Harry

How one's financial life divides up in Canada

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Harry

How one's financial life divides up in Canada

This thread is dedicated to the notion that the order of priorities, and the order of the amounts involved, in matters like Job income, House, mortgage, car etc are both different in Canada from what South Africans are used to. I believe it is important for folks to realise that.

Once one has lived through the mind-numbing wait for a Permanent Resident Visa and one has Landed in Canada, the typical South African over 30 years of age (particularly the males) start putting together their new lives by trying to re-establish everything the family had in South Africa....or at least as close as they can to it.

Pretty soon it becomes evident that things just do not work the same way and frustration and anxiety sets in. This thread is aimed at addressing this aspect.

So, it is not focused on different spelling, or catch phrases, or different school systems or different car licensing arrangements or job searches etc. It is aimed at the fact that one has to look at the FINANCES of one's family in a different way.

I shall kick off with a post based on data from Financial Times published by the National Post this Saturday.

P.S. It is worth remembering that it would be a problem for non-"ticketed" parties ( like myself) to provide financial advice in Canada....another of those protection problems I have referred to elsewhere. I have thus far had better financial advice from others on SACanada than from paid consultants. However, be that as it may, we may not actually provide that advice.

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Harry

About Canadians, their homes and their savings

National Post ran an article on Saturday 1 October, 2005 under the title "Property Index : By the numbers"

They gave a lot of interesting numbers, but here is the bit that I believe newly arrived South Africans should pay attention to:

* Outstanding balances on mortgages $277 Billion CAD

* Percentage of Canadians with home equity loans in 2004 : 22%

* Outstanding balance of home equity lines of credit : $65 Billion CAD

* Percentage of home equity loan money used to fix up houses: 25%

* Percentage of pre-tax household income needed to service the cost of owning a standard two-story house: 41.8%

* Increase in Canadian home prices in the past decade: 50%. Vancouver MUCH higher and Fort MacMurray the most

* Increase in the Toronto Stock Exchange during that time : 22.8%

* The most expensive city in Canada : Toronto

Background:

When I first realised that salaries in Canada are not high by Western standards ( In fact they are amongst the weakest of the developed countires...distinctly lower than the USA and much lower than the UK and Germany), I could not reconcile this with the fact that everyone was forever buying the latest and greatest car and was going on trips to Cancun left right and centre. Sure, a trip to Cancun is not THAT expensive and cars are much cheaper here than in SA. However, to me there appeared to be a distinct disconnect between income and spending in this country.

It now turns out that I have been right. A recent report stated clearly that Canadians are now -0.5% (negative!!) on active saving. That is, there is a nett pull of money out of their savings accounts and such like investments. The stock market has not been a source of great investment returns since 1999 and the Dot com Bust. However, the low mortgage rates ( listed as typically 5.8% for 5 years, but stated to me as 4.6% just yesterday if you shop around...my own payment in 2003 was something like 3.5%) have caused house prices to soar, and that's where the money went that people WOULD HAVE saved.

So What!?

OK, so people put their savings into their homes instead of their savings accounts. That is most certainly what we have done as a family...doing our best to kill the mortgage while rates were low and other investments were demonstrably worse than lousy. That, I would say, makes sense.

However, now look at those stats above again, while realising that most folks in Canada run a collection of credit cards and 40% of them certainly DO NOT PAY OFF all their credit card debt per month. Folks have put their money in their houses, and are mostly still nursing a huge mortgage. I know it is at (say) 4.6%, which means they pay about A THIRD of what a South African borrower pays in SA. That means you can borrow about three times as much capital for the same "price" ( Welcome to a stable country).

To get a mental grip on some of this, I perused the www.Realtylink.org website and their formulae to get the following model family, based on a house I chose in Port Coquitlam near Vancouver:

Purchase Price of Property: $409,000

Location: Port Coquitlam, BC ( Vancouver Tri-Cities area)

Mortgage TERM : 5 Yr

Down Payment $ 143,150 ( 35% selected to get 4.6% rate)

Total Mortgage Amount $ 265,850

Monthly Mortgage Payment $ 1,486

Monthly Property Taxes $ 206

Monthly Heating Costs $ 200 (estimated)

TOTAL Monthly Payment $ 1,891

Household Income Required as per the rules of Canada-Mortgage: $ 70,921 ~$71,000

For a 5.8% mortgage the mortgage payment is $1,669 per month and the required income is $77,800

I copy here the rules as laid out by Canada-mortgage governing "income" and "expenses":

The Household Income Required figure of $ 70,921 is the minimum amount of Gross Income to qualify for a total mortgage of $ 265,850 under generally accepted underwriting guidelines. Typical loan qualification criteria requires that borrowers spend no more than 32% of their gross income (Gross Debt Service Ratio or GDSR) on shelter financial obligations including mortgage payments, taxes, utilities & half of condo fees. In addition, borrowers should spend no more than an additional 8% to 10% (Total Debt Service Ratio or TDSR = 40% to 42%) of their gross income on all other financial obligation including personal loans, car loans, credit cards and other debts. The calculation therefore assumes the total of all non-shelter financial obligations will not exceed $ 5,674, or an additional 8% of the required household income. The minimum loan term is set at six months. The greater of the current three year posted mortgage rate or the actual contract rate may be used for calculation purposes. Borrowers may be required to demonstrate their ability to cover closing costs equal to at least $ 6,135, or 1.5% of the $ 409,000 purchase price.

That figure of $71,000, by the way, is higher than the average Canadian family income, which is somewhere between $55,000 and $60,000, depending on who you ask. I believe they estimate low, but make of it what you please. I believe $71,000 is at the high end of the ball-park.

NOW, armed with this, Back to the National Post:

According to them, our $71,000 Port Coquitlam family is still paying off on that mortgage. HOWEVER, they have meanwhile borrowed against their share of the value of the house. That is, if they have paid off (say) half of mortgage amount of $265,850, then they now own (265,850)/2 + $143,150 = $276,075 of that house and still owe $132,925 on it. By now the Bank will have talked them into a "Mortgage line of Credit", based on that 67.5% of the house that they own. Ostensibly this is for home improvements, but the bank will explain that they do not care what you do with the money, like buying a new car....ANYTHING TO GET YOU INDEBTED to them!

According to National Post, our little Port Coquitlam family owes the bank (65/277)X132,925 = $31,192 in Home Equity Loans, over and above the $132,925 they still owe on the mortgage.

According to the National Post, our little Port Coquitlam family has used around $8,000 for home renovations ( adding value to the house, e.g. bathroom or kitchen renos, typically). The other roughly $23,000 was more than likely used to buy the new Chrysler Caravan on a cash back basis while prices are good. Actually, it is likely that they paid up the credit card with some of that, in order to avoid paying 18% interest. The mortgage line of credit is typically around 1% above prime rate.

You see, once you've GOT the first mortgage, you don't get too many questions. Then they are less worried about how solid your finances are and more worried about how they can snare you for debt. All thebanks then merely fight one another for you as an object of potential debt.

My View:

I know that I last messed with SA mortgages in the 80's. I know the game there has changed since. I know that the building societies offered mortgage lines of credit. I had that and never used it there. At the time, one's pension was the BIG BIG BIG thing that one worried about for retirement. One's house came next, on the basis that one was going to retire IN IT. The car, by the mid -nineties, was half as much as the house!!

It is simply different here. The house tends to be a bigger deal and the pension stuff much less so. The car is insignificant in the grand scheme of things.

In North America it is not only business that is hugely greased by credit...every individual's life is entangled with the rise and fall of interest rates in a very very very tight fashion. People live much more on credit over here than what I was used to.

Our little Port Coquitlam family is probably composed of mom, dad and two kids. They SHOULD have an RRSP and definitely an RESP, but I bet you they never looked at RESP. (Different subject, look elsewhere, but if you have kids...start one now.). They have a Chrysler van, probably a second older car, a nice home, a bunch of tax deductions, a mortgage somewhere between 4.6 and 5.8% and they owe the bank another roughly $32,000CAD on their Mortgage Line of Credit and another $132, 925CAD on the mortgage. Then there are at least two credit cards, of which at least one is not paid up every month....not to mention the store credit card at Zellers. Hubby is probably NOT checking his credit rating FICA score regularly, but he may NOT be progressing.

However, when the 5-year term of the mortgage is up, they'll have to renegotiate. At that time the rate will likely be higher and the economy a bit better. If that rate goes to 7.5%, the monthly payment goes to $1,945 and I can only hope the family income has increased to $88,000, which would be the soundly required income according to Canada-Mortgage. That means a 3.5-4% increase per annum. Not likely!

That's when he is going to rue the Mortgage Line of Credit, the overspent Zeller's card and the not-so-new Chrysler. The higher mortgage rates will lead to a flattening of house prices and our little family will have their lives entwined with that house......and they'll have little if any other savings.

I hope this helps to sketch a picture of Canada and home finances, and also gives some colour to the dangers lurking in the picture. I am a cautious person by nature, but we also have a huge part of our family estate tied up in our house. This is unavoidable in Vancouver. So I watch these matters and refuse to use the mortgage line of credit that was foisted on me and "religiously" pay my credit cards which I use extensively. I never owe on a credit card. On the other hand, one only lives once and I'll probably die a bitter old miser that has not been to Cancun, while our Little Port Coquitlam family will somehow muddle through, because the national economy is based on them and their situation....Who is to say. I am not clairvoyant. To each his own.

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Harry

The Current State of Canadian Family Finances

2004 Report

This is a superb piece of work by a chap named by Roger Sauvé of People Patterns Consulting and the document may be found HERE

It is rather heavy reading, but it answers all these questions we get so often:

What is the average family income?

Can one get by with only one family member earning?

etc etc etc.

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grumbleguts

Harry,

This is very useful info - thanks, maybe you could setup links to it from some of the other forums (immigration topics in particular) so more folk get to see it.

neil

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Gautenger

Thanks for these insightful posts Harry.

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Deonm

Harry - Baie dankie,die artikel is in my beskeie opininie beslis een van die mees insiggewende artikels wat nog geplaas was.

Doen so voort.

Groetnis

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Harry

Thanks, Neil, Gautenger & Deon.

When one does this emigration/immigration thing beyond the age of 45, you have to make some serious calculations. I can understand why the Government makes 45 a sort of watershed age. Things just become a lot more complex. Most of those complexities are in the job and money domain.

At first one veritably bleeds money in all directions as you pay cash in your first year for a new life. Then you get some sort of first level of stability and you start making serious calculations. That's when it hits you that you are in effect back where you were when you were 33, but you have at best 20 years left to work. However, that is also the typical "amortisation period" of a mortgage. That's when you start worrying about whether you will ever own your house and whether you'll have enough money to retire at all and whether you'd have to take a manual job at Home Depot after retirement in order to make ends meet. Some of my friends had to and I seriously admire them for it, but thought it really hard on them.

It is so much better if you can sit down, make the calculations and set some savings goals, upper limits on mortgage payments, goal retirement kitties and stuff like that. It then struck me that everyone around me was spending money like it was going out of fashion. This got me to worry about what I was missing.

It turns out I was NOT really missing anything. People really live that "close to the edge here". Maybe it is because there is a safety net. Maybe it is just the sixties Flower-Power self-indulgent generation that is struggling to grow up....I dunno. But I find it scary. That's probably why I am not a hugely successful businessman and find myself in a salaried job instead. Maybe I should buy another house and take a huge mortgage and speculate on the thing...but that's not me.

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Harry

It's now a year since I wrote the articles above, and I still believe in every word I wrote there.

However, since then, I have seen figures published indicatingthat people in Vancouver use up to 67% of their income on paying mortgages, utilities and property tax, and maybe 45% elsewhere in the country.

Today The National Post published an article that makes no sense to me whatsoever. It addresses the matter of "Middle Class Canada". They provide some numbers relating to family spending bythe so-called Middle Class.

There is something deeply and profoundly wrong with the percentages they give but the other numbers might be more realistic, though a number of them are sheer lunacy...such as $400 on average a year for driving lessons...that is an indefensible straight-faced lie( at least in BC). Mortgage payments of $11,856 sound more like they are talking only Nova Scotia and nowhere else. When they list things about "vacation homes" they have to be talking about Ontario, where it is the "in thing".

Lastly, will someone please point me at the university that charges only $3,300 per annum. The truth is that the figure ( for those who pay it) is closer to $6000. However, I guess quite afew families do not have kids at university and that brings the average numbers down.

6-10-21hhcosts.jpg

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Alwyn

I'm not even in Canada and it looks like somebody as clueless as Paris Hilton came up with those figures.

One obviously missing thing is the mortgage on the holiday home or is that included in the main mortgage?

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Harry

Alwyn,

I'd feel like National Post sullied the quality of this thread, but I also felt obliged to post their statements. I only hope folks will stick to the stuff I gave further above, which I regard as very carefully prepared, because I slaved over it.

I generally go with National Post, but in this case they screwed up utterly, as far as I am concerned. Maybe their editor is mathematically challenged.

I assure you, the average Canadian family spends way way way more than 19% OF THEIR TOTAL INCOME (let alone of their EXPENSES) on mortgage + property tax + Utilities. Three times that figure is more likely.

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pretor

The National Post figures probably illustrate that "average" is not a good statistic to describe income and cost of living. Such values are usually not normally distributed (I believe), so perhaps median, upper and lower quartile values may have been more instructive. Any statisticians out there?

However, the "Shelter" figures are quite a good approximation of what I pay in the bustling metropolis of Saskatoon, based on 2007 prices. Perhaps Saskatoon is an "average Canadian city"... I hope they based their percentages on the "average household income" in Canada and not on the "average single person salary". If it was the latter I'm being severely underpaid...

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Guest

Harry thank you for an informative post and keeping us immigrants in waiting for the bus supplied with valuable information. Posts such as these make this forum a great resource.

:ilikeit: Regards,

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johankok

Pretor - quite right - median might be a better representation, but in stats average is still one of the most important figures, especially couples with standard deviation. However, a national survey normally skew things a lot, due to the city / country side differences, and also the provincial differences, which are vast. A different problem is the "average" bond repayments, as most of them are based on bonds on houses purchased quite some time ago.

One will have to adjust these national average values to your potential local circumstances. When immigrating one has to adjust housing accordingly. Other things to take into account, is that one will most likely have to furnish the house completely, buy cars etc. Settlement costs tends to be quite high, thus could have a marked influence on living for a newfie.

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pretor

The document at the end of this LINK provides fairly recent (2006) inter-city comparison data. It illustrates the huge differences between cities. Having lived in Vancouver until May 2007 and since then Saskatoon, I find the ratios between figures for the two cities to be a reasonably accurate reflection of the true state of affairs, especially at the higher end of the scale (bearing in mind that I rented in Vancouver). Something a new arrival should bear in mind is that your salary in the big centres like Vancouver is not necessarily higher than in the smaller centres. Thus, with the lower cost of living you much more able to rebuild your life savings with a balanced portfolio and to afford that yearly vacation in Cancun/Europe/... without breaking the bank. The effect of cost of living on your "true salary" is discussed in this DOCUMENT. It's a few years old but it makes for interesting reading...

I can also support what Harry said about credit cards: use them extensively here (you get all sorts of different rebate schemes, mine gives me a certain % of my annual spend back) BUT kill the balance off IN FULL each month (i.e. use it as a debit card). That's the quickest way of building up a good credit rating. Using that strategy I was capable of getting my credit score up to 750 in about 10 months. Something else to bear in mind: you will most definitely be asked to secure your card for the first 6 months at least (or until they're happy with your credit score). That entails investing a sum of money with the bank equal to your credit card limit.

I hope this information is not off-topic. If it is, please zap it or move elsewhere. These were my experiences from March 2006 to present.

Post edited for language and additional links on 13 July @ 14:21

Edited by pretor

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johankok

pretor -- gexcellent link :ilikeit::holy:

I believe that repeating such information will just help people to keep it in mind. It is also a good hint that the large city might not result in a higher salary. --- Grr... I'll have to look for a career change or something to have a good excuse to live in a smaller place.

Edited by johankok

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jpd

The table above is a good indication on how Canadians as a whole allocates their income on different spending items - there is no such thing as an average Canadian. Firstly, people in different income groups will spend differently. Secondly, during different life stages people will spend differently. Thirdly, costs are different in different parts of the country.

As an example, when I first came to Canada, I spend just over 50 percent of my disposable income on shelter. Last year, when I was frantically paying off my mortgage, more than 80 % of my disposable income related to shelter. Now that the mortgage is gone, shelter costs only represent about 5%

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Bob Fitzsimmons

As a long time resident I have found this thread to be very interesting. True - There are a lot of those who max out their credir cards. Really dumb idea. Some spend 110% of their income. There are those who do not.

If you want to buid your Credit rating it's simple. Borrow 75% for 4 days, and put it in your bank account. You do NOT actually have to buy something - just a cash advance. On day 5 pay it back, with interest. If you over pay the interest they show it on your statement. Reduce your next interest payment a bit. Next week - Day one repeat etc., etc.

What they want to see is if you pay on time, plus the number of transactions. After 6 weeks ask for an increase and start again. After 60 days ask for a lower interest rate, because your a good customer.

Just don't be foolish and spend the money.

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pretor

Quite an interesting article HERE on the financial situation of Canadians. I hope the link continues to work, Yahoo sometimes remove topics after a short time.

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Dedré

Thanks Pretor, this is an flippen interesting read.

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Gordon

The abovementioned report is based on "The current state of Canadian Family Finances 2006" Vanier Institute whose 2004 figures Harry used when starting this thread. What is scary to note is that the total debt load to disposable income has now risen to 127%. However, this is not surprising as it is a worldwide trend and SA is not too far behind with this ratio. For those with foresight and vision this does not bode well for the future especially with the US economy tottering on the brink.....

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rroberts

I have been offered a job with a salary of $100 000 a year.Is this regarded as a good/fair/bad salary in Toronto?

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Guest CharlvS
I have been offered a job with a salary of $100 000 a year.Is this regarded as a good/fair/bad salary in Toronto?

I would say that this is a very good salary. I guess this kind of money would normally be earned by a couple.

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miena

You should ask if this is the value of the "package" or base. Do you have any benefits etc? What about bonus structure? What about ESOP etc.

Remuneration is pretty complex here, so please make sure what the 100k means. Toronto is expensive. It all depends on wheteher you are single or have a family with kids etc. In general terms I agree that a 100k base is a really good entry point if it is base only.

To really comment you should give information on what job it is and we can give you an idea if it is a fair offer.

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pretor
I have been offered a job with a salary of $100 000 a year.Is this regarded as a good/fair/bad salary in Toronto?

In post nr. 14 of this thread I included two links to studies that compare costs of living between different cities. In the second document, the authors looked at salaries earned by academics at various Canadian universities in absolute and cost of living adjusted terms. It makes for interesting reading and goes to show that one has to be careful not to only look at the number.... I'm sure you'll find the answer to your question in one of these.

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Jules
I have been offered a job with a salary of $100 000 a year.Is this regarded as a good/fair/bad salary in Toronto?

If it's base salary then it's a good start for sure. In Rand terms it's a mega income but remember that TO is expensive in Rand terms too. Your biggest decision is going to be real estate. What are you accustomed to?

If you want to buy near downtown then you wont get much on that income, unless you have a big downpayment. If you are willing to do a long commute then you can buy a decent size home that's a 45 to 60-minute commute and you will live more than OK. Just depends on what you are used to in SA...

$100k is better than most immigrants' first job. Take it!

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