How To Handle Your Mortgage In A Divorce

Divorce and Mortgage

Short of getting married, buying a house with your partner for life (or intended partner for life) is possibly the most concrete commitment you can make to them. In fact, as marriages frequently end in divorce within ten years, and the average amortization period for a mortgage is considerably longer, it could be said that it is in many ways a bigger commitment. Regardless, joining together to buy a house which you will share as a couple is a big move, and bigger still if you are joint account holders on the mortgage. An even bigger move is if you divorce while you are still paying off the mortgage – creating conditions for some of the most unpleasant times of your life, if you do not both swiftly resolve to conduct the entire process with maturity and dignity.

When a couple divorce, there is always a question over the marital home. Will it simply be sold with the couple splitting the money equally or according to a ratio of their choice? Will one partner buy out the other? It is for both of you to decide. It may be that one partner wants a clean breakaway and intends to leave the area, in which case the only thing that remains is whether the remaining partner wishes to stay in the house and can meet the full mortgage payment. It is important at an early stage to consult your mortgage agent in order to find out exactly how it affects your specific mortgage.

There may be some justification for applying for a new mortgage – whether this be for the purposes of buying out your spouse’s half of the equity in the house or in order to search for a new home. If this is the case then it is important to take account of the fact that there will be some changed data on the new application and that you are unlikely to have the same borrowing power as an individual that you did as a couple. Indeed, it is often worth involving the mortgage in discussions between lawyers if the divorce is to be conducted with the help of legal representation. This can help to divide it fairly and equally.

It is also worth taking into account that debt taken out in joint names will affect the credit scoring of both parties. Sorting out the issue of the mortgage is in this case all the more important, as acrimony over a divorce can be multiplied if one partner is considered to be behaving in any way that is injurious to the other. Although the marriage may have come to an end – potentially a very unpleasant end – the couple who are separating will usually have bought the house together at a time when they were very much in love, and its sale, or even departure from it by one of the parties can cause a great deal of heartache. It is sensible in this case to be businesslike although not insensitive, and making things easier will include smoothing out any financial issues – in which the divorce must be considered a priority.

Mutual Fund Fees and Expenses

Mutual Funds 101: Part 3 – Last Part

The following is an Excerpt from my first book Invest Now. Invest Now is jam-packed with timely information and timeless advice for the beginning Canadian investor. Invest Now covers a broad range of topics including Internet Scams. To purchase a copy, visit Chapters Indigo or click here to buy online – Invest Now: A Canadian’s Guide to Investing

What Are Fees and Expenses?

Mutual funds would be an unbeatable investment vehicle if there were no fees. But without charging fees, fund companies would not be able to give you all these options. Many financial gurus and critics would tell you to avoid mutual funds because of these fees and expenses, but I beg to differ. I think it’s better to pay fees than to lose all your money. When you buy stocks, you pay to do that-and then pay again to sell. In mutual funds, things are different. You pay your fund company every day for as long as you hold the fund. So if you calculate the cost of a thousand dollars’ worth of investments in both stocks and mutual funds for ten years, your cost for mutual funds will definitely be higher.

Let’s look at these examples:

$1000 in mutual funds:

A 3% MER would cost $1000 × 3%, which equals $30 a year.

The 10-year cost is $30 × 10, which equals $300.

$1000 in stocks:

Standard trading fees to buy = $29

Standard trading fees to sell = $29

Total cost in 10 years = $58

Buying stocks looks good in the above example—if your stocks make money. Compared to losing your money in stocks, you would not mind paying fees to buy mutual funds instead. I invest in both mutual funds and stocks. In last 10+ years, a couple of my stocks have evaporated almost overnight. I lost money in mutual funds too, but the margins were very slim. I have never lost my whole investment in mutual funds. If you know any investors, ask them how many times they lost money in stocks and how many times they lost money in mutual funds. You will get the obvious answers. Try it!

Beware of and Avoid Mutual Fund Fees and Expenses

It is time to explain the fees and expenses associated with mutual funds. An educated investor, who knows how these costs and expenses occur, should be able to reduce overall costs significantly, thus achieving higher return.

MER

This is the major cost of holding a mutual fund. MER stands for management expense ratio. The MER measures a fund’s total expenses for a financial year. A MER calculates a fund’s expenses by the fund’s average assets. The MER is expressed as a percentage of the fund’s total net assets. If you break down the MER, you will get

MER = (M + ER) × GST

The M stands for “management fees.” The M is the big chunk of the MER. This is where fund companies make money. Management fees cover compensations to dealers, sales and marketing costs, corporate expenses, portfolio-management cost, investment research cost and so on.

The ER stands for “expense ratio.” Expense ratios include administrative costs, such as regulatory costs (provincial and federal), client services and administrative costs, custodian fees, fund-reporting costs (annual report, prospectus and so on), audit and legal costs, technology costs and so on.

GST: Yes, you pay tax again when you invest your already-taxed dollars.

The MER can be found in a fund’s prospectus and on the Internet. Also, you can call your fund company to obtain the MER. It is important that your funds do not have a skyrocketing MER. Always pick a fund with a reasonable MER—not more than 2.5%. You can actually shop around for a certain type of fund and pick one with a lower MER. I will discuss index funds shortly, which have a low MER compared to regular mutual funds.

The MER Mystery

New investors will be puzzled when they do not see costs, mainly MERs, coming out of their investments up front. It’s not on your statement, not on your receipts, not on your confirmation slips … not anywhere. Does that mean that fund companies are not charging you MER fees? Are they giving you everything for free?

No, not at all. You see, fund companies came up with this brilliant way to charge you invisibly every day. The MER comes off a fund’s NAV (or net asset value—the fund’s price per unit) every day, so you don’t see it. That’s why it is important to hold a fund with a reasonable MER: in the long run, you don’t want to evaporate your money by paying a high MER. Usually, Canadian funds have a lower MER than specialty funds (which we will discuss later), and specialty funds have a higher MER than foreign funds.

Huge MER gaps can exist. A Canadian equity fund at one fund company can have a 2% MER, and the same type of Canadian equity fund at another fund company can have a 3% MER. A higher MER does not necessarily mean a higher rate of return.

Let me give you a simple example of how you pay MERs invisibly. Suppose your fund’s actual unit price is $10.05 for any given day before adding any expenses or MERs. Now your fund company will add their daily cost to $10.05 and will charge you $10.30 (assuming cost for one day is $0.25). You will never see the actual value $10.05 anywhere. Investors will see $10.30, and this is what the fund company will publish on their Web site or in the newspaper as the NAV for that day. I wish fund companies would disclose MERs visibly, but it does not look like that will happen any time soon. That’s why you absolutely must do your homework before you invest anywhere.

Loads

Mutual funds come in a confusing variety of packages: front-end load, back-end load, low load, or even no-load. Let’s clarify these.

Front-end load: When you buy this load, you pay your dealer’s commission up front. Commissions can run from 0% to 5%. If you are buying $1000 worth of funds with a 5% commission, your dealer is receiving $50, and only $950 is getting invested. With this option, you don’t pay any charges or fees when you redeem your funds. Always buy front-end funds at 0% commission, so you invest the full amount. This option is also known as initial service charge, or ISC.

Back-end load: When you buy this load, you are agreeing to stick to your fund for a few years (usually seven), and if you withdraw before passing those years, you will get hit by redemption fees. Redemption fees decline every year until they no longer exist at all. If you have always wondered why your broker or dealer always wants you to hook up with back-end funds, it’s because these funds give them a flat up-front commission (usually 5%) from the fund company. Who eventually pays this commission? It’s you. Buying back-end means you have to stick to the fund for many years, or pay redemption fees, just to compensate your fund company for that commission. Your goal is to stay away from back-end load. Back-end load is also known as rear-end load, deferred sales charge (DSC) and so on.

Low-load: This one is a kind of back-end load with reduced commitment lengths (usually three years) and reduced redemption fees as well. Also stay away from this load.

No-load: This is just a 0% version of a front-end load. But make sure the MER is not higher than other loads, in which case this is a good option.

Trailer Fees

Fund companies pay your broker or dealer trailer fees as long as you hold the fund. Trailer fees are already in the MER. Trailer fees are service commission fees, meaning your dealer or broker should keep funds on track, answer your questions, service your accounts and so on. Generally, front-end funds pay 1%, and back-end funds pay 0.5% trailer fees.

Turnover Ratio

The turnover ratio tells you how actively your fund manager is trading. Lots of trading can be expensive. The higher the turnover ratio, the more expensive the fund is. For an open account, a high turnover ratio can translate into high tax bills. You should be able to find this information in your mutual-fund prospectus.

The Prospectus: Your Mutual-Fund Bible

I have described some of the fees and expenses involved with buying a mutual fund. There might be more fees and expenses, along with other risks. A successful investor is an educated investor who researches fees, expenses, and risks. Remember, an emotional decision will not make you a successful investor. Plenty of tools out there can help you with your research, and this book will show you those tools.

The prospectus is a powerful tool that will help you a lot with your research. A prospectus is a selling document published by fund companies. By law, this has to be distributed to you as an investor. This document, which looks like a magazine, must explain a fund’s objectives, holdings, performance, risks, fees, expenses and so on. In plain words, it must provide full and true disclosure of all the important stuff you need to know to make an informed and educated decision. You can obtain this document by calling your fund company, or you can download a copy on your fund company’s Web site for free.

Always read the prospectus carefully and thoroughly. Dissect all the information it provides and then reread key information, such as risks and costs.

Miscellaneous

– Pick funds with a reasonable MER. Be extra-cautious not to pick a fund with more than a 2.5% MER. The same types of funds can have different MERs at different fund companies. If my fund company charges me a higher MER for the same kind of fund, there had better be some explanations justifying that higher MER.

– The MER is shown annually and calculated daily. The NAV you are paying for each unit already includes the MER; you do not pay the MER separately.

– The NAV, or net asset value, is what you pay for your funds. In mutual funds, you buy one unit or one share, just like one stock or one bond. The NAV equals the fund’s assets minus the fund’s liabilities. Fund companies price their funds every business day after markets close. The NAV is what you see in the newspaper or on Web sites in the Fund Prices section.

– Fund companies pay your broker, dealer, or discount brokerage trailer fees as long as you hold your funds.

The Trailer Chart

Load Type Fund Companies Pay

Front-load Up to 1% annually

Back-load Up to 0.5% annually

Low-load Pays same as back-load at

first, but later changes to front-load

·   At www.sedar.com, you can find documents submitted by public companies and mutual-fund companies. You will be able to access mutual fund prospectuses, annual reports, financial statements and so on. This is a good place to start your research. Check this site whenever you need to look for a document and you don’t want to wait for the paper version to arrive in the mail.

Compound Interest Basics

The Idea of Compounding

Compound interest is something consumers hate. With compound interest, not only are you charged interest on the principle, which is the money you borrow, but you are charged interest on the interest. The interest compounds on itself, making you pay more and it is something most people could do without.

Compound interest has actually been with humanity for quite awhile, dating back 2,000 years to the days of the Roman Empire. Back then, compound interest was regarded as the worst type of usury and it was condemned under Roman law. As well, the Qur’an and the Bible both contain references to compound interest. In the Qur’an it says “O ye who believe. Devour not usury, double and quadrupling. Observe your duty to Allah, that ye may be successful.” In the Bible, there is a reference to it in Leviticus 25:36-37 which reads “Take no usury or interest from him; but fear your god, that your brother may live with you. You shall not lend him your money for usury, nor lend him your food at a profit.”

In 1613, Richard Witt wrote Arithmetical Questions, which is considered a landmark book on compound interested. Completely devoted to the subject of compound interest, it was in sharp contrast to other books because most devoted only a chapter to the concept.

Enough about the history of compound interest though, how does it work? Well, if you take out a loan that has interest compounded on a monthly basis then it will work like this:

The loan is for $1,000 and you have one percent interest per month, which means that at the end month one you owe $1,010, and at the end of the second month you owe $1,111 and so on. So, the interest from month two is being added to the principle you owe, plus the interest you owe from month one. Naturally, this can quickly get out of control, especially when you are dealing with very high interest rates.

Most people prefer to see interest as a yearly percentage and for this reason many governments force banks and other financial institutions to disclose the equivalent total interest for the year. So, for one percent interest per month, the annual percentage rate would be 12.68 percent. This prevents people from being misled into thinking they are only paying one percent interest on their principle.

Compound interest should not be confused with simple interest, which is interest that is not compounded on top of it. Sadly, simple interest is not used very often. Compound interest is used quite a bit in finance and economics and if you have a credit card, you are paying with compound interest.

It is important to look at the laws dealing with usury to ensure that you are not becoming a victim of it through compounding interest. You want to ensure that when you get a loan, you are not going to be paying interest on interest to a degree that could cause you to default on the loan itself.

How Compound Interest Works

Making Money with Compound Interest

First Published: June 17, 2010 ADawnJournal.com

Compound Interest 101

When most people think about compound interest, they think about credit cards and how they lose money with compound interest. Most people hate compound interest, and they want nothing to do with it but what about if we told you that you can make money with compound interest? What about if we told you that there is the possibility to make money with something that you only think about as a bad thing?

Well, you can if you know how to use compound interest properly.

The first thing you need to do to make money with compounding interest is to start saving at a very early stage. Many experts will tell you that it is not how much money you begin to save with, but how early you begin to save. If you start saving at the age of 20, $2,000 a year, you will save $20,000 by the time you hit 30. That is much better than throwing down $20,000 at 30 and it is easier to handle on your pocket book as well. You also make more money on the money you save earlier. That $20,000 from the age of 20 to 30 will grow because of compound interest, while that $20,000 at 30 will not. The best way to look at this is with an RRSP. So let’s do some examples to show how compounding interest can work.

If someone is the age of 20 and they put in $5,000 into their RRSP, by the time the person is 65 that amount of money will have grown to $160,000 if it grows at eight percent per year. That may seem like a lot of money but it is not when you are trying to retire. Compounding interest works here because each year, the interest is put on top of the total amount in the account. Here is how:

• Age 20: $5,000 x .8 percent $5,400

• Age 21: $5,400 x .8 percent $5,832

As you can see, the interest has gone on top of the previous amount made from interest in the past year.

How do you make the compounding interest work for you then? By putting away money every single year, without fail. So, if a 20 year old puts away $5,000 every year, then by the time they retire they will have saved a staggering $1,932,528.09. That is enough to retire on! Here is how it happens:

• Age 20: $5,000 x .8 percent $5,400

• Age 21: $10,400 x .8 percent $11,232

• Age 22: $16,232 x .8 percent $17,530.56

That is how easy it is to build your investment over time using compound interest when you put money into your RRSP each year. When you do invest this way using compound interest, you need to remember three things:

• Begin the process early because the more you contribute early, the more money you can make on compound interest.

• Keep your investments regular and do not allow gaps in when you invest each year.

• Give it time to build. Do not be impatient because it is a slow process that can keep making you money if you give it the time.

How To Invest In China Through ETFs

Investing In China through ETFs

First Published: June 20, 2010 ADawnJournal.com

ETFs, or exchange-traded funds, are considered to be some of the safest forms of investment in the world today. If you are thinking of investing, and don’t mind less reward for less risk, then an ETF is what you should be looking at. Currently, China is a growing giant that will probably overtake the United States midway through the 21st century as the world’s largest economy and that has a lot of investors thinking about getting in on the action. However, China is still a difficult investment because of the chaotic market in the country; so many investors decide to invest in China through ETFs. If this is something that would interest you, then here is how you go about it:

1.   Look at various Chinese ETFs available based on their industry weights, how many holdings are in each ETF, and the expense ratios of the ETFs. Some that you can look at include iShares FTSE/Xinhua China Index, which is based off an index that has 25 companies in it. There is also the SDPR S&P China ETF and this one has more companies than the iShares ETF.

2.   You should consider not only investing in ETFs that are focused in China, but throughout much of Asia, which is currently booming while the rest of the world is suffering through a recession. One example ETF that you can look at is Vanguard’s Pacific ETF. Another one to consider is iShares MSCI Taiwan Index Fund. An index fund is a form of the ETF which is often considered the safest type of stock investment in the world. Another ETF to consider is the iShares MSCI Hong Kong Index Fund.

3.   In Canada, financial institutions like BMO, BlackRock, Claymore offer China and emerging market ETFs. Some of the examples are BMO China Equity, iShares China Index Fund, Claymore Brick ETF etc. A good resourceful ETF site is TMX Money. 

4.   After you have done the research for your ETFs, all you need to do is talk to your investment broker about what you want to invest in, and they will take care of it for you. However, this will cost you commissions and fees so if you want to keep from losing that money, you can invest yourself. The best way to do this is to get the ticker symbols of the ETFs that you want to buy into, go into your investment account and purchase these stocks as you would any other stock.

China is a booming country that is going places in the world. It will soon be the largest economy in the world, and with the world’s largest population it is also a force on the production and manufacturing platforms. That all being said, many feel that China is still a risky investment, and you should decide to invest in China based on your own risk tolerance and unique investment objectives. However, ETFs may provide a better alternative than directly buying stocks and also, it’s  a lot easier to get in on the action as China continues to take the world by storm and generate capital for the investors who can tolerate risk and put money into this growing giant from the Far East.

With some risks, ETFs can be still better but profitable, and may be the best option when investing in China.