Month: July 2016

30 Practical Tips To Avoid Debt

J. Douglas Hoyes

Posted in Dealing with Debt

Reading time: 32 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
Squares spelling out the word tips

Today’s show is our 100th episode of Debt Free in 30. To celebrate this milestone, I broke away from my usual format. No guests, no specific topics. Instead, I shared my top 30 tips to help you avoid unwanted debt. Many of these tips are based on the topics I’ve covered in other episodes and they are also tips we provide our clients during their credit counselling sessions designed to help them build stronger money and debt management skills.

30 practical tips to avoid debt

Credit cards

If I had to choose which tip is the most important, I would have to say it’s tip number one:

  1. Credit cards should be a substitute for cash, not a way to borrow money. If you want to purchase something for $1000, it makes more sense to buy it with a credit card than to carry $1000 in cash. If you carry the cash, there is a chance you could lose it or be robbed. Go ahead and take advantage of the convenience of a credit card, just be sure to pay it off once you get home. Where you get into problems with credit cards is when you use them as a substitute for borrowing. Credit card debt is becomes a permanent problem for many because the interest rate is very high and minimum payments don’t allow you to pay down any of the principle.
  2. Never carry a balance on a credit card.
  3. Keep only one or two credit cards.
  4. Don’t call it a credit card – call it a debt card. A credit card is not cash and if you carry a balance it’s debt. If you call your credit card a ‘debt card’, would you think twice before using it?

Payday loans

  1. Never use payday loans to keep up with debt payments – you are delaying the inevitable. Using a payday loan to pay the interest on your other debts just delays the inevitable. There are better alternatives to payday loans if you have a financial emergency. If you a struggling with multiple payday loans like many of our clients, consider your options to eliminate payday loan debt.

Spending & Borrowing

  1. Don’t balance your budget with credit.
  2. If you can’t afford it, don’t buy it. Save up for it.
  3. Think ahead – know what expenses are coming up & prepare for them such as Christmas, birthdays, and car repairs.
  4. Be aware of your spending habits – avoid bad choices. I remember one person in particular who was spending $300 a month on magazines. I said hey, that’s insane. Go to the library and read them for free, get that app on your phone so you can read them for a lot less. Find a better way if that’s where you’re spending a lot of your money. Another example is visiting the coffee shop every morning when you could make your coffee at home for a fraction of the cost. By being aware of your spending habits, you can avoid bad choices.
  5. Smaller is better. Buy a smaller house and buy a smaller car. You’ll save on the purchase price and ongoing costs.
  6. Shop around and buy everyday items that you need like toilet paper when its on sale.
  7. Look beyond the monthly payment. What’s the interest rate? How much will you pay in total over the life of the loan.
  8. Read the fine print on any debt or contract you sign. For instance, rented water heaters often have a buyout/payout clause at the end even if you return a 15-year-old unit.
  9. Don’t miss payments. Late payments & added interest costs add up quickly. Take this as a sign you either need a better plan or are spending too much already.
  10. Be aware of hidden debt. If you’re self employed a tax debt can creep up if you are not making your monthly installments.

Becoming debt free

  1. Know who you owe – make a list.
  2. Figure out what your debt is costing you each month.
  3. Make a plan to pay off your debt. Write it down.
  4. Start by paying the highest interest rate debts first.
  5. Avoid the minimum payment trap. Where possible, pay more than the minimum.
  6. Consider alternatives. Can you borrow what you need from someone else? Can you postpone the purchase? Or, can you get something else or do without it?
  7. Know your real goals. Avoiding debt is the best way to save money for your future.
  8. Close your home equity line and reduce your open lines of credit – they are too tempting.
  9. If you have more debt than you can handle, consider your debt relief options and do your research.
  10. A consumer proposal is the number one way to get out of debt, if you are not able to do it on your own.

Staying out of debt

  1. Don’t co-sign debts. You are 100% liable for the amount owed if your co-signer defaults on the loan. The debt is not split 50/50 between the both of you. I’ve done lots of bankruptcies over the years for people who were perfectly good at managing their own finances but they co-sign for somebody else, that person wasn’t able to pay the debt and as a result, boom, they’re hit with the debt.
  2. Don’t borrow to loan your children money. If you want to help your children, loan them cash. Do not borrow money on your own line of credit.

Saving for the future and rebuilding your credit

  1. Pay yourself first. It’s an old rule of thumb for a reason. Even 2-3% is good, if you are not able to save 10%.
  2. Build an emergency fund early and be sure to replace what you use.
  3. If you want credit again in the future, take steps to rebuild your credit now. You can review your credit report once a year for free.

Curious to learn more about the 30 tips? Listen to the podcast or read the transcript below.

Resources mentioned in the show:

FULL TRANSCRIPT show #100 How to Avoid Debt

30 Practical Tips To Avoid Debt

This is episode 100 of Debt Free in 30. Our first episode was broadcast back in September 2014, and we aired an episode every week for the last 100 weeks. I’ve had lots of great guests on the show and we’ve covered a lot of topics. And today to celebrate episode number 100, we’re going to do something completely different, no guest, no specific topic, instead I’ve got 30 practical tips to help you avoid unwanted debt and live debt free. Many of these tips are based on topics we’ve covered over the last 99 episodes here on Debt Free in 30, these are tips that have helped many of my clients and I think they can help you too. So, we’ve got just under 30 minutes to go through 30 tips so let’s get started.

First up some tips on credit cards. Credit cards are a very expensive form of borrowing. If you have good credit your mortgage interest rate may only be 2 or 3 or 4% but a credit card from a bank can easily carry a credit rate of 19% and a retail store credit card can have an interest rate of 30% or more.

So, here’s my first tip and this may be the most important tip of the day, tip number one credit cards should be a substitute for cash, not a way to borrow money. So, think about what I’m saying there. I understand why if you’re going to go to the store and buy something that costs $1,000, you don’t want to have a thousand dollars in $20 bills shoved into your pocket. You might lose it, you might get robbed, not a good idea. So, paying with a credit card makes perfect sense, it’s safe, don’t have to worry about it.

That’s fine if you have the $1,000 sitting in your bank account, using a credit card as a substitute for that cash is fine. You go to the store, you make the purchase, you come home, at the end of the day, at the end of the week, at the end of the month whenever your credit card bill is due, you’ve got the money sitting in your bank account, no problem, you transfer it to your credit card, debt is paid, never have any interest, that’s fantastic.

Where you get into problems with credit cards is when you use them as a substitute for borrowing. So, I want to buy that $1,000 thing and I don’t have the cash to do it, so I use my credit card to borrow the $1,000 to buy that item. That’s a problem because credit card interest rate is very high. The interest rates on credit cards are very high, that’s not how you want to be borrowing. If you really want to borrow money and you need to borrow money, fine, go to the bank, negotiate a line of credit, a term loan, whatever. The interest rate will be much more reasonable, that’s how you borrow if you have to.

Using a credit card to borrow is very dangerous, which brings us to tip number two, never carry a balance on a credit card. Again, pretty obvious if the interest rate on your department store or gas store credit card is 30%, carrying a balance is hugely expensive. So you want to find ways to avoid that, again either get a loan at the bank at a much lower interest rate or don’t spend the money if you can’t afford it, don’t use your credit card as a way to borrow, never carry a balance on a credit card.

Tip number three, keep only one or maybe two credit cards. I’ve dealt with lots of people over the years who’ve got five, six, seven, 10 different credit cards and they’re carrying a balance on each of them. Again, that’s totally crazy. And I understand why that might be so, you might have a credit card that you use for business purposes, that’s where you fill your expense report with your boss every week, maybe your company covers that credit card. Maybe you’ve got a different credit card because you earn a lot of points on it. Maybe one of them you get points at the grocery store, another one you get points at the gas station, okay. It gets to be pretty complicated though having multiple credit cards. If you’re going to use a credit card, figure out the one that works best for you, that has the best features, the best rewards, cash back, lowest fee, whatever it is that works for you and use that as your credit card.

If you want to have a second credit card as a backup, okay I understand it. I’ve had cases where I try to use my credit card and that bank’s machine happens to be down but another one is working. Okay, I can understand having two – there may be circumstances where that makes sense. But having 10 of them and trying to juggle all the balances on them and know when the payments are due, again pretty dangerous not something I recommend. And it’s also probably not helping your credit score if you have multiple credit cards carrying a balance. So, tip number three only one or two credit cards at the most.

Tip number four, don’t call it a ‘credit card’, call it a ‘debt card’ because that’s really what it is. We’ve been convinced that a credit card is a good thing, we all know that hey, give credit where credit is due, credit is a good thing. We’ve been conditioned to believe that credit is a positive thing. Well, okay but if you said to yourself, I’m using my ‘debt card’ and every time I go to the store and put my credit card in the machine, I’m actually putting my debt card into the machine, I’m actually borrowing money every time I do it. Would that make me use my credit card a little bit less? Maybe, I think it’s a great tip to change the psychology of how we think about credit and debt, call it a ‘debt card’.

The first four tips were about credit cards, I’ve got one tip on a topic we’ve covered a lot on this show and that’s payday loans. Tip number five: never use payday loans. Don’t use them to keep up with debt payments, because all you’re really doing is delaying the inevitable. If you’ve got a whole bunch of debt and our study shows that people that have payday loans also have a lot of other debt, then getting a payday loan to pay the interest on that other debt doesn’t make any sense at all.

So, avoid payday loans, there is always a better solution. And if you like to hear more go to our website at hoyes.com, type in the word payday loans, you’ll see all sorts of different resources on it. And in fact last week’s show, show number 99, we actually talked about payday loans and payday loan solutions so there’s lots of good information for you there.

Tip number 6, we’re going to start covering some tips on spending now, tip number six, don’t balance your budget with credit. What am I talking about? Well, I bring in $3,000 a month, I spend $3,500 a month, where does that extra $500 come from? Well, it comes from credit. I borrow $500 every month.

Now you might not think you’re borrowing, you don’t actually realize it because well, I use my credit card and my balance is going up by $500 a month, plus interest, but I don’t notice that. That’s a mistake. Don’t balance your budget with credit, or I guess a better way to say that would be don’t balance your budget with debt. Keep track of what you’re spending every month and don’t spend more than you’re bringing in. If you have to use debt to cover your expenses, you’ve got to make some changes, you’ve either got to increase your income or reduce your debt, those are the only two choices you’ve got, which leads to tip number seven, if you can’t afford, it, don’t buy it. Simple obvious advice, save up for it and then buy it, that way you can’t get into trouble.

Tip number eight, think ahead, plan ahead, know what expenses are coming and prepare. I say this to a lot of people, we all know when Christmas is coming this year, it’s December 25th, it’s the same day ever year. You know exactly when everyone in your family’s birthday is because it’s the same day every year. You can plan in advance for those things. You know when Thanksgiving is going to be, when you’re going to have to buy the turkey, these are regular events.

Now there are some events that you don’t know when they’re going to happen. You don’t know when your car is going to need to be repaired, you don’t know when you’re going to get sick and be off work for a couple of weeks and need some extra cash ’cause your pay cheque isn’t coming in. That’s fine, you can set aside some money to do that but think ahead to all the things that could happen in your life and certainly the ones that are easily predictable and be prepared for that.

Tip number nine, when it comes to spending be aware of your spending habits, avoid bad choices. I’ve met with people in the past and I remember one person in particular who was spending $300 a month on magazines. I said hey, that’s insane. Go to the library and read them for free, get that app on your phone so you can read them for a lot less cost. Find a better way if that’s where you’re spending a lot of your money. Another common example is hitting the coffee shop every morning. Again, nothing wrong with that, coffee is not illegal, I’ve got a cup of coffee right beside me as I’m recording this. But there are other ways to have your coffee if you can’t afford that cup of coffee every morning. So, maybe it’s making a pot of coffee in the morning and drinking all you want at a lot less cost. Being aware of your spending habits, allows you to avoid bad choices.

Tip number 10, small is better. And I know we’re conditioned to believe the opposite of that but buying a smaller house or a smaller car saves you a huge amount of money in the long run. And I know with the real estate market that way it’s been in 2013, 2014, 2015, 2016 in places like Vancouver and Toronto, you want to buy places as big as you can because it will go up more, the bigger it is.

Okay, until it isn’t the case. The problem with a big house is it comes with a big mortgage. The problem with a big car is it costs more, you’re going to pay more for gas, you’re going to pay more for the, potentially the maintenance cost but certainly the loan cost of the car is going to be more if you’ve bought a more expensive car. So, figure out what is the smallest house, apartment, car I can get away with and go with the smaller one. You’ll save on the purchase price and a whole lot more money in your pocket is always better.

Tip number 11 when it comes to spending shop around. And again, this may seem obvious but when things are on sale they are a lot cheaper. I was at the big box store a couple of weeks ago and they had toilet paper on sale. It was $4.99 now, the regular price is somewhere between $10 and $12 so it was 50% off. So, if you can think ahead and have a little bit of extra money in your budget, when a sale like that comes up, great I can buy some extra, stock up on it, and save a huge amount of money over the long run. And of course toilet paper is just one example but anything that will keep for more than a few weeks, well if you can buy it at a cheaper price when it’s on sale, then that obviously makes sense.

So, shopping around and knowing when things are on sale and being able to take advantage of it by having the cash is a good idea. And there’s certainly lots of apps that will help you. We talked about that on the show before, apps that will tell you what sales are coming up, what sales are at the stores right now, shopping around can save you a lot of money.

Tip number 12, look beyond the monthly payment. You go and you’re going to buy a car and the salesman says oh it’s going to be $350 a month and you go hey, great that’s fantastic, I can afford $350 a month let’s do the deal. Yeah, but there’s a lot of other questions you need to be asking yourself. What’s the interest rate? How much will you pay in total over the life of the loan? Because there’s a big difference in a loan t that’s $350 for four years and a loan that’s $350 for seven years, yeah, I know they’re both $350 a month but if all you’re focusing on is the monthly payment, you’re missing the point. You want to know what am I paying in total, what’s the interest rate and of course what other charges are built into that. So, look beyond the monthly payment, there are other numbers that are probably of even greater importance.

Tip number 13, read the fine print. If you’re borrowing money or singing any kind of contract, read the fine print. Rented water heaters often have a huge buy out or pay out clause at the end. So, even if you have that water heater in your house for 15 years, there may be a $500 charge for them to come and pick up your old water heater if you want to get rid of it. So, before signing a contract, actually read it so that you know what’s in there and then you can decide in advance whether it makes sense. And don’t be pressured when the salesman is sitting there to sign whatever they put in front of you. Read the fine print, take your time, you’ll save yourself some money in the long run.

Tip number 14, don’t miss payments. And again, sounds obvious but late payments and added interest costs add up very quickly. So, if you are getting hit with late payment charges or service fees, take that as a sign that you either need a better plan, a better budgeting strategy or you’re just spending too much.

An NSF charge on your bank when you bounce a payment, can add up to more than what you are paying on the original payment. So, if your hydro bill comes due and they try to take the payment out of your account and the money isn’t there, your $100 hydro bill all of a sudden becomes $150 when you add in the bank charges. So, don’t miss payments, again plan ahead. If you’re scheduling things like hydro payments well, see if you can schedule them on the day you’re payday comes out. And that way you’re much less likely to miss a payment, the money’s in the account when they payments come out.

Tip number 15, be aware of hidden debt. I see this a lot with people who are self employed. When you’re an employee you get a pay cheque every two weeks, taxes, CPP, EI, everything is taken off that cheque. You don’t have to worry about it. But when you’re self employed, you are responsible for paying your own taxes, you’re responsible for paying your own share of CPP, it’s not coming off your cheque every month because you don’t get a cheque every month, you get paid whenever you do work, whenever your customers pay you. So, be aware of that hidden debt that you have to the government.

My advice if you’re self employed is talk to your accountant, figure out what you are likely to owe at the end of the year, and then divide it into 12 equal payments and then send that money to the government every month. That way at the end of the year, when you file your taxes, the debts are already paid, don’t have to worry about it. Let’s do some tips now on getting out of debt and becoming debt free.

Tip number 16, know who you owe. If you’ve got a bunch of debt, make a list. I have people meet with me all the time and I say to them okay so tell me who you owe money to and they go well, I think there’s this and I think there’s – they’re not really sure. You can’t attack your debt if you don’t know who you owe the money to. So, make a list, write it down, who do you owe the money to, what’s the interest rate, how much do you owe them and what’s the minimum payment each month? When you see it in black and white, right in front of you, it’s a lot easier to make a plan to deal with it.

Number 17, figure out what your debt is costing you each month. Well, once you’ve made that list and you add it up, you can say oh my goodness, it’s costing me $2,000 a month just in interest payments. When you actually know that number,that will motivate you to make some changes. What are the changes? Well, tip number 18, make a plan to pay off your debt, write it down. Tip number 19 is start by paying the highest interest rates debts first.

Now I know there’s a lot of controversy on this and you can look back to one of our previous podcasts that I did on this, I personally believe you should start with the highest interest rate debt first, because that’s the most bang for your buck. Paying off a credit card that carries a 30% interest is better than paying off your car loan that carries a 4% interest. Now I understand there are alternate viewpoints on this. Some people say well you should pay off the small one first ’cause that’ll give you a sense of accomplishment. Okay, fine if you owe $100 on an old phone bill, fine pay it off, get it out there, one less thing to worry about. I’m not too worried about that.

Other people should say well you should pay off callable debt first so things like a car loan, well if you don’t pay the car loan, the bank has the right to seize your car and repossess it. Okay that is true but I still think it’s better to keep your payments up to date on your car absolutely so you don’t lose it but I still favour paying off the highest interest rate debts first because that’s where you get the biggest bang for the buck.

Tip number 20, avoid the minimum payment trap. Where possible, pay more than the minimum. Again, I see this all the time, people say well, I’m doing fine, you know, my minimum payment’s $300 and that’s what I paid. Okay, but all you’re really doing in most cases is covering the interest. So, where possible cover the minimum. And again, back to the previous tip, I would be paying more than the minimum on my highest interest rate debt so that I can chip away at that one first.

Tip number 21, consider your alternatives. So, if you’ve got a bunch of debt, can you borrow what you need from someone else? Can you postpone the purchase of that thing that you were going to buy? Can you get something else or do without it entirely? Often we get caught in the zone of this is what we have to do. I meet with all sorts of people who have an expensive car and I say to them, well what are your other alternatives? Well, I don’t know, I bought a brand new car, I just assumed that’s what I had to do.

Well, no there’s lots of alternatives, you could buy a used car, you could take public transit, you could car pool. I knew a lady who didn’t own a car but once every two weeks she go to the car rental place, rent a car from 9-5, so she didn’t pay any overnight rates, was relatively inexpensive. And once every two weeks she did all her running around, went and visited her mother, did her grocery shopping, had all her doctor appointments and the rest of the time she just walked or did public transit. So, she had the use of a car but at a much lower cost than actually owning a car. That’s a classic example of knowing your alternatives.

Tip number 22, know your real goals. Avoid getting in debt in the first place is the best way to save money for your future. So, if you’re real goal is I want to own a house some day, then saving money now and avoiding debt now is the only way to actually get there. So, know your real goals, your real goal isn’t to go on that vacation next week. Your real goal is to buy a house three years from now. That will help focus you on what you need to spend your money on.

Tip number 23, close your home equity line and reduce your open lines of credit, they’re just too tempting. Having a line of credit where I can instantly push a button on my computer and get access to five thousand dollars is just too tempting. Unless you really think you’re going to use it, reduce or eliminate whatever lines of credit are out there so you can’t be tempted.

Tip number 24, if you have more debt than you can handle, consider your options, do your research, which leads me to tip number 25, a consumer proposal is now the number one way to get out of debt if you can’t do it on your own. You should understand what a consumer proposal is and how it can help in your situation. We’ve done shows on this before and again you can go to hoyes.com and do a search.

But a consumer proposal really simply is a deal that we help you negotiate with your creditors to pay off all of your debts. In most cases you’re paying off at much less than 100 cents on the dollar. The average proposal is somewhere between 30 and 40 cents on the dollar. So, if you have $100,000 in credit cards and unsecured debts, payday loans, income taxes and so on, it may be possible to work out a payment where you pay back 30 or $40,000 and eliminate the rest of your debt. That for some people is a better option than struggling to make huge payments over an extensive period of time. It’s just a better solution in a lot of cases. I’ve got five more tips. We’re going to take a quick break and come back with those. You’re listening to our special 100th show right here on Debt Free in 30.

It’s time for the Let’s Get Started segment here on Debt Free in 30. Today is show number 100 and we are going through 30 tips to help you avoid unwanted debt and to live debt free.

I’ve got five more tips for you, two tips to start on staying out of debt, tip number 26, don’t co-sign. You co-sign someone else’s debt and they say oh don’t worry, we just need your signature and I’m good for it. Yeah, if they can’t pay the loan, then you are 100% responsible for it. I’ve done lots of bankruptcies over the years for people who were perfectly good at managing their own finances but they co-sign for somebody else, that person wasn’t able to pay the debt and as a result, boom, they’re hit with the debt. So, if you want to avoid unwanted debt, don’t co-sign.

So, how can you help your friend, your neighbour, your family member, your mother, your son who needs help? Well, you say to them well I can’t co-sign your loan, but look I got $2,000 in my savings account, here I’ll give you that, I’ll loan you that. At least by doing that, you only lose $2,000. You only lose the money you give them, nothing more. Co-signing a $30,000 car loan puts you at much greater risk, which brings me to tip number 27, don’t loan your children money.

Okay, I know that sounds pretty harsh but again, I’ve done lots of bankruptcies over the years for parents who help their kids out to the tune of 20, 30, 40, $50,000, their kids weren’t working, they were helping pay their mortgage, pay their rent, whatever and as a result, now the parents are in such significant debt that they had to go bankrupt.

So, again, if you want to help your children, it’s your choice, it’s your money, give them cash then. Don’t be borrowing money on your own line of credit to give your kids. Your kids are better off selling their house, moving to a smaller place, moving back in with you if that’s what it’s going to take, and that way meet – they’re not dragging you down. So, I am not a big fan of loaning your children money unless it’s money you’re fully prepared to lose because that may be what happens when you make a loan.

Three more tips and these are tips about savings and rebuilding after a financial problem. Tip number 28, pay yourself first, this is classic old school advice and it’s still very good advice, if you can’t save 10%, well even 2%, 3% will do. Now I’m only giving you this advice if you have already cleaned up your debt. It doesn’t make a whole lot of sense in my view to be putting $100 a month in a savings account that pays 0 interest when you’ve got a credit card that’s charging you 30% interest.

Pay off your debts first but once you do, your first priority should be paying yourself first, take some of the – take a preset amount off every pay cheque, tuck that away into a savings account, into a TFSA, into a RRSP, do your research, talk to your financial advisor and see what makes the most sense for you. That’s the way you get ahead in the long run. If you can’t save 10% like I said, 2%, 1% whatever you can, but that’s how you get started.

Tip number 29, build an emergency fund, you want to do it early. Ask yourself this question, if I was to get laid off tomorrow, if I was to lose my job, if something happened and I wasn’t going to get paid for the next month would I be able to survive? A lot of people today well sure I got a line of credit, I’d be able to survive for months. That’s not what I’m talking about, what I’m talking about do you have cash tucked away again in a savings account, in a TFSA or somewhere where you can access it in the event of a problem in the future. That’s the whole point of an emergency fund. And you want to set up that emergency fund early.

Sometimes an emergency fund is for a very specific thing, I know my car’s getting old, I know at some point over the next year I’m going to have to pay $1,000 to get it fixed. Okay, well start setting that money aside. The key is do it early. And again, you want to have your debt paid off before you do this ’cause again it doesn’t make a whole lot of sense to be earning zero interest in a savings account where your emergency fund is if you’ve got huge other debts.

Final tip of the day, tip number 30, if you want to get credit again in the future, take steps to rebuild your credit now. We’ve done entire shows on credit rebuilding, conceptually it’s pretty simple. What you want to do is start by getting a copy of your credit report and reviewing it. You can get a copy a year for free from both Equafax and TransUnion, take a look and see what’s on there. And clean up the old things, if you’ve got an old cell phone bill from a year ago that’s $100, well get it paid off, get it off there. And then take steps to rebuild your credit.

So, obviously paying off debt is the first step, the second step will be to build up some savings and the third step will be to re-establish credit and again, you can go to hoyes.com and we have information on how to do this, it may be getting a small secured credit card, a small unsecured credit card, it may be getting an RRSP loan. There are a number of things you can do to gradually rebuild your credit, if you want credit again in the future.

If you said to yourself hey look, I’m never borrowing again anyways, I don’t need it, well then fine don’t focus on that at all. But if you’re goal in the future is to finance a car, buy a house, then having good credit is important, it’s something you can’t do in five minutes. You’ve got to start now, with a plan and gradually work towards it but it is possible, I’ve done hundreds of bankruptcies over the years for people who then two or three years later, were able to buy a house, it is possible. That was the Let’s Get Started segment. I’ll be back to wrap it up. You’re listening to Debt Free in 30.

Announcer:       You’re listening to Debt Free in 30. Here’s your host, Doug Hoyes.

Doug H:            Welcome back, it’s time for the 30 second recap of what we discussed today. This was episode 100 of Debt Free in 30. And on today’s show I gave the best tips we’ve discussed over the last two years right here on Debt Free in 30. I shared tips on credit cards, payday loans, spending and tips to get out of debt, become debt free and tips to stay out of debt. Our final three tips were on saving and rebuilding your credit after eliminating all of your debt. That’s the 30 second recap of what we discussed today.

I hope you enjoyed the first 100 episodes of Debt Free in 30. My goal with this show was to present different points of view and I think we’ve achieved that goal. I’ve had the great pleasure of interviewing a wide range of guests and know I’ve learned a lot from them. So, what’s the plan for the next 100 shows? For the next four shows, for the month of August, we’ll be re-broadcasting four of our most downloaded shows. If you’re new to the show, these are the shows most downloaded by our listeners. So, that’s a good indication that they’ve got lots of great content.

Starting in September I’ll be back with all new shows and a slightly different format. I’ll have a new show for you every week but we’ll change it up a bit. Some of the shows will be short and deal concisely with one topic. Other shows, when we’ve got a great guest with lots of ground to cover may be a bit longer than 30 minutes. I think you’ll like it.

Skirting the Essence of Ontario’s Debt Settlement Laws

J. Douglas Hoyes

Posted in Viewpoints

Reading time: 5 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
Cheetah sitting to show the predatory nature of debt settlement

A year ago Ontario enacted legislation targeted at reducing consumer abuse by unlicensed debt settlement companies. While this legislation has helped eliminate some of the severe abuses, most agencies have just switched tactics and we fear indebted consumers seeking debt advice are still at risk.

Let’s review some key points in Ontario’s debt settlement laws:

  • The legislation was renamed the Collection and Debt Settlement Services Act;
  • Debt settlement companies taking fees for debt settlement services must register under the Act;
  • Up-front fees for debt settlement services were prohibited and overall fees were limited to 15% of payments.
  • Lawyers, not-for-profit credit counselling agencies and Licensed Insolvency Trustees were exempt from this legislation.

So what’s happened a year later? Sadly, we are still receiving phone calls from clients who are paying excessive fees to unlicensed, unregulated debt consultants using salespeople to trap desperate debtors into paying fees for very little benefit. Debt settlement companies have taken advantage of two elements of the legislation to continue to operate, albeit in a different form.

Scenario #1: The Referrer

Ontario's Debt Settlement Laws- fb

This is the most common new approach being used by debt consultants to work around Ontario’s debt settlement consumer protection laws. The pitch is simple: Your debt advisor or ‘credit counsellor’ tells you they can help you settle your debts for pennies on the dollar and, because they work for you, they can help you get a better deal than if you talk directly to a Licensed Insolvency Trustee. They present themselves as offering consumer debtor protection or debtor assistance. Their claim is that Licensed Insolvency Trustees work for the creditors (not true by the way) and that as a result trustees don’t have an incentive to get the best deal for the debtor. Since they are not Licensed Insolvency Trustees (true) they claim to be operating in the best interests of the debtor (not always so true).

What they are really doing is charging massive fees to help you through the consumer proposal process, or in other words, they charge a highly expensive, and totally unnecessary, referral fee to see a Licensed Insolvency Trustee.

Unfortunately, getting their help means signing a contract requiring the debtor to pay substantial fees and complete certain documents before they receive this referral. These fees often amount to several thousands of dollars. Yet, these fees are not for debt settlement services – they are referral fees. Hence these new debt consulting companies do not fall under the jurisdiction of Ontario’s debt settlement legislation. So no fee limits, and fees can be charged before any real value is provided.

As to whether they can help you achieve a better deal, it’s unlikely for the following reasons:

  • As Licensed Insolvency Trustees, we work with individual creditors daily and as such we are well aware of what type of deal large creditors are willing to accept. Creditors do not look favourably towards lowball offers and can, in response, counter with a much higher request than the debtor can afford or may simply vote against the proposal.
  • Even if the debt advisor convinces the debtor to propose lower proposal terms, and these terms are accepted by creditors, the savings are rarely sufficient to warrant the substantial fees paid to the debt consulting company.

Scenario #2: The ‘Law’ Firm

As mentioned earlier, lawyers are excluded from the requirements under the Collection and Debt Settlement Services Act and this includes limitations against upfront fees. As a result, some large debt settlement companies have just rebranded themselves as legal representatives. They are now acting under the umbrella of a law firm to circumvent the rules since lawyers are excluded from the legislation. These are the same agencies as before, just with different window dressing.

Again, the settlement process being offered through these agencies is the exact same process the Ontario government tried to stop. I recently received a call from a prospective client who approached one such company before calling us. In reviewing the documentation provided to this individual, a redacted copy of which can be found here, their four step process is much the same as it was prior to any new legislation:

Step 1: Provide information including a financial capacity and proof of income. They also ask for a financial hardship letter which makes it all look very official.

Step 2: As your debt ages, forward all calls to your assigned ‘law clerk’. You can read this to mean you should stop paying your bills.

Step 3:  Follow the payment plan outlined in the client retainer agreement. You can read this as submit all payments upfront before any settlement can be arranged.

Step 4: Stay in touch. They admit it can take six to eight months to arrange a debt settlement.

As you can see, this is the same old debt settlement scam that asks people to stop paying their bills, pay money to the debt settlement company and wait, hoping they can arrange a settlement. In the meantime, creditors will call, will pursue legal action and their situation worsens.

It bothers me to see that the debt settlement landscape hasn’t really changed. While the new legislation may have slowed down deceitful debt settlement practices for a time, they have returned in full force. So the leopard has changed his spots, but not for the better.

If you are looking for a safe way to settle your debt, consider the only legally enforceable debt settlement program in Canada which is a consumer proposal filed through a Licensed Insolvency Trustee.

Renting Vs Buying: Which One Makes More Sense?

J. Douglas Hoyes

Posted in Money Management

Reading time: 28 minutes

Hoyes, Michalos & Associates Inc. - Hoyes, Michalos & Associates Inc. | Ontario Licensed Insolvency Trustees
Text stating buy or rent

Given today’s real estate market, it’s not surprising that the most popular podcast episodes of this year featured Hilliard MacBeth discussing his book, When The Bubble Bursts, Surviving the Canadian Real Estate Crash, and Ben Rabidoux sharing his thoughts on the Canadian real estate market.

Listeners want to know if they should rent or if they should buy? While I am not a real estate expert, I want to help those who are trying to decide by comparing the different possible outcomes of renting vs buying.

From our own Joe Debtor study, we know that home owners in high ratio mortgages are at an increased risk of becoming insolvent. The average insolvent home owner had a mortgage ratio of 90% and owed over $68,000 in unsecured debt. Why? Because most people focus on the mortgage payments and forget to pay attention to all the other costs associated with owning a home.

Renting vs buying

To help determine which one is a better option, I run through a few scenarios in the podcast. Please note that numbers are rough estimates for the general costs associated with owning and selling a home at the five year maturity date, and that the math has been simplified to help illustrate a point.

Let’s say I buy a property for $500,000 with a down payment of $100,000. Let’s say that the maintenance and repairs required over the five years, averages out to roughly $400 a month and my condo fees are $500 a month. Let’s see what happens when houses prices stagnate and when house prices continue to grow over the next five years:  buying

How much you will come out ahead obviously depends on how much the value of your home increases, but did you notice just how much other costs eat into that appreciation?

What happens if you rent? I looked into the costs of renting a $500,000 home and the average monthly rent was about $2,400 a month. Assuming you take the $100,000 down payment and invest that money in a TFSA, what would happen after five years?renting

 

Depending on the rate of return, you pay anywhere from $39,000 to $17,000, which isn’t bad considering you had a place to live for 5 years.

But how does renting compare with buying?buying vs renting

If the Canadian real estate bubble continues to grow, you could potentially come out ahead by $41,000. In this scenario, purchasing a home makes more sense. However, if the Canadian real estate bubble bursts and house prices stagnate, you could lose, in our scenario, up $54,216 over the five years, making renting a much better option. Especially, if you are able to get a good rate of return on your investment.

When comparing the two options, you need to consider all the factors, from your down payment, to the interest rate, to how long you plan to live there. Of course, there are also other factors that can have an impact on your decision to rent or buy, such as: the flexibility to move, being able to have pets, and to paint or decorate as you wish.

What should you do?

My advice to anyone it to think about what your future holds. Sit down and crunch the numbers for the different scenarios for your situation, and ask yourself the following questions:

  • What do I think my house will be worth in five years?
  • What will it be worth in two years?
  • What will it be worth when I decide to sell it?
  • What do I think interest rates are going to be?
  • Are interest rates going to keep going down or are they going to go up?
  • What happens if I have to renew my mortgage at a higher interest rate in the future?
  • What are your job prospects?
  • Are you in a very secure job that you’ll have for the next 20 years?
  • Or, are you in a job where there’s a chance you might get laid off?

Ultimately, run the numbers to see what makes the most sense in your situation and do not let FOMO (the fear of missing out) guide your decision making process.

Resources mentioned in the show:

FULL TRANSCRIPT show #Renting vs Buying a Home

Doug Hoyes: I can track how many people download the podcast version of each episode of Debt Free in 30 and I can tell you that so far in 2016, the most downloaded episode is episode 89, titled “Is the Real Estate Bubble About to Burst”, with my guest Hilliard MacBeth. Mr. MacBeth literally wrote the book on this topic with the book When The Bubble Bursts, Surviving the Canadian Real Estate Crash. Episode 94 with Ben Rabidoux, where we also talked about real estate was also one of our top downloaded real estate episodes so that tells me something. It tells me that Canadians are interested in whether or not they should be buying or selling real estate. Unlike Hilliard MacBeth and Ben Rabidoux I’m not a real estate expert, I have no idea if real estate in Ontario and Vancouver will keep going up or whether it will crash.

I’m recording this in July, 2016 so if you’re listening to this podcast at some point in the future you may already know the answer to that question. But as of today, I don’t. But here’s what I do know, you can make a lot of money in real estate but you can also lose a lot of money. When your house goes up in value, it’s great, when it doesn’t, well, it isn’t. And I know from past history that real estate problems have been an issue for people who ultimately end up having to go bankrupt or file a proposal.

Every two years we do our Joe Debtor study where we take a look at what the profile is of a person who ends up filing a proposal or going bankrupt. When we last did this study last year, one in four, so about 24% of the people who file a bankruptcy or do a consumer proposal, own a home at the time that they file. The average mortgage outstanding at that point in time is just under $200,000. However these are not average mortgages.

The average insolvent home owner had a mortgage ratio of about 90%. In other words 90% of the net realizable value of their home was encumbered by debt. The typical home owner was around 46 years old, they had an average net monthly income of just under $3,000. But they also had total unsecured debt of over $68,000. So, think about that. They’ve got a mortgage of around $200,000 but they’ve also got other debt, credit cards, bank loans and so on of over $68,000. And when you break it down in fact personal loans were about $26,000, credit cards were almost $30,000. They also owed something for taxes, student loans and some other debts.

So, why is that? Well, one of the reasons is when you buy a house, you need to furnish it. You need to do some landscaping, you need to do some repairs, need to put a new roof on it, got to paint it, got to do this, got to do that. All of those things cost money. And that’s one of the things people will when they’re buying a house. They look at the numbers and then go okay, well the mortgage payments going to be this much a month, I can afford that and they forget about all of the other things.

So, what I’d like to do today is give you my thoughts on real estate. And I want to give you how I think about this decision should I buy a house or not, should I sell my house or not. I’ve been talking to a lot of people this year who own houses that have gone up in value, but they also have a bunch of other debt just like I talked about with our typical client. And so, they come to me and they say hey, what should I do?

Well, it’s a difficult decision. On the one hand if you sell your house you can cash in, get some money and use that money to pay off your credit cards and bank loans. But then of course you don’t have a place to live, you now either go to buy a smaller place or you’ve got to rent. Does that make sense? Well, that’s what we’re going to talk about today. I also talked to other people who perhaps have gone through a bankruptcy or proposal, they’re finished, they’re credit’s starting to look good, they’ve done some things to repair their credit and now they’re deciding should I buy a house or should I continue to rent? Well, we’re going to talk about the thought process behind that decision today as well.

Obviously the answer depends on what the real estate market is going to do in the future. In places like Vancouver and Toronto, it’s been going up literally for years and years and years. If it continues to do that, then yeah, I guess buying is a good idea, interest rates are pretty low right now. If they stay low, again buying is a good idea. But if interest rates go up or if the economy slows down and as a result real estate prices go down, not so good an idea.

So, how do you actually think through that decision? Let me give you an example. And here’s how I would do it. I’m going to pick a mythical property and I’m going to assume that that property sells for $500,000. Now this could be a good sized house in a place outside of Toronto or it could be a relatively small condo in Toronto. Let’s assume that you’ve got a $100,000 saved up as a down payment. Now I understand a lot of people aren’t going to have that but to keep the math simple, let’s assume that. Let’s assume that you can go out and quality for a mortgage, a five year fixed rate of 4%. If you’ve got really good credit you’re going to actually get a mortgage interest rate lower than that right now but let’s again to keep the math simple, assume you’re going to buy a $500,000 downtown in Toronto, you’re going to have $100,000 down payment, you’re going to end up with a mortgage for five, locked in at 4%. So, if you amortize the mortgage over 25 years, so the rate is guaranteed for the first five, but you’re going to be paying it off over 25 years, your monthly mortgage payment would be $2,104.08.

So, let’s assume you’re going to live in this place for five years. You’ve got a five year mortgage locked in, you’re going to live in it for five years. Well, after five years if you pay $2,104.08 every month for 60 months, after five years you’ll have paid just over $126,000 in mortgage payments. The balance of your mortgage at the end of five years, obviously your mortgage started out at $400,000 ’cause you had $100,000 down payment, at the end of five years, your mortgage balance will be just over $348,000 so you will have paid down just under $52,000. The difference of course is the $74,000 you paid in interest.

Now let’s assume the maintenance fees are $500 on this condo that you’ve bought. If you are buying a house, well there aren’t maintenance fees but obviously you’ve still got property taxes and things like that so again I’m keeping round numbers just to keep it simple. If you own a place there’s also repairs and maintenance, the fridge or the stove or some light fixture or something goes wrong you’ve got to replace it, you’ve got to clean the carpets, you might have to repaint. So, let’s throw in another $400 a month for repairs and maintenance. And I realize some months you don’t have to pay anything, other months you’re going to pay more than that. But let’s assume over the course of the five years it averages out to around $400 a month.

So, to own the condo or the house you’re going to need $100,000 down payment and you’re going to pay mortgage payments of $2,100 a month, maintenance fees and property taxes of $500 a month and repairs and maintenance let’s say $400 a month. So, roughly that is about $3,000 a month to own this $500,000 condo.

So, what would it have cost to rent this exact same place? Well, I went on the internet and did some searching around and you can probably rent the exact same place for about $2,400 a month. And in fact I had a meeting with a property manager back in June and that person told me that yeah, the average investor she works with who owns a condo and she then rents it out for them, is cash flow negative somewhere between $300 and $600 a month. In other words the investor takes the money from the renter to pay the mortgage and condo fees and everything else. But it’s not enough to cover all the costs, so each month the investor who owns the condo and is renting it out, has to kick in somewhere between $300 and $600 a month. Well, that’s what my numbers are showing as well.

So, let’s do a comparison here. Let’s assume that I’ve got $100,000 for the down payment and I’m either going to buy the $500,000 condo or I’m going to rent that exact same condo. So, option number one, I’m going to rent it. So, let’s assume I take my $100,000 down payment and I invest it ’cause obviously I don’t need it., I’m not buying a place. And let’s assume I can earn 1% a year on it after tax. So, maybe I’m earning 1% in my TFSA so there’s no tax on it or maybe I’m earning more than 1% but I pay the tax on it.

So, I can rent and pay $2,400 a month in my example. So, after five years I’ll have paid $144,000 in rent and I will still have original $100,000 investment. So, with the interest at 1% a year, it’ll have grown to about well just over $105,000 after five years. Now of course if I can earn more than 1% I’ll have more. If I can earn let’s say 5% a year, then at the end of five years I’ll have $127,000. But let’s keep it simple, let’s assume I only earn 1%. So, I paid $144,000 in rent, I have $105,000 now in savings at the end of five years, so my net cash reduction over those five years was well, $38,889 to be exact. But let’s assume it’s roughly $40,000 and that makes sense because I actually had a place to live for five years. So, makes sense that it would have cost me something.

Now let’s look at the second option, buying. So, let’s assume I can buy the condo for $500,000 and I’ll use my $100,000 in savings for the down payment. So, I go out, I get my mortgage and as we went through all the numbers I’m going to pay over five years let’s say about $3,000 a month, which is about $180,000 over five years. So, my net cash drain is $180,000 as compared to only $40,000 for renting. But of course that’s not a valid comparison because I still own this condo I just bought. I own a condo that now has a mortgage on it after five years that has been paid down to just over $348,000.

So, let’s assume I could sell it for exactly what I paid for it, $500,000. I’d have to pay real estate commissions of let’s say 5% and I’d probably have $1,000 in legal fees to sell it. And let’s assume that there are no penalties to break the mortgage because I locked in for five years and now it’s maturing and now I’m selling. So, I sell for $500,000, pay the $25,000 in real estate commissions, pay $1,000 in legal fees and I pay off the mortgage of $348,000. So, I’m left with about $125,784.

So, I paid out $180,000, $3,000 a month while I lived in the condo for five years. Obviously that included my condo fees and repairs and maintenance and everything. But I recover about $126,000 when I sell. So, my net cost for five years was about $54,000. So, to compare, renting cost me $40,000 for five years, owning cost me $54,000 over five years. In this example renting was better from a numbers point of view.

Of course I can change the assumptions and get a different answer. If the home went up in value over five years, so instead of being worth $500,000 at the end of five years, let’s assume it was worth $600,000. Well, in that case when I sold it, my real estate commissions would have been a little bit higher but I would have netted about $221,000. So, my cash costs for those five years were actually a positive $41,000. In other words I owned a condo for five years and even with all I paid in costs, I’m still $41,000 ahead. That’s better than being $40,000 in the hole over five years. You can see from this example that the breakeven point will be somewhere around 10% increase in the price of the house or a sales price of about $557,000.

So, from a math point of view, here’s the question you’ve got to ask yourself. If you plan to own the condo for five years, what are the chances that in five years you can sell the condo for more than $557,000? If the chances are good, then owning may make sense financially. In my example you can sell the condo for about $515,000 in five years. That would be about the same as renting. So, your cash would go down by about $40,000 over those five years, which is about what you would have lost over five years by renting. So, just so we’re clear on that, if you sell the condo for $515,000 at the end of five years, that’s almost exactly the same as renting.

Now again, if you change the assumptions, the math will change. If you assume that you could earn 5% per year on your investments, you could rent and invest the $100,000 in cash and in investments instead of using it for a down payment, so at the end of five years, your investments going to be worth over $127,000. So, I paid $144,000 in rent, I have $127,000 in savings at the end of five years. So, my net cash reduction over five years was just over $16,000, so, to compare that to buying, how much would you have to sell your house for in five years to be only down $16,000? Well, the answer’s about $540,000.

So, you see how changing some simple assumptions makes a big difference. If you can earn 5% on your down payment money by renting you earn that money and renting starts to look a lot better than buying. So, as you can see there are many factors to consider. How much can earn on your down payment? What’s the interest rate on your mortgage? What will you pay in condo fees, property taxes and repairs and maintenance? If you buy a brand new condo it’s possible that repairs and maintenance will be very low because none of the appliances will need replacing in the next few years. If you buy a used condo or house it’s highly likely that you’ll be replacing a lot of stuff in the next five years.

Now of course in my example I just assumed that you had $100,000 down payment, well there’s not a lot of people who are walking around with $100,000 in their pocket. If you only had a $50,000 down payment or a smaller number, then the interest rate on your interest rate on your mortgage is going to be higher. If you have less than a 20% down payment, you need mortgage insurance, which usually you get through CHMC, your lender arranges all of this. But what it means is your monthly mortgage payment is higher than the number I was using in my example. So, if you don’t have the big down payment, then the mortgage is going to cost more and the math obviously is quite a bit different.

Now of course there’s a bunch of things other than just math you have to consider when you’re going through this thought process of should I buy or should I rent? Should I sell my house and rent? What should I do? Some of the non math considerations, the non financial considerations are things like security. If you are renting a condo and the landlord decides to sell it, well at some point you’ve got move out. If you’ve got a one year lease at the end of that one year lease, he can kick you out if he wants to sell it. If you own your own place, you’re in complete control, you can stay there as long as you want. What about things like painting the walls? Well, your lease might say no, the landlord takes care of all that. But if you really want to have your office painted in red or your bedroom painted in green, well if you own the house you can do whatever you want. If you’re renting, you don’t have that flexibility.

What about things like pets? Well, if you own your own house, you can have as many pets as you want, nobody can say anything. But if you are a tenant, there may be rules either in your building or that your landlord has imposed saying that you can’t have certain pets. What about flexibility? If you own your house and you decide to move let’s say you find a better job opportunity in some other city, some other province and you want to move, you’ve got to sell your house. That obviously takes time, you’ve got to have a real estate agent involved, you’ve got to have people coming through your house to look at it, you end up paying real estate commissions and so on.

If you are renting your house, then you’re a lot more flexible. You can say okay, I’m done, I’m out of here at the end of my lease. Here you go landlord. And if you’ve been there for a year you’re probably on a month to month lease anyways, so it’s real simple. You give your landlord 60 days notice or whatever’s required under your lease and you’re gone, no costs, no hassle. So, renting gives you in a lot of cases a lot more flexibility than if you own.

What this all comes down to is your view of the future. What does that future hold? And unfortunately that’s an impossible question to answer. So, my advice is to sit down and crunch the numbers under different scenarios and it’s pretty easy to do with a simple spreadsheet, you can do it with a pen and a calculator, ask yourself some questions. The first question would be okay, what do I think my house will be worth in five years? What will it be worth in two years? What will it be worth when I decide to sell it? What do I think interest rates are going to be? Interest rates right now are about as low as they’ve ever been. Are they going to keep going down or are they going to go up? What happens if I have to renew my mortgage at a higher interest rate in the future?

You want to play with all these different scenarios and that helps make it a lot clearer. I think at the very least I’d be talking to my friends who own a condo or who own a house of the kind that I’m thinking of buying, and ask them what does it cost them to live in their place. Because we’ve ignored all the other things like hydro and gas and all the other utilities and other costs. You want to have a pretty good idea of what you’re getting yourself into. Because I’ve met with a lot of people who said hey, I had no idea it was going to cost that much to own my house. I knew I could cover the mortgage but I didn’t realize about all these other things. I think the final thing about the future to consider is what are your job prospects? Are you a very secure job that you’ll have for the next 20 years with no problems? Or are you in a job where there’s the chance you might get laid off? Again, important things to consider.

I’ve got some more thoughts on this as to how to make these decisions and I’m going to talk about that in the Let’s Get Started Segment but first we’re going to take a quick break. You’re listening to Debt Free in 30. I’ll be right back.

It’s time for the Let’s Get Started here on Debt Free in 30. This is the segment of the show where we talk about practical advice. Today we’re talking about real estate and I’ve been giving you my thoughts on how to make the decision about whether you should buy or whether you should rent. Obviously in some cases the decision is made for you. If you don’t have any money for a down payment then it’s pretty much impossible to buy unless you want to be borrowing at massive interest rates.

But if you have a down payment saved up, should you buy or should you rent? And as I went through in the first segment, the thought process is fairly straightforward, you need to start by crunching the numbers, obviously there are some non math considerations that we talked about. Do I want to be able to paint the walls whatever colour I want? Do I want to be able to have pets? Am I worried about the landlord kicking me out? Putting those aside from a math point of view, the starting point is to either open up a spreadsheet or get a pencil and paper and do the math.

So, do the scenario if I rent, how much will it cost me? You want to start by assuming how long it is that you are likely to live in that particular property. So, in the example in the first segment, I assumed well, I’ll probably be here for five years. Okay, what is my rent going to be over five years? In the example I used in the first segment, I just assumed the rent stayed the same $2,400 a month for the whole five years. Obviously it will probably go up each year so maybe you want to build in a couple of percentage points each year. That’s fairly simple.

The buy and mortgage scenario is a little bit different. Obviously in the renting scenario you can invest your down payment ’cause you don’t need it to buy the house. How much can you earn on that? Well, again that’s a little more tricky but you can talk to your financial advisor, you can talk to your bank and see what deals are out there. If you know you’re going to be living in the place for five years then you could lock your down payment investment, which you don’t need for the down payment, into a longer term GIC to earn some extra interest. Perhaps over a five year time period it’s worth putting it into mutual funds, ETS, the stock market, whatever. Those are all decisions for you to make.

Then you do the math on the buying. The most important consideration of course is what will the house be worth in five years? And that’s an impossible question to answer. It’s very difficult because if you’ve only been watching real estate in Vancouver or Ontario, particularly the Toronto area for the last five or 10 years, you will assume that real estate always goes up, it doesn’t. Real estate goes up and then it goes down. It can’t always go up because otherwise a small tiny condo in Toronto will eventually be worth 100 million dollars, that doesn’t make any sense. At some point there’s too much supply, the costs get too high, interest rates go up, the economy goes into a recession and prices go down.

I know this for a fact and I’ve told this story before, I bought my first house, it was a townhouse back in 1989. The real estate market peaked around 1987, 1988 and so I thought that by buying in 1989 I was getting a really good deal. And in the complex that I bought my condo in, my townhouse condo, just north of Toronto, the – somebody the year earlier had paid $275,000 for a unit. I was able to buy mine for $205,000. So, I thought hey, this is a fantastic deal, obviously the market has peaked and has stated to come down, I’ve got a great deal on this.

Well, as it turned out I owned that condo for seven years before moving out to the Cambridge area. And over that seven year period, I lost $20,000, in other words I sold my condo seven years later for $20,000 less than I paid for it. That’s what happens in the real estate market. It goes up but it can also go down. The period back around 1989/90 was very similar to the period we’re in now here in 2016. We’d had a great run up in prices and everyone thought they would continue to go up forever, that’s not the case. They stabilize, they start to come down but then they keep coming down because now people are going okay, I better cash out. So, all those people who are buying, buying, buying and buying a second property and a rental property that help prices go up, are the same people are selling that help prices go down.

So, here’s the question for you, if you buy your house can you weather the storm if when it comes time to sell it’s worth 5% or 10% or 20% less than what you paid for it. Yes, if it goes up that’s fantastic, you make lots of money but it is equally likely, particularly given how high the market is right now, that it could go down. That’s why my advice is if you are risk adverse, if you don’t want to have to worry about interest rates going up when it comes time to renew your mortgage or if you don’t want to have to worry about the house price being lower when you sell it, then the safest option for you is to rent.

It may or may not make sense purely based on the numbers but from a sanity point of view, a risk point of view, renting is often a very good idea for a lot of people. Crunch the numbers, put in different assumptions and see what makes sense in your situation. That’s the Let’s Get Started segment. I’ll be back to wrap it up in a moment. You’re listening to Debt Free in 30.

Announcer:       You’re listening to Debt Free in 30. Here’s your host, Doug Hoyes.

Doug Hoyes: Welcome back. It’s time for the 30 second recap of what we discussed today. On today’s show I talked about real estate and more specifically how you can make the decision about whether you should buy or whether you should rent, whether you are a new home buyer or whether you’re considering selling your property that you have now, cashing in, using the money to pay off debt and going to rent. That’s the 30 second recap of what we discussed today.

I think there’s one other key point that we didn’t address and that’s what’s called FOMO, the fear of missing out. A lot of people are buying real estate today because they’re afraid if they don’t buy today, prices are going to up and they’re going to miss out. If I don’t buy today, by next year prices will be so much higher, I will never be able to buy a house. As I said in the first segment and in the second segment, prices do not go up forever.

So, if you can’t afford to own a home today, if you don’t have a significant down payment or if you’re worried that prices may go down in the future, don’t worry about missing out. There’s nothing wrong with renting. Save your money, take whatever down payment you’ve got saved up, invest that and be quite confident that renting is not a horrible idea. You are saving your money, you’re eliminating risk, if house prices do go up, oh well, you’ve still got a place to rent, no big deal. But if house prices do go down because interest rates go up or because the economy gets weaker, you’ll be in a much better position to buy in the future. That’s the safe alternative.