Archive for 2011
Do I really need to buy that?
Thursday, May 12th, 2011
Ever feel as if you’re spending too much? That’s no surprise: retail stores are designed specifically for that.
It’s well known that profitability in the retail business is often based on impulse buying: purchases that the consumer was not planning to make. Sales specialists have a full arsenal of techniques to encourage impulse buying – with the result that a fair number of households can’t quite make ends meet.
Let’s see how it works.
·Store layout
Have you ever wondered why the milk is usually at the back of the store? As you can see from the diagram below, retail operations are designed so that the traffic patterns will lead you past all kinds of less essential items on your way to the milk fridge. And of course batteries and chocolate bars are always at the checkout.
·Product displays
Why is candy displayed near the cash register at a child’s eye level? The answer is obvious.
·Clever incentives
Potato chips are on sale at two for $5.99? That might not be much of a bargain if the price is somewhat higher than the cost of one bag and you don’t really need the second. Similarly, certain products might be displayed prominently on the shelves because the manufacturer has paid the retailer a premium in order to be featured – even though the items aren’t necessarily on special.
·A shopping-friendly atmosphere
Does the store offer you free coffee to enjoy as you shop? How nice. But this also means that you’ll spend more time exposed to the products on offer. Pay attention to the background music and aromas, too. They are often designed to “enrich your shopping experience” – but not your wallet.
Of course there are ways to counteract these unquestionably effective tactics, but it takes discipline.
Make a list and stick to it
No less than 75% of consumers don’t do this.
·Delay your purchase
If you discover a product while browsing, make a note of it and add it to your list… for next time (if you decide you really want it, that is).
·Pay cash
We always have less money in our wallets than we can access with our credit and debit cards.
·Make a budget
…and keep it up to date by regularly entering each new expenditure. Few things will discourage unnecessary purchases as effectively as red ink in the family budget.
In the end, it comes down to simply ensuring that when we buy, we are making our own decisions, not just reacting to the stimulation of our senses by the expert use of tried-and-true techniques!
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What happens to a TFSA after death?
Thursday, May 12th, 2011
The question everyone forgot to ask.
The TFSA has been around for three years already! Announced with great ceremony in 2008 and implemented the year after, the tax-free savings account (TFSA) allows thousands of Canadians to shelter up to $5,000 a year from taxes – for a total of $15,000 to date.
So far, so good. But did you ever wonder what happens to all that lovely money when the contributor dies? We know that an RRSP becomes fully taxable unless provisions were made to roll it into the surviving spouse’s RRSP. But what about the TFSA?
Not taxable, unless…
Well, relax: there won’t be any appalling claims that allow the taxman to rake in up to half of your savings, as is the case for the RRSP. Nonetheless, you should take two precautions:
- Designate a successor holder
The successor holder can only be your legal or common-law spouse. This person simply takes your place as the TFSA account holder, and your savings can continue to grow without being taxed. If your spouse also has a TFSA, he or she can roll the contents of yours into it without affecting his or her contribution room. - Designate a beneficiary
The beneficiary is the person who inherits the contents of your TFSA, but not the account itself, which, in the absence of a successor holder, will be closed. This means that while the amount the beneficiary receives from the account is not taxable, any future income on those savings immediately becomes taxable. You may designate a beneficiary if the TFSA consists of an annuity contract from an insurance company.
Remember: the successor holder takes precedence over the beneficiary; the beneficiary takes precedence over the estate. Designating a beneficiary is recommended since in provinces other than Quebec, probate fees are incurred when amounts are payable to an estate, and these can be quite high in some provinces.
Review your arrangements regularly
In all provinces, TFSA designations can be made by filling out a form, usually provided by the financial institution. But be careful! Just like a will, a successor account holder or beneficiary designation must be kept up to date. For example, if your ex-spouse is still named as your successor account holder, neither your former nor your current spouse will be able to roll your TFSA into theirs: the first because he or she is no longer your legal or common-law spouse, and the second because he or she is not the designated successor holder.
The same attention must be paid to the designation used: the successor holder and the beneficiary do not have the same rights. The consequences if you forget or neglect these details will be less dramatic than with an RRSP, but why create problems for your heirs when you can prevent this so easily by meeting with your financial services professional (and your notary, in Quebec) and filling out the proper forms?
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Reviewing your life insurance: just like spring cleaning
Thursday, May 12th, 2011
Spring is often a time of renewal: new house, new car, new travel – sometimes even a new relationship! All of which should prompt us to think about our life insurance coverage.
Granted, no one really likes to talk about life insurance (except insurance specialists, of course). That’s why so many people treat their insurance portfolios like some kind of machine they can set once, and then ignore forever.
Actually, life insurance lives up to its name: it’s about life – those of our spouses, our children and our other survivors – and that’s why all kinds of life events should trigger a reconsideration of our coverage. Here are some examples of trigger events. If any of these ring a bell with you, it might be time to talk to your financial services professional!
- Legal separation
If you forget to change the beneficiaries for your policy, in the future your new spouse could end up with fewer rights than your “ex” and even his or her children. Any change in your marital status should immediately be reflected in your life insurance policy. - Children
Life insurance exists so that your spouse, your children and sometimes your grandchildren can maintain their standard of living and financial security, and carry out the plans you have made for them (education, for instance), in the event of your death. If more children arrive, update your coverage. It might also be a good idea to get life insurance for your children to protect their insurability early in life. Often, grandparents or godparents will provide a “gift” of life insurance for a child. - Death
If your spouse or someone you rely on financially dies, the responsibility for protecting your dependents then falls to you – including after your own death. - Buying a house
Are you raising your standard of living by purchasing a new home? Your life insurance should enable your survivors to take on the expenses associated with this more valuable asset. Have you bought a vacation home? Be aware that the capital gain on your second residence will be taxable at the time of your death. Your life insurance could help your heirs pay this tax. - A renovation project
The same thing goes when you make substantial renovations. Ensure that you have enough coverage for this new asset if you want your survivors to benefit from it. - A new job
If a promotion comes with a higher income, it will likely also raise your family’s standard of living. Don’t forget to protect this quality of life in the event of your death. - Starting a business
You and your partners have a heavy responsibility: you have to protect not only your respective families, but also the company’s continuity and the smooth transfer of share ownership in the event of a partner’s death. It’s better to deal with this question right from the outset by means of a partnership agreement and the appropriate insurance policies. - A trip
Travel is a great pleasure, but also a risk factor. Whenever you plan a trip to a foreign country, it might be a good habit to check that your life insurance policy is still up to date. - Illness
Illness can have a serious impact on a household’s financial security. This is especially true if one of your parents develops a long-term degenerative disease with age. If you die before they do, your life insurance should provide for their needs as well. Of course, the same thing applies if your spouse or children have special needs. - Returning to school
The decision to go back to school could remove one spouse from the job market, leaving the other to provide for the household’s financial security during this time. The couple’s insurance portfolio might need to be changed to reflect this situation. - An inheritance
An inheritance might seem like a gift from heaven, but it quickly becomes an integral part of your asset base. Assess its impact on your standard of living. If that has risen, see if a change in your life insurance is in order. - Approaching retirement
Finally, your coverage needs change as you get older. Your survivors will probably have made lives for themselves and will be less dependent on you. On the other hand, you yourself might be facing new coverage needs that would be better met by long-term care or critical illness coverage than life insurance.
Numerous studies show that a large number of Canadians – up to 40% – do not have life insurance that is appropriate for their situation. It’s spring… Why not tidy up your insurance portfolio?
Posted in Actualis Newsletter - brought to you by Craig Melnychuk, Treasurer | 1 Comment »
To Be a Better Salesperson, Don’t SOUND Like One
Tuesday, May 10th, 2011
Just wondering …… why in the world do some salespeople feel like they must sound like a salesperson when they get someone on the phone?
What is it about presenting … whether it be selling by phone or speaking before a group that causes some people to cinch up and sound like the synthesized voice that gives the phone number on directory assistance?
I spend a lot of time on airplanes, and can’t tell you the last time I actually listened to the flight attendant giving the speech about the flat end going into the buckle. Oh yes I can, I flew Southwest a couple of weeks ago and, as many of their attendants do, this one delivered the announcement like they were actually talking to a person, and with humor and enthusiasm. That got my attention.
The bottom line is that on the phone, sounding canned, like you’re reading something, or like you’ve just been awakened at 3:00 a.m. is detrimental to your success.
But, many people sound that way. And many of those don’t realize it. Here are a couple of points to keep in mind.
We tune out–and are often annoyed by–unemotional, canned messages. Think about the sales calls you have received at home … the ones that follow the couple of seconds of dead air after you pick up the phone and say “Hello … hello …?”
You first hear the din of what sounds like a noisy restaurant, and the monotone voice greets you with,
“Hello, can I speak with (bad mispronunciation of your name)?”
Then they begin reading a script.
Likewise, think about some really bad acting you’ve seen in a play or movie. It looks and sounds stilted … unnatural, like it’s being read. It has the same turn-off effect.
People will speak with those who sound conversational.
What more can I add?
But please don’t misunderstand me on one key point:
Preparing what you’ll say and scripting your opening is still the best way to approach a call. But never, ever, SOUND like you’re working from an aid.
As I always say, the worst time to think of what you’ll say is as it’s coming from your mouth.
Exercises
So, what to do? Easy. The better prepared you are, the more natural you will sound. “Humanize” your calls. Remember, you’re talking to another person, not at a phone instrument. Listen to your calls on tape, and ask yourself, “Would I talk to friend like this? Does this sound natural?”
Prepare your openings and recite–not read–them into a tape player. Pretend you are talking to a good friend in a social setting.
The less you sound like a salesperson, the more you’ll sell.
Here’s to making this your best week ever!
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What’s hiding behind our income tax returns?
Tuesday, April 26th, 2011
What’s hiding behind our income tax returns?
Behind the form we fill out each year is hidden a complex system of taxation where it’s easy to get lost… Welcome to “Income Tax 101,” courtesy of Actualis Express!
As the saying goes, in this world nothing is certain but death and taxes. The first is true beyond the shadow of a doubt; as for the second, well, that depends.
Let’s take a closer look.
Five factors to consider
Fundamentally, the amount of tax you pay on your income is based on five main factors:
- the size of your income
With social justice in mind, Canada favours a progressive taxation system whereby your tax rate increases with your income: you not only pay more tax, you pay a larger percentage of your income.
- the source of your income
Your income is taxed differently depending on whether it comes from your salary or your investments: wages and interest are subject to the biggest tax bite; dividends and capital gains are taxed at a lower rate.
- your province
Since tax rates differ from province to province, if you live in Alberta, for example, you’ll pay noticeably less tax than your brother-in-law in Manitoba on the same income.
- your household situation
Our system includes an impressive array of tax and social measures based on household income, number of children, services used, etc.
- your tax planning
You can reduce your total tax bill by using deductions, deferring certain kinds of income, allocating your investments wisely and splitting your income.
What not to do
These factors appear to be quite straightforward, but they are the source of both the complexity of our taxation system and the many errors made by taxpayers when filing their returns. Here are a few “don’ts” to watch out for:
- Don’t confuse the marginal tax rate with the average rate
It’s a popular misconception that we are all paying 50% of our income in personal taxes. This is because people confuse the marginal tax rate and the average rate. The marginal tax rate – which can in fact reach 50% in some provinces – is the tax that applies to each additional dollar that you earn above certain thresholds. At the federal level, for instance, these thresholds will be as follows for 2011:
If your income is $75,000, your federal income tax will be calculated as follows: $0 on the first $10,527, $4,653 on the next portion, and $7,360 on the third portion. Total: $12,013, or 16% of your annual income. To find out the combined tax rates in effect in your province, we recommend using an online tax calculator such as the one provided by Ernst & Young.
It’s important to understand these concepts not only to calculate your tax payable, but to help you make good decisions. Suppose you are thinking of taking a job that would increase your income from $75,000 to $85,000, but would force you to buy a second car. Well, if you live in Ontario, the car had better cost you less than $6,700 a year, because with a combined marginal tax rate of 32.98%, that’s how much of your raise you’d have left after the taxman got through with it.
- Don’t forget your tax credits
Every year, thousands of taxpayers – especially pensioners – pay more tax than they should because they aren’t fully aware of the tax credits and deductions they are entitled to. Even if you don’t have to pay any income tax, you can still claim certain credits. Tax credits known as “refundable” are not simply “deductions”: you are entitled to them based on your income, no matter what.On the other hand, don’t forget about all the credits and exemptions that may be lost with a move into a higher income bracket. Some studies show that these lost benefits could have the effect of a spectacular increase in the marginal tax rate – to the extent that the middle class would be burdened with the highest marginal rates, instead of the wealthiest taxpayers. Here’s some advice: know your tax credits.
- Don’t fail to manage your sources of income strategically
Another frequent mistake: managing your investments without paying attention to the different tax rates that apply to interest, dividends and capital gains. Your financial services professional can help you distribute your investments with a view to ensuring that your most heavily taxed investment income is tax sheltered.
- Don’t neglect to file an income tax return
Suppose you take a sabbatical and your income for the year is less than the basic exemption. You should still file a tax return in order to create RRSP contribution room that you will be able to use to decrease your taxes in future years.These are just a few of the many pitfalls that await the unwary taxpayer… And that’s why you shouldn’t look at income taxes as an annual April headache: instead, they should be a topic of regular discussion with your accountant and your financial services professional.After all, if you feel as if you’re paying too much income tax, remember this fact: you could be right!
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Turning Failures Into Opportunities and Eliminating Rejection
Tuesday, April 12th, 2011
At age 19, his application to Harvard Business School was rejected. He was devastated at the time.
However, exploring other options, he quickly regrouped and sent in a late application to Columbia, where two investment experts that he admired were teaching. He was accepted. There he learned the values and principles that guided his investing.
Today he is the second wealthiest man in America and the most famous stock investor in the world. Of course I’m talking about fellow Omahan, Warren Buffet. (No, I do not know him, and he does not call me for advice.)
Buffet is a big believer in looking for the opportunities in setbacks. Which is what all great salespeople do as well.
In a Wall Street Journal article, Buffet said,
“The truth is, everything that has happened in my life…that I thought was a crushing event at the time, has turned out for the better.”
He said that with the exception of health problems, setbacks teach “lessons that carry you along. You learn that a temporary defeat is not a permanent one. In the end, it can be an opportunity.”
Buffet has many examples of negatives becoming positives. He said when he was young he was terrified of public speaking–so much that he sometimes threw up before an address. Knowing he needed to do something, he enrolled in a Dale Carnegie speaking course, and says the skills he learned there enabled him to woo his future wife, who was a champion debater.
“I even proposed to my wife during the course,” he said. “If I had been only a mediocre speaker I might have not taken it,” meaning that the extreme negativeness of the situation is what resulted in the positive.
I have a process I have used for many years that enables me to keep my own personal attitude up during even the most difficult situations, find positives in negatives, and although it sounds cliché, turn problems into opportunities. I believe it would do the same for you.
Two Magic Questions
Whenever you experience something that you perceive as being negative–many fall into this category… really now, many people blow things way out of proportion–or, you are faced with something that truly is devastating, take a deep breath, stop, clear your mind, then ask yourself these two questions:
“What can I learn from this?”
“What good can I make from this?”
Begin implementing these two questions today, and I know you will view things differently, and see more opportunities where they might not have been there otherwise.
Eliminating “Rejection”
How about never experiencing “rejection” again in sales?
What is rejection anyway?
Is it a ‘no’ you hear at the beginning of a call? Is it losing out on a competitive proposal. Is it being hung up on?
If you think it is, it is. Now, I’m not going to get all out-there-philosophical on you, but let’s keep this simple:
- Stuff happening TO you in sales (getting no’s) is inevitible, if you are placing calls.
- What HAPPENS to you is not rejection.
- Rejection is the definition that someone attaches to what happens to them.
- No one person or situation can cause you to feel rejected unless you allow it/them to.
- Change your definition of rejection so that it does not include getting a no on a call.
- After no’s, ask yourself the two questions I presented earlier.
- Ensure you get a win on every call by accomplishing something, or even attempting something, regardless of how minor. This is what I call your Secondary Objective.
More than almost any other profession, how you feel when you are performing your job affects your outcome. Coupled with the fact that all day long we proactively put ourselves in situations where the outcome may not be the one we desire, there’s little wonder most people would never consider sales as a career, and many have left because they couldn’t handle what they defined as “rejection.” This underscores the need to follow processes like I’ve outlined.
You are a special person for doing what you do. To continue surviving, thriving, and ensuring you will have your best year ever, implement these ideas for turning challenges into opportunities, and never experiencing rejection again!!
Here’s to making next week your best one ever!
By Art Sobczak
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Begin 2011 By Getting the Easy Sales
Tuesday, April 5th, 2011
Did you go through an annual review recently?
They can be very profitable.
Oh, I’m talking about YOU doing an annual review of your customer and prospect database, and then doing reviews with your customers and prospects.
That’s right. The first place to mine for gold is in the treasure you now possess.
Most people begin a new year with grand plans to increase their new business. Yet many of those same people don’t pick up the easy stuff first, skimming the cream that already residing in their computer.
Here’s how.
1. CALL YOUR BEST CUSTOMERS
Of course, you know everything important that’s happened recently in the world of each of your best customers, right?
And you have your thumb on exactly what their plans are for 2011 and beyond, right?
And they’re going to continue buying from you at the same level, right?
Of course you know this because they are very, very important to you, accounting for most of your income.
They are helping to finance that new car, house, boat, or whatever else you have your eye on.
You are ingrained in these accounts because you also know that your smartest, hungriest competitors are having strategic sales meetings right now putting bulls eyes on those accounts, targeting them to steal away from you, so that THEY can get lots of business from them.
What’s that you say?
Maybe all of those things are NOT true? Maybe you should pay more attention to them?
Yes, of course you should. Quickly.
Today. Target the 20% of your customers that now give you over 80% of your business. Call and do an annual review with them. But DO NOT say you just want to call and make sure everything is OK with them. Be proactive. Tell them that your goal is to help them have their best year ever.
Find out about,
- Major changes.
- News.
- Bought or sold divisions, assets.
- Added or dropped product lines.
- Major initiatives.
- Changes planned for 2011.
- Personnel changes for them? Promotions. Changes in the department(s) that you affect.
Know the answers to these questions, and you’ll increase your value to them, consequently providing a payoff for you.
2. CALL YOUR SMALL CUSTOMERS
Mine your database and pull out the customers who bought from you once, or those who just buy one or two items or limited single services from you.
Are you customers small because you THINK they are?
Or are they buying other things that you sell from your competitors?
Chances are, the answer is “yes” to both questions.
3. CALL YOUR LOST SALES
Scan your database and pull out the 10-20 biggest sales you really wanted, worked hard for, but did NOT win in 2010. Call them.
But, please, do NOT say,
“I’m just calling to touch base.”
Review your notes and develop a value-added reason for calling. Say something like,
“I came across some interesting information in Info Industry Journal, and remembered how you were concerned with the issue of external data security locking in a multi-user environment. I wanted to send that to you …”
Of course you would then ease into a discussion of their present situation, and perhaps uncover any possible areas of dissatisfaction.
Calls to all three of these groups are really no-brainers!
Think about it …
…you’ve already done the heavy lifting with all of these people. You’ve put in the long hours, investing time and money in proposals and calls. You know their situation. And very importantly, you’ll get to these people more easily than you would cold prospects. You probably know their executive assistants on a first name basis.
Try this. What will it be worth when you pick up a piece of business from one or two of them?
Make Next Week Your Best Week Ever!
Art
QUOTE OF THE WEEK
“”Why not go out on a limb. Isn’t that where the fruit is?”
Frank Scully
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Do you and your spouse ever talk about… money?
Friday, March 11th, 2011
For any couple, richer or poorer, talking about finances can easily create static. The solution? Clear the lines of communication – for love and money.
Sad, but true: statistics show that among couples who separate, money issues are a critical factor up to 90% of the time. And yet, any good psychologist will tell you that most couples would rather talk about anything – even sex problems!– rather than discuss their finances.
The thing is, money tends to highlight the differences between individuals. We each have our own way of planning for the future we envision, and this affects how we spend, save and invest. Are you easy-going about money or do you worry all the time? Do your spouse’s spendthrift (or tightwad) ways drive you crazy? Were you saving for a vacation only to find that your partner decided to buy a new home entertainment system instead? Do the two of you truly share the same financial goals?
These kinds of things come up more often than you might think, and can create tension that eventually leads to financial problems. The solution? Open, ongoing dialogue. Here are a few tips to help make it easier to approach this touchy subject.
| • | Make time to talk about money |
| Make “dates” with your spouse to talk about money. Don’t avoid the subject or let yourselves go off on tangents. | |
| • | Be prepared |
| Take it seriously. Beforehand, think about what you want to discuss and assemble the necessary documents: your financial balance sheet (assets, debts), your household budget, a statement of income and expenses, your credit reports, if any. Your financial services professional can recommend some practical tools to help you with this. | |
| • | Be honest |
| Have you secretly always wanted to start a business? Is your number one priority the education of your children – from your previous marriage? Or is it your own retirement? Being specific about your dreams will make it easier to decide how to achieve them. Together. Or at least, at the same time… | |
| • | Keep it civil |
| You might discover differences – and differences of opinion – that you never suspected. Listen to each other and try to be understanding. Have your discussions in an environment where you both feel free to speak frankly and, if necessary, have a neutral third party, such as your financial services professional, on hand to help you look at things objectively. | |
| • | Take notes |
| A written record of what you talked about, along with the associated documents, will help you keep track and measure the progress you make together. |
When all is said and done, it isn’t always easy for a couple to talk about money… but with the right attitude, a willingness to compromise and, if necessary, some outside help, it’s not the end of the world, either!
Posted in Actualis Newsletter - brought to you by Craig Melnychuk, Treasurer | 1 Comment »
Moody markets?
Friday, March 11th, 2011
When the markets are on the rise, we sometimes say that good news has put them in a buoyant mood. And when things aren’t going so well, they’re… “depressed”. Sound familiar?
The graph below might remind you of your own emotional ups and downs over the past three years. In fact, it simply shows changes in the Toronto Stock Exchange’s S&P/TSX index, with its very high highs… and very low lows. But if it happens to mirror your emotional state, rest assured that it doesn’t mean you are unusually sensitive.
Like a drug
According to a number of researchers working in a branch of neurological science known as “neuroeconomics”, a financial gain triggers activity in the same areas of the brain as physical pleasure or certain drugs. In its own small way, the effect is not unlike that of cocaine, which triggers the release of dopamine and creates feelings of extreme confidence. Conversely, a financial loss, especially after a long period of gains, can cause anxiety that feels a bit like withdrawal.
Beyond fear and greed
This isn’t to say that the investment world behaves irrationally, but these studies allow us to understand that while the markets reflect rational behaviours most of the time, there are moments when irrational emotional reactions take over. This irrationality is a direct function of the wealth creation process: the greater the creation of wealth, the more the markets tend to conceal risk. On the other hand, the greater the destruction of wealth, the more this exuberance is replaced not by simple fear, but by a contagious anxiety and behaviours that are just as irrational. Unlike fear, which has a source, anxiety tends to be unspecific: it invades a person’s whole life, reduces the ability to listen and affects one’s sense of proportion.
How can you protect yourself?
Nothing could be more natural than feeling anxious during a period of high volatility such as the one we went through two years ago – not to mention the ones we will inevitably experience in the future. However, there are ways to control one’s emotions and prevent oneself from making regrettable decisions. Here are a few:
- Did you have a plan? Did it assume that you would have financial gains or losses due to stock market fluctuations every year, within certain boundaries? Go back to that plan. Sometimes, what seems exceptional was actually predictable – and predicted.
- Don’t let negative emotions turn into anxiety. If you start to feel over-anxious, resolve the issue right away. Get something out of your anxiety, once and for all, and get to the bottom of the problem with your financial services professional.
- Make it a habit to see both the positive and negative sides of every situation. When things are going well, look at the dark side. When they’re going badly, look at the bright side. Learn to keep market upswings, as well as declines, in perspective.
- Get moving! Exercise, yoga, recreational activities – all trigger mechanisms that can break the anxiety cycle and help you look at the reality of the situation in a more rational way.
In short, whether the mood of the markets is buoyant or depressed, the main thing is… not to be that way yourself.
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Mortgages aren’t what they used to be
Friday, March 11th, 2011
On March 18, some new standards for residential mortgages will come into force in Canada. Will this be enough to rein in the spiralling debt load that Canadians are carrying?
Federal Finance Minister Jim Flaherty was faced with a dilemma: how could Canadians’ debt load be reduced without triggering a crash in the real estate market? On January 17, 2011, he finally announced three changes that will tighten mortgage credit conditions without restricting access to home ownership:
- for buyers making a down payment of less than 20% of the property value, the maximum amortization period for a government-insured mortgage is cut from 35 years to 30 years;
- the maximum amount that can be borrowed when refinancing a mortgage is reduced from 90% to 85% of the home’s value;
- and the government will no longer provide insurance backing for lines of credit secured by homes, such as the very popular home equity lines of credit.
The first two measures take effect on March 18, and the third on April 18.
Then what?
What will these measures change? Basically, one thing: the amount of money that Canadians can borrow against their homes. By reducing this amount, the government is trying to reduce the average Canadian’s total indebtedness, which is already alarmingly high, at about 148% of disposable income. The idea is that fewer people will find themselves with debts they can’t repay in the all-too-predictable event that interest rates start to rise.
As shown in the illustration below, the amortization period reduction alone looks like it could have a noticeable impact.
But…
It must be said, however, that in 2010, even though 30% of home buyers chose a 35-year mortgage, only 2% of all buyers would fail to qualify for a 30-year mortgage. So it seems that in almost every case, restricting the amortization to 30 years would not significantly slow the drive towards a more expensive home and a heavier debt load. On the other hand, forcing people to repay their mortgages more quickly will allow them to replace a debt with savings that much sooner.
Other effects
As for reducing the mortgage refinancing maximum from 90% to 85%, it sends a message to consumers who are tempted to use their home as a bank machine. This type of borrowing has increased twice as fast as mortgages in the past 10 years, and now accounts for 12% of household debt.
Lastly, eliminating government insurance on home equity lines of credit is a way of transferring the credit risk to the lending institutions to encourage them to reduce the flow of credit. Until now they have been very generous with this type of loan, since the risk was borne by taxpayers.
Once, twice, three times
This is the third time in 26 months that the federal government has tightened credit conditions in the mortgage market. In 2008, the maximum amortization period for government-insured mortgages was reduced from 40 to 35 years (now 30 years). And in 2010, a regulation was brought in that forced all mortgage applicants to qualify for a 5-year fixed-rate mortgage, no matter what term they were seeking.
In the long run, some economists fear that by curtailing debt, the government might cause a slowdown in the real estate market, and even hobble economic growth. On the whole, though, the effect is expected to be real, but modest, combined with the impact of the overall economic situation. The CMHC predicts that Canadian housing starts will decrease by 6.5% in 2011, and sales of existing homes by 1.1%. Nonetheless, selling prices for existing homes are expected to increase by 2.9%.
Other observers are less optimistic, however, and predict that higher interest rates in conjunction with a credit squeeze will result in a significant drop – up to 25%!– in residential property values over the next few years.
Time will tell who is right, but meanwhile, Canadians would do well to pay attention to the message the Minister of Finance is sending them: be prudent.
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