Jul 042018
 

Five years ago I acquired a variable rate mortgage from CIBC. It was the cheapest rate I could find at the time. I was quite pleased with the rate but that mortgage term expired a couple of months ago. So I shopped around to see if I can find another good deal.

I expected my mortgage to become more expensive. Surely rates would have climbed over the last 5 years right?

But no. To my surprise I found a lender that offered me an interest rate that’s lower than my previous mortgage by 43 basis points. 😀 CIBC was not able to match this offer so I switched. The new financial institution I am with is not one of the big 5 banks in Canada. It is a lesser known company called National Bank.

I was paying 3.05% with CIBC. This was a variable rate 5 year mortgage at prime minus 0.40%. This was the best CIBC could do.
But my new mortgage with National Bank is only 2.62%. This is also a variable rate 5 year mortgage term. Except the rate is Prime minus 0.83%

A 0.43% difference in interest rates doesn’t sound like a lot. But my mortgage balance is around $193,000. So I will be saving roughly $4,000 over the next 5 years because I switched to a cheaper mortgage provider.

However there are costs associated with changing lenders. Appraisal costs $600, and legal documents from a notary public was $800 in my case. Luckily National Bank has a $750 rebate program for transferring over an existing mortgage. 🙂

In the end the cost of changing banks was worth the extra savings in my case.

Even though most Canadians are choosing fixed rate mortgage I still believe that variable rate is the way to go if you want to save money. The increase in fixed rate mortgages locked in by most home buyers this year is “seen as a response to rate hikes, and fear of higher rates in the future.” But critics have been calling for higher rates for over a decade. Yet rates haven’t actually gone up much. In fact, mortgage rates have dropped over the past 5 years as shown in my post today. That’s why we have to be informed of economic conditions so we can make our own financial decisions, instead of following others. 🙂

I have been a homeowner for almost 10 years. During this time my mortgage interest rates fluctuated from 2.3% to 3.2%. It doesn’t look like rates will climb significantly any time soon. Until we see increasing mortgage rates, I would expect Canadian housing prices to climb even higher.

 

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Random Useless Fact:

30 years ago only 5% of the population admitted to being chronic procrastinators compared to 25% today. Some believe technological advances is the main cause of this change.

Aug 012016
 

Stock Markets Reach Record Highs… Again 

Both the Dow Jones and the S&P 500 indexes have climbed to all time highs in late July. 🙂 But corporate earnings have been stagnant and economic growth remains weak. Restaurant sales have slowed. The U.S. economy only grew a disappointing 1.2% in the second quarter, well below expectations. 😕

So what’s producing so much excitement in the stock market? In short, I believe it’s largely caused by Negative Interest Rate Policies (NIRP). For example, in Europe the benchmark lending rate is negative 0.4%. Usually the bond issuer pays interest to the investor. But with negative rates, the investor pays the issuer. Currently about 1/3rd of the world’s government bonds are producing negative yields. Investors can’t get rich by holding these securities anymore. So in this kind of environment bonds really hold people down.?

As a result of NIRP, more investment capital has moved from the bond market to relatively stable stocks. These tend to be companies that operate gas pipelines, railways, utilities, telecommunication services, and other infrastructure that are recession resistant. Last year I wrote about how to easily make $75 of annual income without using any of my own savings by using leverage to buy shares of TransCanada Corp (TRP.)

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I purchased TRP stocks for $42 per share. I mentioned at the time that analysts had an average price target of $57.50 per share. This doesn’t always happen, but sure enough TRP is trading at roughly $60 per share today. 😀 So not only am I making $75 a year in dividends, but I’ve also made $1,800 in unclaimed capital gains so far. 😉

In normal circumstances this kind of price movement in a large cap, blue-chip company wouldn’t happen. But due to a lack of viable investment alternatives, an influx of additional buyers has pushed up TRP and many other relatively safe stocks.

Increasing Valuations and Risk

Unfortunately, NIRP produces asset bubbles and may cause the markets to behave precariously. The chief executive of DoubleLine Capital, who oversees more than $100 billion in assets, recently said that many asset classes look frothy and his firm continues to hold gold, which has also climbed due to NIRP.  At the end of July gold reached $1,350 per ounce, the highest monthly close in years! Stock investors have entered a “world of uber complacency,” said Jeffrey to the media. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong. Continue reading »

Oct 102015
 

New Purchase: Royal Bank of Canada Stock

September has historically been a bad month for the stock market, and this year was no exception. This is why I didn’t invest aggressively last month. However now that it’s October, I decided to get back into buying more equities. 🙂

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So after looking through my watch list of different companies, I’ve decided to invest in shares of Royal Bank of Canada. 😀 I usually don’t keep disposable cash lying around so last week I borrowed $4,000 from my TD margin account and transferred the money into my TFSA to buy 55 Royal Bank shares (RY.TO) at $71.30 each.

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I know purchasing about $4K worth of stocks with no money down sounds a bit risky, but I think I’ve made the right decision here. 😀 The stock pays me a 4.43% dividend yield, which happens to be more than the 4.25% interest I’m being charged for the margin loan. As long as I plan to hold the stock until my retirement and can service the cost of the loan, then I don’t see any downsides to financing this entire purchase with debt. 🙂

Royal Bank Stock Analysis

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After doing some research and analysis on this company here are some reason why I chose to buy this stock.

  • It can print currency. Due to fractional-reserve banking, all chartered banks can create new money through lending. This license to manipulate the money supply in the market has many unique advantages.
  • Safety and stability. RBC is currently the largest company in the country, worth $106 billion by market capitalization. An economy of scale offers RY a competitive edge against smaller rivals. Even if Canadian banks run into solvency problems in the far future, the CMHC or other Crown corporations will probably step in to bail them out. In the U.S. the government’s TARP program in 2008 transferred $431 billion to struggling U.S. banks.
  • Growing profits. Royal Bank continues to deliver earnings growth year after year. According to stock analysts the estimated earnings in 2017 will be around $7.35 per share, which would make RBC 19% more profitable than last year’s actual earnings.15-10-royal-bank-stock-earnings-growth
  • Attractive valuation, relative to historical averages. The P/E ratio is used to determine how much investors are willing to pay for a stock. A high ratio signals that buyers are willing to pay a premium for the shares. But lately the trailing P/E ratio of Royal Bank (Blue line below) is at the lowest it’s been in years! This P/E compression won’t last forever so right now looks like a good time to start accumulating a position.15-10-ry-royal-bank-price-to-earnings-ratio-historical
  • Growing dividends. According to its investor’s relations, RY has increased dividends by more than 400% since the year 2000. It increased dividends almost every year, except during the financial crisis period.
  • Protection against rising interest rates. RBC holds about $463 billion in net loans. If it can charge even 0.25% more interest on average, then that’s an additional $1.16 billion of revenue every year, minus loan lost provisions. A rising interest rate environment benefits all banks. The more interest homeowners pay for their existing mortgages over the next 25 years, the more money Royal Bank can make from those loans. 🙂
  • Potential split soon. The stock tends to split 2:1 when each share reaches around $80 to $90. The most recent split was in 2006, and then in 2000 before that. The share price is currently around $74 today. Stocks splits create more demand since each share becomes more affordable to own for new investors.

Continue reading »

Jul 162015
 

Earlier this year a Vancouver house with a $5 million assessed value was put on the market for $6 million. Guess how much it ended up selling for? Hint, it’s in the upscale Shaughnessy neighbourhood. 🙂

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After 12 days and multiple bids from 10 prospective buyers the 78 year old home was sold for $8 million, lol. Welcome to Vancouver. You’re welcome to buy a house here, as long as you’re willing to pay $2 million over the asking price. 😛

Our hot real estate market is about to get even more extreme because yesterday morning the Bank of Canada announced another 0.25% rate cut. Holy pumpernickel! Now it will be even harder to raise rates in the future without pricking the bubble. 📌

The Effects of the Rate Cut ✂

The overnight lending rate was lowered to 0.5% in an attempt to boost capital expenditure and drive companies to spend more on hiring and manufacturing. However this will also unintentionally persuade already heavily indebted consumers to take on even more debt.

The problem with monetary policy is that it affects the entire country even though places like Vancouver really don’t need any further easing of credit. A better solution would have been to address the faltering economy in some parts of Canada, like Alberta, using targeted fiscal policy instead of a blanket rate cut. But that’s just my personal opinion.

Continue reading »

Feb 152015
 

A new study by the University of Pennsylvania’s Wharton School found that adults in many countries make money decisions with surprisingly little financial knowledge. Researchers asked people in 18 countries THREE simple financial literacy questions about interest rates, inflation and investing.

When Americans over 50 years old were asked these 3 questions, only 50% could answer the first two questions correctly. Furthermore, just 33% knew the correct answer to all three questions. “Even well-educated people are not necessarily savvy about money,” according to the report. Among people with post-graduate degrees, 64% were able to ace the quiz. That’s better than the average, 🙂 but still less than my expectations.

Do you think you are smarter than most Americans? According to the report, answering each additional question correctly is associated with a 3% to 4% greater probability of planning for retirement.

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The Wharton study found that men (38%) were more likely than women (23%) to know the answer to all three questions. The guys also claimed to feel more confident about their financial knowledge, even when they answered incorrectly. The ladies, on the other hand, were more likely to admit that they didn’t know the answer to a question. Women are so modest. 😳

So how many did you get right on your first try? Feel free to spoil the answers below in the comments section if you think you know the correct answers. 😉 I’ll verify by tomorrow. Financially literate individuals save more, earn more on their investments, and manage their money better. So if you got 3 out of 3 correct then congrats! Your financial future is looking bright. 😀 Otherwise, keep brushing up on your personal finance knowledge. 🙂

Continue reading »