Thursday, April 19, 2012

Once again: Pay down your debts before rates rise

Don't be a dollar short and a day late again. This is starting to be like an old record that plays and plays and plays - then one day we wake up and there are CD's.

Neil "Mortgage Man" McJannet


ROB CARRICK | Columnist profile | E-mail

From Wednesday's Globe and Mail

Published Tuesday, Apr. 17, 2012 7:53PM EDT

Last updated Tuesday, Apr. 17, 2012 7:55PM EDT

The decade’s most ignorable piece of financial advice: Pay down your debts before interest rates rise.

You’ve heard this warning a hundred times, you ignored it and rates held steady at historic lows. Now, the Bank of Canada is signalling that borrowing costs could rise if economic conditions keeps improving. Here are 10 reasons not to tune out this time around:



1. Rates will eventually rise – it’s inevitable

Financial stress now seems a permanent feature of the global economy. Will China’s economy stall? Will Europe’s debt problems worsen? Can the United States address its debt problems and get its economy going again? These are all open-ended questions that suggest there’s a chance interest rates will need to stay low for longer. Not forever, though. It could be years until stability rules, but it could also be months.

2. Borrowing means you can’t afford the stuff you’re buying

Borrowing is okay when buying houses and cars because few of us can pay cash for such large expenses. But using a line of credit to finance your lifestyle is like living on other people’s money. Exception: If you use your credit line strategically to acquire things that are paid off quickly without immediately running up your debt again. Question for you: How often are you using your line of credit? If it’s more than a few times a year, you’re likely overspending.

3. Cutting debt gives you a buzz

I paid off a five-year car loan three years early in 2011. What a high. Better than buying the car.

4. Less stress

I can tell from reader e-mails that people are stressed about debt and wondering what to do. Try taking your tax refund and using it to pay down your credit card or line of credit balance. Stop contributing to your registered retirement savings plan or tax-free savings account for one year and use the money to lower your debt. Get rid of that second-car loan.

5. Your next mortgage renewal could be scary

People who bought homes in the past couple of years have benefited from historically low mortgage rates. As recently as last month, you could get a fully discounted, five-year, fixed-rate mortgage for about 3 per cent. That compares with an average of roughly 4.5 per cent over the past decade and a high of about 5.5 per cent.

Use this Globeinvestor.com calculator to look at scenarios showing how much more your mortgage will cost if you renew at higher rates: http://tgam.ca/DKA7 (you’ll need to find out what your balance on renewal is).

And don’t tell me that future pay increases will help you afford larger mortgage payments. Big raises are scarce these days and, when you get one, you’re not going to want to see it eaten up by your mortgage.

6. Your kids need help affording university

One of my pet peeves is that parents are not saving enough in registered education savings plans. Cut debt and you have some free cash flow you can put into a regular monthly RESP contribution plan.

7. You get more control over when you retire

Reduce your debts and you can also increase your retirement savings. The more you save for retirement, the less likely it is that you’ll have to continue working in some capacity after you turn 65 to generate income.

8. You won’t retire with debt

People over the age of 45 are among the biggest debt fiends in the country. What are they thinking? That it would be fun to be on a fixed income while trying to cope with rising borrowing costs on lines of credit or mortgages? It’s hard to believe this even needs to be said, but a financially secure retirement starts with zero debt.

9. You’re covered for emergencies

People without debts are better able to afford a health or dental emergency, a basement flood, a leaky roof or a major car-repair bill. If you don’t have an emergency fund, pay off a debt and use the monthly payments you were making to build up your savings.

10. There’s no down side

No one has ever told me: “I really regret paying off my debts.” There’s always a use for the money you save, even if it’s to rack up more debt.

For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).

Wednesday, April 18, 2012

Once again: Pay down your debts before rates rise

ROB CARRICK | Columnist profile | E-mail

From Wednesday's Globe and Mail

Published Tuesday, Apr. 17, 2012 7:53PM EDT

Last updated Tuesday, Apr. 17, 2012 7:55PM EDT

The decade’s most ignorable piece of financial advice: Pay down your debts before interest rates rise.

You’ve heard this warning a hundred times, you ignored it and rates held steady at historic lows. Now, the Bank of Canada is signalling that borrowing costs could rise if economic conditions keeps improving. Here are 10 reasons not to tune out this time around:



1. Rates will eventually rise – it’s inevitable

Financial stress now seems a permanent feature of the global economy. Will China’s economy stall? Will Europe’s debt problems worsen? Can the United States address its debt problems and get its economy going again? These are all open-ended questions that suggest there’s a chance interest rates will need to stay low for longer. Not forever, though. It could be years until stability rules, but it could also be months.

2. Borrowing means you can’t afford the stuff you’re buying

Borrowing is okay when buying houses and cars because few of us can pay cash for such large expenses. But using a line of credit to finance your lifestyle is like living on other people’s money. Exception: If you use your credit line strategically to acquire things that are paid off quickly without immediately running up your debt again. Question for you: How often are you using your line of credit? If it’s more than a few times a year, you’re likely overspending.

3. Cutting debt gives you a buzz

I paid off a five-year car loan three years early in 2011. What a high. Better than buying the car.

4. Less stress

I can tell from reader e-mails that people are stressed about debt and wondering what to do. Try taking your tax refund and using it to pay down your credit card or line of credit balance. Stop contributing to your registered retirement savings plan or tax-free savings account for one year and use the money to lower your debt. Get rid of that second-car loan.

5. Your next mortgage renewal could be scary

People who bought homes in the past couple of years have benefited from historically low mortgage rates. As recently as last month, you could get a fully discounted, five-year, fixed-rate mortgage for about 3 per cent. That compares with an average of roughly 4.5 per cent over the past decade and a high of about 5.5 per cent.

Use this Globeinvestor.com calculator to look at scenarios showing how much more your mortgage will cost if you renew at higher rates: http://tgam.ca/DKA7 (you’ll need to find out what your balance on renewal is).

And don’t tell me that future pay increases will help you afford larger mortgage payments. Big raises are scarce these days and, when you get one, you’re not going to want to see it eaten up by your mortgage.

6. Your kids need help affording university

One of my pet peeves is that parents are not saving enough in registered education savings plans. Cut debt and you have some free cash flow you can put into a regular monthly RESP contribution plan.

7. You get more control over when you retire

Reduce your debts and you can also increase your retirement savings. The more you save for retirement, the less likely it is that you’ll have to continue working in some capacity after you turn 65 to generate income.

8. You won’t retire with debt

People over the age of 45 are among the biggest debt fiends in the country. What are they thinking? That it would be fun to be on a fixed income while trying to cope with rising borrowing costs on lines of credit or mortgages? It’s hard to believe this even needs to be said, but a financially secure retirement starts with zero debt.

9. You’re covered for emergencies

People without debts are better able to afford a health or dental emergency, a basement flood, a leaky roof or a major car-repair bill. If you don’t have an emergency fund, pay off a debt and use the monthly payments you were making to build up your savings.

10. There’s no down side

No one has ever told me: “I really regret paying off my debts.” There’s always a use for the money you save, even if it’s to rack up more debt.

Monday, April 9, 2012

Canadians confused over real estate market

By Liam Lahey

Despite highly-competitive interest rates, Canadians are backing away from the real estate market. And it's no wonder. Consumers are bombarded with contradictory economic reports about the fragility of the housing market in the U.S., the blistering-hot Canadian real estate bubble -- is it even a bubble? -- and varying interest rates that seem to change on a dime according to the whims of the big-six Canadian banks.

These conflicting messages are playing out in housing market sentiment, suggests an annual Royal Bank of Canada survey.

According to the "19th Annual RBC Homeownership Poll", an increasing majority of Canadians believe that now is the time to get into the housing market (59 per cent, up four percentage points from last year), instead of waiting until next year (41 per cent).

And yet, more Canadians say they are unlikely to buy within the next two years (73 per cent, up two percentage points), even as confidence in homeownership is on the rise.

"What we're seeing here is consumers are taking a smart approach to buying a home. Canadians are recognizing housing is a good investment (88 per cent of respondents say so) and with the low interest rate environment and affordability at reasonable levels, they're telling us that now's a good time to buy," says Claude DeMone, director, Strategy and Portfolio, Home Equity Financing at RBC in Toronto.

"However, they're unlikely to do so within the next two years. I think that's people taking a smart approach, looking at their budget, and ensuring they have the resources to buy a home they can afford and that they can keep their mortgage payments are kept in line going forward."

The RBC poll also finds that after four years of sentiment favouring a buyer's market, the tide appears to be turning. More Canadians surveyed this year feel the current housing market is a seller's market, in which sellers have the advantage because the number of buyers exceeds the number of homes available (27 per cent, up from 20 per cent in 2011).

Nearly four-in-10 Canadians say it is a buyer's market (38 per cent, down two percentage points from a year ago). Fewer believe that the housing market is balanced (36 per cent, down from 40 per cent a year ago).

"With the low interest rates we've been seeing recently, it's a great story for consumers," he says. "If you're buying a home, this is a great time to get into the market but the right thing to do is to consider your budget and determine if you're ready. That's where some of the conflicting opinions on the market is: it's the difference between desire and ability."

Canadian economists have fretted about rising housing prices as household debt levels have soared. The ratio of debt to personal disposable income hit a record 151.9 per cent last year.

A Royal LePage House Price Survey shows strong year-over-year price gains for all housing types.

In Toronto, the numbers show it is most definitely a seller's market with prices steaduly on the climb in the first quarter of 2012:

Standard two-storey homes posted the largest price increases rising 7.5 per cent year-over-year to $645,467
Detached bungalows rose 5.5 per cent year-over-year to $544,450
Standard condominiums witnessed an increase of 3.5 per cent to $353,355 compared to the same period last year
The same holds true for Vancouver's hot housing market:

Standard two-storey homes saw the largest year-over-year price increases, rising 9.1 per cent to $1,182,250
Detached bungalows posted a similar 9.0 per cent year-over-year increase rising to $1,068,500
Standard condominiums rose a modest 0.5 per cent year-over-year to $510,000.
"Our housing market is being pulled in opposite directions by opposing economic forces," Phil Soper, president and chief executive of Royal LePage Real Estate Services, said in a statement.

"On one hand, there is the rapidly strengthening U.S. economy, increasing Canadian consumer confidence and what can only be called a national mortgage sale encouraging activity and bidding up home prices. On the other, we have signs of over-shooting values and strained affordability in our largest cities. We are likely to see much more modest price appreciation as the year unfolds."