Today's Globe and Mail article Never missed a mortgage payment and still facing foreclosure about the nasty fallout on innocent responsible homeowners reminds me of a situation just as bad, if not worse, in the UK. A family member who has had a mortgage with lender Nationwide for the past two years is being refused a new mortgage for an attempted trade-up to a larger property. Like the unfortunate Ms. Matthews in Canada, this person has never missed or been late on payment, nor missed any payments on loans of any sort.
Worse than the Canadian situation, the person has an impeccable credit rating and a highly secure job. The reason given for the refusal of a new bigger mortgage - the person has used on a few occasions the planned overdraft facility on a bank account, an overdraft which was promptly paid back. It's ironic and laughable that a convenience which the banks happily provide and promote (for all the fees they garner) has been used as the excuse for the refusal.
I don't know for sure but I suspect that Nationwide in reality probably doesn't have the money to lend in the global aftermath of funding scarcity described in the Globe article. Even before the crash Nationwide had begun severely restricting mortgage availability according to the March 2008 Times article Nationwide shuts door on mortgage hunters.
The immediate consequence is one less house in Scotland that will be sold. We've gone from credit gluttony to credit starvation.
Showing posts with label mortgages. Show all posts
Showing posts with label mortgages. Show all posts
Monday, 7 December 2009
Saturday, 24 May 2008
Lessons of a Failed Endowment
An acquaintance here in the UK recently received the annual statement for a Life with Profits Endowment policy. An endowment is a kind of investment whose purpose is to provide a target lump sum a specified number of years in future, when it matures. Most often, as in this case, it is meant to pay off an interest-only mortgage when the mortgage ends. The word "Life" means that there is also a life insurance policy that pays off the lump sum if the person dies before the policy matures. The "with Profits" bit refers to the method of crediting the profits generated by the underlying investments in stocks and bonds (the details of which are hidden and unknown to the investor). The profits are dribbled out in the form of so-called bonuses to smooth out returns from year to year. The proceeds are normally free of further tax in the hands of the investor since the life insurance company has already paid taxes. Endowments were often touted as "tax-free" investments when all that really meant is that they were tax-prepaid. For a longer explanation, read this page at InvestmentGuide.co.UK.
In this case, the endowment was to generate £24,000 over the twenty years, starting in 1992 and maturing in 2012. My acquaintance would pay £49 a month during the twenty years. That's about a 6.5% rate of return. It would actually be a little more since the insurance component costs something and not all goes into the investment component, but the insurance cost is minor - less than 10% of the premium.
"RED ALERT: HIGH RISK OF SHORTFALL" read the top of the statement in big bold (though not red) letters. You're not kidding! The plan as of May 2008 was worth £13,162. That's about 4% return per year. The statement also provides low/medium/high projections of possible value at maturity in 2012 were £16,400, £17,500 and £18,600 using 4%, 6%, 8% growth rates. Hmm, wonder which one to count on? High risk of shortfall? Is this the British fondness of under-statement?
To put this abysmal rate of return since 1992 in perspective, consider that the FTSE 100 index has risen about 5.3% a year since 1992 (see EconStats for the numbers). That's not even counting the 3% or so per year in dividends distributed by those companies, which would give an annual return of 8.3%. In that context, the 6.5% per year that would have been required to produce £24,000 seems quite achievable, even if lower yielding bonds were added to the mix.
I suspect that fees and expenses ate away the returns as much or more as Standard Life's investment incompetence. Whatever the cause, the result is awful, especially since the person is still locked in and cannot cash out, or even suspend payments, without paying severe penalties that would be worse than simply sticking with it for another four years. Caveat emptor indeed!
The lessons I draw from this:
In this case, the endowment was to generate £24,000 over the twenty years, starting in 1992 and maturing in 2012. My acquaintance would pay £49 a month during the twenty years. That's about a 6.5% rate of return. It would actually be a little more since the insurance component costs something and not all goes into the investment component, but the insurance cost is minor - less than 10% of the premium.
"RED ALERT: HIGH RISK OF SHORTFALL" read the top of the statement in big bold (though not red) letters. You're not kidding! The plan as of May 2008 was worth £13,162. That's about 4% return per year. The statement also provides low/medium/high projections of possible value at maturity in 2012 were £16,400, £17,500 and £18,600 using 4%, 6%, 8% growth rates. Hmm, wonder which one to count on? High risk of shortfall? Is this the British fondness of under-statement?
To put this abysmal rate of return since 1992 in perspective, consider that the FTSE 100 index has risen about 5.3% a year since 1992 (see EconStats for the numbers). That's not even counting the 3% or so per year in dividends distributed by those companies, which would give an annual return of 8.3%. In that context, the 6.5% per year that would have been required to produce £24,000 seems quite achievable, even if lower yielding bonds were added to the mix.
I suspect that fees and expenses ate away the returns as much or more as Standard Life's investment incompetence. Whatever the cause, the result is awful, especially since the person is still locked in and cannot cash out, or even suspend payments, without paying severe penalties that would be worse than simply sticking with it for another four years. Caveat emptor indeed!
The lessons I draw from this:
- don't invest in something merely for tax savings or a tax-free payoff
- fees and expenses are a critical investment evaluation factor, the lower the better
- passive index-type investments will more often do better for the average person than any type of active fund management, even when the approach of the fund company is conservative - the fund performance is just under a lower bar
- a complicated product like an endowment should be subject to much skeptical scrutiny - e.g. why is an endowment better than simply buying term life insurance separately and getting a repayment mortgage? If you cannot understand what you are buying, there is a significant chance you will be taken advantage of - see ThisIsMoney article amongst many, on how mis-selling of endowments caused enormous criticism and compensation for some has come about.
Monday, 19 May 2008
Ins and Outs of Mortgage Investment Corporations
A reader brings up an interesting question:
"I'm interested in investing in real estate, but the market is pretty volatile right now and I don't want to put a large lump some of money into real estate at this point but still would like to 'play' the market. What do you think about mortgage investment corporations like ACIC? I found their website (http://www.acicinvestor.ca)? Could you do a review of ACIC or products like this?"
I must admit to not knowing about MICs before now, so I am approaching this cautiously and don't pretend to have a final answer or a blanket answer that applies to every MIC. A due diligence process is very much in order.
What is a Mortgage Investment Corporation? (good place to start, huh?)
A MIC is a corporate structure recognized in Canada's Income Tax Act (thus the use of MIC as a proper noun) that enables small investors to pool funds and invest in (i.e. act as a lender of) mortgages. The Act allows the MIC itself to be exempt from income tax as long as it passes along all its income to the investors, in whose hands it is, of course, taxed.
A picture is worth a thousand words (perhaps more, the way I write). Here is a good summary of the flow of various funds into and out of a MIC from one of these outfits Magenta Mortgage Corporation.
Just below the diagram on the Magenta explanatory webpage is a succinct summary of the Income Tax rules about what a MIC can and cannot do. Or you can try deciphering the ITA section 130.1 yourself. Here is Magenta's summary:
(btw, to me the availability on a company's website of clear and complete information is a good sign, though by no means a final answer)
MICs go back to the 1970s, that alone being a favourable point. If their format/structure itself were bad, they should have disappeared, right?
MICs are thus a legitimate investment vehicle, though naturally that doesn't mean every MIC will be successful and a good place to invest money.
The Prospectus and Audited Financial Statements
MICs are securities and as such, are bound by the securities regulator in its home province to send a prospectus to all potential investors. The Prospectus details everything about the MIC and is essential reading. Most of the MIC websites are coy and require you to give them your name and contact info before giving you a copy (no doubt so they can do some selling). One exception is Westboro, whose very readable Prospectus is on this Documents page.
The audited financial statements tell you how the company is succeeding, how much profit it is making, how big and diversified is its lending, how much leverage it is using, percent of loans in arrears and so on. It's necessary and highly useful reading to understand a potential investment.
Each to Its Niche
Within the tax rules, MICs vary quite a lot in the types of loans and borrowers they focus on. Among the possibilities: first mortgages, second mortgages, multi-unit residential buildings, construction loans, individuals or companies, commercial properties (up to the limit), people the banks won't lend to like poor credits, bankrupts, self-employed, undeclared income
Rates of Return
This is the big carrot, naturally. The historical rates claimed went from a minimum of 8% a year up to c. 12%! That's impressive! This is cold, hard cash either paid out, either monthly, quarterly or semi-annually, as a cheque / deposit into your bank account or reinvested. That's pretty darn good considering that these cash distributions have been steady for years. For instance, check out Cove MIC's table of its returns , which averaged 10.53% since 1999.
What are the Risks?
Check out the sensible questions that the OSC suggests you ask in this information page on the Westboro site.
Fraud - less likely since a MIC must produce audited financial statements every year. Check out the financial statements and see if the MIC is subject to any lawsuits.
Losing MIC Status - failing to keep within the Income Tax Act rules would cause the MIC to have its income taxed before being distributed to shareholders and would lower returns considerably
Manager (In)competence - the success of the MIC depends to a critical degree on the experience, expertise, judgement and good faith of the managers. Do they know the business, do they know their market and do they have a record of success? Can and will they find a steady flow of new mortgages to keep the income flowing in? Think of it as a job interview.
Leveraging - the rules allow the MIC to borrow money but some do more than others. The spread between the lower rate of the MIC's borrowing and the lending will boost the ability to generate shareholder returns but it also increases risk. The audited financial statements will show how much the MIC has borrowed. The prospectus will say if the MIC has a policy to cap what it will borrow. Many of the MICs are fairly short term lenders - 24 months or so - which reduces interest rate risk and should allow the MIC to continually readjust its lending rate to match increases or decreases in general interest rates and keep the spread between its lending and its bank borrowing rates constant.
Default on Mortgages - mortgage borrowers may not pay back what they owe; all the MICs claim to be very careful about who they lend to but some are explicitly in a niche where the banks don't tread or in second mortgages. The MIC gets a higher interest rate but that is associated with the higher risk. At least one MIC - Cooper Pacific - has two funds, one that lends out first mortgages with an 8% return and another with second mortgages with a 12% return. "You takes your picks and you takes your chances."
Market Downturn / Geographical concentration - some MICs, the smaller ones, are concentrated in very limited markets, like Westboro in Ottawa or Edgeworth in northern Alberta. Ottawa is a stable market but what happens to Edgeworth if the oil industry cools off considerably, as it has done in the past? A general economic recession would everywhere increase the number of borrowers having difficulty to repay.
Liquidity (Can't sell) - the basic method to get your money back is not a sale in some market since MICs are not (with one exception, I found) publicly quoted companies but for the MIC to redeem the shares; the restrictions vary by MIC, whether funds can be sold / withdrawn immediately, or with 30/60/90 days notice; for smaller MICs, the Income Tax Act restriction that each MIC must have at least 20 shareholders might come into play;
A Partial List of MICs - there seem to be a lot of these around
Taxes and Which Account to Hold the MIC Investment
A registered account such as an RRSP or a RRIF is the natural place for a MIC investment since it will generate all its income only as interest (and not as dividends, despite some use of the word dividends to describe the cash distributed; and don't be fooled when they are called preferred shares - the dividends are interest for tax purposes), which is taxed at the highest rate. I don't know for sure but I would hope and expect that a MIC could also reside within a LIRA or an LRIF but that would need checking out.
Some MICs want or allow you to hold the MIC investment withing your own self-directed RRSP. Others want you to set up an RRSP with a connected financial services provider.
Minimum Investment Amount
This may be the key practical point that blocks the average investor from getting into a MIC. The lowest minimum investment I found was $5,000 at ACIC and that only for a non-registered account. There is the publicly traded Quest Capital whose shares sell for about $2.05-$2.10, so you can get in for less ... but is it a good MIC?
The MIC's Place in a Portfolio
A MIC is fixed income. But unlike a bond, the value of your principal stays the same. If you invest $10,000, that's what you get back when you redeem shares and cash out. Bond value will fluctuate with interest rates, which affects their return. The MICs return is only the interest. As for other asset classes, like real estate investment trusts (REITs), various types of equities, real return bonds (RRBs) and short term cash (i.e. things like T-bills and GICs), the MIC is most like latter - little or no variation in principal value or in returns. There is more risk however, due to the nature of the mortgage investment.
I would suspect there is little correlation of returns with any other asset class, which means that MICs offer the happy prospect of adding true diversification to a portfolio by either reducing overall variability or increasing returns, or a bit of both.
Being ever the compromiser, I would therefore tend to replace some of my cash-type holdings and some of my corporate bonds, perhaps up to 10% of my overall portfolio.
For others like retired folks who want a steady, high income stream and don't mind the tax rate, MICs may be a good vehicle.
As far as ACIC goes, I cannot offer an opinion since I didn't feel like giving them my name and details just to have a look at their prospectus and financial statements and get into their guts a bit more.
MICs are definitely worth consideration and will get a close look when I do my portfolio review shortly.
Thanks for the great question.
"I'm interested in investing in real estate, but the market is pretty volatile right now and I don't want to put a large lump some of money into real estate at this point but still would like to 'play' the market. What do you think about mortgage investment corporations like ACIC? I found their website (http://www.acicinvestor.ca)? Could you do a review of ACIC or products like this?"
I must admit to not knowing about MICs before now, so I am approaching this cautiously and don't pretend to have a final answer or a blanket answer that applies to every MIC. A due diligence process is very much in order.
What is a Mortgage Investment Corporation? (good place to start, huh?)
A MIC is a corporate structure recognized in Canada's Income Tax Act (thus the use of MIC as a proper noun) that enables small investors to pool funds and invest in (i.e. act as a lender of) mortgages. The Act allows the MIC itself to be exempt from income tax as long as it passes along all its income to the investors, in whose hands it is, of course, taxed.
A picture is worth a thousand words (perhaps more, the way I write). Here is a good summary of the flow of various funds into and out of a MIC from one of these outfits Magenta Mortgage Corporation.
Just below the diagram on the Magenta explanatory webpage is a succinct summary of the Income Tax rules about what a MIC can and cannot do. Or you can try deciphering the ITA section 130.1 yourself. Here is Magenta's summary:
(btw, to me the availability on a company's website of clear and complete information is a good sign, though by no means a final answer)
MICs go back to the 1970s, that alone being a favourable point. If their format/structure itself were bad, they should have disappeared, right?
MICs are thus a legitimate investment vehicle, though naturally that doesn't mean every MIC will be successful and a good place to invest money.
The Prospectus and Audited Financial Statements
MICs are securities and as such, are bound by the securities regulator in its home province to send a prospectus to all potential investors. The Prospectus details everything about the MIC and is essential reading. Most of the MIC websites are coy and require you to give them your name and contact info before giving you a copy (no doubt so they can do some selling). One exception is Westboro, whose very readable Prospectus is on this Documents page.
The audited financial statements tell you how the company is succeeding, how much profit it is making, how big and diversified is its lending, how much leverage it is using, percent of loans in arrears and so on. It's necessary and highly useful reading to understand a potential investment.
Each to Its Niche
Within the tax rules, MICs vary quite a lot in the types of loans and borrowers they focus on. Among the possibilities: first mortgages, second mortgages, multi-unit residential buildings, construction loans, individuals or companies, commercial properties (up to the limit), people the banks won't lend to like poor credits, bankrupts, self-employed, undeclared income
Rates of Return
This is the big carrot, naturally. The historical rates claimed went from a minimum of 8% a year up to c. 12%! That's impressive! This is cold, hard cash either paid out, either monthly, quarterly or semi-annually, as a cheque / deposit into your bank account or reinvested. That's pretty darn good considering that these cash distributions have been steady for years. For instance, check out Cove MIC's table of its returns , which averaged 10.53% since 1999.
What are the Risks?
Check out the sensible questions that the OSC suggests you ask in this information page on the Westboro site.
Fraud - less likely since a MIC must produce audited financial statements every year. Check out the financial statements and see if the MIC is subject to any lawsuits.
Losing MIC Status - failing to keep within the Income Tax Act rules would cause the MIC to have its income taxed before being distributed to shareholders and would lower returns considerably
Manager (In)competence - the success of the MIC depends to a critical degree on the experience, expertise, judgement and good faith of the managers. Do they know the business, do they know their market and do they have a record of success? Can and will they find a steady flow of new mortgages to keep the income flowing in? Think of it as a job interview.
Leveraging - the rules allow the MIC to borrow money but some do more than others. The spread between the lower rate of the MIC's borrowing and the lending will boost the ability to generate shareholder returns but it also increases risk. The audited financial statements will show how much the MIC has borrowed. The prospectus will say if the MIC has a policy to cap what it will borrow. Many of the MICs are fairly short term lenders - 24 months or so - which reduces interest rate risk and should allow the MIC to continually readjust its lending rate to match increases or decreases in general interest rates and keep the spread between its lending and its bank borrowing rates constant.
Default on Mortgages - mortgage borrowers may not pay back what they owe; all the MICs claim to be very careful about who they lend to but some are explicitly in a niche where the banks don't tread or in second mortgages. The MIC gets a higher interest rate but that is associated with the higher risk. At least one MIC - Cooper Pacific - has two funds, one that lends out first mortgages with an 8% return and another with second mortgages with a 12% return. "You takes your picks and you takes your chances."
Market Downturn / Geographical concentration - some MICs, the smaller ones, are concentrated in very limited markets, like Westboro in Ottawa or Edgeworth in northern Alberta. Ottawa is a stable market but what happens to Edgeworth if the oil industry cools off considerably, as it has done in the past? A general economic recession would everywhere increase the number of borrowers having difficulty to repay.
Liquidity (Can't sell) - the basic method to get your money back is not a sale in some market since MICs are not (with one exception, I found) publicly quoted companies but for the MIC to redeem the shares; the restrictions vary by MIC, whether funds can be sold / withdrawn immediately, or with 30/60/90 days notice; for smaller MICs, the Income Tax Act restriction that each MIC must have at least 20 shareholders might come into play;
A Partial List of MICs - there seem to be a lot of these around
- All Canadian Investment Corp (ACIC) - lends mostly in western Canada on multi-unit residential and commercial mortgages; min $5k investment / $20 k in RRSP (2% fee if redeemed in less than 2 yrs)
- CareVest Capital Inc. - lends in Ontario and western Canada; residential and commercial mortgages; founded 1994; $400 million in assets; 4000 investors
- Cooper Pacific Mortgage Investment Corporation - western Canada; founded 1994; 1000 investors; interim mortgage and construction finance; min $25k; monthly dividends
- Cove Mortgage Investment Corporation - BC; founded 1976; $42 million in assets
- Dominion Properties - Edmonton;
- Edgeworth Mortgage Investment Corporation - northern Alberta; recently founded
- First Island - BC and Alberta mortgages only; founded 1973; $155 million in assets
- Magenta Mortgage Corporation - Ottawa and eastern Ontario, 14 years in operation
- Sun Country MIC - western Canada; founded 2001
- TGL Mortgage Investment Corporation - Alberta; "high yield" mortgages
- Quest Capital Corp - unusually, a public company quoted on the TSX (symbol QC)
- Westboro Mortgage Investment Corporation - Ottawa; founded 2006; min $100k investment; aim to have $3m under investment by 2008; interesting discussion of their clientele and niche under How is it all possible
Taxes and Which Account to Hold the MIC Investment
A registered account such as an RRSP or a RRIF is the natural place for a MIC investment since it will generate all its income only as interest (and not as dividends, despite some use of the word dividends to describe the cash distributed; and don't be fooled when they are called preferred shares - the dividends are interest for tax purposes), which is taxed at the highest rate. I don't know for sure but I would hope and expect that a MIC could also reside within a LIRA or an LRIF but that would need checking out.
Some MICs want or allow you to hold the MIC investment withing your own self-directed RRSP. Others want you to set up an RRSP with a connected financial services provider.
Minimum Investment Amount
This may be the key practical point that blocks the average investor from getting into a MIC. The lowest minimum investment I found was $5,000 at ACIC and that only for a non-registered account. There is the publicly traded Quest Capital whose shares sell for about $2.05-$2.10, so you can get in for less ... but is it a good MIC?
The MIC's Place in a Portfolio
A MIC is fixed income. But unlike a bond, the value of your principal stays the same. If you invest $10,000, that's what you get back when you redeem shares and cash out. Bond value will fluctuate with interest rates, which affects their return. The MICs return is only the interest. As for other asset classes, like real estate investment trusts (REITs), various types of equities, real return bonds (RRBs) and short term cash (i.e. things like T-bills and GICs), the MIC is most like latter - little or no variation in principal value or in returns. There is more risk however, due to the nature of the mortgage investment.
I would suspect there is little correlation of returns with any other asset class, which means that MICs offer the happy prospect of adding true diversification to a portfolio by either reducing overall variability or increasing returns, or a bit of both.
Being ever the compromiser, I would therefore tend to replace some of my cash-type holdings and some of my corporate bonds, perhaps up to 10% of my overall portfolio.
For others like retired folks who want a steady, high income stream and don't mind the tax rate, MICs may be a good vehicle.
As far as ACIC goes, I cannot offer an opinion since I didn't feel like giving them my name and details just to have a look at their prospectus and financial statements and get into their guts a bit more.
MICs are definitely worth consideration and will get a close look when I do my portfolio review shortly.
Thanks for the great question.
Wednesday, 7 May 2008
Manulife One: a Mortgage-Banking Combi Product to Like
So often one comes across financial products that sound good in principle but are not good value for money. It looks to me that Manulife's ONE Account is a winner that every aspiring homeowner should have a good look at. Back in 2007, Million Dollar Journey did a review of Manulife One and generally seemed to like it, though not as much as me.
How It Works: The account combines a mortgage with a normal chequing and savings bank account. Every day, Manulife sums the positive amount on deposit on the bank side with the negative amount in the mortgage to arrive at a net amount borrowed, and then calculates interest at the mortgage rate on the net amount. There is no interest paid on the savings while the mortgage is not yet paid off and the daily balance is negative. Meanwhile the bank account can be used like any normal chequing account to pay bills, write cheques, withdraw cash at ATMs, the whole bit. If you ever suddenly need to spend extra, and go overdrawn, that is possible too, up to 90% of the appraised value of your home according to Manulife.
As an aside it is surprising that these types of accounts are not more prevalent in Canada. In the UK they have been around for many years and are commonly known as offset mortgages or current account mortgages (because the savings offsets part of the debt).
The Key - Staying Positive: The account works best when there is a positive bank balance however small and variable, because this accelerates paying off the mortgage. It does so not just by a bit but by a surprisingly enormous amount, in many cases years off the time it takes to pay off the mortgage. Manulife has a calculator on its site in which you can plug in your own numbers to see by how many years and how much interest is saved. If you have your pay deposited into the account and then use it till the next pay for normal household spending, then there could/should be a net balance throughout, which reduces the net debt and the interest charged.
Earning a Higher Rate with Savings: One of the neatest aspects is how a positive bank balance works in your favour. Instead of having your money sitting earning around 0.5%, the going rate these days on many chequing accounts, and which is taxable (perhaps taking another third off that, making it more or less zero), it saves interest at the much higher mortgage rate, currently around 4.75% for variable mortgages, which is after-tax dollars by the way. That's the equivalent of earning 4.75% on your bank balance. Getting no interest paid to you on the bank balance even saves the hassle of reporting the puny interest to the CRA of your annual tax return.
Multiple Applications: Manulife suggests several other uses of the account
Value for Money: All these benefits would be lost if the pricing was bad, the mortgage rate too high, the options too restrictive or the account fees uncompetitive. Happily, Manulife's pricing seems to be very comparable and competitive all round.
Mortgage rate - the open variable rate at prime 4.75% matches the big lenders and the 1 year seems to be the lowest around (see table from Cannex that I downloaded today)
Banking fees - the $14/month fee looks roughly comparable to big bank chequing options e.g. Bank of Montreal's Performance Plan charges $13.95 per month unless one keeps a minimum $2500 balance, which earns a princely 0.5% per year; Scotiabank's PowerChequing is better at $3.95 month unless a $2000 minimum balance is maintained, which earns exactly 0%. Nevertheless, even at $10 / month extra, the thousands saved in mortgage interest more than makes up for it.
Downside - Debt Temptation: The only downside I can see is that anyone with a tendency to get too easily tempted to use the borrowing margin and increase debt instead of paying down the mortgage will find this account too convenient and easy to abuse.
Other than that, I say kudos to Manulife for a smart, flexible and good value product that enables Canadians to pay down their mortgage much faster and with money that they are actually using for their everyday expenditures.
How It Works: The account combines a mortgage with a normal chequing and savings bank account. Every day, Manulife sums the positive amount on deposit on the bank side with the negative amount in the mortgage to arrive at a net amount borrowed, and then calculates interest at the mortgage rate on the net amount. There is no interest paid on the savings while the mortgage is not yet paid off and the daily balance is negative. Meanwhile the bank account can be used like any normal chequing account to pay bills, write cheques, withdraw cash at ATMs, the whole bit. If you ever suddenly need to spend extra, and go overdrawn, that is possible too, up to 90% of the appraised value of your home according to Manulife.
As an aside it is surprising that these types of accounts are not more prevalent in Canada. In the UK they have been around for many years and are commonly known as offset mortgages or current account mortgages (because the savings offsets part of the debt).
The Key - Staying Positive: The account works best when there is a positive bank balance however small and variable, because this accelerates paying off the mortgage. It does so not just by a bit but by a surprisingly enormous amount, in many cases years off the time it takes to pay off the mortgage. Manulife has a calculator on its site in which you can plug in your own numbers to see by how many years and how much interest is saved. If you have your pay deposited into the account and then use it till the next pay for normal household spending, then there could/should be a net balance throughout, which reduces the net debt and the interest charged.
Earning a Higher Rate with Savings: One of the neatest aspects is how a positive bank balance works in your favour. Instead of having your money sitting earning around 0.5%, the going rate these days on many chequing accounts, and which is taxable (perhaps taking another third off that, making it more or less zero), it saves interest at the much higher mortgage rate, currently around 4.75% for variable mortgages, which is after-tax dollars by the way. That's the equivalent of earning 4.75% on your bank balance. Getting no interest paid to you on the bank balance even saves the hassle of reporting the puny interest to the CRA of your annual tax return.
Multiple Applications: Manulife suggests several other uses of the account
- debt consolidation and reduction of net interest costs by moving higher rate credit card debt, car loans, personal loans into borrowing against the secured debt of the mortgage, which is the cheapest rate available
- access to home equity or reverse mortgage replacement for retired people
- emergency savings fund instead of keeping this in a savings account, term deposit or GIC, which will earn less than the interest saved on the mortgage
Value for Money: All these benefits would be lost if the pricing was bad, the mortgage rate too high, the options too restrictive or the account fees uncompetitive. Happily, Manulife's pricing seems to be very comparable and competitive all round.
Mortgage rate - the open variable rate at prime 4.75% matches the big lenders and the 1 year seems to be the lowest around (see table from Cannex that I downloaded today)
Banking fees - the $14/month fee looks roughly comparable to big bank chequing options e.g. Bank of Montreal's Performance Plan charges $13.95 per month unless one keeps a minimum $2500 balance, which earns a princely 0.5% per year; Scotiabank's PowerChequing is better at $3.95 month unless a $2000 minimum balance is maintained, which earns exactly 0%. Nevertheless, even at $10 / month extra, the thousands saved in mortgage interest more than makes up for it.
Downside - Debt Temptation: The only downside I can see is that anyone with a tendency to get too easily tempted to use the borrowing margin and increase debt instead of paying down the mortgage will find this account too convenient and easy to abuse.
Other than that, I say kudos to Manulife for a smart, flexible and good value product that enables Canadians to pay down their mortgage much faster and with money that they are actually using for their everyday expenditures.
Wednesday, 7 November 2007
An Intriguing Free Book to Download plus a UK Mortgage Primer
Check out the Mortgages Exposed web page for access to a free download of the book In My Opinion by Michael Kelly, a successful retired entrepreneur. I've just skimmed through a few pages so don't have a firm opinion of it, but first impression is good: it looks quite readable and hey, it's free and it's the complete 110 page tome, not just excerpts. The style looks breezy and light-hearted, advice on what the grandfather has learned and wants to pass on to his grandchildren. The topics he covers includes some financial and budgeting advice, along with relationship advice (from a guy, no less!), education, children, running a business, being an entrepreneur, gambling and even death.
Here's a sample quote I can relate to: "You need not give self-created wealth away. Spend it first. But if you must give it away, do it when you are still alive and can directly observe and enjoy the happiness it might hopefully bring."
Another part of the website has an excellent series on mortgages as done in the UK, actually another short book that can be downloaded with working spreadsheets. The explanation starts from scratch, assuming little or no investment knowledge, and works through the various types of mortgages and related topics - fixed rate, variable rate, interest only, lifetime/revers/shared appreciation, buy-to-let, gearing, buy or rent - in short all the common situations with tips and tools for comparing and deciding between alternatives. There are a series of downloadable spreadsheets to work your own calculations, perfect for DIY types. There is a little bit of theory and lots of practical guidance. The perspective of someone who spent 30 years in the business shows through, who made his money, retired and is now giving back his knowledge to anyone who wants it. Overall, a gem of a resource.
Here's a sample quote I can relate to: "You need not give self-created wealth away. Spend it first. But if you must give it away, do it when you are still alive and can directly observe and enjoy the happiness it might hopefully bring."
Another part of the website has an excellent series on mortgages as done in the UK, actually another short book that can be downloaded with working spreadsheets. The explanation starts from scratch, assuming little or no investment knowledge, and works through the various types of mortgages and related topics - fixed rate, variable rate, interest only, lifetime/revers/shared appreciation, buy-to-let, gearing, buy or rent - in short all the common situations with tips and tools for comparing and deciding between alternatives. There are a series of downloadable spreadsheets to work your own calculations, perfect for DIY types. There is a little bit of theory and lots of practical guidance. The perspective of someone who spent 30 years in the business shows through, who made his money, retired and is now giving back his knowledge to anyone who wants it. Overall, a gem of a resource.
Sunday, 28 October 2007
The Lowdown on the Most Popular UK Financial Comparison Websites
Just came across a fabulous report - Compare and Contrast: How the UK Comparison Website Market is Serving Financial Consumers - released by the Resolution Foundation on October 11, 2007.
The report assesses the eight most popular financial comparison websites serving the UK market along with that of the regulatory agency itself, Financial Services Authority:
Though it specifically states that the aim of the study is not to determine which is the best, the detailed and impartial comparisons give a consumer a pretty good idea of which one is good or not so good in which area. I really like that the comparison dimensions used in the study are all of critical importance to a consumer: accuracy, completeness and impartiality of the information provided, explanation of technical terms, relevance of fact finding to provide an accurate quote, consumer ease and flexibility in searching and sorting results of the website and facility to contact the providers directly. Interesting factoid: not all providers participate in the comparison websites - Royal Bank of Scotland does not, per the report.
The report does conclude, however, ''there was no “all round best performer”''. It does say the websites perform a very valuable service (i.e. they are not slimy, evil things to be avoided), a re-assuring statement since so many people use them and since the number and complexity of financial choices keeps rising. In fact, some of the sites were found to provide better information on secured loans than the providers themselves! The main criticism is that some of the websites don't properly disclose when their editor's choice or best buys are actually the result of commercial sponsor ties and not the objective best value product.
Here's my summary (caveat emptor, it may not be 100% the way you would read it or the way the authors would say it) of the results:
1) Accuracy of product info - the best: moneysupermarket and MoneyExpert; FSA and uSwitch the worst
2) Accuracy of product quotes - the best: MoneyExpert and Moneyextra; Kelkoo is awful
3) Completeness of info - varies between products more than sites; info on mortgages ''generally poor''; Kelkoo weak across the board
4) Relevance of fact finding - generally poor across all sites for mortgages, credit cards and savings; Motley Fool, MoneyExpert and Kelkoo miss key info in every product
5) Terms explained - moneysupermarket best due to forums where people can ask experts; Motley Fool, uSwitch and FSA explain all terms while Kelkoo explained none and has no product guides
6) Consumer experience - MoneyExpert the best by a lot; Kelkoo is c-r-a-p
7) Flexibility - Moneynet the best, Motley Fool not far behind; MoneyExpert the pits, while moneysupermarket is not much better
8) Market coverage - no one wins but Kelkoo loses with ''low coverage''
9) Impartiality - Motley Fool and uSwitch exemplary by being ''frank and open''; moneysupermarket, Moneynet, MoneyExpert and Kelkoo are completely unforthcoming about their editor's choices as being based on commercial relationships
10) Ability to act on info - Motley Fool, MoneyExpert and FSA are the leaders; the others all only give contact info for affiliated providers (is it so hard to look them up yourself if you have their name?)
About my only overall conclusion is to not bother with Kelkoo; it scores lowest on too many dimensions and is really good in none.
Now that you be aware, you can also beware.
Well done to the Resolution Foundation, an organisation devoted to improving the financial capabilities of the low and medium income person.
Update October 29 - we used moneysupermarket today to get car insurance quotes and found one that has saved us several hundred pounds for the coming year. It was very slick, we were even able to complete the deal directly with the provider by phone after generating the quote online using a quote. There were no less than 26 different quotes and there would have been more except a bunch of providers don't want to insure recently arrived Canadians. Very impressive, took about 30 minutes from start to finish.
The report assesses the eight most popular financial comparison websites serving the UK market along with that of the regulatory agency itself, Financial Services Authority:
- www.moneysupermarket.com
- www.fool.co.uk
- www.uswitch.com
- www.moneynet.co.uk
- www.moneyexpert.com
- www.moneyextra.com
- www.moneyfacts.co.uk
- www.kelkoo.co.uk
- www.fsa.gov.uk/tables
- www.themoneypages.com - not on the report list but another one I think is worth a look
Though it specifically states that the aim of the study is not to determine which is the best, the detailed and impartial comparisons give a consumer a pretty good idea of which one is good or not so good in which area. I really like that the comparison dimensions used in the study are all of critical importance to a consumer: accuracy, completeness and impartiality of the information provided, explanation of technical terms, relevance of fact finding to provide an accurate quote, consumer ease and flexibility in searching and sorting results of the website and facility to contact the providers directly. Interesting factoid: not all providers participate in the comparison websites - Royal Bank of Scotland does not, per the report.
The report does conclude, however, ''there was no “all round best performer”''. It does say the websites perform a very valuable service (i.e. they are not slimy, evil things to be avoided), a re-assuring statement since so many people use them and since the number and complexity of financial choices keeps rising. In fact, some of the sites were found to provide better information on secured loans than the providers themselves! The main criticism is that some of the websites don't properly disclose when their editor's choice or best buys are actually the result of commercial sponsor ties and not the objective best value product.
Here's my summary (caveat emptor, it may not be 100% the way you would read it or the way the authors would say it) of the results:
1) Accuracy of product info - the best: moneysupermarket and MoneyExpert; FSA and uSwitch the worst
2) Accuracy of product quotes - the best: MoneyExpert and Moneyextra; Kelkoo is awful
3) Completeness of info - varies between products more than sites; info on mortgages ''generally poor''; Kelkoo weak across the board
4) Relevance of fact finding - generally poor across all sites for mortgages, credit cards and savings; Motley Fool, MoneyExpert and Kelkoo miss key info in every product
5) Terms explained - moneysupermarket best due to forums where people can ask experts; Motley Fool, uSwitch and FSA explain all terms while Kelkoo explained none and has no product guides
6) Consumer experience - MoneyExpert the best by a lot; Kelkoo is c-r-a-p
7) Flexibility - Moneynet the best, Motley Fool not far behind; MoneyExpert the pits, while moneysupermarket is not much better
8) Market coverage - no one wins but Kelkoo loses with ''low coverage''
9) Impartiality - Motley Fool and uSwitch exemplary by being ''frank and open''; moneysupermarket, Moneynet, MoneyExpert and Kelkoo are completely unforthcoming about their editor's choices as being based on commercial relationships
10) Ability to act on info - Motley Fool, MoneyExpert and FSA are the leaders; the others all only give contact info for affiliated providers (is it so hard to look them up yourself if you have their name?)
About my only overall conclusion is to not bother with Kelkoo; it scores lowest on too many dimensions and is really good in none.
Now that you be aware, you can also beware.
Well done to the Resolution Foundation, an organisation devoted to improving the financial capabilities of the low and medium income person.
Update October 29 - we used moneysupermarket today to get car insurance quotes and found one that has saved us several hundred pounds for the coming year. It was very slick, we were even able to complete the deal directly with the provider by phone after generating the quote online using a quote. There were no less than 26 different quotes and there would have been more except a bunch of providers don't want to insure recently arrived Canadians. Very impressive, took about 30 minutes from start to finish.
Monday, 21 May 2007
Book Review: Wealth Logic by Moshe Milevsky
This is another of York University Finance professor Moshe Milevsky's "Logic" books (previously reviewed Money Logic and soon to be reviewed Insurance Logic) about everyday financial, investing, purchasing and spending choices facing ordinary people. Unless you happen to be a finance prof, it's likely there is something of interest for you in this book. It comprises 40 chapters, of 2 to 7 pages each, on a wide, eclectic range of topics, all somehow connected with personal finances, such as insurance, taxes, mortgages, mutual funds, RRSPs, retirement, car loans vs leasing, investing, diversification, risk, pensions, annuities and more. Each chapter addresses a narrow issue or a choice and gives either a definitive answer when there is one, or guidance on how to make the correct choice, when personal circumstances can change the answer. Conveniently, each chapter gives a one or two sentence summary conclusion - e.g. chapter 10 on What is Financial Risk? concludes: "The lesson in all of this is that only a large and well diversified portfolio of stocks can truly grow in the long run. Otherwise, you are simply gambling." Most chapters have one or two simple tables or graphs that present the result of calculations to back up the conclusions. Milevsky presents the rationale, the "logic" and the conclusions, not any complicated math. He does provide some references and a two-page bibliography for further reading. There is no index, something I would normally consider to be a major deficiency but the nature of the book makes an index un-necessary.
The book is accessible to anyone who has basic knowledge of practical money affairs. Milevsky is good at defining terms for the uninitiated. For example, in "Mortgages: Fixed or Floating Rate?", there is an assumption that a reader generally knows that a mortgage is a loan to buy a house, but Milevsky takes the trouble to write, "With a fixed-rate mortgage, your monthly payments are pre-determined and known in advance ...". The test of accessibility for me is that those topics with which I was not familiar did not cause me to scratch my head wondering how his argument / discussion had got to where it led. Maybe it's his teaching background but it is a valuable writing quality for an author addressing a general audience. The writing style is casual and conversational but not cloying or condescending. It's a good book to read in short chunks of 10-20 minutes, on the bus commuting, waiting at the pool during kids' lessons, during commercial breaks while the Ottawa Senators are winning the Stanley Cup for the first time etc. The whole book is 237 pages.
A very small amount of the content suffers from being out of date, for instance, the rant against the foreign content cap in RRSPs that is no longer relevant since the federal government finally removed the restriction a few years ago. Another is the negotiating spreads on mortgages by Canadian banks - is it still one percent reduction one should demand/expect or have the years since 2001 widened or narrowed the spread?
There is some overlap between Money Logic and this book - topics like diversification, risk, borrowing to lend, dollar cost averaging appear in both. Money Logic treats fewer topics in much more length and depth, doing a better job demonstrating the fallacy of dollar-cost averaging, for instance, though of course the conclusion is the same. So, if you decide you can trust Milevsky and don't need all the proof and only want to buy one book, I'd suggest Wealth Logic. I don't regret buying both, since there is real non-repeated value in Money Logic too.
In short, buy this book ($15 to $20 at the on-line retailers) and keep it around till you need to have a quick look at what to do whenever a financial decision comes up. Milevsky may have your answer in his 40 topics and you can be sure it is well thought out and neutral. Five stars out of five is my rating.
Buy this book at
chapters.indigo.ca
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