Little Money Lab

With the current super low interest rate and fairly big drop of the housing price, many people are considering buying a new home. But, at the same time, people are worried about the possible interest rate hike in the future.  Both US and Canadian government, actually all countries around the world, have injected a large amount of money into the economy and try to stimulte it. The chance of high inflation in the near future is very possible.  But should you be worried about the interest rate increase if you are going to buy a new home now? My thought is that as long as you live within your means, in other words, buying a home which you can comfortable afford now, you should not be worried. Here is why:

        1. Interest rate usually increases along with the inflation rate. Hopfully, your salary will keep going up for at least the inflation rate. A house that is affordable to you today should be affordable to you in the next five years.

        2. The prime rate is not usually mortgage rate. If the prime rate goes up to 11% in 2014, the mortgage rate will probably be 11%-x%. Yes, it will be much much higher than today’s rate. But it won’t be that bad as you think.

       3. One can always renew their mortgage early. Home buyers can always do a early renew on their existing mortgage and lock into a fixed mortgage rate when they think the interest rate is going up to the roof.

    So, home-owners-soon-to-be should not be worried about the interest rate hike. But the key is to buy a house/condo one can afford. We do not want another sub-prime crisis.

Smith Manoeuvre seems to be a famous and hot trick to make your mortgage payment tax deductible, at least I believed so. However, It turns out not that simple. Let’s take a look at the following example:

In Month 1, I paid down the principal on my mortgage for $500. And immediately, I invested $500 from my HELOC. Asumming the interest rate and HELOC is the same as 5%, the $25 interest from my HELOC account is tax deductible. But what about the $25 interest which has already been paid on my mortgage? I paid two $25 interest, but only get one $25 interest as tax deductible, right? The interest I paid to my mortgage is still not tax deductible. Assuming my marginal tax rate is 35%, I am actually paying $25 more interest in order to get $8.75 back.

Smith Manoeuvre does not make your mortgage payment tax deductible, but a trick to transfer a debt into a loan product that is tax deductible.  If it does not do the trick, why many people are doing it? Well, it is because that there is a hope that you can get the extra interest paid back from your investment with capital gains, dividends paid and etc.  If not, then Smith Manoeuvre is a losing strategy. It is also a risk that an individual should take when implementing it.

We moved into our new house about two months ago and have just got the first bill for one complete month. Therefore, I thought it might be interesting to see what the extra cost will be if someone buy a house than living in a rental. Since houses vary in location (I mean different provinces and cities), square footage etc, the extra cost to live in the house will be different as well. Before getting into the detail numbers, I think it might be a good idea to let you know that the house I have is 1800 sq ft and in Calgary, Alberta.

The additional expenses I can think of to live in a house are:

1. Difference between mortgage payment and rent. My mortgage payment is about the same as my previous rent payment. So the difference in this category is zero for me.
2. Property Tax: my property tax is around $2300 this year. Therefore, I need to pay about $200 more each month to live in my own house.
3. Extra utility cost: the bill we got for the month of February, including water, sewer, electricity, and natural gas for heating, is $277. I think it is fair to say that it is about at least $200 more than living in a condo or apartment.
4. House Insurance: It costs $691 per year to insure my house.

Overall, living in your own place will cost at least $5,400 more, for an 1800 sq ft house in Calgary, compared with living in an apartment or rental. Should you buy or rent? It really depends on your own situation. If you can afford the additional cost and the principal in your mortgage payment adds up to more than $5,400 per year, it might not be a bad idea to buy a house. In the end, I viewed the primary as a place to live and raise my family, not an investment.

I have not been posting for a quite long time. Despite all the ups and downs in the market, I actually feel it is difficult to find a topic to write about. Everytime, I thought I can blog on an interesting topic and then I saw some other bloggers have already put up a post. And then I gave up. I am trying to start all over again this time. It might be a good idea not to limit the posts just on money matters but to expand it a little bit more into my everyday life. That should bring up more topics for me to write about. We will see how it goes this time.

After almost a month, I have finally settled down in the new city, Calgary. The stock market has been absolutely voliatle during the last few months. We just hit a record high sell off in October. A record $8.45 billion have been pulled from Canadian mutual fund market in October. September held the previous record for net outflows with $4.5 billion.  The net outflows/net redemptions in October were reported as follows:

RBC Asset Management Inc. - nearly $2 billion

CIBC Asset Management - nearly $1.4 billion

TD Asset Management - $1.1 billion

IGM Financial (includes Investors Group and Mackenzie Financial) - $489 million

CI Financial Income Fund - $340 million

AGF Management - $232 million

DundeeWealth Management - $171 million

This is definitely a record month of fear. Personally, I am still hanging on to my own investment strategy, well diversified and invest in ETFs.

I have been ignoring my site for a couples of weeks. That reason why is that I have been going through a very important interview for a job that I like in my dream industry. The result has been very statisfied. After one 90 minutes interview, one 30 minutes peer interview, and a three hours meeting with my future boss, internal clients, and the HR people, I finally got the job. In late October, I will start my new role in the new company. Since I live in NewBrunswick, I would have to relocate to Calgary. The relocation process has a lot of hassle and pressure.  The good news is that I have all my stuffs packed and shipped away about two days ago.  I have about 3 weeks before the new job starts and will enjoy the time off.

Yes, you heard it right. It is per month, not per year. This bank is claiming that you can get 5% return on your money each month, guaranteed!  It is hard to believe this kind of return, and even harder to believe that there are people who actually think it is possible and legistimate. Let me say it out loud: If it is too good to be true, it probably is. Given the current market condition, even 5% return PER YEAR is very hard to achieve and maintain. 5% a month would be a miracle for a bank to give out without their being some sort fraud.The trick played by the orgainzation who commits in this type of fraud is to get your money, pay you several month’s interestes to let you believe that you just found yourself a great deal, and then run with all your money. You will be extremely lucky to find there are any money left in your account.

When it comes to investment, it is important to have a realistic expectation on the return rate of your money. If not, the result will be either 1. you give up and back out totally 2. you could be the victim of the kind of fraud mentioned in this post.  So, please do not give up investing, stay the course and invest long term. Most importantly, do not be a fraud victim.

I have been an ING Direct customer since year 2006. The service from ING Direct is very professional and helpful. The only complain from me will be the lack of the ability to buy their mutual funds online. Each time when you want to buy into their StreetWise funds, you have to call them. The whole process is somewhat inconvenient. Today, when I was checking my ING accounts, I noticed that there is a new feature from ING Direct Canada. You can buy/sell their StreetWise funds directly through their website now! Moreover, if you want to setup a monthly contribution, you can do it online too! I am glad that ING is making such a good improvement on their online services. That just makes my life a little bit easier

Emerging market is a very important part of the assets allocation. According to wikipedia, The term emerging markets is used to describe a nation’s social, or business activity in the process of rapid industrialization. The term “rapidly growing economy” is now being used to denote emerging markets. Most of the emerging markets share the common characteristic: High Risk and High Return. The market volatility is huge. Stock price tends to go up and down sharply in a short period of time. Although the emerging market has probably the greatest risk in the stock market, it will not be wise to ignore it and not to include it in your overall portfolio. Read More