Family Formation & Housing

For young couples starting families, buying their first home and/or other real estate. Covers mortgages, credit cards, interest rates, children’s education savings plans, joint accounts for couples and the like.

How federal housing policies could impact first-time homebuyers

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By Jordan Lavin, Ratehub.ca

Special to the Financial Independence Hub

For a little more than a decade, the Federal Government has been making policies that make it harder to buy your first home in Canada.

It’s hard to blame them. The great recession of 2008-09 was principally caused by a crash in the U.S. housing market which, in turn, had been caused by lax mortgage lending standards. Hundreds of thousands of people bought homes they couldn’t really afford, and were later foreclosed on or forced to sell. Left behind was a glut of housing inventory and an equal glut of people who had lost everything. The ripple effect was felt throughout the world, including here in Canada.

Fortunately, the mortgage problem was isolated to the United States. But the repercussions hit Canada hard, and interest rates fell to unprecedented lows as a response to the worsening economic situation. During the recovery, mortgage rates in Canada continued to fall and house prices quickly rose. In hot markets like Vancouver and Toronto, the average price of a home nearly doubled between 2010 and 2016.

All this left government officials on this side of the border wondering if it was possible for the mortgage and housing market to fail here. With the compounding worry of a housing market crash – what if prices went back down as quickly as they had gone up? – they began making new policies with the goal of making it more difficult for Canadians to qualify for a mortgage, especially if that mortgage were to be insured by the Canada Mortgage and Housing Corporation (CMHC).

Among the changes: Limiting amortization length for insured mortgages to 25 years; Limiting CHMC insurance to homes purchased for under $1-million only; Establishing a minimum down payment of 5% and then increasing the minimum for homes over $500,000; and expanding a “stress test” to eventually force all mortgage borrowers to qualify at a higher interest rate than they would actually pay.

This cocktail proved poisonous for first-time homebuyers. High house prices, harder qualification criteria and lower earning potential forced first-time homebuyers to get creative, finding new ways to afford homes.

Today, the government is looking at two new policy changes that could have an impact on first-time homebuyers.

A return to 30-year insured mortgages for first-time homebuyers

Currently, the longest you can take to pay back an insured mortgage (mortgage insurance is usually required when you have a down payment of less than 20%) is 25 years. But one policy change the government says they’re looking at is increasing that limit to 30 years.

This is a boon to affordability, at least at the qualification level. Ratehub’s mortgage payment calculator shows that the monthly payment on a $500,000 mortgage at today’s best rate of 3.29% will be $2,441 when amortized over 25 years, or $2,181 when amortized over 30 years. Since mortgage affordability is based on a fraction of your income, a lower payment equals a higher purchase price you can qualify for.

But there’s a significant downside. The obvious is the additional 5 years of mortgage payments later in life. If you’re over 35, signing a new 30-year mortgage could keep you making payments into retirement. Continue Reading…

Prairies and Eastern Canada most affordable for single home buyers, study says

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

Despite recent reports that home prices in Canada’s tightest markets are starting to cool, skyrocketing values over the last five years mean purchasing real estate is still financially unfeasible for many prospective buyers – especially those trying to do so on their own.

However, while this certainly is the case in the Vancouver and Toronto markets – where average home prices rose 35 and 58% between 2014 – 2019, respectively – a new study from Zoocasa reveals homeownership isn’t out of the cards for buyers willing to expand their search.

Where can single purchasers afford a home?

To find which markets can be considered affordable on a solo budget, the study sourced average home prices for 20 cities across the nation. It then calculated, assuming a 20% down payment, mortgage rate of 3.29%, and a 30-year amortization, the minimum income required to purchase the average home in each market. That amount was then compared to actual median income data of “persons living alone who earned employment income” as reported by Statistics Canada.

The numbers reveal that for single purchasers earning the median income, 10 markets can still be considered affordable: and all are located within the Prairie and Eastern Canadian provinces.

Regina takes the top spot for single buyer affordability; there, an earner bringing in$58,823 would qualify to purchase a home at the average price of $284,424, and have an “income surplus” of $20,025. This surplus indicates the buyer is not purchasing at the top of their affordability, an important consideration when interest rates are on the rise.

The other most affordable cities include Saint John, where the average home priced at $181,576 could be purchased on an income of $42,888 with $18,038 left over, and homes on the Edmonton MLS, where earning $64,036 would net a $17,826 surplus on the average home price of $338,760. Calgary, Lethbridge, Winnipeg, and Halifax can also be considered to be affordable markets based on the study’s criteria.

Vancouver, Toronto, still well out of financial range for solo buyers

On the least affordable end of the scale is Vancouver, where the average home costs $1,109,600: out of the range of the local median single income of $50,721 to the tune of $88,361.

Affordability also remains steep for single buyers in the Toronto market, despite overall higher earnings and lower average home price: there, an income of $55,221 would fall $46,858 on the average home price of $748,328. Victoria rounds out the top three with an average home price of $633,386, $39,359 below what the median income of $86,400 can afford. Continue Reading…

FP: How retired seniors can use their spouse as a tax asset

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My latest Financial Post column has just been published in the print edition of the Wednesday paper (Feb. 27, page FP8), under the headline Top tax asset in Retirement? Think Spouse. Click on the highlighted text to access the full story  via the National Post e-paper. Or for the website edition, click on this clever headline: Your biggest tax asset in Retirement may be sleeping right beside you.

The column looks at how senior couples approaching Retirement or semi-retirement face a slightly different tax situation than when both were working in full-time jobs. There’s limited scope for income splitting when you’re working but Pension Income Splitting — introduced more than ten years ago — is a real boon for senior couples that enjoy one fat employer-provided pension and the other does not.

For tax purposes, up to half of the pension can be “transferred” to the lower-income spouse’s hands, thereby reducing some of the highly-taxed income for the pension recipient, and putting more of the pension into the low-taxed hands of the spouse receiving some of the transfer. Note this doesn’t actually mean they receive the pension: it all happens on the tax returns, and is easily handled by tax software when you choose to file your taxes jointly as a couple. Note that unlike in the United States, there is no formal joint tax return for couples in Canada: each spouse must file on their own but the tax software makes it relatively smooth by creating so-called “Coupled Returns,” which helps optimize who claims deductions like charitable or political contributions and the like.

Because the column has to fit in the paper and included several sources (some of whom blog here at the Hub), I’ve taken the liberty of adding some of the points made that did not appear in the column or had to be truncated.

Income splitting options limited under age 65

Under age 65, the options for income splitting are very limited, says Aaron Hector, vice president of Calgary-based Doherty Bryant Financial Strategies.  “Generally here you are only looking at payments out of defined benefit plans (of which  up to 50% can be split) or spousal loans from non-registered investments.”

Doherty Bryant’s Aaron Hector

More from Aaron Hector:  “If each spouse has their own registered plan (RRSP/RRIF/LIRA/LIF) then the withdrawal from their own personal plan can be taxed fully to them. So if one spouse is working, they may not need or want to draw any additional income from their registered plans, but the spouse who is not working can choose to draw down their registered plan. It is important to note that regular RRSP withdrawals will never qualify for income splitting, even after 65. The withdrawals need to come from a RRIF to be eligible for income splitting. Sometimes people are hesitant to convert their RRSPs into RRIFs because they don’t yet want to commit to the subsequent forced annual taxable RRIF withdrawals. What is less commonly known is that someone can convert only a portion of their RRSP into a RRIF, leaving the remaining RRSP balance untouched until it is forced into being converted into a RRIF by the end of the year in which they turn 71. Furthermore, if someone converts to a RRIF early (ie. before 71) then they will always have the option to convert their RRIF back into a RRSP anytime before 71. Doing so would allow them to ‘turn off the taps’ that is the RRIF income stream. Once you turn 65 (but not before) withdrawals from RRIFs and LIFs become eligible for income splitting. Only the spouse who’s RRIF/LIF is being drawn upon needs to be 65; the recipient of the income splitting can be younger than 65. However, in this case the recipient spouse will not get the “pension income tax credit” until they are also 65.

It’s also important to note that when it comes to these income splitting provisions, age 65 at any point of the year is sufficient. If you turn 65 on December 31, then the same 50% splitting provisions apply to you as if your birthday was on January 1. (ie. the splittable portion does not get pro-rated in the year you turn 65 depending on your specific birth date). Because of the age 65 significance, and also as a hedge against future governments changing the tax rules (ie. taking away pension income splitting rules, which have not always been allowable) I try to have my client couples have an even amount of money in their registered plans. Spouse 1 should add up their RRSP, LIRA, Spousal RRSP, etc.. and the total should be close to the same total of spouse 2. If there is a discrepancy, then Spousal RRSP contributions should be utilized to even things out. This allows flexibility in income planning and withdrawals in the years prior to age 65. I caution on Spousal RRSP contributions the closer someone is to needing the money because of the 3 year-rule. The 3-year rule is such that if a withdrawal is made in the year of a contribution, or either of the next two calendar years, then the income from that withdrawal will be attributed (ie. taxed) back to the contributing spouse instead of the Spousal RRSP account holder.”

Taxation of Non-registered income works differently

Income from non-registered accounts works a bit differently, Aaron notes: Continue Reading…

How to make the most of your HELOC

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By Sean Cooper

Special to the Financial Independence Hub

A HELOC, short for “home equity line of credit,” is a revolving line of credit secured by your home’s equity. HELOCs have a reputation for being a convenient, flexible and low-cost way of accessing credit. A HELOC can be a great way to borrow money cheaply (it sure beats using your credit card!), as long as you do it responsibly.

Using your HELOC responsibly means using it for something that is likely to increase your net worth and having a plan to pay back the money you borrow. (It can be tempting to make interest-only payments, but you’ll literally find yourself no further ahead.) To address this, most lenders have recently introduced stricter qualification rules for HELOCs. You’re required to pass the mortgage stress test (2% + your HELOC rate), in addition to some lenders making you qualify based on your HELOC limit rather than your current outstanding balance.

The amount that you can borrow by way of a HELOC has also decreased over the years. With a HELOC today, you can access up to 65% of your home’s appraised value. Note that your mortgage balance and HELOC together can’t be more than 80% of your home’s appraised value.

Now that you have a better understanding of HELOCs, let’s take a look at a couple ways to make the most of your HELOC.

Home Renovations

A popular use of HELOCs is home renovations. But before undertaking a major home renovation, it’s important to ask yourself why you’re doing the renovation. Continue Reading…

5 mistakes people make buying Term Insurance

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By Jane Rupert

Special to the Financial Independence Hub

An essential component of planning for the future involves planning your finances. After all, when your career finally falls into place, your funds need to be managed appropriately too. How you save, invest, spend and leverage your income can help with deciding how secure (or not secure) your finances for the coming years will be. In times like these, when the avenues and options are aplenty, it shouldn’t be too difficult to choose the right options for yourself. You can also do research on finding recommended independent agents who can help you get the right insurance policy for your need.

However, making mistakes when you try to work things out on your own is only human, and that’s why we’re here to throw light on some mistakes that you can avoid.

When we say mistakes, we’re talking particularly about Term Life Insurance. Term Life Insurance involves selecting the term or duration for which you will be paying your premium and also allowing your policy to mature and grow in monetary value. Needless to say, the longer you let it mature, the larger your policy amount is going to be when you decide to cash it in or pass it on to your family. That being said, it’s a given that we believe in the importance of taking up a life insurance policy. So, let’s also throw some light on mistakes that you should avoid making when you decide to invest in one.

1.) Being hasty

There are tons of policies and financial companies that you can choose from, so why be hasty about it? A common mistake some people make is to go for the first policy that is presented to them, without doing their own research and weighing out the alternatives in the market. Now, this could lead to you overpaying for your policy or taking up too many riders, without deriving any actual, significant benefit from it. Hence, step one is to always check out multiple, get instant term life insurance quotes, make a proper comparison and then decide which policy best suits your requirement.  

2.) Buying small

For some of us, an insurance policy is a way to make up for deficit income. Whether it’s because of disability or unemployment, it’s important to have something as a backup to help you out in times of financial crisis. However, a common mistake people make is to take a policy that is only just enough to make up for their income, without considering the long-term repercussions of it. Taking a small policy amount also means that it won’t last you too long, and if a sudden medical emergency arises, for example, you might burn through that amount in no time. Taking a larger policy amount is a smart move because it ensures that you have a broader net to fall on if times get rough. Continue Reading…