Canadians typically consider mortgages as a burden, to be paid down as quickly as possible, or at least before retirement.
It may seem counter-intuitive, but for the wealthy, mortgages are a tool to make more money.
Carrying a mortgage when you don’t need one might seem like a head-scratcher. Why borrow when you’ve already got plenty of funds at hand?
But as F. Scott Fitzgerald purportedly once said, “The rich are different from you and me.”
It sometimes makes sense for high-net-worth people to take on new debt, says James Robinson, mortgage agent at Dominion Lending Centres in Toronto.
“Using your real estate holdings to borrow money for investment purposes – either your principal residence or any other investment or personal-use property – falls under the ‘wealthy people become wealthy by using other people’s money’ category,’” Mr. Robinson says.
“If you can invest at a higher rate of return than you can borrow, you will increase your wealth and, therefore, your net worth.”
There are also tax advantages, though Mr. Robinson advises investors to seek professional advice about tax implications. In Canada, mortgage interest is not tax deductible; however, the interest paid on funds borrowed for investment is, so borrowing has to be structured carefully to avoid running afoul of the Canada Revenue Agency.
Remortgaging or taking a line of credit secured against property can also be advantageous for investors who are affluent but don’t quite reach the high-net-worth (HNW) category.
Financial institutions generally consider HNWs to be people with $1-million in liquid assets, while those with $100,000 to $1-million are considered “affluent” or “sub-HNW.”
One reason that HNW clients can consider taking on a mortgage is that “normally, they’re the ones who have access to assets for security [their houses and other properties] as well as the income required to service the debt,” says Paul Shelestowsky, senior wealth advisor at Meridian Credit Union in Niagara-on-the-Lake, Ont.
For those who are barely at the HNW threshold but want to boost their investable assets, “unless you can obtain a preferred rate from your lender, using secured debt is the only advisable way to borrow to invest,” Mr. Shelestowsky says.
Mr. Robinson cites several good ways to borrow to invest.
“The most common strategy used is to simply refinance your principal residence to access some of the equity you have built up over the years, and use the additional funds to purchase an investment property,” he says.
Wealthy borrowers who refinance in this way increase their asset base through leveraging, but this also is contingent on the value of real estate going up, Mr. Robinson adds.
“If you own $600,000 worth of real estate and prices rise by 5 per cent, you have increased your worth by $30,000. If you leverage and now own $1.2 million worth of real estate and prices rise by 5 per cent, you have increased your worth by $60,000.”
What could possibly go wrong? A few big things, the experts say.
For one, it’s never certain that the value of real estate will rise. There’s always the risk that you will be paying off a mortgage on a property whose value is drifting sideways, or even dropping. This could be happening, too, as your market investments are nosediving.
“Remember that when you leverage and asset values fall, the same multiplying effect occurs in the opposite direction. Don’t get caught in a get-poor-quick scheme,” Mr. Robinson says.
Real estate values do tend to go up over time, but it is not a straight line, he adds. In Ontario and other parts of Canada, the years from 1989 to 1996 were brutal for real estate values.
Debt-holders must be patient, says Andrea Thompson, senior financial planner with Coleman Wealth, part of Raymond James Ltd. in Toronto. “Investors must be able and willing to sit with a paper loss and continue to collect the monthly income, rather than panic and sell at a loss.”
Investors considering taking a mortgage should also be mindful of rising interest rates. The Bank of Canada is holding the line on rates for now, but it has hiked its key lending rate three times since last July, Ms. Thompson says.
High-net-worth borrowers also should consider the type of mortgage. “Looking at a variable rate or open mortgage might be preferable to some who want more flexibility, if they want to collapse or modify their strategy if and when interest rates rise,” Ms. Thompson says.
A different way to go, Mr. Robinson says, is to take what some lenders now offer as an “all in one” borrowing product, secured by real estate.
“This combines a mortgage with a home equity line of credit to allow you excellent flexibility in your borrowing as well as the ability to keep your borrowing segmented for interest calculation and tax deductability,” he explains.
Even the wealthy should be cautious in this volatile investment climate, Mr. Shelestowsky says.
“An overarching theme from the investment world is ‘lowered return expectations’ going forward,” he says. “Target expectations have been drastically reduced across all investor profiles.”
Source; DAVID ISRAELSON SPECIAL TO THE GLOBE AND MAIL
If it would sell for less than $200K, it might be a decent investment property
Q: My 91-year old father just moved into assisted living. His townhouse is in my name. It has no money owing on it. Unfortunately, it looked like a time warp circa 1979. We will spend just under $20,000 renovating it. We borrowed this money on a low-interest loan.
The home is in a nice section of town in Prince George, B.C. Renting seems like a long term play but risky, just after we put so much money into it. It is in a strata, which has a monthly cost of $200. We could expect monthly rent between $1,000 to $1,200. Does renting make financial sense?
A: Your situation is pretty common these days, T, as baby boomers are tasked with managing their aging parents’ finances. There isn’t exactly a manual on best practices either.
I’m assuming that your father has sufficient pension income or other resources to fund the assisted living costs, so that the income or the proceeds from the townhouse are not crucial for his day-to-day well-being.
You mentioned that the townhouse is in your name. Do you mean it’s 100% in your name or it’s joint with your father? If it’s 100% in your name, one thing to consider is that if you own a home of your own, you may have a capital gain when you sell your father’s home as you can’t have two tax-free principal residences.
If it’s held jointly with your father, assuming he added your name for estate planning purposes only, your father may still be able to claim a full principal residence exemption on sale. That said, if he’s in assisted living now and not ordinarily living there, delaying a sale may attract some capital gains tax, T.
If there are other people, like your siblings, who are beneficiaries of your father’s estate, you should seek input from them assuming the house proceeds are also meant for them.
And if the property is beneficially your father’s and your name has just been added legally, remember that the same logic applies to the house proceeds if you sell it. That is, the money is still technically your father’s money while he’s alive, even if it goes into a joint account.
I’m cautious about doing a renovation before the potential sale of a property, especially one as dated as your father’s. I’d definitely seek input from a realtor as to what to do and what not to do as renovations are often based on personal taste and may not return 100 cents on the dollar. Renovations for listing purposes should at least be high priority, marketable and ensure widespread appeal.
Even if you rent, I think you want to try to ensure your renovation money is well-spent to maintain the property, appeal to renters and eventually appeal to buyers.
Of note is that if you do rent the property, the interest on the borrowed money for the reno will be tax-deductible against the rental income, T. Rental income is taxable on your personal tax return, with an offsetting deduction for eligible interest, strata fees, property taxes, insurance, utilities and other associated costs.
Renovations are generally not deductible like other expenses, but get added to the cost of the property for tax purposes and you may then claim depreciation (capital cost allowance) of up to 4% per year on a declining basis.
Whether renting is the best option depends in part on your other options. If you would otherwise invest fairly conservatively, you might only be able to generate 2% interest or less on the net sale proceeds (back out real estate commissions, legal fees and as mentioned earlier, capital gains tax if applicable from what you’d ultimately have to invest).
If you would invest more aggressively, is this money going to stay invested the same way upon your father’s death? If so, a balanced portfolio might generate 4-6% over the long run and an all-stock portfolio might generate 6-8%. Will real estate do better? It’s hard to say.
But when evaluating the real estate, start with what you expect the rental income to be, T. You said between $1,000 and $1,200 per month and net of your strata costs of $200, you’re looking at $800 to $1,000. Depending on property taxes, insurance and incidentals, your net rental income might only be $600 to $800, let’s say. So let’s use the midpoint of $700 for our calculations.
As a landlord who already owns a potential rental property (as opposed to one who was thinking of buying a specific property), I think I’d want to be aiming for at least a 4% capitalization rate, meaning if $700 per month ($8,400 per year) was under 4% of the property value, you might consider selling. If you could only generate $700 in net rent per month and the property value was more than $210,000, you should possibly be considering your options. So if the property could sell for, say, $225,000, I think you need to at least consider selling. If, on the other hand, it would fetch much less than $200,000, you might have a decent yielding investment property.
Regardless of how the numbers shake out, I think you also need to consider simplicity with a rental property. If you live in Vancouver and the property is in Prince George and it would be a hassle to manage, you might lean more towards selling. Even if you’re in Prince George, if your time and attention would be better allocated to your father’s care, you should also consider selling.
Hopefully this helps you weigh your options, T. In the meantime, I hope your father’s transition to assisted living is an easy one for all involved.
How much are you paying each month in condo maintenance fees and what do those fees truly pay for? If you don’t know the answer to that question, you might want to read this study.
Maintenance fees (MF) are a constant topic in condo real estate, both during your search process and once you own a home. Back in 2015, we released a study that revealed the truths and myths behind maintenance fees in Toronto condos. But two years is a long time, especially in today’s real estate climate, so we’ve come back with our Maintenance Fee Report 2.0.
But first, a bit of maintenance fee 101
Every homeowner will pay maintenance fees in one form or another. Whether you have a freehold house or a condo apartment, a homeowner’s maintenance fees cover a wide range of home upkeep costs from lawn care to roof repair.
For a freehold house, the everyday upkeep costs will vary from year to year, depending on the condition of the house and whether there’s a need for sudden repairs. Unexpected costs are the most common worry with owning a freehold house. When a pipe bursts or the furnace quits, you can be hit with a sizable bill.
For condos, the maintenance fees tend to follow the rate of inflation, acting as a fund for the on-going upkeep of your unit and building in a range of ways. That fund, if managed well, can keep unexpected costs away for good.
That’s the key benefit of the structure of condo maintenance fees over freehold: the potential to remove sudden, unexpected costs.
It’s not surprising that there are a lot of misconceptions surrounding condo maintenance fees. In this report, we’ve picked the most common concerns that our Condo Pros hear from clients and broken them down into true or false answers.
1. Maintenance fees have no legal increase limit
There is no legal regulation regarding the amount that a condo building’s maintenance fees can be increased annually. There is a general rule that maintenance fees increase to adjust with inflation and/or the needs of the building. Condo corporations are non-profit entities made up of unit owners within the building, not an outside group. The cost of operation adjusts for the true cost of maintaining the building. The condo board members who may vote to raise maintenance fees are in the same boat as all other owners in the building.
2. Lower maintenance fees mean lower monthly costs
Maintenance fees cover different elements from building to building. Some buildings include the cost of water, heat, hydro, insurance, and other elements in the maintenance fees. Others may not. If those elements are not included in the maintenance fees, you will have to pay them separately. That’s why it’s important to know exactly what your maintenance fees cover. A low maintenance fee does not necessarily mean low monthly costs.
The maintenance fee that includes water, heat, hydro, and A/C is obviously more expensive, but these elements must be paid regardless. If you’re paying for these elements separately, the total monthly costs could be much higher than if they were included in the maintenance fees.
3. Smaller boutique buildings are less expensive than high-rise towers
Condo building maintenance fees depend on a lot of factors. At the top of the list is the building’s footprint and the number of units. Between two buildings of a similar footprint, it doesn’t matter if the buildings are five-storeys or forty. It will cost the same amount to maintain and repair the roof. That cost is dispersed across the units. The more units, the broader the dispersal; and the lower the fee for each individual unit.
Building amenities are another key contributor with a range of factors. But it still has to do with the number of units. A concierge service shared between ten boutique units will be more expensive per unit compared to a concierge shared between 400 units.
Between two buildings of a similar footprint and similar amenities, the one with more units will tend to have lower maintenance fees. However, the building with more units will have a higher opportunity for wear and tear of common elements, which might in the long run cost more to maintain.
4. Maintenance fees always spike within 3-5 years for new buildings
TRUE AND FALSE
Every building is managed differently. Builders often market new buildings with low maintenance fees to make them more appealing to buyers. Once the condo board takes over, it is common to see fees undergo slight increases as the board fills out the reserve fund. After an initial increase, however, fees should stabilize. In the case of well managed properties, maintenance fees even come down. For instance:
5. Low maintenance fees are a sign of value
Maintenance fees should be priced in accordance with the true cost of operating and maintaining the condo building. If that true cost is low, and the maintenance fee is low, then great. But if maintenance fees are low for the sake of attracting buyers, and are not adjusted to the true costs, then you could run the risk of a mismanaged reserve fund.
A better sign of value is smart building management. The maintenance fees fill the reserve fund and are used for big repairs, upgrades, etc. If a building is poorly managed, the reserve fund may deplete, at which point the condo board will have to issue “special assessments.”
During the condo search process, however, you may still want to look for buildings with low maintenance fees as a means of maximizing your purchasing power. With a lower all-in monthly maintenance fee, you can allocate more of your monthly budget towards a mortgage payment, thereby increasing the size of the mortgage you can carry. Just be mindful of the building’s true operating costs.
6. Cost of Parking Spot and Locker are included in maintenance fee
Parking spots and lockers are often separately titled properties, which means they have their own maintenance fee attached to them. If your parking spot or locker is separately titled, then you have to pay a separate fee on top of your condo maintenance fee.
Source: via Condos.ca as of Jan 4, 2018. All data is for 2017 unless otherwise noted.
Condos.ca has worked diligently to ensure the accuracy of this information and our calculations including the removal of any small samples and data anomalies that could skew results. However, we cannot guarantee the information with 100% certainty due to factors including but not limited to potential incorrect information entered by listing brokerages or agents on MLS. This information and the views and opinions expressed here are intended for educational purposes only. Condos.ca accepts no liability for the content of this study.
It wasn’t that long ago when the outlook for retirees focused on baby boomers downsizing and moving into smaller homes in the country — trading an urban lifestyle with a relaxing, rural retirement.
Fast forward 20 years, and many retirees are opting to stay in their homes for longer: renovating, upgrading and improving accessibility along the way.
A comfortable home is a comfortable lifestyle that many are not willing, or wanting, to give up.
The definition of “old” has changed.
Joseph Segal, the founder of Kingswood Capital, has just put his tony 22,000-square -foot home in Vancouver’s west side up for sale, for $63 million.
Why? Because they are downsizing to a smaller home in Vancouver.
“I’m an old man,” said the 92-year-old Segal, and “it’s a big place.”
Many of us are living longer and have healthier lifespans with various sources of retirement income, and ultimately we will ask the question: should we buy a condo, downsize to a smaller home or cash in and rent?
All options have pros and cons.
Is a condo right for you?
Buying a condo may mean downsizing our footprint, but in many cases it doesn’t mean downsizing the cost.
Retirement communities are being pitched to seniors across the country with promises of amenities such as entertainment, hospitals to retail.
Many choose to be closer to families along with the desire to live in accommodations that are maintenance free. It can be enticing.
On the other hand, the concern over new costs such as condo fees or retirement residence fees can be worrisome.
Is it time to downsize?
In a hot real estate market, the temptation to cash in and lock in your appreciation can be overwhelming.
But before you do, Ted Rechtschaffen, president and CEO of TriDelta Financial, said in a BNN interview to ask yourself: is the house I’m in now too large or too difficult for me to manage?
And consider where your wealth is concentrated. Do you have too much of your wealth tied up in real estate? You have to live somewhere. So do you buy or rent? Unless you plan on living in a home for at least 6 years, you might be better off renting.
I’ve never been a fan of trying to time the market. You have to get it right at least twice. Going in and getting out.
Consider your lifestyle, potential longevity and retirement funding options. Even if you don’t pick the peak of the market you are still holding on to the lottery ticket that doesn’t have an expiration date.
Q: What happens if I die, was previously married and had a will—but am now remarried (blended family) and have not written a new will? What happens to my estate if I die? How is it divided? Does my new spouse get all the assets? Or is it split between all children (his and mine)? Or do just my own children and spouse inherit everything? Or just my children?
A: Donna, You ask, “What happens to your blended family if you die?”
The simple answer is that no one knows. No one can give you an answer without knowing your specific circumstances. You cannot get simple answers to comfort you. I’m not trying to scare you, but you need to get advice.
There are so many variables that determine who shares in your assets. Here are some variables that only involve children when parents die:
Minor Children Suffer Most
What are the ages of all children (his and yours)?
Are you supporting any children?
Are any children financially dependent?
Do you need guardians for children who are minors?
Should trusts be set up to invest minor’s inheritances?
Is any child on government assistance?
Should discretionary trusts be used for spendthrift children?
Do estranged children have claims to your estate?
Did you promise to pay for their children’s education or wedding?
You can protect minors with a will and estate plan.
Government Rules May Divide Your Estate
What happens if you don’t take the time to prepare an estate plan?
The government has a will for you that cannot be varied.
Governments have rules to divide your estate among your next of kin. These rigid rules are not flexible. These rules dictate who controls your money and who is your executor. They also decide who gets what and when.
What about Spouses and Wills?
Another set of variables applies to your spouse.
What if your new spouse has more wealth than you?
Should your money go to your spouse or your children?
What if your spouse requires a full-time personal service worker?
You Need to Reduce Taxes
Government tax rules apply if you have no will. As you can imagine, the government does not give you any tax breaks. You will pay the maximum in income and probate taxes.
You cannot use any tax deferrals or tax reduction options. You need to learn how to designate some assets like tax-free savings accounts and registered plans. You may need to protect your assets from creditors or prior spouses.
All of these variables affect what your family receives if you die. These examples do not consider lawsuits from prior spouses. All lawsuits waste your money and incur legal costs and delays. Lawsuits also destroy families and wipe out estates.
Estate Planning Can Avoid Lawsuits
You need to consider tax, estate and family laws. You need good professional advice to get it right.
Remember: estate planning is what you do for the people you leave behind.
If you love your family, find the time and write a will.
When divorcing partners divide their assets, the split isn’t always as fair as it first appears. Here’s what you need to know.
Two weeks after his divorce, Phil Doughty received a blunt letter from his ex-wife’s lawyer. It informed him he’d contravened his settlement by not giving his ex her $100,000 share of his pension within 10 days of the divorce.
“It was a knockdown punch,” says the retired teacher from Montreal. “I had no idea I had to pay her right away, or that the money would come directly out of my pension fund.” Doughty thought his ex would simply get a share of his benefit after he stopped working. “I’d never heard of a company taking money out of a pension eight years before retirement.”
With his pension fund depleted, Doughty’s monthly cheques were reduced by over a third when he eventually retired, yet he was still required to pay spousal support from what remained, leaving him strapped. “I had to find another lawyer to help me get out of those support payments I couldn’t afford anymore.”
Doughty (we’ve changed his name, and those of all the featured subjects in this article) believes his pension arrangement should have been handled differently—at the very least it should have been explained to him properly. “I guess it was just something the lawyers worked out between them,” he says. “My lawyer and I never really talked about the pension.”
It seems hard to believe a lawyer would not talk to a client about how such an important asset would be divided, but Doughty insists he would have remembered such a conversation. His situation is just one example of how partners frequently get divorced without understanding all the financial implications.
“Divorce changes a person’s financial situation dramatically and often there is no planning for it,” says Debbie Hartzman, a Certified Divorce Financial Analyst in Kingston, Ont., and co-author of Divorce Isn’t Easy, But It Can Be Fair. (CDFAs are planners with additional training in the financial impact of separation and divorce. See “Where to get help,” at the bottom of this page.) “I’ve had clients say things like, ‘I just spent four years fighting with my ex, I have this cheque for $400,000, and I have no idea what that means in terms of my financial future.’”
Surely part of a lawyer’s job entails discussing financial matters surrounding divorce. Apart from custody of children, aren’t money and property the big issues in divorce? “A family lawyer’s job includes giving advice about a number of financial issues, but we are not financial analysts,” says Bruce Clark, who observed many divorce-related financial problems during his 35-year career as a family lawyer in Toronto.
Lawyers may not anticipate the long-term implications of divorce-related financial matters. For example, Hartzman explains it’s possible to have different divisions of assets that all meet the 50/50 requirements of the law but have profoundly different financial consequences for the divorcing partners. Her book includes a case study that presents different ways to legally divide the assets of a middle-class couple. Both are 58 years old, and the largest assets are the house and pensions (his is four times more valuable than hers). In one scenario, the assets are split more or less equally, so the initial net worth of the two partners is about the same. However, her share of the man’s pension is paid out as a lump sum, and the support payments are not structured to reflect the fact his post-retirement income will be higher than hers. As a result, after age 65 the woman’s net worth and monthly cash flow flatline, while the man’s relative financial situation steadily improves. “The person with the pension can end up in a much better financial position than the person with the house, particularly if the pension is indexed to inflation,” says Jim Doyle, a CDFA with Investors Group in Vancouver.
Here’s a different scenario: she keeps the house and gets only a quarter of his pension. To the untrained eye that seems to be simply an alternative way of dividing the pie equally. Yet this arrangement ensures the woman’s net worth stays similar to the man’s for the rest of their lives, without diminishing his financial situation.
Of course, case studies do not translate into rules that ensure ideal financial arrangements for every divorcing couple. That’s why it’s a good idea to consult a financial professional as well as a lawyer if you’re going through divorce or separation.
Don’t assume every asset must be split down the middle. “People often want to split up each individual asset, but not all assets are created equal. It’s usually better to look at assets in terms of how to divide the whole cake,” says Hartzman.
Doughty is not the first divorced person to be subject to pension shock. Many people don’t even realize pensions have to be shared after divorce, says Clark. “In my experience, most people consider their pensions to be their personal property, as opposed to an asset that must be shared equally after a divorce. In a longer-term marriage the pension is often the single biggest asset.”
This was the case for Doughty and his ex-wife, who had sold their matrimonial home shortly before separating. By law his ex-wife was entitled to half the teacher’s pension that accumulated during their marriage.
“Pensions are very, very complicated assets,” says Sharon Numerow, a CDFA and divorce mediator with Alberta Divorce Finances in Calgary. “Defined benefit pensions must be independently valued by an actuary, and the rules about paying out a spouse vary from province to province.” For example, in Alberta there are no longer any provincial pension plans that allow monthly payouts to an ex-spouse when the member spouse retires. Therefore, the only option is to give the ex-spouse a designated value that is transferred into a Locked-In Retirement Account or LIRA (called a locked-in RRSP in some provinces). “This almost always has to be done after the separation agreement is signed, and not usually at retirement,” says Numerow.
On the other hand, Ontario recently adjusted its Family Statute Law in the opposite direction. Now a portion of a person’s pension payments can be made directly to an ex-spouse after retirement. Another possibility is for the spouse without the pension to get another asset equal to the value.
Bottom line, don’t underestimate the potential for misunderstanding pension division. It’s important to work with your lawyer to understand the legal issues, then talk to a financial planner who can help you appreciate the short-, medium- and long-term implications of the division of this and your other assets.
Close to home
Another key, says Hartzman, is determining whether it’s viable for one partner to stay in the family home. There are two main questions: Can one partner actually afford to keep the home? And how will keeping the home affect that person’s financial future?
“Most people I’ve worked with live in houses that require two incomes, so after divorce one person would be trying to maintain the home on half as much income, and often it just isn’t affordable,” Hartzman says. “Can you imagine how hard it is to tell someone already going through the emotional turmoil of divorce that they can’t afford to stay in the family home they and their children are so attached to?”
Sandra Baron, an Ottawa mother of two, did manage to stay in the matrimonial home after her divorce. A financial planner helped her figure out how to pull this off. “My first lawyer really didn’t seem to understand my financial situation,” Baron explains. “I went to see a financial planner and asked if I could afford to buy out the matrimonial home from my husband. He helped me work it out.”
Baron and her spouse had always lived within their means. They had no debt other than a mortgage with much lower principal than they qualified for. That, combined with support payments and Baron’s earning potential (she had been an at-home parent most of her marriage but began doing contract work after the divorce), meant she was able to keep the family home.
The financial planner also gave Baron some tax-saving advice on how to invest some money she had brought into the marriage. Since she had that money before the marriage and kept it in a separate account, it was not an asset that had to be shared equally. However, had she used that money to help pay down the mortgage, it would have become part of the value of the matrimonial home and therefore a joint asset.
This is also the case if one spouse receives an inheritance or gift during the marriage. In most provinces, as long as the money is kept in a separate account it does not have to be divided equally after a divorce. But if it is used to purchase a joint asset, such as a house, it becomes the property of both spouses. (In some jurisdictions growth in the value of the inheritance or gift may count as an asset to be shared.)
Perhaps the biggest factor in Baron’s situation was that she and her husband actually saved money for their separation. “It was almost five years from the time we realized the marriage was likely not able to be repaired that we saved for the eventual separation. Unless the relationship was harmful, I felt it was in the best interest of everyone—particularly the children, who are all that really mattered in the end—to plan and wait so things would be better for them financially.”
It’s a safe bet the path Baron and her ex-husband took is not typical of divorcing couples. Obviously they got along well, even after deciding to separate; they had no debts other than the mortgage and were both well acquainted with their family financial situation. The opposite is much more likely, says Numerow. “It’s common for one partner to know very little about the family finances, and they often don’t know the extent of their debts.”
Lady in red
When Anna Masters, of Taber, Alta., separated from her husband she moved in with her sister and started a new job at a bank. She also applied for a new credit card through that bank, so the person doing the credit check was one of her colleagues. When the Equifax credit report came through, the coworker quietly asked Masters to step into her office. “You are behind in all your bills and credit cards. Most of them are in collections,” the embarrassed colleague said.
“I was horrified,” says Masters. “Even the cell phone bills weren’t paid. I didn’t even know my ex had his own cell phone.”
That’s not the worst of it. Masters’ ex-husband had a line of credit she didn’t know about it, which listed her as a co-signer. Masters says he must have forged her signature on the application.
It’s not hard to find similar tales of woe. Alan Leclair of Winnipeg tried to remortgage his house not long before he and his wife split up. “When the credit check came in the banker said to me, ‘You’ve got debts you didn’t tell me about. You’d better go home and talk to your wife about it,’” says Leclair. These debts were considerable—between $30,000 and $40,000 in unpaid credit card balances. Fortunately, Leclair’s ex-wife eventually agreed to take responsibility for them.
Masters was less fortunate. She got stuck with a big chunk of debt—loans and credit cards her husband was supposed to pay off, but didn’t—as well as the line of credit he’d fraudulently put her name on. “I could only get part-time work at the bank, but I worked every other junk job I could find. It took me three years, but I paid off my share, and in a way I’m glad I went through the experience. I’m in control of my finances now,” Masters says.
The one smart thing Masters feels she did in the lead-up to her separation was to start setting aside money (“Omigod money,” she called it) so she’d have something to fall back on in an emergency. “Even before I realized the full extent of the financial mess we were in, I knew my ex was spending irresponsibly, so I started squirreling money away.” That money—about $3,500, which she kept in a sock hidden under a pile of towels in the linen closet—ended up being used to cover her living expenses during a spell of unemployment after moving to a new town after she was separated.
Leclair did something similar. “I had a friend who was going through a divorce and I asked him for advice. He said, ‘Put a few bucks away.’ So I did.” He hid cash in his house and even left about $500 at a friend’s house. “When the separation happened I was in scramble mode, dealing with all kinds of things. It was comforting to at least know that money was there,” he says.
Clark, the family lawyer, explains any money you stash prior to separation “will still be subject to division, but you will have the use of it while property issues are being sorted out. There is nothing illegal about this as long as you declare the amounts you have put aside.”
It’s hardly surprising that people have trouble working through issues like asset division and debt. But the path to divorce is laden with other potential financial mistakes.
One is trying to settle too fast. “People want it settled tomorrow,” says Jim Doyle, the financial planner. “Emotions often determine the choices rather than making the numbers make sense. I say to people, ‘Let’s slow down and do the math.’” He says it’s common for partners to make hasty, ill-advised decisions about asset splitting just to avoid conflict. “Sometimes in relationships where there is an imbalance of power, one person might simply capitulate, resulting in a financial decision that may have negative consequences down the road.”
Don’t ignore the tax implications. “One of the biggest items that is often overlooked in separation and divorce agreements is tax deductions, such as child-care expenses, and credits that may apply to separated and divorced parents,” says Numerow. For example, a divorced parent can claim one child as a dependent, but both parents cannot claim the same child.
Another dangerous road is trading property for time with children. “Big mistake—just don’t do it,” says Numerow. In addition, remember that spousal or child support and asset division are, for the most part, completely separate issues.
Finally, if you’re a common-law spouse, don’t assume the process is the same as it is for married couples. Generally, legal requirements regarding spousal and child support are the same, provided a couple has been living common-law for at least two years (three in some provinces). However, the division of assets is not automatic, as it is in a marriage, which comes as a surprise to many people, Numerow says. “Go to a lawyer and find out what you do and don’t have to share. Laws concerning common-law separations vary by province.”
One message Clark, Numerow and Hartzman all want to get across is this: both partners should always be aware of the family’s financial situation. If one partner is more hands-on with the money, the other at least needs to understand the big picture. “I’ve met a lot of spouses who weren’t involved in the finances and they’re ashamed,” says Numerow. “I tell them, ‘Don’t beat yourself up over it. Now is the time to begin your learning.’ However, if both partners were on top of the family finances it would make divorce a lot easier.”—written by John Hoffman
Where to get help
Certified Divorce Financial Analysts usually charge between $175 and $250 per hour. “If people do their homework and bring in all the relevant financial information, we can usually get a fairly good handle on the situation in two hours,” says CDFA and author Debbie Hartzman. “For an individual, it usually takes no more than three hours overall. With couples it usually takes three sessions of an hour or an hour-and-a-half each.” She notes that a better understanding of your financial situation can save your lawyer’s time, which is much more expensive.
To find a CDFA, do a web search for your town and CDFA, or visit the website of the Institute for Divorce Financial Analysts (www.institutedfa.com) and search by city, town or area code.
A growing number of homeowners are unlocking the equity in their houses, by selling and moving into a rental.
William Jack woke up in the middle of the night last month as he often does. This time, though, he rolled over and went back to sleep.
That’s when he knew that after more than two years of turmoil, he was finally home. The fact that the roof over his head belongs to someone else only added to his peace of mind.
William and his wife, Mary Taylor, are among a growing number of Toronto area downsizers, who are choosing to rent rather than buy a retirement nest. It is a choice, they say, that can be physically, mentally and financially liberating.
The couple — he’s 71, she’s 69 — are healthy, vibrant people. But a couple of years ago, their two-storey home of 32 years with its reverse ravine lot was “just consuming too much time and it was absorbing huge amounts of energy that we wanted to use in other ways,” said William.
“There were rooms we didn’t go into,” said Mary.
“We watched both our parents go through this downsizing exercise. I swore I would never do to anyone what my parents did to me. It was a nightmare,” said William.
“We wanted to leave while we still could — gracefully,” said Mary.
Royal LePage realtor Desmond Brown helped sell the couple’s east-end home and, in the end, he was the one who helped them find the two-bedroom, 1,800-sq. ft. condo they have been renting near the lake since the fall.
The emotional and financial decision to rent rather than buy is becoming more common, said Brown.
Clients like William and Mary, “have had a really good run by owning their own homes for many years,” he said.
“They’ve accumulated a lot of equity. They have a feeling that the market is going to go back down again and all the benefits of this great market are going to be lost if they don’t cash in,” said Brown.
At the same time, these home sellers can’t necessarily see spending $1 million or more, plus maintenance fees, on a condo.
“Yes, I was incensed when I saw these places for the same amount of money as our house. How could that possibly be,” said Mary.
But, she said, “It doesn’t make sense to rail against the market. That’s the market, so you accept it or not.”
Initially they were open to renting or buying.
“Buying any of the units we looked at would have consumed a huge percentage of our net worth. You don’t want 50-, 60-, 75-, 80 per cent of your net worth in one piece of real estate. It’s just too risky,” said William.
“The price of the condominiums we were looking at went up by $20,000 a month or more,” said Mary.
The couple pays about $4,200 a month in rent. It might sound like a lot but they write only three cheques a month — rent, hydro and cable. When they lived in their house, there were 15 to 20 regular expenses.
Gone, they say, are the bills for a security system, for chimney repairs, sewer connections and maintenance agreements on appliances. Even firewood cost $500 a year.
The condo is the third rental for the couple since they sold their house. The first summer they rented a place in Prince Edward County and then they moved to the west end for a year. But they missed the east end.
“We realized community was much more important than we thought. The cottage was isolated and (the west end) place was so transient you couldn’t have a community,” said Mary.
Now they live in a building where they know other members of their yacht club and they enjoy bird-watching near the lake.
Their apartment is decorated with souvenirs of their travels but there is no granny vibe.
It’s the type of high-end rental that can be difficult to find. Apartment hunting is not particularly lucrative for realtors even if they can find something suitable among the few leases on the Multiple Listings Service.
In the hot Toronto property market, renters are increasingly in the same position as home buyers. They have to compete, sometimes by offering higher rents or cash upfront.
“We were paying $3,750 (in their previous west-end apartment) and when (the owner) listed it on MLS there was a bidding war and she ended up getting $4,500 a month,” said William, an actuary and former IT executive.
Helping clients find a rental is all part of the service Brown provides when he has helped someone sell a home. He found this couple’s condo by word-of-mouth. But he acknowledges the searches can be challenging.
“When you’re spending up to $5,000 you’re going to be picky so finding the right one can take some time,” said Brown.
Mary says they knew they were home as soon as they walked through the door of their condo. But that was after they had looked at a lot of places — many were “appalling,” said William.
Is renting a condo saving them money on a monthly basis?
“Probably not. But it isn’t costing us more,” said William. He says they have taken the proceeds from their home sale and invested the money.
Releasing the equity on your house can actually generate enough cash flow to cover rent, agrees Scott Plaskett, CEO of Ironshield Financial Planning.
For people rich in equity but cash poor, renting can give them the freedom to pay for some of the extra things they want in life. It’s all very well to watch your home’s value appreciate, but you can’t eat a doorknob, he said.
If the decision to rent or buy a smaller home is a financial wash, he advises his clients to go with the better emotional fit. That frequently depends on whether they are comfortable giving up the control of owning their own place or whether they really need the cash to cover the cost of enjoying their retirement.
But Plaskett warns retirees to be aware that the economic environment in which they are investing the equity they have earned on their homes has changed.
“We’ve never really existed in an environment where we’ve had wealth with interest rates this low,” he said.
If you’re going to rent and invest your home’s equity you need to look carefully at where you’re putting that money so you’re not seeing your old age security benefits clawed back.
“Now you have all this money that’s being released from one of the legal tax shelters in Canada into a non-sheltered environment,” said Plaskett.
When their abundant garden became too much to manage, Jane and Bill Martin, 79 and 80, didn’t even consider buying another home.
“We don’t want the responsibility. (With an apartment) you can close the door and go away. We just didn’t want to own again,” said Jane.
Experienced apartment dwellers, the Martins raised their kids in an east end rental.
They only bought their house south of Scarborough General Hospital because an accountant advised it as a wise investment, said Jane.
When it came time to move, it took a couple of months viewing between 15 and 20 apartments (“From the worst on up,” said Jane.)
“The ads look good but when you go and look at the place. . . ” she said. “Most condos you’re talking 700 to 900 sq. ft. That won’t do.”
They found 1,230 sq. ft. with two bedrooms, two bathrooms and two balconies for $1,882 a month near Cummer and Bayview Aves.
The TTC is outside the door and conveniences such as a drug and grocery store, banks and the post office are right there.
They’re not used to the shopping in their new neighbourhood yet. It feels like a long way to big department stores after living five minutes from the Scarborough Town Centre for so many years.
They still go back to their old neighbourhood butcher.
“We had a lot of good friendly neighbours so you miss them,” Jane said. “Every now and again we make a little excursion day and head down there and do some shopping and get some haircuts.”
Laurie Bell has been downsizing seniors for five years. Lately, she says, she sees a trend to renting rather than buying among people who can still live independently.
One couple actually rented a condo to see if they would like the lifestyle.
In two other cases the reasons were financial, said Bell, who has a background in mental health and, at one point, even sold real estate.
“When the person’s significant major asset is their house, they’re looking at how they can move, get rid of the maintenance,” she said.
“They just want to know where they stand financially. It’s frightening to look at renting a condo because it might just be for a year.”
More seniors want to maintain their autonomy and avoid relying on their children or other family members.
“They’ve seen it not go well if people do wait too late and there’s been a precipitous incident,” said Bell, whose company is called Moving Seniors with a Smile.
Services like hers take a lot of the physical and emotional stress out of the downsizing process.
There is often 30 or 40 years’ worth of possessions to sort through, which can be emotionally taxing because her clients can’t keep it all.
She also has a coterie of reliable service providers: movers, junk removal companies, even shredders for paper work.
Bell describes it as a three-day process. The first day is spent packing, the second day the client’s belongings get moved and the third day they get the new place set up.
“They can have friends over for cocktails by 5 p.m.”