Financial Literacy Newsletter - June 2021
Navigating home ownership
A few words from FCAC
Welcome to the June edition of the Financial Literacy Newsletter. In this edition, we’ll share information, tools and resources to help you navigate the subject of home ownership. We have pulled together helpful content for both first-time homebuyers and existing homeowners.
Many Canadians are spending more time at home than ever before between work, school and family time. And some of you are also living in a hot real estate market. Has this caused you to reflect on your current living situation? If so, many questions may be on your mind, such as: Are you ready to buy your first home? Should you break your mortgage to take advantage of lower interest rates? Should you use your home equity line of credit to finance your renovations? The articles in this edition will help you navigate these questions and help set you on the right path as a homeowner.
As we are still living with the pandemic, the extent of the impact on financial consumers is not fully known. However, FCAC recently published its Summary of findings COVID-19 surveys: Financial impact of the pandemic on Canadians to provide insights into how Canadians are managing. The dashboard shares findings from two FCAC surveys. The first is the COVID-19 Financial Well-Being Survey, designed to collect information about Canadians' day-to-day financial management and financial well-being during the pandemic, as well as during the recovery. The second, the Survey on Canadians' Use of Bank Products/Services, is designed to track how Canadians are using financial products during the pandemic and to what extent they are accessing COVID-19 related relief measures offered by the banks. The dashboard will be refreshed when new data becomes available.
As always, we invite you to browse through FCAC’s tools and resources, check out the excellent content on our COVID-19: Managing financial health in challenging times webpage, as well as browse the resources and events in the Canadian Financial Literacy Database.
If there’s something in this newsletter that you enjoy, please share it with your network and remember to connect with us on social media via Facebook, Twitter, and Instagram – we’re also on YouTube and LinkedIn.
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- FCAC launched its COVID-19 survey dashboard in May 2021, which contains findings from two national surveys regarding the financial impact of the pandemic on Canadians. It will be updated regularly with new data and findings.
- FCAC held public consultations from November 2020 to January 2021 to inform the renewal of Canada’s National Strategy for Financial Literacy. A summary of what we heard is now available.
- FCAC updated its web content on Paying back student debt to inform Canada Student Loan holders on the potential disadvantages of transferring their student loan to a private lender including losing access to repayment assistance programs.
- Research shows that financial-related fraud has been on the rise since the start of Covid, and the sophistication of the scams is increasing. For example, a recent investment scam claiming to represent Fidelity Investments references federal bodies like FCAC to add legitimacy to their claims.
- On June 1, 2021, the mortgage stress test increased to 5.25% or to the interest rate you negotiate with your lender plus 2%. See How the stress test can impact your qualification.
Are you financially ready to buy a home?
Buying a home is one of the biggest financial decisions you will ever make. Knowing your current financial situation helps ensure you buy a home you can comfortably afford and that meets your needs.
Calculate how much mortgage you can afford
Before you begin searching for your new home, you'll want to get an idea of how much you can afford. Use these handy online homeownership calculators to evaluate your financial situation, determine your home buying budget, and what your monthly payments will be.
Get your mortgage pre-approved
Once you have an idea of how much home you can afford, you may want to obtain a mortgage pre-approval. A pre-approval gives you a clearer picture of the mortgage you can qualify for, your estimated payments, rate and terms.
To get your mortgage pre-approved, you will need:
- Your personal information, including identification such as your driver’s license
- Details on your current job and proof of your salary
- Information about your bank accounts, financial assets, current loans and other debts
- An indication of how much your down payment will be and where the money will be coming from
- Proof that you have enough money to cover the costs of closing the sale (usually between 1.5 to 4% of the cost of the house)
Trouble qualifying for a mortgage
Sometimes, after everything has been taken into account, you may still find that you cannot afford the home that meets your needs. If that happens, you may want to:
- Pay off some other loans or debts;
- Save up for a larger down payment; and/or
- Revise your target house price.
Are you a first-time home buyer
The Government of Canada’s First-Time Home Buyer Incentive helps qualified first-time homebuyers reduce their monthly mortgage payments without adding to their financial burdens. This program is a shared equity mortgage. This means that the government shares in the upside and downside of the property value. It allows you to borrow 5% or 10% of the purchase price of a home. You pay back the same percentage of the value of your home when you sell it, or within a 25-year window.
The Incentive enables first-time homebuyers to reduce their monthly mortgage payment, without increasing the amount that they must save for a down payment. No on-going repayments are required, the Incentive is not interest bearing, and the homeowner can repay the Incentive at any time without a pre-payment penalty.
Learn more about the First-Time Home Buyer Incentive and see if the program is right for you.
CMHC can help
Canada Mortgage and Housing Corporation has the housing information and support you need to make sound decisions. For more home buying tips, visit CMHC's interactive Step by Step Guide.
Understanding your mortgage contract
Mortgages are often the largest financial commitment Canadians make. It is important to find a mortgage that is right for you and suitable for your needs and circumstances. Mortgage brokers are regulated professionals who can help you find the right mortgage.
For more information on the mortgage broker’s role and requirements in the transaction process, you can speak to a licensed mortgage broker. You can also connect with the regulatory authority in your province for specific regulatory requirements.
Understanding your mortgage contract
Like most legal contracts, a mortgage can be very complicated. Before signing a mortgage contract, you need to be sure that you understand all of the terms and conditions.
Preapproval vs. mortgage contract
When a lender preapproves you for a mortgage, it is not a guarantee that they will enter into a mortgage contract with you. A preapproval means the lenders is interested in offering you a mortgage, but they might choose not to after closely assessing you and/or the property.
Total cost of the mortgage
The total cost of the mortgage depends on the terms and conditions for paying it back, such as the interest rate and the amount of time it takes to pay off the entire mortgage or “amortization period.” The total cost can be much more than the amount you are borrowing.
An estimate of the total cost of borrowing for the term must be provided to you. In most provinces this information will be provided by the person who takes the credit application, such as a mortgage broker.
Choosing a variable, fixed or convertible rate will have an impact.
If the interest rate is variable, there is the risk that it might go up. Even if the rate is fixed, the interest rate can still increase when you renew the mortgage. Increasing interest rates can raise your payment amounts and can make the total cost of the mortgage much higher in the long run.
Watch out for fees and penalties
There are often fees and chargeable penalties included in a mortgage contract. Be sure to understand not only which fees and penalties may apply and when, but also how the amounts are calculated. Lenders have to provide you with information on fees and penalties.
Pre-payments can help you pay your mortgage back faster, but most mortgages have rules and restrictions. Depending on the mortgage, pre-payments can come with costly penalties.
Early Exit - Leaving a mortgage before the term has finished can lead to penalties and fees.
Administration & Discharge Fees - If you decide to exit a mortgage agreement, renew the mortgage with another lender or pay the entire mortgage amount early, you may have to pay for the administrative work needed to make the change.
Late Payment Penalties - Your lender may charge you fees and penalties if you are late making a mortgage payment. You should understand both the triggers and the amount of these penalties.
Be prepared for renewal
The agreement with the lender is usually for a limited term (often five years) and not for the entire length of the mortgage (i.e., the amortization period). At the end of the term, your mortgage will have to be renewed. There are no guarantees that the lender will renew your mortgage and the terms and conditions could change.
To understand what to expect when working with a Canadian mortgage broker, please review the MBRCC’s information on Working with a Mortgage Broker and the Code of Conduct for the Mortgage Brokering Sector.
What is mortgage life insurance and do you need it?
Mortgage life insurance is an optional product that may pay the balance on your mortgage to the lender upon your death. This product is optional. It can be useful if you have dependents or a spouse who might like to stay in your home after your death, but who might not be able to continue making the same mortgage payments as before.
Note that mortgage life insurance is different from mortgage loan insurance, which is required if your down payment is less than 20 percent of the purchase price of your home.
Before you buy mortgage life insurance, check if you already have insurance coverage that meets your needs through your employer or another policy. Keep in mind that your home can be sold to pay back the mortgage, so mortgage life insurance may not be necessary for you.
When a Canadian bank offers you an optional service, it must inform you about any charges that will apply. You must also be given the option to opt out of—or cancel—the service.
How much does mortgage life insurance cost
You pay a fee called a premium, based on the amount of your mortgage and your age. Premiums are usually added to your regular mortgage payments. As you pay down your mortgage, the premiums generally remain the same, even though you’ll owe less on your mortgage over time.
Mortgage life insurance vs term or permanent life insurance
As you pay down your mortgage, mortgage life insurance covers a smaller amount of money.
Term or permanent life insurance may provide better value than mortgage life insurance. With term or permanent life insurance, the death benefit, or amount payable to your beneficiaries, won't decrease over the term of the policy. Upon your death, your beneficiaries may use the insurance money to pay the balance of your mortgage.
Mortgage disability and critical illness insurance
Mortgage disability and critical illness insurance may make mortgage payments to your lender if you can't work due to a severe injury or illness.
Mortgage disability and critical illness insurance is usually a combination of several insurance products, including:
- critical illness insurance
- disability insurance
- job loss insurance
- life insurance
Most insurance plans have a number of conditions attached to them, including a specific list of illnesses or injuries that are covered or excluded. Pre-existing medical conditions are usually not covered. These terms and conditions of insurance are listed in the insurance certificate. Ask to see the insurance certificate before you apply, so you understand what the insurance covers.
Before you buy mortgage disability or critical illness insurance, check if you already have insurance coverage that meets your needs through your employer or another policy.
- Read FCAC’s Mortgage life insurance: rights and responsibilities to learn more about the lender’s responsibilities and your consumer rights related to this optional service.
- Visit Mortgage Professionals Canada for information on mortgage-related insurance.
Interest rates are down, should you break your mortgage
The pandemic is causing many of us to re-evaluate our finances. If you are thinking of renegotiating your mortgage to take advantage of a lower interest rate, be aware that this could mean having to break your mortgage contract.
Before breaking your mortgage, make sure the benefits outweigh the costs. Far too many homeowners who have broken their mortgage contracts have been shocked by penalties amounting to tens of thousands of dollars, or other fees required to complete the transaction.
Know the costs
The cost to break your mortgage contract depends on whether your mortgage is open or closed. An open mortgage allows you to break the contract without paying a prepayment penalty.
If you break your closed mortgage contract, you normally have to pay a prepayment penalty. This can cost thousands of dollars.
Before breaking your mortgage contract, find out if you must pay:
- a prepayment penalty and, if so, how much it will cost
- administration fees
- appraisal fees
- reinvestment fees
- a mortgage discharge fee to remove a charge on your current mortgage and register a new one
You may also have to repay any cash back you received when you got your mortgage. Cash back is an optional feature where your lender gives you a percentage of your mortgage amount in cash.
Call your mortgage provider and ask for detailed information on prepayment penalties or check to see if they have a prepayment penalty calculator available on their website.
They can provide you with the actual mortgage prepayment charge that would apply at that point in time.
Another option: blend-and-extend
Some mortgage lenders may allow you to extend the length of your mortgage before the end of its term to take advantage of a lower interest rate. With this option, you don’t have to pay a prepayment penalty. Lenders call this option the blend-and-extend, because your old interest rate and the new term’s interest rate are blended. Keep in mind that you may need to pay administrative fees.
Be patient and shop around
Depending on the cost to break your mortgage, it may be best to wait until the end of its term and shop around for a new contract that provides a lower interest rate or better suits your needs. Start shopping around a few months before the end of your term. Contact various lenders and mortgage brokers to check if they offer mortgage options that better suit your needs. Don’t wait until you receive the renewal letter from your lender.
Breaking your mortgage is a big decision. Learn more about the pros and cons of taking this step. This will help you make an informed decision that is right for you. Check out these resources to learn more:
- Take a look at FCAC’s Breaking your mortgage video and Breaking your mortgage contract web content to learn more.
- Read Canadian Bankers Association (CBA)’s article Breaking your mortgage contract and understanding prepayment charges to learn more about prepayment charges.
Quiz: How well do you know your home equity line of credit?
You may be familiar with the term Home Equity Line of Credit or HELOC. You may have a HELOC in place, either tied to your mortgage (called a readvancable mortgage) or as a stand-alone loan product. But how well do you know your HELOC? Take our quick quiz to test your HELOC knowledge. Click on the question to see the correct answer.
True or False: A HELOC is not an installment loan, like a car loan that you pay down over time?
True. You usually have no fixed repayment amounts for a HELOC. Your lender will generally only require you to pay interest on the money you use. However, it requires discipline to pay it off because you’re usually only required to pay monthly interest versus pre-set installment payments. We encourage you to create a repayment plan and follow it to pay down your HELOC in a timely way.
True or False: A HELOC is secured against a home?
True. A HELOC is a secured form of credit. The lender uses your home as a guarantee that you'll pay back the money you borrow.
True or False: A HELOC’s credit limit can automatically increase when a mortgage or other related products are paid down?
True. As you make regular mortgage payments and your mortgage balance goes down, the equity in your home increases. Equity is the part of your home that you’ve paid down through your down payment and regular payments of principal. As your equity increases, the amount you can borrow with your HELOC also increases.
True or False: Your lender can require you to repay your HELOC at any time?
True. Your lender has the right to demand that you pay the full amount at any time. Your lender can also take possession of your home if you miss payments even after working with your lender on a repayment plan.
True or False: A financial institution can lower the credit limit on your HELOC at any time?
True. A financial institution can lower the credit limit on your HELOC at any time (your lender will provide advance notice of any change).
True or False: Are there fees to transfer a HELOC to another institution?
True. You’ll likely have to pay legal, administrative, discharge and registration costs as part of the switch. You may also be required to pay off all other forms of credit, such as credit cards, that may be included within a HELOC combined with a mortgage. Ask your lender what transfer fees apply.
True or False: A HELOC is revolving credit, like a credit card that you can pay down and re-use?
True. HELOCs are revolving credit. You can borrow money, pay it back, and borrow it again, up to a maximum credit limit.
True or False: With a HELOC you can borrow up to a maximum of 65% of the value of the property?
True. You may be able to borrow up to 65% of your home’s purchase price or market value on a HELOC. This doesn’t mean you have to borrow the entire amount. You may find it easier to manage your debt if you borrow less money.
True or False: A financial institution can increase a HELOC’s interest rate without providing advance notice?
True. The variable interest rates can change which could increase your monthly interest payments. Make sure you only borrow money that you can pay back. This will help you manage a potential increase in interest rates. In some circumstances banks can change the interest rate on your HELOC without providing notice.
Do you want to know how your responses compared to those of other Canadians? Take a look at the survey results from our 2019 Home equity lines of credit: Consumer knowledge and behaviour report.
• Watch FCAC’s Is a Home Equity Line of Credit right for you? video to learn if a home equity line of credit is right for you
Your complete home maintenance timeline, simplified
By Canadian Real Estate Association (CREA)
Whether it’s your very first home or a fresh start, there’s a lot to be aware of when it comes to household maintenance. While some developers provide guides to help homeowners get acquainted with maintenance schedules, most owners have to learn on their own. That’s why we consulted Paul Justice, of Justice Construction, to compile a comprehensive—and handy!—timeline to give you a head-start on what to check, when to check it, and how to prepare for the short and long term.
The importance of scheduling
Many homeowners overlook maintenance items until serious repairs are needed, ultimately costing more money. According to Justice, the two most commonly overlooked items by homeowners are the foundation and mould. By being aware of what to look for and establishing a habit of regular maintenance and inspections, you can stay on top of your home’s care, boosting its value and ultimately reducing stress and saving money on costly repairs or renovations.
Choose one day each month for these revolving items which can easily be performed in a morning or afternoon.
- Replace the furnace filter (if you don’t have central air conditioning, then you only need to do this during months of operation)
- Clean your kitchen range hood filter
- Test your smoke and CO (carbon monoxide) detectors
- Wash hardwood floors (if you have them)
- Clean your shower heads and faucet aerators
- Inspect and clear out all sink and tub drains
These tasks should be performed twice each year, once when preparing for winter and again each spring.
- Replace smoke and CO detector batteries
- Check your attic for evidence of water incursion, rodents and confirm your insulation is in good shape
- Inspect your windows and doors (ensure frames, sweeps, stripping and caulking are in good shape)
- Inspect your eavestroughing, gutters, and flashing
- Pull out appliances like your fridge and stove to vacuum and dust behind
Annual maintenance and inspections usually happen in the spring or fall with a few exceptions that are not season-specific.
- Inspect and pressure wash your home’s exterior
- Inspect your roof, eaves, and flashing each spring
- Inspect and clean your AC
- Check your deck or porch, and wood fence for damage or rot and replace boards as needed
- Inspect your asphalt driveway. If you see the colour and definition of individual pebbles, then you know it’s time to reseal
- Have your carpets professionally cleaned. You can also rent a carpet cleaning machine
- Have your chimney and fireplace/wood stove inspected and cleaned
- Check for mould: Inspect your home’s interior, especially places you don’t see often, and check for musty or dank odours
- Inspect horizontal runs from your gutters
- Inspect your foundation for cracks and moisture
- Test your home’s thermostat
- Inspect and clean out your eavestroughs and gutters
- Check your septic system (if you have a septic tank, it’s important to have a professional inspect it annually)
- Drain and shut off exterior faucets
Any time of year:
- Inspect your plumbing for leaks or sweating
- Review your electrical system. Whether you live in an older home, or a new build, identifying potential problems early can save a lot of stress down the road
- Call an HVAC professional to service your furnace each year
- Inspect your flooring for wear and tear
- Check your toilets-if they start to rock, prevent damaging leaks by replacing the flange
It’s never too soon to start your own household maintenance schedule, and to start saving for those larger eventualities down the road. The savings to your pocket book as well the peace of mind that comes with preparedness will go a long way to ensure long-term enjoyment and comfort in your home.
For more tips on home improvement, trends and insights, visit the Living Room– REALTOR.ca’s blog for homeowners.
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