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HISA down to 1.0%
September 20, 2020
3:48 pm
AltaRed
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Loonie said
Regarding commercial loans: It's really hard to get a small business loan and they often want you to put up your house for it. It's a high risk loan, and they know it. They also charge way above mortgage rates for it, so there is lots of profit there to offset losses, assuming most debt is paid.

They are more willing to loan to big corporations. These often have some real assets and there is the hope/expectation that if they got into big trouble, the government would offer them a helping hand. They DO regularly get into trouble, and often it is the taxpayer who is left holding the bag (with a hole in it) , and then they flee to another country.  

I am thinking more of the alternative lenders, e.g. the credit unions and small banks not publicly traded making loans to local businesses. The big boys can take care of themselves in one form or the other, including raising capital via share issues.

September 20, 2020
10:31 pm
Loonie
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CUs also issue shares which members can buy, and they seem to be very popular. The rates are similar to bank dividends and are vulnerable as are bank dividends. CU investment shares are much harder to unload than bank common shares, so should provide good stability, depending on how much is outstanding.

A couple of small CUs that I belong to, with deposits around 160 million, reported 1 default each last year, and these were both mortgages with a recoverable asset. It would be interesting to know how this compares to banks' loan books. I think they have a ways to go before there is a crisis. One of the two (I don't know about the other) has set the bar for what they will fund higher than that mandated by law for the banks and they turn people away regularly because of this and/or convince them to buy less expensive properties. Their smaller size may make them more vulnerable but it may also make them more cautious.
I mention only these two because they are the only ones I have this information on.
We have seen over and over again how some of the biggest banks in the world get caught with loan defaults on higher risk lending. They do it because they are big and they figure they can afford the risk because they can foresee good profits. Sometimes they win and sometimes they lose.

Some of the smaller banks like HCG and EQ seem to specialize in riskier mortgages but not so much small business loans as far as I know (and I may not be fully informed). Higher losses are therefore expected, but are also intended to be offset by higher rates and lower dividends to investors, at least in some cases. With higher rates, you also get higher spreads and higher margins. I can't speak to how effective this might be in future, but the theory seems sound. Buffett was certainly impressed with HCG's loan book a few years ago, and ran laughing all the way to the bank, begging for more. (Me? As a "little guy", I just bought more GICs from HCG when they were desperate enough to pay 3.5 when others were well below 3; have been very happy with this.)

September 21, 2020
7:30 am
Norman1
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AltaRed said

Bad choice of words on my part. I recognize the initial deposit was used to make the loan, but that liability is still on the books and the FI has to come up with the cash IF the depositor wants to transfer out their account balances. It is still a potential cash flow issue (subject to reserves on hand of course). A run on the bank aka HCG 3 years ago is an example in the extreme.

Liquidity is managed regardless of whether the loan has defaulted or not.

Many mortgages that are not in default, for example, are routinely not paid off at the end of the term. People often renew their mortgage for another few years. However, the GIC deposits that were funding the mortgage may not be rolled over. Sometimes, the GIC's mature weeks before!

Those liquidity considerations are routinely handled by a bank.

From a liquidity perspective, there isn't a big difference between a loan that is renewed and not paid off and a loan that has defaulted.

September 21, 2020
7:50 am
Norman1
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Loonie said

Some of the smaller banks like HCG and EQ seem to specialize in riskier mortgages but not so much small business loans as far as I know (and I may not be fully informed). Higher losses are therefore expected, but are also intended to be offset by higher rates and lower dividends to investors, at least in some cases. …

Higher losses are not always the case. I think it was Equitable Bank that was considering reducing the amount they were provisioning for losses. They were following industry standards for the amount they were provisioning. But, they found that the actual losses were significantly less than what they had been provisioning.

Also, defaults don't necessarily mean actual losses. Should there be a default on a mortgage with the borrower making an 80% down payment, there would be a very good chance the lender will recover the money lent, the interest, and the foreclosure cost. Is such a mortgage really risky when the borrower doesn't have a credit record yet with Equifax and TransUnion?

September 21, 2020
7:29 pm
Loonie
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Someone who can put down 80% is extremely unlikely to default. If push comes to shove, they could get a roommate.

Isn't EQ into second mortgages though?

September 22, 2020
9:37 am
Norman1
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I think Equitable Bank will do a second mortgage if the situation makes sense. The alternative lenders will examine each situation and decide. That's how such lenders have built their business.

The big banks used to decline mortgage applications from applicants who can put 80% down but do not have an Equifax or TransUnion credit history. Such applicants had to go to lenders like Equitable Bank. Equitable Bank knew the situation, approve the mortgage, and charge the applicant a higher rate. Higher rate for not much extra risk!

That's why most of the mortgages are not renewed at alternative lenders. After a year or two, the applicant has a credit history and can go to one of the big banks for a prime mortgage at a lower rate.

It is not as easy now as the big banks realized what they were leaving on the table. Some of them have special lending units, like a new immigrant unit, that can approve mortgages to people who can put 80% down but don't have a Canadian credit history.

November 22, 2020
11:38 am
Alexandra
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The first of my GIC's @ 3% with Motus matured today. It was in the HISA at 9PM PDT. So that was nice. I have 7 more GIC's with them all at the 3% maturing between Dec 2020 & mid June 2021.

It was good while it lasted. Thought they might offer more than .15% if one renewed. Not yet anyway. I'll just leave the funds in their 1% HISA until I am fully hooked up with Canadian Tire Bank, then transfer to their 1.8% HISA.

Hoping for some increases in short/long term rates this coming Dec, Jan & Feb.
Maybe it would be better to invest in mutual funds or in individual stocks, but as I am in my early 70s, I just cant take the anxiety any more. Thought also of purchasing a small condo to rent out (Victoria area), probably would see a much greater return. Even there I am hesitant.

November 22, 2020
1:41 pm
AltaRed
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I wouldn't have been a happy camper had I bought investment real estate in Victoria in 1985. https://househuntvictoria.ca/2016/03/17/a-brief-history-of-prices/ It would have taken 10 years to break even again. When was the last time the stock market needed a 10 year recovery period?

Also note that the CAGR over the full period of time was 3.74%, less than half that of either the TSX Composite or the S&P500. The only way that investment would have paid off is from the leverage, i.e. high LTV (low equity).

Cap rates are also pretty thin. Look at page 22 of http://www.jllmultifamilybc.co.....preads.pdf You may need to consider the most utilitarian condo as you can and milk it to death with minimal maintenance to keep positive cash flow. Minimal cost per door.

November 22, 2020
1:55 pm
Loonie
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Real estate is a longer term investment as there can be downturns, but the "dividends" (i.e. rental income) are more stable.

The thing is, though, do you still want to have to be dealing with getting rid of a bad tenant or responding to someone's broken down fridge at 10pm when you're in your 80s?

November 22, 2020
2:11 pm
smayer97
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AltaRed said
I wouldn't have been a happy camper had I bought investment real estate in Victoria in 1985. https://househuntvictoria.ca/2016/03/17/a-brief-history-of-prices/ It would have taken 10 years to break even again. When was the last time the stock market needed a 10 year recovery period?

stock mkt was net flat from about 2000 to 2011, and although not a 10 yr period, mkt was also net flat from 2007 to 2013.

November 22, 2020
2:13 pm
pooreva
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Loonie said
Real estate is a longer term investment as there can be downturns, but the "dividends" (i.e. rental income) are more stable.

The thing is, though, do you still want to have to be dealing with getting rid of a bad tenant or responding to someone's broken down fridge at 10pm when you're in your 80s?  

Or NOT getting any rent money due to covid-19 then covid-20, covid-21, etc.??????

November 22, 2020
2:15 pm
smayer97
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pooreva said

Or NOT getting any rent money due to covid-19 then covid-20, covid-21, etc.??????  

Yes that would be tough if you are caught on the wrong side... but same with the markets as I point out above...

Bottom line, there is risk in any investment... you have to weigh the pros and cons of each.

November 22, 2020
9:26 pm
Norman1
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smayer97 said

stock mkt was net flat from about 2000 to 2011, and although not a 10 yr period, mkt was also net flat from 2007 to 2013.

I didn't see any of that with my portfolio. That also wasn't the case with the TSX 300.

From the start of 2000 to end of 2011, the S&P TSX 300 Total Return index went from 17,979.18 to 33,303.95. Up 85.2% over the 12 years or compounded 5.27% per annum.

From start of 2007 to end of 2013, it was from 31,213.49 to 40,334.38. Up 29.2% or compounded 3.7% per year over the 7 years.

November 23, 2020
1:02 am
smayer97
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Norman1 said

smayer97 said

stock mkt was net flat from about 2000 to 2011, and although not a 10 yr period, mkt was also net flat from 2007 to 2013.

I didn't see any of that with my portfolio. That also wasn't the case with the TSX 300.

From the start of 2000 to end of 2011, the S&P TSX 300 Total Return index went from 17,979.18 to 33,303.95. Up 85.2% over the 12 years or compounded 5.27% per annum.

From start of 2007 to end of 2013, it was from 31,213.49 to 40,334.38. Up 29.2% or compounded 3.7% per year over the 7 years.  

I cannot speak to the TSX 300 specifically. Glad it worked out for you.

That said, though my data was based on the DJIA, the broader TSX was also flat in the same period I mentioned. In fact, it was worse... The TSX hit the Jun 2000 high of 11,423 as a low nearly 7 times since then, even as late as Mar 2020, so depending on when you got in and out, you could easily have been flat for the past 20 years. And from mid 2007 to today, you would be mostly underwater until as late as June 2020. Granted, the market has since moved off that low but that is a lot of ups and downs to weather over 20 years.

Like I said, it is all about knowing and balancing the pros and cons between types of investments.

November 23, 2020
3:32 am
topgun
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smayer97 said

I cannot speak to the TSX 300 specifically. Glad it worked out for you.

That said, though my data was based on the DJIA, the broader TSX was also flat in the same period I mentioned. In fact, it was worse... The TSX hit the Jun 2000 high of 11,423 as a low nearly 7 times since then, even as late as Mar 2020, so depending on when you got in and out, you could easily have been flat for the past 20 years. And from mid 2007 to today, you would be mostly underwater until as late as June 2020. Granted, the market has since moved off that low but that is a lot of ups and downs to weather over 20 years.

Like I said, it is all about knowing and balancing the pros and cons between types of investments.  

The only thing that matters is now. I received my normal pensions, dividends and interest. Enough to pay bills until more arrives in the next 30 days. Have fun.

Have a Great Day

November 23, 2020
4:42 am
Alexandre
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smayer97 said

Yes that would be tough if you are caught on the wrong side... but same with the markets as I point out above...

Bottom line, there is risk in any investment... you have to weigh the pros and cons of each.  

You can walk away from bad investments and cut your losses. It is much harder to walk away from bad tenants.

I know people who rented their condos, but stopped years ago for that reason. They are totally not inclined to start renting their properties any time soon. Tenant protections are really strong these days, property owners assumed to be rich folks who can handle any financial storm including tenants not paying rent.

November 23, 2020
7:43 am
Norman1
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smayer97 said

I cannot speak to the TSX 300 specifically. Glad it worked out for you.

That said, though my data was based on the DJIA, the broader TSX was also flat in the same period I mentioned. In fact, it was worse... The TSX hit the Jun 2000 high of 11,423 as a low nearly 7 times since then, even as late as Mar 2020, so depending on when you got in and out, you could easily have been flat for the past 20 years.…

Don't use the DJIA for performance work. It's garbage for that. No-one adjusts the weighting of all the stocks in a portfolio because one of the stocks has a stock split.

The TSX 300 Total Return Index was around 47,000 in March. That 11,423 in March is the TSX 300 Index which is the price-only index that does not include dividends and their reinvestment.

The TSX 300 Index reflects what the investor has, disregarding any dividends. The TSX 300 Total Return Index more accurately reflects what an investor has when the dividends are accounted for and reinvested.

November 23, 2020
12:44 pm
seh
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Alexandre said

You can walk away from bad investments and cut your losses. It is much harder to walk away from bad tenants.

I know people who rented their condos, but stopped years ago for that reason. They are totally not inclined to start renting their properties any time soon. Tenant protections are really strong these days, property owners assumed to be rich folks who can handle any financial storm including tenants not paying rent.  

"Tenant Protections" are now 100% bullet proof. Our governments actively encourage tenants to stop paying their rents "during these trying times", by not processing eviction notices and/or taking 12 months to evict once they resume. Anyone who gets past the move in stage can simply stop paying rent for at least 12 months until evicted, and then move on to the next poor landlord. Some U.S. legislators (Ilhan Omar) are publicly declaring landlords should not be able to evict anyone. This will spread.

However if you're still convinced residential real estate is the investment sector you want to be in, perhaps a REIT is the best way to spread the risk, and eliminate the headaches of being a landlord.

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