Friday, March 21, 2008

Complaining About Property Tax Like Crying with a Loaf of Bread

A lot of people were very upset when the Toronto Liberal government recently announced a proposal to increase property taxes. You may disagree, but I don't think the proposed property tax increase is a big deal. Based on the average price of a home in the city of Toronto, which is around $365,000, the proposed increase would amount to a total of $81 per year. But to be fair, when you consider all the escalating costs homeowners have been facing in recent years including the new city land transfer tax on purchases in addition to rising utility costs and taxes, together they add up. And if you're on a fixed income, keeping ahead of it all can be a challenge.

Now if you are a homeowner and have owned a home in the city of Toronto for the last ten years, let’s consider for a moment how you have benefited. House prices have increased dramatically in the past ten years -- if you bought a house in 1997 for $190,000, given an average increase of 6% per year, your house would be worth approximately $365,000 today. Last year alone you would have benefited from an increase of approximately $22,000 in the value of your house! When you look at the big picture, it makes an additional $81 a year in property taxes look like spare change. And CMHC has forecasted yet another 6% increase in house prices this year.

My grandfather once said to me, when you have something great and you complain about it, it’s like crying with a loaf of bread. And having lived through the great depression, he knew that if he had nothing else but could still afford to buy a loaf of bread for dinner, then you still had something. Let’s not forget how fortunate we are to live in a city like Toronto (in Canada actually). Because of the high demand for real estate, homeowners have benefited from considerable increases in the value of their homes and in their net worth in recent years.

So how do you convert equity into cash you can use to pay bills? You borrow against the equity you have in your home. One method is to get a line of credit. Usually the rate charged on a secured line of credit is at Prime. Prime rate is currently 5.25% and with downward pressure on rates as a result of the subprime mortgage crisis in the U.S., rates are expected to go down.

If you’re reluctant to borrow, you could also consider downsizing your home. For some, that may be a good solution, especially if you're an empty nester and you have more house than you need. You'll probably enjoy lower property taxes and utility costs on a smaller home too, but selling costs are high. You’ll have to pay real estate commissions and legal fees on the sale of your home, as well as land taxes and legal fees on the purchase. After expenses, if you move from a $400,000 home to a $300,000 in the city of Toronto, you'll end up saving around $70,000. Approximately $30,000 will go up in smoke. Moving expenses can take a large bite out of your equity.

If you want to stay in your home because you’re comfortable there, and if you’re over the age of 60, you may qualify for a reverse mortgage. The dominant player in the reverse mortgage market in Canada is CHIP -- that stands for Canadian Home Income Plan. CHIP has been around for 20-years. Their borrowing rates are around 2% higher than the current prime rate, but the benefit of the reverse mortgage is that you never need to make a payment and they won't ever force the sale of your home as long as you’re living in it. I recently had a conversation with Greg Bandler, an SVP at CHIP. CHIP takes a holistic approach to addressing the needs of their clients by leveraging their network of financial planners and by looking at your whole financial picture.