Out of the Woods?

What does CDIC know that we don’t?

CDIC – the Canada Deposit Insurance Corporation – is the government agency that guarantees your bank deposits for up to $100,000 just in case your bank goes bust.  ‘Course that guarantee comes with a price tag, which the banks pay in the form of premiums. Now CDIC is floating the idea that it will raise deposit insurance premiums – doubling them – to ensure it has the resources it would need if a major failure occurred.

Part of the problem comes from the fact that Canadians may be parking more at their local bank for a couple of reasons:

  • They were scared out of the markets and sought what they thought of as higher ground… bank deposits of all types, and
  • They may also be saving more as they finally wake up to the fact that you can’t spend every red cent you make.

Whatever the reason, the end result is that the amount CDIC has to cover has jumped. The Globe and Mail reported a CDIC spokesperson as saying that while deposits typically grow by about 6%, last year they jumped by 15%.

I wouldn’t be in the least bit surprised to see CMHC (Canada Mortgage & Housing Corporation), the organization that insures mortgages, follow suit.  With interest rates at record lows and lenders offering clients more than enough rope to hang themselves, when interest rates start to rise – and rise they will – it’ll be interesting to see how homeowners cope with higher mortgage payments. If they can’t, it’ll be CMHC that’s left holding the bag, covering mortgages that go under.

If you borrowed $350,000 at 2.75%, and interest rates increase by even 1%, you’ll see a jump in your mortgage payment, unless you extend the amortization when you renew. So your $1600 a month payment would jump to almost $1800.  And if you had to renew at 5.49%, which is today’s posted rate for a five-year term, you’d have to find just over $2,100 a month to keep your home. Would you be able to come up with $500 a month more?

Canadians haven’t come anywhere close to feeling the pain of our American cousins. The New York Times Magazine reported last weekend that millions of Americans have watched as their homes have gone under water financially. They call it having “an upside down mortgage”: one where you owe more than the house is actually worth. And even Americans who CAN afford their payments are choosing to stop making those payments rather than throwing good money after bad. So the crisis down south ain’t over yet.

Further north we have been insolated from the same kind of meltdown because of our national banking system that demands higher reserves, and because of a central bank policy determined to hold interest rates down. But for how long? And then what?

If our economy had rebalanced during the last recession – yes there would have been more pain, but at least it would be over – I might be a little more optimistic. But it didn’t.  And while you’ve heard me rant on and on about the fact that “the fundamentals” can’t change, we still have people saying that they have. And we have governments prepared to pour millions into a broken economy, rather than accept the fact that markets – all markets – have ups and downs, and you have to learn to take the bad with the good.

Like protective parents who can’t stand to see their children suffer in any way, these governments have put their own financial health at risk to try and keep us happy and spending so we can buoy up the economy. But it isn’t working.

The bail-out of domestic car companies have left them holding inventory nobody wants to buy, while foreign dealers continue to rake in the money from consumers who think things are all fine on the northern front. The suppression in the natural rise of interest rates – in the global economy inflation is ratcheting up with a vengeance — has kept real estate markets hot and given home-owners the false impression that real estate values can’t go down. “Hey, we came through a recession and our house is worth even more, aren’t we smart.” Hey you only have to look down south to see that real estate is just one more asset class susceptible to market cycles.

George Athanassakos who is a professor of finance at the Richard Ivey School of Business at the University of Western Ontario, says in his column that he can’t sleep. He says that when the recession hit, about 60% of Canadian households were in a net debt position. Since then the problem has actually gotten worse as we continue to take on mortgages we won’t be able to afford when interest rates start to rise. Apparently the recession did nothing to knock some common sense into our heads. Oy!

I’ve always believed you should plan like a pessimist so you can live like an optimist.  If you owe money, it’s time to stop spending on anything that isn’t an essential, pay down your debt, and build up your emergency fund. Since it’s impossible to predict what it will take to push Canada over the edge, you better be shoring up your financial defenses if you want to be able to ride out the storm that’s coming.

Here are three upcoming locations for book signings:

Saturday, Jan 23  @ 1 pm – Chapters, Oshawa Centre,  419 King Street West
Wednesday, Jan 27 @ 7 pm – Indigo, Manulife Centre,  55 Bloor Street West
Saturday, Feb 6 @ 1 pm – Chapters, Square One, 189 Rathburn Road West

This will likely be the final three, so come one, come all and let’s par-tay!

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Gail Vaz-Oxlade

Gail Vaz-Oxlade wants YOU! Join MyMoneyMyChoices.com to get smarter about your money and help others get smarter about theirs. Isn’t it time we eliminated financial illiteracy? Come find me on Google+ and on Twitter.

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73 Responses to “Out of the Woods?”

  1. Very timely message Gail. “Live for today with tomorrow in mind.”

    It’s like squirrels – to sustain all seasons they stash away food supplies.

  2. If you get a variable rate mortgage but could afford the payments on a fixed rate mortgage, increase your payment amount to match the fixed rate…that way there is more going on principal and you are “cushioning” yourself for an increase in the variable rate…

  3. One thing I’ve never understood. How do you calculate your payments, post renewal?

    So let’s say I took a mortgage in 2000 at a 5 year rate of 5% with a 25 amortization. In 2005, it comes up for renewal. Do I estimate this by taking my remaining balance, at prevailing rates, for a 20 year amortization? Or do I have the option to extend it again to 25 or 35, and do I pay CHMC again? I’m confuzzled.

  4. My GF and I have been living poorly on purpose for the last year or so. We have a 7-year fixed rate, 30 year amortization mortgage. We are throwing as much money into it as possible on an accelerated bi-weekly schedule (47% of our NET), and we are on a path to pay it off in 10 years at this rate. It is unlikely to occur like that with all of life’s little surprises, but one our term is up for renewwal in another 5 years, we can still take a blow and survive if the rates shoot up.

  5. It’s interesting to read Gail’s perspective on the state of the global economy. It is sobering to hear a realist’s take on the state of things. A big market correction seems to be on the horizon — earlier this week I sold all of my holdings which I bought last spring in anticipation. Even the Economist’s lead story this week is that bubbles are forming — government’s keep providing cheap money, people keep borrowing it, people keep buying increasingly expensive and arguably over-valued stock of companies whose profits are coming largely from government stimilus spending, and governments are going further and further into debt to finance it all. Something’s gotta give it seems, and soon too.

    At least we can keep our government accountable to do the right thing — wait, no we can’t, they’re taking an extended Christmas vacation from the House!

  6. @ Geoff

    At renewal, everything becomes negotiable again, amortization, term length, and type of mortgage. Your house will be appraised, and it is likely that you paid off more than the CHMC floor of 5%. You will there fore not need insurance.

    However, something crazy might happen like the value of homes start to decrease wildly, and you have too little equity in the house, ending up with owing more than the house is worth, just like the scenario in the US as Gail described.

    The only mitigation plan I have found is to inject more money into my mortgage, going straight to the capital I owe.

  7. We just renewed our mortgage in December. We were not required to have a formal appraisal. (The lady at the bank asked us what the house was worth.) We were able to lower our rate but keep the payment the same, so the amortization was shortened by a few months. We were offered the chance to add money to the mortgage and to change from fixed to variable rate, but we declined both.
    We bought the house in 2005, with a 25 year amortization, and we officially have 13 years left on the mortgage. We were initially able to cut 4 years off just by paying weekly! We were able to cut off another 2-3 years by increasing the payment. I hope to have the house paid off before the end of the 5 year term!

  8. Hey Gail, how about a book signing in Calgary, Alberta…we’d love to have you and all your wisdom you would bring! Just thinkin’.

  9. avatar Traciatim Says:
    January 14, 2010 at 9:49 am

    “Further north we have been insolated from the same kind of meltdown because of our national banking system that demands higher reserves, and because of a central bank policy determined to hold interest rates down.”

    I thought it was mostly because we don’t have no recourse mortgages.

  10. Hey Gail, how about a book signing in Calgary, Alberta. We would love to meet you and have some of your wisdom rub off personally. Just think”.

  11. @ Daniel and others – thanks. Although I think Toronto is likely going to experience a slight price decrease, I really don’t think there’s going to be a significant crash. As Triciatim points out above, there are some major differences between Cdn and us banking rules, which helps. Unemployment, however, is a real worry but at the moment, my wife and I are doing well and I can only worry about so much.

    @ Dave – you sold all your holdings? Wow that’s gutsy. Personally I’m buying as much as I can (low cost index funds) because I’m digging the dividend payments, but I’ve never been a market timer either so maybe I’m buying at the peak.

  12. May I question the whole idea of home ownership as being an investment to begin with? With a 25 years mortgage, you end up paying about 3 times the initial purchasing price. Do you believe the property you buy now will be worth over 3 times the actual price? If the answer is no… you ain’t making any money here! So not an profitable investment at all.

    Some exceptions made, If you actually plan on living in it for a long period, don’t expect to make money out of it.

    What about the Equity you may ask? Equity = power to borrow = power to dig your own hole. Is it worth buying 300K of equity at the cost almost a million?

    I believe that real estate, unless being an income property, a flip or a quickly paid off mortgage is a well marketed financial trap that people get into without enough consideration. Renting might mean giving your money away to someone else without a return. But take away taxes, fluctuating interests rates, upkeep costs, time and energy (those things we rarely put a price on in equations anymore)… and you might just find out that you are better of giving some of you money away, save some of it that would have been gushed in renos of all kinds and enjoy your peace of mind…

    TV shows and commercials are successfully selling the idea that owning a property is an essential part of a successful life… Think again! The mess south of the border actually originated from this mere concept.

  13. @ Marc. Very interesting comments. “Owning” a home and paying a mortgage is definitely not an investment, although we have been brain-washed to think so. It is a luxury for sure, and we have to remind ourselves of all the interest + upkeep costs we end up paying as you vividly described, for “owning” property and a piece of land is not necessarily the best investment decision. I think it is wise to sit and compare both approaches “renting versus buying”, and determining what suits you.

  14. @ Daniel / Marc – I do agree that home ownership is not, and should not be, the goal for everyone. That said, I love being a homeowner, and I rented from 18 – 26 so have some exposure to both sides of the fence. I like the upkeep, and the security that homeownership provides. Nice homes for rent in Toronto are also not particularly easy to find either for under $2500 (any more, and its about my mortgage+taxes).

    As for if I believe the price will be worth 3x when I sell it…. that is far beyond my ability to forecast. I do know that having a house that’s paid for will make retirment easier, though on schedule to have it paid off by the time I’m 48 (I’m 34). However, I don’t necessarily need my house to sell for 3x what I paid for it, to make a significant profit. I bought my loft in 2002 and sold it for $50,000 more than I paid for it in 2007. Not a lot, but then again I only paid $150K in the first place. Yes, I put in improvements – A/C, better shelving – but I also got the benefit of those improvements for many years. Most importantly, it acted as a forced saving plan. There’s no way I’d have saved the roughly $70,000 I walked out with (after paying off mortgage/fees etc). I think you have to be really diligent about putting the savings from renting into investments to make renting work long-term.

    The mess south of the border wasn’t just greed for houses, it was using houses a cash machine (taking equity out), and the no-recourse loans didn’t help, as did poor banking. When my wife I took out a mortgage in Toronto in 2007 I practically had to give a blood sample — and I had an existing mortgage history.

  15. May I challenge readers to honestly state why they have decided “owning” versus renting a house? In my case, I think it is the thrill of getting exactly the house I want, in the section of town I prefer, made me choose to own. Traditional thoughts and obsolete mentality probably had something to with it too …

    Im begining to get frustrated at the amount of money I throw at the house, and interest costs to my bank, while I live frugally. I could of course fallback to regular mortgage payments any time, but I would just make the banks richer, and renew in 5 years with an almost identical mortgage + larger bi-weekly payments.

  16. I agree with the posters regarding owning your house. But there is a generation who indeed benefited greatly by home ownership. My parents bought their wartime house (brick 1.5 storey on a corner lot in a desirable neighbourhood) for $15,000 in 1965. Today the same house is worth approximately $130,000. My mother still lives there and it has been paid off for years and years. I don’t think any of us will see those kind of returns but for those that bought in the 50’s, 60’s and even the 70’s the return is there.

  17. In BC, it is cheaper at the moment to own than rent. So I believe it’s like paying yourself. You will end up getting money in the end instead of the landlords.

    My mom read an article that said we should except to be paying around $800 more a month in mortage within 3 years. The positive thing is that our consolidation loan will be done in 3 years and we prob. will equal balance. Actually, if my dh and I keep with the plan we will have an extra $1500 a month in 3 years to put towards these issues and still have more money to put into savings/ef.

  18. Like Dave, I’ve been really cautious on the markets – only I sold everything before the crash and did not get back in to take advantage of the recent market surge. I’m with Gail. I don’t trust this “recovery”. We haven’t fixed the problems that led to it, and we’re encouraging people to go out and do the same stuff that caused the trouble in the first place.

    Big banks globally have been wrapped in a “too big to fail” safety blanket while the rest of us are out in the cold – paying off the blanket.

    Having said that, the market will do what it will. It could continue higher, but my money will not be on the ride. I think Gail is right. Now is the time for us to give up our grasshopper ways and get with the ant program. Winter will come. We just don’t know exactly when.

  19. @ Daniel – I bought primarily because I wanted to put down roots while I started a family. I bought in central Toronto because I really hate commuting, and have paid a pretty penny for it. To me, it’s worth it. I would suggest, however, if you’re really upset you can always sell your house and rent, it’s not a forever contract. I kept investing in my rrsp week after week too, even though those funds went down in value a whole lot more than I think my house did. So far, 2009 sale prices are higher than 2007 when I bought my latest and hopefully final house, but we’ll see. I say “think” because until you sell, you really don’t know what your house is worth. It’s only worth what someone else is willing to pay.

    @ Leslie – I think you also have to remember that in the last 1960s/1970s, our parents were also paying 15 – 20% mortgage rates, which I can not fathom (born in 1975). Also, my parents, like yours, probably realized the biggest gains by simply buying and staying put, and not trading up every 5 years like some people do. I’m hoping my next move is into a pine box, personally.

  20. Indeed buying a house several decades ago was a great way… that may not be as relevant today… As for tricking ourselves into an obligated saving plan… not so much considering the amount we give the bank, we end up spending more than saving. And for Geoff, I’m happy you did the right thing at the right time. Lots do not have your chance today.

    And I am not questionning the idea of owning a home. That is a well deserved heartfelt need everyone should be able to fulfill… I am just tired of hearing the investment part of it when in fact, it is quite a privileged lifestyle, should be considered as so and appreciated for what it is. Too much misinformation out there…

    And for the mess South of the border… if people had not been induced into the false idea that home ownership was for everyone (blame the banks, the greed or whoever), this mess wouldn’t have happened.

    Glad to have this discussion!

  21. Great advice, Gail, and one that we have taken. We’re on track to be mortgage-free in 6 years now (total 15 years owning a home) and have built up a decent (3-4 months) emergency fund to boot. And, thankfully, following your plan, we are NOT in a “net debt” position. Yeah!

    One question though about this paragraph:

    If you borrowed $350,000 at 2.75%, and interest rates increase by even 1%, you’ll see a jump in your mortgage payment, unless you extend the amortization when you renew. So your $1600 a month payment would jump to almost $1800. And if you had to renew at $4.25%, which is today’s posted rate for a three-year term, you’d have to find almost $1,100 more a month to keep your home.

    I simply can’t get the numbers to work; is there a typo here? I totally agree with your overall point that when interest rates rise, some folks are going to find themselves over-extended. And the jump in payment @2.75% vs 3.75% does indeed come out at about $200, from about $1600 to $1800 (assuming a 25 year amortization). But I can’t see how adding another 0.5% (to 4.25%) to add almost $1,100 more per month, not even if I shorten the amortization to 20 years. Sorry if this seems picky, and I mean no offense–I mentioned our family finances being “Vaz Oxladized” in our Xmas letter this year for goodness sakes; love your work!–but I’d hate someone to get caught up on a typo (I think?) and not hear you important message.

  22. Geoff – I agree that they realized the benefits because they didn’t constantly move up. I’m a little older than you and when we bought our first house it was 1984 at an interest rate of 14% (and we were pleased to get that since it had been up to 18% a couple of years before). I don’t think my parents paid those kind of interest rates in the 60’s and early 70’s but the mortgage was low – considerably lower than we take out to buy vehicles. My parents have always said they don’t know how people can afford to buy today. Of course my parents didn’t owe anyone anything except the mortgage and didn’t even have a credit card until the 80’s. Quite a different mind set from today.
    We have owned two houses – one for 21 years and then sold to build our house in our preferred area in 2005. We made a $100,000 profit on first house but unfortunately that equalled just about the money we put into it for upkeep and major renovations. However, we did enjoy those upgrades for a long time. We were lucky to find a lot in our very preferred neighbourhood that became available when a school was torn down. We decided to make the move as this once a once in a lifetime chance for us to have a home that meets our needs in a great neighbourhood. However due to our ages 47 & 51 we know that we may have to postpone our planned early retirement for a few years. Our house is worth less than it cost to build at the moment but since we don’t plan to sell for a long time we are hoping that the value will rebound. In any event we have security in knowing that we are in our preferred area, in a home that meets our needs and we love it. If we were renting we would be concerned that at some point the house may be sold etc. For us the security is worth the extra costs.

  23. Marc, DanielC

    I totally agree.

    In our case, our homeowner cost (tax, insurance, upkeep cost, etc) is more than our mortgage. Almost as much as rent in this area.

    Even once we pay off our mortgage, we will still have this cost.

    I know that in our case renting would have been cheaper, but I have kids and like the privacy of a house more. I know that we could rent a house, but it would be much more.

    I never see a house as an investment, it is a place you live. Everyone has to live somewhere.

  24. I don’t know Marc.. there’s arguments for and against owning a property and they have been discussed on this blog before but I feel there’s more secutiry in owning my own home. Does this make sense? Who knows lol… All I know is that my husband and I will be mortgage free in 10 years so I won’t have to worry about making a payment out to anyone. Of course there is still maintenance and property taxes true, but being DIYer’s to the extreme we save alot of money doing renovations by ourselves and we still max out TFSA’s, have pensions, RESP’s and $0 debt.

    We’ll be able to retire early if we want to because we won’t have mortgage payments or rent to worry about so for us this makes sense. At least that’s the plan… hopefully, it will work out that way. I really really worry about people taking on a lot of debt right now because of the low interest rates. I just don’t understand it though, isn’t this what happened in the States?? Why are some following the EXACT same path to debt. I just don’t get it.

  25. Is anybody else worried about paying for the huge deficit caused by the Olympics? That’s something else we in BC are going to have to deal with, and many are worried that, as with Expo 86, there will be an additional crash after the party which we can’t afford to pay for.

  26. @Didi – very good point about becoming rent and/or mortgage free as early as possible though, and hopefully before retirement.

  27. Canadians playing it safe with mortgages

    http://www.globeinvestor.com/servlet…30801/GIStory/

  28. *** I realized I made a mistake in what I wrote… we are safe right now for 2.5 years because we are locked into a fixed rate. That’s why I am not concerned at the moment except that we will continue debt rep.

  29. @Danielc – thanks… I know that it means paying more now and as a result living more frugally but I really believe that either way you end up paying.. whether it’s in renting your whole life or paying out more now to own.(hopefully in the shortest amount of time possible) If you own you can have more control later when you want to retire or if circumstances change and you can’t work you have less expenses… who knows what can happen but I as I said, I just feel more secure and in control this way. Maybe I’m just a control freak lol.

    There are arguments for renting and taking the extra money you would have paid to own and investing it but that’s a gamble to it seems and sadly, I don’t know too many people with the discipline to pull it off.

  30. @ Daniel and others — I, like you, advocate really looking at renting vs buying, and do not buy into the argument that rent is necessarily a waste of money. Houses can quickly become moneypits, but for me, like others, with kids, I like the security of a house even though I realize the kids do not know/understand/care at all. Although my wife and I enjoy a significant income, we deliberately bought a house that was 3x our household income, and not the 5x we could have. This priced us out of our preferred areas, such as Leaside, and into Don Mills which is still a very nice area.

  31. I think the same could be said for buying or leasing a car as buying or renting housing… It depends on the person and the situation. I personally bought my house because I wanted location, security and the tradition of a ‘home’.

    As for considering home ownership as an investment, well, that’s just plain silly, once you take the numbers into consideration. I look at my home as an investment for my future. I know that in 9ish years it will be mine and when I retire I won’t have to worry about rent. Yes property taxes will always be there plus home improvement and the like, but it still gives me that sense of security.

    On a side note, do all you renters out there have renter’s insurance? Make sure you do! Friends of mine recently lost everything because of a fire in their building and they’re up $#!t’s creek because they just pooh-poohed the idea of insurance.

  32. Risa, I used an online calculator at RBC to do the numbers. I haven’t had time to run them again (am doing media interviews ALL day), but that’s what they produced when I ran them the first time.

  33. I’m a home owner of 10 years, less than 9 years left on the mortgage. I couldn’t imagine paying rent right now. Rent prices or crazy around here. For example a co-worker is paying $200 more a month for a not so nice motel unit, than I pay for my mortgage + property taxes.
    If we stay in this home, we will fully own this home when I am around 37-38, bought it when I was 19.

  34. We are renters, and we love the flexibility it gives us, due to our fairly itinerant lifestyle. Case in point, we can’t stand our current flat anymore because of noisy neighbours. No problem – just move! Over here (UK) it’s unusual to rent unfurnished accommodation, so we have relatively little stuff to move (no kids yet either). Our next move is actually only a few streets over, since we adore our neighbourhood, but into a slightly larger, brighter flat with fewer shared walls. It’s got a bit of garden, too, and I can’t wait to get my fingers into dirt again. And I’ve talked to the current tenant to make sure there are no noise issues!

    However, we are putting money into a down payment fund for when we move back to Canada. At that point, we will be looking for maybe a 2 or 3 bedroom townhouse, something with a small garden – if there are kids, they can share; I’ve never seen anything wrong with that. Our experience with UK living has taught us to live with minimal space, and we are very willing to trade centrality for square footage.

    The big appeal of home ownership for us is to be able to make it our own – years of bland white and cream walls really grate after a while. I’d love to be able to take ownership of the maintenance issues, too, rather than relying on the agency to send someone. I guess it’s really all about control. Also, we’re of a generation that is learning to expect little from the government, and it would definitely be nice not to be paying rent or mortgage in retirement. Better to front-load the cost during a 15-25 year period of full employment.

  35. I agree that it depends on the person regarding buying vs renting. My husband plays guitar (think of bands like Motley Crue or Metallica) and he always played quietly in the apartment and couldn’t wait to get a house! Now he rocks out and loves it! I also love having a yard in the summer and being able to garden. We didn’t buy the house because it was a good investment – we bought it because it gave both of us the opportunity to do the things that we love.

    Of course now that I know the importance of having a maintenance fund I would have been putting aside money from the time we bought the house. Now that we’ve hit the 10 year mark the fridge died in the spring, we had to replace a couple of windows and it would have been nice to have the money ready for this purpose. Now we are putting a maintenance fund away every month for the future.

  36. In the rent versus own question you should factor in the maintenance costs but also factor in the principal repayment as a form of savings (yes, markets could go down but on average the trend is slightly up, after factoring in inflation).
    So, don’t take your whole mortgage payment + maintenance vs rent as it will almost always come out better to rent.

    The question is in 25 years (assuming that’s your amortization) if you saved extra your weren’t paying when renting vs selling you house how much cash in hand would you have.

    example:
    225K mortgage on a $250K house with mortgage rate averaging 6% would give you payment of $1440. Add in maintenance, taxes + utilities and you would probably be looking at $2500 a month.
    If you sold the house that you bought and the value increased by 0.5% per year you would have $285K.

    Say you could rent an equivalent house with utilities included for $2000.
    Save that extra $500 for 25 years at an average of 4% you would have about $260K in savings.

    The house is better, but only slightly.

    PS. CMHC insurance is for the life of the loan, if you transfer lenders it goes with you. The only time you should have to pay more premiums is if you increase the loan amount (re-finance) or you buy a new property without 20% down and don’t port your old loan. If you are re-financing and want to save on the premium you should keep the amortization constant — you’ll only pay on the new money, if you extend the amortization you will have to pay on the whole loan, also why porting when buying a new property can be a good idea.
    At renewal you can extend the amortization but this is always a bad idea if you can avoid it as it just adds to how much interest you’ll pay.

  37. avatar chubby bunny Says:
    January 14, 2010 at 12:56 pm

    Hey All – I just stopped in to share the news that I am DELIGHTED with the outcome of my court proceedings yesterday. The judge was incredibly sympathetic to my plight. I was awarded a 2 week/2week timeshare of the children with the ex, and with that comes the applicable child support to me! There are still some smaller hurdles to get over: I have to find a home close to their school before the order comes into effect, and we have to sit down with the lawyers to hash exactly how much $$ it’s going to be. I’m going to offer him less child support in return for his picking up the children and taking them to school. Hopefully we can find a way to cooperate. Thank you to all for letting me vent and for giving me so much support recently.

    As for this topic – as I do not own a home, I will continue putting my nose to the grindstone so to speak and continue paying off that CC. A $170/month loan will be done in July, and then I “only” have left another $12000 on my CC to whittle away. Thanks to Gail, though, I have a viable, positive plan and budget in place, and I am feeling very optimistic about it all!

    I do have a question for y’all…..should I buy a new (read used) car? Right now, I’m driving a 2001 Chev Cavalier, which only seats 5. That means that I can’t adequately transport all six of the children myself. In addition, I will be living further away from my work, so a new vehicle might be more reliable (not that I’ve really had a problem with my car). My reluctance is of course in taking on another monthly payment, especially one that I wont be able to cover if HE decides he’s not paying the child support that particular month. I’m also worried about my credit report. I’ve got an R1 rating all the way down, but recently I applied and got an RRSP loan (ding), and applied twice for a new CC with lower interest rates (ding, ding). Won’t it look bad trying to get a car loan too? Can I even get approved?

  38. We renewed our mortgage June 08 and switched to a variable rate mortgage. We adjusted our biweekly payment amount at renewal which set us up for 17 years to pay it off (knocking off 3 years right off the bat). With the drop in rates, we’re on the path to have it all paid off in 9 years (based on current prime rate)…knocking another 8 years off. I realize that prime will likely increase before the end of our mortgage term but I intend on making additional payments to get it done within the 9 years.

  39. My husband and I spent some time weighing the options of renting versus home ownership before we bought. The decision essentially came down to lifestyle.
    We live in an area where rental costs are considerably higher than purchase costs, even including mortgage and property taxes, so if we wanted to rent, the options were an apartment or a house quite far from work. We wanted a house for the driveway, the backyard, the storage space, and the not-apartmentness of it. We bought close enough to work that my husband walks or bikes, but we did have to pay a premium to be as close as we are.
    For many people who are able to choose, I think renting may be a better way to go, but only if they are setting enough money aside (invested conservatively) to cover the cost of rent after retirement, and not just spending the extra money.
    In the short term, we could absolutely have lived more cheaply in an apartment, but cost is rarely the only consideration in a decision.

  40. A very sobering post Gail, may more people take it to heart.

    With the low rates for mortgages we are actually setting up the line of dominos to fall again as they did in the States. All these people will buy houses they can barely afford, the rates will go up, foreclosures will abound again thereby starting a new recession.

    The Bank of Canada PROMISED they would increase interest rates and even asked Cdns to keep this in mind if they are thinking of jumping on the homeownership train.

    I vote for home ownership. I have moved and rented 20 times in 9 years. In all that time I had one good landlord and one that was ok. The rest were awful. If it’s my house and the roof starts leaking at 4 am on Christmas day, then my husband is up there immediately to fix it. That said, I don’t delude myself that it’s “our” house since we are paying the bank for it and if we stop, we lose it. For us, the mortgage is cheaper than any rent we can get around here. We have a backyard for the kids, and although we know that any improvements we make won’t increase the selling price, we like that the house looks nice.

  41. @ Chubby Bunny – first, congratulations. It sounds like you were treated fairly. As for your question on the car – do you have an actual need for a larger vehicle, or is it a presumed future need? You mentioned that one of your kids is 20. How often do you perceive needing to drive all 6 children simultaneously? It’s important to remember these kids aren’t sixtuplets and all 3 years old. What are the logistics involved, really? How many trips a day would it take you in your current car, how far, how many different schools, could the 20 year old watch over 2 of the kids, and the second oldest etc etc etc. Personally, I would do everything I could to not incur additional debt, especially if your current car is reliable but you are relying on your ex to make your future car loan payments. Paraphrasing a famous quote about the markets, “your ex may be able to behave irrationally far longer than you’re able to remain solvent” afterall.

  42. I look at the ownership question pretty practically. I’m a young singleton, and I have no intention of pairing up anytime soon, so there’s no chance I could afford mortgage + taxes + maintenance on any place worth having in Toronto. Hence I’ll have to put up with (crappy) rentals for the foreseeable future.

    I know I should probably get renter’s insurance, but I’m put off by having to track down the answers to questions like when my plumbing was last upgraded. (I’m a renter; I pay other people to care about this stuff.) And the only expensive (>$1000) belonging I have is my computer. I could easily replace everything in my apartment for the $ in my emergency fund, so I don’t even know if renter’s insurance makes sense for me.

  43. avatar chubby bunny Says:
    January 14, 2010 at 1:57 pm

    @Rebecca – If a fire starts in your unit, or you leave the water on, and it drips into someone elses apartment…..it’s deemed your fault, and you could be liable for all the damages and replacement values of other peoples things as well. Do you have enough in your EF to cover their losses as well? Insurance is something you hope you never, ever have to use, but if you do you’ll be thanking your lucky stars.

  44. ^^ @Rebecca

    You may not have much to worry about to replace when it comes to rent insurance, but there are liabilities that could haunt you. For example, if your bathtub, for whatever reason, starts leaking and causes damage to the unit below, you are held liable for their damage. That’s one example, but hopefully you get the idea. Getting renter’s insurance is not that much but could be worthwhile. Mine is about $170/year and that covers $30,000 personal property plus something for other liabilities. You can get a lower personal property coverage and that would cheapen it.

  45. avatar chubby bunny Says:
    January 14, 2010 at 1:59 pm

    There is a very good video at http://yourmoney.ca/saving_penny about that topic.

  46. Chubby Bunny :
    Can you rent a van on the (possibly) few occasions that you need a bigger vehicle? Could the older child drive a rental as a second car when needed? Does your current car insurance transfer to rentals? Without a minimum of 3-month emergency money (which would have to cover the car payment), I would look at alternatives.

    I am still waiting for the Canadian housing bubble to burst.

  47. avatar chubby bunny Says:
    January 14, 2010 at 2:08 pm

    @Geoff – thank you for some very good thoughts on my vehicle buying decision. First off – the 20 year is on her own, and lives on the other side of the city, and therefore is of no help at all. There are six other children to worry about (16, 14, 13, 11, 9 and 6). The biggest issue is how they are going to get to school and back. I suppose the best thing to do right now, is to wait and see how cooperative the ex is going to be with this. Like I said, I am going to offer him significantly less child support in return for his transporting them. If he is willing to come to my place in the morning, and take them to school, and for them to walk to his place after school, and then he transports them to my place after his work, then it could work out very well, and I wouldn’t need to incur the cost right now. My anticipated home-base is within 5 minutes of his house and the school, and practically on his workplace doorstep.
    Hmm – I guess it’s a wait and see scenario at this point.

  48. avatar chubby bunny Says:
    January 14, 2010 at 2:12 pm

    Marie – thank you for the comment. This is a 5 days a week problem, so renting wouldn’t be an option.

    I kinda like the Kia Rondo, it can seat 7, and seems reasonably priced. Anybody have an experience with Kia’s?

  49. WHAT is DH???

    “Actually, if my dh and I keep with the ” yatta yatta?

    the only thing i can think of is DA’ husband am I totally off?

  50. DH = Dearest Hubby. or Dead Hubby, if in trouble.

    😉

    @ CB – your second-eldest is 16. Personally I think you shouldn’t be so quick to accept lower child support for transportation, since your child is getting close to adulthood but you will need to care for your kids for a long time. I’m not a lawyer so get second opinions (actually, even I was, I’d still say get a second opinion) but I do know, an agreement, once signed, can be difficult to change. So it won’t matter that transportation gets easier in 2012 so you should get more $, etc. Off to court you go again.

    @ Marie – how long have you been waiting for the cdn market to burst? And define: burst. I hear that a lot, but don’t know. To me it’s a 40% or higher drop, and I just don’t see that happening in Toronto or Vancouver anytime soon.

  51. Geoff:
    25-30% drop. There might be some areas in Canada that dropped that much (mini-bursts), but that would be few and the auto industry got some money to keep people employed.
    I left TO because of the insane cost of living to move to a town with affordable housing. And then the prices went up 5% every year (should be 3%) for a couple of years and then 30% for a few years in a row (what are they thinking???). The price changes are more leveled now but I don’t know who can afford these mortgages around here. I don’t think they should ease up the rules for mortgage. A downpayment of less than 10% can get you in trouble too easily. When they change the mortgage rules and when the rates drop, the prices go up. I don’t you always end up paying less (agree to a pricy house (price inflation, buying bigger), more insurance,…).

  52. Gail,

    Probably a glitch in their calculator then–I used the calculator on ING and got different figures, as the idea of a 1% increase in mortgage rates leading to a $200 rise in payment and a further 0.5% rise leading to a $1100 rise just struck me as odd. I think my past lives as both a math teacher and an editor were kicking in here! :-)

    But the main message is one that I agree too few people are hearing: make sure your budget can handle it when interest rates rise–because they will rise!

    Good luck with the interviews!

  53. Chubby Bunny; if the place you are considering (or area) is only 5 minutes from your ex’s place could you consider walking the children?? Also, would it be possible to switch vehicles with your ex for when you have the kids? I am assuming that he has a vehicle big enough?
    just a thought.

  54. A Vancouver Perspective:

    Rent vs. Own – Well rents are high here but the cost of owning is even higher. A close friend earning over $100 000/year refuses to buy. He has been renting for the last 10 years. His argument is that he has a huge savings account that grows and grows, his retirement savings are maxed out every year, he has healthy RESP’s set aside for his 2 children plus additional savings accounts for their other future needs (cars, weddings, travel, etc…) Every discussion with him always ends with the fact that he prefers not having the headache of a house and having a high disposable income.

    Housing as an investment: There were some good comments for and against this above, especially with all the number crunching. But what I always think about is my little old Grandma. She’s in her 80″s, fairly healthy, travels twice a year, otherwise her needs are very minimal. Her security has been her house, She’s lived in the house since the 60’s and it was paid off a long time ago. She has been widowed for about 25 years, and has a small pension, but her paid off house in Vancouver (a vancouver special with a suite) provides her with incredible rental income. Its like her own personal retirement plan.

    Vancouver Solutions: For all the people wondering how people afford such expensive homes, let me tell you what people here are doing. Every house has a rental suite aka “mortgage helper” and its not uncommon to have 2 rental suites. This often helps offset the cost of a higher mortgage. Plus with density limits maxed out all over Vancouver, people are always looking to rent. Other people, rent a small place in Vancouver or live with family, and own an affordable home out in the Valley (far suburbs) which in turn, they rent out. The difference goes into savings so that they can one day have a decent mortgage payment for a place closer to work. But I think a lot of people are also counting on these rental suites in case the “bubble” does one day burst. If they lose a job, the mortgage payment is offset by the rental income, same with if interest rates go up. Personally, when the bubble does burst, i’d prefer to be the homeowner with a “cushion.”

  55. KIA’s are fabulous. I have owned a KIA RIO 5 for the last four years and never have any issues with it. Great on gas and good driving in the city and highway. Mine even started in our -52 weather that we had here in Edmonton back in December for a couple days and it doesn’t even have a block heater. They start anytime as long as you put synthetic oil in them the dealership told me.
    As for the main topic of the day. I do worry about what will happen when we go to renew our mortgage in four years. Even though we got our mortgage before the rates went to their current lows I am terrified that our when we renew our the interest rates will have jumped to 8% or more. We are paying down our mortgage as quickly as we can without sacrificing savings, EF’s and RRSP’s just in case this does happen. But as long as we don’t take on any stupid debts we should be able to manage a increase in interest rate (within a couple points) just fine.
    Congrats Chubby Bunny!!

  56. @chubby bunny – congratulations! I am so pleased the courts gave you a favourable – and apparently fair – decision.

    @Manisha – we will probably be moving back to Vancouver in about 3 or 4 years (currently overseas) and I have to admit I am selfishly hoping for prices to fall there if we are ever to be able to afford anything. Our best bet is probably one of the newer developments, if people default on their off-plan purchases (often first time buyers or investment buyers). Victoria is also a big rental suite-mortgage helper city – our friends who own a house there actually live in the suite and rent out the main part of the house for more money.

  57. Hello Gail,

    Love your show! My husband and I bought our home 5 years ago and our mortgage renewal is coming up in March we were in a 5 year fixed mortgage at 4.29% amortized over 25 years, we make bi-weekly accelerated payments and have currently cut our mortgage down by 10 years.

    My question is this we have been hearing a lot about these all in one mortgages and have been trying to get peoples oppinions on this type of mortgage and whether it is a good idea or not.

    People that we have talk to that have them seem to really like it, but some of the financial people that we have talk to are really against them. I have run our numbers allowing extra spending just in case and have determined that with my husbands income yo-yoing from month to month (he is in sales) averages around 50K per year, our home would be paid off in approx 7 years, 8 years sooner than our traditional mortgage. Costing in us much less in interest and letting us be debt free sooner.

    We would love your oppinion?

  58. @Alison – I’m hoping prices will come down too especially after the Olympics. I don’t think there is much defaulting happening anymore. (My husband is a commercial banker so some of this is his insight) Developments aren’t getting the same kind of financing the used to. The Bankers have buckled down. What this means is that developers can’t rely as much on pre-sales now as they used to before to raise capital. Developers have to demonstrate a stronger capital base before they get financing. So this means they are selling less units as pre-sales because they are often better off waiting for the development to finish and then ask for market value at that time. And since they are putting in more of their money they make sure they can afford to hold out for the righ buyer and the right price.

    Hopefully for you, the currency exchange will make a big dent in your down payment!!! (you were in the UK right??)

  59. avatar Northern Lass Says:
    January 14, 2010 at 5:19 pm

    Love your show Gail!
    I have some Nunavut perspective to add.

    1 1/2 years ago, we were renting, but the homeowners were coming back to town. We were paying $2300 a month, plus electricity and phone/cable/internet.
    The private Housing in Nunavut isn’t exactly plentiful, and there was only one unit in town that was available at the time that fit our needs.

    Per month, here’s the cost analysis:
    Rent: $2700 (They wanted to “adjust this” (UP) in a years time)
    Fuel: $650 (average)
    Electricity: $300 (average – we have 24 darkness for 2 months – this means a lot of lights are on all day in the winter, and none in the summer.)
    Water/Sewer: $45
    No direct Maintenance costs, but liable for any damage inside. (It was new construction. And we have a dog. She chewed things before she got fixed. It would’ve been a disaster if we were renting.)
    I suspect we also would’ve had to pay the heating for the garage, although we were not allowed to use it. (That would’ve been extra)

    Total: $3695 +

    To Buy:
    Mortgage: $2000
    Fuel: $650 (average)
    Electricity: $300 (average)
    Water/Sewer: $45
    Maintenance: $250 (We only recently started saving this – Thanks Gail!)

    Total: $3245

    Home ownership is cheaper, even adding the extra insurance and land lease costs. (Approx. $200 a month) It also gives us piece of mind – as my husband says, if he wants to put his head through the wall he can! (Not that he would.) The only ones we’re accountable to are ourselves – not a landlord.

  60. IMO it’s possible to invest in housing, but as with every investment, it requires capital, knowledge of the market, and luck to do it successfully. And living in an investment, you might not be dispassionate enough about the right time to sell or buy.

    On the non-investing kind of buying housing, I’m occasionally tempted to buy a flat so that I can arrange everything exactly like I want it, but the numbers never add up: I live in a rent-controlled place, and even with tax benefits, inflation and low interest rates it’s a better deal for me to save until I can afford to buy a place cash on the table than to take out a mortgage. In either case it’d take about 20 years to own a place I’d like, if all goes well, but in the former scenario I won’t have a mortgage to worry about.

    Even if renting costs more in the end (as in Lilly’s calculation), I think of it as a get-away-fast premium. If the neighborhood goes to the dogs, if rot is discovered in the walls, if my income nose-dives, I can move on three-months’ notice and am off clear, no haggling, paperwork, debt or tied-up capital. So I prefer renting for the very same reason Didi prefers buying: It’s safer.

    (Though, by a strange twist of the law, should I become long-term unemployed I’d be better off with a mortgage than with money in the bank. I allow my pessimism to fail me at that point.)

  61. @Rebecca- I have 1mill liabilbity and 50k personal items and i pay juat over $19 for it a month. Definatly worth the $$ in case I live in a deuplex and you have to plan for the worst.

    As for the rent VS buy thing I am in no hurry to move I live on a noisey street 2blks from the train but I only pay 650 in rent plus utilties for 3 bed and 2 bath and half a yard. VS a apt for 750 and one bedroom so im getting a steel but me and the boyfriend have no problem socking away 70k in the next 4 years to put a heafty dp on a house. hes an electrician and I have family in all trades except for plumbing…. so mabye a few DIY classes in plumbing before I buy a house

  62. Fixed the numbers.

  63. Rent vs Own ~ We bought our first small 2 bedroom home in Spring 1974. Sold less than 2 years later to move towns and there was a bidding war for it. That was nice. Our current home was purchased in Dec. 1975. Big old house no one lived in for 2 years. We’ve done a lot of work on it and it needs (read I want) more. Happy to say it is not a money pit though. I think it’s an age thing. Buying a home was just part of the plan in the olden days. Once we sell here, I’d like to rent till I see what the future holds. We did live in a lovely condo in Toronto for 16 months starting in 2001 with hubby’s job (they paid the expenses) ~ down the street from the old Maple Leaf Gardens. We had a great time there.
    As promised I said I’d give an update re: life insurance. I liked the agent, but I’m cautious. There is a lot to digest. Permanent vs Universal. Have much to think about. Can’t give a definitive answer right now. We don’t want to be insurance poor.
    ~chubby bunny – so glad you are pleased with how things went. You have much to think about too…..

  64. […] Originally posted here: Out of the Woods? « gailvazoxlade.com […]

  65. So here is a question for all of you. My husband and I are in debt of about $80k. If we sold our townhouse we could pay all of that Debt off with the equity that we have.
    Would it be prudent to do so? We are only 28 and 29 years old. We could rent a house in this area for the same amount of $$ that our mortgage currently sits at, so we in essence would be “moving up”. Then, if the interest rates do go up, and the housing crisis really hits, we would be out of it, instead of having to foreclose?
    Thanks for any suggestions. We are really trying hard to turn this around.

  66. […] Vaz-Oxlade comments on the problems with a prominent golfer with her article Out of the Woods?, OK, it has nothing to do with that, but still an interesting article about the […]

  67. @Alisha – if you do sell, and don’t need the extra space (i.e. for children), I would advise staying with housing that has the same floorspace as you have now. Keeping it small really helps curb the urge to spend to fill the new space, and it sounds like a year or two of financial breathing space is in order.

  68. Thank you for your reply Alison. :)

  69. @ Alisha – you need to provide more details. When you break out your ‘pie’ how do you look? See Gails’ debt tool to see the approximate % your income should make up. Ie 30% for home, 15% debt repayment, 20% life, etc (or whatever it is). An $80K debt on a family income of $75,000 is very worrying, but on a combined income of $150,000 is less so. Personally I think you’re uncomfortable with that kind of debt – as would I – so would lean towards selling the house but there are lots of costs involved in doing so too.

  70. […] This post was Twitted by CRAcorruption […]

  71. […] Vaz-Oxlade posed the trillion dollar question in a post that asked if we are Out of the Woods? She blows the sugar coating off the cow pies like only Gail can, questioning the wisdom of keeping […]

  72. Exactly, what i was looking for!

  73. […] http://gailvazoxlade.com/blog/archives/1353 – Out of the Woods? gailvazoxlade.com… If you are really serious about owning one of the timeshares listed, we’ll get together a total cost to transfer….read more at http://www.westweeks.com/ […]

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