Recently, Rob Carrick of the Globe and Mail wrote an article in which he compares Canadian equity mutual funds to the iShares Canadian Composite Index Fund (XIC) in terms of performance over the last five years. He discovered that only five mutual funds out of about 100 beat the ETF.
Funds which beat XIC in the last five years:
Acuity All Cap 30 Canadian Equity
imaxx Canadian Equity Growth
Altafund Investment Corp.
TD Canadian Equity
TD Canadian Equity-A
While I would argue that you really need a longer time period and varying conditions (ie bear market) to determine if ETFs are superior to mutual funds, this study raises some interesting questions. If you have an investment advisor who tells you that they can pick top performing mutual fund managers then I would suggest you take a look this list of Canadian equity funds and if you don’t see anything familiar then maybe you should ask your advisor why they didn’t pick one of the top funds. Another good question to ask yourself is why you even need an advisor if you can pick a standard ETF and get better performance.
One of the big benefits of Exchange Traded Funds (ETFs) are the lower management costs which are typically less than 0.5% when compared to mutual funds which normally charge anywhere from about 1.3% to 3% for equity funds. Books such as Four Pillars of Investing and Random Walk Down Wall Street emphasize the fact that these lower costs result in better returns for ETF. Only a minority of mutual funds will beat their index in any given year and the problem is that very few of those funds can continue to beat the index for any length of time. Over time, broad market ETFs will beat the vast majority of mutual funds which makes it very difficult to pick the rare fund that does better than an ETF.
The problem we have as consumers is that we never see any advertising which promote ETFs (since they are low cost after all) but we get bombarded with ads from financial companies which always boast about one or two of their funds which have had superior performance in a recent time period. What you need to figure out is how many funds those companies manage and how many are they advertising? It’s usually a small percentage.
The BagLady had quite a post this week – if anyone out there has been through potty training their kid (I haven’t) then feel free to comment on this one. On an unrelated note – check out her sitemeter stats for the last month.
Canadian Dream did a bit of an expose on his recent history – incredible story if you ask me.
My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.
Remember that a mortgage is a fancy term for a loan; however, it is a loan that is secured against the value of your home itself. The original amount that is borrowed is referred to as the principal.
A conventional mortgage requires a downpayment of at least 20% the purchase price of a home.
First time home buyers can take advantage of the federal government HBP (Home Buyers’ Plan) whereby an individual is allowed to withdraw up to $20,000.00 from his/her RRSPs. Minimum repayments of 1/15th of the loan are required each year, with the full amount to be repaid within 15 years. You are essentially loaning yourself the money for a home purchase. The downside is that the withdrawn money would be not be appreciating in your RRSP.
If you do not have 20% down, what are your options?
When a mortgage is taken out on more than 80% of a house’s cost, then it is known as a high-ratio mortgage and lenders require mortgage insurance to protect themselves in case of default. The insurance is required on the full mortgage and is either paid upfront or added to the mortgage itself.
Mortgage insurance is charged on the full principal mortgage. The calculation is based on the percentage of the mortgage compared to the total purchase price.
CHMC (Canadian Mortgage and Housing Corporation) and Genworth Financial Canada are the two institutions which provide mortgage insurance in Canada. Mortgage insurance premiums are available here.
Table of CMHC Mortgage Loan Insurance Premiums
Loan Size
(% of Lending Value)
Single Advance Premium
(% of Loan)
Up to and including 65%
0.50%
Up to and including 75%
0.65%
Up to and including 80%
1.00%
Up to and including 85%
1.75%
Up to and including 90%
2.00%
Up to and including 95%
Traditional Down
Payment Flex Down
2.75%
2.90%
Up to and including 100%
3.10%
Note: See your lender for premium surcharges and other terms and conditions that apply.
Thus, with a house purchase price of $400,000 and a $50,000 down payment, the CMHC premium to insure a high ratio mortgage would be:
$350,000 mortgage x 2% (the rate for a loan 87.5% of the house value) = $7,000.
My husband and I decided to avoid taking out a high ratio mortgage and will be using a line of credit to top up our downpayment to reach 20%. We were leery of the compounding interest on a higher mortgage. As good savers, we are confident of paying off a line of credit quickly, so the borrowing cost will actually decrease as the loan is paid off.
Different Types of Mortgages
The lowest lending rate is only one of the considerations for a mortgage. These other variables will be discussed below and vary by bank or lending institution.
Fixed or Variable Rate — A fixed rate is a set lending rate for a specified period of time with fixed payments. A variable rate changes on a monthly basis against the prime rate. Therefore, while your payments remain the same, the amount that goes towards the principal loan versus interest changes.
Although historically, variable rates have saved money, it is a guess which direction rates will go in the next few years. Therefore, which route you go depends on your comfort level in terms of risk.
Open or Closed – Open mortgages allow you to repay the entire mortgage or make extra payments without penalty fees. Some closed mortgages charge a fee for extra payments, while other closed mortgages require that you wait until the end of the term. The degree of “openness” on a mortgage varies between institutions. If you wish to pay down a mortgage faster and will have extra funds for payments, you may not want to choose a completely closed mortgage.
Term – The length of a mortgage agreement can last from 6 months to 10 years. Short-term mortgages run for two years or less and are advantageous for borrowers who think that rates will be decreasing in the next few years. After the end of a term, a new mortgage can be negotiated with a different lender.
Amortization period – A period of 15 to 40 years can be chosen. The length of time that you choose to pay back your mortgage will affect the size of your payments and the amount of interest that you will eventually pay.
Payment Schedule – The frequency of payments (monthly, weekly, bi-weekly, etc.) against your mortgage will vary between financial institutions. Because interest is compounded monthly, making weekly payments will more quickly reduce your principal mortgage than paying on a monthly basis, even if the overall size of the monthly payment is the same.
Pre-payment Options – Essentially extra payments against the mortgage free of penalty fees, the terms and amount vary between lenders. As with a more frequent payment schedule, pre-payments help reduce the principal and the overall interest borrowing cost.
The regular RESP grants (CESGs), calculated at 20% of contributions, are available to all eligible Canadians regardless of their individual or family income. It doesn’t matter whether you earn $20 a year or $2,000,000 a year – you still qualify for the basic RESP grants.
Besides the 20% basic grant, the government offers additional grants based on family income.
There are a large number of middle (and lower) income Canadians who are eligible for these additional grants – and probably don’t know about it.
Buy The RESP Book on Amazon
The income levels for additional grants apply to the primary caregiver of the child and not the person who opens the account.
These additional RESP grants apply to the first $500 of contributions each year, unlike the normal RESP grants, which are payable on the first $2,500 of contributions per year.
There are two different income levels to qualify for these additional grants.
Families with a net income between $42,707 and $85,414 are eligible for an extra 10% grant on the first $500 of contributions each year for a total of $50 per year.
Families with a net income of $42,707 or less are eligible for an extra 20% grant on the first $500 of contributions each year for a total of $100 per year.
These income ranges are for 2012. To get updated value for future years, please visit this CanLearn page.
The family income in this case refers to the primary caregiver, who might not necessarily be the subscriber or owner of the account.
Net income: This is the amount on Line 236 of your T1 general tax form. It is your income net of RRSP contributions, child care expenses etc.
Canada Learning Bond – no RESP contribution required . $500 initial one-time payment followed by $100 per year for 15 years – total potential of $2000.
Eligibility – If primary caregiver is eligible to receive NCBS – National Child Benefit Supplement – this supplement is generally for families with a net annual income below $42,707 .
You have to apply for the initial contribution within 6 years of the child being born and the subsequent contributions, 6 years after the birthdays. There is no income test for ACES grants.
Both the CLB and ACES grants do not require a contribution, so anyone who qualifies for them should take advantage of the program and get the grants. For the addition CESG grants, these require a normal RESP contribution to be made before getting the additional grant, so I would caution anyone who is in a lower income range to make sure that you have your own finances in order before contributing to an RESP.
Let’s look at an example!
Mary and Steve make a combined family income of $71,500 which makes them eligible for an extra 10% CESG grant on top of the regular 20% grant.
If they contribute $1000 in a year then they will get:
Normal CESG grant of 20% = $200.
Additional CESG grant of 10% on the first $500 of contribution = $50.
So the total CESG grant on their $1000 contribution will be $250.
More detailed RESP information
Check out the RESP rules page for a list of more detailed RESP articles on this site.
Are you the type of person who has to have everything updated in their new house? Do you shudder at the thought of having laminate counters in your kitchen and not stone? Do you throw out perfectly good cabinets and replace them with expensive new “modern” cabinets? Do you toss out modern white appliances and replace them with stainless steel ones?
If so, then this post is for you! I’ll discuss two reasons why you shouldn’t be replacing parts of your house that are still functional – one is the environment and the other is your pocket book.
Most renovations are not good for the environment
Environmental effects of renovations are pretty major. Lots of energy gets used to make new materials like drywall sheets, kitchen counters, tiles etc. so if you are throwing out perfectly functional kitchen counters then you are not doing the environment any favours. Another problem is that the disposal of demolition material takes up a lot of space in landfills. It’s one thing to replace an item that is broken or in a state of disrepair but to redo a bathroom because you don’t like the colour of the tiles is a bit of a waste.
Renovations don’t always add to house value
At this point if you are thinking that you would be willing to fork out some money for a Prius but you are not going to give up your dream kitchen for the environment then let’s take a look at the effect of renovations on your house value. A lot of people assume that any money they put into a house automatically gets added to the value of their house. So if they buy a house for $400k and spend $30k on a new kitchen then the house must be worth $430k right? This assumption is a bit of a stretch, however let’s say for the sake of argument that it’s accurate. If that assumption is true, then the opposite must also be true – if you remove anything of value from the house then the value of the house must go down as well. Typically when you buy a house that is in half decent condition then you are paying for all the various parts of the house. If the kitchen is in reasonably good condition or even if it’s not that great but still functional then you paid some $$ for that kitchen when you bought the house. If you were to remove the kitchen and then put in a new one then you have to subtract a value for the removed kitchen.
Let’s look at a hypothetical example:
Let’s say you buy a house for $400,000, the kitchen was remodeled about 20 years ago and is in fairly good shape but it looks a bit dated in your opinion. The new kitchen you want will cost $25,000. Let’s assume the value of the existing kitchen is $10,000. We’ll also make the assumption that your house value goes up or down with any money invested in renovations or demolition (removal of value).
In this case the added value of the new $25,000 kitchen will be:
$25,000 – $10,000 = $15,000. Considering you paid $25,000 and went through a lot of hassle for the new kitchen you didn’t get a very good return on your investment.
So how do you help save the environment, get your money’s worth from renovations and still have your dream kitchen?
I suggest two different alternatives:
Try to buy a house with a kitchen that is in the poorest condition possible. The more rundown the kitchen is, then the less value it has and the negative effect of removing it will be minimized.
Lower your standards a bit. Consider repainting the cabinets instead of replacing them. The repainted cabinets might not be quite as nice as the new ones but for less than 5% of the cost you might have a much better value. If the appliances aren’t too old then hang on to them and decorate the kitchen in such a way that they fit in. Bottom line is to try to only replace items that need replacing and just fix up/paint everything else.
Summary
Whether you are thinking of the environment or your pocket book – try not to remove items of value when you are doing renovations. Use as much as you can of the existing room.
If you have to gut a kitchen/house then buy one that is about to fall down, that way you aren’t throwing out anything of value.
And remember – it doesn’t matter how much you spend on your new kitchen – the food will still taste the same!
Canadian Financial DIY posted an excellent article comparing the show “Who Wants to be a Millionaire” to investing – check it out and see for yourself.
The Financial Blogger addressed one of my pet peeves regarding lack of financial education in schools.
Canadian Capitalist posted an article pointing out that high investment costs (which we are all obsessed with) are not the worst enemy of the investor.
I recently moved my rrsp account from low cost mutual funds to Questrade where I bought some ETFs. I thought I would share the experience with you since I learned a few things during the process.
My plan was to buy four ETFs:
XSB – ishares short term bond (Cdn $)
XRB – iShares real return bond (Cdn $)
VTI – Vanguard US equity (US$)
VEA – Vanguard Europe and Far East (US$ to buy)
I described in a previous post about my first efforts at completing an equity trade. With this solid background I figured I’d be in better shape this time.
If you check out my post on my planned asset allocation you’ll notice that this portfolio is incomplete. That’s because we have several investment accounts so this one doesn’t represent the entire asset allocations. Once I get all the accounts figured out then I’ll post on the final asset allocations.
My goals for this exercise was to try to buy as many shares as possible and minimize the amount of cash in the account and to try to get it over with quickly. I didn’t want to have to spend a lot of time at work trying to get the best price for each security.
I started off with the Canadian purchases. This turned out to be a minor mistake because for some reason I thought that once I purchased the Canadian securities I would phone Questrade and get the Cdn$ converted to US$ and then buy the US$ securities. In actual fact when you buy US$ securities, you put the order in and then the dealer converts to US$ when the trade gets filled. The problem is that since you don’t know the exact currency conversion rate in advance you can’t utilize your last few dollars properly when buying a US$ security since you don’t know the exact maximum number of shares you can buy.
I used only limit orders which are market orders with a limit on them ie if you put in a buy when a stock is trading for around $50.00 with a limit of $50.50 then you will get the market price but only if it is less than or equal to $50.50.
Anyways, on with the trades…
XRB – The ETF had gone from $18.49 to $18.50. I put in a limit order for 700 shares with a limit of $18.55. It was filled immediately for $18.49. Very successful trade!
XSB – This one caused me a some trouble. This one has very slow trading activity so unless your order gets filled right away it might take a while. The last order was $27.97, I put an order for 1050 shares with a limit of $27.98 – first mistake – I should have had a higher limit. Second mistake, I didn’t put in a “all or none” order and 50 shares got filled at $27.98. The price drifted up during the day so my 1000 shares remaining with a limit of $27.98 couldn’t get filled. The problem was that I was already looking at one commission for the 50 shares so if I cancelled the remaining order the I have to pay a second commission. Luckily the trades are cheap at Questrade because by the end of the day the order had expired. The next day the last trade was $28.03, I put in my order of 1000 shares with a limit of $28.05 – filled right away.
VTI – this ETF had the higher share price so I bought it next. Last trade was $146.17 so I put in order for 350 shares with limit of $146.20. The price went up quickly to $146.20 so I had to wait about 15 minutes and it was filled at $146.20.
VEA – my problem with this order was that I didn’t know how much money I had in US$ – I called Questrade to get a recent conversion rate which I used to approximate the amount – I decided to go for 1000 shares. Last trade was $47.29, I put in order for 1000 shares with limit of $47.32 with all-or-none to prevent partial filling. Price went up for a while but it got filled about half an hour later at $47.32.
The next day I checked my cash balance and I ended up with about $900 in cash. This isn’t a big deal since these ETFs will be creating cash via interest and dividends anyways but if I could do it again, I would have left one of the Canadian securities to be the last trade so that I could accurately use up all my cash.
Anyways, it was fun buying these ETFs and I ended up learning quite a bit in the process.
One of the main benefits of RESP accounts is the federal Canadian Educational Savings Grant (CESG). This grant is 20% of any eligible contributions in an RESP account.
How the RESP grant system works
Let’s say you open an RESP account for your bouncing new baby and contribute $1,000 into the account. Your financial institution will send the account and contribution information to the Canadian government for grant approval. If the grant is approved, the institution receives the grant money and deposits it into your account.
Buy The RESP Book on Amazon
The math
20% of the $1,000 contribution is $200, so you will now have an extra $200 in the account courtesy of the Canadian government. This basically gives you an extra 20% one-time return on your contribution.
$2,500 – Amount of annual grant-eligible contribution room accrued each year starting in 2007 or the year the child was born (whichever is later). The contribution room continues accruing up to and including the year when the child turns 17 years old. This amount is based on the calendar year and not the birth date.
$2,000 – Amount of annual grant-eligible contribution room accrued each year starting from the year the child was born or 1998 (whichever is later) up to and including 2006.
20% – Amount of grant earned on an eligible contribution. For example: a $1,000 contribution would earn a grant of $200, if that contribution is eligible for a grant. There are additional grants available for lower income families.
$500 – Maximum amount of grant a beneficiary is eligible to receive for each calendar year from the year they were born or 1998 (whichever is later) to the year they turn 17 years old. This amount was only $400 for years prior to 2007. A calendar year is from January 1st to December 31st.
$7,200 – Lifetime grant limit per beneficiary. If you contribute $2,500 every year, you will hit the maximum grant level in the fifteenth year, and no more grants will be paid to the beneficiary. This limit includes additional grants available to lower income families.
$50,000 – Lifetime contribution limit per beneficiary. Because there is no annual limit, you could potentially make one single contribution of $50,000 to an RESP if you choose.
Contribution room carry over. One of the great things about the RESP is that you can carry over unused contribution room into future years. However, there is a catch: Only one previous year’s worth of contributions can be used each year.
Contributions are not tax-deductible. You won’t get a tax slip, and you can’t deduct RESP contributions from your taxable income.
For example: If you start an account for your six-year-old child, you can contribute $2,500 (this year’s contribution room) plus another $2,500 (from previously unused contribution room) for a total of $5,000, to receive a grant of $1,000. You are allowed to contribute more than $5,000 in this scenario, but there will be no grant paid on the amount above $5,000. When calculating contribution room carryover from past years, don’t forget that the contribution limit was only $2,000 prior to 2007.
RESP contribution examples
Let’s do some examples to clarify exactly how this works.
Example 1 – Simplest example
Steve was born in 2010. His parents are broke, but one kindly grandmother decides to open an RESP account for him.
She opened the account in 2010 and has $2,500 of contribution room available. She contributes $1,500 to the account in 2010, so the RESP grant is $300 (20% of $1,500).
In 2011, she contributes $1,200, thereby qualifying for a $240 grant.
Example 2 – A more complicated example
Little Johnny was born in 2006. His parents decide in 2010 to set up an RESP account for him. They want to know how much money they can contribute each year to catch up on all the missed government grants.
Let’s add up the current contribution room.
2006 – $2,000 of contribution room
2007 – $2,500 (new rules)
2008 – $2,500
2009 – $2,500
2010 – $2,500
In 2010, the couple has $2,500 of contribution room for the current year plus $9,500 of contribution room from previous years.
Since the rule is that you can only contribute up to $2,500 of previously carried over contribution room each year in addition to the current contribution room, this means they can contribute this year’s amount ($2,500) and another $2,500 for a total of $5,000, which gives a grant of 20% or $1,000 for 2010. Since they only used $2,500 of their available $9,500 of carried over contribution room, they now have $7,000 in contribution room to carry over for the future.
In 2011, they can contribute another $5,000 for a $1,000 grant. $4,500 of contribution room is carried forward to the next year.
In 2012, they can contribute another $5,000 for a $1,000 grant. $2,000 of contribution room is carried forward to the next year.
In 2013, they can contribute only $4,500. $2,500 from the current year plus $2,000 they carried over from the past.
In 2014 and beyond, they can only contribute $2,500 each year and expect to receive the full grant of $500.
Summary of contributions they can make to get all the government grants:
If you have a family plan with two or more beneficiaries, you need to allocate each contribution between the beneficiaries. For example, you might want to set up all contributions to be divided equally between the account beneficiaries. Or you might have a particular contribution that should be allocated to just one beneficiary. You must set the allocation so the government can track the grants for each child.
When you open an RESP account or add a new beneficiary to an existing account, you can set up the default allocation to split the contributions equally among the children on the account. If you want to make a contribution with a different allocation, you have to indicate this on the purchase order.
More detailed RESP information
Check out the RESP rules page for a list of more detailed RESP articles on this site.
