Wealthy Barber - Chapter Three intermission

Now, anyone who's been riveted by my ongoing Royston Notes version of the Wealthy Barber may wonder why I am choosing to have an intermission now, only two chapters in.

"Hurry up, I want to get rich!" I can hear you yell, some of you poised with a calculator and bank statement handy, waiting for me to distill the pearls of wisdom from this best-seller so you don't have to read it yourselves.

Slow down cowboys. Truthfully, Chapter 3 is boring as shit. It's about insurance and even I have to admit that trying to make any talk about insurance interesting is painfully hard. I've been trying to think of what to say in an entertaining way but uggg.. insurance. It's evil, like fake sugar evil. Sure, the argument can be made that, like cops, you will want it when you need it. Until then it just feels like you may as well burn your money that could be better spent investing. At least that's how I feel. I can guarantee I spent more on car insurance over my life than any amount I have had to pay out due to the accidents I have had.

The Wealthy Barber Crib Notes Chapter 2

An ongoing half-assed summary of Canada's most famous financial advice book.

Chapter 2: Create or update your will.

Especially if you are married, get divorced, have kids, own a house or have assets. Don't get a will if you have nothing of value.

Yes, you are going to die and your mortgage will still exist. Your car payments will still exist. Your debts will continue to exist and charge interest. Make it a bit easier on everyone by designating where your shit will be going and who will be taking care of it.

But what about insurance, you ask?  spoiler alert; Chapter 3 next!

The Wealthy Barber Crib Notes Chapter 1

For those with perhaps a passing interest in finances (pun intended), you may have heard of the book The Wealthy Barber by David Chilton. It's not quite a Finances-For-Dummies book but it became quite popular for bringing the highly complicated world of Finances (anyone seen The Big Short?) down to the Every-man level.

It's nothing ground-breaking in the literary world. In fact, it reminds me of a lot of similar self-help books that frame their lessons in the third person. The reader is simply an eavesdropper on a conversation based in a barbershop which conveniently avoids any other intrusions into these lessons. There are some bad jokes, stilted attempts at character development but again, it wasn't meant to entertain but inform.

It was written in 1989, back before the Internet, The Clintons and all that Y2K nonsense. However, the advice probably still applies today.

I say probably because I haven't finished reading it. I am on Chapter Three. But seeing as how I am morphing this blog from a mortgage-based to a financial-based, I am going to condense the chapters for you in The Wealthy Barber to simple one sentence summaries.

Chapter 1 Summary - Save 10% of your earnings.

That's it. I'm not going to get into how to save 10% other than to say you should have a savings account that you don't access for funds and then put 10% of your paychecks into it.

But what actually is 10%? someone might ask.

Take that net pay amount on your check and move the decimal point over one. If you made $100.00, 10% is $10. If you made $1354.00, put aside $135.40. You can also google 'what is 10% of 687.99?' and you will get an answer.

Technology can be great.

You can finally use that watch your grandma gave you
for your 10th birthday!

Anyways, that's lesson one. And like the Wealthy Barber says to his interested parties; come back next week and I will tell you lesson two.

2017 and still no rocketship Or Still broke after all these years.

It’s been an amazing year, pop culture news be damned. A lot of people died. A lot of people were upset and a lot of people never stopped being upset. Eventually, they will all die too as will those who weren’t that upset to begin with.

I finally got married the right way, finally pushed out of my comfort zone in work and leisure. I still found last year I was peculiarly preoccupied with proper lawn care, the SpaceX launches and how to save a buck or two on the smallest things. I continued to compare prices for groceries, popped in on the occasional garage sale and still went to wherever the price of gas was one cent cheaper. For me 2016 investing went as far as a quality pair of new sandals which I chickened out of wearing at my wedding, instead relying on a 10 year old pair of reliable work shoes that still had the sheen to them.

Missing my old 90s grunge boots...

I like to believe I’ve sacrificed nothing in trying to live within my means over the years; I’ve been fortunate to accomplish a lot of dreams that didn’t involve needing cash to do them. My latest accomplishment was falling in love and marrying the most amazing woman to share my life with, both the ups and downs, the highs and lows. We work hard together at providing the right atmosphere for our children as they grow and learn, no matter how empty our fridge has been over the years. For us, money is a means to an end and there is no end in sight.  

New News is Old News

There has been a slight panic in the mortgage industry in the first week of October when the Canadian federal government announced new regulations upcoming to make it A) harder for homebuyers to buy houses and B) more expensive for foreign homeowners to sell houses.

To put these two main points into consideration, here is my very simple explanation.

A) Qualifying Rate- Will now be based on the benchmark of a five year fixed rate. Benchmark rates are generally an average of lenders qualifying rates and typically are about 1.5% higher than the best rates a lender will give you. So, if you qualify for a mortgage at 4.5%, most likely you can get the loan for 3%.

What this means - Before, some lenders were only checking to see if you qualified based on the lesser number and rewarding you the mortgage. Now, all lenders will require homebuyers to be able to pay back a mortgage as if they were paying 4.5% interest. That doesn't mean you will have to pay 4.5%, it only means if the rates went up to 4.5%, you have to prove you could pay that at the end of your five year term.

What you can do - 1- after you get your pre-approval, don't go out and find the most house you can possibly afford. I tell this to all my clients anyways but most still do that. Look for what that suits you, not your pre-approval.

2- Haggle. ie; lower your offering price. Check out your local assessment website to see what the gov't believes the house is worth. Check out similar sales. If you qualify for $250K and the house you want is $250K, offer $220K. Real estate is not set in stone. Get the right price to hedge against future interest rate hikes. Too many times I've seen panic buying because someone 'really wanted that house'. We live in an impulse buying world right now but real estate, and the hundreds of thousands you will be on the hook for is not meant for impulse or panic buying.



B) Selling your Home - When you sell your home, which for most Canadians is their principal residence, you don't have to declare that income on your tax return and pay taxes on it. Now, if your home isn't truly your principal residence, you will be paying tax on the income received from the sale.

What this means - Before, foreign owners could purchase a home in Canada, say it was their principal residence and then sell it for a tidy profit because we, as Canadians, don't really check up on what exactly is considered a principal residence. If you might recall, this became a real issue for Mike Duffy, Conservative Senator, who listed his property on Prince Edward Island as his principal residence but actually lived mostly in Ottawa.

So, the loophole here was that foreign owners could buy a house in Canada, state it as their principal residence although they may only actually be in Canada for two weeks of the year. The house could sit empty for the other fifty weeks. They could then sell that house and not have to pay any tax on the sale. While this doesn't change the specifics of foreign ownership, it makes it no longer as lucrative for 'house-flippers'.


So, that's my quick takeaway from Monday's announcement. For most of you that read this, there is no real need to panic. I think as more people start to make offers better suited to their future income it might even bring real estate down a little. Not a lot, but a little. Which in the end, is good for home buyers.

Deciphering mortgage news predictions

So it's been awhile. I had a decent lunch with a successful mortgage broker yesterday; talking about what makes for a good broker, what's new in the industry, etc. I was going to talk about what he shared with me but then this morning I read this article on the future of Canadian mortgages which predicts a tightening of the rules in November for lenders and what it means for the bottom line to consumers.

Acronyms and Your Mortgage Application

Yep.

There are 2 or 3 major factors when applying for a mortgage. For us insiders, they are given handy acronyms so it makes us sound really smart. These are;

Math.

LTV (Loan to Value) - ie. How much money are you wanting to borrow vs the actual value of the home in question. You want to buy a $1 million home and have $500,000 in cash? That's a 50% LTV. That's good. Lenders LOVE a low LTV.

However, due to reality, very few people, especially first time home-buyers have that sitting in their bank account. That's why there are two definitions of a mortgage - Conventional, in which the borrower has at least 20% of the LTV for a downpayment and High Ratio, in which the borrower has the minimum 5% to 19% of the LTV. A High Ratio mortage requires an extra insurance charge to protect the lender in case of bankruptcy. The main insurers for home mortgages in Canada are CMHC, Genworth and Canada Guaranty.

Easy come, easy go

TDS (Total Debt Servicing)  This number is tied to your income. Now income could be considered as employment or pension or 'other'. Recent media coverage of suspicious foreign-purchased luxury homes in the Lower Mainland has highlighted some borrowers as being simply 'housewives' or 'businessperson' without documentation stating exactly how they create this income. All that matters is that is foreign investment coming into Canada under the guise of real estate ownership.

But for us Canadians, you have to provide proof of how you come to have income in Canada, both presently and in the future. This income has to prove that you can afford your daily expenses such as groceries, utilities, credit card payments as well as the cost of a mortgage payment. The magic number for your TDS - Total Debt Servicing must be 40% or less. Again, the lower the score, the stronger your application.

A basic view of how your credit is scored.

CB (Credit Bureau) - This is your financial resume. It provides proof through a neutral 3rd party (either Equifax of Transunion) of your history paying off bills and loans. The copy I receive is an amalgamation of mixed numbers and words in a near indecipherable code for the average person. However, I did find this link online which I only wish was as clear and concise when reviewing a credit history. A credit score ranges between 300-900. Unlike the other two acronyms, the higher the number the better. Most lenders won't look at giving best rates to anyone under 600. But not to worry, there is a complete other side of mortgages (called the B side) which takes on higher risk clients, for higher interest rates to reflect that risk.


These 3 acronyms are the most important letters in your life when it comes to being approved for a mortgage. Everything else is just peripheral evidence gathering. Your mortgage broker can help you discuss your scores and what can be done to improve them if needed. Buying a house is not an impulse buy - the best value you can get for your money is to take a balanced, well-informed look at your present finances and then you can make a plan or path towards home ownership.

Playing the Interest Rate Chicken Game with your Term

5 Year vs. 10 Year Mortgages – Does it Matter? 

The best and worst thing about becoming a mortgage broker is the training. On one side, getting your license involves doing a lot of math with specialized calculators and an understanding of legalities and other professions surrounding purchasing real estate. The advent of the Internet has made the former redundant and while it's nice to know how a real estate appraiser uses comparable sales to determine a home's net worth, it isn't up to me to actually do the appraisal.

Your friendly mortgage broker learns a lot through osmosis and trial and error and trying again. Most of my education has come after I received my license. Understanding credit reports and lender's various positions regarding credit scores, 'high-risk' locations for lenders, purchasing your parents' house, sweat equity as a down payment, all matters not covered in the How-To-Brokerage textbook. 

Thinking about bankruptcy protection?

I first went bankrupt in the mid-90's after my first business venture failed. Five years later, my second venture also failed to see me grasp the golden ring of success. I was once again left penniless. Eight years ago, a bitter divorce, a career change, move and custody battle left me for the THIRD time in large debt to my creditors. I filed to be put in a consumer proposal. That's two hard knocks against my credit score and I'm only in my forties.  

and so the opposite is true...

So I've been there. I know what it is like to feel the strain of financial hardship, to think the good times will last and also the bad times will never end. If you are feeling any bit of the latter right now, I may be able to help.

I'm a victim of my own optimism, some bad advice and some bad choices. I get that. Your probably think that too. A few years ago, I made another career choice and that was to become a mortgage broker. I learned that if you have a house there are options out there which can help you avoid bankruptcy or discussing the benefits of a consumer proposal. I wish I knew what I know now eight years ago.

Explore all your options first. If you own a house, see if you can use the equity in that to lessen your debt. Can you rent a room to reduce debt? What about renegotiating your mortgage payments?

Simply, would you rather be paying 19% interest on your credit cards and/or other debts or move that balance to your mortgage and pay only 3%? Not only are you spreading your repayments out over a long period of time, your credit score will still be intact, if not slightly better.

So, contact me. Let's talk and see what I might be able to do for you.

Long Time, No Shop Talk

Hi everyone.

You may have been wondering when I was going to post another mortgage-related blog. So was I.

Truthfully, for 99% of us, mortgages aren't as exciting as say, hockey or a car accident. Maybe mortgage-related news is the equivalent of watching a dart game. Which is a great analogy.

I'm the dart thrower tosser and your mortgage application is the dart. Sure, you can definitely throw your own dart at the board - there's a good chance you will hit it. Maybe you hit a seven, maybe a 15.

Unless it's on fire. Then you should call the fire department.

Or I could step up and throw it for you. I will own that dart board. Most people aim for the bulls-eye - I'm aiming for that triple 20. But maybe due to your circumstances I have to aim at the ten or sixteen. I could also hit that three, maybe we should talk about that strategy first. But when it comes down to it, I have the knowledge and the skill to take that shot for you.

Existentialism via your Mortgage

Mortgages brokers are essentially salespeople. I've been doing this for a couple of years now and I can honestly say I don't think we really see ourselves as that though. Maybe it is because we don't sell our clients anything tangible. We sell percents, theoretical savings, education and insurance. If I want to continue the sales pitch- peace of mind. Salespeople are usually equated with cars, televisions and furniture. Not future savings.

We don't sell you houses; that is the profession of Realtors and a good one is worth their weight in commissions. We definitely don't buy you houses as ultimately it is your name on the title deed. You are the home-owner, no matter how big or small.

I find you the right lender for your needs. The lender is the one who will probably give you the largest amount of money in your life. And while you don't technically see it in nice crisp $100 bills like in the movies, you do become responsible for it and most importantly, paying it back.

that's a whole lot of house right there...

So what is a mortgage broker? As I mentioned earlier, we sell you numbers and savings. If it helps to be more tangible, we find you the right lender for your needs.You don't pay us to do that; instead the lender pays us.

I think the biggest question out there is 'Why bother?'.

Why use a mortgage professional

Just asked this question today.

Mortgage Math or How to save $17,529

Mortgage Math or... How to save $17,529 dollars*.

You like math? I don't. All those numbers mixed in with the alphabet...it always seemed fishy to me but apparently, if you do it right, it can allow us to put a man on the moon or shoot a camera to Pluto, a gazillion miles away. Which is odd as sometimes my computer can't find the Internet signal from the basement of my house.

And bank math? It takes a special type of person to want to really sit down and figure out where you are in the future regarding retirement savings, especially if you are only given a 30 minute appointment.

I, personally, have lots of trouble ever imagining myself living mortgage free, it's easier to believe I am paying rent for the rest of my life. It's just too far in the future for me. It may as well be Pluto.

But one of the advantages of a mortgage broker is if you ask, I will show you the savings when you refinance or switch your mortgage. One of the more frustrating issues for people looking to refinance or switch is the penalty payout hidden in the fine print of most fixed mortgages. It can run into the thousands of dollars and it is a hard pill to swallow, particularly if you are only going to save 1% on a new interest rate. That's usually enough for people to walk away from looking further.

On Networking

I get it. We live in the age of social media which means social marketing which means social networking. Everything we do on the computer, one of the most non-social activities we partake in short of masturbating is considered a 'social' activity of some sort.

And if you are in sales, be it cars, telephones, mortgages, financial planning, laptops, Amway or self-publishing you are continually being told "you have to get out there and market yourself!"

I was approached recently about marketing my ...talents... on a website. It was a great place for people to see that I am someone who was willing to pay X amount per month to prove that I am a mortgage broker. Once my name was on that list, it gave me the opportunity to be lumped in with 18 other brokers in my area who were getting their name out there.

Yes, a lot of my social contact is through the computer - Facebook is still my go-to but it's primarily for my true friends and family. I'm not too keen on friending someone because we are in the same industry.

I'm also on LinkedIn which is apparently like Facebook, only it is more acceptable to reach out to complete strangers and friend them. I don't know why Jim from Atlanta Mazda wants to link with me but whatever, that's what I'm supposed to do. Keep it professional.

I was on Twitter but that seemed sad/funny. It was like being at a convention of Late Night joke writers. Perhaps because that was where my taste ran to. If you tweeted something funny, I'd follow you. If I wanted other people to follow me, I'd tweet at someone famous and all of their followers would read it. Then some would follow me. Once I realized I was saying I tweeted someone as if it was a valid form of deep interaction, I deleted my account.

I don't have snapchat. My understanding is it allows you to send a picture then it will delete immediately after being opened. This seems like something all fathers should make sure isn't installed on their daughter's cell phone. I can't imagine how many dick pics have been sent out in an odd new-age social media flirtation ritual.

Pinterest seems like every art/craft teachers' wet dream. It seems to be a website that allows you to see all the cool and cheap shit you won't ever do with cinder blocks or pallets. I don't know how that helps me sell you a mortgage.

I'm digressing... social media. Point is, I'm not very good on social media. I like my blogs, I like Facebook. I don't use it too often to market myself and that would make most networking authorities cringe. I stand by the best referral is word of mouth. I don't know of anyone who was approached because they tweeted something.

But it's a changing battlefield apparently. I have to get on the social marketing/networking train or step off the tracks.

Another Case for Variable Rate Mortgages

Questions found on the Internet that may be relevant to people who read this blog.

Hi anonymous Internet Advisor...

I am currently coming up to the end of my first mortgage term. I went with a 5 year fixed term @ 3.45%, which at the time was a great rate. My bank is now offering 2.25% variable, which would bring my mortgage down by $150/month. I've never been a risk taker financially, which is why I went with the safe bet on the original term. However, I am starting to wonder what the real level of risk is, and if it might be to my benefit to switch to the variable rate, since it is so low right now.

I guess what I am really wondering is, how often do variable rates change, and what are the chances that they would jump way up. I am in Canada if that is relevant.

Sexy Time Talk With a Mortgage Assassin (Part 1)

Hello Ladies...

Let's talk about two things that go together like chips and salsa, fish and chips, or fish and chips and salsa... you know, like a fish taco. So fish and tacos. I'm talking about sex and mortgage brokering, the hottest combination out there. Except for fish tacos.

Are you saying fish tacos are sexier than mortgages? 

To some people, that answer is a most definite yes. Especially with a chilled glass of Courvoisier.

Surely there are some sexual benefits of being a mortgage broker? 

Let's put it this way... Every time I hear 'Oh, you're a mortgage broker? You want to make out?' it instantly makes me think of three things;

1) you are pretty drunk and have low standards
2) you dig people prying into your personal financial affairs in order to get you the lowest interest rate possible when borrowing huge amounts of money
3) you are probably a business account manager for a national lender

The Mortgage Broker And You

Hi.

You want to buy a house or perhaps you have one and it's time to renew. Where is the first place you turn to for help? Your bank. After all, you have most likely been with them since you opened your first savings account, an idea that was forced upon you by your parents. They will know what to do and they will help you because you've been with them 10, 20 years.

I totally get this kid...

And they do help you. You go in, talk about purchasing a house and they say we will give you the money to buy this house and you can slowly pay us back over the next two or three decades with this little amount of interest tacked on. Next thing you know, you've signed some papers, told your Realtor and by this time next month, you are a proud new homeowner!

Yes, mortgages are complicated. Some are more complicated than others. Hotels, apartment buildings, skyscrapers, they all have mortgages of some type. But let's just keep things simple. I'm talking to you, the simple home owner or buyer.

Do you Like Money?

Have you considered that your house is perhaps your most tangible asset? If you are in need of money (and let's face it, a lot of us are) perhaps there is a way to tap into your house's equity. Use that money to pay down your debts, leaving you with more money for you on payday!

What's the matter with that idea?

There will be more about the concept of cashing in on your home's equity later but for now, let's just call this a teaser...

Decreasing Debt Loads, the Wolf in Waiting

The Wolf In Waiting

Let's go house shopping! 

If there is one thing I have heard too much of in the world of finances is that Canadians have an insanely high debt ratio. Very few people care about this. Mainly because they aren't in the financial industry. But I'm here to tell you every time there is a news story about the Prime Rate, Bank of Canada or Canadian Real Estate bubble there is usually a caveat about how much the average Canadian is in debt. We have heard it so much we have tuned it out, much like the phrases 'historically low interest rate' or 'continuing war in Afghanistan'. In effect, we are being trained (conspiracy theorists can submit theories in comments) to ignore that little boy who is crying Wolf. Nobody is telling us to stop spending money. In fact, it's the opposite. We need to keep spending money to keep the economy in motion. It's why it has 'never been easier' to qualify for financing that new house, car, big screen television. It's why Black Friday has become a North American institution; more important to Americans that Thanksgiving.  

Q; Am I ready for a loan?

Question,

Hi, I received an inheritance a few years ago and purchased a property with it in which I rent on a month to month basis for $1600. i have $55-$60k I'm willing to put down for a down payment. my question is: is it possible for me to qualify for a loan and use my income from my home to pay for mortgage and other fees? I have only been working since April 2014. is my only option to continue to work? thank you for reading.


Answer,

There's a lot of vagueness to this question; For instance, you don't specify how much of a home are you looking to buy or much of anything of your current situation, other than you have a large amounts of savings. Also, does the property you purchased with your inheritance also has a mortgage attached to it? I would think it does so basically I believe you are asking if you could pay for two mortgages based on solely the $1600 month rental income you receive because you want to leave your job ('is my only option to continue to work?')

Quick answer. No. 

Longer Answer; Why I say that - let's say you buy something small in a small town, like a condo that lists for $150,000. The minimum 5% down is $7500. Let's add in the extra expenses roughly and say with fees and such you pay $10,000. You now have a house with roughly a $142000 mortgage. Let's make your mortgage $700/monthly on a 25 year amortization. You have income of $1600 coming in (assuming there is no mortgage) leaving you with $900 a month revenue and your savings of roughly $45,000.

A lender would think positively on your original application only if you have your tenants under some type of long-term contract - not just a verbal month-to-month agreement. You would need to have to have them sign something. Your work history is short so the will want to see two years of taxable income so your rental income has to be declared as well. They will want to see at least a 3 month history of your savings in your bank account, or a letter from a trustee/lawyer declaring it to be an inheritance and not, say, from drug smuggling. Also, you give no indication of your credit score, which is evidence of you being able to go into debt and repay it on a convenient monthly schedule. Why should a lender believe you would pay them back that $142,000?

Now it sounds like you want to quit your job and live off that $1600 a month (which being month to month would be considered a 'high-risk' income; what do you do if the renters leave without notice?) while maintaining 2 houses. How long do you see this working out? Poverty line in Canada is around $20,000/yearly, which is where you would be without your job. You would have to find a way to pay for 2 sets of property taxes, 2 sets of repairs, 2 sets of utility bills (if your renters suddenly move out which they could as you don't have them under contract). This doesn't even include your own personal expenses, such as transportation, education, food, clothing, etc.

While $45,000 in savings sounds like a lot, truth is it's not that much of a safety cushion if you are not steadily replenishing it via employment.


I hope that helps to give you an idea where you stand and what lenders consider when approving mortgages; for more information give me a shout and I can go through this in better detail as you provide me better detail.