Chapter 3 Summaries - Kyle Brennan
Planning you Tax Strategy
Taxes and Financial Planning
Taxes on purchases – sales tax. Food items and prescription drugs are exempt to sales to reduce
economic burden on poor.
Taxes on property – real estate major source of revenue for local governments. Increasing rates
are large concern to homeowners.
Taxes on wealth – “Capital Gains Tax”, Sales of assets (stock or bond), transferring ownership
asset, gifts or inheritance.
Taxes on earnings – supports a number of social benefit programs. Pension plans, Employment
insurance. Tax is withheld by employer.
Filing your Federal/Provincial Income Tax Return
Who must file? All residents of Canada for any year they have balance of taxes owing.
Income Tax Fundamentals
Step 1: Determining total income
o Employment income
o Net Business income
o Investment income
o Taxable capital gains
o Other income (corporate pension plans, RRSPs)
Step 2: Calculating Net income
o Net income – total income less deductions.
o Deductions – expenses that taxpayers are allowed to deduct from total income.
Common permitted deductions are:
Contributions to deferred income plans
Union and professional dues
Child care expenses
Others: Spousal and child support, interest paid on loans the proceeds of which
are used to earn taxable investment incomes, employment expenses (ex.
Step 3: Calculating Taxable Income
o Security options deduction – equals one half of stock option benefit included under
o Capital gains deduction – equals to one half of the eligible capital gains exemption.
o Net capital losses – prior years can be carried forward indefinitely and used to offset any
o Others: employee home relocation, employment with Canadian Forces, and carry
forward from non-capital losses from prior years.
Step 4: Calculating Federal Taxes Owing
o 0 to 37,178$ 15% tax rate
o 37,179 to 74,357 $ 22% tax rate o 74,358 to 120,877 $ 26% tax rate
o Over 120,887 $ 29% tax rate
o Marginal Tax rate – rate you pay on the next dollar of taxable income earned.
o Average Tax rate – total tax due divided total taxable income.
Step 5: Calculating Net Federal Tax
o Two Types of Tax Credits.
Non-Refundable tax credits (most common, subtracted from total amount of
taxes owed, never reduce net federal tax below zero)
Refundable tax credits
o Personal credits – spousal, dependants, age and disability reduce payable income tax
directly by how much you apply to each situation.
o Calculate the non-refundable tax credit by determining the maximum applicable
amount. The government pre-sets some of these. When these are determined, it is
calculated by multiplying the amount b the lowest marginal tax rate.
Making Tax Payments
o Source withholding – tax withheld from payment is considered to have been paid by you
to the tax authorities. End of the year your T4 is used to report your annual earnings and
o Reductions of source withholding – must prove you are paying more withholding tax
o Installment payments – Tax payments must be paid in installments if the difference
between your payable taxes and the amount you have had withheld at source is more
than 2000$ in both the current and either the two preceding years.
Deadlines and Penalties th
o File taxes by April 30 each year. (balance owing due)
o If you or your spouse has business income it is June 15
o Penalties – 5% on balance, plus 1% of unpaid balance for each month your return is late.
Tax Planning Strategies
How should you receive income?
o Small business owner – pay themselves a salary or receive remuneration in the form of
dividends only worth it after 250,000$ income.
Tax Free Saving account
o 5000$ annually, amounts withdrawn are free of tax
o Any unused room can be carried forward
o Important for Canadians with below average incomes, and those with high income that
want to save more than the 20,000$ max RRSP.
Tax Deferral techniques
o RRSP, RPP, IPP, DPSP.
Income Splitting techniques
o Making contribution to spouses RRSP
o Splitting the CPP benefits with spouse
o High income spouse pay for living expenses, lower income invests income.
o Opening a RESP
o Setting up a trust investment
Ensuring your Portfolio is Tax Efficient o Whether the interest on a loan made for an investment purposes can be deducted from
taxable income. If proceeds of a loan are invested in assets that generate taxable
dividends, interests, or rents, then the interest paid on the loan is tax deductible.
Tax issues important to students
o Report scholarships, fellowships, bursaries, grants and RESPS.
o Deductions – Moving expense, child care expenses, interest paid on student loan
o Non-refundable tax credit – tuition and textbooks.
Changing tax strategies
o Consider changes in personal situation and your income level.
Tax Assistance and the Audit Process
Tax information sources
o Tax Publications
o The internet
Tax preparation software and electronic filing
o Electronic filing most popular
Tax preparation services
o Most people do their own tax return. Helps improve your understanding of your
1. Excise Tax – tax imposed on specific goods and services (ex – gasoline)
2. Average Tax Rate – Total tax due divided by total income [Line 435/Line 150 x 100]
3. Employment income – Remuneration received for personal effort.
4. Investment income – Income from property, including income in the form of interest, dividends,
and rents net of expenses.
5. Marginal tax rate – The rate of tax paid on the next dollar of taxable income
6. Net business income – Net income from an activity that is carried out for profit, after expenses
7. Net income – Total income reduced by certain deductions, such as contributions to an RRSP or
8. Tax audit - A detailed examination of your tax return by the Canadian Revenue Agency
9. Tax credit – An amount subtracted directly from the amount of taxes owing
10. Tax evasion – The use of illegal actions to reduce ones taxes
11. Tax planning – The use of legitimate methods to reduce one’s taxes.
12. Taxable capital gains – Net gains from the sale of capital assets such as stocks, bonds, and real
estate. One-Half of net capital gains are taxable.
13. Taxable income – The net amount of income. After allowable deductions, on which income tax
is computed. Chapter 4 The Banking Services of Financial Institutions
LO 1- Analyze factors that affect selection and use of financial services.
Financial Needs for short term needs
-Living expense payments
Cash Availability Savings Chequing Credit Cards
-Cheque cashing -Regular savings -Regular chequing -All purpose cards
-ATM's account -Online payments -Cash advances.
-Traveller's cheques -Money market -Automatic payments
-Foreign currency account -Cashier‟s cheques
exchange -Money orders
Financial Needs for long term goals
-Long term financial security
Savings Credit Services Investment Services Other Services
-Guaranteed -Cash loans for autos, -Registered -Insurance (auto,
Investment education, and other Retirement Savings home, life, health)
Certificates (GIC's) purposes Plan (RRSP) -Trust service
-Canada Savings -Mortgages -Brokerage Service -Tax preparation
Bonds (CSB) -Home equity loan (full service or -Safety deposit boxes
discount) -Budget Counselling
-Investment advice -Estate planning
Common mistakes involved with managing current cash needs include:
-Overspending due to impulse buying and credit cards
-Having insufficient liquid assets (available cash) to pay current bills.
-Using savings or borrowing to pay current expenses
-Failure to invest unneeded funds in an interest-earning savings account or other investment plan
for long-term goals.
Quick cash sources
In order to get cash in an emergency situation you can use a savings account, redeemable GIC, or
mutual fund. A bank overdraft or credit card will also supply you with cash but most likely at
high interest rates. The best way is too have a personal line of credit already set up in case of an
emergency. Financial Services:
Savings- (time deposits) include money in savings accounts and investment certificates
Payment Services- the ability to transfer money to other parties, eg. Chequing accounts and
Borrowing- credit cards, cash loans, mortgages.
Other Financial Services- Trusts- a legal agreement that provides for the management and
control of assets by one party for the benefit of another. eg. RESP
Direct Deposit- having a paycheck directly deposited into a bank account.
Automatic Payments- bills paid through the direct withdrawal from a bank account.
ATM's- can be expensive with frequent use as they can charge fees for each transaction.
Methods of Payment
1. Point of Sale Transaction- debit card or credit card payment.
2. Stored Value Cards- prepaid cards for purchasing specific merchandise, some are reloadable
3. Smart Cards- (electronic wallets) look like ATM cards but have microchip which stores
prepaid amounts for buying goods and services, also stores data about account balance,
transaction history, insurance info, and medical history.
4. Electronic Cash- SecurNat offered by National Bank of Canada allows you to pay online
purchases from National Bank approved merchant with a credit card.
Opportunity Costs of Financial Services
-Higher long-term returns may result in low liquidity capability.
-Minimum balance accounts can tie up extra money that could be earning interest otherwise.
As a general rule when the interest rates are rising us long term loans to take advantage of low
interest rates and select short-term savings instruments to take advantage of the higher interest
rates when they mature. Furthermore when interest rates are falling you should use short-term
loans to take advantage of lower interest rates when you refinance loans. Should also select long-
term savings instruments to lock in earnings at current higher interest rates. LO 2- Compare the types of financial institutions.
Types of Financial Institutions
Deposit type Non-deposit type
-Chartered banks -Life insurance companies
-Trust companies -Investment Companies
-Credit unions/cuisses popularise -Mortgage and loan companies
Prime Rate The rate the banks charge their most creditworthy corporate and retail
Bank Rate The rate a central bank charges for loans to national banks (eg. the rate
the Bank of Canada charges the Bank of Montreal)
91-day T-bill rate The yield on 91-day government treasury bills
30-yr T-bond rate The yield on 30 year government treasury bonds
5-yr mortgage rate The amount individuals pay to borrow for the purchase of a home
5-yr term deposit - The amount that individuals receive for 5-year term deposits
Savings deposit rate The amount that individuals receive for regular savings deposits.
Deposit Type Institutions
The division referred to as the 'four pillars' separated banks, trust companies, insurance
companies, and investment dealers. But in 1992 was revoked by Canadian government allowing
them to compete more directly with one another.
Chartered Banks- a financial institution that offers full range of financial services to individuals,
businesses and government agencies.
Schedule I banks- full service domestic banks, including the big six banks (RBC financial,
CIBC, BOM, Scotia bank, TD Canada Trust, and National Bank of Canada), smaller Canadian
owned banks, and other non-bank financial institutions.
Schedule II banks- subsidiaries of foreign banks in Canada that have restrictions on asset growth
as well as on lending activities that are a function of their local capital base rather than that of the
parent base. Focus on corporate loans.
Schedule III banks- branches of foreign institutions that have been authorized to bank in Canada. Trust Companies- offer a broad range of financial services similar to those provided by banks.
They are also the only corporations allowed to act as a trustee in charge of property, stocks and
Credit Unions and Caisses Populaires- user owned, non-profit, co-operative financial institution,
usually offer credit cards, mortgages, home equity loans, direct deposit, cash machines, safety
deposit boxes and investment services.
Life insurance companies- main purpose is to provide financial security for dependants
Investment companies- (mutual funds) offers banking-type services. Common one being the
money market fund which is a combination savings-investment plan in which the investment
company uses your money to purchase a variety of short term financial instruments. Your
earnings are based on the interest the investment company receives.
Mortgage and Loan Companies- provide real estate mortgage loans as well as financing
opportunities for individuals and small businesses.
Finance and Leasing Companies- extend loans and leases to both individual and businesses and
are categorized by the type of loan or lease they offer. (Eg. Consumer loan companies vs. finance
companies that serve the corporate sector.)
Pawnshops- makes loans based on the value of tangible possessions. Used to get cash fast.
Cheque-Cashing Outlets- cash cheques for a fee anywhere from 1-20 percent of the cheque
-Time and money savings -Potential privacy, security violations
-Convenience for transactions, comparing rates -ATM fees can become costly
-No paper trails for identity thieves -Difficulty depositing cash, cheques
-Transfer access for loans, investments -Over spending due to ease of access
-Email notices of due dates -Online scams, "phishing" and email spam
LO 3-Compare the costs and benefits of various savings plans.
Types of Savings Plans
Type of Alternative Benefits Drawbacks
Regular Savings Low minimum balance. Ease Low rate of return
accounts/passbook accounts of withdrawal. Insured to $100,000 per financial
GIC's Guaranteed rate of return for Possible penalty for early
time of GIC. Insured withdrawal. Minimum deposit
Interest-earning chequing Chequing privileges. Interest Possible service charge for
accounts earned. Insured to $100,000 going below minimum
balance. Cost for printing
cheques; other fees may apply
Money market accounts Favourable rate of return Higher min balance than
(based on current interest regular savings accounts. No
rates). Allows some cheque interest or service charge, if
writing below a certain balance.
Money market funds Favourable rate of return Min balance. Not insured
(based on current interest
Canada Savings Bonds Rate of return varies with No interest paid if redeemed
(CSB's) current interest rates. Low min before 3 months.
deposit. Regular or compound
Term Deposits and GIC's
Term deposits- a deposit made for a specified term in exchange for a higher rate of return. Can
be redeemed before maturity by earning a reduced interest rate (paying penalty).
Guaranteed Investment Certificates' (GIC's)- are term deposits made for longer periods of time.
Usually 1-5 years.
Interest Earning Chequing Accounts
Canada Savings Bonds (CSB's)-developed from victory bonds. Sold only once a year in 6-month
period October to April. They have a fixed interest rate for first year and subject to guaranteed
minimum. Rates can be adjustable in later years. CSB's can be cashed at any time for face value
plus earned interest. Can get regular interest bond or compound interest bond.
-Regular interest bond pays out interest earned once a year, and denominations for this
bond range from $300 to $10000 and must be purchased with cash.
-Compound interest bond reinvests earned interest automatically until redemption or
maturity. Denominations range from $100 to $10000 and can be paid with cash, through
a monthly payment plan with financial institution, or through a payroll savings plan.
-There is also a 3rd bond: the Canada Premium Bond (CPB) which is sold at same time
as others but has higher interest rates because it can only be redeemed on the anniversary
date and the 30 days following. LO 4- Identify the factors used to evaluate different savings plans.
Rate of Return- (yield) the percentage of increase in the value of savings as a result of
Compounding- the more frequent the compounding rate is the higher the return will be.
Effective Annual Rate (EAR)- formula that calculates effective return, takes compounding into
EAR= [1+k/m] - 1 m= # of compounding periods in a year
k= rate of return quoted for a year
Money that is being earned in a savings account should always be compared to the inflation rate
to ensure that you are not actually losing money by letting it sit there. The real rate of return is
the investment's EAR subtract the inflation rate. Real Rate of return = EAR - inflation rate.
Tax Considerations- Taxes also decrease the amount of interest actually earned on savings. If in
26% tax bracket federally, you would do 1- 0.26= 0.74 then multiply this value by yield on
savings account (6.25%) 0.74*0.0625 = 0.046 therefore your after tax return would be 4.6%.
Then if inflation was 3% over that year. The real after tax return is 4.6%-3% = 1.6%.
Liquidity- refers to the ease in which you can access cash or convert investments into cash with
minimal loss of principal.
Safety- most savings plans are insured through the federal government. The CDIC protects
eligible deposits up to a maximum of $100,000 per person including principal and interest.
Restrictions and Fees-always be sure to look into the hidden fees and restrictions that banks
apply to their savings accounts, such as minimum balances, transaction fees and interest rates.
LO 5- Compare the costs and benefits of different types of chequing accounts.
Types of Chequing Accounts
3 categories: regular chequing accounts, activity chequing accounts, and interest-earning
Regular Chequing Accounts-have monthly service charges that can be avoided by maintaining a
minimum balance. Some banks will also waive the service charge if there is a certain balance in
savings account. Activity Accounts- charges a fee for each cheque written and sometimes a fee for each deposit,
in addition to a monthly charge. No minimum balance is required. It's most appropriate for
people who write only a few cheques each month and are unable to maintain the required
Interest-Earning Chequing Accounts- usually require a minimum balance. If the account balance
goes below this amount you may not earn interest and may incur a service charge.
Evaluating Chequing Accounts
Restrictions- the most common limitation on chequing accounts is the amount you must keep on
deposit to earn interest or avoid a service charge.
Fees and Charges- most financial institutions require a minimum balance or else will incur a
Interest- frequency of compounding and overall rate.
Special Services- some banks offer 24 hour ATM and home banking services. Also overdraft
protection is a useful service to avoid a service charge for exceeding the available funds in the
chequing account that would normally result in a bounced cheque. It automatically gives a loan
to a chequing account to cover cheques written in excess to the available funds.
Other Payment Methods
Personal cheque is the most common but can also use a certified cheque which is just a personal
cheque with a guaranteed deposit, can also purchase a money order. These three methods allow
you to make a payment that the recipient knows is valid.
Travellers cheques allows you to make payments away from home, they require you to sign each
cheque twice, first when you purchase them and then again to identify yourself you sign them
again when you cash them. Prepaid travellers cards allow travellers to get local currency from an
Personal Financial Management
Chapter 5 Summary - Intro to consumer credit
Credit- An arrangement to receive cash, goods, or services now and pay for them in the future
Consumer Credit- The use of credit for personal needs (except a home mortgage) Using credit to purchase goods and services may allow consumers to be more efficient or more
productive or to lead more satisfying lives. There are many valid reasons for using credit. “Shopaholics”
and young adults are those most vulnerable to misusing credit. Post-secondary students are a prime
target for credit card issuers.
Advantages of Credit:
-Enjoy things now and pay later
-Helpful in emergency situations
-Credit cards are more convenient and safer to use than cash
Disadvantages of Credit:
-Temptation to overspend
-Failure to repay can cause loss of income or valuable property
-Credit costs money (interest)
Types of Credit
Consumer Loan- One-time loans that the borrower repays in a specified period of time with a pre-
determined payment schedule
Revolving Credit- a line of credit that loans are made on a continuous basis and the borrower is billed
periodically for at least partial payment
Credit Limit- The dollar amount, which may or may not be borrowed, that a lender makes available to
Interest- A periodic charge for the use of credit
Personal Line of Credit- A pre-arranged loan from a bank for a maximum specified amount
Credit Cards Costs:
-Late or overdue payments
-Charges from exceeding the credit limit
-You can get a short term no interest loan if you pay the full balance each month
-Several rewards type services offered through the issuers
What to do when stolen:
-Call the issuer and report it stolen
-Have the card cancelled immediately
-Ask for a new account # and credit card to be sent to you
Home equity line of credit- A personal line of credit based on the current market value of your home
less the amount still owed on the mortgage
Credit Bureau- A reporting agency that assembles credit card and other information about consumers
Credit Reporting Legislation- Fair credit reporting act- Applicable in Columbia, Ontario, BC, Nova Scotia,
Character- The borrower’s attitude towards credit obligations
Capacity- The Borrower’s financial ability to meet credit obligations
Capital- The borrower’s assets or net worth
Collateral- A valuable asset that is pledged to ensure loan payments Conditions- The general economic conditions that can affect a borrower’s ability to repay a loan
Credit (from Latin credo translation. "I believe") is the trust which allows one party to
provide resources to another party where that second party does not reimburse the first party
immediately (thereby generating a debt), but instead arranges either to repay or return those resources
(or other materials of equal value) at a later date. The resources provided may be financial (e.g. granting
a loan), or they may consist of goods or services (e.g. consumer credit). Credit encompasses any form of
deferred payment. Credit is extended by a creditor, also known as a lender, to a debtor, also known
as a borrower.
Sources of Consumer Credit
Credit costs money
o Weigh benefits of buying an item on credit versus waiting until you have saved enough
money to pay cash
o Do I need a loan?
o Can I afford a loan?
o Can I qualify for a loan?
What Kind of Loan should you seek?
o Parents and Family members are often the course of the least expensive loans
o Financial assets held by a lending institution
Ex. GIC or the cash value of a whole life insurance policy
o Chartered banks, trust companies, and credit unions
o Finance companies, retailers (such as car or appliance dealers), and banks through credit
o Inexpensive loans to finance education beyond high school are available from the
government of Canada
o Interest rates lower than commercial rates because they are subsidized by the federal
Government student loan programs
o Canada Student Loans Programs (CSLP) – federal program
Open to full-time and part-time students o Provincial programs
The Cost of Credit
Effective Cost of Borrowing
Effective Annual Interest Rate (EAR) depends on
o The quoted annual percentage rate
o How frequent interest is compounded
o Whether interest is charged on a discount basis (up front)
o Whether any other charges are incurred such as service charges, credit-related
insurance premiums, or appraisal fees
The annual percentage rate (APR) is the percentage cost of credit on a yearly basis
o May be compounded more frequently
o Thus the effective annual interest rate may be higher than annual percentage rate
The higher the compounding frequency, the higher the EAR
EAR is calculated as:
o E A R = (1 + APR/m) - 1
Where m is the number of times per year interested in compounded
o Ex. Borrow $100 and bank quotes you an APR of 6%, compounded semi-annually
o EAR=(1+0.06/2) – 1
Tackling the trade-offs
Term VS. Interest Cost
Longer term means the smaller monthly payments but you pay more in interest
Ex. Buying a car for $7,500, placed down payment of $1,500, need to borrow $6,000
APR, Term of Loan Monthly Total Amount Total Interest
Compounded Payment Repaid Cost
Creditor A 14% 36 months $205.07 $7,382.52 $1,382.52
Creditor B 14% 48 months $163.96 $7,870.08 $1,870.08
Creditor C 15% 48 months $166.98 $8,015.04 $2,015.04
Lender Risk VS. Interest Rate
To reduce the lender’s risk you can…
o Accept a variable interest rate
o Provide collateral to secure a loan
o Make a large payment up front
o Have a shorter term
Calculating you loan Payments
Fixed-rate instalment loan
o Pay off over a pre-determined period of time
o Payment represents blend of interest and principal o Ex. Peter buying a car, $5,000 loan at a fixed rate of 9%, compounded monthly (refer to
time value of money discussion in Chapter 1 and the formula in exhibit 1B-4 on page 46)
5000 = PMT [11.4349]
PMT = 5000 ÷ 11.4349 = 437.26
Floating rate personal line of credit
o Variable interest rate tied to lender’s prime rate
o Compounded daily
o Payments not fixed
o At risk if interest rates rise
o Takes longer to repay if only paying minimum required
o Ex .Peter has $5000 line of credit, prime rate is 6% and peter pays 3% above prime.
Month Beginning Interest Principal Total Payment Ending Loan
Loan Balance Charge Reduction Balance
1 5000 36.99* 250 286.99 4750
2 4750 35.14 237.50 272.64 4512.50
3 4512.50 33.38 225.63 259.01 4286.87
*Calculated as: 5000 x 0.000246575 x 30
Financial Planning calculations
Cost of carrying credit card balances
Adjusted balance method
o Creditors add interest after subtracting payments made during the billing period
Previous Balance method
o Creditors give you no credit for payments made during the billing period
Daily balance method (fairest method)
o Creditors add your balances for each day in the billing period and then divide by the
number of days in the period
Cost of credit and expected inflation
o Borrowers and lenders are less concerned about dollars, present or future, than about
the goods and services those dollars can buy
i.e. purchasing power
o generally lenders seeking to protect their purchasing power, add the expected rate of
inflation to enable you to repay the loan with cheaper dollars
Avoid the minimum monthly payment trap
minimum monthly payment is the smallest amount you can pay and still be a cardholder in good
o is not the total amount due
o the longer you take to repay the more interest you will incur Credit Insurance
ensures the payment of your loan in the event of death, disability, or loss of property
three types of credit insurance;
o credit life, (most commonly purchased type of credit insurance)
o credit accident and health (also called credit disability insurance) and,
o credit property
Managing your debt
A sudden illness or loss of job may make it impossible to repay your debts
Contact your creditors at once to work out a modified payment arrangement
Your vehicle can be repossessed if you default on your payments and you could incur added
costs so it is better to sell yourself and repay the debt
Debt counseling services are available but be sure to investigate the company
Warning signs of debt problems
Emotional problems such as the need for instant gratification
The use of money to punish such as a husband who buys a new car without consulting his wife,
who, in turn, buys a diamond watch to get even
The expectation of instant comfort
Keeping up with the joneses
Overindulgence of children
Misunderstanding or lack of communication among family members
The amount of the finance charges
You continually go over your credit limit
You use your credit card as a necessity rather than a convenience
You borrow money to make it from one pay cheque to the next
Your wages have been garnished to pay outstanding debts
You pay only interest or service charges monthly and don’t reduce your total debt
You are pressured or threatened by creditors
Utility services are cut off for unpaid bills
The serious consequences of debt
Loss of job due to garnishment of wages
Neglecting health and educational needs of family members
Alcoholism or drug abuse
Neglect of children
For more information visit the Government of Canada’s office of the Superintendent of
Bankruptcy at http://www.ic.gc.eic/site/bsf-osb.isf
Chapter 7- The Finances of Housing Traditional Perception of housing cost- although this does not completely apply today traditionally
housing should cost between 25-30% of year expenses or 2.5 times yearly income.
Evaluating Housing Alternatives
Renting apartment, renting house, owning new house, owning previously owned house, owning
condominium, owing co-operatively, and owning mobile home. All of which has advantages and
Housing Rental Activities
1. The search- geography, costs, talk with locals
2. Before signing a lease- lease start cost and facilities,
3. Living in a rental property- upkeep of property, respect other tenants, contact owners for
4. At the end of the lease- clean apartment, require any deductions from deposit to documented
3 main advantages of renting
Mobility- a change of location is significantly easier when renting, fewer responsibilities- renters do
take on responsibilities like rent and utilities but usually do not have to worry about many maintenance
and tax costs associated with home ownership, and lower initial costs.
3 disadvantages of renting
Few financial benefits- renters are subject to rent increases, which they have little control and do not
see any financial gains, Restricted Lifestyle- renters sharing dwelling generally have to abide by rules like
noise policies and other restrictions, Legal Details- a lease that outline all the legal responsibilities of the
The Home Buying Process
Step 1: Determining Home Ownership Needs
What are the benefits of home ownership?
1. Pride of ownership- having a place to call one’s own is a primary motive of many homebuyers. 2. Financial benefits- a potential benefit is increases in the value of the property. If the dwelling is
your principle residence increases in value are not subject to taxes. Homeowners are able to
borrow against the equity in their homes.
3. Lifestyle Flexibility- homeowners are able to do what they want to their home unlike renters.
Drawbacks of homeownership
1. Financial uncertainty- saving for the down payment as home prices increase. Obtaining a
mortgage. Changing property values can affect your financial investment.
2. Limited mobility- selling a home quickly can be a challenge and costly.
3. Higher living costs- homeowners are responsible for the maintenance and repairs.
4. Higher property taxes
Assess Types of Housing Available
Single family dwellings, multi-unit dwellings, manufactured homes, mobile homes, and building a home.
Consider Forms of Home Ownership
1. The most common form of home ownership is one in which an individual or a couple is the sole
owner of an entire property.
2. Condominiums- an individually owned housing unit in a building with several such units. Condos
consist of two part the first is the part that is individually owned by each tenant and is paid and
maintained by the individual. The second part is the common areas like lobbies and hallways
that are owner by all the members of the condo. These areas are paid for jointly and generally
maintained by an outside company.
3. Co-operative Housing- co-ops are member owned communities where residents make decisions
on how the co-op operates. A co-op is governed by directors and members. Two types non-for
profit and for profit.
Determining Amount of Down Payment
Minimum amount for a down payment 5%. Large down payments make financing easier.
First time homebuyers can use up to $25,000.00 of pension plan funds towards the purchase of
Making a 20% down payment qualifies you for a conventional mortgage
High ratio mortgages are for anyone paying less that 20% down payment of the appraised value
of the home.
Federal law requires you have mortgage insurance if your mortgage represents 80% or more of
the total purchase price in order to protect the lender.
Calculate Your Affordable Home Purchase Price Lenders generally use two ratios to determine the amounts associated with your mortgage. The Gross
Debt Service (GDS) and the Total Debt Service (TDS).
GDS- is your monthly shelter costs as a percentage of your gross monthly income. Most lenders
recommend you spend no more than 30 to 32 percent of your gross income on shelter costs.
TDS- is your monthly shelter costs plus any outstanding debt payments and obligations (credit cards, car
payments etc.) as a percentage of your gross monthly income. Most lenders recommend you spend no
more than 40% of your gross income on shelter and non-shelter financial obligations.
GDS = ((PI + T + H)/ GI) x 100%
TDS = ((PI + T + H + D)/ GI) x 100%
PI= monthly principal and interest payments on mortgage
T= monthly property taxes
H= monthly heating costs
D= monthly debt service payments
GI= monthly gross income
Step 2: Find and Evaluate a Property to Purchase
Selecting a Location
Location, location, location is important to remember
Zoning laws of the area are restrictions on the property in an area
Using a Real Estate Agent
The main services real estate agents provide:
1. Presenting your offer to the seller 2. Negotiating a settlement price
3. Assisting you in obtaining financing
4. Representing you at the closing
Real estate agents can also make recommendations about insurance, lawyers home inspectors etc.
Conducting a Home Inspection
Have a certified professional come to the home before purchase to inspect the home for potential
problems that may arise down the road. The home inspector will ensure 4 aspects of the house are
sufficient and report on any problems including; interior construction, interior design, exterior
facilities, and exterior construction.
Step 3: Price the Property
Determining the Home Price
The main factors to consider are recent selling prices in the area, current demand for housing, the
length of time the home has been on the market, the owner’s need to sell, financing options, and
features and condition of the home. If your initial offer is accepted then you have a valid contract if not
then negotiating the purchase price begins.
Step 4: Obtain Financing
The Application Process
1. After completing the mortgage application, a meeting between the lender and borrower is
scheduled. The borrower presents evidence of employment, income, ownership of assets and
amounts of existing debts.
2. The lender obtains a credit report and verifies other aspects of the borrowers application and
3. The mortgage is either approved or declined and indicates the maximum amount you qualify
Evaluating Different Interest and Payment Options
Fixed Rate Mortgages- allow the borrower the opportunity to lock into a specific rate of interest for a
period of time generally 1, 3 or 5 years. In Canada fixed mortgages are compounded semi annually.
However payments are generally made monthly, weekly, or bi weekly. Variable Mortgage Rate- has an interest rate that increases or decreases during the life of the loan.
When mortgage rates are high many people choose variable rates in hopes of the rates coming down. A
rate cap is a limit on the increases and decreases in the interest rate charged on an adjustable rate
Split or Multi-Rate Mortgages-This type of mortgage allows you to split the borrowed amount into
three to five parts, each of different maturity and interest rates.
Options for Paying Back Your Mortgage- most mortgage lenders offer options to your payment plan
that will allow you to speed up your payment schedule through; accelerated mortgage payments,
double up on monthly payments, or make lump sum payments directly reducing the principal.
Second Mortgages- aka a home equity loan allows the homeowner to borrow on the paid up value of
Refinancing- the process of obtaining a new mortgage on a home to get a lower interest rate.
Step 5: Close the Purchase Transaction
Before the closing do a walk through of the building to ensure everything is up to your standards
The closing involves a meeting among the buyer, seller and notary or representatives of party to
complete the transaction
The closing cost also referred to as the settlement costs, are the fees and charges paid when a
real estate transaction is completed.
Types of closing costs are insurance costs to protect against unforeseen errors in the inspection,
the deed-recording fee, etc.
An escrow account is money usually deposited with the lending instituition for the payment of
property taxes and homeowner’s insurance.
Selling Your Home
Preparing Your Home for Selling When selling your home you want to ensure that you present it in a way that will entice prospective
buyers. Clean, well lite, smelling nice are good ways to provide the buyer with a good image of the
Determining the Selling Price
An appraisal of the home will give you an accurate price and will help to determine its appropriate value.
Insurance and Risk Management: An introduction
- You purchase insurance to control the effects of uncontrollable financial risk inherent to life and
living (and for that matter even death)
What is insurance?
- Insurance: protection against possible financial loss
o One thing in common;
They give peace of mind that comes from knowing that money will be available
to meet the needs of your survivors, pay medical expenses, protect you home
and belongings, and cover personal or property damage
- Insurance company: a risk-sharing firm that assumes financial responsibility for lossess that
may result from an insured risk
o Insurer: an insurance company
- Policy: a written contact for insurance
o Premium: the amount of money a policy-holder is charged for an insurance policy
Insured: a personal covered by an insurance policy
Policyholder: a person who owns an insurance policy
Types of risk
- Insurance companies offer financial protection against such dangers and losses bu promising to
compensate the insured for a relatively large loss in return for the payment of a much smaller
but certain expense called the premium
o Risk: change or uncertainty of loss; may also mean “the insured”
o Peril: the cause of possible loss
o Hazard: a factor that increases the likelihood od loss through some peril
- The most common risks are classified as; o Personal risk: the uncertainties surrounding loss of income or life due to pre-mature
death, illness, disability, old age, or unemployment
o Property risk: the uncertainties of direct or indirect losses to property due to fire,
eindstorm, accidents, theft, and other hazards
o Liability risks: loss posibiltites due to neglect resulting in bodily harm or property
damage to others
Pure risk: a risk in which there is only a chance of loss; also called insurable
They are accidental un unintentional risks for which the nature of
financial cost of the loss can be protected
- Speculative risk: a risk in which there is a chance of either loss or gain
o Ex. gambling – legally defined as uninsurable
Risk Management Methods
- Risk management: is an organized strategy of protecting assets and people
o Long range planning process
- Insurance is not the only method of dealing with risk; in some situations other methods may be
1. Risk Avoidance
You can avoid the risk of an automobile accident by not driving to work
People avoid that risk by not smoking or by not walking through high-crime
2. Risk reduction
You can reduce the risk of injury in an auto accident by wearing a seat belt
You can reduce the risk of illness by eating a balanced diet and exercising
3. Risk assumption
Taking on responsibility for the loss or injury that may result from a risk
Makes sense to assume the risk when the potential for loss is small
Self-insurance: the process of establishing a monetary fund to cover the cost
of a loss
Does not eliminate the risks; it provides a means for covering losses
4. Risk shifting
Most common method of dealing with risk is to shift, or transfer, it to an
insurance company or some other organization
Insurers, in their turn, usually insure themselves through what is known
Planning an insurance program
- All people have their own needs and goals, many of which change over the years, a personal
insurance program should be tailored to those changes
o In the early years of marriage – property insurance
o When you have children - life and disability insurance, adequate health insurance o High income – children’s education, more life insurance to match the higher standard of
living, revised health insurance
o Old with no dependents – retirement and health coverage benefits
- Steps in developing an insurance program
1. Set insurance goals
o Goal is to minimize personal, property, and liability risks
Covering the basic risk means providing a financial resource to cover costs
resulting from a loss
o Income, age, family size, lifestyle, experience, and responsibilities influence the goals
you set , and the insurance you set, and the insurance you buy must reflect those goals
o A basic risk management plan should include
Potential loss of income but to the premature death, illness, accident, or
unemployment of a wage earner
Potential loss of income and extra expense resulting from the illness, disability,
or death of a spouse
Additional expenses due to the injury, illness, or death of other family members
Potential loss of real or personal property due to fire, theft, or other hazards
Potential loss of income, savings, and property due to personal liability
2. Develop a plan to reach your goals
o Planning is a sign of maturity, a way of taking control of life instead of letting life happen
You need good information
3. Put your plan into action
o Obtain financial and personal resources, budget them, and use them to reach your risk
o The best risk management plans have flexibility – allows you to respond to changing life
o To put your risk management plan to work, you must answer
What should be insured
For how much
What kind of insurance should I buy
4. Review you results
o Evaluate your plan periodically
The needs of a single person differ from those of a family, a single parent, a
couple, or a group of unrelated adults living in the same household
Property and liability insurance
- Major disasters have caused catastrophic amount if property loss
- Since most people invest large amounts of money in their homes and motor vehicles, protecting
these assets from loss is a great concern - The price you pay for a home and automobile insurance may be viewed as an investment in
financial protection against those losses
o Property and liability insurance offer protection from financial loss that may arise from a
wide variety of situations
- Main risks related to homes and automobiles
o Property damage and loss
o You responsibility for injuries to others or damage to the property of others
Potential property loss
- Property owners face two basic types of risk
o Physical damage; caused by such hazards as fire, wind, water, and smoke
o Loss of use; due to robbery, burglary, vandalism, or arson
- A person may be judged legally responsible for injuries or damages
- Liability: legal responsibility for the financial cost of another person’s losses or injuries
o Negligence: failure to take ordinary or reasonable care in a situation
- Strict liability: a situation in which a person is held responsible for intentional or unintentional
- Vicarious liability: a situation in which a person is held legally responsible for the action of
Principles of home and property insurance
- Homeowners insurance: coverage for a place of residence and its associated financial risks
Homeowners insurance coverages
- A homeowners policy provides coverages for the building and other structures, additional living
expenses, personal property, replacement value of your home, personal liability and related
coverages, and specialized coverages
- Building and other structures
o The main component
- Additional living expenses
o If damage from a fire or other event prevents the use of your home, additional living
expense coverage pays for the cost of living in a temporary location while you home is
- Personal property
o Typically, a home insurance policy will cover damages or destruction of the contents of
o Two ways to calculate;
As a percentage of the total value of your insurance coverage
Limit coverage – normally 70 to 80 percent of the limit on the dwelling
As an itemized basis that lists and values all the contents of your home Allows you to list and value all the items that you wish to protect and
ensures adequate coverage
o Recommend that you keep your list of items in a safety deposit
o Personal articles endorsement: additional property insurance to cover the damage or
loss of a specific item of high value
Requires a detailed description, periodic appraisals to verify the current value
o Personal property coverage usually provides protection against the loss or damage of
articles taken with you when away from the home as well as for contents of your vehicle
On vacation or used while at school
Property that you rent is insured while in your possession
o In the event of damage or loss of property, you must be able to prove both ownership
Household inventory: a list or other documentation of personal belongings,
with purchase dates and cost information
Can include photographs and video
Make sure that closet and storage areas are photographed open
o Be sure to indicate the value of the objects
- Replacement value of your home
o The replacement value of your home for insurance purposes is not its current market
value, principally because that type of valuation includes the value of the land,
foundation, which are unlikely to be affected by typical disasters
Solely bases on the replacement value of your homes structure
o A professional appraisal will usually give you both the depreciated value and the
replacement value of the structure of your home
Depreciated value: a reduction in the value of an object, based upon its age
and the percentage it has decreased each year
o While replacement value offers you better protection than depreciated value coverage,
you are required to rebuild the house in order to receive a settlement from the
o With depreciated value coverage, your compensation is in the form of cash and you can
decide whether to rebuild or not
- Personal liability and related coverages
o The component of homeowners policy protects you form financial losses resulting from
legal action or claims against you or family members due to damages to the property of
Includes the cost of legal defence
o Umbrella policy: supplementary personal liability coverage; also called personal
o Voluntary medical payments: home insurance that pays the cost of minor accidental
injuries on one’s property Minor injuries on your property and minor injuries caused by you, family, pets
away from home
Allows fast processing of small claims, generally up to $5000
o Should you or your family accidently damage another person’s property the voluntary
damages of homeowner’s insurance will pay for these minor mishaps
Payments are made regardless of fault
- Specialized coverages
o Most common insurance is general
o Rider: an addition of coverage to a standard insurance policy
Insurance riders and policies can be purchased to cover just about anything, but
something to keep in mind is that the costs of insurance are bound to rise
whenever risk increases
- For people who rent, home insurance coverage include personal property protection and
o The building owners property insurance does not cover tenants personal property
unless the building owner can be proven liable
- Tenants insurance is relatively inexpensive and provides protection from financial loss due to
many of the same risks covered in homeowners policies
- Tenants Legal Liability
o Under any liability policy, you are not protected for loss to property in you care or
o If you case damage to your apartment or unit because of fire, smoke, explosion, or
water damage, you can be held liable for it
Portion of your policy responds to this type of loss
Home insurance types
- There are two types of policies
o Named perils: a policy in which only those perils that are specially listed will be
covered should a loss occur
The consumers suffers a loss to their property, they must should that the cause
of the lass was one of the perils named in order for the loss to be covered
o All risk: a policy in which any event that causes loss or damage to the insured property
is covered unless it is specifically excluded
Most personal property policies do not cover, for example, damage to business
or agricultural property, damage cause by wars, floods, or earthquakes or
- The more extensive the coverage, the higher premium you pay
- Manufactured housing units and mobile home usually qualify for insurance cover with
conventional policies o The cost of mobile home insurance is most heavily affected by location and by the
method used to attach housing unit to the ground
- Home insurance policies include coverage for
o Credit card fraud, cheque forgery, and counterfeit money
o The cost of removing damaged property
o Emergency removal of property to protect it from damage
o Temporary repairs after a loss to prevent further damage
o Fire department charges in areas with such fees
- Exclusions are like small print
o Companies use exclusions to help limit the risk they assume for the policy holder
Home insurance cost factors
- Financial losses cause by fire, theft, wind, and other risks amount to billions of dollars each year
- Before an insurance company pays you any amount of your claim, you will be asked to pay a
o Deductible: a fixed sum of money that is stipulated by your policy
- The higher deductible you agree to pay, the lower the premium on your policy will be
o This is for three reasons
Since you share more of you risk with the insurance company, it needs to pay
It is generally agreed that people are more careful if the costs of being careless
A higher deductible means that the insurance company deals with fewer claims,
thus saving administration fees
o Can also be your personal advantage as the effect of a higher deductible is to lower the
premium coast per dollar of insurance and, thus, raise the amount of coverage
- The rule is that your deductible should total no more that 3% of your net worth
How much coverage do you need?
- Your insurance protection should be based on the amount needed to rebuild or repair your
house, not the amount you paid for it
o Most insurance policies have had a built-in inflation clause that increases coverage as
property values increase
- Co-insurance clause: a policy provision that requires a homeowner to pay for part of the
losses if the property is not insured for the specified percentage of the replacement value
- Most companies suggest full coverage
- If your are financing a home, the lending institution will require you to have property insurance
in an amount that covers its financial investment o Personal belongings are generally covered up to an amount ranging from 55 to 75
percent of the insurance amount on the dwelling
- Insurance companies base claim settlements on one of two methods:
o Actual cash value (AVC): a claim settlement method in which the insured receives
payment based on the current replacement cost of damaged or lost item, less
Your settlement amount is determined by take the current cost and subtracting
the years of depreciation
o Replacement value: a claim settlement method in which the insured receives the full
cost of repairing or replacing a damaged or lost item
In order to receive the replacement value, the item must be replaced with an
item of like kind and quality and for the same use
Factors that affect home insurance
1. Location of the home
o The location of the residence affects insurance rates
Efficiency of the fire department, distance from the fire station, the available
water supply, frequency of thefts
2. Type of structure
o A brick house would cost less to insure than a similar house made of wood
However earthquake coverage is more expensive for a brick home than for a
o Age and style
o Source of heat
3. Coverage amount and policy type
o The policy you select and the financial limits of coverage affect the premium you pay
The comprehensive form of homeowners policy costs more than a tenants
o The deductible amount in your policy also affects the cost of your insurance
The most common deductible amount is $300
Reducing home insurance costs
- Home insurance discounts
o Most companies offer incentives that reduce home insurance costs
Lower if you have smoke detectors or a fire extinguisher
Deterrents to burglars – deadbolt locks or an alarm system
- Company differences
o You can save up to 25% on home owner’s insurance comparing companies
o Don’t select a company on the basis of price alone
Consider service and coverage and reputation Automobile insurance coverages
- Potential damages associated with the risks of owning and operating an automobile can be very
large, so much so that they may prove to be disastrous for your wealth and financial future
- All provinces and territories require minimum automobile insurance coverage
- Policies protect you from three major financial risks
o Risk of the injury or death to you as owner and your financial risks
o Possibility of damages, destruction, or theft
o Third-party liability – the possibility that you will held financially liable if you and your
car injure someone else
- Every jurisdiction has minimum insurance laws because of the tremendous social and financial
risks that are associated with automobiles
- You should note that in areas where your insurance is publicly provided, you can expect to pay
just one price for coverage and he it in just one place
o If the insurance is provided privately through an insurance company, you will find a
number of competing suppliers and the price you will be asked to pay may vary
- 2001 to 2003, auto insurance rates increased by 20% in provinces with private insurers
o Caused by growth in high injury claims
- In a tort-based system, as in the province of British Columbia, injured parties are allowed to take
the at-fault to court for the full amount of their damages
- No-fault insurance: an automobile insurance program in which drivers involved in accidents
collect medical expenses, lost wages, and related injury cost from their own insurance
o Fault is determined in every accident for the purpose of premium calculation
o Allows you to collect payment from your own insurance company for bodily injury, and
to claim damage to you own automobile no matter who is at fault in accident
If you are at fault, you insurance premiums may increase
o This type of system is intended to provide faster settlement of claims and reduce the
cost associated with taking legal action
Ontario had a partial no-fault system the still allows suits in situations involving
serious injury or death
Motor vehicle coverages
- Bodily injury liability
o Bodily injury liability: coverage for the risk of financial loss due to legal expenses,
medical costs, lost wages, and other expenses associated with injuries caused by an
automobile accident for which the insured was responsible
The automobile owners policy covers both the owner and people who drive the
vehicle with the owner’s permission
In cases where the owner is uninsured, your policy will be needed to
settle the claim
- Accident benefits o Accident benefits: Automobile insurance that covers medical expenses for people
injured in ones car
Cover income replacement, medical rehabilitation and attendant care expenses,
and death and funeral costs for people who were injured in your automobile,
These benefits are available if the related costs are the result of an automobile
accident, regardless of fault
- Uninsured motorist’s protection
o Uninsured motorist coverage: automobile insurance coverage for the cost of injuries
to a person and member of his or her family caused by a driver with inadequate
insurance or by a hit-and-run driver
Typically through collision and comprehensive damage
o Collision: automobile insurance that pays for damage to the insured’s car when it is
involved in an accident
The insurance company’s right to recover the amount it pays for the loss from
the person responsible for the loss is called subrogation
- Comprehensive physical damage
o Comprehensive physical damage: automobile insurance that covers financial loss from
damage to a vehicle caused by a risk other than c collision, such as fire, theft, glass
breakage, hail, or vandalism
Certain articles in your vehicle, such as some radios and stereo equipment, may
be excluded from this insurance
These types of articles may be protected by the personal property
coverage of your home
Other automobile insurance coverages
- Towing and emergency road service coverage pays for the cost of breakdowns and mechanical
o Beneficial on long trips on long trips or during inclement weather
- Purchasing duplicate coverage as part of your automobile insurance could be waste of money
- You can also purchase waiver of depreciation coverage for new vehicles
o If you are in an accident, the insurance company will calculate the value of your loss
based on the vehicle’s retail value
Automobile insurance costs
- Premiums reflect the amounts insurance companies pay for injury and property damage claims
o Your automobile insurance is directly related coverage amount and such factors as the
vehicle, your place of residence, and your driving record
Amount of coverage
- How much coverage do I need? o Affect the amount you pay for insurance
- Legal concerns
o Every province had laws that mandate automobile liability insurance coverage
o Third-party liability (minimum of $200000) accident benefits, and uninsured motorists
coverage are mandatory in order to operate a motor vehicle in Canada
Driving without it can result in criminal charges
o You may prefer to carry more insurance
If you feel that your net worth is large enough for the liability risk of losing it to
be too great, you will want to get more coverage
o The prudent amount of coverage that is now commonly sought by Canadian drivers is
Automobile insurance premium factors
- Several factors influence the premium you pay or automobile insurance
- Make and style of car
o The type of car you drive generally does not affect the premium you pay for third-party
Does affect the cost of coverage for physical damage to your car
- Use of the vehicle
o What you use your vehicle for has an impact on your premium
Pleasure/business/farming/distance driven to work/use for the deliveries or
- Rating territory
o Rating territory: the place of residence used to determine a person’s automobile
Geographic locations have different cost
- Driver classification
o You are compared with other drivers to set your automobile insurance premium
o Driver classification: a category based on the drivers age, gender, material status,
driving record, and driving hobbits; used to determine automobile insurance rates
Young drivers and those over 70 have more frequent and severe accidents
As a result they pay a higher premium
Poor driving record increases your insurance costs
o The number of claims you file with your insurance company also affects your premiums
- Provincial differences
o The factors used for determining the rate of your insurance premium will vary among
- Some drivers have accident records or other characteristics that make them very high-risk and
thereby unacceptable to standard insurance companies o Creating an insurance pool that assigns high-risk cases to companies in proportion to
their share of automobile insurance in each province
The result if that no company receives more than its fair share of bad risks and
insurance is available to all drivers
- High-risk pool: consists of people who are unable to obtain automobile insuranc