Home Car Insurance
Rent or own vacation property
Every year, I meet more and more people that have bought vacation property or are thinking about buying vacation property. The question I get is whether this is a good idea or not.
It’s in the numbers
I’ve always said there are two influences to every decision we make – the logical influence
and the emotional influence
. From a logical perspective, the answer often lies in the number so let’s look at an example that is near and dear to my brain.
Previously, we took a family vacation to the Okanagan where we spent a week in Kelowna and a week in Vernon. We loved both places but we really fell in love with the resort we stayed at in Vernon called the Outback Resort
. In fact we loved it so much we fell in love with the idea of spending longer summer vacations there and if that was the case, we should explore the option to buy a place there. We called up a realtor and looked at a 2-bedroom option and a 3-bedroom option. Let’s look at the math.
The math of the BUY
The 2-bedroom unit was selling for $300,000. If I put $50,000 down, the $250,000 mortgage would cost me $1315 per month (roughly $9300 of that payment would be interest and the rest would go towards principle).
Along with the mortgage payments
is the strata fee of $350 per month and the property taxes at $2500 per year.
Total annual cost to purchase the condo is $16,000 per year. I can take some pretty nice holidays for $16,000 per year not including the $50,000 down payment.
Rent or buy?
Next, let’s look at renting. If I was to rent this unit for a vacation, it would rent for $339 per night. That means I could rent that place for 47 nights a year or 7 weeks to reach a total cost of $16,000.
With four young boys, there is no way I am going to be able to spend 7 weeks of every year in Vernon.
In my opinion, the math is pretty clear . . . rent the place for a week or two and I will be out of pocket a lot less than buying.
But what about an investment?
My response was “Yes but only if the numbers justify a return”.
If I look at the annual cost of $16,000 on a $300,000 property, I need that property to increase by 5.3% per year just to recover my costs. I don’t know if Vernon vacation real estate will increase by 5.3% per year but I know there are a lot of properties for sale and the prices have come down (not up) in the past few years. I also know that prices in Vernon are very much dependent on buyers from Alberta and Vancouver.
I know lots of people who bought property in the US and have not experience positive growth. I’m sure there are others who have made money as well.
Flip a coin on the investment argument. I say 50% chance it will beat 5.3% growth and 50% it won’t. What do you think?
What about renting it out on the days we are not there?
Here’s another argument from my lovely wife who really wants this place in Vernon. Here’s the problem. Let’s say we want the place for 2 or 3 weeks of every year. We are going to pick the summer months when the kids are on summer holidays, which is peak rental season. To recoup our $16,000 annual cost, we will need to rent the place for 60 to 80 nights in the year. Now this sounds like a part time job to me for a lot less money than my real job makes me.
My five cents
I’m not trying to discourage anyone from buying vacation property but I do think it requires careful thought and analysis of the numbers. The math on the $400,000 3-bedroom option was not appealing but every property has it’s own set of numbers. Run the math, think logically and put emotions aside when making this big decision.
This is a simplistic analysis but a real one. Any thoughts on what I have missed? Do you have an experience (positive or negative) you want to share with others about buying vacation property?
Paying more frequently does not necessarily pay down mortgages faster
( Mortgage - It comes from France, mort in French means death. And mortgage has an ironic twist to it as it means to pay until death! )
One of the biggest misconceptions about paying down mortgagesis the notion that if you pay weekly, biweekly or twice a month instead of paying your mortgage monthly, you will save a lot of money. To illustrate my point, let’s take a look at three brothers – Mark, Tony and Bill. Let’s assume they each have a $100,000 mortgage amortized over 25 years at 6%. Mark elects to pay his mortgage monthly, Tony pays his mortgage twice a month and Bill elects to pay his mortgage bi-weekly. Let’s see how the brothers fared after 25 years.
Monthly vs twice a month
On Mark’s $100,000 mortgage, he pays $639.81 per month. After 25 years, he will have paid off that $100,000 by making a total of $191,943 in payments.
Tony, on the other hand pays twice a month. If Tony pays exactly half of Mark’s payment, he would pay $319.91 twice a month instead of paying $639.81 and he would save a whopping $547 of interest over 25 years. Paying more frequently does not make a significant difference.
Does bi-weekly make a difference?
Let’s bring Bill into the picture. Bill makes bi-weekly payments which means he will make 26 payments over the course of a year. If we simply take Mark’s monthly payment of $639.81 he would pay a total of $7677.72 over the year. If we take $7677.72 and divide by 26 payments, Bill would have to make payments of $295.29 every 2 weeks.
By making more frequent payments of $295.29 every 2 weeks, Bill will save more than twice as much as Tony with $1248.60 in interest saved over the 25-year amortization period. But again, the savings is still pretty insignificant.
Three ways to pay less on your mortgage
Paying your mortgage more frequently does save you some money but real benefit comes in three other strategies.
1. Lower interest rate. In the example of the brothers, I used a 6% interest rate. Using a 5% interest rate figure will save the brothers up to $17,480 of interest over the 25 years. That’s much more significant than the $500 to $1500 we were talking about by paying more frequently. To get lower rates, consider shopping around for the best rate, barter with your institution for a lower rate or consider shorter-term variable rates instead of locking in for the long term.
1. Shorter amortization. Most people stretch out the amortization period for as long as they can to keep payments as affordable as possible. Let’s look at Mark again with his $639.81 monthly payments based on a 25-year amortization. On a 20-year amortization, Mark’s payments would go up to $712.19 per month. With higher monthly payments, Mark would save over $21,000 in interest on the same $100,000 mortgage. If keeping payments the same were important, Mark could go out and borrow $90,000 on a 20-year amortization instead of $100,000 on a 25-year amortization and have the same $640 per month payment. I guess the point here is to live within your means and buy a house or condo you can afford.
1. Extra payments. Let’s look at Bill’s situation again. If Bill paid the same $319.91 bi weekly payment as his brother Tony (instead of $295.29), he would save $16,951.20 of interest over the amortization. Now that’s significant. The difference in interest savings comes from the fact that Bill makes two extra $319.91 payment every year. In fact those extra payments will help Bill to pay off his mortgage 4 years sooner than his other brothers.
Most mortgages have provisions to allow for extra payments like doubling up payments or paying an extra lump sum towards the principal balance. Whatever the case, making extra payments makes a huge difference to paying down your mortgage faster and paying less interest to the banks.
Combining these strategies can make an even bigger difference. The good news is it doesn’t take much to make a big difference in savings. All it requires is a little discipline to become mortgage free a lot faster.
Pay down your mortgage fast with these smart tips
Looking at your mortgage bill and seeing the remaining balance can be tough. Equally hard to swallow is the number of years you'll be tied down to your home loan.
It's a burden that almost everyone goes through. Fortunately, there are some tricks to help you save on your mortgage and trim years off the duration of the loan.
For example, Shashank Shekhar, CEO of Arcus Lending and author of, "First Time Home Buying 101," recommends adding any extra income towards your mortgage.
"A lot of people get a one-time or a two-time bonus," says Shekhar. "I tell my clients to forget that they get a bonus and to use it each time to make a lump sum payment towards their principal; just work with your regular salary that you get and think that your bonus doesn't even exist."
Read on for additional advice from mortgage experts…Tip #1 - Maximize Your Tax Refund this Year and Put it Towards Your Mortgage
With the tax refund season well underway, this tip is especially relevant.
"Instead of blowing your income tax money on toys and dinners, use it to pay down your balance faster," advises Carolyn Warren, author of the best-selling book, "Mortgage Rip-Offs and Money Savers.".
And although not everyone gets a refund, CRA says that about three out of four filers usually get one, according to their website.
"For instance, let's say you pay an extra $1000 each year, you could take off as much as six or seven years off your mortgage and also lower your interest rate in the process," Warren explains.
If you can't pay an extra $1000 each year, you could still trim some years off your mortgage with a smaller amount, she adds.Tip #2 - Be Aggressive During the First Five Years
"The first years of your mortgage, payments heavily go toward interest, so by paying sooner, you get to the point where more of your payment goes toward your own principal balance," explains Warren. "How mortgages work is that it looks like an upside-down pyramid if you're drawing out how much of your payment goes towards interest and how much towards principal balance."
As a result, the faster you start paying down your principal, the closer you get to paying off your mortgage, says Warren.
"So if you can put some extra money on your balance in those first five years, it's tremendously helpful," she adds.
Warren says one of the ways this can be accomplished is by paying an extra $100 or $200 on your mortgage each month right from the start. If you view it from a yearly basis, an extra payment of $100 each month equals an extra $1200 on your mortgage at the end of the year, and an extra payment of $200 comes to $2400 annually. That extra money makes a considerable difference from year to year and could help you start paying down your principal much faster, she says.
If you're unable to pay the extra $100 or $200 on a monthly basis, use whatever extra money you might have available "because every little bit helps," says Warren.Tip #3 - When Refinancing, Don't Forget about the 20-Year Loan
Refinancing to a shorter-term loan is another smart option for homeowners who want to pay off their mortgage faster, says Shekhar.
"It's pretty standard for everyone to get into a 30-year fixed loan, which is fine if you're a first-time homebuyer, and I understand you want to keep your payments low in the 25 -year fix," says Shekhar. "But after some time, when you become a little more comfortable with your finances, you should definitely consider a 15 or 20-year fix."
"It's not just that you pay your loan faster, but it's surprising how much money you can save as well," he says.
And while you may not hear about 20-year loans as often as you may a 15-year loan, it's definitely a viable option to consider, especially if the payments on a 15-year term don't seen manageable.
"If you can't afford the payment on the 15-year loan, you might be able to afford the payment on the 20-year," says Warren.Tip #4 - Tell Your Lender You Want Extra Payments to be Applied Immediately
If you’re putting in the effort to make extra payments towards your mortgage, make sure you’re getting the biggest bang for your buck.
In order to do so, it’s imperative that you tell your lender exactly how you want the extra funds to be applied to your mortgage. For the biggest savings, tell your lender to apply the extra payments towards your principal - immediately.
Otherwise, your lender may simply hold on to the extra payment and apply it during your next scheduled payment. Remember, your interest accrues daily, so even if the funds are sitting idle for just a couple of days, you could be missing out on big savings.Tip #5 - Consider if Tapping Your RRSP is Worth it
This option isn’t right for everyone, so you’ll need to carefully assess which option will give you the biggest return: Investing in your RRSP or paying down your mortgage?
The answer will depend on a variety of factors, including:
Higher Return on Investment: Think about what your current mortgage interest rate is and how much time is remaining, and compare that with your RRSP investments. Which has the higher return? If you have a rock-bottom interest rate in the 2s or 3s, it may not be worth tapping into your investments that are yielding high profits.
Taxes: When you take money out of your RRSP , the amount is considered taxable income. This means that if you take out a significant amount to pay down your mortgage, you may move up a tax bracket or two.
As you can see, there's a lot to consider when making this decision, so it's best to consult with your lender and financial adviser to see which option is most beneficial for your future.
Your home is a focal point in retirement
Your relationship to your home is a very personal one. Decisions about whether you purchase a home or rent and whether you move to another home in retirement will vary dependent on your values, interests and personal circumstances.
One way to evaluate living arrangements in retirement is to see your home as the focal point of your lifestyle:
· Health Care. Where you live will determine your access to health care, the availability of medical professionals, and whether or not services are free or provided on the basis of a fee.
. Where you live on December 31st of each year determines the marginal tax rate
you will pay.
. Your primary domicile (or where the majority of your activity takes place) will determine where probate
· Support. The location of your home in retirement can be instrumental in the degree of support you may be able to receive from relatives and friends in times of crisis.
Should I stay or should I move?
Is the house you are in now, the house you see yourself in during your retirement? Many factors can influence the decision to stay where you are and age in place.
· long residency
· family associations and memories
· proximity to family and friends
· sweat equity (the time and effort given to making the house a “home”)
· neighbours and neighbourhood support
· ownership (in the case of home owners)
For those who struggled for many years with seemingly endless mortgage payments, the satisfaction of finally owning your home can be a significant reason to stay put.
Is your home ready for retirement?
Many Canadians have looked at renovations, both big and small as a means of improving the home. One of the questions to ask yourself is whether it is best to have these renovations completed before you retire.
Generally, homes require regular maintenance, repairs and renovation. Ideally, the costs of repair and renovation are best managed while working unless you are planning to do the work yourself in retirement. The advantage of renovating before retirement is that it can create a 15-year window in retirement, where the costs for the renovations do not have to be accounted for within the retirement budget.
Another consideration is whether your home can be adapted as your personal health situation changes. Changes in health and mobility may make your current home less than ideal and potentially make moving a preferred option. Evaluating, potential barriers in your home and considering any safety concerns may help you realistically assess the suitability of your home in retirement.
An important long-term consideration in choosing a retirement location is access to services and support from family and friends. Consider the implications of losing one’s ability to drive a vehicle (for example due to failing health). Would your present location allow you to continue staying in your home or would your location, under those circumstances isolate you?
Have you thought about where you are going to live in retirement? Will it be the house you are in? Will you move and why?
For information on home adaptation options and financial assistance see the website of Central Mortgage and Housing Corporation at http://www.cmhc-
Car Insurance for Canadian Drivers
Many of us like the independence that having a car provides. However, with the ability to drive a vehicle comes responsibility. Every province and territory in Canada requires that you have insurance if you want to drive a car. In fact, if you drive without insurance, you run the risk of losing your driver’s license.
Car insurance is a necessary expense for Canadians, but it doesn’t have to be overly costly. If you are careful about your coverage, and you take the time to compare your options, you can find cheap car insurance
that provides you with adequate coverage at a reasonable cost.
What Auto Insurance Coverage Do You Need?
First of all, you want to make sure that you have all of the auto insurance coverage that you need. Canadian drivers are required to have basic liability coverage. This is coverage that kicks in when you damage someone else’s property, or if you cause injury to someone else. The idea is that your insurance pays for such damage or injury when the accident is your fault. That way, someone else isn’t paying (financially, at least) for your mistakes.
Other typs of insurance include the following:
· No-fault: This is insurance that protects you if the other driver is at fault and you don’t want to go through the hassle of contacting his or her insurance. It also protects you and pays the bills for your own injuries and damage if the accident is your fault.
· Collision: This is insurance that covers damage to your own car. It doesn’t even have to be damage by another car.
· Comprehensive: Other types of insurance won’t cover non-accident typs damage. With comprehensive, you receive protection in the event of natural disasters, fire, theft, and vandalism.
· ERS: Emergency Road Service is all about helping you get back on the road. If you breakdown and need a tow, or if you need light repairs made, this coverage will take care of the costs.
How to Pay Less for Auto Insurance
If you want to pay less for auto insurance, the key is in your driving behaviours, as well as in the coverage that you have. The higher the coverage amount you require, and the more coverage you ask for, the higher your premiums will be. However, you can get a break in the cost if you are a safe driver. If you aren’t at fault in accidents, and if you don’t have traffic violations, you will have lower premiums.
Your premiums are also influenced by what type of car you drive, where you live, and the deductible that you set. You want to make sure that you have adequate coverage so that you are protected from paying big in the event of an accident, no matter who is hurt — and no matter who is at fault.
A higher deductible, meaning that you pay more out of pocket, can help you keep a lid of regular premium costs. If you are worried about paying a higher deductible, you can start an emergency car fund in order to help you afford the cost so that you aren’t running into problems when it comes to pay your higher deductible.
In any case, the risk of not having car insurance is too high. You need some coverage in order to make sure that you are adequately protected.
Do You Have the Right Home Insurance?
Insurance is designed to help you protect your assets. And one of your biggest assets is your home. A home is an expensive purchase, and when damage is done to your home, it can be costly to repair.
Insurance can help you better handle those costs. When you pay regular premiums, the insurance company promises to pay the cost of damage to your home, and to its contents. Home insurance can also provide you with liability protection if someone is injured on your property, and compensation for items stolen from your home.
Without insurance coverage, all of these items can be financially devastating. With insurance coverage, you have a way to avoid having it all come down on you at once.
What is the Right Home Insurance Coverage?
Your first order of business is to determine whether or not you have the right coverage for your home. At the most basic level, you want to make sure that you have enough money to cover the cost of replacing your home if it is destroyed. You also want to make sure that you have enough contents insurance to replace the items in your home. Finally, consider a minimal amount of liability insurance so that you can offset costs if someone is injured on your property and needs medical attention.
It’s important to look a little deeper as well. Some policies don’t cover all types of damage. You might not have protection from flood damage, or damage from earthquakes. If you run a home business out of your home, you might not be completely covered, either. Some policies only offer very limited coverage of home business equipment in your home. Finally, if you have particularly valuable items, such as fine paintings or heirloom jewelry, the contents insurance you have might be insufficient.
Look carefully at your policy papers to determine what, exactly, is covered. You might need to purchase additional coverage to make sure that your individual situation is fully taken care of. This is especially true in the case of home business activities, and in the case of particularly valuable items.
Review Your Coverage Over Time
Once you purchase your home insurance
coverage, you aren’t done. You need to check up on the status of your policy over time. If your home has appreciated since you bought it, there is a chance that it is no longer completely covered. If you bought your home for $150,000, and got a policy for $200,000 more than 15 years ago, you might find that you are short on coverage. What if your home is worth $275,000 now? What if you have bought more things for the inside of the house, so the contents are worth more?
Regularly review your home insurance coverage, and determine whether or not you need an increase. It might mean a higher premium (you can offset a higher premium with a higher deductible in many cases), but it also means that you know you are covered. And you can’t put a price on peace of mind.