variable combination.
"You would have multiple mortgage segments attached to the same home," says Marcia Moffat, head, Home Equity Financing, RBC Royal Bank. You could set up a mortgage where, for example, you have "half your mortgage as a five-year fixed rate, a quarter of your mortgage as a two-year fixed rate, and you could take a variable rate mortgage for the other part."
A number of brokers have seen increased interest in these umbrella products.
"Combination or hybrid mortgages are growing in demand," says Rosa Bovino, a mortgage broker with Invis, "... mostly because people are unsure where the market is going. For those who are not comfortable locking in the full amount and want to play with the prime rate, there are some great variable rates out there where you're ... paying 1.9%, which is phenomenal."
As well as being exposed to different interest rates, the amortization period for each segment can also be different.
"If you think of the other side of your balance sheet, with your investments, you would typicallydiversify-- you wouldn't take a single approach to all your assets," says Ms. Moffat. "This is applying the same mindset to the credit side of the balance sheet."
The hybrid mortgage has one other hidden asset, Ms. Bovino says. It can help households in which the mortgage holders have different risk tolerances.
"You do get couples, one is more conservative [and] the other one wants to gamble," says Ms. Bovino. "That's where you see a larger percentage of the clients taking on [hybrid mortgages]."
As with all mortgages, it pays to ask questions and read the fine print.
"There are a lot of nuances with those mortgages, and you have to be very careful with the lender you choose and the different ... options and terms," says Kim Gibbons, a broker with Mortgage Intelligence in Toronto. "I disclose up front what the risks are for those mortgages and when I do...for the most part, (clients) usually choose to go either fixed or variable. I am able to provide them with a better rate on either fixed or variable as opposed to the hybrid."
Whether or not you pay a rate premium for a hybrid mortgage may depend on how it is structured.
"If they're working with a mortgage broker, they're going to get the wholesale rate so there is no upping any interest rate because you're splitting your mortgage," says Ms. Bovino. "Overall, by doing the combination mortgage you will probably pay less over the life of a mortgage ... if a component of it is at the lower variable rate."
Advisors also suggest thinking ahead to renewal time.
"When the mortgage comes up for renewal, there may be two portions of it that are up for renewal at different times," says Ms. Gibbons. "This makes it very difficult to break the mortgage ... you would have to pay penalties on the part that is not matured."
While you cannot readily switch lenders mid-way through a hybrid mortgage, "the nice thing about them coming up at different times is that you're not 100% exposed to any one particular rate environment. This is a way to hedge your bets," says Ms. Moffat. "With a five-year and a two-year, you'll be exposed to whatever the environment is in two years and the other in five years. It's a bit of a laddering approach."
There is a lot to consider when deciding whether to go for a fixed or variable rate mortgage -- not least, your tolerance of risk and your ability to sleep at night. Generally, fixed rate mortgages charge a higher rate and cost more, but payments are fixed for the term of the mortgage so you know what amount is coming off your principal. Variable rate deals, on the other hand, have generally cost less over the term of a mortgage but payments rise -- and fall -- with rate changes, so while your payment stays the same, the amount that goes toward the principle could vary.
In recent years, a number of lenders have begun offering mortgages that feature a fixed and variable combination.
"You would have multiple mortgage segments attached to the same home," says Marcia Moffat, head, Home Equity Financing, RBC Royal Bank. You could set up a mortgage where, for example, you have "half your mortgage as a five-year fixed rate, a quarter of your mortgage as a two-year fixed rate, and you could take a variable rate mortgage for the other part."
A number of brokers have seen increased interest in these umbrella products.
"Combination or hybrid mortgages are growing in demand," says Rosa Bovino, a mortgage broker with Invis, "... mostly because people are unsure where the market is going. For those who are not comfortable locking in the full amount and want to play with the prime rate, there are some great variable rates out there where you're ... paying 1.9%, which is phenomenal."
As well as being exposed to different interest rates, the amortization period for each segment can also be different.
"If you think of the other side of your balance sheet, with your investments, you would typicallydiversify-- you wouldn't take a single approach to all your assets," says Ms. Moffat. "This is applying the same mindset to the credit side of the balance sheet."
The hybrid mortgage has one other hidden asset, Ms. Bovino says. It can help households in which the mortgage holders have different risk tolerances.
"You do get couples, one is more conservative [and] the other one wants to gamble," says Ms. Bovino. "That's where you see a larger percentage of the clients taking on [hybrid mortgages]."
As with all mortgages, it pays to ask questions and read the fine print.
"There are a lot of nuances with those mortgages, and you have to be very careful with the lender you choose and the different ... options and terms," says Kim Gibbons, a broker with Mortgage Intelligence in Toronto. "I disclose up front what the risks are for those mortgages and when I do...for the most part, (clients) usually choose to go either fixed or variable. I am able to provide them with a better rate on either fixed or variable as opposed to the hybrid."
Whether or not you pay a rate premium for a hybrid mortgage may depend on how it is structured.
"If they're working with a mortgage broker, they're going to get the wholesale rate so there is no upping any interest rate because you're splitting your mortgage," says Ms. Bovino. "Overall, by doing the combination mortgage you will probably pay less over the life of a mortgage ... if a component of it is at the lower variable rate."
Advisors also suggest thinking ahead to renewal time.
"When the mortgage comes up for renewal, there may be two portions of it that are up for renewal at different times," says Ms. Gibbons. "This makes it very difficult to break the mortgage ... you would have to pay penalties on the part that is not matured."
While you cannot readily switch lenders mid-way through a hybrid mortgage, "the nice thing about them coming up at different times is that you're not 100% exposed to any one particular rate environment. This is a way to hedge your bets," says Ms. Moffat. "With a five-year and a two-year, you'll be exposed to whatever the environment is in two years and the other in five years. It's a bit of a laddering approach."
Friday, June 25, 2010
Five things to ask before you sign a mortgage
What penalties could I face?
Ask your mortgage provider what will happen if you pay off your mortgage early, refinance it or sell your house. You may be facing a three-month interest penalty or an interest-rate differential, which is the difference between the interest charged at the time you signed your mortgage and the interest available at the time of refinancing. These penalties could add up to thousands of dollars.
What are my prepayment privileges?
Find out how much of your mortgage can be paid off without incurring penalty fees. The speed at which you pay down your mortgage has a huge effect on the amount of interest you pay over time.
Is my mortgage portable or assumable?
If you sell your house before your mortgage is paid and buy another one, find out whether your mortgage is portable, meaning you can take it with you to the new property at the same interest rate. Or, if you sell the house, can the new owners assume your mortgage, meaning can they take over your mortgage at the same rate? This can be a good selling feature.
What’s my risk tolerance?
You will be faced with a choice of a fixed or variable interest rate, so ask about the pros and cons. Also, ask yourself whether you can handle rising rates, which will increase either your monthly payment or your amortization, depending on the type of mortgage. And find out what happens if you take a variable-rate mortgage and later decide to lock in at a fixed rate.
Can I accelerate my payment frequency?
Find out whether you can pay weekly or bimonthly, rather than monthly. This simple measure can knock years off your amortization and thousands of dollars off your total interest costs.
Ask your mortgage provider what will happen if you pay off your mortgage early, refinance it or sell your house. You may be facing a three-month interest penalty or an interest-rate differential, which is the difference between the interest charged at the time you signed your mortgage and the interest available at the time of refinancing. These penalties could add up to thousands of dollars.
What are my prepayment privileges?
Find out how much of your mortgage can be paid off without incurring penalty fees. The speed at which you pay down your mortgage has a huge effect on the amount of interest you pay over time.
Is my mortgage portable or assumable?
If you sell your house before your mortgage is paid and buy another one, find out whether your mortgage is portable, meaning you can take it with you to the new property at the same interest rate. Or, if you sell the house, can the new owners assume your mortgage, meaning can they take over your mortgage at the same rate? This can be a good selling feature.
What’s my risk tolerance?
You will be faced with a choice of a fixed or variable interest rate, so ask about the pros and cons. Also, ask yourself whether you can handle rising rates, which will increase either your monthly payment or your amortization, depending on the type of mortgage. And find out what happens if you take a variable-rate mortgage and later decide to lock in at a fixed rate.
Can I accelerate my payment frequency?
Find out whether you can pay weekly or bimonthly, rather than monthly. This simple measure can knock years off your amortization and thousands of dollars off your total interest costs.
Monday, June 21, 2010
Too much belt-tightening poses risks
Simon Avery - CTV News
Confusion reigns in the markets as investors struggle to figure out which events and indicators will define the next cycle and which are red herrings to be ignored.
The list of potential catalysts and sparks keeps growing. Fears of a European debt crisis seizing up interbank lending, for example, have expanded to include worries about German austerity measures extinguishing an early economic recovery. Investors may hope for some clarity out of the G20 summit that begins this week, as well as an announcement from the U.S. Federal Reserve on Wednesday. In the meantime, gold is likely to keep its shine and stocks will attempt another delicate climb forward on low volume.
Economic fundamentals remain on track for a broader recovery, says Roland Chalupka, chief investment officer and portfolio manager with Fiduciary Trust Co. of Canada. But now is not a good time to buy, he advises.
He draws some confidence from the fact that the jobless rate has steadied, that interest rates remain extremely low and that global credit markets have held up to Europe’s woes. But even though he believes the economy is turning around, he remains cautious. “As investors, we have to pay attention to price,” he says. “We are now really looking for the right price to add risk.”
He considers stock prices too high right now and wants the markets to shed between 10 and 15 per cent off their peak valuations reached in April. That translates into a buying range on the S&P/TSX composite index of somewhere between 11,090 and 10,474. On Friday, the index ended the week at 11,928.
Gold will continue to grab investor attention this week, as nervous uncertainty defines broad sentiment. Analysts are looking at the rising price of the precious metal with some bewilderment, because stock markets have also managed gains in the last seven trading sessions. Normally, gold prices climb as traders lighten their risk exposure, betting on bullion as a safe haven. Mr. Chalupka recognizes that gold prices will likely continue to climb, but he has avoided exposure to bullion in his portfolio. “Our safe asset is Canadian bonds. They are far less volatile and they pay you an income,” he says.
The Fed’s announcement midweek on the federal funds target rate and brief comments on the economy may give investors a better sense of clarity. It is a challenging moment for the U.S. central bank, as indicators suggest the economy is losing some momentum and as worries about deflation grow.
“We are now running the risk of too much government belt tightening,” Sherry Cooper, chief economist at BMO Nesbitt Burns, said in her weekly note Friday. Her comments echo a growing concern among economists and some politicians that the recovery is precarious and vulnerable to deficit hawks turning off government stimulus too early, especially in Europe where Germany is embracing austerity measures.
The issue of how best to nurture the recovery will likely dominate the G20 meeting in Toronto late this week. “Our highest priority in Toronto must be to safeguard and strengthen the recovery,” U.S. President Barack Obama said in a public letter to the other G20 leaders. Expect disagreement among governments about the need to keep the pump primed versus the necessity of reining in spending to get deficits under control.
Confusion reigns in the markets as investors struggle to figure out which events and indicators will define the next cycle and which are red herrings to be ignored.
The list of potential catalysts and sparks keeps growing. Fears of a European debt crisis seizing up interbank lending, for example, have expanded to include worries about German austerity measures extinguishing an early economic recovery. Investors may hope for some clarity out of the G20 summit that begins this week, as well as an announcement from the U.S. Federal Reserve on Wednesday. In the meantime, gold is likely to keep its shine and stocks will attempt another delicate climb forward on low volume.
Economic fundamentals remain on track for a broader recovery, says Roland Chalupka, chief investment officer and portfolio manager with Fiduciary Trust Co. of Canada. But now is not a good time to buy, he advises.
He draws some confidence from the fact that the jobless rate has steadied, that interest rates remain extremely low and that global credit markets have held up to Europe’s woes. But even though he believes the economy is turning around, he remains cautious. “As investors, we have to pay attention to price,” he says. “We are now really looking for the right price to add risk.”
He considers stock prices too high right now and wants the markets to shed between 10 and 15 per cent off their peak valuations reached in April. That translates into a buying range on the S&P/TSX composite index of somewhere between 11,090 and 10,474. On Friday, the index ended the week at 11,928.
Gold will continue to grab investor attention this week, as nervous uncertainty defines broad sentiment. Analysts are looking at the rising price of the precious metal with some bewilderment, because stock markets have also managed gains in the last seven trading sessions. Normally, gold prices climb as traders lighten their risk exposure, betting on bullion as a safe haven. Mr. Chalupka recognizes that gold prices will likely continue to climb, but he has avoided exposure to bullion in his portfolio. “Our safe asset is Canadian bonds. They are far less volatile and they pay you an income,” he says.
The Fed’s announcement midweek on the federal funds target rate and brief comments on the economy may give investors a better sense of clarity. It is a challenging moment for the U.S. central bank, as indicators suggest the economy is losing some momentum and as worries about deflation grow.
“We are now running the risk of too much government belt tightening,” Sherry Cooper, chief economist at BMO Nesbitt Burns, said in her weekly note Friday. Her comments echo a growing concern among economists and some politicians that the recovery is precarious and vulnerable to deficit hawks turning off government stimulus too early, especially in Europe where Germany is embracing austerity measures.
The issue of how best to nurture the recovery will likely dominate the G20 meeting in Toronto late this week. “Our highest priority in Toronto must be to safeguard and strengthen the recovery,” U.S. President Barack Obama said in a public letter to the other G20 leaders. Expect disagreement among governments about the need to keep the pump primed versus the necessity of reining in spending to get deficits under control.
Friday, June 18, 2010
Canada’s financial hub is preparing for G20 lockdown
Jameson Berkow, Financial Post
All five major banks will be reducing hours or shutting a total of 51 branches that are inside or close to the summit meeting in downtown Toronto. Plans are also underway to reduce staff on trading floors and corporate offices and move some operations to remote locations or allow employees to work from home.
Most banks will be implementing so-called “business continuity plans” — previously put to the test during the SARS outbreak and the Ontario power blackout in 2003 — and now being put through their paces once again. Although the summit takes place on the June 26-27 weekend, many banks will be limiting operations in the days leading up to it.
Banks are keeping details of their plans largely under wraps. Many bank employees who generally work downtown still don’t know if they are going to be coming into work or if they will be at a remote site setup. Much will depend on the intensity of the protests and the level of street disruptions.
The Bank of Montreal, in addition to closing nine downtown locations, intends to shift part of its trading operations to an alternate location outside of the secure zone, which encloses most of the financial district.
“Trading will probably split operations, moving half of its staff to an alternate location to reduce demand on the main trading floor,” Ralph Marranca, a spokesman for BMO said. At the peak of the summit disruption, BMO could have as many as 40% of its downtown staff working from home, he added, though plans are still in flux.
Toronto-Dominion Bank will modify hours at 22 branches, for five business days leading up to the summit.
“Like many companies expecting to be impacted by the summit, we have pretty robust plans in place,” said Wojtek Dabrowski, a spokesman for TD. “In order to make sure everything runs safely and smoothly we’re closing eight branches in the downtown core.”
Decisions about further closures or reductions in hours, including trading and other operations will be made on an ongoing basis, Mr. Dabrowski said.
For Royal Bank of Canada, the summit will be a real-life test of its continuity strategy.
“This is an actual event taking place in Toronto so we are putting our customized business continuity plans in place,” Don Blair, a RBC spokesman said.
RBC’s strategy, which also involves closing eight of its downtown branches from June 24 until June 27, will have as many employees as possible who work downtown either work from home or from alternative RBC locations in the Greater Toronto Area. According to Mr. Blair, RBC is planning to maintain normal trading operations for its investment services, Mr. Blair said.
An RBC branch in Ottawa was firebombed last month. The group that claimed responsibility for the attack, FFFC-Ottawa, has said it planned to protest at the Toronto event as well.
The Canadian Imperial Bank of Commerce will be closing six downtown locations, including its flagship Commerce Court branch, for all or part of the summit duration.
Aside from closing six downtown locations, Bank of Nova Scotia is not planning any specific mitigation strategy to deal with the G20 disruption. Though the bank will be “implementing business continuity plans as required,” said, Joe Konecny a bank spokesman.
The Toronto Stock Exchange (TSX), which maintains a corporate headquarters one block from the secure zone, is expecting approximately 75% of its staff to work from home. Though it does not anticipate any impact on its trading operations which occur off-site, according to TSX spokeswoman Carolyn Quick.
All five major banks will be reducing hours or shutting a total of 51 branches that are inside or close to the summit meeting in downtown Toronto. Plans are also underway to reduce staff on trading floors and corporate offices and move some operations to remote locations or allow employees to work from home.
Most banks will be implementing so-called “business continuity plans” — previously put to the test during the SARS outbreak and the Ontario power blackout in 2003 — and now being put through their paces once again. Although the summit takes place on the June 26-27 weekend, many banks will be limiting operations in the days leading up to it.
Banks are keeping details of their plans largely under wraps. Many bank employees who generally work downtown still don’t know if they are going to be coming into work or if they will be at a remote site setup. Much will depend on the intensity of the protests and the level of street disruptions.
The Bank of Montreal, in addition to closing nine downtown locations, intends to shift part of its trading operations to an alternate location outside of the secure zone, which encloses most of the financial district.
“Trading will probably split operations, moving half of its staff to an alternate location to reduce demand on the main trading floor,” Ralph Marranca, a spokesman for BMO said. At the peak of the summit disruption, BMO could have as many as 40% of its downtown staff working from home, he added, though plans are still in flux.
Toronto-Dominion Bank will modify hours at 22 branches, for five business days leading up to the summit.
“Like many companies expecting to be impacted by the summit, we have pretty robust plans in place,” said Wojtek Dabrowski, a spokesman for TD. “In order to make sure everything runs safely and smoothly we’re closing eight branches in the downtown core.”
Decisions about further closures or reductions in hours, including trading and other operations will be made on an ongoing basis, Mr. Dabrowski said.
For Royal Bank of Canada, the summit will be a real-life test of its continuity strategy.
“This is an actual event taking place in Toronto so we are putting our customized business continuity plans in place,” Don Blair, a RBC spokesman said.
RBC’s strategy, which also involves closing eight of its downtown branches from June 24 until June 27, will have as many employees as possible who work downtown either work from home or from alternative RBC locations in the Greater Toronto Area. According to Mr. Blair, RBC is planning to maintain normal trading operations for its investment services, Mr. Blair said.
An RBC branch in Ottawa was firebombed last month. The group that claimed responsibility for the attack, FFFC-Ottawa, has said it planned to protest at the Toronto event as well.
The Canadian Imperial Bank of Commerce will be closing six downtown locations, including its flagship Commerce Court branch, for all or part of the summit duration.
Aside from closing six downtown locations, Bank of Nova Scotia is not planning any specific mitigation strategy to deal with the G20 disruption. Though the bank will be “implementing business continuity plans as required,” said, Joe Konecny a bank spokesman.
The Toronto Stock Exchange (TSX), which maintains a corporate headquarters one block from the secure zone, is expecting approximately 75% of its staff to work from home. Though it does not anticipate any impact on its trading operations which occur off-site, according to TSX spokeswoman Carolyn Quick.
Wednesday, June 16, 2010
Maybe your mortgage needs a check-up
Andy Holloway, Financial Post
While about 80% of Canadians visit a doctor at least once a year to help ensure they remain physically healthy, the number of people who check their financial health by regularly reviewing their mortgage is far less.
Plenty can change in someone’s life in a year, never mind during the standard five-year mortgage a lot of Canadians sign up for. A career change, kids, retirement or newfound money or it could be that such a major event is on the horizon. All can affect the type of mortgage that fits just right.
“A lot of people don’t like to face up to it but, doing an annual financial check-up is a very smart thing to do,” says Peter Aceto, CEO and president of Toronto-based ING Direct Canada. “Managing your financial lifestyle is just as important as managing your diet and exercise.”
Aceto says people often just wait for a renewal letter before they look at their mortgage, and even then they’ll likely send the contract back without considering if it is meeting their current needs because they feel changing providers or the terms is futile. But they should put just as much thought into a renewal or a review as they did when they signed the initial deal.
Kelvin Mangaroo, founder of RateSupermarket.ca, which compares mortgage rates and brokers across the country, agrees. “Canadian consumers tend to become complacent about their mortgage payments and they could be saving a lot of money.” He says home owners should annually review three main things: their current and expected future risk profile and net income as well as rates.
For example, the more adverse you become to risk, the less likely a variable mortgage will be right for you. Aside from comparing rates, Ratesupermarket.ca has a few other online tools that can help consumers figure if a change is a good thing, such as a mortgage calculator and a mortgage penalty calculator that will show how much you can expect to pay to break your existing mortgage. You can also sign up for e-mail alerts that tell you when rates change.
Rates are an obvious thing to pay attention to. If they’re going up, make sure you can make the higher monthly payment that may come at renewal time, or lock into a fixed rate if you’re on a variable. If rates are dropping below your existing rate, you might want to refinance or renew early.
“You’re making a commitment to be mortgage free in 25 years so you should have a longer term view of what interest rates will look like over that period, says Aceto. “Make sure you’re comfortable with them and comfortable making those payments.”
Even though banks are in the business of getting as much interest from you as they can, many will allow people to pay a lump sum of the principal on the mortgage’s anniversary and increase their monthly payments. An extra $100 a month on a standard $200,000 mortgage could save almost $18,000 in interest and shorten the amortization period by about four years, according to Aceto.
Paying down your mortgage faster may seemingly put a crimp into your future finances if something happens and you need the money — unlike, say, putting it into a tax-free savings account or other low-risk liquid investment. But many financial institutions have a re-advance clause that allows you to retrieve some of the money spent accelerating mortgage payments, says Peter Veselinovich, vice-president of banking and mortgage operations at Winnipeg-based Investors Group.
Of course, it may become more difficult to get those funds back if there is a dramatic downward change in housing values and you haven’t built up enough equity. But that’s where understanding your entire financial situation, not just your mortgage, can help. “Most of us don’t like to think about debt, says Veselinovich. “It’s just something that somehow comes up and ends up as part of our personal balance sheet and we make payments.”
Even something simple such as making renovations could affect the type of mortgage desired. For example, topping up or refinancing an existing mortgage can pay for renovations, providing you’re comfortable with a blended interest rate. If you’re buying a new home, you may be able to port your current mortgage. Or maybe you just want to consolidate higher-interest unsecured debt into your mortgage. “Rolling that into your mortgage can significantly save on interest costs and that will help you get out of debt sooner,” says Feisal Panjwani, a Surrey, B.C.-based broker with Feisal & Associates under the Invis Inc. umbrella.
A mortgage can also help you become more tax efficient if you’re thinking of investing in a business, buying a rental property or putting some money into mutual funds or the stock market. That’s because the interest paid on money borrowed on a principal property can be written off against revenue from those investments.
But the biggest reason for making changes to your mortgage mid-stream may be because it could be a lot easier to do something before your situation changes. “Making changes to your mortgage before you go into a new venture or before you retire would allow you to qualify much easier rather than waiting for your mortgage to come up for renewal,” says Panjwani.
While about 80% of Canadians visit a doctor at least once a year to help ensure they remain physically healthy, the number of people who check their financial health by regularly reviewing their mortgage is far less.
Plenty can change in someone’s life in a year, never mind during the standard five-year mortgage a lot of Canadians sign up for. A career change, kids, retirement or newfound money or it could be that such a major event is on the horizon. All can affect the type of mortgage that fits just right.
“A lot of people don’t like to face up to it but, doing an annual financial check-up is a very smart thing to do,” says Peter Aceto, CEO and president of Toronto-based ING Direct Canada. “Managing your financial lifestyle is just as important as managing your diet and exercise.”
Aceto says people often just wait for a renewal letter before they look at their mortgage, and even then they’ll likely send the contract back without considering if it is meeting their current needs because they feel changing providers or the terms is futile. But they should put just as much thought into a renewal or a review as they did when they signed the initial deal.
Kelvin Mangaroo, founder of RateSupermarket.ca, which compares mortgage rates and brokers across the country, agrees. “Canadian consumers tend to become complacent about their mortgage payments and they could be saving a lot of money.” He says home owners should annually review three main things: their current and expected future risk profile and net income as well as rates.
For example, the more adverse you become to risk, the less likely a variable mortgage will be right for you. Aside from comparing rates, Ratesupermarket.ca has a few other online tools that can help consumers figure if a change is a good thing, such as a mortgage calculator and a mortgage penalty calculator that will show how much you can expect to pay to break your existing mortgage. You can also sign up for e-mail alerts that tell you when rates change.
Rates are an obvious thing to pay attention to. If they’re going up, make sure you can make the higher monthly payment that may come at renewal time, or lock into a fixed rate if you’re on a variable. If rates are dropping below your existing rate, you might want to refinance or renew early.
“You’re making a commitment to be mortgage free in 25 years so you should have a longer term view of what interest rates will look like over that period, says Aceto. “Make sure you’re comfortable with them and comfortable making those payments.”
Even though banks are in the business of getting as much interest from you as they can, many will allow people to pay a lump sum of the principal on the mortgage’s anniversary and increase their monthly payments. An extra $100 a month on a standard $200,000 mortgage could save almost $18,000 in interest and shorten the amortization period by about four years, according to Aceto.
Paying down your mortgage faster may seemingly put a crimp into your future finances if something happens and you need the money — unlike, say, putting it into a tax-free savings account or other low-risk liquid investment. But many financial institutions have a re-advance clause that allows you to retrieve some of the money spent accelerating mortgage payments, says Peter Veselinovich, vice-president of banking and mortgage operations at Winnipeg-based Investors Group.
Of course, it may become more difficult to get those funds back if there is a dramatic downward change in housing values and you haven’t built up enough equity. But that’s where understanding your entire financial situation, not just your mortgage, can help. “Most of us don’t like to think about debt, says Veselinovich. “It’s just something that somehow comes up and ends up as part of our personal balance sheet and we make payments.”
Even something simple such as making renovations could affect the type of mortgage desired. For example, topping up or refinancing an existing mortgage can pay for renovations, providing you’re comfortable with a blended interest rate. If you’re buying a new home, you may be able to port your current mortgage. Or maybe you just want to consolidate higher-interest unsecured debt into your mortgage. “Rolling that into your mortgage can significantly save on interest costs and that will help you get out of debt sooner,” says Feisal Panjwani, a Surrey, B.C.-based broker with Feisal & Associates under the Invis Inc. umbrella.
A mortgage can also help you become more tax efficient if you’re thinking of investing in a business, buying a rental property or putting some money into mutual funds or the stock market. That’s because the interest paid on money borrowed on a principal property can be written off against revenue from those investments.
But the biggest reason for making changes to your mortgage mid-stream may be because it could be a lot easier to do something before your situation changes. “Making changes to your mortgage before you go into a new venture or before you retire would allow you to qualify much easier rather than waiting for your mortgage to come up for renewal,” says Panjwani.
Monday, June 14, 2010
The new face of debt
Andrew Allentuck, Financial Post · Friday, Jun. 11, 2010
For James Kennedy, a federal civil servant before he retired, and his wife, Jane, who retired from the Calgary civil service, the golden years have become a series of tough compromises. Both 59, they live in Qualicum Beach, B.C., a five-minute walk from the Strait of Georgia on Vancouver Island. They enjoy the mild weather, long walks on the beach and their beautiful home.
Trouble is, a lack of employment income combined with debt stalk the good times they thought they would have after they left their careers.
Their jobs paid them a total of about $100,000 per year. Today, as a result of too much house and the repairs it entails — repainting, new floors, new electrical circuits, new kitchen counters, custom French doors and other elegances — they carry a debt of almost $70,000, nearly twice their retirement income of $37,000 a year.
If they pay off the debt, James and Jane would face a cash shortage. They could do it, but it would wipe out all of their RRSPs and other retirement assets built up over their working lives. A tough choice.
“We used to think that our house would go up enough in price to cover our debts,” Mr. Kennedy explains. “But I don’t think you can rely on that.”
Their situation could be resolved by selling the house, yet they fear that having paid too much in renovations, even downsizing might leave them house broke — with a nice abode and nothing else.
“As I approach the age of 60, I don’t want to carry so much debt. There has to be an end to the debt. I want my mind to be clear that when we get our Canada Pension Plan and Old Age Security, we will be able to keep those benefits. We don’t want to go into our sunset years paying off our debts.”
See The Kennedys are not alone. A flurry of recent studies show a significant increase of retirees in debt. First was Investors Group, which said 62% plan to carry debt such as a mortgage into their golden years. Then Royal Bank of Canada came out with its Ipsos Reid poll, which found four in 10 Canadians retired with some form of debt, and one in four began retirement with a mortgage on their primary residence.
“More and more, Canadians are carrying debt into retirement,” said Lee Anne Davies, head of retirement strategies at RBC.
Just this week, BMO Financial Group noted less than half of Canadians 55 and over have a post-retirement income strategy in place and only a third have considered that they might outlive their savings.
It’s a new and dangerous trend.
Unlike their parents and grandparents, who remembered the Great Depression and regarded debt as a first step toward ruin, today’s retirees, especially Baby Boomers born between 1947 and 1966, grew up comfortable with owing others. Indeed, for many who grew up in the expansionary years of the 1960s, it was a normal and expected to have a credit card, fund a university education with loans, graduate to readily available mortgages and then to handy lines of credit from accommodative banks.
“Retirees, especially Boomers, are less averse to debt than their parents were,” says Peter Drake, vice president for retirement and economic research with Fidelity in Toronto. The contrast with earlier generations is stark, Mr. Drake adds. “They lived through a sustained period of strong economic growth and have adopted the idea that they will be well-off.” Boomers have always had a major influence on consumer trends, and now they are changing the face of retirement as well.
“Boomers don’t have the same sense of saving for bad days that their parents had,” explains Charles Mossman, a finance professor at the Asper School of Business at the University of Manitoba. “When they retire, former workers, especially those who don’t have defined-benefit pensions that provide a guaranteed and sometimes even an indexed cash flow, wind up with more debt service charges than they can afford.”
According to a special report by The Office of the Superintendent of Bankruptcy that was released in 2008, 15.3% of all individual bankruptcies in Canada in 2003 were of individuals 55 and over, up from 6.9% in 1993. “Those over 65 are less likely to be able to recover economically and socially from the bankruptcy,” noted the OSB.
The risk of senior bankruptcy grows with age. A study for the Canadian Institute of Actuaries released June 2007, shows that longevity risk — the chance of living to a very ripe old age — poses the problem of running out of personal savings.
Given Canadians’ extending life expectancy — currently 78 for males, 83 for females — a person retiring at age 55 has a 40% chance of running out of personal savings by age 85 and a 90% chance of being flat broke by age 95. It should be noted the data shows that women, who outlive men on average and tend to have lower lifetime incomes, have even greater reason to fear poverty caused by longevity.
Compounding the longevity problem is the trend, promoted by some financial services companies, to early retirement. Remember Freedom 55? But retiring at that age means giving up what may be one’s most financially productive years. Indeed, if the average retiree has paid down most of his or her debts, and delays retirement to age 62, he or she can live in reasonable financial security, says demographer David Foot, an economist on the faculty of the University of Toronto and author of the 1996 bestseller Boom, Bust & Echo.
It would be wrong to label all debt foolish and all debtors in peril of financial catastrophe, argues Tina DiVito, head of retirement solutions at BMO Financial Group. “There is bad debt and good debt. Bad debt may be what one borrowed for a transitory pleasure, such as a vacation, after which the borrower has to pay high interest rates and gets no tax breaks.
“Good debt bears moderate rates of interest and is payable in a reasonable time period, perhaps as a part of an investment that makes interest tax-deductible,” Ms. DiVito says.
For good debt, consider the case of 61-year-old Montreal retiree Ioanna Jakus, who has maintained a mid-six figure investment portfolio while living on an after-tax income of less than $2,000 per month.
A former bank employee, she has a $10,000 line of credit with her stock broker. “I use the line to buy stocks and bonds,” she says. “I can deduct the interest I pay from my taxable income. My investments have been successful and have more than paid the cost of credit. What’s more, rates of interest are so low that borrowing to invest just makes sense for me.”
Not only has Ms. Jakus made intelligent use of credit, she has done so expertly, selecting low-risk GICs, bonds and blue-chip stocks with strong dividends. “I have always been motivated by the knowledge that only I can control my destiny,” she explains. “My husband and I paid off the mortgage — that was when interest rates were near 20% — and we never borrowed again for spending.
“Of course, I can clear my investment debt in a moment by using cash in one of my accounts. My philosophy has always been not to take risks that I cannot afford, especially when it comes to borrowing money.
“Nobody can look after me as well as I can,” she adds.
That’s a lesson a lot of retirees have yet to learn.
For James Kennedy, a federal civil servant before he retired, and his wife, Jane, who retired from the Calgary civil service, the golden years have become a series of tough compromises. Both 59, they live in Qualicum Beach, B.C., a five-minute walk from the Strait of Georgia on Vancouver Island. They enjoy the mild weather, long walks on the beach and their beautiful home.
Trouble is, a lack of employment income combined with debt stalk the good times they thought they would have after they left their careers.
Their jobs paid them a total of about $100,000 per year. Today, as a result of too much house and the repairs it entails — repainting, new floors, new electrical circuits, new kitchen counters, custom French doors and other elegances — they carry a debt of almost $70,000, nearly twice their retirement income of $37,000 a year.
If they pay off the debt, James and Jane would face a cash shortage. They could do it, but it would wipe out all of their RRSPs and other retirement assets built up over their working lives. A tough choice.
“We used to think that our house would go up enough in price to cover our debts,” Mr. Kennedy explains. “But I don’t think you can rely on that.”
Their situation could be resolved by selling the house, yet they fear that having paid too much in renovations, even downsizing might leave them house broke — with a nice abode and nothing else.
“As I approach the age of 60, I don’t want to carry so much debt. There has to be an end to the debt. I want my mind to be clear that when we get our Canada Pension Plan and Old Age Security, we will be able to keep those benefits. We don’t want to go into our sunset years paying off our debts.”
See The Kennedys are not alone. A flurry of recent studies show a significant increase of retirees in debt. First was Investors Group, which said 62% plan to carry debt such as a mortgage into their golden years. Then Royal Bank of Canada came out with its Ipsos Reid poll, which found four in 10 Canadians retired with some form of debt, and one in four began retirement with a mortgage on their primary residence.
“More and more, Canadians are carrying debt into retirement,” said Lee Anne Davies, head of retirement strategies at RBC.
Just this week, BMO Financial Group noted less than half of Canadians 55 and over have a post-retirement income strategy in place and only a third have considered that they might outlive their savings.
It’s a new and dangerous trend.
Unlike their parents and grandparents, who remembered the Great Depression and regarded debt as a first step toward ruin, today’s retirees, especially Baby Boomers born between 1947 and 1966, grew up comfortable with owing others. Indeed, for many who grew up in the expansionary years of the 1960s, it was a normal and expected to have a credit card, fund a university education with loans, graduate to readily available mortgages and then to handy lines of credit from accommodative banks.
“Retirees, especially Boomers, are less averse to debt than their parents were,” says Peter Drake, vice president for retirement and economic research with Fidelity in Toronto. The contrast with earlier generations is stark, Mr. Drake adds. “They lived through a sustained period of strong economic growth and have adopted the idea that they will be well-off.” Boomers have always had a major influence on consumer trends, and now they are changing the face of retirement as well.
“Boomers don’t have the same sense of saving for bad days that their parents had,” explains Charles Mossman, a finance professor at the Asper School of Business at the University of Manitoba. “When they retire, former workers, especially those who don’t have defined-benefit pensions that provide a guaranteed and sometimes even an indexed cash flow, wind up with more debt service charges than they can afford.”
According to a special report by The Office of the Superintendent of Bankruptcy that was released in 2008, 15.3% of all individual bankruptcies in Canada in 2003 were of individuals 55 and over, up from 6.9% in 1993. “Those over 65 are less likely to be able to recover economically and socially from the bankruptcy,” noted the OSB.
The risk of senior bankruptcy grows with age. A study for the Canadian Institute of Actuaries released June 2007, shows that longevity risk — the chance of living to a very ripe old age — poses the problem of running out of personal savings.
Given Canadians’ extending life expectancy — currently 78 for males, 83 for females — a person retiring at age 55 has a 40% chance of running out of personal savings by age 85 and a 90% chance of being flat broke by age 95. It should be noted the data shows that women, who outlive men on average and tend to have lower lifetime incomes, have even greater reason to fear poverty caused by longevity.
Compounding the longevity problem is the trend, promoted by some financial services companies, to early retirement. Remember Freedom 55? But retiring at that age means giving up what may be one’s most financially productive years. Indeed, if the average retiree has paid down most of his or her debts, and delays retirement to age 62, he or she can live in reasonable financial security, says demographer David Foot, an economist on the faculty of the University of Toronto and author of the 1996 bestseller Boom, Bust & Echo.
It would be wrong to label all debt foolish and all debtors in peril of financial catastrophe, argues Tina DiVito, head of retirement solutions at BMO Financial Group. “There is bad debt and good debt. Bad debt may be what one borrowed for a transitory pleasure, such as a vacation, after which the borrower has to pay high interest rates and gets no tax breaks.
“Good debt bears moderate rates of interest and is payable in a reasonable time period, perhaps as a part of an investment that makes interest tax-deductible,” Ms. DiVito says.
For good debt, consider the case of 61-year-old Montreal retiree Ioanna Jakus, who has maintained a mid-six figure investment portfolio while living on an after-tax income of less than $2,000 per month.
A former bank employee, she has a $10,000 line of credit with her stock broker. “I use the line to buy stocks and bonds,” she says. “I can deduct the interest I pay from my taxable income. My investments have been successful and have more than paid the cost of credit. What’s more, rates of interest are so low that borrowing to invest just makes sense for me.”
Not only has Ms. Jakus made intelligent use of credit, she has done so expertly, selecting low-risk GICs, bonds and blue-chip stocks with strong dividends. “I have always been motivated by the knowledge that only I can control my destiny,” she explains. “My husband and I paid off the mortgage — that was when interest rates were near 20% — and we never borrowed again for spending.
“Of course, I can clear my investment debt in a moment by using cash in one of my accounts. My philosophy has always been not to take risks that I cannot afford, especially when it comes to borrowing money.
“Nobody can look after me as well as I can,” she adds.
That’s a lesson a lot of retirees have yet to learn.
Thursday, June 10, 2010
Mend Money Mistakes
In the long run, bad money habits can cost you more than you might think. Here are 7 of the most common money blunders, according to experts.
MISTAKE #1: Not setting a specific financial goal. Whether you're saving for retirement, a dream holiday or a vacation home, determine the minimum amount you'll need. Work backward from your goal to discover how much you need to save (or cut back) on a monthly basis.
MISTAKE #2: Not paying yourself first. Make savings a priority -- not just a matter of whatever is left over at the end of the month. Consider setting up a regular savings plan that will automatically deposit a set amount into your account on a monthly basis. The easiest way to save is when you never see the money in the first place!
MISTAKE #3: Taking out a payday loan. People struggling to juggle bills and expenses sometimes fall into the pattern of relying on a payday loan. A payday loan -- where you cover your loan with a cheque dated to your next payday -- allows you to borrow up to $1,000, usually without a credit check. However, if done on a regular basis, this nasty little habit can be costly indeed. Experts say you could end up paying an annualized interest rate in excess of 60 per cent, the highest lending rate allowable under Canadian law. This is because many shops allow or even encourage rollovers, allowing borrowers to stay current on an outstanding loan by paying a fee instead of paying in full.
MISTAKE #4: Not paying enough attention to credit cards. Pay attention to what your interest rates are for each card. (Department stores and gasoline cards are typically the worst.) Obviously, it's better to pay off the card in full each month, but if this isn't possible, be sure to pay on time to avoid hefty late fees. To ensure that at least your minimum payment is paid on a timely basis, set up an automatic debit with the credit card issuer or use the regular payment feature of your online bill-pay system. Be sure to compare credit card companies to see who charges what.
MISTAKE #5: Not having enough disability insurance. If an injury or illness prevents you from working for a few weeks or months, make sure you have adequate coverage either through your employer or privately held plans.
MISTAKE #6: Avoiding the budget-busters. Even seemingly insignificant purchases can add up, so keep a daily record of what you buy. To reduce impulse buying, avoid shopping when you're feeling bored or down-hearted.
MISTAKE #7: Not doing your research. The more you learn about financial products, the less likely you are to end up overpaying for them. Read free advice on independent sites like www.360financialliteracy.org.
MISTAKE #1: Not setting a specific financial goal. Whether you're saving for retirement, a dream holiday or a vacation home, determine the minimum amount you'll need. Work backward from your goal to discover how much you need to save (or cut back) on a monthly basis.
MISTAKE #2: Not paying yourself first. Make savings a priority -- not just a matter of whatever is left over at the end of the month. Consider setting up a regular savings plan that will automatically deposit a set amount into your account on a monthly basis. The easiest way to save is when you never see the money in the first place!
MISTAKE #3: Taking out a payday loan. People struggling to juggle bills and expenses sometimes fall into the pattern of relying on a payday loan. A payday loan -- where you cover your loan with a cheque dated to your next payday -- allows you to borrow up to $1,000, usually without a credit check. However, if done on a regular basis, this nasty little habit can be costly indeed. Experts say you could end up paying an annualized interest rate in excess of 60 per cent, the highest lending rate allowable under Canadian law. This is because many shops allow or even encourage rollovers, allowing borrowers to stay current on an outstanding loan by paying a fee instead of paying in full.
MISTAKE #4: Not paying enough attention to credit cards. Pay attention to what your interest rates are for each card. (Department stores and gasoline cards are typically the worst.) Obviously, it's better to pay off the card in full each month, but if this isn't possible, be sure to pay on time to avoid hefty late fees. To ensure that at least your minimum payment is paid on a timely basis, set up an automatic debit with the credit card issuer or use the regular payment feature of your online bill-pay system. Be sure to compare credit card companies to see who charges what.
MISTAKE #5: Not having enough disability insurance. If an injury or illness prevents you from working for a few weeks or months, make sure you have adequate coverage either through your employer or privately held plans.
MISTAKE #6: Avoiding the budget-busters. Even seemingly insignificant purchases can add up, so keep a daily record of what you buy. To reduce impulse buying, avoid shopping when you're feeling bored or down-hearted.
MISTAKE #7: Not doing your research. The more you learn about financial products, the less likely you are to end up overpaying for them. Read free advice on independent sites like www.360financialliteracy.org.
Monday, June 7, 2010
Wal-Mart new kid on bank block
John Greenwood, Financial Post
Wal-Mart Stores Inc. changed the face of retail in North America by making life easier for the little guy through its simple formula of cutting prices and cranking up volumes.
Is banking next?
This week the retailing giant won final approval to open a bank in Canada, providing entry to an industry that has been much criticized for perceived high prices and lack of competition. Andrew Pelletier, a spokesman for Wal-Mart Canada, said the company plans to provide "convenient and value-focused financial products and services" for its customers.
He declined to discuss details of the company's plans in advance of the official lunch of the new bank, set for June 15.
While the rise of Wal-Mart has been a boon for consumers, it has been devastating for competitors, many of whom ended up being bought out or going out of business.
In the United States, fierce resistance from the banking industry forced the retailer to abandon a bid to buy a bank early in the decade, though it continues to offer services such as cheque cashing and money transfer.
Wal-Mart applied for the licence to the Office of the Superintendent of Financial Institutions, the Canadian banking regulator, nearly two years ago. Mr. Pelletier declined to discuss why the process has taken so long.
If Wal-Mart saw opportunities south of the border where there are more than 1,000 banks fighting it out for customer deposits, there would likely be an even bigger prize waiting in this country, where the industry is dominated by a oligopoly of just six major players.
Consumer groups regularly complain about credit card fees and low interest rates on savings accounts available to bank customers in Canada. Management fees on Canadian mutual funds, most of which are controlled by the big banks, are similarly out of whack compared with the United States and other developed countries.
In the United States, Wal-Mart is a significant player in the money-transfer business, partly because many of its customers are recent immigrants still with family in other parts of the world. Additional services, such as the ability to offer deposits and make loans, would provide further opportunity to the company at a time when profits from its bread-and-butter retail business have come under pressure from the recession.
Wal-Mart would not be the first non-bank to try to break into financial services in Canada. Other retailers such as Canadian Tire Corp. and Loblaw Cos. are also working to establish themselves.
One of Wal-Mart's main advantages may be its reputation for low prices, which may help it get the word out to potential customers that it can offer a better deal than the competition at a time when Canadian consumers are scrambling for all the savings they can get.
The federal government has recently taken steps to shake up the banking sector, including the decision to make it easier for credit unions to expand across the country and the move to prohibit banks from using their websites to sell insurance.
Opening a bank is a costly undertaking for Wal-Mart and the company will likely move carefully as it plots its moves over the next few years, but it clearly believes the investment will pay off.
Wal-Mart Stores Inc. changed the face of retail in North America by making life easier for the little guy through its simple formula of cutting prices and cranking up volumes.
Is banking next?
This week the retailing giant won final approval to open a bank in Canada, providing entry to an industry that has been much criticized for perceived high prices and lack of competition. Andrew Pelletier, a spokesman for Wal-Mart Canada, said the company plans to provide "convenient and value-focused financial products and services" for its customers.
He declined to discuss details of the company's plans in advance of the official lunch of the new bank, set for June 15.
While the rise of Wal-Mart has been a boon for consumers, it has been devastating for competitors, many of whom ended up being bought out or going out of business.
In the United States, fierce resistance from the banking industry forced the retailer to abandon a bid to buy a bank early in the decade, though it continues to offer services such as cheque cashing and money transfer.
Wal-Mart applied for the licence to the Office of the Superintendent of Financial Institutions, the Canadian banking regulator, nearly two years ago. Mr. Pelletier declined to discuss why the process has taken so long.
If Wal-Mart saw opportunities south of the border where there are more than 1,000 banks fighting it out for customer deposits, there would likely be an even bigger prize waiting in this country, where the industry is dominated by a oligopoly of just six major players.
Consumer groups regularly complain about credit card fees and low interest rates on savings accounts available to bank customers in Canada. Management fees on Canadian mutual funds, most of which are controlled by the big banks, are similarly out of whack compared with the United States and other developed countries.
In the United States, Wal-Mart is a significant player in the money-transfer business, partly because many of its customers are recent immigrants still with family in other parts of the world. Additional services, such as the ability to offer deposits and make loans, would provide further opportunity to the company at a time when profits from its bread-and-butter retail business have come under pressure from the recession.
Wal-Mart would not be the first non-bank to try to break into financial services in Canada. Other retailers such as Canadian Tire Corp. and Loblaw Cos. are also working to establish themselves.
One of Wal-Mart's main advantages may be its reputation for low prices, which may help it get the word out to potential customers that it can offer a better deal than the competition at a time when Canadian consumers are scrambling for all the savings they can get.
The federal government has recently taken steps to shake up the banking sector, including the decision to make it easier for credit unions to expand across the country and the move to prohibit banks from using their websites to sell insurance.
Opening a bank is a costly undertaking for Wal-Mart and the company will likely move carefully as it plots its moves over the next few years, but it clearly believes the investment will pay off.
Wednesday, June 2, 2010
Credit Score Secrets
by Gail Vaz-Oxlade, for Yahoo! Canada Finance
Ever wonder how that magical number – The Credit Score – is computed?
Whether you’re obsessing over your FICO score or your Beacon score, you’re likely shopping for credit. The FICO score was developed by Fair Isaac & Co., which began credit scoring in the late 1950s. The point of the score is consolidate your credit profile into a single number. The Beacon score is a brand name used by Equifax, the largest credit-reporting agency in Canada. While Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed, whether you get a loan or not is a numbers game: The more points you score on your credit app, the better you do.
There’s a reason you have to fill out so much information when you’re applying for credit. Everything counts. Your age, your address, and even your telephone number all have a role to play in whether or not you’ll get credit.
Young ‘uns and old folk are at a disadvantage since under 21 and over 65 likely means you aren’t working; no points for you. If you're married, you’ll get a point for being “stable.” And while you might think that being divorced would work against you (all that spousal and child support), most creditors don’t give a whit.
No dependents? Zero points. You’re probably still gallivanting like a teenager since you haven’t yet “settled down.” One to three dependents? Score one point. You’re a solid citizen. More than three dependents? Score zero. Have you no self control! And don’t you know that with all those mouths to feed you could get in debt over your head? Your home address counts too. Live in a trailer park or with your parents? Bad risk, score zero points. You could skip town with nary a look over your shoulder. Rent an apartment? Give yourself one point. Own a home with a big fat mortgage and you’ll score major points since someone has already done some checking and you qualified for a mortgage. Own your home free and clear? Even better. You’ve proven you can pay off a sizable debt and now you have a pile of equity that the card company would love to help you spend.
Previous Residence? Zero to five years (some applications only go to three years), score zero points since you move around too much. No land-line: zero points. How the Dickens are they gonna find you when you fall behind in payments. Since they can’t use your cell phone to actually locate you physically, it doesn’t count.
Less then one year at your present employer earns you no points. Again, it’s a stability and earning continuity thing. The longer you’re on the job, the more likely you are to be bored out of your mind but you’ll score more points. And, not to overstate the obvious, the more you make the better.
The more willing you are to make your lender rich, the higher your score will be. Since the FICO score was originally designed to measure customer profitability, if you pay off your balance in full every month, you’re going to score lower than the guy who only makes the minimum payment and pays huge amounts of interest.
Scores range from 300 to 900 and if you manage to hit 750 or above you’ll qualify for the best rates and terms. Score 620 or lower and you’ll pay premium interest if you even qualify; 620 is the absolute minimum credit score for insured mortgages.
Your credit score can change quickly. Payment history accounts for about 35% of your credit score and just one negative report can drop your pristine score into the doldrums. Since scores are updated monthly, your bad behaviour won’t go unpunished for long.
The type of credit you have counts for about 10% of your score. And your current level of indebtedness accounts for about 30% so going too close to your credit limit is another way to deflate your score. One rule of thumb is to keep your balances below the 65% mark. So if you have a limit of $1,000, you won’t ever carry a balance that’s more than $650.
Having too much credit available can also hurt your ability to borrow since the more credit you have, the more trouble you can get yourself into. If you’ve got a walletful of cards, canceling credit you’re not using can be a good thing – for both you and your credit score – over the long haul. Careful though. If the card you’re eliminating is one with a long, positive history, you’ll eliminate what could be a very good record of your repayment when you cancel the card. You’d be better off cutting up the card so you aren’t tempted to use it, while you establish a track record (six months or more) before you actually cancel the account.
Credit shopping can also cost you points. Since about 10% of your credit score relates to the number and frequency of new credit enquiries, applying willy nilly for new credit will end up costing you. However, it’s only when a lender checks your score that this registers on your score. Checking your own credit report/score is considered a “soft” inquiry and does not go against your score.
Ever wonder how that magical number – The Credit Score – is computed?
Whether you’re obsessing over your FICO score or your Beacon score, you’re likely shopping for credit. The FICO score was developed by Fair Isaac & Co., which began credit scoring in the late 1950s. The point of the score is consolidate your credit profile into a single number. The Beacon score is a brand name used by Equifax, the largest credit-reporting agency in Canada. While Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed, whether you get a loan or not is a numbers game: The more points you score on your credit app, the better you do.
There’s a reason you have to fill out so much information when you’re applying for credit. Everything counts. Your age, your address, and even your telephone number all have a role to play in whether or not you’ll get credit.
Young ‘uns and old folk are at a disadvantage since under 21 and over 65 likely means you aren’t working; no points for you. If you're married, you’ll get a point for being “stable.” And while you might think that being divorced would work against you (all that spousal and child support), most creditors don’t give a whit.
No dependents? Zero points. You’re probably still gallivanting like a teenager since you haven’t yet “settled down.” One to three dependents? Score one point. You’re a solid citizen. More than three dependents? Score zero. Have you no self control! And don’t you know that with all those mouths to feed you could get in debt over your head? Your home address counts too. Live in a trailer park or with your parents? Bad risk, score zero points. You could skip town with nary a look over your shoulder. Rent an apartment? Give yourself one point. Own a home with a big fat mortgage and you’ll score major points since someone has already done some checking and you qualified for a mortgage. Own your home free and clear? Even better. You’ve proven you can pay off a sizable debt and now you have a pile of equity that the card company would love to help you spend.
Previous Residence? Zero to five years (some applications only go to three years), score zero points since you move around too much. No land-line: zero points. How the Dickens are they gonna find you when you fall behind in payments. Since they can’t use your cell phone to actually locate you physically, it doesn’t count.
Less then one year at your present employer earns you no points. Again, it’s a stability and earning continuity thing. The longer you’re on the job, the more likely you are to be bored out of your mind but you’ll score more points. And, not to overstate the obvious, the more you make the better.
The more willing you are to make your lender rich, the higher your score will be. Since the FICO score was originally designed to measure customer profitability, if you pay off your balance in full every month, you’re going to score lower than the guy who only makes the minimum payment and pays huge amounts of interest.
Scores range from 300 to 900 and if you manage to hit 750 or above you’ll qualify for the best rates and terms. Score 620 or lower and you’ll pay premium interest if you even qualify; 620 is the absolute minimum credit score for insured mortgages.
Your credit score can change quickly. Payment history accounts for about 35% of your credit score and just one negative report can drop your pristine score into the doldrums. Since scores are updated monthly, your bad behaviour won’t go unpunished for long.
The type of credit you have counts for about 10% of your score. And your current level of indebtedness accounts for about 30% so going too close to your credit limit is another way to deflate your score. One rule of thumb is to keep your balances below the 65% mark. So if you have a limit of $1,000, you won’t ever carry a balance that’s more than $650.
Having too much credit available can also hurt your ability to borrow since the more credit you have, the more trouble you can get yourself into. If you’ve got a walletful of cards, canceling credit you’re not using can be a good thing – for both you and your credit score – over the long haul. Careful though. If the card you’re eliminating is one with a long, positive history, you’ll eliminate what could be a very good record of your repayment when you cancel the card. You’d be better off cutting up the card so you aren’t tempted to use it, while you establish a track record (six months or more) before you actually cancel the account.
Credit shopping can also cost you points. Since about 10% of your credit score relates to the number and frequency of new credit enquiries, applying willy nilly for new credit will end up costing you. However, it’s only when a lender checks your score that this registers on your score. Checking your own credit report/score is considered a “soft” inquiry and does not go against your score.
Tuesday, June 1, 2010
Bank of Canada raises interest rate to 0.5 per cent
The days of record low interest rates in Canada appear to be coming to an end. The Bank of Canada announced Tuesday the central bank's first interest rate increase in three years.
The bank hiked the overnight lending rate from 0.25 per cent to 0.5 per cent.
BNN's Michael Kane told CTV's Canada AM that GDP numbers released Monday were likely "the final nail in the coffin for record low interest rates."
Those numbers showed that the country's gross domestic product expanded by a whopping annual rate of 6.1 per cent in the first three months of this year -- the largest quarterly increase in more than a decade.
Today's rate hike will likely lead to a rise in the prime rate that banks extend to their best customers. Short-term, variable mortgage rates will also likely rise, but longer-term fixed mortgage rates -- which are more influenced by the bond market -- are expected to remain unchanged for now.
The bank hiked the overnight lending rate from 0.25 per cent to 0.5 per cent.
BNN's Michael Kane told CTV's Canada AM that GDP numbers released Monday were likely "the final nail in the coffin for record low interest rates."
Those numbers showed that the country's gross domestic product expanded by a whopping annual rate of 6.1 per cent in the first three months of this year -- the largest quarterly increase in more than a decade.
Today's rate hike will likely lead to a rise in the prime rate that banks extend to their best customers. Short-term, variable mortgage rates will also likely rise, but longer-term fixed mortgage rates -- which are more influenced by the bond market -- are expected to remain unchanged for now.
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