Buying a House or Rent

Advantage of Buying a House

-You end up being the owner

-Building Equity, Money will be yours

-Able to renovate and change as you choose

-Pets are your choice

-Homes usually increase in value over time (more equity/money)

-Parties and friends on your schedule

Disadvantage of Buying a House

-All responsibility is on you (Repairs, Money, Bills..)

-You might go into debt

-Need a down payment

-Bad Neighbours

-Interest on mortgage is more than renting

-"Other" Expenses (Insurance, Security…)

Advantage of Renting

-Cheaper

-No Maintenance

-No Down Payment

-Short Stay

- No tax

Disadvantage of Renting

-Bad Landlord

-Some don't allow pets

-No Changes

-Bad Neighbours

-Roommate

-Have to live by 'their' rules

-One Year Lease

-All your money is Lost

More Info:

http://warriorism.info/personal-finance-advice/renting-vs-buying-a-home.php

http://www.haesemathematics.com.au/samples/ibssl-2_15.pdf

Real-Life Examples:

http://www.getrichslowly.org/blog/2007/07/16/renting-vs-buying-the-realities-of-home-buying/

http://www.financefox.ca/owning-home-renting/

Example:

Determine the maximum affordable price a family should pay to purchase a home if they have a gross monthly income of $3600.00; monthly property taxes are $150.00, and monthly heating costs average $135.00 per month all year. The family is able to finance their mortgage at 7% and has $15000.00 available to put into a down payment.

Interest Rate Factor Table*

Rate Factor Rate Factor

6.0% 0.00640 8.0% 0.00763

6.5% 0.00670 8.5% 0.00795

7.0% 0.00700 9.0% 0.00828

7.5% 0.00732 9.5% 0.00861

Source:

http://realestate.yahoo.com/info/guides/buying-vs-renting

Buying vs Leasing

Trying to decide if buying a car or leasing a car can be difficult but educating yourself a little can help you out in the long run.

 Advantages to Buying a car

• You own the car
• You can make any modifications you want
• You can drive it as many kilometres as you please
• You can drive the vehicle for as many years as you want
• Buying is cheaper in the long run if you drive it for many years
• Buying is also cheaper if you plan to buy it outright without taking a loan

Advantages to Leasing a car

• Lower initial costs 
• Lower monthly payments through leasing a car versus financing a loan
• Repairs (that are not your fault) are the responsibility of the owner
• You like to drive a new and fairly trouble free vehicle
• No resale or trade in obligation

Disadvantages to Buying a car

• Financing is very expensive versus the low monthly lease payments.
• New cars are VERY expensive may have to settle for an old model
• Bound to a fix termed finance plan
• Down Payment can be costly

Disadvantages of Leasing a car

• More expensive in the long run if you choose to buy the car for residual value after the lease is up. You end up paying more than the car is valued at initially.
• No modifications Minor or Major
• Set amount of kilometres

With these pros and cons in mind deciding which one to choose is a good suggestion. If you have to have the best car on your block then leasing may be for you. But if you want to drive it for a long time and own it then buying a car will be the right path. Below is an examples of payment plans.

Leasing: A new luxury car has a purchase price of $24,500 and can be leased for 36 months with no down payment for $345 a month plus taxes. After the 36 months the car has a purchase option price of $14,500.

$345 (monthly payments) x 1.12 (tax) = $386.40 ( monthly payment + tax) x 36 months = $13,910.40 at end of the lease.
If you want to purchase the car it would now be $13,910.40+$14,500= $28,410.40 in total by the time the car is yours.

Buying: You can take out a loan to buy the car outright at an interest rate of 1.8% compounded monthly. When you buy the car you pay GST, PST and a down payment of $3000. Using the TVM solver we can discover monthly payments then the total cost of purchasing the car.
N=36 (Number of payments made to the account)
I%=1.8 (Interest rate)
PV=$27,440 (this is the initial car cost of $24,500 x 1.12 for tax) or the loan itself
PMT=$783.56 (monthly payment)
FV=0 (Future value of the loan)
P/Y=12 (Number of payments per year)
C/Y=12 (Number of compound periods per year)
Beginning or End


Now that we know monthly payments we can see how much we payed after the three years.
36 months x $783.56 (monthly payment) = $28,208 + $3000 (down payment) = $31,208 total after the three years.

To calculate how much was interest we simply subtract $27,440 (loan) from the total payed at the end of the three years. $28,208-$27,440= $786 dollars payed in interest

By the end in this situation that leasing the car is cheaper you own it after the lease is up and the only difference is the $3000 down payment you used when buying the car so it would be smarter to lease this car instead of buying it outright.

 A great site to find out how to build a car you enjoy and see what's in your budget is http://www.ford.ca/app/fo/index.do  this site  will allow you to build your own Ford vehicle and then choose payment options it gives you the option of financing and leasing to see which one is better for you.

Personal Finance

• Buying a House

Terms:
     - Principal- how much you borrowed from a bank (found by subtracting, the down payment form the selling price)
      -Down payment- your money that you use to help pay for the house. This is becomes your equity.
      -Mortgage- a loan secured by property
      -Equity-share of the value of the house
               Example: if you owe $100,000 on a $300,000 home, you have $200,000 of equity on the day you move into the house your down payment is your equity.
      -Interest- the amount you pay the bank to borrow their money. It also called "the cost of borrowing"
      -Mortgage payment- a regular payment to the bank that pays for the interest and pays down the unpaid balance. (monthly, semi-monthly, biweekly, weekly)
      -Amortization period- how long will it take to pay off the mortgage, often 25 years
      -Term- the length of time a mortgage agreement is good for. Anywhere from 6 months to 10 years. When the term is over, a new agreement must be reached with a new interest rate.




 Initial Cost of Buying a House:
- Appraisal fees - When borrowing money the lender (e.g., bank) must determine the value of the property. A certified appraiser will determine the value of the property.
- Inspection costs- An inspection of the property is not absolutely necessary, but it will let you know if any repairs are required or if the house has any structural problems.
- Property survey- This will supply information on how buildings, fences, and the like are situated on the property. If there are any easements on your property, it is a good idea to know about this before making the purchase. Easements are rights of way by the town, city, or utility company to access your land for specific purposes such as digging up telephone wires. Anencroachment is an intrusion onto your land by a neighbour's structure, or possibly an encroachment on your neighbour's land by something on your property. In either case, you would certainly want to know about this before purchasing this property. If a recent survey is available to you, a property survey may not be necessary.
- Insurance costs for high ratio mortgages - You must pay additional insurance costs if you have a high ratio mortgage. A high ratio mortgage is a house loan where less than 25% of the original cost of the home is paid with the down payment. The cost for this insurance is usually about 1.25% -3% of the total mortgage, depending upon the amount of your down payment.
- Home insurance - As soon as you purchase a home, it is wise to purchase home insurance.
- Land transfer tax- Some provinces levy a tax on any property that changes hands. As the buyer, you are responsible for this cost. It is usually a small percentage of the purchase price.
       0-$30,000         nothing
  $30,000-$90,000    0.5%
  $90,000-$150,000  1.0%
  over $150,000        1.5%
- Interest adjustments- The buyer is responsible for any interest payable between the closing date (the date of possession) and the first mortgage payment.
- Prepaid property taxes and utilities- You will have to reimburse the seller for any utilities or taxes paid for the period of time you own the home.
      month/12*annual amount
- Legal fees - It is normally a good idea to hire a lawyer you trust to look after all legal transactions.
- Sales tax- GST may be charged when buying a new home in Manitoba.
- Moving expenses - You may need to pay professional movers, rent a truck, or hire helpers when you move. Driving expenses, meals, and motel bills may also be part of the cost of moving.
- Service charges- Hookup fees for telephone, TV, and utilities will likely be added to your first bills.
- Immediate repairs- Some of these may be necessary prior to your moving in. You may want to negotiate the cost of these repairs with the seller.
- Appliances - You may need to buy appliances such as a fridge, stove, washer, dryer, and/or dishwasher when you move in.
- Decorating cost- You may want to do some painting, wallpapering, carpeting,before you come in.

• Gross Debt Service Ratio (GDSR)

Your GDSR should not exceed 32%-highest amount you should spend
GDSR= (monthly mortgage+ monthly taxes+ monthly heat)/gross pay*100%

•  TVM Solver

    N=total number of payment to the account
    I%=annual interest rate as a percent
    PV=present value of the account
    PMT=payments made to the account
    FV=future value of the account
    P/Y=number of payments made per year
    C/Y=number of compounding periods per year

• Buying vs Leasing a New Car

1. Buying a car

When calculating the price of a new car, we first have to subtract the value of any trade-ins. Then we add the GST (5%) and PST (7%) to the difference to find out how much we have to pay.

  Example：Steve wants to buy a new Ford truck worth $22,000 and he is offered $3000 for a trade-in value on his old truck.How much does he pay?

     $22,000-$3000=$19,000

     $19,000*(1+0.05+0.07)=$21,280

2. Leasing a car

 When you lease a car you are only paying for the depreciation of the car during the lease. This means you are paying for the lost value of the car. You also must pay the PST and GST on the depreciation and include the taxed in your monthly payment.

 At the end of the lease, the value of the car is now called the residual value. The residual value is a percentage of the original price.

  

• Net Worth

Net worth- defined as the difference between your total assets and liabilities. 

- Assets- what you own, include cash, bank accounts, stocks, mutual funds...

- Liabilities- what you owe. It includes mortgage, car loan, personal loans, line of credit...

3 types of Assets

- Liquid Asset- anything that can be converted to cash quickly.

                        For example, cash, Canada saving bonds...

- Semi-liquid Asset- longer term investments meant for the future

                        For example, bonds, stocks, real estate, mutual funds...

- Non-liquid Asset- investments for long term and enjoyment and include things like home, vacation property, cars, boats...

2 types of Liabilities

- Short term debt- anything to be paid off in the next 12 months

                           -include credit card, personal loans, consumer loan

- Long term debt- anything that takes a long time to pay off

                          - car loan, mortgage

Debt Equity Ratio (DER)- this is a measure of debt burden. You should try to keep your DER under 50%.

DER=(total liabilities - mortgage)/ net worth*100%

Net worth= total assets- total liabilities

We want to improve DER by keeping our liabilities small and increasing our net worth.

Personal Finance - Planning

It is very important to have a plan for your money. A plan helps you keep track of where your money goes and also helps you plan for the future, such as goals you may set for yourself. A financial plan or budget helps you:

• see where your money goes and how it is being spent
• stay out of debt, or help you pay it off
• keep you organized
• make investment decisions
• build trusting relationships
• meet financial responsibilities (such as short term/long term goals, various payments, etc.)
• save money
• prepare for emergencies

In order to prepare your plan, you need to do the following:

• identify your goals and the deadlines to go along with them
• estimate/budget your expenses
• calculate your income
• review personal debt issues
• allocation of savings
• balance income vs. expenses
• impliment plan
• constantly review and revise

There are many ways to get advice on how to arrange a budget and plan that will work for you and suit your needs, such as going to your bank, looking on the internet, or talking to people and seeing how their past experiences with budgets have worked out. If you make a plan that works for you, and you stick to it, you will be able to reach your goals.

Here is a link to a student budget calculator by CIBC: https://www.cibc.com/ca/education/articles/student-budget-calc.html