By Scott Ronalds

It’s been a few months since we last checked in with Bruce. Things are good on the work and home fronts, and his portfolio is holding steady in a bumpy market (as of June 30th, he’s up about 3.5% year-to-date).

The family took a two week holiday to California in the spring, which included stops at Disneyland for the kids and a few wineries in Santa Barbara for the adults, before settling in Palm Springs. The sun and cheap merlot had a lasting impact. Bruce has long wanted a vacation home and stepped up his search after getting back from holiday. The relentless rain in Vancouver was a trigger. He flew back down to Palm Springs with his wife last month to look at a few properties and is now in the process of closing on a 2 bedroom townhouse for a price of $225,000. It gives him comfort that the same home sold for close to $400,000 in 2006.

Bruce carefully considered a few issues before deciding to buy in the U.S.:

  • Taxes (if he rents the property, he will have to claim the income and file a return with the IRS. He will also have to pay taxes on any capital gains that may be realized when the property is sold).
  • Financing.
  • Ongoing costs (monthly maintenance fees, property tax, improvements, etc.).

Wisely, he consulted with a tax lawyer in Canada to get a full understanding of the responsibilities and liabilities of owning a home in the U.S. Bruce also quickly learned that he couldn’t obtain a mortgage from a Canadian lender to buy the property, and would require a 30% down payment to secure a mortgage with a U.S. bank. His other option was to pay cash for the property by selling some of his investments (he has been holding some cash for this purpose) and using a line of credit in Canada. He opted for this option, as the complexity and exchange rate risk (monthly payments in U.S. dollars for 20-30 years) of a U.S. mortgage was a deterrent.

Bruce decided to redeem $50,000 from his investment portfolio ($30,000 from his Steadyhand account and $20,000 from his discount brokerage account) and use a home equity line of credit on his home in North Vancouver to come up with the proceeds for the purchase. He made this decision, rather than liquidating all his non-registered investments, because he wants to keep money in the market as he feels there is good upside potential over the next several years.

He obtained a $200,000 line of credit at a current rate of 3.5% (prime plus 0.5%). Bruce realizes the leverage and interest rate risks of his situation: if rates rise, his monthly payments will rise. Further, there’s the possibility that the value of his home in North Vancouver could fall, thereby reducing the equity against which his line of credit is secured. The California property could also fall in value. He knows the risks and is comfortable with his situation.

Bruce’s $30,000 redemption presented an opportunity to rebalance his portfolio. Strong performance from the Small-Cap Fund and a weak stretch from the Global Fund meant that his asset mix had drifted modestly. To re-align his portfolio closer to its strategic target, he took the redemption from the Savings Fund and Small-Cap Fund, and made a few other minor switches including adding to the Global Fund. His fund mix is now as follows:

Savings Fund – 6%
Income Fund – 30%
Equity Fund – 27%
Global Equity Fund – 24%
Small-Cap Equity Fund – 13%