Effective tax planning is something the wealthy have been doing for years. Unfortunately the typical legal fees for tailored advice from a good tax attorney are enough to deter the Average Joe’s of us from seeking good advice. When you add the fees for incorporations, establishing trusts, drafting loan documents and then the accounting fees for managing all this each year, it simply doesn’t make sense for most of us. Would you spend $10k+ for advice on how to structure your affairs if you aren’t making six-figures?

An article published by The Star today highlights some of the popular methods of building and protecting wealth through various legal structures which are available to us. It is definitely worth reading but I need to emphasize something they barely touched: You should seek independent advice from your financial planner before embarking down this path. Oh and by independent, I don’t mean your bank. Seek advice from someone who doesn’t have financial products to sell you and who doesn’t have monthly quotas to meet!

The article resonated with me when I read:

“Individuals today are looking for ways to make and save more of their money”

So true. Saving money is on everyone’s mind right now, especially as we realize the stock market is not a bank account! For those of us who are looking for a simple AND effective method to build wealth, we should look a little closer to home than these complicated tax structures though… We should look at our mortgages!

With interest rates as low as they can go, it is worth analyzing our personal positions today and reviewing our plans. When the Bank of Canada dropped interest rates to 0.25% they dramatically changed the market and also the strategies we should be using. Perhaps we can refinance to a lower rate, but keep our payments the same?

If you’re in a variable mortgage you have already enjoyed declining mortgage rates and the extra cash that provides you each month. How you put those extra dollars to work for you is what separates the financially savvy from the Average Joe’s.

I implore you to take advantage of the low rates out there and accelerate your wealth building. We can all put more equity into our homes right now using either the extra money we have from the lower monthly payments, the banks own money (Read Bank-Like-The-Bank and ask us how) or a combination of both! This extra equity will save us tens to hundreds of thousands of dollars in interest payments, how’s that for Building Wealth in Times of Trouble?

The first step is to find a reputable mortgage broker that you can trust (http://givemortgages.ca can help you here) and have them run your numbers for you. Please don’t hesitate to get in touch with us for help through this process.

Every month, each of your creditors sends a report card to the credit bureau, grading your level of responsibility as a borrower. The combination of these reports from each creditor over a period of time paint a picture of your credit worthiness that potential future lenders can use to make a decision about whether or not to lend you money when you need it.

Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The two major Canadian credit reporting agencies don’t necessarily use the same scoring software, so don’t be surprised if you discover that the credit scores they generate for you are different.

There are 5 broad categories the system looks at to compute your score. Here is a simple explanation of each and a breakdown of the weighted importance placed on each category.

1. Your payment history - Pretty self explanatory…either you pay on time or you don’t. 35% of your score is dependant on your payment history and each time you are more than 30 days late or worse counts! Always make your payments on time, and if you must pay something late make sure it’s 29 days late or less.
2. What you owe - The system likes to see that you are a balanced, responsible credit user. This means that being maxed out on every account is bad which is obvious, but it also means that having 10 accounts with a zero balance is bad too (contrary to popular belief). Not using credit is not indicative of a responsible borrower, it’s like you never borrowed anything at all which gives no indication to the bureau of what kind of borrower you are. The ideal number is to be carrying between 10-30% of your available credit (loans, lines of credit, credit cards) with consistent activity over a period of time.
3. Length of your credit history - Just like anything else, the longer you have a good, clean, measurable record the better. Remember, this means a long record of activity, not inactivity. 15% of your score is dependant on the length of your history.
4. Types of Credit - Remember, balance is important! The system will score you higher if you have a good mix of different borrowing vehicles (lines of credit, loans, credit cards) rather than 6 credit cards alone. It is also important to note that the bureau does not like retail credit cards (the ones that charge 30% interest!) because their easy to get and even easier to default on! Be careful with those “Don’t pay a cent events”
5. New credit – There is a point where credit shopping begins to look suspicious. That’s why the bureau tracks your application patterns. Every time you apply for credit, an “inquiry” appears on your bureau. Too many inquiries in a short period of time will work against you in two ways. It will make the next potential creditor ask themselves “why is everyone else declining this person?” and it will eventually bring your score down. Just another good reason to use a broker (one application) when arranging a mortgage right?

Update: There’s more information on how your credit effects your mortgage application under Getting Approved.

Making emotional decisions about your finances, especially your mortgage, is a sure fire way to make costly mistakes time and time again. Unless you are taking risks with investments, the numbers are always certain, predictable and never lie. It’s all pretty basic mathematics, right?

If you don’t choose to take the time and learn how to understand the numbers, or if you turn a blind eye to the story they are telling, then you really don’t have anyone to blame but yourself, do you? That would be like opening a business in China, refusing to learn Chinese, and then wondering why you are having difficulty communicating with your clientèle. I wouldn’t be doing you any favours by telling you otherwise.

Here are the two most common mistakes Canadians make when deciding which path to take with their mortgages:

1. Not refinancing because of a penalty – The banks love to prey on our disdain for short term pain. This is why penalties are built into your mortgage: to protect the bank and deter you from seeking a better deal elsewhere.
   
   If it costs you a $5,000 penalty to save $10,000 in interest over the next 3-5 years, it makes sense… period. There’s no discussion necessary here especially since in most cases you can include the penalty in the new mortgage and avoid paying any money out of pocket.
   
   Refinancing is a mathematical transaction and you would only do it if the numbers made sense. When they do though, you must be willing to pull the trigger.
2. Consolidating debt into your mortgage – So many websites and financial institutions promote this strategy which only make things “feel” better. They sell you on the fact that consolidating your debts into your mortgage will free up cash flow and that it is better to carry your consumer debt at a lower interest rate on your mortgage.
   
   In some cases they may be right, but the compounding interest of a mortgage hurts you faster than most consumer debts. Over the long term, this move can end up costing you thousands more!
   
   These Debt-Consolidating-ReFi’s also free up more available credit, which is likely what got you into this mess in the first place.
   Do not overlook the fact that consolidating debt is a band-aid, not a cure for your problems. History unfortunately has a way of repeating itself.

Now, the bank will try to retain your business at all costs and often they will present options to you that make you feel good right now, but will make you pay much more later for this privilege. It would be nice if your bank was willing to just tell you what’s best for you, even if that meant dealing with another bank, but unfortunately business is business and the banks are in the business of making money.

It is our responsibility to make the best decisions for our own financial well being at all times and sometimes that means your loyalty to a specific institution and your emotions must take a back seat to the facts and the numbers.

The message here is simple: Know the math, and make your decisions based on fact, not emotions.

My jaw dropped last Friday when I was reading a recent article from CNBC regarding the return of DIY investors to the market place. This article told the story of how individuals were “taking control of their finances” and turning to options trading in order to “bet” on the direction of stocks. The sad part about this article was that they used the terms “bet” and “control” so closely together that one might be forgiven for thinking that taking a punt at the roulette table was akin to being in control of your finances!

Now, the savvy financial minds of Bay St and Wall St will tell you that you can make money in a bear market by trading options, a type of derivative tied to underlying stocks – which is true, you can! You can also lose a lot more if you take a short position on a stock which ends up rising. In fact, the amount you stand to lose in this case is limitless!

The timing of this “jump into options” advice is obviously perfect given the gyrations in global stock markets right now and it is no doubt tempting for many of us to follow suit and take a punt, but will you sleep at night?

The CNBC article also failed to give reference to any DIY traders who were making enough money to live comfortably off and even went so far as to point out that these traders were still hoping to find a real-job soon in order to build their capital base up and “try again”. Still sounds like gambling to me. Why doesn’t someone offer them some sound financial advice like paying down their mortgages faster, saving thousands in interest, and then living comfortably with the certainty of their current income? Oh that’s right – the banks don’t want people to stop paying interest, their bonuses depend on it!

People – don’t be fooled. Investing or trading (or gambling!) whilst you have a mortgage is like bleeding out of one arm with your mortgage interest whilst trying to take a blood transfusion from your investments in the other. Let’s stop the bleeding first – we can teach you how, just stick around!