Bankruptcy is a financial technique in which you declare that you cannot repay your creditors now or see a way to repay them in the future. Depending on your income and the amount of money you owe, an individual may declare chapter 7 or chapter 13 bankruptcies. However, in either case, bankruptcy is a fairly public affair. Your name and address will be published in at least one of the local newspapers for all of your friends to read, and your neighbors will see movers coming to repossess some of your items. For many people, the worst part of bankruptcy isn’t losing the money; it’s losing pride and dignity.
The first way to deal with this is to realize that most of your friends and family have gone through money problems at one time or another in their lives. Although they may not have resorted to bankruptcy, there is certainly no question that only the very lucky do not feel drowned by debts at one point or another. Simply put, people will understand. Even though you may feel like everyone is snickering at you behind your back, the truth is that most people are actually empathizing with you.
Also realize that not everybody will realize you’ve declared bankruptcy. Most people do not take the time to read the newspaper that carefully, and even though word does travel fast, it is not a topic that most people will bring up because it simply is not that interesting. You might feel like you’re the headlining news, but in actuality, most people probably didn’t even know about it.
It is important to continue with the process, even if people do find out. If you are embarrassed, simply understand that so are all of the people in this country who are going through the same thing. You are not alone. In fact, you may be able to get counseling to help you go through the bankruptcy process. You may be surprised at how many people have declared bankruptcy and gone on to be very successful.
If bankruptcy is the best thing for your family and your financial situation, it is most important that you continue with the declaration. Take care of yourself first, then worry about what other people have to think. The most important thing is not what your neighbors have to say, but instead what you are doing to get yourself back on track financially so that your future will be brighter.
Friday, May 27, 2011
Thursday, May 26, 2011
Mortgage borrowers show confidence, says CAAMP
Many Canadians are aggressively reducing their mortgages by making lump sum payments, increasing monthly payments and reducing amortization periods, revealing confidence and financial flexibility in a stable mortgage environment, says the Canadian Association of Accredited Mortgage Professionals (CAAMP).
The association’s spring survey report is a bi-annual review of the Canadian mortgage market authored by CAAMP chief economist Will Dunning. The report is based on information gathered by Maritz Research Canada in a survey of 2,000 Canadian consumers in April 2011.
Some highlights from the report:
* Twenty-two per cent of mortgage borrowers increased their payments during the past year, 18 per cent made a lump sum payment, nine per cent did both and 27 per cent who renewed increased their payments;
* For mortgages repaid in the last 20 years, one-third were paid off early;
* For the first time, CAAMP has identified that home equity lines of credit (HELOC) represent 22 per cent of all mortgages, making these lines of credit a $215 billion industry;
* On average, Canadian homeowners have $222,000 in home equity, equal to 66 per cent of the value of their homes;
* During the past year, homeowners borrowed $26 billion in additional equity from their homes. Fifteen per cent of homeowners withdrew equity, averaging $30,000;
* Investments (28 per cent) replaced debt consolidation (19 per cent) as the number two use of home equity takeout. Home renovations remain number one (36 per cent).
“Prudent management of their mortgage debt has paid off for Canadians,” says Jim Murphy, president and CEO of CAAMP. “By taking advantage of low interest rates, we have been paying down our mortgages. As economic confidence returns in Canada, many survey respondents have told us they now feel comfortable using some of that equity to improve their homes and to invest,” says Murphy.
Of an approximate 9.45 million homeowners in Canada, an estimated 1.87 million hold a mortgage and a HELOC; approximately 770,000 have a HELOC only with no mortgage and approximately 3.83 million have a mortgage only. About three million Canadians have no debt on their homes.
Canadians hold $2.10 trillion in home equity and appear generally comfortable. Quebec and Atlantic Canada lead the way in equity comfort levels (81 and 82 per cent respectively). In contrast, homeowners in Manitoba and Alberta have lower levels of comfort with their current equity positions (31 and 29 per cent respectively).
While the CAAMP spring survey report reflects a positive outlook by mortgage borrowers, Dunning cautions that the pace of the economic recovery will remain modest in 2011 and 2012. “Mortgage credit will continue to expand by about $80 billion (7.8 per cent) in 2011, down from its peak of 13 per cent in 2008, but nevertheless a healthy increase,” Dunning says.
Article coutesy of REM
The association’s spring survey report is a bi-annual review of the Canadian mortgage market authored by CAAMP chief economist Will Dunning. The report is based on information gathered by Maritz Research Canada in a survey of 2,000 Canadian consumers in April 2011.
Some highlights from the report:
* Twenty-two per cent of mortgage borrowers increased their payments during the past year, 18 per cent made a lump sum payment, nine per cent did both and 27 per cent who renewed increased their payments;
* For mortgages repaid in the last 20 years, one-third were paid off early;
* For the first time, CAAMP has identified that home equity lines of credit (HELOC) represent 22 per cent of all mortgages, making these lines of credit a $215 billion industry;
* On average, Canadian homeowners have $222,000 in home equity, equal to 66 per cent of the value of their homes;
* During the past year, homeowners borrowed $26 billion in additional equity from their homes. Fifteen per cent of homeowners withdrew equity, averaging $30,000;
* Investments (28 per cent) replaced debt consolidation (19 per cent) as the number two use of home equity takeout. Home renovations remain number one (36 per cent).
“Prudent management of their mortgage debt has paid off for Canadians,” says Jim Murphy, president and CEO of CAAMP. “By taking advantage of low interest rates, we have been paying down our mortgages. As economic confidence returns in Canada, many survey respondents have told us they now feel comfortable using some of that equity to improve their homes and to invest,” says Murphy.
Of an approximate 9.45 million homeowners in Canada, an estimated 1.87 million hold a mortgage and a HELOC; approximately 770,000 have a HELOC only with no mortgage and approximately 3.83 million have a mortgage only. About three million Canadians have no debt on their homes.
Canadians hold $2.10 trillion in home equity and appear generally comfortable. Quebec and Atlantic Canada lead the way in equity comfort levels (81 and 82 per cent respectively). In contrast, homeowners in Manitoba and Alberta have lower levels of comfort with their current equity positions (31 and 29 per cent respectively).
While the CAAMP spring survey report reflects a positive outlook by mortgage borrowers, Dunning cautions that the pace of the economic recovery will remain modest in 2011 and 2012. “Mortgage credit will continue to expand by about $80 billion (7.8 per cent) in 2011, down from its peak of 13 per cent in 2008, but nevertheless a healthy increase,” Dunning says.
Article coutesy of REM
Wednesday, May 25, 2011
How to score the perfect mortgage
Rachel Mendleson - The Globe and Mail
In this excerpt from the MoneySense Guide to Buying and Selling Your Home, a book in the "Best of MoneySense" series, writer Rachel Mendleson cuts through the jargon and explains how to find the mortgage that's right for you.
Lauren Chender likes to shop around. So when she and her husband were trying to figure out what kind of mortgage to get on their first home, she took to the Internet and began comparing the interest rates posted on various bank websites. But as the Toronto resident did more research, she discovered that it might be possible to get even lower rates through an independent mortgage broker, or by speaking with a financial institution’s mortgage department directly. Even when she found a good rate, she discovered that the tough decisions just kept coming. Should she go with a variable or fixed rate? What about the amortization period? “It’s overwhelming,” says Chender, who wound up using a broker to secure the mortgage on her semi-detached Victorian. “There was a lot to know.”
Chender is hardly alone. Despite the fact that how you finance your home will have a significant impact on everything from what you can afford to how long you’ll be in debt, the complexity of mortgages can make it difficult to arrive at an informed decision. But by understanding what’s at stake, you can cut through the jargon and weigh the options to find a mortgage that’s right for you.
Perhaps the most important thing to consider when thinking about how to finance your home is what taking out a mortgage really means. As Rob McLister, editor of Canadian Mortgage Trends, explains, “Mortgages are definitely among the cheapest money you can borrow, simply because they are secured by quality assets.” But they are also a tremendous responsibility, and something that can greatly increase what you end up paying for your home. While an interest rate of 4 per cent on a $200,000 loan may not seem like a lot today, that changes dramatically when you consider that repayment will likely be spread over decades.
With that in mind, the first step to choosing the right mortgage is identifying the lender whose terms work best for you. While prospective home buyers often begin with their financial institution, your search shouldn’t stop there. As Sarah Daniels, a Vancouver-area realtor, points out, “The lenders are in competition for you.” She advises using a mortgage broker, who will “shop you around” to all the lenders, free of charge. (Mortgage brokers are paid a finder’s fee by the lender. There’s no charge to the home buyer for a pre-approval and no obligation.) And whether you opt for a broker or not, a second opinion never hurts. “It always helps to get one or two other quotes to keep everyone honest,” says McLister.
It’s a good idea to get pre-approved for a mortgage before you start house hunting. That way, you can get a sense of your budget, and avoid falling in love with a property you can’t afford. To give you a pre-approval, lenders factor in your income, type of job and credit history. They also take into account how much you have to put toward a down payment, and any other debts you may have. The amount you are pre-approved for is the upper limit of what the lender will allow you to borrow. Add that to your down payment, and you’ve got the total amount you have to put toward a home. If you have bad credit, are self-employed or want to borrow more than what a bank or credit union will approve, you may want to consider using an alternative lender. But while second- or third-tier lenders (examples include Equitable Trust and Aaron Acceptance Corp.) have looser requirements, the mortgages they issue come with higher interest rates (sometimes much higher), so they are not generally recommended for first-time buyers.
The specifics of the mortgage you select will depend on what makes the most financial sense, as well as your personal preference. One important decision is whether to go with a fixed rate of interest, which is locked in for the entire term of the mortgage (usually five years), or a variable rate, which can change depending on market forces. In today’s low interest rate environment, “variable rates are initially cheaper upfront,” says McLister.
The risk is that they could rise far above the fixed rate later in the term, increasing your monthly payments. You’ll also have to set the amortization period, which is the theoretical length of time you have to pay off your mortgage in full, assuming you never move. Bear in mind that while a longer amortization (as of March 2011, the maximum for an insured mortgage in Canada is 30 years) may give you a bigger mortgage or lower monthly payments, it’ll also mean paying more interest in the long run. If you want the flexibility to make additional lump-sum payments outside of your scheduled monthly (or bimonthly) payments, this must be stipulated in your mortgage. And beware that if you break your mortgage before the term is up, you’ll have to pay a penalty–usually three months’ interest for variable-rate mortgages, more for fixed-rate mortgages. (This doesn’t apply for open mortgages, which are mainly for homeowners who plan to sell within a few months.) Mortgage insurance is one of the extra costs to buying a home that can be easy to overlook. But if you are putting less than 20 per cent down, your lender will require that you purchase an insurance policy to protect them in case you don’t hold up your end of the deal. Calculated on a percentage of the total mortgage, your insurance premium will depend on how well qualified a borrower you are, and can amount to thousands of dollars.
As Daniels observes in her book, for a $450,000 mortgage, even the most qualified borrower who gets the lowest rate (which she sets at 1.5 per cent) would be on the hook for an additional $6,750 in insurance.
If you’re lucky, your family may offer to help with financing. But it’s important to understand how the contribution factors in. A family gift is considered a traditional source of down payment, which is ideal. It will increase the size of the mortgage you can get or allow you to pay for a greater proportion of your home up front. But if the family help is a loan, your down payment is considered to be non-traditional, which, if you’re putting down less than 20 per cent, will result in slightly higher insurance premiums.
When your mortgage is up for renewal, it may be tempting to simply sign on the dotted line, and accept whatever package your lender offers you. However, not shopping around can cost you. “The bank relies on people just to sign the renewal agreement at posted rates. As soon as you do that, you’ve lost thousands of dollars by not negotiating,” advises Vancouver mortgage broker Alma Pasic. Don’t be surprised if you need a refresher course. “It’s like you’re doing it for the first time, because everything has changed,” she says. “It’s hard to keep up–even for us.” RACHEL MENDLESON Sidebar: Cost Cutter If you can live with the uncertainty, a variable-rate mortgage has historically saved home buyers money over a term of five years or more. A 2008 study led by Moshe Milevsky, a professor at York University’s Schulich School of Business, found that variable rates would have saved Canadian borrowers money on a five-year term more than 77 per cent of the time between 1950 and 2007, and chopped a year off the amortization period. By taking on a more predictable, fixed-rate mortgage, you are offloading risk to the lender, and that comes at a price. You might sleep easier, though.
Excerpted from MoneySense Guide to Buying and Selling Your Home (Rogers Publishing Limited, $9.95). The book is available at bookstores and newsstands or online at http://moneysense.ca/myhouse
In this excerpt from the MoneySense Guide to Buying and Selling Your Home, a book in the "Best of MoneySense" series, writer Rachel Mendleson cuts through the jargon and explains how to find the mortgage that's right for you.
Lauren Chender likes to shop around. So when she and her husband were trying to figure out what kind of mortgage to get on their first home, she took to the Internet and began comparing the interest rates posted on various bank websites. But as the Toronto resident did more research, she discovered that it might be possible to get even lower rates through an independent mortgage broker, or by speaking with a financial institution’s mortgage department directly. Even when she found a good rate, she discovered that the tough decisions just kept coming. Should she go with a variable or fixed rate? What about the amortization period? “It’s overwhelming,” says Chender, who wound up using a broker to secure the mortgage on her semi-detached Victorian. “There was a lot to know.”
Chender is hardly alone. Despite the fact that how you finance your home will have a significant impact on everything from what you can afford to how long you’ll be in debt, the complexity of mortgages can make it difficult to arrive at an informed decision. But by understanding what’s at stake, you can cut through the jargon and weigh the options to find a mortgage that’s right for you.
Perhaps the most important thing to consider when thinking about how to finance your home is what taking out a mortgage really means. As Rob McLister, editor of Canadian Mortgage Trends, explains, “Mortgages are definitely among the cheapest money you can borrow, simply because they are secured by quality assets.” But they are also a tremendous responsibility, and something that can greatly increase what you end up paying for your home. While an interest rate of 4 per cent on a $200,000 loan may not seem like a lot today, that changes dramatically when you consider that repayment will likely be spread over decades.
With that in mind, the first step to choosing the right mortgage is identifying the lender whose terms work best for you. While prospective home buyers often begin with their financial institution, your search shouldn’t stop there. As Sarah Daniels, a Vancouver-area realtor, points out, “The lenders are in competition for you.” She advises using a mortgage broker, who will “shop you around” to all the lenders, free of charge. (Mortgage brokers are paid a finder’s fee by the lender. There’s no charge to the home buyer for a pre-approval and no obligation.) And whether you opt for a broker or not, a second opinion never hurts. “It always helps to get one or two other quotes to keep everyone honest,” says McLister.
It’s a good idea to get pre-approved for a mortgage before you start house hunting. That way, you can get a sense of your budget, and avoid falling in love with a property you can’t afford. To give you a pre-approval, lenders factor in your income, type of job and credit history. They also take into account how much you have to put toward a down payment, and any other debts you may have. The amount you are pre-approved for is the upper limit of what the lender will allow you to borrow. Add that to your down payment, and you’ve got the total amount you have to put toward a home. If you have bad credit, are self-employed or want to borrow more than what a bank or credit union will approve, you may want to consider using an alternative lender. But while second- or third-tier lenders (examples include Equitable Trust and Aaron Acceptance Corp.) have looser requirements, the mortgages they issue come with higher interest rates (sometimes much higher), so they are not generally recommended for first-time buyers.
The specifics of the mortgage you select will depend on what makes the most financial sense, as well as your personal preference. One important decision is whether to go with a fixed rate of interest, which is locked in for the entire term of the mortgage (usually five years), or a variable rate, which can change depending on market forces. In today’s low interest rate environment, “variable rates are initially cheaper upfront,” says McLister.
The risk is that they could rise far above the fixed rate later in the term, increasing your monthly payments. You’ll also have to set the amortization period, which is the theoretical length of time you have to pay off your mortgage in full, assuming you never move. Bear in mind that while a longer amortization (as of March 2011, the maximum for an insured mortgage in Canada is 30 years) may give you a bigger mortgage or lower monthly payments, it’ll also mean paying more interest in the long run. If you want the flexibility to make additional lump-sum payments outside of your scheduled monthly (or bimonthly) payments, this must be stipulated in your mortgage. And beware that if you break your mortgage before the term is up, you’ll have to pay a penalty–usually three months’ interest for variable-rate mortgages, more for fixed-rate mortgages. (This doesn’t apply for open mortgages, which are mainly for homeowners who plan to sell within a few months.) Mortgage insurance is one of the extra costs to buying a home that can be easy to overlook. But if you are putting less than 20 per cent down, your lender will require that you purchase an insurance policy to protect them in case you don’t hold up your end of the deal. Calculated on a percentage of the total mortgage, your insurance premium will depend on how well qualified a borrower you are, and can amount to thousands of dollars.
As Daniels observes in her book, for a $450,000 mortgage, even the most qualified borrower who gets the lowest rate (which she sets at 1.5 per cent) would be on the hook for an additional $6,750 in insurance.
If you’re lucky, your family may offer to help with financing. But it’s important to understand how the contribution factors in. A family gift is considered a traditional source of down payment, which is ideal. It will increase the size of the mortgage you can get or allow you to pay for a greater proportion of your home up front. But if the family help is a loan, your down payment is considered to be non-traditional, which, if you’re putting down less than 20 per cent, will result in slightly higher insurance premiums.
When your mortgage is up for renewal, it may be tempting to simply sign on the dotted line, and accept whatever package your lender offers you. However, not shopping around can cost you. “The bank relies on people just to sign the renewal agreement at posted rates. As soon as you do that, you’ve lost thousands of dollars by not negotiating,” advises Vancouver mortgage broker Alma Pasic. Don’t be surprised if you need a refresher course. “It’s like you’re doing it for the first time, because everything has changed,” she says. “It’s hard to keep up–even for us.” RACHEL MENDLESON Sidebar: Cost Cutter If you can live with the uncertainty, a variable-rate mortgage has historically saved home buyers money over a term of five years or more. A 2008 study led by Moshe Milevsky, a professor at York University’s Schulich School of Business, found that variable rates would have saved Canadian borrowers money on a five-year term more than 77 per cent of the time between 1950 and 2007, and chopped a year off the amortization period. By taking on a more predictable, fixed-rate mortgage, you are offloading risk to the lender, and that comes at a price. You might sleep easier, though.
Excerpted from MoneySense Guide to Buying and Selling Your Home (Rogers Publishing Limited, $9.95). The book is available at bookstores and newsstands or online at http://moneysense.ca/myhouse
Tuesday, May 24, 2011
Low interest rates seen sticking around
MARTIN MITTELSTAEDT - Tuesday's Globe and Mail
Interest rates have recently being going somewhere unexpected: down.
At their trough last week, the yields on 10-year U.S. Treasuries, the benchmark North American rate, touched 3.11 per cent, the lowest level in six months and more than half a percentage point below their February peak.
Yields on 10-year Government of Canada bonds have fallen, too, and are now virtually identical to their U.S. counterparts.
The sliding rates have surprised many market watchers. With the United States government bumping up against its debt ceiling, inflation ticking upward, and a growing debt crisis in Europe, most expected interest rates to be increasing.
While predicting the future for rates is notoriously difficult, some observers believe that the current low-rate environment may continue for a while. If so, it will mean pain for savers, but good news for borrowers.
A drop in interest rates is equivalent to a sale on the price of money, and corporations are already rushing to take advantage of the easy lending conditions, even if they’re in no immediate need of funds. A case in point is Google Inc., which has $37-billion (U.S.) in cash and marketable securities on its balance sheet, but raised $3-billion from a bond issue last week anyway. Mortgage rates have fallen, too – good news for homeowners looking to refinance.
But lower rates have not turned out so well for some of the market’s savviest players, including Bill Gross, the founder of Pimco, the world’s biggest bond fund. Earlier this year, he sold his U.S. Treasuries, because he thought interest rates were poised to rocket higher, which would drive down prices of bonds.
It’s difficult to fault his logic: only a few months ago, the case for higher interest rates seemed so compelling.
Governments around the world are carrying bloated deficits and massive borrowing needs. In the United States, politicians have yet to agree on any clear path to deficit reduction, despite more than $1-trillion in annual red ink. Meanwhile, oil has been trading consistently around the $100-a-barrel level, thereby lifting inflation, another bond-market negative.
And the U.S. Federal Reserve is no longer putting its thumb on the scale. In less than six weeks, it is going to end its program of quantitative easing, under which it is buying $600-billion in Treasuries to goose the economy. Many bond-market followers believe the Fed’s massive buying binge has been propping up Treasury prices and keeping yields artificially low.
So what has been pushing rates lower in recent months?
A weaker-than-expected recovery is the major culprit. “The global economy, and the U.S. economy in particular, is not on quite as solid a recovery track as people were imagining in the very optimistic days of six months or so ago,” observes Peter Buchanan, senior economist at CIBC World Markets.
A slew of recent statistics underlines that weakness, ranging from the poor state of U.S. home sales to the slowing pace of U.S. manufacturing growth. Meanwhile, the Japanese economy, the world’s third-largest, is shrinking and creating a further drag on global commerce, although few foresee a double-dip recession.
“We’re looking ahead toward a bit of a cooling in economic growth,” said Paul Dales, senior U.S. economist at Capital Economics, who foresees output in the U.S. rising about 2 per cent this year.
That level of growth won’t be “anything to celebrate but it’s nothing like the recession we saw previously,” he said.
Another factor driving rates lower has been the early May rout in commodities, which dampened some of the worry on the inflation front. In addition, the recent sluggish performance of the stock market suggests that investors are getting nervous and growing more willing to buy super-safe government bonds.
Mr. Dales believes the current trends have room to run, and that rates will surprise to the downside.
He predicts U.S. 10-year Treasury yields could slip to 2.5 per cent in the low-growth, less inflation-spooked environment he foresees ahead.
If growth continues to be slow, lower rates might be staying around for a while.
Mr. Buchanan says the most likely scenario, given the poorer economic outlook, is for the Fed to hold off on raising rates until 2013. He believes the yield on Treasuries will rise gradually, instead of falling further, getting back to 3.4 per cent by the end of this year and to 4 per cent by the end of 2012. http://www.theglobeandmail.com/report-on-business/economy/interest-rates/low-interest-rates-seen-sticking-around/article2032075/
Interest rates have recently being going somewhere unexpected: down.
At their trough last week, the yields on 10-year U.S. Treasuries, the benchmark North American rate, touched 3.11 per cent, the lowest level in six months and more than half a percentage point below their February peak.
Yields on 10-year Government of Canada bonds have fallen, too, and are now virtually identical to their U.S. counterparts.
The sliding rates have surprised many market watchers. With the United States government bumping up against its debt ceiling, inflation ticking upward, and a growing debt crisis in Europe, most expected interest rates to be increasing.
While predicting the future for rates is notoriously difficult, some observers believe that the current low-rate environment may continue for a while. If so, it will mean pain for savers, but good news for borrowers.
A drop in interest rates is equivalent to a sale on the price of money, and corporations are already rushing to take advantage of the easy lending conditions, even if they’re in no immediate need of funds. A case in point is Google Inc., which has $37-billion (U.S.) in cash and marketable securities on its balance sheet, but raised $3-billion from a bond issue last week anyway. Mortgage rates have fallen, too – good news for homeowners looking to refinance.
But lower rates have not turned out so well for some of the market’s savviest players, including Bill Gross, the founder of Pimco, the world’s biggest bond fund. Earlier this year, he sold his U.S. Treasuries, because he thought interest rates were poised to rocket higher, which would drive down prices of bonds.
It’s difficult to fault his logic: only a few months ago, the case for higher interest rates seemed so compelling.
Governments around the world are carrying bloated deficits and massive borrowing needs. In the United States, politicians have yet to agree on any clear path to deficit reduction, despite more than $1-trillion in annual red ink. Meanwhile, oil has been trading consistently around the $100-a-barrel level, thereby lifting inflation, another bond-market negative.
And the U.S. Federal Reserve is no longer putting its thumb on the scale. In less than six weeks, it is going to end its program of quantitative easing, under which it is buying $600-billion in Treasuries to goose the economy. Many bond-market followers believe the Fed’s massive buying binge has been propping up Treasury prices and keeping yields artificially low.
So what has been pushing rates lower in recent months?
A weaker-than-expected recovery is the major culprit. “The global economy, and the U.S. economy in particular, is not on quite as solid a recovery track as people were imagining in the very optimistic days of six months or so ago,” observes Peter Buchanan, senior economist at CIBC World Markets.
A slew of recent statistics underlines that weakness, ranging from the poor state of U.S. home sales to the slowing pace of U.S. manufacturing growth. Meanwhile, the Japanese economy, the world’s third-largest, is shrinking and creating a further drag on global commerce, although few foresee a double-dip recession.
“We’re looking ahead toward a bit of a cooling in economic growth,” said Paul Dales, senior U.S. economist at Capital Economics, who foresees output in the U.S. rising about 2 per cent this year.
That level of growth won’t be “anything to celebrate but it’s nothing like the recession we saw previously,” he said.
Another factor driving rates lower has been the early May rout in commodities, which dampened some of the worry on the inflation front. In addition, the recent sluggish performance of the stock market suggests that investors are getting nervous and growing more willing to buy super-safe government bonds.
Mr. Dales believes the current trends have room to run, and that rates will surprise to the downside.
He predicts U.S. 10-year Treasury yields could slip to 2.5 per cent in the low-growth, less inflation-spooked environment he foresees ahead.
If growth continues to be slow, lower rates might be staying around for a while.
Mr. Buchanan says the most likely scenario, given the poorer economic outlook, is for the Fed to hold off on raising rates until 2013. He believes the yield on Treasuries will rise gradually, instead of falling further, getting back to 3.4 per cent by the end of this year and to 4 per cent by the end of 2012. http://www.theglobeandmail.com/report-on-business/economy/interest-rates/low-interest-rates-seen-sticking-around/article2032075/
Friday, May 20, 2011
It’s not Bank of Canada’s job to guide markets on rates
STEPHEN GORDON - The Globe and Mail
The Bank of Canada is scheduled to make its next interest rate announcement on May 31, and my understanding is that the consensus of opinion among private sector analysts is that interest rates will remain unchanged, because there was no explicit warning of an increase in its April 12 decision.
This consensus of opinion may turn out to be well-founded -- but not for that reason. Recent reports confirm what Bank officials have said several times: the Bank of Canada believes that it under no obligation to provide guidance about short-term interest rates. Governor Mark Carney has already noted that one of the contributing factors of the financial crisis was the private sector’s overconfidence in its ability to predict central banks’ behaviour.
Central banks do not seek to create surprises for their own sake, and they will do what they can to reduce uncertainty when doing so does not conflict with their policy goals. But providing direction for private sector short-term forecasts for interest rates is not a policy goal in itself.
Curious games can occur when central banks seek to avoid surprises -- monetary policy can become effectively outsourced to financial market analysts. For example, if the consensus opinion is for no rate change, then the central bank may feel obliged to fulfill that expectation rather than risk an interest rate ‘surprise’, even if the monetary authority’s analysis points to an interest rate hike.
To read more......
The Bank of Canada is scheduled to make its next interest rate announcement on May 31, and my understanding is that the consensus of opinion among private sector analysts is that interest rates will remain unchanged, because there was no explicit warning of an increase in its April 12 decision.
This consensus of opinion may turn out to be well-founded -- but not for that reason. Recent reports confirm what Bank officials have said several times: the Bank of Canada believes that it under no obligation to provide guidance about short-term interest rates. Governor Mark Carney has already noted that one of the contributing factors of the financial crisis was the private sector’s overconfidence in its ability to predict central banks’ behaviour.
Central banks do not seek to create surprises for their own sake, and they will do what they can to reduce uncertainty when doing so does not conflict with their policy goals. But providing direction for private sector short-term forecasts for interest rates is not a policy goal in itself.
Curious games can occur when central banks seek to avoid surprises -- monetary policy can become effectively outsourced to financial market analysts. For example, if the consensus opinion is for no rate change, then the central bank may feel obliged to fulfill that expectation rather than risk an interest rate ‘surprise’, even if the monetary authority’s analysis points to an interest rate hike.
To read more......
Tuesday, May 17, 2011
Debt Consolidation: An Alternative to Bankruptcy
Bankruptcy is when a person or business officially declares the inability to pay back creditors the money that was previously borrowed. This should only be done as a last resort, because bankruptcy will affect every aspect of your life. It will also affect your ability to get loans, mortgages, and credit card in the future. However, for some people, declaring bankruptcy means finding freedom once again. It wipes your slate clean so to speak, and you can start over again with your credit.
However, there are a number of things you should try before you declare bankruptcy. One of these things is debt consolidation. Deb consolidation cannot help everybody concerned with money problems, but for some, it is just the boost needed to keep them from declaring bankruptcy.
Debt consolidation is basically taking all of your loans and paying them off using one large loan. You then have one monthly bill to pay instead of a number of smaller bills. This can save you money in the long run. Why? The one large loan will usually have a secured lower fixed interest rate. This is especially advisable if you are considering declaring bankruptcy because of high credit card debts.
Credit cards have very high interest rates—usually much higher than any other kind of loan. If you miss just one month of paying your card in full, you may never get back on track for paying off the balance. This can really start to add up if you find that you have more than one card. If you are far into debt, you can probably not get an unsecured loan from a financial institution, like a bank. However, you should be able to get a secured loan. A secured loan uses your house, car, or other possessions as collateral. With a lower interest rate, you can start making headway into your debt instead of simply making the minimum monthly payments. This will help you to avoid bankruptcy.
Consolidating your debts may not be the best choice for everyone. In fact, in some cases, bankruptcy is really the best way to get back on the financial fast track. However, it is important to realize that you have choices. If you don’t have to declare bankruptcy, avoid it and you will find that your life will be financially easier to handle in the future. It depends on your unique situation. Talk to a financial professional if you want more help learning about debt consolidation.
However, there are a number of things you should try before you declare bankruptcy. One of these things is debt consolidation. Deb consolidation cannot help everybody concerned with money problems, but for some, it is just the boost needed to keep them from declaring bankruptcy.
Debt consolidation is basically taking all of your loans and paying them off using one large loan. You then have one monthly bill to pay instead of a number of smaller bills. This can save you money in the long run. Why? The one large loan will usually have a secured lower fixed interest rate. This is especially advisable if you are considering declaring bankruptcy because of high credit card debts.
Credit cards have very high interest rates—usually much higher than any other kind of loan. If you miss just one month of paying your card in full, you may never get back on track for paying off the balance. This can really start to add up if you find that you have more than one card. If you are far into debt, you can probably not get an unsecured loan from a financial institution, like a bank. However, you should be able to get a secured loan. A secured loan uses your house, car, or other possessions as collateral. With a lower interest rate, you can start making headway into your debt instead of simply making the minimum monthly payments. This will help you to avoid bankruptcy.
Consolidating your debts may not be the best choice for everyone. In fact, in some cases, bankruptcy is really the best way to get back on the financial fast track. However, it is important to realize that you have choices. If you don’t have to declare bankruptcy, avoid it and you will find that your life will be financially easier to handle in the future. It depends on your unique situation. Talk to a financial professional if you want more help learning about debt consolidation.
Thursday, May 12, 2011
Roseman: Why we're so uneasy about our money skills
By Ellen Roseman
A federal task force made 30 recommendations on how to boost Canadians’ money management skills. But in the three months since the report’s release, not much has been done.
I’m happy to see a non-profit group take up the cause.
ABC Life Literacy Canada has announced a national awareness campaign, called Financial Literacy Week, to run from Oct. 30 to Nov. 5 this year.
“We want to shine a spotlight on math skills,” says Margaret Eaton, president of the group, which has 10 employees and a $1.6 million budget, with funding from the TD Bank Group for its financial literacy work.
“Numeracy is really important, but most Canadians don’t feel comfortable with it.”
To prove its point, ABC Life Literacy has released an Ipsos Reid online poll that shows little confidence in many areas of personal finances.
Just three in 10 Canadians (28 per cent) strongly agree that their math and money management skills help them plan for a secure financial future.
Six in 10 (62 per cent) say they can use help with money management skills. That goes up to almost three-quarters (73 per cent) of 18-to-34-year-olds.
Four in 10 (38 per cent) say they aren’t putting any money away each month for long-term savings.
Just over a third (36 per cent) are saving $200 a month or less. The average amount devoted to long-term saving is $211 a month.
Four in 10 (38 per cent) say their household doesn’t follow a budget.
Of those who follow a budget, only 12 per cent say they never exceed it. Three-quarters (77 per cent) usually stay within budget, 10 per cent rarely do and 1 per cent never do.
“Budget” was a term very familiar to 67 per cent of respondents and somewhat familiar to 27 per cent. “Interest” and “minimum payment” had similar profiles.
Less well known were the different types of registered plans designed to save or defer tax.
RRSP (registered retirement savings plan) was very familiar to 53 per cent and somewhat familiar to 30 per cent.
RESP (registered education savings plan) was very familiar to 28 per cent and somewhat familiar to 29 per cent.
Only 21 per cent of the 1,022 adults surveyed feel strongly confident about teaching money, savings and budgeting to other people.
Another 49 per cent feel somewhat confident teaching others about money, while 30 per cent aren’t confident at all.
The widespread feeling of unease with money management skills shouldn’t come as a surprise.
Product choices are more varied and complex, thanks to competition and financial engineering. This leads some people to put trust in advisers who don’t deserve their trust.
Governments keep changing the tax rules, depriving some people of benefits they should get. The tax-free savings account, for example, is confusing and subject to errors.
There’s little information about personal financial management taught in Canada’s schools. This leaves young people defenseless against non-stop sales pitches for spending and credit.
Households feel besieged by the rising cost of living. The recent spike in gasoline prices leaves them frightened and unsure. It’s no wonder they’re not saving for their long-term future.
And as the survey shows, people who feel shaky about managing money aren’t comfortable trying to teach others how to do it.
ABC Life Literacy has been around for 20 years, focusing on reading skills. It now realizes that an understanding of mathematical concepts is crucial in today’s society.
It runs courses and publishes books designed for people with low levels of financial literacy and numeracy (Grade 3 to Grade 6).
A promising initiative is its Good Reads book series for those who struggle with longer volumes. Easy Money, a 96-page book by TV debt diva Gail Vaz-Oxlade, has sold 22,000 copies at $6.99 online. See www.grassrootsbooks.net.
“People are thirsty for information,” Eaton says. “We want to be the catalyst for other groups.”
Boosting money skills is a mammoth task. For one week this fall, let’s hope to see many organizations show their commitment to get the job done.
Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca.
A federal task force made 30 recommendations on how to boost Canadians’ money management skills. But in the three months since the report’s release, not much has been done.
I’m happy to see a non-profit group take up the cause.
ABC Life Literacy Canada has announced a national awareness campaign, called Financial Literacy Week, to run from Oct. 30 to Nov. 5 this year.
“We want to shine a spotlight on math skills,” says Margaret Eaton, president of the group, which has 10 employees and a $1.6 million budget, with funding from the TD Bank Group for its financial literacy work.
“Numeracy is really important, but most Canadians don’t feel comfortable with it.”
To prove its point, ABC Life Literacy has released an Ipsos Reid online poll that shows little confidence in many areas of personal finances.
Just three in 10 Canadians (28 per cent) strongly agree that their math and money management skills help them plan for a secure financial future.
Six in 10 (62 per cent) say they can use help with money management skills. That goes up to almost three-quarters (73 per cent) of 18-to-34-year-olds.
Four in 10 (38 per cent) say they aren’t putting any money away each month for long-term savings.
Just over a third (36 per cent) are saving $200 a month or less. The average amount devoted to long-term saving is $211 a month.
Four in 10 (38 per cent) say their household doesn’t follow a budget.
Of those who follow a budget, only 12 per cent say they never exceed it. Three-quarters (77 per cent) usually stay within budget, 10 per cent rarely do and 1 per cent never do.
“Budget” was a term very familiar to 67 per cent of respondents and somewhat familiar to 27 per cent. “Interest” and “minimum payment” had similar profiles.
Less well known were the different types of registered plans designed to save or defer tax.
RRSP (registered retirement savings plan) was very familiar to 53 per cent and somewhat familiar to 30 per cent.
RESP (registered education savings plan) was very familiar to 28 per cent and somewhat familiar to 29 per cent.
Only 21 per cent of the 1,022 adults surveyed feel strongly confident about teaching money, savings and budgeting to other people.
Another 49 per cent feel somewhat confident teaching others about money, while 30 per cent aren’t confident at all.
The widespread feeling of unease with money management skills shouldn’t come as a surprise.
Product choices are more varied and complex, thanks to competition and financial engineering. This leads some people to put trust in advisers who don’t deserve their trust.
Governments keep changing the tax rules, depriving some people of benefits they should get. The tax-free savings account, for example, is confusing and subject to errors.
There’s little information about personal financial management taught in Canada’s schools. This leaves young people defenseless against non-stop sales pitches for spending and credit.
Households feel besieged by the rising cost of living. The recent spike in gasoline prices leaves them frightened and unsure. It’s no wonder they’re not saving for their long-term future.
And as the survey shows, people who feel shaky about managing money aren’t comfortable trying to teach others how to do it.
ABC Life Literacy has been around for 20 years, focusing on reading skills. It now realizes that an understanding of mathematical concepts is crucial in today’s society.
It runs courses and publishes books designed for people with low levels of financial literacy and numeracy (Grade 3 to Grade 6).
A promising initiative is its Good Reads book series for those who struggle with longer volumes. Easy Money, a 96-page book by TV debt diva Gail Vaz-Oxlade, has sold 22,000 copies at $6.99 online. See www.grassrootsbooks.net.
“People are thirsty for information,” Eaton says. “We want to be the catalyst for other groups.”
Boosting money skills is a mammoth task. For one week this fall, let’s hope to see many organizations show their commitment to get the job done.
Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca.
Tuesday, May 10, 2011
Canada's economy creating more full-time, and better paying jobs
By Julian Beltrame, The Canadian Press
OTTAWA - The Canadian economy is not only creating more jobs, it's creating better jobs according to one of the country's major banks.
CIBC's latest employment quality index shows that 60 per cent of new jobs created over the past year would qualify as high-paying, quality jobs.
The bank says there's been an increase in full-time and paid employment, as opposed to self-employment, over the past 12 months — helping push the employment quality index up 2.7 per cent.
The sharp improvement has come about because many of the 283,000 jobs created in the past year have been in relatively high-paying sectors, including manufacturing, finance, construction and the public service.
Previously, the new jobs created since the end of the recession in the summer of 2009 have tended to be part-time and in lower-paying service industries.
"This (quality) measure is roughly back to the pre-recession levels," said economist Benjamin Tal. "This is a much better performance than a similar measure in the U.S., where the quality of employment index continues to soften despite some improvement in the pace of job creation."
Canada's employment record since the end of the recession has been among the strongest in the industrialized world with over 500,000 new jobs added since July 2009. That's about 80,000 more than was lost during the 2008-2009 recession.
By contrast, the United States remains about six million jobs shy of its pre-crisis levels.
But despite the full rebound in the jobs market, the complaint had been that many of those new jobs were not of the same quality as the jobs that vanished. Some economists derided them as service industry McJobs, or part-time, or "forced self-employment" by those who create their own form of employment — usually lower paying — because they can't find regular work.
Over the past 12 months, that trend has started to reverse. Almost all the new jobs have been in paid employment, not self-employment.
As well, growth in full-time jobs has outnumbered part-time by more than two-to-one, and well-paying jobs in manufacturing, construction, the financial sector and government have outnumbered low-paying jobs three-to-one.
The question is whether the new and better composition of job creation will continue. There is some evidence it might not, says Tal, noting of the 58,000 new jobs added last month, two-thirds were part-time.
"It's clear that governments will not be hiring in the future and the housing market will not be as strong," undercutting two of the sectors that have been producing high quality jobs, Tal explained.
However, the export sector, which tends to generate higher-paying jobs, is expected to be a leading engine of growth going forward and may be sufficiently robust to take up the slack.
The improvement in the quality of jobs has been good for the economy, the report states, since higher pay puts more money in the pockets of homeowners to spend on consumer goods.
"The impact of job creation on income growth and thus spending is currently more notable than it was in early 2010," Tal said, which will put pressure on the Bank of Canada to hike interest rates in the second half of the year.
Canada's economy also got a thumbs up Monday from the Organization for Economic Co-operation and Development, which forecast Canada would continue to be at the forefront of the global economic recovery.
In its May report on composite leading indicators, the OECD put Canada alongside China as countries with a "regained momentum in economic activity."
Economies in the U.S., Germany and Russia are improving. Overall, the international think-tank says most European countries will experience a slower or stable expansion. Some, like Italy, Brazil and India are pointing to slower growth relative to their trends.
OTTAWA - The Canadian economy is not only creating more jobs, it's creating better jobs according to one of the country's major banks.
CIBC's latest employment quality index shows that 60 per cent of new jobs created over the past year would qualify as high-paying, quality jobs.
The bank says there's been an increase in full-time and paid employment, as opposed to self-employment, over the past 12 months — helping push the employment quality index up 2.7 per cent.
The sharp improvement has come about because many of the 283,000 jobs created in the past year have been in relatively high-paying sectors, including manufacturing, finance, construction and the public service.
Previously, the new jobs created since the end of the recession in the summer of 2009 have tended to be part-time and in lower-paying service industries.
"This (quality) measure is roughly back to the pre-recession levels," said economist Benjamin Tal. "This is a much better performance than a similar measure in the U.S., where the quality of employment index continues to soften despite some improvement in the pace of job creation."
Canada's employment record since the end of the recession has been among the strongest in the industrialized world with over 500,000 new jobs added since July 2009. That's about 80,000 more than was lost during the 2008-2009 recession.
By contrast, the United States remains about six million jobs shy of its pre-crisis levels.
But despite the full rebound in the jobs market, the complaint had been that many of those new jobs were not of the same quality as the jobs that vanished. Some economists derided them as service industry McJobs, or part-time, or "forced self-employment" by those who create their own form of employment — usually lower paying — because they can't find regular work.
Over the past 12 months, that trend has started to reverse. Almost all the new jobs have been in paid employment, not self-employment.
As well, growth in full-time jobs has outnumbered part-time by more than two-to-one, and well-paying jobs in manufacturing, construction, the financial sector and government have outnumbered low-paying jobs three-to-one.
The question is whether the new and better composition of job creation will continue. There is some evidence it might not, says Tal, noting of the 58,000 new jobs added last month, two-thirds were part-time.
"It's clear that governments will not be hiring in the future and the housing market will not be as strong," undercutting two of the sectors that have been producing high quality jobs, Tal explained.
However, the export sector, which tends to generate higher-paying jobs, is expected to be a leading engine of growth going forward and may be sufficiently robust to take up the slack.
The improvement in the quality of jobs has been good for the economy, the report states, since higher pay puts more money in the pockets of homeowners to spend on consumer goods.
"The impact of job creation on income growth and thus spending is currently more notable than it was in early 2010," Tal said, which will put pressure on the Bank of Canada to hike interest rates in the second half of the year.
Canada's economy also got a thumbs up Monday from the Organization for Economic Co-operation and Development, which forecast Canada would continue to be at the forefront of the global economic recovery.
In its May report on composite leading indicators, the OECD put Canada alongside China as countries with a "regained momentum in economic activity."
Economies in the U.S., Germany and Russia are improving. Overall, the international think-tank says most European countries will experience a slower or stable expansion. Some, like Italy, Brazil and India are pointing to slower growth relative to their trends.
Tuesday, May 3, 2011
Rent or buy? Do the math
William Hanley, Financial Post
A young couple who have been renting in our modest Toronto condo building recently bought a home a couple of miles away in a nice old neighbourhood with the aim of starting a family. The house is a big, detached fixer-upper and the renovation costs will be extensive.
In moving up to the rungs on the property ownership ladder, our young friends are committing themselves to a quantum leap in monthly expenses: They came up with a substantial down payment; they are taking on a mortgage payment, property tax bill and other expenses almost twice as large as their $1,600 rent; and they are spending a large amount on the renovation and other costs associated with buying a house.
It is a story that has unfolded millions of times in Canadian history and one that will continue to unfold because home ownership is deeply ingrained in our culture, a cornerstone of getting established and getting on our way in life. People will make great sacrifices and otherwise twist themselves out of financial and emotional shape to buy into the dream.
They willingly become what we used to call “house-poor,” paying well over the one-third of household income that many professionals believe should be the threshold.
Over the past decade, owning has been a financial success for most people, with prices rising almost in a straight line, with low, low interest rates feeding into the equation and with homeowners’ equity subsequently bounding higher.
And yet, if it has been just about as good as it gets for so long, perhaps conditions are going to deteriorate at least somewhat, with prices likely to stabilize or retreat a little and with interest rates set to rise modestly at least.
Our friends and other buyers this spring will know that Canadian house price gains have been flattening out. The Teranet-National Bank House Price Index for February published this week showed house prices gained just 0.1% from January for a 12-month gain of 3.8%. It was the eighth consecutive month of deteriorating gains.
While the forecast of a 25% drop in house prices over the next few years by one widely quoted economist seems far-fetched under present circumstances, a pattern of smaller gains likely signals a flat to slightly lower market.
So, is it time to revisit buying versus renting? For most of the 30% of Canadians who rent their accommodation it’s simply not an option. Getting their hands on a significant down payment and having the flexibility to meet higher payments if rates rise is difficult at best.
But some people with the wherewithal to buy a property might want to keep renting, keep saving and investing, and keep their options open. Other long-time owners might even want to consider selling and renting, thereby locking in their tax-free gains.
If you wish to see how the math works, visit United Mortgage Group’s Rent vs. Buy Calculator website. Even your technodunce reporter could plug in some numbers and come away with worthwhile conclusions.
A two-bedroom condo in our building might sell for $400,000. Let’s say you have a $100,000 down payment, a mortgage rate of 4.5% over five years, a $672 monthly condo fee, $200 a month in property taxes and other expenses of, say, $100 month.
Let’s also say that a two-bedroom might rent for $1,600 a month in the building, other costs might total $100 a month and the rent might rise 2% a year over five years.
All other things considered, the purchased condo would have to appreciate 2.33% a year, selling at $441,571 to match the gain made by renting a similar property in the building and investing the difference in outgoings at a conservative 2.5% a year.
The other way around, an owner could sell for $400,000 — with net proceeds of about $375,000 — and rent for $1,600 a month. The $375,000 could pay a conservative net return of, say, $10,000 a year. That $1,600 a month plus $100 in expenses would add up to $20,400 a year.
But deduct the net investment return of $10,000 a year and the condo fees of $672 a month, property tax of $200 and other expenses of $100 (for $11,664 a year), and the monthly rent for the former owner is basically paid. Or the former owner could invest the $10,000 a year and still end up paying only about $728 a month more than he was when he was owning.
Of course, this is just the rough math, which doesn’t take into account other factors, such as pride of ownership, the sense of place and the strong probability of building equity.
But geez. If I could live in the building basically for what I’m paying now in fees, taxes and insurance (by deploying my $10,000 a year investing return), and have my $375,000 to “invest” in winters in Waikiki and nice overnighters in Niagara-on-the-Lake, well then ….
It’s a thought, but only that. They’ll probably carry me out of here feet first from our condo, the equity in which may one day be needed to help us out in one of the emergency situations that can arise in older age.
Meantime, it wouldn’t hurt for everyone to do some math and determine what’s best financially for them — renting versus buying. And then, of course, throw the math out the window and succumb to the emotional tug of home and hearth.
A young couple who have been renting in our modest Toronto condo building recently bought a home a couple of miles away in a nice old neighbourhood with the aim of starting a family. The house is a big, detached fixer-upper and the renovation costs will be extensive.
In moving up to the rungs on the property ownership ladder, our young friends are committing themselves to a quantum leap in monthly expenses: They came up with a substantial down payment; they are taking on a mortgage payment, property tax bill and other expenses almost twice as large as their $1,600 rent; and they are spending a large amount on the renovation and other costs associated with buying a house.
It is a story that has unfolded millions of times in Canadian history and one that will continue to unfold because home ownership is deeply ingrained in our culture, a cornerstone of getting established and getting on our way in life. People will make great sacrifices and otherwise twist themselves out of financial and emotional shape to buy into the dream.
They willingly become what we used to call “house-poor,” paying well over the one-third of household income that many professionals believe should be the threshold.
Over the past decade, owning has been a financial success for most people, with prices rising almost in a straight line, with low, low interest rates feeding into the equation and with homeowners’ equity subsequently bounding higher.
And yet, if it has been just about as good as it gets for so long, perhaps conditions are going to deteriorate at least somewhat, with prices likely to stabilize or retreat a little and with interest rates set to rise modestly at least.
Our friends and other buyers this spring will know that Canadian house price gains have been flattening out. The Teranet-National Bank House Price Index for February published this week showed house prices gained just 0.1% from January for a 12-month gain of 3.8%. It was the eighth consecutive month of deteriorating gains.
While the forecast of a 25% drop in house prices over the next few years by one widely quoted economist seems far-fetched under present circumstances, a pattern of smaller gains likely signals a flat to slightly lower market.
So, is it time to revisit buying versus renting? For most of the 30% of Canadians who rent their accommodation it’s simply not an option. Getting their hands on a significant down payment and having the flexibility to meet higher payments if rates rise is difficult at best.
But some people with the wherewithal to buy a property might want to keep renting, keep saving and investing, and keep their options open. Other long-time owners might even want to consider selling and renting, thereby locking in their tax-free gains.
If you wish to see how the math works, visit United Mortgage Group’s Rent vs. Buy Calculator website. Even your technodunce reporter could plug in some numbers and come away with worthwhile conclusions.
A two-bedroom condo in our building might sell for $400,000. Let’s say you have a $100,000 down payment, a mortgage rate of 4.5% over five years, a $672 monthly condo fee, $200 a month in property taxes and other expenses of, say, $100 month.
Let’s also say that a two-bedroom might rent for $1,600 a month in the building, other costs might total $100 a month and the rent might rise 2% a year over five years.
All other things considered, the purchased condo would have to appreciate 2.33% a year, selling at $441,571 to match the gain made by renting a similar property in the building and investing the difference in outgoings at a conservative 2.5% a year.
The other way around, an owner could sell for $400,000 — with net proceeds of about $375,000 — and rent for $1,600 a month. The $375,000 could pay a conservative net return of, say, $10,000 a year. That $1,600 a month plus $100 in expenses would add up to $20,400 a year.
But deduct the net investment return of $10,000 a year and the condo fees of $672 a month, property tax of $200 and other expenses of $100 (for $11,664 a year), and the monthly rent for the former owner is basically paid. Or the former owner could invest the $10,000 a year and still end up paying only about $728 a month more than he was when he was owning.
Of course, this is just the rough math, which doesn’t take into account other factors, such as pride of ownership, the sense of place and the strong probability of building equity.
But geez. If I could live in the building basically for what I’m paying now in fees, taxes and insurance (by deploying my $10,000 a year investing return), and have my $375,000 to “invest” in winters in Waikiki and nice overnighters in Niagara-on-the-Lake, well then ….
It’s a thought, but only that. They’ll probably carry me out of here feet first from our condo, the equity in which may one day be needed to help us out in one of the emergency situations that can arise in older age.
Meantime, it wouldn’t hurt for everyone to do some math and determine what’s best financially for them — renting versus buying. And then, of course, throw the math out the window and succumb to the emotional tug of home and hearth.
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