Sunday, June 18, 2017

Begineer's Guide to Mortgage



Hi, today I am going to talk about mortgage and things to consider when getting a new mortgage. Since my near term goal is to pay off my mortgage within three years, I figure it only make sense to do a post about mortgage. OK, so what is a mortgage? It's a fancy term for a loan to allow you to buy a house, meaning you are borrowing money. Mortgage is big business and banks love them. Let's just think about this, when you get a mortgage, you pretty much are sharing ownership of the house with the bank since they in theory are buying the house for you. In return you pay interest and you assume almost all the risk for that property. There is a reason why you must have home insurance on your home or else the bank will not give you the loan. If you stop paying your monthly payments then the bank will come and evict you from the house, this is known as foreclosure. Intro asides, lets get into the process of getting a mortgage.

1. Buying A House
You found a beautiful house that you like, and for argument say that it is $300,000. Using this lovely tool by ratehub.ca we can see how much mortgage we need based on how much money we have saved up for down payment.
Comparison of down payment amount.
Let say you've been saving for a while and can afford to put 20% down payment therefore you don't have to pay for the CMHC insurance (This is a Canada thing). You either have already gone to the bank for a pre-approval or you now go to the bank and ask them for a $240,000 mortgage. You'll have to give them info of the property you just purchased and proof of income (just to make sure you can pay them back). Banks will take your monthly income (gross), so before tax and other deduction, and check what percentage of that will be going towards debt payments. They want to keep that percentage below 40%. Meaning, if you make $5,000 a month then your total debt payment(credit card, loans, car payment) should be less than $2,000. In Canada they have recently implemented a rule that forces lender to do a stress test before they can approve your mortgage. What this means is that during that approval process, they will calculate your monthly mortgage payment at a higher interest rate (~4.64%), and use that number to check if you still below the 40% mark. If you pass all the check then they will give you your $240,000 mortgage.

2. Mortgage Terms
During this whole getting a mortgage process you'll have to consider a few things. The terms for your mortgage, this is quite important, this is basically deciding how long you want to be on contract with the bank and the terms of that contract. Think of it like this, when you get a cellphone plan most of us will be on contract for a certain amount of time with that cellphone company. Mortgage is pretty similar, you negotiate all the condition and then sign on for a set amount of time.

  • Interest Rate - Mortgage interest rate in most banks are based off something call the prime rate which usually follows the overnight rate from Bank of Canada. So when you hear on the news that the interest rates are going up, that usually refer to the overnight rate from Bank of Canada. Regardless, the lower the rate the less you pay in interest every month, which means lower monthly payment. Then there is the fixed rate and variable rate. Fixed rate means that your rate will stay the same for the length of the contract. Variable rate will constantly be adjusted based on the current prime interest rate.
  • Length - This is how long your contract and all the terms in it are good for. 
  • Open vs Closed - Open mortgage means you can pay off the mortgage anytime you want without incurring a fee. The catch is usually a higher interest rate, however this option is good if you think you are going to sell your house or you know you'll have a large sum of money coming your way. Closed mortgage is the opposite, you will be given specific condition on how much extra you can pay ever year and a penalty if you decided to pay off the mortgage early. This is to protect the bank and make sure they get the interest they were promised. 
  • Terms of Payment - Two basic things to look at when shopping for a mortgage are how much can you repay every year and how much can your monthly payment be increased by. These two things will be important if you are considering the pay off your mortgage faster sometime down the road. The more flexible it is and the higher the amount the better.
Just remember that when picking a mortgage, find the one that suits you and don't try to out smart the bank. They have a lot of smart people working for them to make sure they'll not get rip off. It doesn't matter what the term is, they'll still make money off you.

3. Mortgage Payment 
You have your mortgage approved and have moved into your new residence. Suddenly, you realize how much interest you are paying every year and how long you'll be in debt for. Let's face it, nobody likes giving their hard earn money to the bank. You start thinking, how can I not give my hard earn money away. There are a few simple things you can consider if you want to drastically reduce the amount of interest you pay and the overall length of your mortgage. 

Frequency of Payment - There is three frequency that most bank offers. Monthly, Bi-Weekly and Weekly. Lets break these down to the number of payments annually to show you the difference. 
  1. Monthly - 12 Payments, 
  2. Bi-Weekly - 26 Payments (13 Months), 
  3. Weekly - 52 Payment (13 Months)
As you can see that you actually make one extra payment every year by switching to a Bi-Weekly payment frequency. If you select "Rapid Bi-Weekly" payment options, what the bank do is take your current monthly payment and divide it in half. Although you make an extra payment every year, this not affect your payment increase limits nor your early repayment limits. Some banks allow a 100% payment increase, so if you do that with rapid bi-weekly you can make a big dent in your mortgage. By doing so, you'll bring your 25 year mortgage down to about 11 years. TD Bank has a nice little tool that lets you compare different payment frequency. 

Look at the difference in Principal and Interest between the three.

This graph shows the difference of Monthly vs Rapid Bi-Weekly vs Rapid Bi-Weekly(100% Payment Increase)

Early Repayment
 - Usually in your mortgage contract it will state how much you can payback every year without incurring any penalty. My bank allow me to pay back 15% of my original mortgage amount. So in our example, 15% x $240,000 = $36,000. Remember this amount will go directly towards principal. In the above rapid bi-weekly example, if I paid $5,000 annually, I can shave off 8 years off my mortgage, bringing it from 23 years to 15 years. If you don't believe me, just go play around with the TD Bank tool and see for yourself.

Conclusion
If you are thinking about buying a house I hope this little guide will help you out when shopping for a mortgage. If you already have a mortgage hopefully this post gave you some tips on how to pay off the mortgage faster. There is no real secret for paying off your mortgage faster other then put as much money as you can into it and save huge on interest. Just think of that amount of flexibility you'll have once your mortgage is paid off, you no longer "MUST GO TO WORK" in order for you to have a place to live. That's not completely true cause tax and upkeep, but you get the point. 

Sunday, June 11, 2017

Foreign Exchange - XE Trade vs CanadianForex

Just a few hours ago I decided to exchange some money in my USD account with Bank of America into my TD CAD account. I could do it the old fashion way of driving across the border, withdraw my money, bring it back to Canada, then exchange it at the bank or one of those currency exchange booth. However, this will not save me on gas and exchange commission fee so I decided to go with the online method.

There are two popular foreign exchange firms that I am aware of in Canada: CanadianForex and XE Trade. I’ve never used them for personal transaction but I’ve used XE Trade many times back when I still run my small business.

I’ve never used CanadianForex before so I decide to check it out and signed up for a free account. I wanted to transfer $1k USD (still keeping a few hundreds in my BoA account for my next US trip) to CAD so I get an instant online quote from them and compared it with XE Trade.

CanadianForex: $1000 USD = $1317.70 CAD
XE Trade: $1000 USD = $1325.03 CAD (I get more CAD)

As you can see, it’s very obvious who the winner is for this transaction but I do know the rate will get more competitive at higher amount.


My suggestion: sign-up an account with both firm, get a free quote from them by running the process all the way to the end but without confirming the trade (so you’ll see all the commission fee, etc.). By doing that, you’ll be able to compare between the firms and save forex commission. Majority of the time, their rate is much better than the big bank rate of 2.5%+ commission.

Saturday, June 10, 2017

Thrifty Salaryman - June Net Worth Update

A lot of money shuffling happened in the month of May and early June. Previously in May, I have around $15k in cash and saving. After doing a bit of planning, I’ve now reallocated the money into several form of investment. Below is a breakdown of my net worth of $37,565.85 (+22.5% from May) as of June 10. I still have around $5k in cash that I need to reallocate into a form of investment to gain some return from it. Some of it is currently in US dollar which I'll need to exchange them back to CAD using a low fee foreign exchange account such as XE or Canadian Forex.

I am moving more and more of my investment into index fund and ETF for the lower fee (pay yourself first). The RBC Canadian Index Fund is not the greatest option due to its 0.72% MER, I still want to keep my RBC banking account as a result of my small business banking account with them. TD bank eSeries is by far the best Index Fund to have due to it’s low MER. If you can purchase ETFs, go for something like the Vanguard Index ETF.

At my current investment allocation, I am very heavy on equity and majority of it is on corporate stock. This is due to some investment I made a few years ago on the Oil and Gas sector which haven’t recovered yet. My goal, however, is to rebalance my portfolio to have a higher percentage in Index Fund or ETF instead of directly in corporate stock to lower my risk once Oil and Gas recover a bit.

If I can maintain my saving pattern and achieve a rate of return around 7% annually in the long term, I should be on-track in achieving financial freedome within 15 years.

Cash $5,894.12:
$932.42 - TD Chequing
$121.00 ($89.86 USD) - TD Chequing
$2,668.79 - RBC Chequing
$1,580.57 ($1173.79 USD) - Bank of America Chequing
$69.86 - Cash - TD Direct Investing TFSA (will go into an eSeries Index fund after I transfer some more money into the account.
$421.48 - PC Financial Saving

Investment $32,162.73:
$18,531.29 - Equity (Corporate Stock) - TD Direct Investing TFSA
$5,110.00 - Equity (Corporate Stock) - Questrade TFSA
$4,489.35 - Fixed Income (Bond ETF) - TD Direct Investing TFSA - MER 0.13%
$3,074.29 - Canadian Index Fund - RBC TFSA Mutual Fund Account - MER 0.72%
$638.47 - US Equity Index Fund - Employer Pension Plan - MER 0.15%
$319.33 - Canada Equity Index Fund - Employer RRSP - MER 0.15%

Liability:
~$500 - Credit Card Balance (Still within grace period)

Summary of Investment Allocation:
$23,641.29 (73.51%) - Direct Equity (Corporate Stock)
$3,393.62 (10.55%) - Canadian Equity Index - MER 0.67%
$638.47 (1.99%) - US Equity Index - MER 0.15%
$4,489.35 (13.96%) - Canadian Bond ETF - MER 0.13%

Thursday, June 1, 2017

Neighbour Joe - June 2017 Net Worth

Here is my monthly update for June 2017. For those that are new here, I recently started my journey to financial freedom and I am using this blog as a way to track my progress. Here was my net worth last month. This month was very eventful, my son was born at the beginning of the month. I've been busy learning how to be a dad so didn't spend much time on my personal finance. I am also in the process of relocating for work, so hopefully by next month I'll be able to sell my current house.

Asset 
Chequing: $776.65
TFSA Investment: $29,852.41
TFSA Mutual Fund: $3,630.83
Real Estate: $250,000

*Automobile is not included as I feel it depreciate too fast and will give a misrepresentation of my true net worth

Liabilities 
Mortgage: $163,042.62
LOC: $12,076.33

*Credit Card is not included as it is paid in full every month

Last Month Net Worth
: $104,343.24 
Current Net Worth: $108,870.94 (+4%)

My Net Worth went up mostly because of my investment. Currently, about 50% of my investment portfolio is invested into (TSX:SHOP) which had a strong earning report at the beginning of the month. I wasn't able to figure out the current worth of my pension this month. I will try to find out this month and update you guys next month.