November is National Financial Literacy Month, where the Financial Consumer Agency of Canada (FCAC) helps equip Canadians with practical tools and tips to manage their money in a changing world. This year, they’re discussing the often-looming question of housing in all its aspects: renting homes, buying homes, and managing mortgages. While it’s good to have house and home on your mind, with a little help from Magenta and the FCAC, the question of home can be more of a hope and less of a headache.
At Magenta, we aim to connect people with opportunities to build a better tomorrow. This month, we’re furthering our goal by supporting National Financial Literacy Month and sharing resources dedicated to helping Canadians:
- navigate the world of residential finance;
- save for the future; and
- purchase a home with the help of government programs.
Purchasing Your First Home
One of the most important purchases in anyone’s life is their first home. More than just a sign of independence or financial security, a home is a place where you can truly be yourself, a reflection of your life’s journey and the journeys of those you have the pleasure of sharing it with.
In today’s market, reaching the brass ring of home ownership can feel like an impossible dream for certain groups including, new Canadians, Millennials, Gen Z and others who are looking to establish a home base. The good news is that there are many programs and incentives in place to help make that dream a reality- some of which, such as the Home Buyer’s Plan, have become more flexible with the release of the latest federal budget. There are also many tools at your disposal to help you save for the future, like:
- Tax-Free Savings Accounts;
- Registered Retirement Savings Plans; or
- First Home Savings Accounts; and
- the FCAC’s automated budget planner.
If you or someone you know is considering renting or purchasing a home or repaying a mortgage, keep reading to learn more about navigating the world of residential finance in Canada.
Renting a Home
Renting may be cheaper than buying in the short term. As important as the roof over your head is, spending too much on rent can make it difficult to cover your other expenses or save for the future. The FCAC suggests that your rent and household-related expenses should not consume more than 35% of your gross (before taxes and deductions) household income.
The documentation you’ll require to rent is typically less intensive than if you were to purchase the same property. However, your landlord will want to check your credit report to determine whether you can pay rent on time. If you have no credit history, be prepared to provide your landlord with a guarantor. A guarantor is someone with a good credit history who agrees to pay for you if you cannot make rent. Regardless, remember that failure to pay rent on time will hurt your credit history, impairing your ability to rent or purchase other homes in the future.
How to Save for a Home
Saving to make the down payment on a home can be as simple as incorporating it into your budget. Automatic fund transfers to a savings account for each of your pay periods are a great way to start. You can consider investing your savings in a short-term strategy such as Guaranteed Investment Certificates (GICs) or low-risk mutual funds. You can make use of both your Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) to help you reach your goal. Both accounts allow you to save money tax-free. Note that only TFSAs allow you to withdraw money without paying tax.
If you’re self-employed or have a poor credit history, your lender can request a larger down payment. This means they can ask for more than the mandated minimum down payment for a home of that price. However, a larger down payment can be advantageous, as your down payment is deducted from the total value of your mortgage. The bigger your initial payment, the smaller the mortgage. The smaller the mortgage, the shorter the time needed to pay it back, which could save you thousands of dollars in interest fees.
Buying a Home
The first step in buying a home is ensuring you have the means to keep it. The Canada Mortgage and Housing Corporation (CMHC) recommends that your monthly housing costs should not exceed more than about 39% of your gross (before deductions) monthly income. These costs include your mortgage payments, property taxes and utilities. They also recommend that your entire monthly debt load should not be more than 44% of your gross monthly income. This includes mortgage payments and all other debts, such as loan or credit card payments.
Additionally, when you buy a home, you will pay for upfront costs apart from your mortgage and down payment. Examples include home inspection fees, legal fees, property tax adjustments and title insurance. As a rule of thumb, expect to spend between 1.5% and 4% of the home’s purchase price on these costs.
Programs for Purchasing a Home
The Canadian federal government offers several programs and incentives to help make homeownership a reality, especially for first-time homeowners.
- A First Home Savings Account (FHSA): allows you to save up to $40,000, tax-free, towards owning your first home. There is an annual contribution limit of $8,000.
- GST/HST New Housing Rebates: available on some of the taxes you would otherwise pay, provided that the house is new or recently substantially renovated.
- The Home Buyers’ Amount (HBA): a non-refundable tax credit of up to $10,000. The HBA goes towards the purchase of a home if it’s either you or your spouse’s first home.
- The Home Buyer’s Plan: allows you to withdraw up to $60,000 from your RRSP tax-free.
In all likelihood, even with these benefits, you will need to take out a mortgage to finance your purchase. If you are planning to take out a mortgage with a bank, be sure to use the FCAC’s free calculator to determine if you qualify for such a loan. If you don’t qualify for a bank loan in Canada, federal law does not require credit unions and other alternative lenders to use the same metrics. They can evaluate your eligibility differently- particularly if you are self-employed or your credit history, while damaged, is in the process of recuperating.
Renewing Your Mortgage
When you get a mortgage, your contract is in effect for a specific length of time. This is known as the mortgage term. This period can range from a few months to five years or longer. You have to renew your mortgage at the end of each term unless you pay the balance in full. If your mortgage is with a federally regulated institution, the lender must provide you with a renewal statement at least 21 days before the end of the existing term. Your lender must also notify you 21 days before the end of your term if they will not renew your mortgage.
When your mortgage is up for renewal, it’s important to consider if your current mortgage product still suits your needs. If not, then it is time to investigate other options. You can consider your current lender or a different lender entirely. If you need some assistance, a mortgage broker may be able to help you find the mortgage solution best suited to your needs.
When renewing your mortgage, ask yourself:
- Has my income increased since my last term? Does this allow me to potentially pay off my mortgage sooner and save on interest?
- Do I want to change my payment frequency?
- Has my income decreased or has my budgeting priorities changed, making me likely to need to make additional payments?*
- Have I been satisfied with the services offered by my current lender?
- Do I want to consolidate other debts that have higher interest rates and increase the amount of my mortgage?
- Do I still need optional life, critical illness, disability or employment insurance?
*Remember, extending your amortization can result in more frequent and smaller payments. It will increase the amount of interest you’ll have to pay. Consider consulting a tool such as the FCAC’s mortgage calculator to gauge how much this will cost you in the long run.
Changing Lenders
In Canada, if your lender is a federally regulated institution (e.g. a bank), they must offer and sell you products and services that are appropriate for you. This includes assessing your wants based on your circumstances and financial needs. It is worthwhile to describe your financial situation so that you can match it with the best product. Keep in mind that if you change lenders, you may have to pay setup, appraisal, and other administrative fees. These fees would be in addition to paying a new mortgage loan insurance premium if you are extending your amortization period or increasing the size of your loan.
Money on Your Mind
To learn more about Financial Literacy Month and access free tools and information to improve your financial health, please visit canada.ca/money.
If you enjoyed this blog and want to learn more about Magenta or financial literacy, we invite you to check out our Resource blogs.
Disclaimer
The opinions and viewpoints presented in this document are exclusively those of the several writers and do not represent the perspectives of any associated individuals or organizations, including but not limited to the writers’ current or former employers. This article serves purely informational purposes, and the writers have made efforts to verify the accuracy of the information and analysis. The writers take full responsibility for any opinions, forecasts, or predictions made. They do not guarantee the precision or completeness of the document’s contents. This document does not offer professional or investment advice. The writers will not be liable for any consequences resulting from reliance on this piece. Readers should consult with a certified expert before making any financial decisions.