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Is a cottage a good investment?

Posted by on Jun 26, 2014 in Mortgages, Travel | 5 comments

Summer has begun and many Canadians are flocking north to cottage country, to relax and get away from the hustle and bustle of the cities. For many Canadians, owning a cottage is a dream. There’s something about having a place to call your own. A place that your children can grow up in and build memories. And we did as well – although, my parents never purchased a cottage.

When we were young, they would rent the same wonderful cottage every year, about an hour north of us and minutes from the beach. It neighboured two other cottages, side-by-side, which my uncles had rented as well. They were pretty sizeable cottages, but we come from a pretty sizeable family and we all shared living quarters with one other. All in all, including us kids, there were about 20 of us. Many of my closest cousins were there. And some of my fondest memories were there: playing soccer in the grassy fields, swimming in the neighbourhood pool, hiking adventures and days at the beach, and catching frogs and skipping stones. We made fun and memories out of pretty much nothing.

So I completely get it and I completely get generations of cottage owners wanting to pass it down. But although the idea of it sounds lovely, my wife seems to think that because I don’t want to ‘own’ a cottage, that I’m not really a cottage person and that’s not really the case. I also like to travel and explore new places, experience different cultures and not necessarily be tied to one place. Aside from being tied to one place and not being able to afford one right now, there’s also countless other financial reasons why I don’t think it makes sense for us.

What’s it worth to you?

Unless you want to drive for a while, it’s not uncommon to see little cottages within an hour drive of us, selling for upwards of $200,000. In fact, it’s fairly common to see some going for upwards of $300,000. And unless you plan on that being your primary residence, it’s pretty pricey, especially considering the short seasons we have here. At most, I think most provinces get about two months of great summer weather – two months! July and August really are the prime cottage months with temperatures where I am, hovering around the high 20’s, with anywhere from 5-10 days above 30ºC (86ºF) and water’s generally much cooler. Yes, there are the avid cottagers that go year-round, and some who work from their cottage, but I would say those are few and far between. Saying, if you owned one, that you’d go more often and actually doing it are two different things.

But here’s where financially the thought of a cottage, just doesn’t make sense to me. I can rent a cottage for the price of about $1000/week, $2,000/week for one that sleeps about 8 people or 2 families, which essentially brings me back down to $1,000. So my thought is, would I rather spend $300,000 on a cottage, or take three-hundred $1,000 vacations? Let’s say it’s a beautiful $2,000/week cottage, $300,000 can still buy me 150 one-week vacations, 75 two-week vacations – or another way of looking at it – 75 years worth of $2,000 vacations, twice a year.

Look, even if you were to spend $10,000 to take your family on a nice big trip once a year, you would still be able to do that for the next 30 years. And that doesn’t include a pinch of maintenance costs, which can be really expensive. Decks and docks, replacing old plumbing/septic tanks, just to name a few. And it also doesn’t include the mortgage carrying costs. For most buying into the cottage market, it’s usually their second home. And after interest costs and all is said and done, that $300,000 cottage is closer to a $400,000–$500,000 cottage.

On the bright side

Now, I’m not saying cottages are bad investments. Some things hold sentimental value. And in some markets, you may be able to find a cozy little cottage for $50,000. Or maybe you live in an area where you get longer periods of sunny weather. And if you’re comfortable sharing that family cottage, there’s also the ability to turn that cottage into a rental property, in which, even a couple of months a year can help cover your annual maintenance costs and help to pay down some of your mortgage. Which depending on the area, could turn out to be a great investment, provided you can afford the upkeep costs.

Now this cottage example could be a metaphor for so many other things. Whether it’s a cottage or any other long-term investment/purchase that you’re thinking of, put aside your beverage and Muskoka chair, stop romanticizing for a second, and ask yourself if it’s worth owning. Are there other options? Or how can you get the best value out of your investment?

Dream of owning a cottage? Own a cottage (*gulp*)? Is a cottage a good investment? What are your thoughts? Leave your comments below.

Image courtesy of Evgeni Dinev / FreeDigitalPhotos.net

Live in a house you can truly afford

Posted by on May 15, 2014 in Mortgages | 12 comments

I know I recently spoke about the importance of knowing the true cost of owning a home before you get into one, but I decided to follow up with another housing post, because for one, particularly the Canadian housing market concerns me. It concerns me because the today’s first-time homebuyers are taking on massive amounts of debt with these monster mortgages. My home’s value in the past 6 years alone, has jumped by about 75%, judging by similar houses sold in our area. And a lot of them are being sold well over listing price.

The low-interest rates certainly have a lot to do with fuelling sales. Just this week, Investors Group announced they were offering a 1.99% 3-year variable mortgage rate. Nuts! But while it may not seem like interest rates will be rising anytime soon, it is still worrisome that so many Canadians are working just to pay for their homes, leaving very little for little else, including the ‘fun stuff’ and saving for retirement. I certainly wouldn’t be able to afford them today.

Don’t live in a bubble

While many are talking about a bubble, that remains to be seen. I sense a crash coming, but even if the interest rates were to rise by a couple of percent, I have a feeling, anyone who’s built up any equity in their home, will turn to other financial vehicles, to extend their debtload and the amount of time they need to pay for it, instead of saying, ‘hey, wait a minute, maybe we CAN’T afford this house.’

When we signed up for a home equity line of credit to complete a minor reno, I was surprised to learn that we were only on the hook for the interest. Yup, we were only required to pay the interest – no principal. How crazy is that?

I’m not saying to avoid homeownership altogether. A home can be a fantastic investment. But I think far too many are chasing after the housing market just ‘to get in’ or because they feel they can, because all of their peers are. But ultimately, the big question you should be asking yourselves before you get into any house should be, “can I truly afford this?”. So how does one go about living in a house they can truly afford? Easy…

Every house needs a budget

Hey, I understand not everyone loves to budget, and I get it. And week-to-week, month-to-month, there are some that seem to manage fine without one. But what I don’t understand is how anyone can know what house they can truly afford, without creating a budget. This is the biggest financial decision of your lives. Don’t leave it to a bank or other financial institution to tell you how much you can afford.

I remember when I first went in to get my mortgage pre-approval. I went into quite a few financial institutions to compare. All they asked me for was our income, if we had any debts and the size of my downpayment and came back with a number, much higher than I knew we could afford. But then again, they didn’t really know anything else about us. About our lifestyle. Did we have any children? Other obligations?

How much of a part does someone’s lifestyle affect how much they can truly afford? Well consider these two scenarios. Single woman walks into a bank (no punchline here). She’s wanting to buy her first home. She makes $100,000/yr, has a 10% downpayment is debt-free. A married couple who has rented for years, has decided their apartment is much too small for them and their two children. They’re looking to buy their first home too. Together, both Martha and Steve earn $100,000 per year salary. Everything else being equal, who do you think will have a more challenging time paying off the mortgage? Remember, they’re there to sell you a mortgage product, not to try and convince you that’s it’s a bad idea to do so. After all, they’re looking out for their best interests.

It’s time you look out for your own

So, before you lock yourself into a home, take the time to figure out, in an average month, what amount of money you’re able to set aside for all housing costs. Write that number down. Now visit my blog post on the true costs of homeownership, for all the potential expenses related to owning a home. You’ll have to come up with your own numbers based on your area. But once you tally up all those expenses, subtract the expenses from the amount you were able to set aside initially. The new number represents a rough estimate of how much of a monthly mortgage payment you’ll be able to afford. Can you afford a shorter amortization? Find out what other options are available to you and always to add a bit of a buffer to your monthly payment, in the case interest rates do rise.

See, it wasn’t all that hard. You have your whole lives to make your house a home, but there’s no need to be paying for it for the rest of your lives. So do yourselves a favour and plan ahead, and plan to live in a house you can truly afford and love.

The true costs of homeownership

Posted by on Apr 10, 2014 in Mortgages | 7 comments

Ah, the joys of homeownership. There’s nothing quite like the feeling of getting those keys to your first home. And parking the car in your own driveway for the first time, racing to the door, unlocking the door and joyfully glancing at your partner or friend, as you twirl around the empty space.

You imagine where you’re going to put stuff, renovations you want to do. After all, you just saw a whole episode of Property Brothers, how hard can it be? Then the bills start quickly rolling in. Okay, so you kind of accounted for a few things, but unfortunately, homeownership costs don’t end once you sign. There’s additional initial costs of owning a home and the everyday expenses that you need to account for. That’s where the true costs of homeownership lie and I’m here to break down some of them for you.

Look beyond the monthly payment

Wherever you look, home builders are trying their hardest to save you the math, by telling you how much it will cost per month to own your home. Ok, who are they kidding? Sure, it’s an easy way to rope you in, but don’t be fooled by the low monthly payments. There’s many more costs involved than one simple monthly payment and although, it seems like interest rates will stay low for a while, any change in interest rates, can really affect that seemingly low monthly payment.

  • Closing Costs. Realistically, I could probably write a whole post on these, but I’m not going to do that. But many first-time homebuyers don’t consider the extra fees before you move into the home. Without getting into too much detail, in addition to the down payment, you have pay a real estate lawyer, you may have to pay for mortgage loan insurance (in Canada, typically if your down payment is less than 20% of your purchase price. Here’s a breakdown of CHMC fees.), local land transfer taxes, title insurance, registration of the Deed and Mortgage, and other miscellaneous fees. We paid just under $7,000, due at closing, for all these goodies. This, of course, will vary by region, size of your home, size of your downpayment, etc. If you’re in Canada, closingcosts.ca can give you a rough estimate on your closing costs, that you can use to plan.
  • Interest Costs. After closing, you immediately start paying interest. Everyone knows this. But I don’t think that many grasp just how much. I would wager that the average homeowner pays at least twice the original cost of the home over the life of the mortgage.
  • Property Taxes. One more thing renters don’t have to worry about. Thankfully the info is pretty easy to get. Just do a search of homes in your desired neighbourhood on realtor.ca (MLS) or your local home listing service and they will have the property taxes listed.

Oh, I forgot to mention, in addition to closing costs, all your utility companies will also charge you a small setup fee, just for being a new customer. Aww, isn’t that nice? Welcome to the neighbourhood.

Getting zapped with utility charges

  • The essentials: electricity, heating gas and water. Utility rates can fluctuate greatly, depending on the size of your home, utility rates in your area, and the time of year. So, it’s always best to ask your parents, relative or a friend to get a rough estimate of how much it’s going to cost. Electricity and water rates tend to peak in the summer and heating gas, obviously peaks in the winter. But also check to see if the water heater is rented or owned. Some heating gas distributors already include that as part of their bill.
  • Non-essentials: home phone, cable TV, Internet. It pays to bundle where you can. Depending on your area, you can probably get a quick quote online or call them up on the phone. It will be largely dependant on you and what you’re willing to pay for. We manage to keep ours down to about $130 for all three, taxes in. But that’s only because we have the basic everything, except internet and call every year for new promotions. It can be much higher or much lower. It’s really up to you.

Just maintaining

Condo living? Pay set condo fees. Buying a house, the list is a little longer (but not always more expensive). But here are just a few of the expenses you can look forward to:

  • Approximately every 10-15 years. Roof, windows, garage doors made of wood, furnace, AC unit. Lucky for us, we’ll get to replace both our roof and windows this year. Roof for our size home averages about $3,000. Really cheap when you consider quotes for our windows came to an average of about $1,000 each! Ouch! So, make sure to tell Johnny to take his friends and their baseball gloves elsewhere.
  • Every 5-10. Driveway paved, house repainted, some appliances and furniture will need to be replaced.
  • And when you least expect it, all of those things. And other countless things that will break or require maintenance and the countless tools you will need to fix them. Think plumbing leaks, lawn maintenance, etc. That’s why it’s always important to have an emergency fund.

Looking good never cost so much

You can probably get away with milk crates for a while. But keep in mind, the bigger the home, the more furniture you’ll need and the more pillows and knickknacks you’ll want.

Want a greener lawn? Want to spruce up your kitchen? Or bathrooms? All of these items come with a price tag. I used to think many moons ago, like many others, that renting was just throwing your money away. Now I know, that’s really not the case. I’m not here to debate the merits of homeownership or any financial advantages to renting, for that matter — that’s a personal decision, just as much as a financial one.

I’m also not here to scare anyone out of home buying. I’m a homeowner myself and in many ways, I think a home can be a great investment. All I’m saying, is that before you sign your life away. Before you decide to walk into a brand new home (to you) for the first time, really evaluate what YOU can afford. Not what the bank tells you. Know what you’re getting yourself into.

Image courtesy of scottchan / FreeDigitalPhotos.net.

 

Pay off your mortgage or invest?

Posted by on May 9, 2013 in Mortgages | 13 comments

If you were to focus on paying off your mortgage debt or invest today, which would you choose? Whichever side people are on, it always seems they’re really adamant about one side or the other. Personally for me, financial security is always top of mind, so it’s a pretty easy decision. But it’s not always so cut-and-dry.

Any articles I’ve read about investing and many financial advisors I’ve dealt with at the bank, always like to talk in terms of percentages and rarely about the actual money made/saved. Why? Well, for one, saying you’d be earning eight percent per year sounds a heckuva lot better than earning only $200 on a $2500 investment to the average Joe/Jane investor. Yes, if you have a sizeable amount of investments, you’re 8% will go a lot further, but you’re also probably a lot less likely to read this blog.

By the numbers

When I first started investing, I started with approximately $5,000. If we look at an average two-parent Canadian family with children, they brought in an average income of $88,900 after tax, by 2010 standards. The average personal savings rate in Canada at that same time was 4.8%. If we take those numbers and assume everyone put all their personal savings into investments (just for fun), they would be contributing an average of $4,267 per family per year. Now the average is probably a lot lower than that, but let’s use $5,000, for the sake of simplicity.

The average price of a home in Canada is about $350,000. Yes some areas are more, some are less. Although there’s lots of other variables to consider, using those figures, let’s take that $5000/yr investment (invested at the start of the year) and $350,000 mortgage at a 2.99% interest rate as a starting point and see which could save you more over the long-term.

 

Investments vs. mortgages

 

Numbers don’t lie, but may be deceiving

Using the above tables as an example you can clearly see that even if you have any sizeable mortgage, over time, investing is surely the way to go. Or is it?

There’s always ups and downs. Although the charts assume you’ll be earning the same exact percentage on your investments every single year, that’s never the case. Yes, while historically, the TSX has posted some pretty decent returns in the past, it’s also declined almost 3% in the last five. The housing market is no different. The charts above assume a fixed 2.99% mortgage rate for the life of your mortgage, which is highly unlikely. Rates are at all-time lows, so when you factor in rate increases and switch from monthly payments to bi-weekly, paying down your mortgage starts to look a little more attractive (although, maybe not nearly as attractive as the investments, until I get to my next point).

A home can be an investment too. It’s a point often forgotten. Looking at comparable homes in my neighbourhood, my property value alone, has increased over 50% in the past 6 years. Not a bad investment!  So when you look at it that way, the numbers start to seem a lot closer.  Sure, maintenance on your home can start to erode at those percentages too, but when you factor that in over the long-term, it’s not a whole lot and the housing market in Canada has also been a lot less volatile than the stock market has. Also, if you run a home-based business, you can deduct a portion of your mortgage interest and property tax from your income taxes. And you can use that money either to continue to pay down your mortgage, or, you got it – invest it.

Time is money. On a 10-year investment, for example, to get the earnings above, you would have to invest $50,000 ($5,000 per year for 10 years). By comparison, on a $250,0000, ten-year mortgage, because every prepayment works to pay down your principal faster, prepaying $5,000/yr. will work to pay off your mortgage 21 months sooner. Which means you can free up time and money by turning around and investing those almost $10,000 over the next two years, after your mortgage is paid off. On top of that if you’re just paying the minimum to your mortgage and investing, the debt on your mortgage is still increasing. Which means whatever gains you get from your investments will be hampered by the extra debt-load that’s added to your mortgage. But then there’s also a lot of definite tax advantages to choosing investments too. Investments are taxed at a much lower rate than income and when held inside an RRSP account, all investments grow tax-deferred.

Decisions, decisions, decisions

So as you can see, there’s a lot of different things to consider, so which do you choose? It’s hardly an either or, and it shouldn’t be. But  in my opinion, paying off the mortgage first ultimately gives me a guaranteed rate of return and a nice cozy home I can live in. And it gives me one more thing that I may/may not get from my investments… peace of mind.

So what do you choose? Do you focus on the one asset you’re living in, knowing you’re going to have pay it off anyway, or do you sink your money into the stock market?  What do you think? Am I totally bananas? Agree? disagree?

Investment compound interest calculations from moneychimp. Mortgage calculations from the Financial Consumer Agency of Canada.  

 

Shorter amortizations are not always better

Posted by on Apr 4, 2013 in Mortgages | 4 comments

For many, buying a home, is one of the most important, and maybe even rewarding financial decisions you’ll ever make. But it’s also one of the most expensive. Mortgage companies today, offer plenty of options to pay down your your mortgage faster. You can increase your mortgage payments, make lump-sump payments, or change your payment frequency.

Another option often touted, is to shorten your mortgage amortization, but should you? Yes, your amortization affects how much your mortgage is going to cost. Typically, the longer it is, the more costly it is, as you’ll be paying many more years of added interest. But not always. What if you took on that longer amortization, but paid it off just as quickly? Sometimes a longer amortization can give you the flexibility you need in an era of rising house prices.

A new era in housing

Although the Canadian housing market has seen some cooling as of late, housing prices still seem to be edging higher. I was surprised, this summer, to see by how much that home prices have risen in our area. When I saw a ‘for sale’ sign on a home a few doors down, I had to peek and couldn’t believe the prices. This semi-detached, which showed a lot worse than ours was selling for $479,500. An almost 40% increase, from our original house purchase cost five years ago. Mind you, it did have a finished basement. But upon looking at similar houses in our area, even those without finished basements were fetching in and around the same value.

As a short history of listings in my neighbourhood, in late 2009, one sold on our court (or was listed), for $369,000. In the summer of 2011, one went for $399,000. Thirty thousand dollars increase in one and half years – may be reasonable for these type of homes and this area, but $80,000 in the past year? Normally one would chalk to this up to good fortune, but I just couldn’t see this sustaining itself. This is your average first-time home buying neighbourhood. Not to mention, average salaries haven’t increased that much.

To top it off, last July, the Canadian government announced that all new mortgages would return to having a maximum amortization period of 25 years. When I bought, I believe they were offering 40-year mortgages. Crazy, I know. But although this seems like a good move for the government to ‘reign in on borrowing costs’ by lowering the maximum amortization period, it’s made housing quite unaffordable for the first-time home buyer. House prices alone are high, then you factor in a 25-year mortgage amortization, this is what you’re looking at.

Affordability

So in my little neighbourhood, if you took a $475,000 mortgage, minus a 5% down payment (not uncommon among first-time buyers), that would bring it down to $451,250. On a 25-year amortization that house will cost you $2133.21 a month just for the mortgage payment alone! What worries me is that young folks are snapping these up just to “get in the market”, but are they stretching themselves too thin? I think so.

Had it been today, I probably would not have been able to afford this house. I do have a confession to make: I was one of those who held one of the 35-year mortgages. Now let me explain. I didn’t take on a 35-year mortgage, with the intention of taking 35-years to pay it down. My intention was always to pay down the mortgage in 15 years. And in fact after signing the 35-year mortgage, the next day I got on the phone and switched my payment options to accelerate my payments.

So why did I take on a 35-year mortgage then? One word:

Flexibility

Everyone thinks they’ll just buy a house and pay it off quickly. I remember that was a common sentiment amongst my friends who bought around the same time as I did. Or that in five years, we’d be moving on to the next house. Ya, you can count me in on that one. But you don’t truly realize how expensive houses can be to own and maintain until you step foot in that door. And then life happens. You have a child, your car breaks down, your roof has a leak, etc. So while my original goal was to have it paid off in 20, it’s slipped to a little over 22 years total now. But I’m completely comfortable with my situation.

You never ever want to stretch yourself so thin. What were to happen if you lost your job tomorrow? Would you be able to carry the mortgage? At the time I was thinking, if I lost mine today, I would easily be able to revert my payments back to the 35-year. Which would mean my $800 bi-weekly payment would shrink back to about $650, a savings of approximately $300 a month, in an emergency situation. So the extra CMHC mortgage loan insurance costs for carrying a longer amortization at the time (0.20% for every 5 years beyond 25), were well worth it to me.

You may say, what’s the difference whether you pay it off, as an example, a 25-year mortgage in 15 years, vs. signing up for a mortgage with a 15-year amortization? Well, when you sign up for the shorter 15-year amortization on your mortgage, you’re essentially increasing your regular payment amount. Think of a regular payment as the minimum payment amount you have to pay each month (or bi-monthly) to your mortgage company. With a longer amortization, your minimum payment can become smaller – if and when you need it. I’ve since renewed to a shorter 25-year, but with a little over 17 years left on my mortgage, I’m still retaining the flexibility.

But since there are no more (new) 35-year mortgages offered, you’re probably thinking why am I talking about lengthening amortizations when many can barely afford a 25-year amortization? Well if you can barely afford a 25, you may want to consider holding off until you can ‘afford’ to pay it at a 20-year rate and then consider taking out a mortgage for a 25-year.

Look, I’m not hear to tell you to stretch out your mortgage for the sake of getting lower monthly payments, it’s about added flexibility. Because you never know what can happen, but it never hurts to be prepared.

 

* Of course, always consult with a mortgage advisor first about your situation, and whether your mortgage company would be able to accommodate this, or other flexible options.

Image courtesy of FreeDigitalPhotos.net