Archive for Finances

Laurin Jeffrey | February 14, 2012
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Retiring with a mortgage? You have options

Mary Gooderham – Globe and Mail

Paying off the mortgage is something most homeowners hope and expect to do by mid-life. But those who started late, refinanced or traded up find themselves with whopping mortgages to pay, just as they should be looking ahead to retirement.

Continuing to make house payments may not be everyone’s fantasy heading into the golden years. But there are lots of options to consider for those in their mid-50s with sizable mortgages.

“It’s all about planning,” says Anthony Windeyer, a certified financial planner at Coast Capital Insurance Services Ltd. in Vancouver. For most would-be retirees, a home is by far their biggest asset, and it also presents considerable lifestyle issues, he notes.

He says there are three choices for people in their 50s dealing with a substantial mortgage: keep the house and keep up – or, better, accelerate – your payments, sell it and buy something with little or no mortgage, or sell it and rent a place, investing any money left over.

Staying in the home may offer security, knowing that you’ll have a significant retirement asset down the road, and it can also come with large emotional attachments. Of course it also has intangible value, allowing you to maintain your lifestyle in a comfortable space and familiar neighbourhood. If that’s desirable, do the math: If you can afford the payments and other costs, it might be advisable to get aggressive with the mortgage now.

“Anyone who’s looking to retire, there’s no downside to paying off as much as possible of their non-deductible debt,” Mr. Windeyer says, adding that with today’s low returns on investments, “you will never lose if you pay down your mortgage.”

Many empty-nesters end up with mortgages because by 45 they started focusing on wealth-creation as opposed to debt pay-down, and they are now not able to be aggressive enough on the latter, says Al Nagy, a certified financial planner at Investors Group Financial Services in Edmonton.

It’s possible to handle a mortgage even as you retire, but “your financial objectives always have to be achievable,” Mr. Nagy says. “In retirement, cash flow is king.”

A mortgage “has to relate to everything else in your financial planning picture,” he says, to determine “the best bang for your buck.” Putting money into your RRSP does make sense when you have significant income, and your tax rate is higher than it will be in retirement, for example. Then you can apply your tax refunds in a lump sum to the mortgage.

If you’re looking to move or actually have little equity in the home, it makes sense to sell, Mr. Windeyer says, and either buy something more affordable or rent accommodation. One benefit of selling is that real estate prices across Canada are relatively healthy now, he notes. “We don’t know if the market is always going to be high.”

Renting especially makes sense approaching retirement, because if you’re in a more modest place it frees up money to invest for income and to apply to lifestyle. It’s also possible to live wherever you want and transition to accommodations that are near hospitals or more appropriate for those with limited mobility and where it’s possible to eventually receive care.

You’ll also avoid the additional costs of ownership, such as property tax (although in some jurisdictions, such as British Columbia, property tax for older people can be largely deferred), as well as maintenance, which of course can be a hassle in an older home.

One consideration for someone with a mortgage or other debt may be to work longer, which is also a lifestyle issue. “You have to make the choices appropriate for you,” Mr. Windeyer said. “There’s no one answer.”

He notes that the choices include “hard facts,” projecting what the financial picture looks like, and “soft facts,” such as personal preferences. Calculators that factor in elements such as your current and anticipated retirement income can be helpful, but they are “blunt tools” for people with longer time horizons and may be inadequate for those approaching their late 50s.

Home ownership, mortgages, cash flow and other issues are important to consider in terms of your “retirement readiness,” Mr. Nagy says, adding that it’s also important to be “flexible with our goals,” because unexpected things can happen.

“A comfortable retirement is one where you’re not scraping and clawing to make ends meet,” he adds.

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Contact the Jeffrey Team for more information – 416-388-1960

Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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Category: Finances, Mortgages, Real Estate Investment | Tags: , , , , , , , , , , , , , , , , , , , , ,
Laurin Jeffrey | February 12, 2012
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RRSPs or TFSAs: Which is better to use when buying your first home?

Garry Marr – Financial Post

Do you really want to raid your retirement fund to buy your first home?

Nobody sets out to do it, but given the price of Canadian homes, some consumers almost have no choice but to take advantage of the federal government’s Home Buyers’ Plan. You can withdraw up to $25,000 from your RRSP to buy your first home, as long as you pay it back over 15 years. Considering the average home in Canada sold for $363,346 last year, two people with $25,000 each could use that money to get closer to the goal of having a 20% down payment — an important demarcation point because it means you can avoid expensive mortgage-default insurance.

But tax-free savings accounts are now in their fourth year, meaning each individual could have up to $20,000 in that account. The TFSA is becoming a real alternative when it comes to saving for a home.

So which should you use to buy your house?

“There is a huge premium if you sit down and do the numbers for taking it out from the point of view of missed opportunity in terms of growth,” Al Nagy, an Edmonton-based certified financial planner with Investors Group Financial Services, says of removing the cash. “Once you’ve taken it out, unlike a TFSA, that contribution room is not put back. You lose that contribution unless you create new contribution room in terms of new income.”

The loss in terms of sheltered income growth can be harsh, says Mr. Nagy, who cites a 30-year-old individual with RRSP valued at $30,000, earning 8% per annum on average. If there were no HBP withdrawal, the RRSP would grow to $139,829 by age 50 and $301,880 by age 60.

But take $20,000 out and repay it over 15 years and the RRSP would be worth $92,215 at age 50 and $199,805 at 60. Pay the $20,000 back over 10 years and the RRSP would be worth $100,237 at 50 and $216,404 at 60.

“The loss of RRSP growth by using the HBP would be mitigated by the savings in the mortgage interest expenses by reducing the size of the mortgage through the use of the HBP withdrawal,” he notes, adding people need to remember HBP repayment is a non-deductible expense.

“I don’t think we should forget the reason for the RRSP is to save for retirement.”

Don Lawby, chief executive of Century 21 Canada, still sees a strong need for the HBP and says it has yet to be replaced by the TFSA. “I think it still has some value. There is still a lot of confusion out there about the TFSA,” says Mr. Lawby, adding RRSPs remain more attractive to consumers. “People have a tough time saving for a down payment and it assists them to do that because those dollars are before tax.”

He adds there is a third alternative for those interested in buying a house. There is nothing to say you couldn’t use both accounts for a down payment. That could mean $90,000 for a couple and based on today’s home prices you might need that much cash to get to a 20% downpayment.

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Contact the Jeffrey Team for more information – 416-388-1960

Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
———————————————————————————————————————

Category: Buying Real Estate, Finances, First Time Buyers, General Real Estate | Tags: , , , , , , , , , , , , , , , , , , ,
Laurin Jeffrey | February 10, 2012
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Mortgage pullback hints of housing crisis

Susan Pigg – Toronto Star MoneyVille

Mortgage brokers are taking a wait, watch and worry approach to news that CIBC’s wholesale mortgage arm, FirstLine, is no longer accepting new applications from so-called “stated-income” homebuyers.

If other banks and mortgage lenders follow suit, it could become difficult for self-employed, new immigrants and higher-risk borrowers to get mortgages based on the “misleading” notion that Canada is at risk of a U.S. subprime housing crisis if there is a downturn in the market, brokers say.

“If we keep making it harder and harder for people to get mortgages, and the rest of the lending community cuts out similar programs, this is going to have far-reaching effects and runs the risk of creating a made-in-Canada problem,” said Steve Garganis, a broker with The Mortgage Centre.

“It’s very misleading to suggest we have a subprime issue in Canada. We don’t. These things can have a destabilizing impact on the housing market.”

FirstLine, CIBC’s wholesale mortgage arm, quietly announced Tuesday that it will no longer accept applications from homebuyers who can’t prove they have the annual net income to qualify for home loans, a move that ignores the fact tax laws actually encourage self-employed to write down their total income and that new immigrants have no credit record in Canada, brokers note.

FirstLine also set a $1 million cap on what it will lend for a house purchase.

TD Bank said it continues to monitor its lending and has no policy changes to announce at this time. Other banks couldn’t be reached for comment.

FirstLine’s announcement, coupled with news this week that the Canada Mortgage and Housing Corp. could be forced to cut back on the mortgages it insures, is being seen as another major indication that lenders are moving to protect themselves from a possible downturn in the housing market.

In fact, at least one FirstLine employee raised the possibility that Canada could face its own subprime housing crisis in announcing the strict new rules to her broker clients. Attached to her emails was a Bloomberg report pointing to loosening standards among Canadian lenders that have helped push up housing prices the last few years and now pose an “emerging risk” to financial institutions.

Those mortgages, usually granted to the self-employed and recent immigrants, “have some similarities to subprime loans in the U.S. retail lending market,” the Bloomberg story says, quoting from documents obtained from the Office of the Superintendent of Financial Institutions.

That concern may be why FirstLine — once the biggest mortgage lender in Canada and often a lifeline for self-employed and new immigrants — has been slowly backing out of the mortgage business for about a year now, brokers say.

“We see this (FirstLine) change as minor and part of the regular course of business,” CIBC said in an email Wednesday.

Former Bank of Canada economist David Madani called FirstLine’s decision “prudent,” agreeing that lending has become easier the last few years in Canada as housing prices climbed and interest rates dropped.

No one is suggesting Canada is anywhere near as risky as the U.S. where some 30% of homeowners were in over their heads as house prices collapsed. That led to the subprime mortgage crisis that decimated the housing market south of the border, Madani said.

Bank and housing experts have estimated far fewer than 5% of Canadian mortgage-holders are at risk.

But there are worrisome similarities on four other fronts, Madani said in a telephone interview Wednesday: Canada has seen a “very sharp” increase in house prices relative to incomes the last few years; substantial growth in ownership rates; household debt has risen to record levels and there are “significant signs” of overbuilding, especially in the condo market, he said.

“I’m not confident we can dodge the bullet and that there won’t be a correction in the Canadian housing market in the not too distant future,” said Madani, now an economist with Capital Economics.

He predicts a 25% decline in prices over the next few years and calls the Bank of Montreal’s recent description of the Canadian housing market as a balloon that will deflate rather than a bubble that will pop, “semantics.”

But restricting mortgages for the self-employed, who make up 13% of the Canadian workforce, and new immigrants, could do more harm than good to the precarious housing market, warned Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals.

Already they are subject to far more rigorous checks and balances than in the States where some homebuyers famously fabricated high incomes. Canadian higher-risk buyers are also required to put down at least a 20% down payment and pay higher mortgage insurance and interest rates, said Murphy.

Research has shown that those homebuyers aren’t prone to default on their mortgage payments anymore than those who qualify for standard mortgages, he added.

Garganis predicts there will be considerable outcry if FirstLine’s “drastic changes” are adopted by other lending institutions.

“These aren’t B-level homebuyers. This is your next-door neighbour who’s maybe a consultant who works from home. This is your contractor or anyone who isn’t taxed by their employer every paycheque and is considered self-employed.

“This is a huge segment of the population.”

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Contact the Jeffrey Team for more information – 416-388-1960

Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
———————————————————————————————————————

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