Weekend Reading: Mortgage Stress Test Edition

By Robb Engen | February 23, 2020 |
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Weekend Reading: Mortgage Stress Test Edition
For several years the federal government has tightened mortgage rules with the goal of slowing down rising home prices in booming markets like Toronto and Vancouver, and ensuring home owners weren’t getting in over their heads by taking on too much debt. The mortgage stress test, first introduced in 2016 and then expanded in 2018, made would-be home buyers prove they can afford a payment based on the Bank of Canada’s benchmark five-year posted rate (currently 5.19%) rather than the bank’s discounted rate (currently less than 3%).

The mortgage stress test has been widely criticized by the real estate industry as an unfair burden for otherwise well-qualified borrowers. In a surprising announcement this week, the Department of Finance said it will revamp the stress test for insured mortgages (for those who put down less than 20%) effective April 6th.

The Canadian Mortgage Trends website breaks down the changes here:

  • Current stress test rate for insured mortgages (typically those with less than 20% equity): 5.19%
    • Based on the Big 6 banks’ posted 5-year fixed rates.
  • New stress test rate (if it were in effect today): ~4.89%
    • Based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%.

The author says this change will help the average home buyer by decreasing the income required to buy a $300,000 home by roughly $1,500, and allow those who can easily pass the stress test to purchase about 5% more home (someone who qualified for a $500,000 mortgage (previously) will qualify for $525,000 in April).

In reality, this doesn’t do much to help home buyers qualify for a mortgage. In fact, mortgage expert Rob McLister says the looser mortgage stress test may stoke the market and drive prices even higher:

“Homebuyers—particularly younger buyers—are already worried about prices running away from them, given the double-digit gains of the last 12 months. News of an easier mortgage stress test won’t help.”

I understand why mortgage professionals and wannabe home buyers are frustrated by tight borrowing guidelines. But it wasn’t that long ago when we had 35 and 40 year mortgage amortization and zero-down mortgages.

We’ve tightened lending over the past decade to avoid the type of housing crash that occurred in the U.S. ahead of the great financial crisis. By all accounts it has worked. No need to swing back the other way and completely loosen our lending standards.

This Week’s Recap:

Earlier this week I wrote about whether it makes sense to defer OAS to age 70. As with most personal finance decisions, the answer depends on a number of factors.

Then we had a guest post from Steven Arnott, author of The Snowman’s Guide To Personal Finance, on how to become the CFO of your own personal finances.

Many thanks to Rob Carrick for highlighting my guide for the anti-RRSP crowd in his latest edition of Carrick on Money.

Over at Young & Thrifty I wrote about the best low-risk investments in Canada.

I also looked at the difference between index funds and mutual funds.

From the archives: A look at my mortgage renewal strategy.

Over at Rewards Cards Canada you can find the best Aeroplan credit cards in Canada.

Weekend Reading:

A major downgrade to Rogers MasterCards this week. The Rogers World Elite MasterCard got hit the worst, including a new eligibility criteria I’ve never seen before where cardholders must spend at least $15,000 per year on the card or else they’ll be downgraded to another card. Brutal.

From the brilliant Morgan Housel – History is only interesting because nothing is inevitable.

Mr. Housel also lists 100 little ideas that help explain how the world works. One of my favourites:

Ringelmann Effect: Members of a group become lazier as the size of their group increases. Based on the assumption that “someone else is probably taking care of that.”

In his latest Common Sense Investing video, PWL Capital’s Ben Felix looks at whether the value premium is dead:

Do you have a defined benefit contribution plan? Rob Carrick explains how to get the most out of it.

Her husband told her not to work, then cut off her money — here’s how financial abuse traps women.

With RRSPs, there is a time to contribute, there is a time not to contribute and there is a time to withdraw funds — choose wisely.

Here’s Dale Roberts on how to use your RRSP and TFSA to play retirement portfolio catch-up.

Nick Maggiulli has a terrific post explaining why avoiding bad decisions is more important than making great decisions:

“Too many people in the financial community obsess over the “optimal” way to invest when their time would be better spent steering clear of actions that could lead to ruin.”

The F.I.R.E. movement is relatively new but here’s a neat story about how Canadian personal finance blogger Bob Lai grew up with a father who retired at age 43.

Preet Banerjee uses a great example to explain the basics of risk transfer when it comes to life insurance:

In a Globe and Mail column, Preet Banerjee explains why older, actively trading men are more likely to be victims of investment fraud.

Tim Cestnick writes about the best approach to figuring out how much money you’ll need in retirement.

Finally, NPR reports that more employers are looking into the benefits of a 4-day workweek. Nice!

Have a great weekend, everyone!

Earn up to $150 an Hour as the CFO of your Personal Finances

By Steven Arnott | February 20, 2020 |
Posted in
Earn up to $150 an Hour as the CFO of your Personal Finances
This is a guest post by Steven Arnott, a fellow reader and author of The Snowman’s Guide to Personal Finance: A simple approach to managing your money. You can find more of Steven’s work at snowmansguide.com or by following him on Twitter (@snowmans_guide).

This article provides step by step instructions to earn between $60 to $150 an hour working for yourself. As the CFO of your personal finances, you can find ways to spend less and earn more. Opportunities include:

  1. Confirm if each expense is bringing you enough value to continue – ($100 / hour)
  2. For expenses you value, see if you can negotiate a lower cost – ($60 / hour)
  3. Negotiate a raise – ($150 / hour)
  4. Find a new position with a higher salary – ($125 / hour)
  5. Take any reduced spending or increased earnings from above and pay off debt – ($150 / hour)
  6. Take any reduced spending or increased earnings from above and invest – ($60 / hour)

With cost of living up (e.g., education, housing, food, childcare) and wages fairly flat, more and more people are turning to side hustles to make up the difference. Side hustles typically involve providing a service (e.g., freelance writing, driving, dog walking) for someone else. But an often-overlooked side hustle that has tremendous potential is to provide a service to yourself. You can earn $60 to $150 an hour serving as your own CFO.

Taking the CFO position

If you were hired as the CFO for a company, you may start with a few of the following tasks:

  1. Review the financial statements to understand the health of the company (e.g., are they earning more than they’re spending, how much money is in the bank)
  2. Ask the department heads if there are ways to spend less (e.g., bundling orders, changing vendors)
  3. Ask the department heads if there are ways to sell more (e.g., a new pricing strategy, cross-selling to existing clients)

If you’re not interested, and potentially not yet qualified to be the CFO of a company, you may be excited to hear that you can make similar money by being your own CFO. The job isn’t much different, however instead of the company benefiting from your hard work, you realize the value. Tasks can include:

  1. Reviewing your own finances to understand your financial health (e.g., how much you own and owe, how much you earn and spend)
  2. Revisit your expenses (e.g., negotiate your bills, lower the interest you’re paying on any debt, cancel subscriptions you’re not using enough, minimize the taxes you pay)
  3. Increase your earnings potential (e.g., negotiate a raise, set aside savings and look to invest)

Your earning potential as CFO

Let’s look at the type of hourly earnings you could expect for some of the activities. Before we begin, I’ll admit that for many, the benefit of a side hustle is to earn money today. Some of the tasks below will provide an immediate return, while others will take time to pay off. Each of the steps you’re able to take will set you up for a more stable financial future, allowing you to spend your time on what you enjoy.

Revisit your expenses

We often spend money out of habit rather than conscious thought. Two ways that you can ensure you’re getting the most for your money are:

  1. Confirm if each expense is bringing you enough value to continue – ($100 / hour)
    • Steps:
      • Gather your credit card and bank statements for the last 3 months. (30 minutes)
      • Review each expense and reflect on whether it was worth the cost. (1 hour)
      • Identify a list of any expenses you’d like to cut back on. (30 minutes)
      • Add a description of how you’ll reduce that cost going forward. (1 hour)
        • You could share with your friends that you’re saving money the next time they invite you for a dinner out. Or arrange a rotation where you each host a dinner at home.
    • Calculation:
      • People are often shocked at how much they spend on a monthly basis on small purchases. Dining out and transportation are some of the most frequent areas.
      • If you can identify $25 a month in expenses that you can live without and put a plan in place to avoid them going forward, you’ll save $300 a year.
      • With an upfront investment of 3 hours of your time, you’ll be well paid for your efforts.
  2. For expenses you value, see if you can negotiate a lower cost – ($60 / hour)
    • Steps:
      • Use the same monthly statements from above to identify your recurring payments. Examples include:
        • cell phone
        • car or home insurance
        • internet
        • bank fees
        • cable – if you haven’t cut the cord just yet
      • Research current offers from competitors of your current provider. (1 hour)
      • Find or draft a script of what you’ll ask on the phone. (1 hour)
        • Remit Sethi, author of I Will Teach You to Be Rich, has championed this idea for years and provides many scripts on his website.
      • Call each provider to see if there is a lower cost service, bundle, or loyalty discount they can provide. It’s important here not to add services you don’t already have and need. (2 hours – try to find something else to work on in case you’re placed on hold, but don’t let this discourage you)
    • Calculation:
      • There are several ways to lower your costs here. You could:
        • reduce the services you’re receiving if a lower package will still meet your needs.
        • switch to a competitor for a lower price.
        • negotiate a lower rate with your current provider for the same service.
      • If you’re able to reduce your monthly costs by $20 you’ll have $240 more each year. This earns you $60 for each hour of your efforts in the first year alone.

An important note is that this job isn’t a one-time engagement. As you adjust to your new spending habits, revisit your expenses again from time to time. The goal is to make sure you’re getting the most from your money, and spending on activities that will bring you the most fulfilling life.

Negotiate your salary

The unemployment rate in Canada is at its lowest rate since the 1970s. A low unemployment rate typically gives employees more power because employers need to compete to attract talent. With job vacancies above 500,000 in Canada, there’s a lot of competition for the right people. Two ways that you can take advantage of this situation are to:

  1. Negotiate a raise – ($150 / hour)
    • Steps:
    • Calculation:
      • Data from PayScale shows that 39% of those who asked for a raise received what they asked for and 31% received less. This leaves 30% who didn’t receive a raise.
      • If you don’t receive a raise, remain patient and ask for a time to revisit the discussion in the future. In addition, ask if there are any specific outcomes your boss needs to see before they’d be able to give you a raise.
      • A 10% raise on an income of $40,000 is $4,000. Assuming a 50% chance at receiving the raise, your hourly wage for negotiating your salary works out to $150.
  2. Find a new position with a higher salary – ($125 / hour)
    • First a note of caution. Money is only one piece of the equation when it comes to your job. If you enjoy the people you work with and you’re fulfilled at the end of each day then this option may not be for you. Compare the expected change in salary with the other changes to your lifestyle to see if it’s worthwhile.
    • Steps:
      • Research roles in your field to understand what the market is currently paying and what roles would align with your skills and interests. Look at job postings, speak with recruiters and speak with colleagues in the industry. (10 hours)
      • Research best practices for finding a new job. (2 hour)
      • Update your resume. (4 hours)
      • Reach out to your network in the industry and directly to recruiters to avoid submitting a cold resume as often as possible. (5 hours)
      • Research best practices for interviewing. (2 hours)
      • Prepare for interviews. (5 hours)
      • Complete interviews with prospective employers where you feel there’s a good match. (5 hours)
      • Research best practices for negotiating your starting salary. (2 hours)
      • Rehearse how you’ll open the discussion. (2 hours)
      • Rehearse your response to common questions or challenges you may face. (3 hours)
    • Calculation:
      • Data from a 2018 Global News article suggests an average wage increase of 10% to 15% is reasonable to expect when changing jobs (provided you’re past an entry level position).
      • A 12.5% raise on an income of $40,000 is $5,000. While going on the job search is a large commitment of time (40 hours or more) the potential payoff is significant. If you can achieve a switch with 40 hours of work, your hourly wage would be $125.
      • Remember this calculation is only looking at the first year’s increase in earnings. However, you’ll continue to benefit from your newly earned income well into the future.

Pay off debt

  1. Take any reduced spending or increased earnings from above and pay down high interest debt – ($150 / hour)
    • Steps:
      • Calculate any extra money you’ll have on a monthly basis from steps you’ve taken above. (1 hour)
      • Sign into your online bank account and set up a transfer to move the amount you calculated above to your loan account (e.g., student loan, credit card) every month. (30 mins)
    • Calculation:
      • If you have a $15,000 student loan at 5% interest or a $5,000 credit card balance at 15% interest, you’re paying $750 a year in interest costs.
      • By applying $50 a month extra towards these debts, you’ll cut down the time to pay them back and the total interest.
      • If you increase from paying $200 a month today to paying $250 (the $50 we mentioned), you’d save $250 in interest on the credit card and $750 on the student loan. An hourly wage of over $150 for setting up the transfer.

You can apply this strategy to a mortgage, personal line of credit or any other loan to reduce the interest you’re paying. Any dollar saved is a dollar earned.

Invest your savings

Finally, if you have existing savings, or for the money you’ve identified through steps above, compound growth can provide the financial security you’re after.

  1. Take any reduced spending or increased earnings from above and invest – ($60 / hour)
    • Steps:
      • Calculate any extra money you’ll have on a monthly basis from steps you’ve taken above and add it to any savings you have that you don’t need for the foreseeable future. (90 minutes)
      • Read the easy way to start investing today. (30 minutes)
      • Complete additional research on the options of interest to you. (2 hours)
      • Open an account. (1 hour)
      • Complete an initial deposit for any savings you have today and set up a transfer to move the amount you calculated above to your new account each month. (1 hour)
    • Calculation:
      • A reasonable expectation for a medium risk investment would be to earn 5% on average over an extended period.
      • If you invest $50 a month for 5 years at 5%, you’d have over $3,400. $3,000 of that you set aside yourself and $400 came from growth on the investment. With 6 hours work to set up an account and transfer, you’ve earned $60 an hour for your efforts.

Closing Remarks

My goal for this article was to provide realistic examples of how to improve your financial situation through becoming your own CFO. While you may feel some examples are worth more or less than I’ve suggested, I hope the underlying message carries through. There are lots of personal finance topics to help you lower your expenses or increase your income. A short list of additional areas to explore includes:

  1. Lowering your taxes by learning about the Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
  2. Lowering your taxes by understanding common credits and rebates you may be eligible for when filing your taxes.
  3. Receiving grants from the government to help pay for your child’s education through a Registered Education Savings Plan (RESP).
  4. Checking with your employer if they offer a retirement plan, and contributing to it if they match your deposits.

Each new article and idea will have an associated return on the time you invest as we’ve calculated for many examples above. If you enjoyed this post and would like to check out more of my work, I’d invite you to drop by snowmansguide.com once you’ve finished up here.

What steps do you take with your money that provide a great return on the time invested?

Become the CFO of your Personal Finances

Why You Should (or Shouldn’t) Defer OAS To Age 70

By Robb Engen | February 18, 2020 |
Posted in
Why You Should (or Shouldn’t) Defer OAS To Age 70
I’ve long advocated that anyone who expects to live a long life should consider deferring their Canada Pension Plan to age 70. Doing so can increase your CPP payments by nearly 50 percent – an income stream that is both inflation-protected and payable for life. If taking CPP at 70 is such a good idea, why not also defer OAS to age 70?

Many people are unaware of the option to defer taking OAS benefits up to age 70. This measure was introduced for those who retired on or after July 1, 2013 – so it is still relatively new. Similar to deferring CPP, the start date for your OAS pension can be deferred up to five years with the pension payable increased by 0.6 percent for each month that the pension is deferred.

OAS Eligibility

By the way, unlike CPP there is no complicated formula to determine your eligibility and payment amount. That’s because OAS benefits are paid for out of general tax revenues of the Government of Canada. You do not pay into it directly. In fact, you can receive OAS even if you’ve never worked or if you are still working.

Simply put, you may qualify for a full OAS pension if you resided in Canada for at least 40 years after turning 18.

To be eligible for any OAS benefits you must:

  • be 65 years old or older
  • be a Canadian citizen or a legal resident at the time your OAS pension application is approved, and
  • have resided in Canada for at least 10 years since the age of 18

You can apply for Old Age Security up to 11 months before you want your OAS pension to start.

Your deferred OAS pension will start on the date you indicate in writing on your Application for the Old Age Security Pension and the Guaranteed Income Supplement.

There is no financial advantage to defer your OAS pension after age 70. Indeed, you risk losing benefits. If you’re over the age of 70 and not collecting OAS benefits make sure to apply for OAS right away.

Here are three reasons why you should defer OAS to age 70:

1). Enhanced Benefit – Defer OAS to 70 and get up to 36% more!

The standard age to take your OAS pension is 65. Unlike CPP, there is no option to take OAS early, such as at age 60. But you can defer it up to 60 months (five years) in exchange for an enhanced benefit.

Deferring OAS to age 70 can be a wise decision. You’ll receive 7.2 percent more each year that you delay taking OAS (up to a maximum of 36 percent more if you take OAS at age 70). Note that there is no incentive to delay taking OAS after age 70.

Here’s an example. The maximum monthly payment one can receive at age 65 (in 2020) is $613.53. Expressed in annual terms, that equals $7,362.

Let’s look at the impact of deferring OAS to age 70. Benefits will increase by 0.6 percent for each month of deferral, so by age 70 we’ll see a total increase of 36 percent. That brings our annual OAS pension to $10,013 – an increase of $2,651 per year for your lifetime (indexed to inflation).

2). Avoid / Reduce OAS Clawback

In my experience working with clients in my fee-only practice, retirees are loath to give up any of their OAS benefits due to OAS clawbacks. That means designing retirement income and withdrawal strategies specifically to avoid or reduce the OAS clawback.

The Canada Revenue Agency (CRA) calls this OAS clawback an OAS pension recovery tax. If your income exceeds $77,580 (2019) then you are required to pay back some or all of the OAS pension you received. For every dollar of income above the threshold, your OAS pension is reduced by 15 cents. OAS is fully clawed back when income exceeds $126,058 (2019).

So, does deferring OAS help avoid or reduce the OAS clawback? In many cases, yes.

One example I’ve come across many times is when a client works beyond their 65th birthday. In this case, they may want to postpone OAS simply because they’re still working and don’t need the income. In some cases, the additional income received from OAS would be partially or completely clawed back due to a high income. Deferring OAS to at least the next calendar year when you’re in a lower tax bracket makes a lot of sense.

Aaron Hector, financial consultant at Doherty & Bryant, says there is a clear advantage to postponing OAS if someone expects their retirement income to push them into the OAS clawback zone.

“Not only will postponement provide them with an enhanced OAS income, it will also in turn provide them with a higher clawback ceiling,” said Mr. Hector.

It might also allow the opportunity to draw down RRSP/RRIF assets between 65 and 70 which would reduce future expected retirement income (lower RRSP/RRIF assets = lower mandatory withdrawals between age 72 and death).

One could also stash any unspent RRSP/RRIF withdrawals into their TFSA. Growing their TFSA in retirement gives retirees the valuable ability to withdraw money tax-free any time and not have that income affect their means-tested benefits (such as OAS).

3). Take OAS at 70 to Protect Against Longevity Risk

It’s counterintuitive to defer taking pensions such as CPP and OAS (even with an enhanced benefit for waiting) because it forces retirees to tap into their personal savings – depleting their nest egg earlier and faster than they’d prefer. Indeed, people are reluctant to spend their capital.

But this is a good thing, according to Retirement Income For Life author Fred Vettese. Deferring CPP and OAS increases the amount of guaranteed income you will have for the rest of your life, while also reducing your long-term investment risk because you are spending your savings first.

“Spend your risky dollars first because they may not be there for you in your 80s, depending on how your investments do. A bigger CPP (or OAS) cheque, however, will definitely be there for you.”

In one example I looked at a single 59-year-old woman – Jill Smith – who plans to retire on July 1st when she turns 60. Jill requires $48,000 in after-tax spending each year to meet her retirement goals.

She has $775,000 saved in her RRSP, plus $75,000 in her TFSA and $30,000 in cash. She’ll qualify for 80 percent of the CPP maximum and is fully eligible for OAS.

If Jill takes CPP right away (July 2) at age 60 and takes OAS at the standard age 65 she’ll have enough personal savings to last until she’s 89. Her CPP and OAS pensions make up 30.39 percent of her total annual income.

CPP at 60, OAS at 65

Now let’s compare this scenario with deferring CPP and OAS to age 70.

Not only does Jill increase the viability of her retirement plan – her personal savings now last until age 92 – but she has increased the portion of index-protected, paid-for-life government pensions to 54.25 percent of her total annual income.

CPP and OAS at 70

Mr. Hector says that someone who fears running out of money in old age would be wise to postpone OAS to guarantee a higher base level of income when they are very old.

So those are three great reasons to take OAS at 70 – to enhance your annual OAS benefit, to reduce or avoid OAS clawbacks, and to protect against longevity risk.

Now let’s look at four reasons why you might not want to defer your OAS pension past 65.

1). The OAS Enhancement Is Less Enticing Than CPP

The actuarial adjustment you receive for deferring OAS to age 70 is much less than it is for deferred CPP to 70. It is just 36 percent compared to 42 percent. That makes a big difference, considering you’re foregoing your pension for five years. You want to make sure it’s worthwhile.

“When I compare the two side by side it really jumps out at you how there is a much greater incentive to deferring CPP than there is to defer OAS. This of course is due to the fact that there is a greater enhancement effect for CPP,” says Mr. Hector.

Ignoring income and clawback concerns, it is best to take OAS at age 65 for someone who is going to die between 65 and 79 for OAS, but for CPP the range shrinks to 65 to 77.

Taking OAS at age 70 gives the best outcome for those who live to age 88 and beyond.

2). Emotional Factor

Fred Vettese is a big proponent of deferring CPP until age 70 but not as enthusiastic about deferring OAS. He says that starting CPP late is already forcing the average retiree to draw down their RRIF balance much faster than they planned on doing. It is still a good move, but one that makes people uncomfortable.

He says asking people to start OAS late as well will accelerate the RRIF drawdown and make people that much more uncomfortable.

3). You Need The Money

Deferring CPP and/or OAS is a luxury for those who have the means to fund their lifestyle while they wait. Repeat: This is not a strategy for those who need to access their government benefits right away to get by.

Mr. Vettese says you need at least $200,000 before even considering the deferral strategy.

4). Leaving an Inheritance

Deferring OAS and CPP until age 70 means spending down a good portion of your personal savings in your 60s. This could also mean it’s possible to spend down most if not all of your personal savings before you die.

While this ‘die broke’ strategy may be ideal for some, others may wish to leave an inheritance to their loved ones or to charity.

As there is no survivor-OAS pension, someone who is concerned about leaving a large estate to their heirs may decide that they would rather take OAS earlier so that they can leave their investments intact.

“The investments will always have a value for their beneficiaries but that is not true for someone who opted to defer OAS,” says Mr. Hector.

Final Thoughts

There’s no clear-cut answer for deciding if and when to defer OAS.

When I’m working with clients, I always make sure they understand to at least postpone taking OAS until retirement, or the next calendar year after retirement to avoid OAS clawbacks and additional taxes in the final working year.

Then we look at OAS clawback amounts (if any) and see what can be done to avoid them. Sometimes that means taking more from their RRSP/RRIF in their 60s while deferring OAS until somewhere between ages 67 to 70.

But the bottom line is that deferring OAS to 70 is a bet that you’ll live a long life. And, like with an annuity, rather than worrying about what happens if we die early, we should give more thought to whether we live longer than expected.

With that in mind, deferring OAS by 1-5 years can help transfer the risk from your personal savings to the inflation-protected, paid-for-life government pension program.

The more we can ‘pensionize’ our retirement income, the better off we’ll be if we happen to live an extraordinary long life.