How to Get Mortgage and Debt Free by 29

General Brenda Yu 26 Sep

When people find out that shortly after turning 29 we were mortgage and debt free, interesting assumptions seem to arise such as us eating canned tuna every day, or never taking vacations or going out.

In reality we do take several vacations per year, go out at least once a week, and as much as I enjoy eating tuna (usually in sushi form) we do still go out to eat regularly. Yet, doing all this while not earning massive salaries we were still able to have our mortgage paid off and be debt free shortly after turning 29.

In today’s culture there seems to be an acceptance that debt is normal, and to live a “normal” life you must be in debt. We hear about the average Canadian having $25,597 in consumer debt and think, “Hey, being in debt must be normal.” Or we hear about people in a massive debt crisis and at the point of financial collapse and think, “Wow, at least we’re not in that bad of shape. We must be doing okay.”

The reality is that by focusing on three critical elements, anybody can massively reduce their debt and enjoy the stress reduction and the drastic increase in wealth that comes with it, while still living and enjoying life.

How it All Started:

After graduating, my wife and I purchased a home and quickly felt the pain of the giant pile of money leaving our account every two weeks. I started dreaming of all the things we could do with that money once we owned the house free-and-clear. By renting, we could never live rent-free, but in a house, this was actually possible once the mortgage was paid-off.

After spending some time fantasizing of early retirement, more frequent vacations, and all the things we could do with the increased disposable income once the mortgage was paid off, it was time to get to work.

Step 1: Where am I bleeding…financially?

The first step was finding out where our expenses were coming from, and determining which of those expenses could be trimmed on an ongoing basis, while still allowing us to enjoy life (i.e. sushi and vacations).

Like everyone else, the last thing I wanted to do after work was spend hours entering receipts and writing up budgets. So, the ultimate goal was to find an automated system where receipts/expenses didn’t have to be inputted by me (i.e. having a software automatically download and categorize all my transactions) so that by spending just a few minutes every week I could quickly find out where my money was going and where the financial bleeding was taking place.

The 2nd objective was to have the system automatically warn me when I’m overspending in certain areas like going out to eat, or shopping.

I experimented with every tool that I could find, from creating my own spreadsheets, to using off-the-shelf accounting programs, to using different personal finance software and online tools.

These days, I use Mint.com to manage and automate all of the above (it’s also free). This lets me spend just minutes managing my finances every week, while knowing exactly where all the money is going, and warning me of any discrepancies, suspicious activity, and any areas that I’m in danger of overspending in.

Money has a way of being spent whether you’re consciously aware of where it’s going or not. By having an automated system like this in place, I was able to save hours every month by not having to draw up budgets or enter receipts, and ensure that as much money as possible was being put towards paying down the mortgage/debt quicker.

Step 2: Getting Aggressive

After obtaining financial awareness in step one, it was time to set an aggressive goal of how much of the mortgage/debt was to be paid off each month.

By knowing how much we actually needed to live on every month from step 1 (including some “fun” money), I determined that a good aggressive goal was to use 50% of our after tax household income on paying down the mortgage quicker (this is in addition to our existing monthly mortgage payments). Now before you stop reading because 50% sounds ridiculous, please hear me out as it’s really just about being honest with yourself when determining what items are a “want”, versus what is an actual “need” when thinking of buying something. If you followed step 1, you will quickly notice all the things you’re spending money on that can be cut to reach that 50% without sacrificing your standard of living and still enjoying life.

Now that we had the goal of 50%, here’s what we did:

1. At every paycheque, my wife contributed a set amount of money to a joint chequing account. This amount was determined in step 1 when we did our expense analysis, and is a figure that we both agreed upon.

This joint account was then used for all our spending such as groceries, fuel, restaurants, regular mortgage payments, etc. The amount that she didn’t transfer to the joint account was her own personal money that she could use however she wanted. This prevented a LOT of couple’s conflict as it gave her guilt free money that she could spend on whatever she wants whether it’s on a new pair of shoes, clothes, etc. We never got into fights about money because she had “her money” and all the expenses and debt payments were already taken care of first.

2. With every paycheque that I got from work, almost the entire amount (over 95%) went to a separate savings account which was used exclusively to pay down the mortgage/debt as quickly as possible. The remaining 5% was used for my own personal “fun” money.

Since we still wanted to have some fun with international travel, and had the occasional emergency such as the car breaking down, such expenses were covered by the joint account as much as possible. I would use some of my extra mortgage payment money to cover any difference.

By doing this, we were able to pay off the entire mortgage in under 6 years on a typical salary of someone in their 20’s.

Could we have been more aggressive? Definitely. But, this just goes to show that you don’t have to live without any vacations, and other fun experiences just because you’re being financially responsible. It is simply a matter of moderation, sticking to your goals, and not falling for the consumer trap.

What if you’re single?

Having dual incomes definitely helps, but you can still take advantage of many of the things married people have by living with roommates. You can purchase a house and rent some of the rooms to live almost rent-free right away. You can also split the cost of food by taking turns doing groceries and cooking. With your roommates paying for most, if not all of your mortgage, you can easily put 50% of your income towards paying down the mortgage debt, or investing.

Step 3: Avoid the Consumer Trap!

While step 1 and 2 are about gaining awareness and determining the goals, step 3 was quite possibly the most critical of all: avoiding the consumer trap. This is what made the saving rate of 50% possible.

This is easier said than done as companies spend billions every year trying to persuade us that what we “want” is actually something we “need”. When this happens, we as humans let our guard down, then we justify the purchase in our heads (I “deserve” that new car, phone, etc.) and that’s when the marketers and sales people go in for the kill.

There are many ways to avoid the consumer trap, and save money on the things we do actually need. While I cover these in greater detail on the BuildWealthCanada.ca blog, here are some key lessons that have allowed us to be mortgage and debt free in our 20s:

1. Read the top personal finance books. For example, I highly recommend David Chilton’s books: The Wealthy Barber and the Wealthy Barber Returns. The Wealthy Barber is a classic that got me started in thinking intelligently about money at a young age and built a great foundation of personal finance knowledge. His subsequent book (The Wealthy Barber Returns) is also a must read as it updates what was taught in the first book and provides some great additional financial wisdom that can be applied right away.

I also recommend The Millionaire Next Door by Thomas Stanley and William Danko as the book discloses the habits of the wealthy that you can try to emulate in your own life. You can use this book as a checklist to make sure you’re developing the correct wealth building habits.

2. Another critical component was focusing time and energy on areas that have the biggest impact on our financial wellbeing. For example, avoiding consumer debt like the plague, picking the right mortgage, and ruthlessly cutting car costs (as opposed to clipping 50 cent coupons, or trying to find a “deal” on consumer items that in reality shouldn’t be purchased in the first place).

These subjects can be a book of their own, so I will be covering them in greater detail on the BuildWealthCanada.ca blog and podcast. Be sure to sign up (it’s free) to get the latest video tips, podcasts to listen to on your commute to work, and articles that can help save you money, and become debt and mortgage free.

Well, I hope you enjoyed the article and I look forward to sharing more personal finance tips and tricks with you in the next podcasts and blog posts.

Will Chinese Capital Continue to Pour Into Canadian Real Estate? By: Dr. Sherry Cooper

General Brenda Yu 28 Dec

Why Are People Taking So Much Money Out of China?

China is experiencing the largest episode of capital flight in history, encouraged by the slowdown in economic activity, the plunge in the stock market and the surprise devaluation of the currency–the Chinese yuan (also called the renminbi) last August. Chinese businesses and consumers are moving money abroad where its value might hold up. Last year, some $700 billion to $1 trillion (U.S.) is estimated to have fled China (see chart below). The dream of many Chinese to have their children educated overseas is another cause of long-term capital outflows. Finally, the flows are driven by a belief that it will only get harder to move money offshore.

Capital controls already exist. Individuals are limited to the equivalent of $50,000 a year, thoughthere are multiple ways to get around the restrictions. The Chinese government is ramping up efforts to stem the flood of money with new rules making it harder for foreign companies in China to repatriate earnings and for investors to move yuan overseas.

In recent days, the yuan has come under renewed downward pressure with mounting expectation of Fed rate hike. The biggest problem for China so far is perception. Capital flight signals a loss of confidence in the government’s ability to run the economy. The perception is made worse in China by the government’s opacity and by the economy’s difficult transition from reliance on big infrastructure and exports to consumer spending.

Much of that Chinese money is moving into housing, not only in Toronto and Vancouver, but also into real estate in Australia, New Zealand and the United States. The Chinese are now the number-one foreign purchaser of U.S. residential real estate–surpassing Canadian inflows this year. This is stimulating the housing markets, especially in New York, Los Angeles, San Francisco and Seattle. Chicago, Miami and Las Vegas are also seeing significant investment.

House prices in Vancouver have surged exponentially with the rising outflow of Chinese capital looking for a home. To a lesser degree, the same is true in Toronto, blowing up a bubble in already overheated housing markets. Can this continue?  No one knows, but there are varying opinions whether this is a sustainable force for price appreciation or will China’s efforts to crack down on capital outflow be successful, removing one of the linchpins of the Vancouver and Toronto housing markets.

The answer to that question is not simple. Some believe the Chinese money ball will only grow, bouncing its way around the world. Many believe that China doesn’t need to stop the capital outflow, but just to contain it. Historically, governments cannot effectively control capital outflow. However, everything about China breaks historical norms, and the government is working hard to make foreign exchange transactions more difficult. This poses a significant downside risk to Canada’s strongest housing markets.

In another example, the capital outflow from Russia has been proportionately much larger and some of that capital has also found its way into Toronto housing.

Can The Vancouver and Toronto Housing Boom Last? 

The media continue to put the spotlight on the Vancouver and Toronto housing booms and the role played by foreigners to drive up prices. Affordability issues are of great concern and questions continue to arise regarding the sustainability of the housing bubble. Not only are many first-time homebuyers shut out of the housing market, but the supply of listings is held down by the affordability issue as well. Many existing homeowners cannot afford to move up as foreign capital has mainly boosted the luxury housing market. Reportedly, the foreign buyer is far less price sensitive than Canadians, boosting the priced of multi-million dollar homes.

The Canadian government and regulatory response to this foreign inflow of money is evolving. The media have recently highlighted the potential for money laundering and the lax enforcement of  anti-money laundering initiatives in the real estate sector. But it appears that most of the Chinese purchase of Canadian housing is not for money laundering purposes, meaning garnered through illegal activity or to support terrorism. Moreover, Canadian real estate players are not responsible for enforcing Chinese law. According to a spokesman for the Financial Crimes Enforcement Network, an agency of the U.S. Treasury Department, banks are required to “conduct enhanced due diligence on foreign correspondent accounts.”

Meanwhile, Chinese officials have intensified a crackdown on what are known in China as underground banks, which Chinese nationals often use to shift money in and out of the country. Those money-transfer agents, however, remain rampant despite repeated enforcement efforts, according to the state-controlled Xinhua News Agency. While determined individuals can always find a way to move money, including untraceable bitcoin transactions, a slowdown in the volume of Chinese capital moving into Canadian housing is a meaningful risk factor for the hottest markets in Canada.

How to Get a Mortgage While Being Self Employed in Canada By: Geoff Lee

General Brenda Yu 28 Dec

There are great advantages to having business for self. There are many extremely successful business owners that live great lifestyles but don’t have to pay for medical, all because they have great tax write-offs that bring their income down to a low tax bracket. The other side of this is that these great benefits actually make these same business owners work hard to qualify for a mortgage, all because their income is significantly reduced on paper. These business owners know that there is advanced planning involved in being able to qualify for conventional financing.

According to Statistics Canada, in 2015 there were about 2.7 million people self-employed in Canada which is about 14% of the total population of the country. These statistics reflect people that are continuing on in maintaining a significant lifestyle financed by self-employment and being able to be counted as such. In other words, being self-employed is a viable way of making income. It just doesn’t fit very well in the conventional lending “box”.

In order to fit in the conventional lending “box”, there is a measure that lenders require that each mortgagee(s) (the person(s) applying for the mortgage) must meet. Some of the documents that self-employed have to provide for the lender are two most recent years of tax returns that don’t always accurately reflect the actual take-home that a self-employed person has. Tax deductions related to business often reflect meals to rental space to credit card interest, etc. The result is that the income the self-employed business owner shows on their tax return is a significantly lower figure than what they actually take home. However, the “box” requires that tax returns show the required income to justify the mortgage.

So, how does one show enough income when they are self-employed? The following points are suggestions on strategies on how to plan ahead and be prepared when you, as someone who is self-employed, are ready to move forward in arranging a mortgage for property purchase.

  • The easiest way to plan is to write off fewer expenses in the two years leading up to the property purchase. Yes, this means you will pay more personal taxes. However, your income will be higher which will easily qualify you for the mortgage amount that you are looking for.
  • Set your finances up through a certified accountant. Many lenders want to see self-employed income submitted through a professional rather than doing it yourself. The truth is that the time that you spend doing your own taxes will not be as efficient both financially and time wise as a professional. A certified accountant knows what to look for and has enough experience to understand the tax implications. Make sure you discuss with them what your goals are so that they can set up your taxes appropriately.
  • Choose your timing carefully. If you are leaving on an extended holiday or sabbatical within the two years previous to purchasing, your two-year average income is not going to be great. Take all the time off that you want AFTER your purchase. Plan your timeline with INCOME in mind.
  • Ask your Mortgage Broker about STATED INCOME. There are options with some lenders to State your income. This is based on you being in the same profession for at least two years previous to being self-employed. The lender looks at the industry and researches the mean income of someone in that same profession within a reasonable amount of time. STATED INCOME is a complicated approach to showing income. However, your Dominion Lending Centres Mortgage Professional will know what questions to ask and how to negotiate this kind of proof of income. Documents such as bank statements, showing consistent deposits, will be requested by the lender.
  • BANKRUPTCY. Although some business people see bankruptcy as a viable option to get out of a bad deal and regroup, lenders generally do not like bankruptcy. Having said that, some lenders will overlook this if there has been consistent and excellent credit since the time of bankruptcy and you have been fully discharged from the bankruptcy for a specific time period. Make sure you keep ALL Bankruptcy papers easily available along with your discharge papers.
  • Be prepared for higher interest rates. Lenders offer discounted rates to those that fit in the “box”. Those that are not conventional are seen as a risk and, therefore, are applied to a higher interest rate. There also could be lender fees attached to the mortgage.
  • Offer a larger down payment. Lenders are somewhat handcuffed to the insurer when there is less than 20% down payment on a property purchase. But if you offer more than 20% down payment, depending on the lender, their flexibility increases and it is up to the lender or even the branch if they want to take you on as a client.
  • As a last resort, you can do private financing. Even though it is an expensive option, it could result in the mortgage you are looking for. Rates are higher and there will be lender/brokerage fees. However, you could be in a private mortgage for 12 months or even less, whereby giving yourself time to improve your credit (if need be) or topping off a two year self-employed period to set yourself up to show STATED INCOME to the lender. The whole point of private financing is to use it as a short term solution for a long term plan.

Being self-employed does not mean that you have to show enough income on your T1 General in order to qualify for a mortgage. There are many factors involved in showing income when you are self-employed. And every lender has different guidelines as to how they view self-employment. If you are self-employed, plan accordingly and make sure you are well set up to show that the lender that you are a desirable candidate for a mortgage.

6 Tips on How to Repair, Increase and Maintain Your Credit By: Michael Hallett

General Brenda Yu 28 Dec

Credit scores are like report cards for grown‐ups. The score you get ranges from 300 to 900. Your score indicates your creditworthiness to potential lenders, banks, landlords, insurance companies, and even to some employers. The higher your score the better.

1. GET A COPY OF YOUR CREDIT REPORT

Make an inquiry once a year, twice is much better. If you are planning on purchasing anything that requires a credit check, keep track of your credit. This is something that is 100% in your control. As a consumer you have ability to make a soft/consumer inquiry to Equifax as many times as you want without it affecting your score. Here is a link to Equifax. If something doesn’t look right, contact the creditor immediately. Don’t wait to report an incorrect or fraudulent transaction. Is there an outstanding collection? If so, deal with it immediately, and by that I mean pay it. Then argue to get your money back. Do not leave this on your credit report hoping that it will disappear. No matter what, the collection will not be removed until it’s paid unless taken to litigation. Once dealt with, it will still take months to recover the points lost and 6 years to fall off your credit report.

2. NEVER MISS A MINIMUM PAYMENT

Because this attributes to 35% of your overall score, delinquencies have the biggest negative effect on your credit score. If you have overdue bills, make the necessary arrangements with your creditors. They would much rather work with you than file collections against you. If you can’t pay it all back, it’s better to pay some.

3. DON’T CLOSE UNUSED CREDIT CARD ACCOUNTS

Got a credit card that you have had ten years and hardly use? Keep it. It takes 12 years of history with the same specific card in good standing to crack 800 and enter that top 2% tier of quality credit. Cancelling a card can actually lower your score. Keep the old cards and only use them occasionally so the issuer doesn’t stop reporting your information to the credit bureaus. Having a long credit history helps increase your score. Don’t jump around to credit providers. Most ‘large’ providers have several different products. There is likely one that will fit your needs.

4. NEVER MAX OUT YOUR CREDIT CARDS

A good rule of thumb when considering building your credit is to keep the balance at or below 30% of the limit. Furthermore, a balance of 50% of the limit will maintain existing levels and over 75% will start to decrease it. NEVER exceed the limit, by even a $1.

5. DON’T LOOK FOR MORE CREDIT

Don’t shop around for credit or open several credit accounts in a short period of time. It raises alarms at credit bureaus and financial institutions, especially when you don’t have a long‐established credit history. Work with your existing creditors, as there is more relevant history. They are more likely to work with you, especially if you are looking to resolve some credit hardship(s). Always ensure you give your permission before allowing a credit check.

6. RULE OF 2

Ideally, you want to have 2 sources of credit solely in your own name for a minimum of 2 years with at least a $2,500 credit limit. This would be either 2 credit cards or one credit card and a line of credit. Ensure this is in addition to any joint accounts. Joint credit is only reported to the primary credit holders credit bureau and will not have any positive effect on the co-account holder.

If you ever have questions about your financial situation or want to discuss your credit score, please contact Dominion Lending Centres.