Your Money Book

I had a great phone call last week from a radio listener. After we talked, I realized there were a bunch of things in the call that are huge lessons for all of us:

The caller shared that she and her husband were two years away from paying off their mortgage. As I was heading for the fridge to pull out some champagne, she volunteered that they also had a $100,000 line of credit.

Stop! What? OK, let’s not kid each other here. That means they’re a long way from a mortgage burning party. The line of credit is secured against their home – it counts! Kind of like saying we’re debt free except that $8,000 Visa balance. Nice try…

This couple is also planning to retire in a few years. But that means no more paycheques and a big switch to a fixed income. What happens then? Most of us drop back to paying interest only on these horrible lines of credit and that means it’ll never be paid off!

Those circumstances describe a large number of people in a very similar situation, so let’s look at three points:
-First – combine the first mortgage almost done with the line of credit. TODAY! Credit lines are variable rate and change every month. The next rate waves are up up and away. Take the amount you’re paying on the two right now and put it into any on-line calculator. In this case, it’s about $120,000. Take a fixed rate less ¾ percent and plug in the current payment to get the term. In other words, don’t take a 10 year mortgage and drop the payments. Take the payment and make the term work.

-Make that payment as high as you can possibly afford and that should give you your retirement date. Because then you’ll be ahead of the game $1500 or $2000.

-Have the payment and term before going to your credit union or bank. Don’t let someone tell you, “well, you should add a cushion of $10,000” or “you should stretch the mortgage so you have some cushion.” Bullcrap – you’re being sold so get out or tell them to get real: on a longer term or more borrowing. That’s NOT what you want and you’re in control!

A recent survey conducted by Decima Research asked non-homeowners under age 34 for some savings and home purchase feedback.

Just like paying off our debts, the survey shows a real disconnect between the reality of what’s happening and the dreams of what the respondents would like. Here’s what I mean:

The survey involved over 1,200 people aged 21 to 34 who had aspirations to purchase a home in the near future. Of those, nearly a third still live at home to save for a down-payment. But even in the 31 to 34 year group, 22% in Toronto and 17% in Calgary and Halifax, are still living with their parents.

The response was that they’d likely be purchasing a home in the next few years – yet they’d only been saving for a down-payment for an average of 1.6 years. And what are they saving? Less than 13% of their income – even though they’re still living at home.

The respondents said they’d likely save more than 15% for a down payment and that it’ll take less than four more years to save all that. However, this shows a real disconnect between what they’d like to do and what they’re actually doing, in real terms, to save a ton of money.

The savings aren’t happening, even when this age group has a real focused and tangible goal. In a US survey released last week, the pollsters asked 18 to 21 year olds whether they’d start a savings plan of some kind in 2007. Over 90% of them said yes – but when that’s compared to the survey the year before – less than 20% actually did.

It’s not just Generation Y, but don’t all of us have real trouble finding a way to save? Why? Because for this group, it’s likely impossible due to student loans and their credit cards. But for the rest of us, isn’t it also our current debts that are killing our dreams for the future?

Actions speak louder than words and just having good intentions doesn’t make anything happen. It takes a big goal, a strong desire, a specific financial plan and payroll deduction or the savings coming right out of our bank account. It’s called paying ourselves first. But for many of us, just paying down our debts much faster is also a way to generate huge savings. Savings in interest and lots of payments that we now won’t have to pay to make someone else rich.

This morning, I’m not making a shot at the mega-bank managers, but just want to look at their marketing department and advertisements.

Scotiabank says you’re richer than you think. Now THAT is something I like to hear. But I believe that kind of optimism leads us into debt and most people are actually poorer than they think with not enough retirement savings or even an emergency account. Now if they want to make me richer, how about a lower credit card rate and dropping some of those service charges and fees? And their ad on the ATM machines say: Get ahead with good borrowing choices. Now that’s a no-brainer oxymoron isn’t it? If I’m richer than I think, how come there are so many ads wanting me to borrow? Does that help me get richer?

The Royal has ads that say they have the answers to questions I’ll have next week. Oh really? One says: yes, Gerry in Georgtown, you can afford that variable rate mortgage. Hmm…you have no clue who I am, what I make or what my credit score is, but you’re telling me I’m approved AND that I should get a variable rate? That sounds exactly like what happened in the U.S with their mortgage mess, adjustable mortgages and everyone qualified, doesn’t it?

Posters all over the BMO branches promote shoulda, woulda, coulda with the line: you can, with a homeowner readiline. Should, could go into debt with a line of credit secured by their clients’ home? How about should save, could get out of debt and WOULD if they wouldn’t market debt so heavily!

The CIBC says deal with them “for what matters.” But what matters to you and me versus the bank is probably quite different. That’s their slogan and now they’re promoting getting a free fridge. Yes, if you move your mortgage to them AND get a line of credit – so up your home debt beyond just your mortgage they’ll give you a major appliance. I can assure you if I were to walk you through the math it’s NOT a free appliance, honest!
The TD has a cash-back mortgage. Sign a 7-year loan and they’ll give me 7% cash back. So I can walk out with $14,000 if I sign a 7-year mortgage for $200,000? If that sounds like free money you need to give your head a shake because it’s a much higher rate.

I’ll put the math on the web site under tip of the week, but the bottom line is that your payment on this cash-back mortgage will now be $201 higher and at the end of that seven years, your balance will also be over $5,000 higher. With some simple math, that $14,000 free money works out to paying just under 14% for it. Not exactly free because a line of credit would cost you about a third of that interest.

$200,000 mortgage on a 7-year fixed term:
Cash-back rate is 7.95 so the payment will be $1,520
Balance at the end of 7 years: $175,865
Special rate mortgage would be 6.33% at $1,319
With a balance at the end of $170,805
So it’s $201 more a month times 7 years times 12 months a year or $16,884 more
And the balance is higher by $5,060.

That makes it $5,060 higher balance + $16,884 more in payments for $21,994 to get the $14000 up front, translating to a 13.85% interest charge on that money.

But here’s the winner of the most stupid financing ad: It’s an investment firm that wants you to re-mortgage your home so you can invest with them. And their tag line in the ad: “Don’t let all your equity stagnate.” Stagnate? Sounds like three week old bananas or moldy bread. I thought equity was a good thing and the goal was to get the biggest equity in the world – that’s called a paid off home. Here’s some firm doing whatever they can to have to finance more and more.

THAT qualifies for the stupid award – hands down!

We talked, last year about the downside of leasing for the vast majority of individuals. A lease is like renting a vehicle in that you’re paying for only three quarters or so of the price and at the end have an option, or residual, to buy the left-over balance out.

In credit and consumer tips jargon it’s called a fleece. At the end of the lease it is most likely that you will owe more than the vehicle is worth and will just need to walk away after having made all those payments.

For those people leasing an SUV or large truck, they did just dodge a big bullet – sort of.

With the high gas prices, resale values of SUVs dropped between 13 and 20 percent just between March and May, according to the largest vehicle wholesaler in the U.S.

So if own an SUV, the value has plummeted. At the end of the lease, the balance will be massively higher than the value of the vehicle and you’ll be walking away after all those payments.

And it’s getting worse, which is why GMAC just announced the end of last week they’ll no longer be offering any cool rate deals on leases in Canada, period. They just aren’t interested in promoting more leasing so they can take a huge bath three or four years from now – and that’s a real blessing, if the truth were known.

Why? When you drop back your vehicle, the manufacturer has to eat the loss and that’ll go on for years with all those leased vehicles out there. CNW Research estimates this year, the loss will be almost $5 billion, and more than $10 billion over the next few years.

But you also need two important heads-up:

If you’re returning a lease, there’ll be a lot more detailed inspection to see if they can get you to pay some repairs, etc. to avoid a bigger loss on the disposal. Please! Take some digital camera pictures of the lease you’re returning and do not turn over the keys without a written and signed inspection form from the dealer.

And: If you want some good deals and you absolutely have to finance, these lease returns have to be sold: So there’s already 2.9% or 3.9% finance deals on used 2 to 3 year old vehicles. Right now it’s already happening with BMW and Volkswagen, and they’re legit deals, since they can’t melt these lease return units down.