Bruce Ball, FCPA, FCA, CFP

November 21, 2022

The federal government has released new details about a new type of registered savings plan aimed at helping Canadians save for their first home. Find out who qualifies and other key features of these plans.

The Tax-Free First Home Savings Account (FHSA) was first proposed in Budget 2022. A backgrounder¹ and draft legislation was released on August 9, 2022, which provided more details on the plan’s design. On November 4, 2022, the revised legislation was released as part of Bill C-32 (Fall Economic Statement Implementation Act, 2022) and included additional changes². Assuming the bill will be passed, the FHSA rules will enter into force on April 1, 2023.

In this blog, we highlight the key elements of the FHSA proposals and answer some top questions you might have about this new plan.

FHSAs – THE BASICS

The FHSA offers prospective first-time home buyers the ability to save $40,000 tax-free. Like registered retirement savings plans (RRSP), contributions to an FHSA would be tax deductible. Like tax-free savings accounts (TFSA), income and gains inside an FHSA as well as withdrawals would be tax-free.

Who is eligible?

To open an FHSA, you must:

• be an individual resident of Canada
• be at least 18 years of age

• be a first-time home buyer, which means you, or your spouse or common-law partner (“spouse”) did not own a qualifying home that you lived in as a principal place of residence at any time in the year the account is opened or the preceding four calendar years

For the purposes of the first-time home buyer’s test, a home owned by your spouse in which you lived during the relevant period will only put you offside of the test if that person is still your spouse when the FHSA is opened.

How much can you contribute?

You can contribute up to $40,000 over your lifetime and up to $8,000 in any one year, including 2023 even though the rules don’t come into effect until April 1, 2023.

The annual contribution limit applies to contributions made within the calendar year. Unlike RRSPs, contributions made within the first 60 days of a given calendar year cannot be attributed to the previous tax year.

You may carry forward up to $8,000 of your unused annual contribution amount to use in a later year (subject to the lifetime contribution limit). For example, if you open an FHSA in 2023 and contribute $5,000, you can contribute up to $11,000 in 2024. Carry-forward amounts do not start accumulating until after you open an FHSA.

You can hold more than one FHSA, but the total amount you can contribute to all of your FHSAs cannot exceed your annual and lifetime FHSA contribution limits.

Like TFSAs and RRSPs, a tax on overcontributions to an FHSA would apply for each month (or part-month) that the account is over the limits. The tax applies at the rate of 1% to the highest amount of the excess that existed in that month.

An overcontribution can be dealt with in few different ways. First, the account holder can wait until the following year, and then the additional annual contribution room that arises may absorb the excess contribution. Alternatively, it is possible to request that a “designated amount”, not exceeding the overcontribution, be returned to the account holder as a tax-free withdrawal or a transfer to an RRSP. If a tax-free withdrawal is received, the original contribution giving rise to the overcontribution is not deductible. Finally, a taxable withdrawal would also reduce an over-contribution to an FHSA.

Finally, like RRSPs, you can make a contribution but defer the deduction until a later year.

What types of investments can an FHSA hold?

Permitted investments for FHSAs are the same as for TFSAs. These include mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates.

The prohibited investment rules and non-qualified investment rules applicable to other registered plans will also apply to FHSAs. These rules are intended to disallow non-arm’s length investments and investments in assets such as land, shares of private corporations and general partnership units.

Withdrawals

Qualifying withdrawals to buy a qualifying home purchase are not taxable. To qualify, the withdrawal must meet these conditions:

• You must be a first-time home buyer when you make the withdrawal. There is an exception to allow individuals to make qualifying withdrawals within 30 days of moving into a qualifying home.
• You must have a written agreement to buy or build a qualifying home before October 1 of the year following the year of withdrawal, and you must intend to occupy the home as a principal place of residence within one year after buying or building it.
• A qualifying home is a housing unit located in Canada (or a share in a cooperative housing corporation that entitles the taxpayer to possess and have an equity interest in a housing unit located in Canada).

Any funds left over after making a qualifying withdrawal can be transferred to an RRSP or registered retirement income fund (RRIF), penalty-free and tax deferred, as long as you transfer the remaining funds by December 31 of the following year, since the plan stops being an FHSA at that time. Transfers do not reduce or limit your available RRSP room.

If you take out FHSA savings as a non-qualifying withdrawal, you must include the amount in income for the year of the withdrawal and tax will be withheld.

Finally, withdrawals and transfers do not replenish FHSA contribution limits.

Administration

To open an FHSA, you will first need to confirm your eligibility to an eligible issuer.

Financial institutions will have to file annual information returns with the Canada Revenue Agency (CRA) for each FHSA they administer. The CRA will use this information to administer the plans and provide basic FHSA information to taxpayers to help them determine how much they can contribute each year. Taxpayers will still need to monitor the limits to avoid overcontributions.

To make a qualifying withdrawal, you will need to submit a request to your FHSA issuer confirming your eligibility. Issuers will not withhold taxes on qualifying withdrawals.

When any withdrawals are made – qualifying or non-qualifying – the FHSA issuer must prepare an information slip stating the amount of the withdrawal and for non-qualifying withdrawals, the amount of income tax withheld.

TOP QUESTIONS YOU MAY HAVE ABOUT FHSAs

What happens if the FHSA funds are not used to purchase a first home?

If you do not use the funds in your FHSA for a qualifying first home purchase by the earlier:

• the end of the 15th year after the plan was opened, or
• the end of the year you turn 71 years old,

your FHSA will cease to be an FHSA and you must close the plan. Any unused balance in the plan can be transferred into an RRSP or RRIF or withdrawn on a taxable basis.

If the plan is not closed prior to its “cessation date” described above or if the plan otherwise loses its status as a FHSA, the FHSA holder will have a deemed income inclusion equal to the fair market value of all property of the FHSA immediately before the cessation of FHSA status. Therefore, if a transfer to an RRSP or RRIF makes sense, it should be done before the plan loses its FHSA status.

Since you can transfer funds from an FHSA to an RRSP or RRIF without affecting your RRSP limit, an FHSA may have appeal for those who rent their home. With an FHSA, they may still qualify as a first-time home buyer and accumulate funds on a tax-deferred basis, and they can still transfer the funds to an RRSP or RRIF if they do not eventually buy a qualifying home.

Can I contribute to my spouse’s or child’s FHSA? 

The FHSA holder is the only taxpayer permitted to deduct contributions made to their FHSA. You cannot contribute to your spouse’s FHSA and claim a deduction.

That said, the legislation allows an individual to make FHSA contributions with funds provided by their spouse without the attribution rules applying to the income earned in the FHSA from these contributions. Similarly, no attribution arises if you give cash to an adult child to contribute to their FHSA.

What happens to my FHSA on my death?

Like TFSAs, an individual may designate their spouse as the successor account holder and the account could maintain its tax-exempt status after the individual’s death.

If the surviving spouse is named as the successor holder and meets the FHSA eligibility criteria, they would become the FHSA’s new holder immediately on the original holder’s death. The transfer would not affect the spouse’s own FHSA contribution limits. Note that if the deceased individual had an overcontribution to their FHSA immediately before death, the successor holder (i.e. the spouse) may be treated as having made a FHSA contribution at the beginning of the month following the death. The deemed contribution amount is the amount of the overcontribution but will be reduced by the fair market value of FHSA property that did not remain in the spouse’s plan. This deemed contribution will reduce the spouse’s FHSA contribution room, or potentially put the spouse in their own overcontribution position depending on the circumstances.

• If the surviving spouse is not eligible to open an FHSA, amounts in the FHSA could instead be transferred to an RRSP or RRIF, or withdrawn on a taxable basis. If the FHSA beneficiary is not the deceased account holder’s spouse, the funds would need to be withdrawn and paid to the beneficiary. Unlike RRSPs or RRIFs where the value of the plan is generally included as income in the account holder’s terminal return, the payment of the plan balance will be taxable to the beneficiary. If the plan beneficiary is the deceased’s estate, and the surviving spouse is an estate beneficiary, then the estate can pay the plan proceeds to the surviving spouse, and if a joint designation is made, the spouse will be treated as though they received a payment from the plan directly. This may allow for a transfer to the spouse’s FHSA, RRSP or RRIF and otherwise, the spouse will be taxed on the income.  If the plan proceeds are paid or payable to another estate beneficiary, then the income may be taxable to them. The payment is also subject to withholding tax.

Finally, if an FHSA is not closed by its cessation date (in this case, generally the end of the year following the year of the FHSA holder’s death), there will be a deemed income inclusion equal to the fair market value of all property of the FHSA immediately before the cessation of FHSA status at the hands of each beneficiary, or estate, if there are no named beneficiaries (i.e. it will not be included in the deceased holder’s terminal return).

What happens to my FHSA in the case of a marital breakdown?

On the breakdown of a marriage or common-law partnership, an amount may be transferred directly from the FHSA of one spouse to an FHSA, RRSP or RRIF of the other. These transfers would not restore any contribution room of the transferor or count against the contribution room of the transferee. If the transferor’s spouse has overcontributed, the amount eligible for transfer will be reduced.

What happens to my FHSA if I emigrate from Canada?

You can continue contributing to your existing FHSA after emigrating from Canada, but you cannot make a qualifying withdrawal as a non-resident. The rules specify that an individual withdrawing funds from an FHSA must be a resident of Canada at the time of withdrawal and up to the time a qualifying home is bought or built.

Withdrawals by non-residents would be subject to withholding tax.

I just immigrated to Canada. Can I open an FHSA?

Once you become a Canadian resident, you can open an FHSA as long as you qualify under the rules discussed above. To determine whether you qualify as a first-time home buyer, you must consider a foreign home you owned that would be a qualifying property if it was located in Canada. You cannot open an FHSA in a year that you owned such a home or the four previous years.

I’m a U.S. citizen. Can I open an FHSA?

U.S. citizens are generally subject to tax on their worldwide income under U.S. tax rules. Income earned in Canadian registered accounts is generally taxed as it is earned, except for retirement plans, such as RRSPs and RRIFs, that qualify for relief under the Canada-U.S. income tax treaty.

Other Canadian registered accounts of U.S. citizens, such as TFSAs and registered education savings plans (RESP), can create double tax problems and additional U.S. reporting requirements. TFSAs may be subject to tax under U.S. rules. It appears that FHSAs could create similar issues for U.S. citizens, so they should seek specific advice before opening a FHSA.

Can I transfer amounts from my RRSP to an FHSA? 

You can transfer funds from an RRSP to an FHSA tax-free, up to the $40,000 lifetime and $8,000 annual contribution limits. These transfers would not restore your RRSP contribution room or generate a tax deduction.

However, a subsequent qualifying withdrawal from the FHSA would be tax-free, essentially making it a tax-free RRSP withdrawal. To maximize RRSP room, it appears that making contributions to an FHSA is the preferred approach. If money is tight, however, the ability to use transfers from an RRSP will help you maximize your FHSA’s potential tax-free withdrawal.

What’s my best bet: FHSA, Home Buyers’ Plan or TFSA?

The Home Buyers’ Plan (HBP), first implemented in the early 1990s, allows a first-time home buyer to withdraw up to $35,000 from their RRSP to purchase or build a home without having to pay tax on the withdrawal. You must then repay any amounts withdrawn to an RRSP within 15 years, starting the second year following the year in which you made the withdrawal.

The HBP continues to be available under existing rules. Thus, you can make both an FHSA withdrawal and HBP withdrawal for the same qualifying home purchase³.

The best choice depends on different factors, such as timing and the potential amount that will be saved.  The withdrawals under both plans can be made tax-free, but since you will have to repay the HBP withdrawal, it appears to make sense to contribute to an FHSA first. If savings are available after FHSA contributions, then making contributions to an RRSP with a view to later use the HBP may be the preferred option where the primary goal is to save money for a down payment on a home and there are insufficient funds in the RRSP to make a full HBP withdrawal.

However, before making additional RRSP contributions to fund future HBP withdrawals, consideration should also be given to using a TFSA to save money beyond the FHSA. Where a choice must be made as there will be insufficient savings to do both, you’ll need to consider the benefits of each alternative. Although TFSAs are not specifically designed for first-time home savings, these plans are worth considering for several reasons, including:

• the ability to save money on a tax-free basis
• the lack of any requirement to repay amounts withdrawn from a TFSA, as well as the restoration of an equal amount of contribution room in the TFSA in the year following the year of withdrawal
• the ability to withdraw funds saved in a TFSA and deposit them into an FHSA to receive a tax deduction as FHSA room becomes available

Prospective first-time home buyers should review the details of each plan to determine how to make the most of them to boost their savings.  Budget 2022 also included other housing related incentives including the introduction of the new Multigenerational Home Renovation Tax Credit and doubling of both the First-Time Home Buyers’ Tax Credit and Home Accessibility Tax Credit.  The proposed legislation for these two measures has also been included in Bill C-32.

The government aims to make FHSAs available to individuals after March 2023, but at the time of writing this blog, the enabling legislation has not been enacted. Since the rules are still in draft form, any decisions on how best to save for the purchase on a home should be delayed if possible until the final rules have been enacted.

 

Source: https://www.cpacanada.ca/en/business-and-accounting-resources/taxation/blog/2022/november/faqs-tax-free-first-home-savings-account

A “guarantor” is someone who guarantees the repayment of a borrower’s mortgage if that borrower is unable to repay the loan.

Typically, a guarantor is used in situations where the buyer lacks sufficient income to qualify for the value of the loan.  Adding a guarantor can help secure an approval as this lowers the lender’s loan risk.

A guarantor is not the same as a co-signer.

Below are some key facts about guarantors and what makes them different from co-signers:

• The guarantor must be a spouse or immediate family member. This is not necessary for a co-signer, who may be a friend or distant family member.
• A guarantor typically does not have their name on the title of the property but their name will appear on the mortgage. In the case of a co-signer, the name is typically on both the title of the property and the loan.
• Guarantors’ borrowing power for their own loans can be affected by the other loans they are responsible for as a guarantor.
• Like the borrower, the guarantor is responsible for the entire amount of the loan.  In order to qualify, the guarantor must meet the credit, income, liabilities and sometimes assets requirements.  Any potential guarantor should seek legal advice before signing for the loan to ensure they understand the contract.

Whether you want to be a guarantor for someone else’s mortgage, or you need one for your own, be sure to contact me before making any decisions. I am here to help.

 

Adapted from DLC Marketing

As expected, the Bank of Canada–satisfied with the sharp decline in recent inflation pressure–raised the policy rate by only 25 bps to 4.5%. Forecasting that inflation will return to roughly 3.0% later this year and to the target of 2% in 2024 is subject to considerable uncertainty. The Bank acknowledges that recent economic growth in Canada has been stronger than expected, and the economy remains in excess demand. Labour markets are still tight, and the unemployment rate is at historic lows. “However, there is growing evidence that restrictive monetary policy is slowing activity, especially household spending. Consumption growth has moderated from the first half of 2022 and housing market activity has declined substantially. As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment is expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports. This overall slowdown in activity will allow supply to catch up with demand.” The report says, “Canada’s economy grew by 3.6% in 2022, slightly stronger than was projected in October. Growth is expected to stall through the middle of 2023, picking up later in the year. The Bank expects GDP growth of about 1% in 2023 and about 2% in 2024, little changed from the October outlook. This is consistent with the Bank’s expectation of a soft landing in the economy. Inflation has declined from 8.1% in June to 6.3% in December, reflecting lower gasoline prices and, more recently, moderating prices for durable goods.” Short-term inflation expectations remain elevated. Year-over-year measures of core inflation are still around 5%, but 3-month measures of core inflation have come down, suggesting that core inflation has peaked. The BoC says, “Inflation is projected to come down significantly this year. Lower energy prices, improvements in global supply conditions, and the effects of higher interest rates on demand are expected to bring CPI inflation down to around 3% in the middle of this year and back to the 2% target in 2024.” (the emphasis is mine.) The Bank will continue its policy of quantitative tightening, another restrictive measure. The Governing Council expects to hold the policy rate at 4.5% while it assesses the cumulative impact of the eight rate hikes in the past year. They then say, “Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target, and remains resolute in its commitment to restoring price stability for Canadians”. Bottom Line The Bank of Canada was the first major central bank to tighten this cycle, and now it is the first to announce a pause and assert they expect inflation to fall to 3% by mid-year and 2% in 2024. No rate hike is likely on March 8 or April 12. This may lead many to believe that rates have peaked so buyers might tiptoe back into the housing market. This is not what the Bank of Canada would like to see. Hence OSFI might tighten the regulatory screws a bit when the April 14 comment period is over.   Courtesy of Dr. Sherry Cooper Chief Economist, Dominion Lending Centres drsherrycooper@dominionlending.ca

 

Choosing between a fixed and a variable rate mortgage requires a bit of thought.  Both have advantages but there are significant differences between the two.  

Variable Rate Mortgages

A variable rate mortgage has an interest rate that can fluctuate over time, while a fixed rate mortgage has an interest rate that remains the same throughout the life of the loan.

Variable rate mortgages can have vastly lower pre-payment penalties for paying the mortgage off early.  Further, there are two types of variable rate mortgages.  Adjustable rate mortgages are called ARMs for short, and static payment variable rate mortgages are known as VRMs.  Though both have rates that fluctuate, the difference is in whether the payment fluctuates with changes in the rate.  

As the prime rate rises or falls, so does the interest rates  on an adjustable rate mortgage, or ARM. This can be beneficial as rates decrease, as it leads to lower monthly payments. However, if rates increase, the monthly payment on a variable rate mortgage can also increase.  The length of time it takes to repay this loan does not change as rates fluctuate.  

Like fixed rate mortgages, with a static payment variable rate mortgage, or VRM,  the payment is fixed.  The portion of the payment going to interest increases and decreases as the rate fluctuates.  The amount of the payment going toward the principal increases and decreases at the same time.  As interest rates rise, the length of time it will take to repay the entire mortgage lengthens.  As interest rates fall, your mortgage will be paid down faster. 

Fixed Rate Mortgages

Fixed rate mortgages have interest rates that remain the same throughout the term. This provides borrowers with the security of knowing exactly what their monthly payments will be and what their rate will be over the period.  However, if interest rates in the market decrease, borrowers with a fixed rate mortgage may miss out on the opportunity to save money with a lower rate.  Also, penalties on fixed rate mortgages can often be far greater than those of variable rates.  

When deciding between a variable and fixed rate mortgage, it’s important to consider your own financial situation and goals. If you’re comfortable with a bit of uncertainty and are willing to take on the risk of potentially higher monthly payments or a longer repayment period, a variable rate mortgage may be a good option. However, if you prefer the predictability of a fixed rate, this may be a better fit. Ultimately, the right choice will depend on your individual circumstances.  

As always, please give me a call if you have any mortgage questions, I am here to help.

 

 

In lending, there is no question too basic, the details are important, and those details are not always the most intuitive.  Amortization is one of the key elements of a mortgage used to purchase or finance property you already own.  Knowing how amortization works can help you make informed decisions whether you are planning on purchasing, or if you are a borrower already.  

 

Amortization is a financial term that can seem daunting, but it’s actually quite simple to understand.  Essentially, amortization is the process of spreading out loan payments over a specified period of time. 

 

Amortized mortgage payments are split into two parts—a portion for interest and a portion for principal (the original amount borrowed). As payments are made, the principal balance decreases until the loan is paid off in full. 

 

For example, let’s say you take out a loan for $500,000 with an interest rate of 5%, amortized over 25 years. Your amortized payment would be $2,922.95/month. Of this payment, $2,083 would go towards interest, while $840 would go towards principal in the first month. 

 

Over time, the portion of your payment representing interest will decrease as more and more of your payment will go toward the principal (the original amount borrowed).  The last payment on the loan will be fully applied to the principal balance as there will be no remaining interest balance at that point.  

 

As always, if you have any mortgage questions, please feel free to reach out, I’m here to help.  

 

 

Five steps to incorporate as you make your financial plan for 2023.

1. Understand your loan agreements.

Your mortgage may have features you can take advantage of, such as making pre-payments to help you save on interest.  Most allow for changes to payment frequency to help you save interest as well.  While you’re at it, why not review your car and student loan to see what they allow to help you get a jump on interest costs?  

2. Tracking expenses and paying on time.

Mobile applications and other online tools can simplify monitoring and controlling expenses.  Watching what you spend can help you form a budget to keep you in line with your goals.  Paying all your bills on the first of each month can help ensure you pay on time or ahead of time to help maintain a healthy credit score.  Keeping balances at less than 35% of the limit at all times will help keep scores high as well.  

3. Paying off debt vs investing.

In most cases paying off high-interest debt, such as credit cards is priority #1.  Next, weighing out whether you’re better off investing or paying off your mortgage debt can be a question of rates, returns, and your time horizon.  A good financial planner can help you unravel this,  but If your returns are higher than your mortgage rate and you’re able to invest for longer than the time you have left on your mortgage, you may consider putting more of your resources toward investing.  Everyone’s situation is different, and everyone’s comfort level with debt also differs.  A conversation with a good financial planner is recommended.  

4. Saving and investing.

Though expenses have been increasing, staying in the habit of saving even a small but regular amount will continue to yield dividends for you over time.  Adjusting the amount you can afford as you go makes sense, but continuing to put whatever you can aside can each month is advisable. 

5. Tax Planning

Working with an experienced accountant can help you save on taxes and receive all benefits for which you’re eligible as well.  Ensure you’re writing off mortgage interest and expenses where possible, and if you’re self-employed or considering it, you’ll be wanting to ensure your plans are optimized for the greatest tax savings possible as well.

As the saying goes, what’s measured gets done.  Keep an eye on your finances and you’ll be sure to reach your goals this year!  If you need an introduction to a good financial planner or accountant, and if you have mortgage questions at any time, please let me know, I’m here to help. 

 

Adapted from DLC Marketing

One of the biggest benefits to purchasing your own home is the ability to build equity in your property. This equity can come in handy for renovations, investments, purchasing other property through refinancing or taking out additional loans such as a second mortgage.

What is a second mortgage?

A second mortgage is an additional or secondary loan taken out on a property for which you already have a mortgage.  A second mortgage comes with its own interest rate, monthly payments, set terms, and closing costs.

Second mortgages versus refinancing

A refinance is typically done at the end of a current mortgage term to avoid penalties.  However, the penalty can sometimes be justified if the use of the funds generates gains elsewhere. 

Accessing funds with a second mortgage leaves the first mortgage intact, thereby avoiding penalties.  In the case where the first mortgage rate is lower, a second mortgage allows you to maintain the low rate on the first mortgage.  Second mortgage funds can be used for any purpose, and you can also borrow in installments through a credit line in second position behind your first mortgage in some cases.

What are the advantages of a second mortgage?

There are several advantages when it comes to taking out a second mortgage, including:

• The ability to access funds while keeping your first mortgage intact
• Better interest rate than a credit card as they are a ‘secured’ form of debt.

What are some of the considerations of a second mortgage?

As always, when it comes to taking out an additional loan, there are a few things to consider:

• Interest rates tend to be higher on a second mortgage than refinancing your mortgage and come with additional fees.  Due to the higher interest rate, a second mortgage should have an exit strategy so you don’t carry the higher cost for too long.  
• Not all first mortgage lenders allow second mortgages to be added to a property title from other institutions 

To look into making a change, adding a line of credit or a second mortgage, or just a renewal on your existing mortgage, please contact me with any questions.  I’m here to help.   

The Bank of Canada Hiked Rates The Full 50 bps The Governing Council of the Bank of Canada raised its target for the overnight policy rate by 50 basis points today to 4.25% and signalled that the Council would “consider whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.” This is more dovish language than in earlier actions where they asserted that rates would need to rise further. Some have interpreted this new press release to imply that the Bank of Canada will now pause or pivot. I disagree. I expect there will be additional rate hikes next year, but they will be more measured and not on every decision date. I also feel that the Bank will refrain from cutting the policy rate until 2024. The Bank told us today that the “longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.”  CPI inflation remained at 6.9% in October, “with many of the goods and services Canadians regularly buy showing large price increases. Measures of core inflation remain around 5%. Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum. However, inflation is still too high, and short-term inflation expectations remain elevated.” The economy remains in excess demand, and the labour market is very tight. The jobless rate in November fell to 5.1%, and job vacancies increased in September. Wage inflation came in at 5.6% y/y in November for the second consecutive month, marking six straight months of wage inflation above 5%. While headline and core inflation have moderated from their recent peaks, they exceed the 2% target by a large measure. The Bank will monitor incoming data, especially regarding the overheated labour market where the jobless rate is at historic lows. Housing has slowed sharply in recent months, but as long as labour markets are tight, a slowdown in other sectors will be muted. The Bank now says it expects the economy “to stall” in the current quarter and the first half of next year. Bottom Line This will likely be the last oversized rate hike this cycle. The Governing Council next meets on January 25. Whether they raise rates will be data-dependent. If they do, it will likely be by 25 bps. Even if they pause at that meeting, it does not rule out additional moves later in the year if excess demand persists. I expect further monetary tightening, the continued bear market in equities, and a further correction in house prices. Canadian benchmark home prices are already down nearly 10% nationwide. Several chartered banks told us this week that more than 25% of the remaining amortizations for their residential mortgages are 35 years and more. At renewal, these institutions expect to grant mortgages amortized at 25 years, which implies a substantial rise in monthly payments. That may well be three or four years away, but clearly, many households could be pinched unless mortgage rates plunge in the interim. I do not see the policy rate falling to its pre-Covid level of 1.75% over that period because inflation back then was less than 2%, an improbable circumstance as we advance. Although supply constraints may be easing, globalization has peaked. Semiconductors produced in the US will not be as cheap, and many rents, prices, and wages will be very sticky.

Courtesy of Dr. Sherry Cooper Chief Economist, Dominion Lending Centres drcooper@dominionlending.ca

Planning to Sell Your Property.

Whether you are upsizing or downsizing, or selling a rental property, there are a few things to keep in mind throughout the process:

Is Your Mortgage Really Portable?

Porting a mortgage involves porting the terms of your existing mortgage to the new property to avoid a penalty and to maintain your current rate.  

Though you qualified for the mortgage on the current property, you must requalify for the mortgage to be ported to the new property as well, as though the mortgage is brand new.  Your income, any further down payment, and the new property amongst other application details must all be accepted by the lender in relation to the new property before the port can be approved.  

Make sure you qualify for where you’d like to go next before you list your current one for sale.  

Choose the RIGHT Real Estate Professional

One of the most important aspects of the successful sale of your home or property is to price accordingly. When selling, it is vital to avoid emotions in your decision.  To achieve that, it’s helpful to work with a realtor you trust to set a realistic pricing strategy. A  real estate agent can help you maximize the sale price and terms that work for you.  They’re also invaluable in walking you through every step of the sales process, from staging to negotiation and everything in between. 

Improve Your Curb Appeal

Attending to landscaping and any outdoor maintenance or repairs will go a long way in making your property more appealing. A pressure wash and a new coat of exterior paint can also do wonders to give the property a facelift.  Keep it simple, but first impressions count.  

Get Rid of Clutter

In addition to updating your property’s curb appeal, de-cluttering your space is a must. Removing personalized photos, collectibles, memorabilia, and knick-knacks will help open things up and allow potential buyers to envision their own belongings in those spaces. While major renovations are not necessary, a fresh coat of paint and managing any minor repairs will also help make first impressions count.

Understand the Costs

As you form your plans, be sure to remember the costs involved in selling property.  These include::

• Real estate sales commissions
• Closing fees
• Title charges
• Transfer and recording charges
• Additional settlement charges, if applicable
• Debt obligations related to existing mortgages

If you’re looking to sell your home and need mortgage advice or an introduction to a real estate professional, please reach out, I am here to help. 

 

ADAPTED FROM DLC MARKETING

Funding Retirement – Your Property Can Help.

Aside from potential income from renting out part or all of a property, mortgages can supplement income in retirement.  While it’s true qualifying for a mortgage can change as we age, a bit of planning up front can help, just before leaving your prime earning years.  If you haven’t made advance plans, there are options to help you leverage the equity in property in retirement too.

Home Equity Line of Credit (HELOC):  Before retiring, consider setting up the largest line of credit you can qualify for in your highest income years.   HELOCs allow you to borrow only what you need, when you need it, and is amongst the most flexible loans with respect to repayment without penalty.  Though it’s rare, the lender can request the loan be repaid at any time and the rate of interest can change as well.  However, having access to the equity in your home in retirement is a great benefit when managed correctly, and secured with the right lender for you.

Private Loans: Private loans are sometimes an option for retirees with short-term financial needs. Rates are higher, but these loans are easier to qualify for. The value and quality of the property are more heavily weighted than income would be on an application for a regular mortgage.  The ability to make the payments is reviewed, but a strong exit strategy is also important.  Being able to repay the full amount upon the sale of another property would be an example of a strong exit strategy.  Having other property to sell is not always a requirement, exit strategies may vary, as do monthly payment requirements.  Some private loans come with an interest reserve, which allows interest to build over the term of the loan, rather than having to make regular payments.  Proper use and management of private lending is important due to the costs involved but can be a great benefit to borrowers of any age depending on the circumstances.

Reverse Mortgages: A reverse mortgage can be used to:

• replace a regular mortgage of up to roughly half your property’s value
• purchase real estate
• fund investments
• provide lump sum and/or monthly amounts to supplement cash flow

These loans are typically taken by borrowers over the age of 55 on their principal residence, but not all lenders have an age restriction on these loans.  Rates are usually higher than regular home loans.  However, never having to make any payments can lift a burden for those with cash flow issues in retirement, and allow them to stay in their homes.

Lenders offering non-age restricted reverse mortgages can extend them on principal residences, rentals. and second homes in some markets.  In all cases, borrowers retain ownership in their homes, and the mortgage is registered just like any other mortgage, but the balance grows over time as no payments are made.  Reverse mortgage loans are not granted for more than roughly half the value of the property to allow room for the balance of the mortgage to increase over time. Again proper management of a reverse mortgage strategy is important but leveraging this type of loan can yield great benefits to borrowers who need them as well.

As the Canadian population ages, these are just some of the financing options that Canadians can utilize to enjoy retired life.  As every case is unique, to evaluate your options and opportunities, please don’t hesitate to be in touch to discuss your situation with me and to make a plan.

 

 

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