It PAYS to shop around.
Many Canadian homeowners pay too much for their homes because they are not getting the best mortgage financing available in the market.
THE STORY OF TWO BROTHERS
The Story of Two Brothers
This is a story of two brothers each of whom secures a mortgage to buy a $200,000 home. Each earns $70,000 a year and has $60,000 in savings.
The first brother, Brother A believes in the old way of paying off a mortgage, which is as soon as possible. Brother A bites the bullet and secures a 25 year mortgage at the 5 year fixed rate and shells out all $60,000 of his savings as a 30% down payment leaving him zero dollars to invest. This leaves him with a monthly payment of $698.00
Brother B, in contract, subscribes to the new way of mortgage planning, choosing instead to carry a big, long-term mortgage. He secures a 30 year mortgage at a 5 year variable rate and shells out only $40,000 of his savings as a 20% down payment leaving him $20,000 in an investment account (specifically a TFSA, earning annual interest of 8% tax free). This leaves him with a monthly payment of $639.00. Every month he adds the $60 difference to his investment account to earn additional income at 8%.
Results after 5 years
Brother A has a mortgage balance of $120,769.87
Has $0 in savings and investments
Brother B has a mortgage balance of $141,154.15
Has $33,154.15 in savings
Ahead by $13,110.97
The story becomes even more compelling over 15 years.
Brother A has a mortgage balance of $70,728.18
Has $0 in savings and investments
Brother B has a mortgage balance of $95,309
Has $87,039 in savings and investments
Ahead by $62,458
More importantly Brother B has less than a year left before his savings and investments exceeds his balance owing on his mortgage and therefore if he wished he could stop making mortgage payments and use his savings to payoff the mortgage. Additionally saving him $75,358 in mortgage payments.
A 60% Stock / 40% Bond Portfolio Is Ideal?
A 60% Stock / 40% Bond Portfolio Is Ideal?But what about the standard investing gospel, like our much beloved 60/40 stock-bond portfolio? Well, in the most recent (and certainly not last) crisis, they provided about as much protection as a five-dollar umbrella in a hurricane, but you knew that. The real issue is that our bedrock principles actually have quite a poor long-term track record for safety and consistent returns.At first glance, the results of this standard allocation don't look so horrible: a long term average annual return of 4%. But this is a wonderful example of just how misleading statistics can be. The damning truth is such a portfolio suffered six collapses in the last century in which the losses exceed 20%...utter disasters that each took more than a decade to recover from in real terms. There is no reason to expect this pattern to change.The lesson is loud: in our ever more volatile and complex world, a long-only, domestic stock and bond portfolio is inadequate. Those traditional securities represent only a tiny sliver of the potential investment universe: many of the best opportunities are simply, elsewhere. Even more to the point, the biggest key to long term wealth is loss avoidance; and, I bet you've noticed traditional portfolios are subject to periodic, devastating, crashes.
5 Financial Reasons to Buy a Home
5 Financial Reason To Buy a Home1.) Housing is typically the one leveraged investment available. Few households are interested in borrowing money to buy stocks and bonds and few lenders are willing to lend them the money. As a result, homeownership allows households to amplify any appreciation on the value of their homes by a leverage factor. Even a hefty 20 percent down payment results in a leverage factor of five so that every percentage point rise in the value of the home is a 5 percent return on their equity. With many buyers putting 10 percent or less down, their leverage factor is 10 or more.2.) You're paying for housing whether you own or rent. Homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord.3.) Owning is usually a form of “forced savings".Since many people have trouble saving and have to make a housing payment one way or the other, owning a home can overcome people’s tendency to defer savings to another day.4.) There are substantial tax benefits to owning. Homeowners are able to deduct mortgage interest and little secret your Banker has not told you. On top of all this, capital gains are exempt from taxes. 5.) Owning is a hedge against inflation.Housing costs and rents have tended over most time periods to go up at or higher than the rate of inflation, making owning an attractive proposition.Bottom LineWe realize that homeownership makes sense for many Canadians for many social and family reasons. It also makes sense financially.