What Is Mortgage Insurance?

Insurance On Your Mortgage – What You Need To Know

First Published: ADawnJournal.com April 2, 2010

If you have a mortgage, then the chances are that you have mortgage insurance. The principle of mortgage insurance is pretty simple. It is usually included in the mortgage when you take it out, with the value of the insurance added to the principal and other fees, and paid into monthly as part of your usual monthly payment. As with any other insurance premium, the idea is that if certain conditions are met and you are unable to make your monthly payments as normal, the insurance will cover those payments. Among the conditions that are relevant to mortgage insurance are: death, illness, unemployment. Depending on your mortgage account, you may be covered in case of all of these and more, just these, some of these or none. It is worth being aware of exactly where you stand regarding insurance on your mortgage.

The most common and all-encompassing reason for claiming on insurance is death. With other reasons for claiming, there can be arguing over the matter of what constitutes long-term illness, a pre-existing condition, the balance of fault for an employee’s sacking or renegotiated contract and so forth. With death, however, things are generally quite final – or so you would think. Having mortgage insurance that covers you for the death of yourself or a joint account holder may seem to mark the end of the argument, should one of you die. But some insurance companies are reluctant to pay out, and will go to great lengths to frustrate a claim. It is worth being very careful with regard to how the insurance was sold to you, and what the conditions are regarding payouts.

If you have filled in a form to purchase mortgage insurance – as part of an overall deal or separately – it is highly important that you read the questions carefully and answer them truthfully. Even if the answer to a certain question might increase your premium, or negate any cover, it is important to do this before you start paying the premiums. You could well find yourself some way down the line bereaved, ill or unemployed and with a claim for insurance being denied by the company for a reason you would consider to be wholly inaccurate and unfair. It is fair to assume, however, that the insurers have written the policy very carefully to favour themselves.

If you have been to the doctor for a routine check up, the chances are that they have run a routine blood pressure test. So if you are asked on the form whether you have been tested for high blood pressure, you will need to say you have. This may go against the spirit of the truth, but saying “no” may be legally considered a lie, and invalidate any claim made on the insurance. For absolute clarity, it is important to get all the terms of the insurance agreement nailed down before taking out any insurance – if it is heavily weighted against you, you will need to insure independently under the terms of an agreement that allows you to be covered fairly.

Should We Give Credit Cards to Kids?

Credit Cards and Kids

First Published: ADawnJournal.com April 3, 2010

We are living in the age of the Internet and high-tech electronic payment systems – an age in which you don’t need to carry physical money to pay for expenses. Denying the use of credit cards for kids would be like denying them living in the 21st century. These days, credit cards have become a common daily necessity like cell phones and drivers’ licenses. Credit card companies know that teenagers are a good segment of their target market and they are campaigning fiercely to grab their market share. Leaving kids unaware of credit cards would make them fall into the credit card debt trap and will make their whole life miserable in later years. Teaching kids how to handle credit cards and stay debt-free is an important part of being a parent and these lessons should start while they are still at home and at an early age. Today, I will look at the many different aspects of credit cards and kids.

Do Kids Need Credit Cards?

Whether parents like it or not, kids will be exposed to credit card offers these days more than ever. Mail-in offers, credit card companies trying to reach out to kids through various marketing and promotional techniques, and the plastic culture society (using plastic is considered cool) we are living in today – will make it impossible to deny let our kids the use of credit cards. If parents don’t allow them to use it, they will get their hands on it without parents’ knowledge; and credit card companies wait to seize these opportunities so they can prey on kids when kids are ready to try plastic without their parents’ knowledge.

That’s why parents should take the early initiative to break financial illiteracy and start giving kids financial lessons while they are still at home. Early education prevents financial disaster and costly mistakes at a later age. If kids know all the ins and outs of credit cards and start using them responsibly under guidance, they will be able to handle credit cards responsibly and in the long run will be able to avoid credit card debt and will score good credit ratings.

Benefits of Giving Kids Credit Cards

·   Building Credit: Although a credit card is not the most important factor in building good credit, it can definitely be a good tool to help establish good credit. By using credit cards responsibly and paying bills on time, kids will be able to start building a solid financial backbone.

·   Spending Plans: The word “Budget” may be a difficult one for kids to grasp. Create Spending Plans for them and teach the difference between Wants and Needs. Impulse buying can lead them into financial turmoil. Teach them how to spend money wisely on things they need and monitor their credit card bills carefully to make sure they are on track. Teach them the pitfalls of high balances and late payments and guide them to avoid these always.

·   Financial Responsibility: Teach kids about financial services and products along with credit cards as personal finance lessons are not given at educational institutions. Early personal finance education will instill values and responsibilities in kids and it is likely that they will analyze various financial steps they take and will avoid debt, paying interest, and actions to ruin their financial future.

What You Need To Do Before Giving Kids Credit Cards

Let’s look at some scenarios you need to consider before giving them a credit card.

·   Start Talking: Start talking to your kids about the pros and cons and other aspects of credit cards. Tell them the good things about credit cards such as convenience, credit score, better job prospects with a better credit score, lower insurance rates and so on. Tell them the bad things such as interest, late payments, misuse of the card, how it can ruin their credit rating and so on. Tell them about minimum payments, interest charges, why it is wise to pay the balance in full, the effects of late payments, the effects of spending beyond limits and so on.

·   Does He/She Have a Bank Account? Make sure he/she knows how to deal with a bank account and ATM cards, and teach them banking basics before handing them a credit card.

·   Is Your Kid Ready? You need to make this judgment call to determine if your kid is ready to handle credit cards. Is he/she responsible and able to handle money and credit cards? Does he/she know when to buy and when not to buy? What to buy and what not to buy? Does he/she have a job to pay credit card bills? If not, how it will be paid? Will he/she be paying off the balance in full every month? Does he/she realize that interest will be charged if the balance is not paid in full? If you think he/she is not ready yet, continue giving them lessons until he/she is ready.

·   Lay Out a Roadmap: Tell them exactly what things are allowed with their credit cards and what aren’t. This will avoid confusion later on. Tell them what may happen if they fail to follow these guidelines.

What Kind of Credit Cards Should You Give Kids?

There are different opinions on this matter. Some financial experts suggest that you should start with a debit card first and then switch to a credit card. Some experts argue that a prepaid credit card is the best vehicle to start teaching kids about credit cards. Some experts think parents should add kids to their own card as an authorized user so they can monitor how they are doing. However, my own point of view is little different and I think the best type of credit to start with for kids is a credit card with a lower limit. I will tell you why I think this way and what the problems are with the other views I mentioned above.

First of all, a debit card is a debit card. It comes nowhere near close to giving your kids the experience and lessons you expect to give by using a credit card. Before having their first credit card, they should already have a bank account, an ATM card or debit card and this should be enough to give them the experience of how a debit card works. So a debit card is not an alternative to a credit card and kids should have a bank account and a debit card whether they have a credit card or not.

Secondly, prepaid credit cards may sound like credit cards but they aren’t giving kids the real-life experience of a real credit card. These prepaid credit cards have no monthly bills, interest rates, or late fees, as they are paid before and you can use only up to the amount you loaded onto your account beforehand. So it is missing the real, relevant experience of a credit card.

Thirdly, parents should never add kids to their own credit card account. Parents’ credit card accounts will always have much higher limits than you want your kids to access and it will not give them the sense that they need to be financially responsible, as they will know that this is not their own credit card and they don’t need to act responsibly.

A credit card with a lower limit, $200 to $300 to start with, is the best credit card teaching vehicle for kids to start learning the uses of credit cards and start the journey towards becoming financially responsible.

What You Need To Do After Giving Kids Credit Cards

Monitor the transactions on the credit card account regularly. Make sure they are not buying above the limit or buying the things you asked to avoid. Make sure they are paying bills on time. Reinforce the roadmap you laid out before for using the credit card and make sure they are following it. Discuss credit card mistakes you have made or someone else has made in the past and tell them to use them wisely to stay out of credit card debt. Show them good resources on the Internet to learn more about personal finances and how staying financially healthy can pay off throughout the course of their lives. With all the good intentions, if they falter and are unable to handle credit cards and make small mistakes, help them to bailout – but give them the message that this is not going to be a repetitive act and they will have to pay off the bills by working off their own money.

At What Age Kids Should Get Credit Cards?

It all depends. If your kid is ready to handle it, a credit card can be given to 12 – 15-year old kids. However, don’t continue credit card ties with your kids after 20 + years of age. At this point, this should be the end of their college years and they should be responsible enough to handle their own credit. Let them know at least a year ahead that this will be their last year to have credit cards under your guidance and monitoring.

Last Word

Kids do what they see. Teaching alone will not be sufficient to teach kids about credit cards. Kids will watch their parents and copy their financial behavioural patterns. It is important for parents to be financial role models and set up good examples for kids to follow towards achieving financial success. Bottom line, early credit card education depends on how parents proceed and handle their kids’ credit card journey, including misuses of credit cards. Kids can become more responsible or less responsible depending on their parents’ actions.

How Interest Rates Affect Consumers, Investors and Businesses

Interest rates, consumers, investors, and governments

First Published: ADawnJournal.com April 14, 2010

The interest rate of a country is extremely important to the economy. The changing of the interest rate can have a great number of effects on how the economy performs, as well as on the people who benefit or are hurt by the economy.

Consumers

When the Federal government cuts the prime interest rate, it affects consumers as follows:

·   If the government cuts the interest rate, it can lower the cost of getting a mortgage for a consumer. This depends on whether or not the consumer has a fixed or variable interest rate mortgage though. If someone has a variable interest rate, their mortgage payments will go down as the interest rate goes down.

·   The lowering of an interest rate will also help credit card owners. If the rate goes up on a variable interest rate, the credit card owner pays more, while the opposite is true if the interest rate goes down.

·   While cutting an interest rate saves money on mortgages, it hurts a consumer’s savings. Less interest means less money in the bank. When the interest rate goes up, consumers get more out of their savings.

Investors

The changing interest rate will affect investors and make them change their investing habits. Some examples of this with a rising interest rate include:

·   When the interest rate goes up, credit card companies, financial companies, consumer staples and service companies that do not use a lot of debt will be good companies to invest in.

·   Conversely, when the interest rate is up, mortgage lenders, real estate developers and automakers are companies to avoid for investments.

Companies that benefit from high interest rates will typically suffer when the interest rate is slow. Conversely, companies that suffer when interest rates are high will benefit when the interest rate is low.

Businesses

Businesses around the country are significantly affected by changing interest rates. When the interest rate changes, it has an effect on how much, or how little, a company borrows. When there is a shortfall in payroll, or there is a need to buy equipment, a company will often take a short-term loan. If interest rates are high, it will cost the company more to pay back that loan, which can affect the profitability of that business. When interest rates are low, companies can borrow more and not be as hard pressed to pay back the interest.

Business strategy is also affected by interest rates. Since businesses are all about profit, knowing what the interest rate will be on loans is very important. If a company is implementing a new program that will bring in a profit of five percent per year, but interest rates are seven percent per year, then the company should put their money into the bank rather than investing it.

Interest rates are very important for consumers, investors and businesses. When they go up, some areas benefit while others suffer. When the interest rate goes down, other areas benefit while those that benefit on high interest rates suffer.

Foreign Property Mortgages for Canadians

International/Overseas Mortgages for Canadians

First Published: ADawnJournal.com April 22, 2010

Recently released figures suggest that Canadian households have in the past five years increasingly sought to buy properties abroad to add to their own property in Canada. Whether these properties are used for holiday purposes, as a retirement nest-egg or bolt-hole, or merely as an investment, there is a clear benefit to those who can afford it from buying a foreign property for their own reasons. In many countries, it is possible to pick up a bargain – some places will even offer up a number of properties that an assiduous saver could arguably pay for up front in cash. Between this and the comparatively inflated “First World” property markets, however, there are many places where a property can be picked up for a good price, but will still require some borrowing for a purchase to be made.

Getting a mortgage to buy a property abroad is not as straightforward, generally, as finding one to pay for a domestic property. Clearly, it is more so than it used to be – Canadians who wanted to buy foreign properties used to have to find a way around the mortgage question if they wanted to avoid paying large premiums on top of the principal. The evolution of the global mortgage market has reached a point where it is now more than possible to find the right mortgage. Due to financing guidelines it is tricky to get a mortgage in one country for the purposes of buying property in another, so this development has made a big difference for people looking to get into the international property market.

If possible you should always try to get a mortgage in the same country as the property you intend to buy. It may cause a little bit more difficulty up front, especially if there is any kind of language barrier, and if there is such a barrier it is worth getting all documents legally translated as an extra cover for you. However, being able to deal with the bank face-to-face when you are at the property and carrying out any deals connected to it will be to your advantage. As a foreign buyer you will need to provide stronger guarantees to demonstrate your commitment to the property. You may need to put up a larger deposit than a national of the country where you are buying the house or condo, but bear in mind that you are buying a piece of real estate that could cost several times more in your home country and it will not seem as big an issue.

As banking has become more and more internationalized, it may well be possible – and beneficial – to source a deal in your home country to take out a mortgage in the foreign location. Most banks will have a presence or a sister bank in other countries, and if not they will at least have some level of collaboration with banks in those countries. This can make the whole process move a lot more smoothly, and can see you secure a good-value mortgage for an excellently-priced property.

Monetary Policy and Fiscal Policy

What is the difference between monetary and fiscal policy?

First Published: ADawnJournal.com April 29, 2010

Two of the most important parts of any country’s economics are their monetary and fiscal policies. Many people assume that these two policies are one and the same, but this is not the case. These policies are two different entities that affect a country’s economics in different ways.

Monetary Policy

The monetary policy of a country is the process by which a government or central bank supply money to the populace, thereby affecting the availability of money as well as the cost of money and the interest rate associated with it. This is done to reach a certain set of objectives to help the economy grow, as well as remain stable in difficult financial times. Economists will also refer to monetary policy as being the expansionary or contractionary policy of the country. When it is referred to as the expansionary policy, is when the total money supply of the economy is increasing, while contractionary policy is the opposite, where money is decreasing. These two policies within the monetary policy are also used at different times. When there is a recession, interest rates are lowered to combat unemployment through the expansionary policy. However, if the economy is suffering from high inflation, then interest rates are raised through a contractionary policy.

Interest rates are highly important to the monetary policy of the country and there is a distinct relationship between monetary policy and interest rates. Through the monetary policy, the interest rates of the country are tied in with how much money is supplied and how much is being borrowed. Through this relationship, it is possible to influence the inflation, economic growth, exchange rates and even unemployment of the country.

Nearly all industrialized and developed nations operate their monetary policy through specially created institutions. Examples of these institutions include the European Central Bank for the EU, the Reserve Bank of India, The Federal Reserve System of the United States, the Bank of Canada, the Bank of Japan, the Reserve Bank of Australia and the Bank of England. These institutions are called central banks and they have the distinct task of ensuring the financial system of the country is operating properly.

The most often used tool of monetary policy is open market operations. With this the government can manage the money supply of the country by buying and selling treasury bills, foreign currencies and company bonds. Other tools used by central banks to manage monetary policy include discount window lending, fractional deposit lending, moral suasion and open mouth operations.

Without central banks and a monetary policy, the economy of a country would be highly unpredictable. There would be no way to manage money and recessions could easily turn into depressions and inflation could run out of control. Examples of countries with poor monetary policies include Zimbabwe, which has seen its inflation rate reach unprecedented levels. Whenever a country hits a rough patch, or needs to do some work to keep its economy moving forward, the citizens should be happy they have a good monetary policy in place.

Fiscal Policy

Fiscal policy is not monetary policy, and it is important to make this distinction. A fiscal policy is the use of government expenses and revenue collection in order to influence the economy. This differs from monetary policy, which is used to stabilize an economy through interest rates and money supply.

Fiscal policy uses expenditures of the government and taxes in order to influence the economy. Through the changing of the level of taxation, it is possible for the government to improve the demand and level of economic activity, while also allocating resources and ensuring that income is distributed properly. As a result, the fiscal policy of a country can refer to the effect of the outcome of a budget on the activity of the economy. With fiscal policy, there are three different methods that can be used; neutral, expansionary and contractionary.

With a neutral stance, the budget is balanced, where the spending of the government is equal to the tax revenue that comes in. Therefore, the government gets all the money it needs from taxes and the budget outcome has no effect on the economy activity level of the country.

With an expansionary stance, government spending is greater than the tax revenue coming in. This is done by either lowering the taxes of the country, or by increasing the expenditures of the country while leaving taxation the same. This creates a budget deficit in most cases.

With a contractionary fiscal policy, taxation is greater than government spending. This is done through increasing taxation and leaving spending the same, or by reducing spending. This leads to a surplus for the government in most cases.

There are several ways that a fiscal policy will be funded, not including the largest way which is through taxation. These methods include:

1.   Seigniorage, which is printing money.

2.   Borrowing money from the population.

3.   Using fiscal reserves.

4.   Selling assets like land.

When a deficit needs to be funded through fiscal policy, it is usually done through the issuing of bonds, bills and securities. Since these pay interest, the government is able to collect money on them for a fixed period of time. However, when the government is borrowing money and cannot afford the fiscal payments, it will go into default on its foreign loans.

A fiscal surplus can be saved for future use, in which case it is usually invested in currency or other financial investments until it is needed. When there is an economic slump and taxation as well as income falls, these reserves can then be used to continue funding expenditures at the same rate as before, without having to worry about taking on more debt.

The fiscal policy is very important and has been used several times in the past to help countries get out of recessions, while also helping countries continue operating at pre-recession expenditure levels. Fiscal policies, combined with monetary policies, keep a country’s economy moving forward and benefit everyone in the long run.