Category: Mortgages

Old-Fashioned Advice

It struck me recently that one of the reasons I’ve achieved some of my personal finance goals is that I’ve followed old-fashioned advice. These are the top three nuggets that come to mined.

  • Stay Out of Debt.

This particular pearl has served me well. I’ve had credit cards in my wallet for more than 25 years. I’ve paid interest once, and that was because I’d miscalculated when I made my payment. I don’t carry a balance on my credit cards.

The credit card companies would call me a deadbeat. I wear their moniker with pride.

One of the keys to becoming a deadbeat is to have an emergency fund and other accounts to fund short-term inconvenience. If you have a vehicle, then you know that you’re only one weird sound away from a mechanic’s bill. When my vehicle needed $600 of work, I had the money set aside in an account set up to field these kinds of expenses. Mary Hunt calls this a Freedom Account, and she describes it in her book Debt-Proof Living.

If my house burned down, or I lost my job for an extended period of time, then I’d go to my emergency fund in order to pay cash for my living expenses. I have insurance on my house but why should I pay the credit card companies interest while I’m waiting for my insurance money? And if I’m out of a job, that’s hardly the time to be incurring debt in the form of 19.9% interest payments to the banks. I have money set aside so that I don’t have to turn to credit cards during the bad times. You should too.

It takes as long as it takes to create a nice, fat cash cushion of emergency money. Start today.

  • Pay Cash.

The following method has worked for me. I suspect that it will work for you.

First, I identify what I want. Second, I look at my bank account to see if I have the money.

The third step goes one of two ways. If the money is already in my bank account, then I buy what I want. If the money is not in my bank account, then I don’t make the purchase.

Fourth, I get what I want… when I have the cash in hand to pay for it. The fancy term for this is delayed gratification. Call it what you want. The bottom line is that paying cash throughout my life has benefitted me far more than any inconvenience caused by waiting.

  • Pay Off Your Mortgage

I was lucky enough to get into the housing market with a modest, mid-sized mortgage under $70,000. When I moved from my first home into my next one, I bought a property that suited my life circumstances. I did not accept the bank’s gracious offer to lend me several times my annual income. My refusal of that gracious offer has meant that I live in an older home that’s roomy enough for a Single One. It also meant that I could pay off my mortgage in my mid-30’s. I’m happy to report that those former mortgage payment are now the foundation of my automatic investment plan.

I know that there is a lot of debate among very smart people about whether to invest or to pay off your mortgage. Today, we live in a world without pensions and $300,000+ mortgages. Essentially, these two facts combine to create circumstances where people can spend their entire working lives paying off a mortgage. They may not have any “extra” funds to put towards retirement. Every dollar is allocated to paying for the mortgage and for the costs of living. Most people enjoy the little luxuries – you know, food & transportation. Crazily enough, they’ll even prioritize those luxuries over saving for a retirement that’s decades away. Even I go back and forth on whether I should have taken 25 years to pay off my mortgage so I could have invested in the stock market for a longer period of time.

Since paying off my home 10+ years ago, I’ve never worried about having shelter. Rental increases haven’t impacted me, because I own my home free and clear. Mortgage rates no longer make me apprehensive, because I don’t have to worry that my budget will be impacted if those rates shoot up. (Of course, that’s a hollow argument in the mortgage market of 2020 – when 5-year rates can be had for less than 2.5%.) I no longer have to hope that absolutely nothing goes terribly awry with my paycheque for over two decades so that I can service a gigantic debt. This last benefit just might be my very favourite – sleep is easier without money worries.

I still think paying off your mortgage is a great course of action. At the same time, I’m realistic enough to recognize that it’s not always the best option.

Everyone’s situation is different so use these nuggets as you wish. Stay safe – wash your hands – be well.

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Weekly Tip: Ladies, you’re statistically more likely to outlive men so you should invest a greater percentage of your portfolio in equities to generate higher returns over your longer lifespan. Withdraw your age from 120 and allocate the number as the percentage of your investments to the equity portion. As you become a more sophisticated investor, you can change this percentage if you want.

Tough Choices

Try as I might, I still haven’t figured out a way to get everything that I want. There are always tough choices to be made about money. I honestly believe that tough choices are the foundation of the non-financial side of personal finance.

While the Single Ones among us do not have to fight with anyone about money, it’s still incredibly important for us to identify our spending priorities. Being single does not eliminate the requirement to take responsibility for our money. Setting priorities helps us figure out what to do when tough choices have to be made about how to spend our dollars, and which goals to pursue.

Last weekend, I found a wonderful house. It’s a 1500sqft bungalow with main floor laundry, a double-car garage, and – wonder of wonders! – a large foyer that opens into a beautiful, bright living-space. Did I mention the large composite deck, the spacious & fully-furnished basement, and the fabulous ensuite off the master bedroom? It’s even in the neighbourhood that I’ve been watching for the past ten years!

So why didn’t I jump on the change to buy it?

Here’s why… Doing so jeopardizes my retirement plans.

The house is almost perfect for me. It’s main drawback is that it would require me to commit to working for at least another 5 years. Time is precious. I’m not one of the Very, Very Fortunate who loves their job and would do it for free. While my job has a great many benefits, I’ve long dreamed of the days when I can spend my time doing what I want and not what my employer pays me to do. I don’t want to sacrifice 5 years of my retirement for a house.

And it wouldn’t just be losing 5 years of retirement. Having a mortgage again would mean that I would lose the financial flexibility that I have right now. In pre-COVID times, it was so nice to be able to say yes to spontaneous invitations without worrying if my budget could handle the expense:

  • Dinner with friends to celebrate the warmer weather? Sure.
  • Can I afford the Rimrock to attend a good friend’s wedding? I’ll be there with bells on!
  • How about a last-minute theatre performance? Not a problem!
  • Why not pop over to the Emerald Isle in six weeks? I’m on my way!

Taking on a six-figure mortgage at this stage of my life would mean giving up the little extras that bring me joy. Those little extras are my reward for having been diligent and focused in my younger years, when I was paying off student loans, car loans, and the mortgage on my current house. Back then, I said “No” a lot more than I do today. Friends and family often chided me for the financial choices that I made, but I don’t regret following my plan. After all, I was the one who had to live with the consequences of my spending choices.

So as much as I wanted to buy the very awesome new house, I had to make a tough choice between two competing priorities. I could stay on track to retire, and continue to live in my current home which is perfectly suitable for me. Staying in place means that I don’t have to forego time in retirement. Alternatively, I could go back to having a mortgage and living on a tighter budget. In addition to all its lovely features, this new house’s property taxes are twice what I pay now. I’d have a higher heating bill each month, and I expect that the other costs of running a house would be higher too. Also, little renovations that I would want – a railing for the deck, new paint in the dining-room – would have to be put off. My budget wouldn’t handle renovations and mortgage payments at the same time.

At the end of the day, I chose to say “No” to the new house. The truth is that I’m not prepared to give up my goal of retiring when I want. I don’t hate my current house but I’m also not enamoured of the idea of never living anywhere else before my long dirt nap starts. Part of me is craving to be the Joneses, to buy another house, to set up a new little spot to call my own. It seems that everyone I know has bought a new house in the past 5 years – family, friends, colleagues, acquaintances. Why should I be the only one who doesn’t get to buy a new house?

The last question is a stupid one. I am not being deprived of a new house! I’m simply making a different choice. Those who have bought won’t have the option of retiring a wee bit sooner. They’re committed to repaying the bank or losing their home to foreclosure. The choice for them was to buy the house and to work longer than I’ll have to.

When it comes to money, tough choices have to be made sometimes. I’d already defined my priorities so it wasn’t too, too hard to walk away from the new house. I know what’s most important to me.

Ideally, you’ve also defined your priorities and you’ve figured out how to spend your money so that you can meet them. You’re the one who works hard for your money so make sure that you’re pursuing your priorities whenever you spend it. Whether you want a new vehicle, a new home, a new book, or new clothes, just make sure that your money is going towards the priorities you’ve set for your life.

The tough choices won’t go away completely. Knowing your priorities will better equip you to choose the alternative that gets you closer to the life you want to live.

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Weekly Tip: Update your net worth every month, or on a regular schedule that best suits you. Net worth is determined by adding up your assets and subtracting your debts. If you have a negative net worth, that means you’re in debt. If you have a positive net worth, then your assets exceed your debts. Your net worth is a snapshot of your finances at a given point in time. Knowing this number will help you to determine what your next steps need to be on your financial journey.

It Never Hurts to Ask

When it comes to money, it never hurts to ask for what you want.

Case in point – the mortgage on my rental property comes up for renewal this spring. For the first time ever, my bank sent me my renewal instructions 6 months before the renewal date. Usually, I get my renewal letter 3 months before I have to sign on the dotted line. In any event, I was somewhat surprised by their eagerness.

Naively, I’d thought they would be more than happy to renew at my same rate. For the past five years, I’ve been paying 2.79% on my mortgage. It’s a sweet, sweet rate and I’ve loved it. The mortgage before had been at 2.99%, so I’d gotten very comfortable with a rate of less than 3% for a 5-year term.

I girded my loins. I straightened my crown. I softly repeated my mantra to myself – “It never hurts to ask.” And I made the first strike.

Round One

My first call to my bank resulted in the perfectly-pleasant customer service representative telling me that the best my bank could offer was 3% for 5 years. I gently reminded him that I’d been a good customer for over a decade and that I also had a significant portfolio with their investment arm. Mr. Perfectly-Pleasant appeared not to be moved. We courteously discussed my ability to take my mortgage elsewhere, a move I was secretly loathe to make. We also discussed the fact that the Bank of Canada would be making four more rate announcements before I had to renew my mortgage.

(Of course, this means very little since the 5-year mortgage rate is far more heavily influenced by the bond market than it is by the prime rate. The prime rate has far more impact on short-term and/or variable mortgage rates.)

At the end of the call, Mr. Perfectly-Pleasant had stuck to his guns. My bank wasn’t going to offer me a 5-year rate at less than 3%. I’d asked and the answer had been “No”… which I’d chosen to interpret as “Not just yet.”

I’d been knocked on my bum and was no closer to my goal of getting another 5-year mortgage interest rate of less than 3%. Luckily for me, this wasn’t my first time at the Mortgage Rodeo. I knew that this was simply part of the dance that always exists when one wants to borrow money without enriching the creditor too, too much.

It never hurts to ask… but there’s never any guarantee that you’ll get the answer you want.

Round one went to the Bank… but, much like the Terminator, I would be back.

Attempt No.2

The second call to the bank didn’t go too terribly differently except for one incredibly distasteful detail – my bank now wanted to charge me 3.05% for a 5-year rate. Wait one damn minute – 3.05% is even higher than 3%!

I nearly fainted from shock!

How on Earth could my bank even consider charging me a higher rate than the one they’d offered before? Did they not understand that I wanted a rate of less than 3% for another 5 years? Had I not been explicitly transparent by stating “I’d like to have another rate of less than 3% for the next 5 years”?

It had never occurred to me that my bank would try to raise my mortgage renewal rate a second time! Was this some strange ploy to scare me by planting the seed that the rate would keep going up before my actual renewal date?

If so, their plan had failed miserably. I knew I was a great customer with a spotless repayment history and excellent credit. Let’s not forget that both my bank and I were well-aware that many other banks would be happy to have me as a new customer… and that they’d be willing to offer me their Shiny-New-Customer rates.

Still, finding another bank to finance my mortgage wouldn’t be exactly free. I’d have to pay an appraisal fee. Someone would be running a credit check. There was also the fact that I’d had to meet the requirements of B20 Stress Test, which I could easily do. There might even be fees associated with moving my mortgage from one bank to another since my bank would do what it could to extract money from me in lieu of all that mortgage interest they would no longer be getting from me. All of these were little hassles that I really didn’t want to endure if I could avoid them.

My bank was simply doing what banks do: trying to fleece me like they try to fleece all their customers. It wasn’t personal – it was simply business.

Sticking to my Guns

I refused to be deterred from my goal of renewing my mortgage for less than 3%. Just because other people were renewing at higher than 3% rates was no reason for me to do the same. If they jumped off a bridge, was I going to jump too? I think not – my parents had raised me better than that!

Ignoring the also-pleasant customer service representative’s statement that I could get a 5-year fixed mortgage of 3.05%, I asked her if there was any way that the rate could be lowered. Like my wise aunty has often said, them’s that asks are them’s that gets.

Ms. Also-Pleasant did her employer proud. Once again, she repeated that my bank was willing to offer me a 5-year rate of 3.05%. She said that her computer told her that this was the bank’s best rate of the day. Much like her predecessor, Ms. Also-Pleasant told me that I was free to check back in the future. She even added a teaser by stating that the rates might go down in the spring since a lot of people would be buying houses.

The trouble was, I didn’t want to have the task of renewing my mortgage hanging over my head until the spring. I wanted to get this chore crossed off my list, but I wasn’t going to renew unless I got a rate of less than 3% for the next 5 years. Why couldn’t they just give me what I wanted?

I held my tongue and I kept my cool. If I’ve learned anything during my few, precious years on this little Blue Ball of ours, it is this: The person who talks to the public is never the person who has all of the power. There’s no sense yelling or cursing at those on the front lines because they can’t override the decisions made by those who are higher up on the chain. However, they do have the power to put in a good word on my behalf to the people who make the decisions. And this means that it never makes any sense to be rude, mean, or un-kind to the front-line soldiers. (Also, they’re human beings doing a job so you shouldn’t be rude, mean or un-kind to them in any event.)

Again, I ignored the offer of 3.05% and I again asked – politely! – if there was any way for that rate to be lowered. You see, Life has also taught me that it never hurts to ask for whatever it is that you want. If anything, asking for exactly what you want exponentially increases your odds of getting it.

Ms. Also-Pleasant’s response to my polite inquiry thrilled me to the core. She stated that she could forward my request to the Pricing Department and see what they could for me.

Success!!! I had no idea what the Pricing Department was, nor did I have any clue as to what it could do for me. All I knew at the end of the second call was that I didn’t have to start shopping the market for another mortgage nor had I yet reached the point of calling a mortgage broker.

Round Two is what I’d like to call a draw. I hadn’t gotten what I wanted, but I hadn’t landed on my bum either.

Victory!

Phone call number three can legitimately be categorized as a late Christmas present. When I got back to my office after the holidays, my bank had left me a voicemail. Returning their voicemail resulted in unbounded glee for the rest of my first day back in the office.

The mysterious folks of the previously-unknown Pricing Department had finally understood what I wanted… and they’d granted me my wish. Finally, my bank was offering me a rate that I could live with for 5 years = 2.84%. My new rate from the Pricing Department was even lower than the rate my bank was advertising to its own Shiny-New-Customers.

Woohoo! This was more than I’d been paying, but still less than my acceptable upper limit. As much I’m not a fan of banks, even my bank should be allowed to make a wee bit of money from me. I truly feel that I’ve been quite generous by allowing my bank to increase my mortgage rate by the equivalent of 0.01% for each of the next 5 years. I’d allowed my bank to save face by charging me a slightly higher rate. My bank can still hold its head up and participate when all the banks stars talking trash about customers on the playground.

At the end of the day, I’d gotten exactly what I’d wanted. And the cherry on this particular sundae was that my name would not be flagged as a Problem Customer because I’d been polite during all of my interactions with everyone.

So you see… it never hurts to ask for what you want.

Could I have gone back to the Pricing Department and asked for a lower rate? Sure.

Would I have gotten it? Maybe…or maybe not.

Do I feel foolish for not asking for more of a discount? Not in the slightest. My life isn’t about looking to save every single penny. I had a goal and I’ve met that goal. Now, it’s time for me to direct my attention and my energy towards satisfying other goals.

After all, I was one of them’s that asked and now I’m one of them’s that’s gots! ;-}

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Weekly Tip – If you’d like to have $1,378 by the end of the 2020, then I invite you to participate in the 52-Week Savings Challenge. You can complete the weeks in order or however you see fit. Just make sure to make every required contribution then enjoy/invest/donate/whatever-you-want-do-with your money on December 31, 2020.

Renting vs. Owning

I’ve been a big fan of Garth Turner, who blogs over at Greater Fool, for a few years now. He’s a big proponent of creating cash flows for retirement. Towards that end, he has written many, many persuasive posts about why people should sell their homes, invest the equity, and live off the investment income.

It’s not necessarily a bad plan. For a very long time, I thought it was a great plan.

But…

Lately, I’ve come to question how feasible this plan is for everyone who owns a house. If you’ve been in Vancouver or Toronto for a few decades, then your house could likely sell for a high 6-figure amount, possibly even a 7-figure amount. And if you’ve been there for a few decades, then hopefully your mortgage is gone.

Take that sweet, sweet cash and invest it – in a properly balanced and diversified portfolio, a la Garth Tuner. Now you’ve got cash flow coming in from your investment portfolio to pay your rent. If you’re really fortunate, your investments might even kick off enough money for you to live on. Easy, peasy, lemon-squeezy!

Yet I still have doubts…

My only concern with Mr. Turner’s advice is that not everyone has a home that, when sold, will generate enough money to live on. If a person’s in that situation, and sells, then they face the prospect of ever increasing rents. While their portfolio is growing in the background (hopefully!), it’s quite conceivable that their rental increases outpace the growth of their investment income. In this situation, portfolio income isn’t enough to pay your rent. Mr. Turner’s plan no longer works.

Are people really in a better situation if they’re renting and their employment income has to go towards rent, instead of towards buying more investments, because their portfolio’s returns won’t cover the bills?

In that situation, isn’t the portfolio more like a part-time job than a reliable cash-flow on which one can live and eventually retire? And I use the term “part-time job” to convey the idea that, while the income from a part-time job nice to have, the annual amount of money generated isn’t enough by itself to keep body and soul together.

And if their employment income and investment income are both used to pay the rent, then what happens when the employment income goes away?

Then they’re without a home, and their portfolio’s not generating enough money to cover all that needs to be covered.

Renting might not be the answer

One of my greatest financial fears is being an elderly person who rents. Once employment stops, then all expenses have to be covered by pension payments and investment returns. Pensions are disappearing at an incredibly rapid clip. Investment returns aren’t guaranteed, even if you’re one of the lucky ones who managed build a multi-million dollar portfolio before retirement.

It seems to me that a paid-off home is a cornerstone of a secure retirement. People who own their own homes don’t have to be concerned with rental increases or eviction. They can stay in their homes for as long as their health will allow.

This is great!

And yet…

Houses are so damn expensive today! Even if you’re not in Vancouver or Toronto, a $350,000 house isn’t exactly cheap when you’re earning less than six figures. If it takes you 20-25 years to pay off your mortgage, and your employer isn’t promising you a pension, when exactly are you going to have that extra money to set aside in an investment portfolio?

If you’re not one of the people who earns enough money to pay off a mortgage while simultaneously saving for retirement, then maybe Garth Turner is right.

After all, you might avoid rental increases and eviction but let’s face facts. A paid-off house won’t help you buy groceries and heat and medicine in your dotage. Reality being what it is, a person cannot spend their house one doorknob at a time in order to buy what they need, when they need it. Only money can be spent on stuff. A paid for house represents locked-in money. It’s money that cannot be invested or spent unless the home is sold or otherwise mortgaged.

So what’s the right answer?

I have no idea. The older I get, the less I really know for sure.

For many people, housing is ridiculously expensive and it requires a paycheque-to-paycheque existence until the mortgage is gone. Funding one’s own retirement by creating a reliable cash flow is also ridiculously expensive, yet it’s a task that few of us can afford to ignore.

I can certainly see the allure of living off of investment income after liquidating the equity in your home. But so many things have to go right for a very long time for this plan to be feasible. One, you have to properly invest the money. Two, you have to hang on to your investments even when the market drops during a recession. Three, you have to know what to do when black swan events have a negative impact on your portfolio.

Yet, I can also see the hazards of spending most of your working life paying for a house. One, you don’t have significant retirement savings because it took so long to pay off your mortgage. You didn’t have enough time to re-direct your former mortgage payments towards your investment portfolio. Two, you’re making a long-term bet that you’ll always have an income over the 20+ years it might take you to pay off your mortgage. Three, you forever foresake the growth that your money could’ve provided had you invested it in a well-balanced & diversified portfolio.

Again, I don’t know what the right answer is. By way of this article, I simply want you to be aware of the options, the benefits, and the drawbacks. Start figuring out what’s best for you and for your future.

Whether you choose to rent or you choose to own, make that decision with your eyes wide open and fully aware of the opportunity costs of your choice.

Are the Lessons Still Working?

The older I get, the more I think about the ideas that have guided my life’s decisions up to this point. I ruminate on whether some of the ideas that I’ve held dear for a long time are still good enough to follow, or whether they’ve led me to a place that I’d rather not be. In short, I ask myself if those ideas are helping me or hindering me when it comes to achieving my dreams. One of those lessons that I ponder has to do with investing.

When I was younger, I read Dave Ramsey’s book – The Total Money Makeover. I immediately implemented its principles into my life. This book for put me on a very stable financial path. I was young and inexperienced, so this book helped me immeasurably when I was first getting started. And since I’m older than the Internet, I didn’t have access to the myriad of great blogs and websites that now exist to teach people about money.

Fans of Dave Ramsey will know all about the Baby Steps, which are designed to get you living a life that fulfills your dreams once you’re debt-free. If you’re not familiar with Dave Ramsey, get yourself to a library and borrow his book. You may not agree with him, or you may become a disciple. If you’re uncertain about where to start with your finances, his book is a good place to figure out what your next steps should be.

There is a lot to appreciate about the Baby Steps. I’m firmly in favour of getting out of debt. It’s a fantastic goal for just about everyone. I’ve yet to come across a situation involving revolving credit card debt and then think to myself “Wow! What a brilliant idea to pay 29% interest month after month, year after year! I wish I was doing that with my money!”

Nope! I have never once had that thought. When it comes to getting out of debt, I think Dave’s advice is pretty sound… for the most part.

Never refuse free retirement money

However… I’m not as dedicated to everything that Dave preaches as I used to be. Our beliefs about best practices for your money diverge when it comes to saving for retirement and building wealth. If you read his book, then you’ll know that Dave wants you to stop investing for your retirement until all of your debt except for the mortgage on your home is completely gone.

In my opinion, ceasing retirement contributions is a bad choice for a number of reasons. Firstly, people already have a serious problem with saving for retirement and building wealth. That problem generally takes the form of them not doing it! Secondly, the longer money is invested then the more time the money has to compound and grow in the market. It’s so vitally important to simply start investing so that your money starts to grow as soon as possible!

Thirdly, the debt burden to be paid off could be quite large and it might take several years to eliminate it. That’s several years of missed investing! If you’re an older person who’s suddenly decided that it’s time to clean up your personal finances, then you don’t have the luxury of waiting to invest for your retirement. Finally, if you’re getting any kind of retirement match from your employer, then you’re giving up free money when you stop making contributions to your retirement accounts at work. You should not say “NO!” to free money from your employer!

Why pay more for the same thing?

The second area where I disagree with Dave is in respect of where to invest your money. He is a firm believer in buying mutual funds, preferably ones that invest broadly in the stock market. He urges his followers to invest in mutual funds with long-term track records and which provide 12% return on investment. Since he’s from the USA, he encourages people to invest in the S&P 500. I have no quarrel with investing in the stock market. I just can’t figure out why he wants people to invest in mutual funds instead of exchange-traded funds.

For the most part, there’s an ETF out there that is equivalent if not identical to whatever mutual fund has caught your eye. Buying an ETF instead of mutual fund is less expensive than buying a mutual fund. This is because ETFs have lower management expense ratios than mutual funds do. If you want to contribute to a mutual fund that invests in the stock market, then find an ETF that invests in the stock market. Compare the two and then buy the one that’s cheaper. You’ll be investing in the same thing, for a much lower price. The difference between the MERs for the two investment products is money that will stay in your pocket.

Imagine your investment as a 2L carton of milk. You can pay $2.49 for the milk, if it has the mutual fund sticker on it. Your other option is to pay $0.75 for the milk, if it has the ETF sticker on it. One carton is vastly cheaper but you’re still buying the same milk. Why would you pay more for the same thing?

Until I hear a persuasive argument from Dave on why he prefers mutual funds over ETFs, I can’t ever see myself agreeing with him on where people should invest their money once they’re out of debt.

Investing 15% isn’t enough when time is short

The third area where I disagree with Dave is with the amount of money that he wants people to invest. Once you’ve reached Baby Step 7, Dave wants you to invest 15% of your income for wealth-building. Presumably, you can spend the rest of it in any way that you choose.

Woah… 15% of your paycheque isn’t a lot of money if you have no other debts. Personally, I think this number should be way higher. I’d like to see debt-free people investing atleast one-third of their take-home pay, and ideally half of it! My reasoning goes back to the fact that money needs lots of time to grow to significant sums.

If you don’t become completely debt-free until you hit your mid-50s, then you won’t have enough time to build a super-sized cash cushion. Maybe you’ve got a pension so you don’t have as much interest in building your own pot of gold. If you don’t have a pension, then you’re going to need to fatten both your RRSP and your TFSA as fast as you possibly can so that they can get you through your second childhood.

I think saving 15% is a good enough amount if you start in your 20s. This is because young people who aim to retire at 65 have 40 or more years to invest 15% of their income and watch it grow. However, if you’re starting in your 40s or 50s, then you need to save a lot more because you don’t have 40 years of growth ahead of you. There’s no guarantee that you won’t be a victim of downsizing or ageism once you hit your 50s. Dave likes to throw around a rate of return of 12% on mutual fund investments. The longer your time horizon, the better your odds of getting such a lofty return on your portfolio. If you’ve got a short time horizon, then the growth of your portfolio is going to have to come from your return AND your savings so make sure that you save more than 15%!!!

There’s no harm in saving more. Please do not misunderstand – I don’t want you to lead a life of deprivation while you build wealth. I’m not advocating that you deny yourself some of life’s luxuries in order to build mounds of wealth. Sacrificing all the things that bring you happiness and joy alone your journey simply to save for retirement isn’t a good way to live the only life you’ve got.

I just want you to consider saving more than 15% of your income.

If you have no debt and no mortgage, do you really need to spend 85% of your paycheque? Could you not stumble along on two-thirds of it and still do/acquire/experience most of the things on your want-list?

Money Mistake #2 – My Mortgage

Looking back, I’m certain that I made a money mistake when I chose to pay off my mortgage instead of focusing on investing.

At the time, I was in my 30s and my mortgage was less than $100,000. I had bought my first home when I was 28 years old. I had a 25-year amortization and my bi-weekly payments were $750, if memory serves. That amount was probably $450 more than I was required to pay since I had routinely increased my mortgage payment by the maximum allowable percentage each year. I was able to handle the costs of running my home, and my budget fortuitously still contained a significant bit of disposable income.

Hindsight is 20/20

I wish I had known then what I know now. Had I become wiser sooner, I would have invested that extra $450 bi-weekly into the stock market. Hindsight is always 20/20, right?

So how do I explain my choice? A good deal of my reasoning at the time was founded on fear. I’m a Singleton. That means I don’t have a second income coming into my household. I knew that if something were to go catastrophically wrong, then I would lose my home. My family’s not wealthy. They would have done what they could, but I would have most likely lost my home eventually. Having a paid-off home seemed to be the smartest move for me.

I was also a huge fan of Dave Ramsey’s book – The Total Money Makeover. I read that book diligently and wholeheartedly subscribed to his teachings of becoming debt-free as soon as possible. After adopting his teaching, I put it into practice and attacked my mortgage with a vengeance.

With the benefit of time, I’m wondering if I didn’t make another money mistake. My goal had been to retire at age 50, not a particularly young age in the world of F.I.R.E. but certainly younger than the traditional age of 65. I’ve crunched the numbers and I won’t be able to hit my target without a large lottery win, or without developing a taste for cat food. I don’t want to retire simply to stay in my house due to financial constraints.

What could have been

If I’d known then what I know now, I would have stuck to my minimum required mortgage payments. Doing so would have allowed me to invest all that extra money into the stock market. Obviously, I would have taken part in the roller-coaster ride of the 2001 crash. And I would have gone through the other one that we had in 2008. Yet, I would have been be sitting quite pretty by now. My investment portfolio would be much fatter even though I would still have my mortgage.

I should not fault myself for not knowing everything about money in my thirties. Blogs were just beginning to take off. Unlike today, the Internet wasn’t a ready source of debates about the benefits of paying off a mortgage versus investing for the future. I picked a path, believing that I could do just as well if I started investing in my mid-30s. I wanted the security of a mortgage-free home before directing my funds towards my investment portfolio. It seems kind of weird to write that down. Today, I realize that if I had invested first, my portfolio would be throwing off enough income to pay my mortgage.

Take it for what it’s worth

What worked for me won’t necessarily work for you.

Today, 5-year mortgage rates are less than 3.5%. When I took out my first mortgage, I was overjoyed to have a 5-year rate of 6.5%. Today, my first condo would sell for approximately $240,000. I’m the first to admit that my condo wasn’t anything special even though I fell in love with it on sight. (That’s another money mistake that I made!) When I bought that condo, I paid $74,000.

My advice to other Singletons with a mortgage is to crunch your own numbers very carefully.

Like I’ve written elsewhere on this blog, you’re the one who is responsible for your income security in old age. You’ll need a place to live and your goal should be mortgage freedom before retirement. At the same time, you need to invest your money for growth so that you have a nice, fat investment portfolio to get you through the thirsty underwear years.

Even though I now believe that everyone should be investing for long-term growth while paying off their mortgage, you know the particulars of your circumstances better than I do. As such, you are the person best situated to make the choice that you think is best.

My money mistake was a doozy, but I’ll still be okay. I’ve got a mortgage-free home and a solid portfolio. I would have had more if I’d known better, but I still have plenty so I can’t complain too loudly. Life presented me with a choice between two sacks of gold. I chose one over the other, but I still wound up with a sack of gold.

A Little Bit of Wisdom

I’m sharing the following bit of wisdom respecting the mortgage cash account. I don’t think this is a particularly good option for mortgage-holders, but I’m trying to keep an open mind.

The Mortgage Cash Account

My bank holds the mortgage on my rental property. I make bi-weekly payments on my rental property because I want to have it paid off sooner rather than later. By making bi-weekly payments, I’m prepaying my mortgage. Essentially, I’m paying it back faster than required under my mortgage contract.

The mortgage cash account is the accumulation of those extra payments. It’s a visual reminder of how much principal I’ve repaid since starting my bi-weekly payments.

The account is also a visual temptation to spend that money. My bank spins this account as a good thing. They tell me that if some kind of emergency crops up, then I can withdraw money from my cash balance account and that money gets added back to my mortgage. In short, the mortgage cash account allows me to get my extra payments back at a moment’s notice.

Why the Mortgage Cash Account is generally a Bad Idea

At face value, it sounds like a good benefit. In reality, it’s not. This option works best for the bank because it means that I can go back to paying the maximum amount of interest on my mortgage loan. This is not a good thing for me, nor any person who wants to be free of their mortgage debt as fast as possible.

The reality is that I can use that money to go on vacation, buy lollipops, or set it on fire. The money doesn’t have to used for an emergency. There is no obligation to use it on a new roof, or a sewer line repair, or to remove downed trees from my property. The bank doesn’t care how I use that money – they only care that I eventually use it so that they can charge me more interest on it.

Do you see how this could be an impediment to achieving my goal of being mortgage-free? Is it as obvious to you that the bank’s goals are adverse to mine?

Let’s be very honest – most people will simply spend the money from the mortgage cash account on whatever they want. However, if the goal is to pay off the mortgage ASAP, then people should not be spending their prepayments and simultaneously increasing the size of their mortgage!

Emergency Funds are the Better Option

Again, the emergency fund is for emergencies. This is the little bit of wisdom that I want to share with you. No one should be in the position of having a mortgage without also having an emergency fund in place. When the emergency hits, and it eventually will, you shouldn’t be looking to your home to cover the expenses resulting from the emergency.

If you’ve used your emergency funds to pay off the emergency, then you need to re-organize your priorities so that you replenish your emergency fund as quickly as you can. Easy? No, not really. Necessary? Yes, definitely! You always need an emergency fund, no matter what. So do what you have to build one and to keep it funded.

Taking money from your mortgage cash account means increasing your mortgage balance. It means that all your hard work to make prepayments to save on the interest is vitiated. Don’t do that to yourself! If getting rid of your mortgage is a priority, which it should be, then do not use your mortgage cash account. Instead, build and maintain an emergency fund while you’re simultaneously paying off your mortgage.

Rising Mortgage Rates & the Stress Test

Recently, people near and dear to my heart bought a new home. I was more than thrilled for them since their new place is lovely and will be a perfect nest for their growing family. And as they disclosed their numbers to me, I started to think about the impact that the rising mortgage rates will have on them when they go to renew their mortgage in 5 years. I’m fervently hoping that they are not underwater on their mortgage when it comes time for them to renew. The new reality in Canada is that if homeowners are underwater on their mortgages at renewal time, then there is precious little incentive for their lender to give them a preferential renewal rate.

 

What does it mean to be underwater on your mortgage?

 

You are underwater on your mortgage if the mortgage debt outstanding is higher than the market value of your home.

 

For example, if you owe $250,000 on your mortgage and the market value of your home is $200,000, then your mortgage is underwater by $50,000.

 

What is the stress test?

 

The Canadian government introduced a mortgage stress test to assist borrowers to determine if they could afford their mortgage if rates were to increase 2% above the posted 5-year rate. If the posted rate is 3.49%, then the person seeking a mortgage has to demonstrate she can still service the mortgage at rate of 5.49% (= 3.49% + 2%).

 

If you want to read the nitty-gritty details, here is the link as of the time of writing: How the Stress Test Works.

 

The short and sweet of it is this: if you cannot show that your finances could not support a mortgage at a rate 2% higher than the bank’s posted rate, then you cannot get the mortgage amount that you want.

 

Why does it matter if you’re underwater on your mortgage?

 

Being underwater matters when it comes time to renew your mortgage. Banks and other mortgage lenders are not keen to renew mortgages where the underlying asset, i.e. the property, is worth less than the debt. They reasonably and rightly understand that there is less incentive for a homeowner to pay the full price of the debt ($250,000) for something that is worth less than the debt ($200,000).

 

However, let’s assume that you want to stay in your home even though you’re underwater on the mortgage. The lender may not offer you the best rate since there’s less chance that you’re going to switch to another mortgage holder. Before the lender releases title on your property to another lender, you as the homeowner have to pay off the mortgage. But you’re underwater by $50,000 (= $250,000 – $200,000).

 

Another lender is not going to give you a mortgage of $250,000 on a property that is worth $200,000.  Secondly, lenders want homeowner to have some skin in the game so they generally want to see homeowners put down 20% of the value of the home. In this case, the next lender would only advance a mortgage of $160,000 (= 20% x $200,000).

 

As the homeowner, you would have to come up with $90,000 to get a mortgage from another lender. That $90,000 would cover the difference between the debt owed to your current lender, again $250,000, and the amount of money that your next lender would give you, $160,000, on your home which now has a market value of $200,000. Another way of looking at is that you’d have to come up with $50,000 to pay off your old lender and another $40,000 as a 20% equity stake in order to get financing from your new lender.

 

If your current lender is aware that you don’t have $90,000 kicking around, then your current lender has no incentive to offer you a rate that is lower than the posted 5-month rate. In other words, they’ve got you by the short and curlies. Why on Earth would your lender offer you a lower rate if they don’t have to? The only reason that your lender offers you “their best rate” is because they don’t want you to get a mortgage with one of their competitors.  If there’s no chance of you leaving, due to that pesky problem of not having an extra $90,000 lying around, then your lender has no motive to charge you less interest on your mortgage.

 

The second reason to not be underwater on your mortgage is that the new lender is going to subject you to the stress test. Not only do you have to come up with the down payment amount of $40,000 and another $50,000 to satisfy the deficiency between your mortgage debt and the market value of your home, you have to demonstrate to the new lender that you can afford the new $160,000 mortgage at rate that is 2% higher than the posted rate. If you can’t pass the stress test, then the new lender is not going to issue you a mortgage and you’re stuck with your current lender.

 

How to obtain good options for renewal time

 

You want to be in the position of having good options come renewal time. When it comes to mortgages, one of those good options is knowing that you can switch lenders if you need to. Once your current lender is convinced that you have the ability to take your mortgage business to their competitor, they will again be incentivized to give you a discounted mortgage rate, which is simply a mortgage rate that is less than the posted one.

 

In short, the discounted rate is a sweetener that is offered so that you have a good reason to stay with them. They know that it is easier to keep a current customer than it is to find a new one.

 

The main way for you to become a customer that they want to keep is by ensuring that you are making all of your mortgage payments on time and that your mortgage debt remains lower than the market value of your home. You cannot control what the residential market does, but you can control how much money you put towards your mortgage every time you make a payment. Using mortgage prepayment options means that you are eliminating your mortgage debt as quickly as possible.

 

I firmly predict that as mortgage rates continue to rise over the next 5 years, there will be many people who will not be in a position to move their mortgage to another lender due to being underwater on their mortgages, becuase they cannot pass the stress test, or both. The end result will be that these mortgage holders will not be offered discounted mortgage rates by their current lenders. In turn, this means that they will be required to make higher mortgage payments after renewal or else face foreclosure by the bank.

 

Do what you can right now to pay down your mortgage as quickly as possible so that you maintain the desirable position of not being underwater on your mortgage and ensuring that you will be offered the option of being offered a discounted mortgage rate when it comes time to renew your mortgage.

Bi-Weekly Payments vs. Semi-Monthly Paycheques

One of the easiest ways to cut down the amortization of a mortgage is by making bi-weekly payments. A bi-weekly payment is one where, every two weeks, your mortgage lender makes a withdrawal from your bank account for the purpose of paying your mortgage.

 

If you’re paid on a bi-weekly schedule, then there’s absolutely no issue with having your mortgage payment come out of your bank account the day after you’re paid. Money comes in – mortgage goes out. Easy-peasy for all concerned!

 

However, there are those folks who don’t get paid on a bi-weekly schedule. They might be paid monthly, with a mid-month advance. Perhaps they receive a mid-month advance and the bulk of their paycheque is paid at month end. For these people, a  bi-weekly payment plan has to be structured a little bit differently so that they can still save interest on their mortgage debt by decreasing the amortization period.

 

1. Open a second chequing account at Simplii or Tangerine. This will become your mortgage account. 

 

These are online bank accounts that are free.

 

If you are paid monthly and that you receive a mid-month advance, (or even if you’re only paid once a month), arrange to have your mortgage payment deducted from your mortgage account instead of from your current bank account.

 

Since there are 52 weeks in a year, the bi-weekly plan means that 26 payments are made to your mortgage every year. There will be two months in the year where the mortgage payment will be debited three times in the month. However, you will not be paid three time in that month since your employer only pays you twice a month.

 

You’ll need the mortgage account so that your current account isn’t debited unexpectedly, which will mess up the rest of your finances. At this point, you may be wondering how your finances might get messed up with the bi-weekly mortgage payment.

 

Bi-weekly mortgage payments will not always coincide with the days on which you get paid. If you decide to implement my suggestion, the mortgage account will always have a buffer of 2 (hopefully more!) mortgage payments sitting in it. So long as you automatically transfer money into your mortgage account from your mid-month advance and from the remainder of your monthly paycheque, the mortgage balance will be paid down every two weeks without fail because your lender will simply withdraw your mortgage payment from your mortgage account.

 

Do not use your mortgage account for anything else, except your annual property taxes and house insurance. Set up an automatic transfer from your chequing account to your mortgage account to cover the costs of taxes and insurance. This way, the money’s in place when you need it and you won’t have to touch the 2-month buffer of mortgage payments.

 

2. Do not use the lender’s bank account unless it’s free for life.

 

If you’re getting a mortgabe through a bank instead of a mortgage company, the bank will want you to use their bank products. They might even tempt you with one or two years of a free chequing account. My suggestion is to not take their offer. After the first year or two of free banking, you’ll have to go back to paying banking fees unless you’re wiling have $1500 or more held ransom for the privilege of free banking. What I call a ransom is what banks calls a “minimum monthly balance.”

 

I strongly suggest opening your mortgage account at one of the free online banks, Simplii or Tangerine. You don’t have to pay any bank service fees for any of their accounts, which means you don’t have to keep a minimum balance in your accounts to avoid bank fees. (I am not getting paid for this recommendation.)

 

And if you’re already banking with Simplii or Tangerine, then so much the better!

 

3. Figure out how much your mortgage payments will be.

 

You can figure out your anticipated mortgage payment with an online calculator. I say “anticipated” because the actual mortgage payment amount will be finalized on the day that you sign your mortgage documents.

 

BMO has a pretty useful calculator: https://www.bmo.com/main/personal/mortgages/calculators/payment/  (Again, I’m not receiving any compensation from BMO for recommending this calculator.)

 

When using this calculator, be sure to choose the option for determining the accelerated bi-weekly mortgage payment amount. This bi-weekly amount will come out of your mortgage account every 2 weeks once your mortgage is up and running. Take that bi-weekly amount and multiply it by 26, to get the annual total amount of your mortgage payment. Then divide the annual total amount by 24, since you receive your paycheque in 24 instalments over the year. This new amount, i.e. 1/24th of the annual total amount, is the amount that you should be automatically transferring to your mortgage account each time you get paid.

 

You can also pro-rate the transfers if it’s easier on your budget. If you receive 1/3 of your monthly pay at mid-month, the transfer 1/3 of the new amount on the 15th of the month. The remaining 2/3 of the new amount can be transferred at month-end or at the beginning of the month, whenever you get the bulk of your paycheque.

 

The sooner you start automatically transferring money to your mortgage account prior to taking possession of your new home, the bigger a cash cushion you’ll create.

 

Ideally, you start funding your mortgage account via automatic transfers from your current bank account before you even get your mortgage.

 

Why? It’s best to have a buffer of atleast 2 mortgage payments sitting in your mortgage account before the mortgage starts. Taking this step will allow you to adjust the rest of your budget to accommodate your mortgage payments. You’ll have had, at a minimum, 2-3 months to adjust to the impact that your mortgage payments will have on the rest of your financial goals.

 

4. The reason for this suggestion.

 

Why am I suggesting this method of payment? And why am I suggesting that you start now?

 

Again, it’s because your bi-weekly mortgage payments will not always coincide with the days on which you get paid. The mortgage account will always have a buffer of 2, or more, mortgage payments sitting in it. So long as you automatically transfer money into your mortgage account, the mortgage balance will be paid down every two weeks without fail.

 

I want you to pay the least amount of interest possible on your mortgage. To do that, you need to be paying down your mortgage every two weeks. (There’s also a weekly option but I don’t really like that one.) Every time you make a mortgage payment, you’re reducing the principal balance of your mortgage. Every dollar of principal that is paid off is a dollar on which you will never again pay interest.

 

Shaving years off your mortgage means less interest going to the bank because that money stays in your pocket!

Insuring your mortgage

If you have a mortgage, then you should have some kind of insurance in place to pay it off just in case you die while the mortgage is outstanding. My suggestion*** is that you get a life insurance policy that is sufficient to cover the full amount of your outstanding mortgage. This way, the life insurance can be used by your named beneficiary to pay off the mortgage debt in the event of your death.

 

In Canada, there is a product called mortgage insurance. While I am not in any way, shape or form an insurance expert, I would urge you to get a life insurance policy instead of a mortgage insurance policy.

 

If you have a life insurance policy worth $750,000 and a mortgage worth $350,000, then the full $750,000 is paid out to your beneficiary to use as they see fit after your death. Your beneficiary can choose to pay off the mortgage and to pocket the remaining $400,000. Your beneficiary can choose to take over the mortgage payments and put the $750,000 towards some other goal. You don’t really care what your beneficiary does since you’re dead. What you care about while you’re alive is the fact that the life insurance policy will pay out its face-value. Presumably, you care that your beneficiary is put in a position to continue to live in her or his home upon your demise so that’s why you’ve obtained an insurance policy that will be sufficient to pay off the mortgage on that home. (If you don’t care where your beneficiary lives after you die, then there’s really no need for either type of insurance unless you simply have a deep and perplexing love of paying insurance premiums.)

 

If you have a mortgage insurance policy, then your beneficiary will be the lender who hold your mortgage. The mortgage insurance policy will only pay out the necessary amount to cover your mortgage at your death. If you die when your mortgage is $350,000, the the insurance policy pays the bank $350,000 because the bank is the beneficiary.  Let’s say that you you die near the end of the mortgage and your mortgage balance is only $7,500, then the bank gets $7,500 as the beneficiary of the policy.

 

If your intent is to have the mortgage paid off after your death, then life insurance is superior to mortgage insurance.

 

With a mortgage insurance policy, you do not get to choose the beneficiary. If you should pass away when you have children who still need to be raised and educated, a life insurance policy is a better vehicle by which to provide money for their future financial needs. The mortgage insurance policy only ensures that they can stay in the home, but there is no additional money set aside for post-secondary expenses, extracurricular activities, weddings, or any of the other experiences that you, their parent, would have liked to have given them.

 

Secondly, life insurance premiums will buy you the same amount of coverage for the life of the policy. If you’re paying $5 per month for life insurance, then you are getting $750,000 worth of insurance no matter when you die during the life of that policy. Your beneficiaries will get $750,000 whether you die one month after buying the policy or whether you die 3 days before the expiration of the policy.

 

With a mortgage insurance policy, you pay the same monthly premium for a decreasing amount of coverage. In effect, the mortgage insurance policy’s premium gets more expensive as the mortgage balance goes down. Again, assume that the premium is $5 per month. At the start of the mortgage, you’re paying $5 to cover the full mortgage balance of $350,000. Near the end of the mortgage, you’re still paying $5 but, should you die, the mortgage insurance policy will only pay out the very small amount owing on the mortgage debt.

 

Dollar for dollar, you are purchasing more insurance coverage for your life’s expenses with a life insurance policy than with a mortgage insurance policy.

 

Few people like to think about their deaths, which is understandable. However, the fact remains that people die and they leave dependents behind. The responsible and kind thing to do for your dependents is to ensure that they don’t have to worry about where they will live as they struggle to rebuilding their lives after you’re gone. One of the most loving things that you can do for your dependents after your death is to ensure that their overwhelming grief is not compounded by financial worries.

 

*** I am in no way, shape or form an insurance expert. This blog post reflects my personal opinion, which is based on my life experience. Insurance is a very complicated product so if you decide to purchase insurance, please get an unbiased opinion from an insurance expert.