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Category Archives: Anthony & Frank’s Update

Frank Mueller

The new BC Home Owner Mortgage & Equity Plan explained.

Recently, the BC Liberal Government made waves by introducing the “BC Home Owner Mortgage and Equity Partnership.” For your own reference, you can go to the BC Housing website to read more about this new program, but I will highlight some of the main features, as well as some of the potential pros and cons of the program below.

How Does the Program Work?

This new program is designed to assist British Columbia residents who are eligible first-time homebuyers by providing a down payment assistance loan. The BC Home Partnership Loan will match your down payment up to a maximum 5% of the purchase price on a home, to a maximum of $37,500. The maximum purchase price is $750,000.

This loan is repayable over 25 years, but the first 5 years of the loan accrue zero interest and require no repayment. Starting in the 6th year of the loan, interest will begin to accrue, and the borrower(s) will begin to make payments using a 20-year amortization (the original 25 years minus the 5 year grace period). The interest rate will be calculated as Royal Bank of Canada Prime Rate plus 0.5%, and will be reset to the new prime rate + 0.5% on the 10th, 15th and 20th anniversary dates.

Who Qualifies?

The eligibility requirements can be a bit tricky. In order to qualify for the BC Home Partnership Loan, buyers must:

  • Be a Canadian citizen or permanent resident that has resided in Canada for at least five years
  • Have lived in British Columbia for at least the full 12 months preceding the application
  • Be a first-time homebuyer who has not owned an interest in a principal residence anywhere in the world at any time, and has never received a first-time homebuyers’ exemption or refund
  • Purchase a home that is $750,000 or less.
  • The combined, gross household income of all individuals on the title mustn’t exceed a GROSS annual income of $150,000
  • The home being purchased must be used as the principal residence of all individuals on the title for the five years after purchasing
  • Be eligible for a high-ratio, insured first mortgage for the home
  • Your primary lender on the high-ratio mortgage must also agree to have the BC Home Partnership Loan registered on title as a second mortgage

Recall that a new, separate, regulation for home purchasers with less than 20% down (i.e. requiring a high-ratio mortgage) states that the borrower(s) must pass a “stress test”. The stress test will measure the borrowers’ ability to pay their mortgage using the Bank of Canada’s 5-Year Fixed Rate (currently, 4.64%), rather than using the actual rate offered by the bank (currently, mid-2% range).

Detractors of the new program feel that injecting new money into the equation will simply encourage more spending, and ultimately, will fuel higher real estate prices – especially in the Greater Vancouver Area.

Supporters of the new program are quick to counter that this program is available for house purchases anywhere in BC, and that detractors are ignoring the potential benefits for non-GVA residents.

Here are a few handy links:

BC Home Partnership Loan Information

BC Home Partnership Loan Calculator

Frank Mueller

Understanding Your Account’s Performance

Price Per Unit, Net Invested, Book Value, Market Value, Net Asset Value, and Adjusted Cost Base are some of the terms you may come across on your statement. People commonly struggle at times to understand the different “values” that are listed on their portfolio statements. This terminology confusion makes it very difficult to look at your statement and determine how the portfolio is really doing.

Understanding how your portfolio, and the funds within the portfolio, is doing will allow you to make better investment decisions going forward. Let’s investigate this a bit further.

Terminology

Price Per Unit, or Net Asset Value Per Unit (NAV): This will be listed for individual funds in your portfolio. The Price Per Unit refers to the dollar value of 1 individual unit of the fund in question.

Market Value: Market Value of a fund is simply its current value as of the statement date. If your statement was printed today with today’s date, it would reflect yesterday’s market close unit price. The market value of Jim’s fund of 1,000 units of Fund XYZ with a unit price today of $10.00 NAV = $10,000.

Net Invested: This figure will appear for each fund you hold and for each account. Net Invested is simply the initial investment, plus all contributions, minus all withdrawals. For example: Jim initially invested $10,000 in Fund XYZ, subsequently made $1,000 in contributions, and then withdrew $500. Jim’s Net Invested is therefore his Initial Investment ($10,000) + Subsequent Contribution ($1,000) – Withdrawals ($500) = Net Invested of $10,500.

Adjusted Cost Base (ACB) aka Book Value: Book Value (or ACB) is the initial investment, plus subsequent contributions, plus any reinvested distributions, minus any withdrawals. Using the above example, let’s say that Jim also received $100 in interests/dividends distributions, which he opted to reinvest into XYZ. This Book Value (ACB) is thus his Initial Investment ($10,000) + Subsequent Contribution ($1,000) + Reinvested Distribution ($100) – Withdrawal ($500) = Book Value of $10,600.  This is important for tax purposes in a non-registered account.  When you sell these units, you will pay tax on the Market value minus the Book value.

Performance

One common misconception when looking at a statement is to gauge performance by simply taking the Market Value and subtracting Book Value (ACB). This DOES NOT equal performance, and we know this because we’ve already demonstrated above how Book Value differs from Net Invested. How you opt to receive distributions affects your Market Value and Book Cost (or ACB).

As you can see, when calculating the performance on a mutual fund investment it’s important to consider your initial investment, as well as your subsequent contributions and withdrawals or what we call your Net Invested. Let us know if you have questions about your portfolio’s return, as we can explain how your investments are performing, and help you to make the right decisions going forward.

Anthony Sabti

The 2016 Presidential Election: How Will Markets Be Affected?

the important moment of political choice, Democrats or Republicans

General Impact of Elections to Markets

In 2000 and 2008, the last two elections where we knew we were getting a new president, markets were in the midst of a downward correction. In November 2000, the S&P 500 was three months into the Dotcom bubble correction that wouldn’t bottom out for almost another two years. Similarly, in 2008, the S&P was one year into the financial crisis that wouldn’t hit bottom for another four months.

Investors are fortunate enough to not have experienced any such bad luck since then. American markets are trading at market highs, and aren’t defined by any one sector, or a highly leveraged consumer. Fiscal policy is still very accommodating, with interest rates at historical lows.

Although studies show that no one party (Democrat or Republican) is better for the markets, change and uncertainty usually lead to short-term market volatility.  Certainly, the potential of a Trump win could bring a Brexit-like shock to the markets. Frank and I will examine the potential impacts of a Clinton vs. Trump win:

Anthony – What Happens If Clinton Wins?

The research shows that since the 1950’s, whichever candidate leads the polls in October usually goes on to become president. Going by this trend, it seems Hillary Clinton has the better chance of winning the election. The Republicans are expected to maintain control over the Congressional House of Representatives.

This “status quo” outcome would have lesser economic and market impact. Two major policy actions of a Clinton presidency could benefit the economy: changes in corporate tax laws to promote repatriation of corporate profits held overseas to fund infrastructure spending, and immigration reform. Both of these could garner bipartisan support and have a high possibility of enactment.

Possible risks to business of a Clinton win include executive orders on drug pricing, antitrust enforcement, and restrictions on fracking for domestic oil & gas production. Inflation and interest rates will likely remain lower for longer.

Frank  What Happens If Trump Wins?

As Anthony astutely points out, there is no historical evidence in favour of either a Republican or a Democrat presidency, in terms of the effect on the markets. However, the prospect of a Donald Trump presidency does introduce one key variable into the equation: uncertainty.

Opting out, or “ripping up” of NAFTA, and other free trade agreements, could hurt emerging markets (e.g. China, Mexico, etc) who have benefitted greatly from free trade with the U.S.  Trump’s intention to put America First could lead to a shift away from globalization and would represent a risk to all asset classes, at least in the short term, similar to the market corrections post-Brexit.

Introducing stiff tariffs would have the effect of increased prices of goods, leading to lower discretionary income for Americans. This would naturally lead to decreased spending on entertainment, luxury items, etc. Increasing government spending on the military and on infrastructure could be bad for the bond market.

Conclusion

A Clinton presidency would certainly offer – in many ways – a “status quo” for the economy and the markets. There would be little chance of serious reform or change, as a projected Republican-controlled House would work to oppose Mrs. Clinton’s policy reform bills. As far as the markets go, they’d likely continue to be unaffected in any meaningful way in the long term. This would continue the historical trend of economic cycles ebbing and flowing independently of the Presidential election winner.

Trump, on the other hand, would be the more unpredictable president, and the uncertainty surrounding many of his platform policies could have a negative affect on the markets for an unforeseen length of time.

In the long term – regardless of the outcome – markets historically have shown resiliency and eventually adapt to the events at hand.