Thursday, November 24, 2022

When Small Fees Equate to High Interest Rates

There are many ways to hide banking fees so that customers don’t notice them.  One way is to quietly help yourself to a couple percent of people’s mutual fund savings every year.  Another is to tack a foreign exchange fee onto the exchange rate when customers exchange currencies.  I learned about a new one recently with credit card payment plans.

Many of the big banks offer plans that allow you to take a credit card purchase and pay it off over 6 months to 2 years at a low-sounding interest rate.  The trick is that they add fees that also seem small, but they add up.

One example is TD’s credit card payment plan that allows you to pay for large purchases over 6 months at zero percent interest for a one-time fee of 4%.  This sounds way better than paying standard credit card interest rates.  However, looks can be deceiving.

Suppose you make a $600 purchase.  With the 4% fee, this grows to $624.  At 0% interest, you could use the payment plan to pay off this purchase with 6 monthly payments of $104.  Even though the fee is only 4%, the implied annual interest rate with this plan is 13.6%, which compounds to 14.5%.

This may not be a big deal for a single purchase, but if you’re routinely using this plan for every large purchase, you’ve effectively got a 14% credit card, even though it seems like you’re only paying 4%.  In a perfect world, banks would have to disclose these facts to their customers in a way they can understand, but I’m not holding my breath.

Friday, November 18, 2022

Short Takes: FTX Debacle and Foreign Withholding Taxes

It’s amazing how trivial it is to invest well, and yet we need to know a lot to be able to avoid changing course to some inferior strategy that sounds good but isn’t.  I did poorly with my own portfolio for about a decade before smartening up, and I’ve done well for my mother, sister, and mother-in-law, but I haven’t been able to help most others who ask for advice.  In most cases, I end up watching helplessly as they make choices with poor odds.  It would be easier if saying “just buy VBAL” were persuasive.

Here is my review of a book on homeownership:

House Poor No More

Here are some short takes and some weekend reading:

Marc Cohodes
holds nothing back in his analysis of Sam Bankman-Fried and FTX.  I doubted that I’d end up listening to the entire podcast, but I couldn’t stop once I started.

Justin Bender explains U.S. foreign withholding taxes (FWT) on various types of ETFs that hold U.S. stocks.  This is an important topic, because FWT on dividends can be much greater than ETF MERs.

Thursday, November 17, 2022

House Poor No More

Romana King’s book House Poor No More is a comprehensive collection of useful knowledge for all aspects of owning a home, including detailed lists of home maintenance tasks, improvement projects, and much more.  The writing is upbeat and engaging.  To the author’s credit, she quantifies the costs of just about everything.  Unfortunately, this book was written just before interest rates shot up, so several numerical examples look like they are from the “before times” (only 9 months ago).  As has been common in our society for many years now, the author is too positive about taking on large debts.  Those who took on far too much debt while ignoring the possibility of interest rate increases are now facing significant pain.

Some Positives

As a long time homeowner, I thought I had a good handle on home maintenance.  However, King’s comprehensive list of home maintenance tasks covers many areas I know little about.  The many things to check and possibly repair is daunting; some readers may see them as a reason to keep renting.  

Homeowners who aren’t prepared to inspect every aspect of their homes on King’s schedule can still benefit from understanding how various parts of a home work so they can handle problems as they arise.  For example, I’ve always known that it’s bad to have standing water near your foundation, but King goes into detail on the best ways to prevent water damage.  She is also very thorough in her discussion of mould.

“Don’t trust anyone with your own best interests.”  King says it’s a bad idea to trust bankers and real estate agents too much.  Rather than helping you decide whether buying or selling a home makes sense for you, they are often blinded by the fact that they will benefit from the transaction.

“67% of homeowners complain about their home’s lack of storage.”  King suggests several solutions to this problem, and I was pleased to see that the first solution was decluttering.  As someone who grew up with a hoarder who was constantly trying to create more storage areas, I appreciate the value of throwing worthless junk away.

“If you must use your electric [clothes] dryer, be sure to toss a clean, dry towel in with the wet load, as this will significantly reduce drying time.”  I hadn’t heard this before.  It could make a good grade school science project.

“If you have a longer amortization period left and don’t have a lot of equity in your home—especially if you’re a new homebuyer who stretched just to buy in—then consider making extra payments on your mortgage first [before investing].”  In the debate about whether to put extra money against the mortgage or invest it, too many commentators just compare expected investment returns to the mortgage rate and declare that everyone should invest.  It’s refreshing to see someone sensibly taking into account risk level in this decision.  If you can handle rising interest rates or a period of unemployment without financial panic, then invest away.  Otherwise, reducing debt should be the priority.

When making decisions about owning multiple properties, “think about after-tax returns, not before-tax earnings.  When you tally it all up, all that matters is how much you keep, not how much you spend or how much you pay to the government.”  Focusing too much on minimizing taxes leads some people to sacrifice both before-tax earnings and after-tax earnings.

Some Negatives


According to one table in the book, you can afford a home in Canada whose sale price is 8.4 times your income, but in the U.S. it’s only 4.7 times your income.  The U.S. figures come from a Bankrate mortgage calculator, and the Canadian figures are based on a 3.5% mortgage where half of your gross income goes to the combination of the mortgage and $600/month for property tax, insurance, and utilities.  Devoting 50% of your gross income to housing is dangerous, and this analysis ignores maintenance costs.  King devotes 80 pages to estimating home maintenance costs, which total between $2.49 and $9.56 per square foot per year (depending on how much you can handle yourself versus hiring a contractor).  For a 2000-square-foot home, this increases housing costs by $5000 to $19,000 per year.  After paying income taxes as well, this doesn’t leave much for food, transportation, clothing, and other necessities.  Add in today’s higher mortgage rates, and anyone following this plan is cooked.

There is a table summarizing maintenance costs that is muddled.  Its headings say “annual budget,” but the table contains 5-year figures, and one of the numbers is off by $3000.

Another table examines the return on home renovations.  In the example given, a $155,000 investment gives a 72% return over 5 years.  However, this return has little to do with the renovations.  In fact, King assumes that only 60% of renovation expenses get returned when the house is sold.  The rest of the “profit” comes from assumed rising house prices.  Further, the profit figure ignores property taxes, home insurance, and maintenance costs.  To be fair, one should count the savings from not paying rent as well.

In a discussion of the risks of using leverage, King stresses the importance of sticking to a long-term strategy.  However, becoming nervous and selling at a bad time isn’t the only risk.  If you lose your job, and your creditors force you to sell, it makes no difference if you were committed to sticking it out for the long term.

When it comes to mortgage-breaking penalties, “the idea behind the IRD [Interest Rate Differential] is to compensate the lender for any loss due to a mortgage being paid off early (and assumes the funds are being lent again at a lower rate).”  Unfortunately, the IRD calculation used by most of the big banks goes well beyond fair compensation.  They play games with posted rates that boost the IRD by artificially lowering the assumed interest rate the funds will get when re-lent.

King gives a list of “smart ways to bankroll a home renovation.”  I’m with David Chilton on this one.  Growing debt to renovate is often not a good idea.  Sadly, now that interest rates are rising, many Canadians are regretting their decisions to borrow against their homes.

“It’s important to find a good homeowner insurance policy from a reliable provider.”  This is true but unhelpful.  How many people can name an unreliable home insurance provider?  I can’t.

Conclusion

This book teaches the purpose of all components of a home and how to maintain and renovate them.  It includes estimates of costs and the return on investment when you sell your home.  However, readers need to think for themselves on the dangers of stretching their budgets too far when buying a home.  It’s no fun to find out you can’t afford the home you want, but living house poor or being forced to sell is worse.

Friday, November 4, 2022

Short Takes: $340k Phone Hack, Harsh Investment Lessons, and more

Early this year I got a new U.S. dollar credit card but had a hard time getting a reasonable credit limit.  After some trouble, I managed to get the bank to increase the credit limit a little.  This week I got a popup after logging in to my online banking telling me I was pre-approved for another US$4000 increase.  This happened shortly after I had maxed out the card and then paid it off.  I guess they just wanted to see more of a track record on this card before upping the limit, even though I already have a multi-decade track record with another credit card at the same bank.  I was amused when I clicked to accept the pre-approved credit limit increase and got a message saying that they would let me know whether they would “approve my request.”  Later, another automated message congratulated me on getting “my request” for a higher credit limit approved.  What I’d like to know is how often these “pre-approved” credit limit increases get rejected.

Here are some short takes and some weekend reading:

Eric Falkenstein explains how he was hacked and lost $340,000 worth of cryptocurrencies.  The hack began with a mysterious transfer of his phone, but the phone company thwarted his attempts to figure out how it happened.  Another interesting discovery in his investigation is that supposed white-hat hackers offering help are actually thieves who intend to hack you again and who know how to “keep their reputation clean on the web” by getting complaints about them removed.

Andrew Hallam explains some harsh investment lessons that we can only learn in difficult times.

Jonathan Clements is generous in saying that most news isn’t useful to investors.  He makes it clear in the body of his article that paying attention to most financial news goes beyond uselessness and is dangerous for your financial future.

Justin Bender
compares Canadian Equity ETFs: VCN vs. XIC.  In another article and video, he analyzes U.S. stock ETFs trading in Canadian and U.S. markets.

The Blunt Bean Counter
goes through the many estate and tax planning issues he sees with his well-to-do clients.