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Driving until you qualify vs. Condo Living

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By Sean Cooper

Special to the Financial Independence Hub

Are you in the market for a home and finding it tough to afford a decent-sized place? You’re not alone. The new mortgage rules certainly haven’t made it any easier. Homebuyers have seen their purchasing power reduced by about 20 per cent due to the mortgage stress test that came into effect January 1, 2018.

Under the new rules, homebuyers are required to qualify at a mortgage rate 2 per cent higher. If you’re looking to buy a home in big cities like Calgary, Ottawa, Toronto or Vancouver, your options can be quite limited, especially when you’re a first-time homebuyer.

So, you go out into the real estate market, look for the home you’d like to purchase, but can’t afford it. What’s a homebuyer to do? Don’t throw in the towel: there’s still hope! Two popular options are driving until you qualify and condo living. Let’s look at them both now.

Driving Until You Qualify

If you don’t like what you can afford in the big city, your first option is suburban living or what I like to call “driving until you qualify.”

Living in the suburbs does have its advantages. You can typically stretch your home-buying dollar further. Quite often in the suburbs you get more square footage for less than you otherwise would get in the city. Instead of only being able to afford a condo in the city, you might be able to afford a more spacious single-family detached home.

If you’re planning to start a family or have a dog, it’s hard to beat a big yard with a fence. Also, if you’re raising children, the city typically offers better schools. The suburbs also usually have a lower crime rate than the city centre.

Although you probably won’t have shopping at your doorstep, the ‘burbs make shopping easy with big box retailers. If you’re an outdoor enthusiast, you’ll often enjoy the suburbs a lot more. The suburbs usually have a lot more community centres, parks and swimming pools.

But living in the suburbs isn’t without its drawbacks. Perhaps the single biggest downside is the time it takes to commute if you work in the city. You could find yourself travelling for two hours or more a day. Make sure you’re ok with this before buying the property.

A good exercise is to try driving to work in the neighbourhood you’re thinking of buying in on a typical day to make sure the commute is tolerable. If you work from home this won’t be an issue, but don’t forget to factor in the added cost of not only buying a vehicle, but maintaining it as well.

Besides a longer commute, the other big downside is that you’ll be further from downtown. If you’re a millennial and enjoy the nightlife, make sure you’re ok with living further away from most of your friends. If you’re constantly downtown late after work, you may find it a real pain in the neck to commute back to the suburbs.

Condo Living Continue Reading…

Retired Money: Seniors prefer term Guaranteed Lifetime Income to Annuities

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Annuities continue to get short shrift from those nearing or in Retirement, but if you describe them with a different label — like a Guaranteed Lifetime Income — they are viewed much more favourably, according to a study released Tuesday. I summarize the main results of the Canadian Guaranteed Lifetime Income Study in my latest MoneySense Retired Money column, which you can access by clicking on the highlighted headline: Guaranteed Income is a No Brainer: Just Don’t Call it an Annuity.

The study was conducted by Greenwald & Associates and CANNEX for two Canadian insurance companies, Great West Life and Sun Life in February with 1,003 Canadians aged 55 to 75 with financial assets of at least $100,000 (not counting a home. It found only 45% are highly confident they will be able to maintain their standard of living in retirement, assuming a life expectancy of 85.

I’d argue that the majority who ARE confident are probably the beneficiaries of employer-sponsored Defined Benefit pension plans, ideally the kind of inflation-indexed ones that many public servants enjoy. They are of course becoming much less common in the private sector.

This site and my various columns have long argued that, to paraphrase Pensionize Your Nest Egg co-author Moshe Milevsky, DB pensions and Government-provided equivalents like CPP and OAS can be regarded as REAL pensions, because they provide a guaranteed stream of income for as long as you live.

By contrast, investment portfolios comprising RRSPs, TFSAs, group RRSPs and Defined Contribution plans do not in themselves constitute the kind of “real” pension that Milevsky says should be one part of a diversified retirement income strategy. It’s up to retirees to convert their retirement nest eggs into real pensions and one of the most common ways to do this is to buy annuities.

Consider that investors hoping to live on RRSP/RRIF interest, dividends and capital gains have no guarantee their money will last as long as they will. With still-low interest rates and the possibility of stock-market losses, and the constant spectre of rising inflation, longevity risk and the possibility of outliving your money is a real concern.

The study lists several perceived positives and negatives of annuities and segregated funds. And it found the percentage of Canadians who rate GLI as a “highly valuable” supplement to government retirement sources like CPP and OAS has jumped from 60% in 2015 to 80% today.

Note too that Longevity and outliving savings is a particular concern for women, along with not being able to afford long-term care expenses. It’s a fact that women have longer life expectancies,  and the study shows their retirement worries are greater as a result.

Women more concerned about running out of money in old age

The study conducted by CANNEX and Greenwald & Associates found 34% of women are highly concerned about not being able to maintain their standard of living once they retire, compared to only 17% of men. Continue Reading…

Why simplicity beats complexity

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By Steve Lowrie, CFA

Special to the Financial Independence Hub

Complexity. It’s hard to avoid.  Tune into the news, and something’s always breaking.  Even in your own life, how many “other” tasks get in the way of the good stuff?

I’m not suggesting you should only do what is immediately gratifying.  There’s considerable enjoyment to be found in taking on tough challenges.  But today I want to focus on why simplicity beats complexity, especially when it comes to your personal finances.

Simplifying your investments

When it comes to writing about investments why reinvent the wheel?  I agree with every point “A Wealth of Common Sense” blogger Ben Carlson makes in this excellent piece, “Why Simple Beats Complex.”  Instead of writing an overly repetitive post, I recommend you give this a read.  Basically, we are prone to using our oversized brains to over-complicate things, especially investments.  Simple advice:  Don’t do that.

Simplifying your finances

While I don’t want to split hairs, there is a subtle, but incredibly important difference between financial goals, financial plans and financial planning.  Knowing the difference helps simplify all three. Continue Reading…

Toronto vs Chicago housing: An Arbitrage for being under-weight Canadian bank stocks

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Figure 1: Chicago and Toronto Home Prices
By Jeff Weniger, CFA, WisdomTree

Of the major North American cities that feel most like Toronto, Chicago is clearly the closest fit. It’s Toronto’s sister. Chicago is the third most-populous city in the U.S., behind New York and Los Angeles. According to the U.S. Census Bureau, Chicago proper has a population of 2.7 million, almost exactly the same amount as Toronto.1 Both cities have several million more living in the immediate suburbs. Chicago’s money resides mostly on one side of the city, with most of its poverty found on the city’s south and west sides. Wealthy suburbs span almost to Wisconsin in the city’s “North Shore” suburbs, which consist of some of the wealthiest zip codes in the U.S.

Like Toronto, Chicago is a money centre. It is widely considered to be in that tier of financial hubs that includes Boston and San Francisco, behind the center of it all in New York. Its construction is dense; people take trains and buses to commute into the downtown core. Critically, as far as desirability of property goes, Chicago’s weather is miserable, just like Toronto’s. The two cities are also characterized by left-leaning politics, so there isn’t much of a difference on that front either.

When we engage Torontonians about the U.S. and Chicagoans about Canada, time and again the answer comes back: the city that is most like Toronto is Chicago.

Except in one way.

Chicago homes are one third or half of similar homes in Toronto

There is a major arbitrage just sitting there for anyone who liquidates Toronto property, hops on a 75-minute flight and purchases a mirror-image property for one-third or half the price in Chicago. Yes, Chicago is riddled with violence, but not in the neighbourhoods where someone would spend C$767,818, the average Toronto home price in February.2 In those neighbourhoods, the biggest risk is having a $500 stroller run over your toe.

Just what could C$767,818 get in Chicago?

According to the National Association of Realtors’ (NAR) Illinois chapter:

In the nine-county Chicago Primary Metropolitan Statistical Area (PMSA), home sales (single-family and condominiums) in January 2018 totaled 5,777 homes sold, down 8.0 percent from January 2017 sales of 6,277 homes. The median price in January 2018 was $224,000 in the Chicago PMSA, an increase of 7.2 percent from $209,000 in January 2017.

Converting US$224,000 to Canadian dollars at the January exchange rate of $1.231, that is C$275,856 for the median house in Chicago. Granted, U.S. housing data tends to be measured by the median, whereas the Canadian norm is to take the average, but there is still not much of a comparison; the gap is yawning, and this all started happening only in recent years. Continue Reading…

Debt avalanche vs. debt snowball: When math trumps behaviour

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John and Erica Mullen are in their mid-thirties and have two young children at home. Together they earn well over $100,000 per year, but a combination of poor choices and unlucky circumstances have left them buried in debt.

Their substantial income affords them the luxury of not having to turn their life upside down by selling their home and vehicles; however, they will need to make some tough sacrifices in order to dig themselves out of this hole.

Creditor Balance Rate Payment Interest-only
Store credit card $6,800.00 26.00% $200.00 $147.34
Consolidation loan $23,000.00 8.00% $430.00 $153.34
Line of credit #1 $20,000.00 6.34% $105.67 $105.67
Tax bill $1,700.00 5.00% $200.00 $7.09
Car loan #1 $36,000.00 3.90% $460.00 $117.00
Line of credit #2 $16,000.00 3.00% $40.00 $40.00
Car loan #2 $23,000.00 0.90% $317.00 $17.25
$126,500.00 $1,752.67

After a close look at their budget, the Mullens decide they can afford to put $2,000 per month toward their non-mortgage debt. They want to know how best to allocate the extra cash so they can be debt-free faster and pay the least amount of interest.

Two popular debt repayment strategies are the debt snowball and the debt avalanche. Let’s look at each method and apply it to the Mullen’s situation:

Debt Snowball

Dave Ramsey, American author of The Total Money Makeover, suggests an unusual strategy for getting out of debt by using something called the debt snowball method.

With the debt snowball, you’re throwing math out the window, focusing instead on the psychological advantage that comes from making progress with quick, successive wins.

Related: Should you pay off your partner’s debt?

Start by arranging your debts from lowest balance to highest. It feels better to rid yourself of your smallest debt, and the idea is that the snowball effect builds enough momentum so that you’ll be more inclined to stick with the strategy on your way toward debt freedom.

This chart shows how the Mullens would use a debt snowball approach to tackle their debt. Remember, they’re throwing an extra $2,000 per month over-and-above their minimum payments:

Creditors in Original Total Interest Months to Month Paid
Chosen Order Balance Paid Pay Off Off
Tax bill $1,700.00 $7.08 1 May-15
Store credit card $6,800.00 $405.61 4 Aug-15
Line of credit #2 $16,000.00 $301.35 11 Mar-16
Line of credit #1 $20,000.00 $1,572.90 19 Nov-16
Consolidation loan $23,000.00 $2,929.50 25 May-17
Car loan #2 $23,000.00 $390.39 30 Oct-17
Car loan #1 $36,000.00 $3,270.27 37 May-18
 Total Interest Paid: $8,877.10

You can see how the strategy works: the tax loan is killed off in the first month and from there the Mullens can focus on the department store credit card, which will be paid off three months later. Altogether it’ll take 37 months to pay off all their non-mortgage debt and the total interest paid over that time is $8,877.10.

Debt Avalanche

Continue Reading…