My Two Cents on the Canadian Penny

Today, the Canadian government has stopped the production of the penny, and started their initiative to phase out the penny.

"The decision to phase out the penny was due to its excessive and rising cost of production relative to face value, the increased accumulation of pennies by Canadians in their households, environmental considerations, and the significant handling costs the penny imposes on retailers, financial institutions and the economy in general.

The estimated savings for taxpayers from phasing out the penny is $11 million a year."

I did a bit of research, to see how exactly they plan to do this, and these are the facts:

- production of the penny will seize

- retailers are urged to round up or down to the nearest nickel when completing cash transactions

- cheque, debit, and credit transactions will continue to charge to the penny, not having to round up

- businesses can choose to, or not to accept pennies

- the penny will retain it's value indefinitely

So, is it just me, or are there things that just don't quite fit?  The process seems a little ambiguous to me.  If you pay debit, you still pay to the penny, but if you pay cash, you have to round up or down.  In my opinion, this will skew business ledgers, inventory balancing, and general budgeting all around.  The "rounding guide" that the Canadian government put out is somewhat reminiscent of the grade school lessons we all learned years ago.  It's basic to say the least, and the biggest gap you can pay more or less for is $0.02.  It's not much, and for the average person, you'll at most lose $10 if you are rounded up for 500 cash transactions.  But, if you are a business that completes a couple of thousand transactions per day (gas station, grocery store, Tim Horton's, etc...) that could affect your financial statements by tens of thousands of dollars.

Have you heard about that lawsuit agains Subway in the US? Well, they have allegedly been producing 11" subs instead of 12".  First, you think "What's the big deal, it's one inch".  But, consider that this means that every twelfth sub is technically made at 100% profit, because it's paid for by the inch shortage of it's predecessors.  There are approximately 35,000 Subway locations worldwide, and on average I think it's safe to say they sell roughly 5-600 subs per day.  So, that's about 6,387,500,000 subs per year, if you divide that by 12, that gives us 532,291,667 subs made at 100% profit every year, having been paid for by the inch shaved off of previous subs.  Obviously, this is based on a lot of assumptions.  

But what does this have to do with the penny in Canada?  My analogy is simple - it may not seem like a lot, but when you look at it in a grand scale, the two cents can add up, but where do they go?

my baby...

The Truth About 20% Down

Most homebuyers strive to save 20% down when looking to purchase.  Why? Because they can avoid the mandatory insurance premium when you put down less than 20%.  However, we are seeing more and more why this may not be the best choice for everyone.  How is that possible?  If I can get away with not paying insurance, why wouldn't that be the best bet for me?  Well, here are a couple of reasons why:

Rate:  Better rates are offered to 'high ratio' (purchases that have less than 20% down) clients.  At first glance, this is seemingly unfair - if I've saved enough money to put 20%, and need to borrow less, why are you penalizing me?  Well, look at it this way - your two friend Jim and Bob approach you and ask to borrow $1000; Jim is employed, and Bob is looking for work - whom would you feel more comfortable lending the money to?  Obviously, Jim, because you know he can pay you back.  When a high ratio client borrows from a lender, the mortgage must be insured, therefore there is no risk to the lender - whatever happens, they will get their money.  The client who has put 20% down is a greater risk to the lender than the one who puts less, so, in turn, they offer higher rates to mitigate that risk.

Property: When a mortgage is insured, the insurer (CMHC, Genworth or CG) not only assesses the applicant, but the property as well.  They are by far more stringent than the lender.  So, if you and your property are okay with the insurer, chances are, you are okay with the lender.  But, in the instance where you are putting 20% down, and are not insured, this property assessment is not done.  This doesn't mean that the lender doesn't do this, it just means that the bill for this gets turned over to you.  Appraisals are practically mandatory when buying with 20% down, and this usually comes up to about $300-$400.  Not a huge amount, but extra nonetheless.

Debt:  People often save 20% down, but still have balances on their credit cards or lines of credit.  I had a client the other day, who had saved $80,000 to buy a $400,000 home.  She had a loan that amounted to $15,000 and was paying $450/month for it.  When we did the math, it turned out that she was better off putting 15% down ($60,000), paying off her loan, and simply paying the small insurance premium.  We calculated the interest she was paying on her loan, and that amounted to more than the insurance premium.  Plus, it made more sense for her monthly budget as well.

This doesn't mean that you should never put 20% down - every situation is different.  However, look into your options thoroughly before you decide.  It's kind of the lesser of two evils and the greater of two goods.

Prefab Homes

Prefabricated homes (or, prefab homes) are homes that are created offsite, then shipped to the place of dwelling to be assembled.  They are more inexpensive because they are often mass produced, and require less materials and labour because they are manufactured offsite.  Though they are growing in popularity, the prefab home is not a new concept - they were introduced in the early1900's, and gained more popularity mid century across North America and Europe.  The craze has hit again as of late - though not in the form of Sears Catalog Homes anymore.  Ikea has had a line of prefab housing (Boklok) that is offered in Europe for the past 20 years, in which they offer apartment complexes, semis, townhouses, etc...  Go Green initiatives in the prefab world are also growing in popularity, which is optimal because you're able to get an inexpensive, environmentally friendly home delivered to you.  One of the companies who had received a lot of recognition and online buzz as of late is Toronto based Meka, which was the creation a local  designer, a Toronto entrepreneur, and a UofT Professor.  They created a prefab home made of a shipping container, which was 70% recycled material, and is shipped 95% assembled.

HARPER GOVERNMENT TAKES FURTHER ACTION TO STRENGTHEN CANADA’S HOUSING MARKET - What It Means

There's quite a buzz circulating today over Finance Minister Jim Flaherty's changes to government insured mortgages.  He noted that 

“Our Government stands behind the efforts of hard-working Canadian families to save by investing in their homes and their future,” said Minister Flaherty. “The adjustments we are making today will help them realize their goals, build on the previous measures we have introduced to keep the housing market strong, and help to ensure households do not become overextended. As just one example, the reductions to the maximum amortization period since 2008 would save a typical Canadian family with a $350,000 mortgage about $150,000 in borrowing costs over the life of that mortgage.”

The main changes that were implemented today are the following:
1. Maximum amortization for government insured mortgages reduced from 30 to 25 years.
2. Lower the maximum refinance amount from 85% to 80%
3. Re-adjust lending requirements for a GDS of 39% and a TDS of 44%.

So what do these new guidelines mean, and how do they affect us? Well, decreasing the maximum amortization - though it does mean buyers pay less interest - equates to higher monthly prices, which then challenges affordability and qualifying.  A $300,000 home on a 30 year amortization may cost $1200/month, but on a 25 year am can cost upwards of $1400/monthly.  You end up paying off your home at a faster pace, but the other complication is what the bank will allow for you to purchase.  When you look to make a purchase, the bank weighs your income against your debt and the mortgage price of your home.  They then determine if your income qualifies you to sustain this mortgage.  When the monthly payment becomes higher, the strings start to tighten, and what may have been affordable at a 30 year amortization, may no longer be affordable at a 25 year amortization.

Lowering the maximum refinance amount to 80% ensures that owners maintain equity and liquidity in their home.  This also means that insurance will no longer be required.  The percentage is calculated as a percentage of the value of your home - not of your current or previous mortgage, but of the market value of your home.

GDS (Gross Debt Service) and TDS (Total Debt Service) measure how much your responsibilities are serviced by your income.  Simply put, GDS is your mortgage (and taxes) versus your income, and TDS is your mortgage, taxes, and debt, versus your income.  Previously, your ratios could be GDS - 35% and TDS - 44% (depending on your credit score).  Now, GDS is increased to 39%.  This is of a very minimal impact, as the TDS has not changed.

I know this is all a bit heavy, but what we need to keep in mind is that this is for government insured mortgages.   In Canada, you can have your mortgage insured by CMHC, Canada Guaranty or Genworth - so there are still options available.  We have to remember that our government will do anything possible to avoid mimicking the US housing crisis - in which the American government had to provide financial aid to Fannie Mae (their version of CMHC).  They are tightening CMHC guidelines to ensure this.

Check Out My Grills!!!

I LOVE BBQ.  It's one of the best things about summer, and no matter how hard you try, you can't duplicate that grilled taste.  I put together a few really cool grills that I came across...because everything about bbq is amazing.

Bye Bye Baggies

So, Mayor Ford went in yesterday attempting to ban our 5 cent plastic bag fee, and not only came out defeated, but was slapped with an even bigger ban.  As of January 1, 2013, city council is implanting an all around ban on plastic bags.  Kind ridiculous to say the least.  Environmentalists are ecstatic, but there are a lot of valid questions and concerns floating around.  It's recommended that retailers offer paper bags as an alternative.  Firstly, paper bags are more costly to retailers - who will eat up the costs for that?  Higher prices?  Secondly, I can't imagine going to the grocery store and having to carry my juice, flour, and heavier items in a paper bag.  What if it rains?  Thirdly, what is going to happen to the large companies that produce these plastic bags?  It's hard to imaging shopping sans plastic bags, but maybe we're just a bit spoiled and careless.  I have tons of reusable bags, but always forget them when I do my grocery shopping.  I guess I can buy those biodegradable garbage bags for my garbage.  Hmmm...there are still a lot of questions, but maybe it's not that bad....?