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moneysense.ca, 11/04/08
This and That
- Now that taxes are fresh in our minds, it is time to plan to save taxes for 2008. Sixteen ways to beat the taxman from the Financial Post.
- Jonathan Chevreau says that QuickTax Web has been radically revamped this year and is now “neither quick nor painless”.
- Tim Cestnick says that paying down debt with the income tax refund may be a good idea.
- Common mistakes that people make on their tax returns from the Financial Post.
- Students can file their taxes for free via UFile.ca courtesy of an arrangement with the Canadian Federation of Students.
- The CRA offers free Tax Clinics for low-income individuals and families through the Community Volunteer Income Tax Program.
- Thanks to Scott for pointing out that you can opt out of junk mails through the Red Dot Campaign.
- 40-year mortgages have extended the real estate boom but Ellen Roseman writes in The Star that they hold dangers for homeowners.
Blog Roundup will return next week. Have a nice weekend everyone!
moneysense.ca, 11/04/08
I think it will be interesting to see if the stunts pulled by the QuickTax team this year have received enough of a backlash yet (in other words, if they hurt sales enough) for them to make a change for next year. I think that they have probably lost me as a customer forever this year as their changes motivated me just enough to check out Studio Tax and it has met all my needs (although I think the UI could use some minor polishing) and I’m going to be happy to send a donation to the Studio Tax developers.
oxCC: As long as StudioTax works acceptably for my needs, I’m sticking with them as well. It’s a bit rough around the edges but the developers are working to improve all the time, so it can only get even better.
Ellen Roseman’s article is interesting.
Owing more than your one’s home market value is a distinct possibility for many newer Canadian home owners. In a tight cash situation or job loss, it could spell disaster if homes don’t continue to rise 10% / yr (which is unlikley). Just ask our neighbours to the south.
Quick thought on 40-year mortgages:
Many people do use longer amortization periods as a tool to qualify for a house that they otherwise could not afford to buy, and probably should not buy. This places them in a very tenuous position, as the slow reduction of principle makes them more susceptible to the possibility of negative equity.
However, consider the case of a young couple that would qualify for a 25-year mortgage and choose instead a 40-year mortgage. I would play devil’s advocate for one reason to take an extended amortization: income considerations when children are very young. It can be difficult to afford a house on one income. At the time of qualifying, typically both incomes are required to qualify against the mortgage with today’s prices. Choosing lower monthly payments can act as a buffer during these 3-5 years of disrupted income while one parent is acting as caregiver. In this scenario, I would recommend that the couple get accustomed to making payments at the 25-year rate, and use the optional 40-year rate as a last-resort fall-back plan during periods of income disruption.
This plan does require financial discipline to direct excess funds to the mortgage instead of consumption. As discipline may not be all that common among young couples, it is hard to fully advocate this approach for all, but it could certainly work for some – kind of an insurance policy to be used only in dire straits. Anyhoo, this could be one, perhaps small, reason why extended mortgages have become popular.
I think it makes perfect sense to take a 40-year mortgage as long as you can pay it off as if it were a 20 or 25 year mortgage. Most mortgages let you pay extra up to 25% of the principle per year, so you can pay it off as fast as you are able. But in the event you lose your job, your actual required monthly payment is much lower.
However, the majority of people taking out 40-year mortgages are not doing that. They’re getting it because it’s the only way they can afford to buy a house. They not only can’t afford to pay extra, they’re just barely able to make the payments as it is. There was a story on CBC about a young couple in Vancouver who stretched their budget to the absolute max to squeeze into a 500 sqft condo for $300,000. Those people are screwed.
Ben, your assessment on the use of the 40 year AM is exactly why I went with a 35 year AM. My family income in 2006 was right around 60K or so, and we purchased a home for 102K in April of 2007. That summer my spouse decided to start her own business rather than go directly to work after school. This meant our income dropped and things are less structured. The 35 year AM really puts us in a better position to maneuver (even if it isn’t THAT much different).
Our actual aggressive goal is to pay off the home in under 10 years, the real goal is 12 years. Since I am 28, that would put me house payment free at 40. Hopefully the universe and lady luck play fair for that long.
Traciatim’s situation is perhaps the only one when a long AM makes sense. When we purchased our current home, we went with a 25 year AM, despite our plans to pay it off in 15. The longer AM gave some cushion in our budget in case one of us was laid off (and I was actually laid off within months of purchasing our home but that’s another story). But Aleks says my suspicion is that the current popularity of longer AM’s is due to deteriorating affordability and not for cash flow purposes. I agree with Telly that people buying a home today in hot markets are likely to face stagnating or worse real estate markets.
The two mortgages I’ve had in my life were 6-yr amortizations and I paid them both off in 3 yrs. I can’t even conceive of taking out a 10-yr mortgage much less a 40-yr mortgage! My employment situation is usually so volatile that to take a 6-yr amortization was worrying enough having that debt hanging over my head. Why would anybody want to hold a non-tax deductible debt for 40 yrs?
Umm… Because most young couples starting out (or wanting to start a family) don’t have 6 figure trusts funds or oodles of cash laying around? Canada should be proud of it’s home ownership levels, and should be supporting families to go this route. In the next couple decades, Canada is going to have a labour crunch, so either we’re gonna need tonnes of babies right now or increased immigration in the future. So if families don’t feel secure enough to have an extra kid or two, we’re going to have some big issues.
I don’t believe it’s a known fact that Canada is going to have a labour crunch in the next couple decades. Nonetheless, in regards to home ownership, I’m not sure that Canada should be proud of it’s home ownership levels. There was an interesting study that showed the correlation between home ownsership and unemployment:
“found a strong relationship between increases in homeownership and increases in the unemployment rate; a ten-per-cent increase in homeownership correlated with a two-per-cent increase in unemployment. (In the U.S., it may be worth noting, the states that have the highest unemployment rates—states like Alabama, Michigan, Mississippi—are also among those with the highest homeownership rates.) And reluctance to move not only keeps unemployment high in struggling areas but makes it hard for businesses elsewhere to attract the workers they need to grow.”
The full article is here:
http://www.newyorker.com/talk/financial/2008/03/10/080310ta_talk_surowiecki
telly: Thanks for the interesting link. The article does have a point that homeowners might be more reluctant than renters to move in search of jobs and provides a nice counter-point to the usual rah-rah about home ownership. Still, I think that, on balance, home ownership does seem to be a good thing… (assuming that we don’t live miserable lives just to own a home)
Link
“In the U.S., it may be worth noting, the states that have the highest unemployment rates—states like Alabama, Michigan, Mississippi—are also among those with the highest homeownership rates.”
Alabama and Mississippi are two states which have “right to work” legislation, which also has an effect on employment rates, and wages, as workers are less protected from actions of their employer.
DAvid