Why I Chose A Five Year Term For My Mortgage

Last year I felt a lot of stress from being financially over-extended in the form of a mortgage that was too large. One of the obvious remedies to this problem was to concentrate on lowering that debt, which we’ve done with some success. The other significant thing we did was to lock in our mortgage for five years. I realize that studies like the one done by Moshe Milevsky show that shorter terms are cheaper in the long run for mortgages, but in our current situation, the peace of mind of not having to worry about the possibility of increased interest rates is well worth any extra cost that locking for five years might end up causing.

The reason the mortgage payment is such a concern is because our budget is too tight to handle a big increase in payments if interest rates jump up. By locking in, we don’t have to worry about that for five years, at which time the mortgage will be low enough, we’ll be able to handle higher interest rates if need be.

I can’t predict if interest rates are going to go up or down in the future, but I can accurately predict that with the longer term mortgage, I will sleep better at night.

Real Estate

Getting Started With Investment Real Estate – Part 4

To start at the beginning – please see part 1 of this series.

When we last left off, I’d identified an area of town I wanted to buy in, and had toured all the 2 bedroom units in 3 buildings. I’d put in a lowball offer on each of them (12 units I think) and was turned down by each of them. I was upfront to my agent that I was going to keep raising the amount and re-offering on each unit in tern (according to my ranking of their “desirability”).

I actually started getting the feeling that my agent wasn’t presenting the offers. She told me that the listing agents were getting angry at the offers, but when I asked her for more details about the conversations, she got vague in a hurry and couldn’t provide any specifics. Finally, in an effort to get her to present the offers, I offered to fax them to the listing agents myself to save her the effort (since I was making A LOT of offers), which she declined, saying this was part of her job.

What got her going again was I told her that I thought after the current round of offers maybe I’d target another, more affordable, area of town. I think she decided that presenting offers was easier then showing me more units and got to work. Again, this is my speculation, I *HOPE* she was presenting offers and doing her best to get me a good price, but you never know for sure.

It actually got to the point where she was suggesting I talk to the listing agents directly. She diplomatically presented this as wanting to help me get the best possible price, even if it meant her losing out on her commission. I think the reality may have been that she was thinking I was too much work for the expected commission (which I can totally understand, I’d drop clients if they weren’t profitable from a payment-per-hour-of-work perspective too). Amusingly, right when we were having this conversation, one of my offers was accepted (outright) and I got a 2-bedroom condo in rough shape for $126,000.

My original plan was to do the renovation work myself. I had approached buying the condo (which are known to be one of the least profitable forms of rental housing) as a learning exercise, and even if I just broke even I was reviewing it as more then an investment. Doing the reno work was supposed to be a chance to learn about painting and laying down flooring.

My father had offered to come help me do the work, and I’d refused (I don’t like the idea of dragging in friends and family as free labour on money-making ventures). Faced with a fairly daunting job ahead of me, I reconsidered and asked him if he was still willing to help teach me how to do it. In the interim, he’d reconsidered as well ( we’re an indecisive bunch), but he suggested I get the unit professionally worked on in order to get it in rentable shape ASAP, and generously offered $5K towards the renos.

I debated about trying to do it myself, and got to the point where I was losing sleep worrying about doing the work. At that point, I decided to bite-the-bullet, get advice and hire contractors to do the painting and flooring for me.

(Continue to part 5).

Personal Finance

Mortgage Renewal Time

My mortgage is coming due at the end of July and I decided to shop around to get the best rate I could. In the past few years I’ve been renewing with one year terms at TD Canada Trust where my mortgage guy always gave me reasonable rates which I verified by talking to other people I knew who were mortgage shopping. ING Direct website is also a good indicator of competitive mortgage rates. Last year I didn’t think I got a competitive renewal rate but I renewed anyways because of extenuating financial circumstances – 2 mortgages, maxed out line of credits, baby was due same week as the mortgage etc etc. This year I’m down to one mortgage and the LOCs are paid off so it’s time to go shopping!

I used a mortgage broker who was recommended by two different friends of mine. She gave us a quote of 5.19% for 5 years for a $190k mortgage with a LOC up to $250k. The LOC requires a lawyer to setup and there is a $500 cash back for the legal fee so I don’t have to pay it. I also asked if she would cover the $270 fee that TD is charging for allowing me the privilege of not renewing my mortgage with them and she agreed (sometimes you just have to ask). By way of comparison ING Direct had 5.24% for their fixed five year mortgage and TD (my current bank) offered a whopping 5.49% for five years. Almost a third of a percent is a steep price to pay for the convenience of staying with TD.

I feel good about putting in a proper effort to get a good mortgage rate. I wasn’t that concerned about what the exact value of the best rate, since there is nothing I can do about that, but I really didn’t want to sign up for a mortgage thinking that there was a better deal out there if only I had searched a bit harder.

Book Review

The 4-Hour Workweek by Tim Ferriss

I had been coming across references to Tim Ferriss’ “The 4-hour Workweek” when a friend was good enough to send me a copy. Its a very quick read, and I tore through it over the last week’s commute.

There were parts of this book I really liked, parts I didn’t buy, and parts I found rather distasteful.

The Good: One of Tim’s central idea is to focus on your “competitive advantage” (he doesn’t put it this way). Hire people to do anything that you can get them to do cheaper then it would be to do it yourself, then focus on the higher paying elements of your life. He presents this as the 80/20 rule (20% of what you do provides 80% of the benefit). I definitely agree with this idea. I had a relative in England who was an insurance executive and he HATED to do yard work. I told him to hire a neighborhood kid for 5 quid a week to do the yard work then work a bit more on the job to pay for it (he was paid far more then what the yard work would cost). He agreed with the principle, but wasn’t willing to do it.

Tim suggests doing this to your ENTIRE life constantly. He suggests things like virtual assistants from India to deal with all the little irritant in your day so that you’re free to concentrate on what you do to make money. I’ve spent 45 minutes some days trying to sort out billing problems with my phone or internet, and its a great idea to outsource this very frustrating experience. How funny it’ll be if we hire people to argue with the people business have hired to talk to us.

Tim also talks about the fears of not working 9-5 and the spiritual angst of doing the same. I’ve worked on starting a business, and taken time to “smell the roses” in my life, and he’s dead-on that the puritan work-ethic kicks you hard for not being a good corporate drone like everyone else (plus friends and family don’t like it too much that you aren’t a wage slave the same as them).

The Bad:

Tim suggests financing all this with “financial muses” which are basically small products or services that you test market until you find one that you can sell for a big markup. You then automate the entire process of manufacturing, advertising and distributing the product/service and just let the money trickle in and fund your lifestyle. Nice idea, but I have the feeling its not quite so easy.

He suggests costing out “adventures” as motivators for setting up these muses (e.g. figure out how much it’ll cost to study Spanish in Buenos Aires for 6 months, then keep trying different ideas until you find one that can fund it). Again, not so sure its as easy as all that (or wouldn’t everyone be doing it?).

The Ugly:

Quite a few of the choices Tim makes in his life seem quite unethical to me. He brags about winning a marital arts competition by dehydrating himself down 2 weight categories (then re-hydrating back up to his proper weight before competing) and using a rule-technicality (basically shoving his much smaller opponent off of the mat) to win. Doable, and he apparently has the trophy, but has he actually accomplished anything?

He also seems to have made most of his money from selling “BrainQUICKEN” and “BodyQUICKEN” which are “supplements” (in my opinion snake oil).

I’d have trouble selling stuff that didn’t work (in my opinion – hopefully dropping that in will save me from being sued :-)) even if it made me a lot of money.

Interesting ideas and a quick read, but not quite the radical life-changing book its being billed as.


Rebalancing With A One Stop ETF?

I’ve been doing a lot of research recently on ETFs and what’s in them because I’m about to convert a good chunk of my rrsp over to ETFs. One of the new ETFs I’ve been looking at is VEU – Vanguard world equity minus the US. This ETF would replace three ETFs I was planning to buy: VKG – Vanguard European, VPL – Vanguard Pacific and VWO – Vanguard Emerging Market. At first this ETF seemed like a great idea because it would save on transaction costs and would make the portfolio a bit simpler.

Today, however it occurred to me that since that part of my investment strategy is to rebalance on a regular basis, combining different geographical and economic regions into less ETFs might reduce the benefit I can get from rebalancing. The emerging market area is one particular class that is very volatile and as a percentage of your portfolio can easily double or half depending on the markets and is a great candidate for portfolio rebalancing. According to this article by MartinGale the portion of world equity of emerging markets is around 9%. If they keep up their torrid pace then this percentage could climb quite a bit. On the other hand, they could get reduced significantly as well. With the VEU ETF I won’t be able to do anything about it except go along for the ride.

Another benefit with having more specific ETFs is that you can better control the risk level of your portfolio. For example I am thinking of only having about 6% of my equity portfolio in emerging markets since I don’t want the risk involved with the proper weighting of 9%. Another investor might want to go overweight and have 10-15% in emerging markets. Either way you can’t overweight or underweight emerging markets with VEU.

On the other hand, if someone comes out with a world equity ETF which happens to have the underlying weightings that I’m looking for…I would be tempted to buy it and be a completely passive investor.


Cutting Food Costs

I’m trying to “put my money where my mouth is” (or maybe change the money going into my mouth) and pull back on my food spending a bit. I packed my lunch for the first time yesterday and brought two tuna and mustard sandwiches (mustard as a healthier alternative to mayo), a bag of carrots, an apple, chickpea salad and coucous. It took about 5-10 minutes to make the night before and cost around $3.50.

If I could cut *ALL* my food spending in half, that’d be an extra $4000 per year (after taxes). In addition to being extra money to save/invest, that’d reduct my annual spending to $24,228.85, which (assuming the 4% retirement figure) would allow me to retire on $605,721.25 (instead of $705,721.25). Very significant savings from packing a lunch and eating out a little less often.

It’d be interesting to prepare an Excel chart looking at my savings rate and retirement target and calculating how much “time to retirement” cutting back on certain expenses would provide (the double-whammy of lower expenses and increased savings would be powerful I think). Might definitely help “cut-to-the-bone” if you saw that cutting something out would let you retire 3 years earlier.

I still don’t quite get how Derek Foster is able to support a family of 4 on $400k, but I’ll keep thinking about it. I suspect that once you factor in CPP and whatnot it can reduce how much you need for retirement.

Personal Finance

Not another rrsp vs. mortgage post!

I had mentioned previously that our general financial plan to prepare for retirement was to pay off all debts, max out my rrsp room, and hopefully invest outside the rrsp as well. I don’t want to ignite the immortal rrsp vs. mortgage debate since it appears that either option or any combination is a financially prudent course of action, but I would like to share my approach for my situation.

In our case, we do both rrsp contributions and extra mortgage payments. I don’t maximize the rrsp for now because I’d rather focus more on the mortgage since it worries me a lot more than the any lack of rrsp does at this point in time. On the other hand, being in a high tax bracket I like to make rrsp contributions because the money left over after taxes is not all that much. On the other hand again, the mortgage doesn’t go down very quickly if you don’t make extra payments.

I’ve read a number of rrsp vs. mortgage debates where the rrsp side argues that future investment returns will be higher than the current mortgage rates and vice-versa but the reality is that if you are planning to pay off your mortgage in 10-15 years as I am (or even quicker) then it’s debatable how much confidence someone can have in assuming a certain rate of return on their investments since 10-15 years is not really a long time when you’re talking about equities. Another factor is the mortgage rate assumption, a lot of investors just take the current rates and assume they won’t change when they do their calculations but are the rates really going to stay in a narrow range over the next five, ten, fifteen years? Assumptions are great for getting an “idea” of what might happen but they are really just guesses.

To conclude, I don’t know if it really matters that much exactly how we go about (eventually) maxing my rrsp and paying off the mortgage as long as we do it in a way that feels most comfortable.

Business Ideas

Another New Financial Product I’d Like to See

Continueing in the same vein as yesterdays new financial products post, another product I’d like to see is “segmented” loans. Basically these would be exactly the same as regular loans, except that you would be able ot “tag” part of them for specific uses, and those tagged parts would each be individually tracked.

e.g. say you qualified for a 80% (under new CMHC rules to avoid mortgage insurance) loan on a principle residence. But say you’d been saving for a while, and actually had a 25% down-payment. You take out the 80% loan, and tag 5% of it as “borrowed for investment purposed” and buy some dividend stocks with it. You also specify that all payments are to go towards the “non-investment” 75%. At the end of each year, they report your mortgage information, and give you a breakdown on the different “tagged” amounts. Each year you’d get a deduction for the investment portion of the mortgage, which would increase as time went on (since it would be accumulating interest as you paid down the other portion).

HOWEVER, from both your perspective and the banks, the mortgage is being paid EXACTLY the same as if it was all one amount (same payments, same amortization, same rate, etc), its just some automated book-keeping to help your with your taxes.

Eventually you’d pay off the “non-investment” part (especially if you kept refinancing, and borrowing more for investment purchases against your primary residence) and then would start paying off the tax-deductible portion.

I realize this is quite similar to a readvanceable mortgage, but the big difference is that this would ONLY require bookkeeping, in terms of movement of money, nothing would be different from a traditional mortgage (I could write a simple on-line application that would take any mortgage and break it up to provide this information). Therefore, anyone who offers mortgages could add this as a free additional service.