Financial Literacy Newsletter - May 2019
It’s home-buying season!
A word from the commissioner
Welcome to the May edition of the Financial Literacy Newsletter. Spring is finally here, and it is shaping up to be a busy season. This is the time of year when many Canadians shop for a home, so we are featuring articles that should be of interest to potential homebuyers and homeowners. We will offer useful tips and tools to help you choose a mortgage, renew your mortgage, or pay off your mortgage faster. We will also highlight the potential downsides of home equity lines of credits (HELOCs), which has become one of the main drivers of household debt.
The week of May 6 is also Mental Health Week. To mark this important campaign, which has been a nationwide tradition since 1951, FCAC is promoting its new Financial Wellness at Work web pages. They feature a wealth of resources for both employers and employees, and it builds on the ongoing work FCAC does to help Canadians improve their financial health and overall well-being. For more about this important week, I encourage you to read my blog post.
Rent or own, it’s still your home
Buying a home is one of the most important financial decisions Canadians will make in their lifetime. The decision to buy or rent can depend on a wide variety of factors, and it’s unique to each person’s situation. For this issue of the newsletter, we’ve teamed up with our colleagues at Canada Mortgage and Housing Corporation (CMHC) to highlight some of the tools and information available to help Canadians make informed financial decisions around housing.
Initial decision: should you rent or buy
The question of whether to rent or buy isn’t always an easy one. CMHC offers tools and information to help you confidently decide what’s best in your situation.
To start, consider a few simple questions:
- What do you really want in a home?
- What is your current financial situation?
- What are your financial and lifestyle needs?
While everyone has different needs and wants, knowing your priorities will help you make a well-informed decision for your situation.
Next, weigh the main pros and cons of renting and buying:
Pros of renting
- Less maintenance and repair costs
- Lower monthly upfront costs
- Shorter-term commitment
Cons of renting
- Monthly payments may increase year after year
- The risk your lease won’t be renewed
Pros of buying
- Freedom to renovate
- Ability to build equity in an investment
- Potential for rental income
Cons of buying
- Ongoing costs including property taxes and insurance
- Increased monthly payments if interest rates go up
Finally, focus on the financials
There are several calculators you can use to help evaluate your financial situation. They also let you test out different renting and buying scenarios.
- Affordability Calculator (estimate how much mortgage or rent you can afford)
- Debt Service Calculator (compare monthly debt payments and expenses to income)
- Mortgage Calculator (explore rates, payment frequency, amortization options and more)
Ready to rent or buy? There’s a guide for that
Once you’ve decided whether to rent or buy, there’s a lot to do. Both decisions include many considerations and financial details. CMHC offers guides to walk you through each step of the process.
Whether you’re a landlord or a prospective tenant, CMHC has you covered in their easy-to-follow rental guide.
Some of the topics include:
- lease and rental agreements
- credit checks and bad credit
- rental payments and deposits
First-time buyers and seasoned resellers will all benefit from CMHC’s step-by-step buying guide.
The guide and downloadable workbook include tips on:
- finding a home
- calculating your finances
- exploring financing options
- making an offer and closing a deal
- Condo buyers’ guide (detailed information on buying a condominium)
- Newcomers buying and renting guides (available in 8 languages!)
- Seniors’ housing guide (housing options and financial info for people 55+)
Looking for more information?
CMHC’s resources listed above are all found on their website.
The FCAC also has resources for potential homebuyers. Make sure to take a look at the buying a home page for more information.
Don’t let your dream of owning a home turn into a nightmare
Buying a home and living there comfortably is a long-cherished dream for many of us. However, if you have access to a home equity line of credit (HELOC), it’s important to be smart about how you use it, or you could end up further in debt.
Find out if this product is really for you
HELOCs are revolving credit products, guaranteed by the value of your home. In other words, you use your home as a guarantee that you’ll pay back the money you borrow.
When used responsibly, HELOCs can help improve your financial well-being. For example, they can allow you to increase the value of your property by renovating it, go to school or consolidate your high-interest debt.
HELOCs offer a flexibility that favours the disciplined user
Interest rates are often lower than other traditional types of credit such as credit cards and unsecured loans. You can borrow as much as you want, up to your available credit limit and you can pay back the money you borrow at any time without penalty.
The flip side is that this flexibility can induce you to go further into debt over a longer period, to the point of eroding your wealth.
The Financial Consumer Agency of Canada published a study indicating that over 25% of Canadians holding HELOCs often pay the interest only and that they would have difficulty repaying if the payment amount increased by as little as $100. Paying interest only makes it difficult, if not impossible, to pay off your debt over the long term.
What you need to know about HELOCs
At any time, your lender can reduce your credit limit, raise the interest and/or demand that you pay the full amount of your credit balance. The bank could also take possession of your home or sell it if you default on payment.
To avoid putting your financial well-being at risk, consult a financial advisor so that you understand these products and can make an informed decision. Remember, however, that you are your own best advisor.
Breaking your mortgage contract: what you need to know
Why break your mortgage contract
If you want to change the terms and conditions of your mortgage contract before the end of your term, you will need to renegotiate it.
When you take on this kind of renegotiation, you break your old mortgage contract and replace it with a new one.
You may want to break your mortgage contract, if:
- interest rates have gone down
- your financial situation has changed
- you want to buy a new home and plan on moving
There may be some significant costs to breaking your mortgage contract.
Read your mortgage contract or ask your lender if breaking your mortgage contact is an option. It is important to consider all the costs and benefits.
To qualify for a new mortgage at a bank, you will need to pass a mortgage “stress test.”
You will need to prove you can make payments at a qualifying interest rate, which will typically be higher than the actual interest rate in your mortgage contract.
Cost of breaking your mortgage contract
If your lender allows you to break your closed mortgage contract, you will usually have to pay a prepayment penalty.
Your lender may agree to reduce your prepayment penalty if you want to break your existing mortgage, but plan to arrange a new one with the same lender.
Before breaking your mortgage contract, find out if you have to pay:
- a prepayment penalty and, if so, how much
- an administration fee
- an appraisal fee
- a reinvestment fee
- a 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 first got your mortgage. Cash back is an optional feature where your lender gives you a percentage of your mortgage amount in cash right away.
Early renewal option
Some mortgage lenders may allow you to extend the length of your mortgage before the end of your term. If you choose this option, you are not required to pay a prepayment penalty. Lenders call this early renewal option the blend-and-extend because your old interest rate and the new term’s interest rate are blended. You may need to pay administrative fees.
Your lender must tell you how it calculates your interest rate.
Pros and cons of breaking your mortgage contract
When interest rates fall, it may be tempting to break your existing mortgage and renegotiate a new one at a lower interest rate, or to blend-and-extend.
Before you do, consider the pros and cons:
- you may get a lower interest rate
- you may be able to pay off your mortgage faster if you keep your payments the same
- you can lock in the lower interest rate for the new term of the mortgage
- you could end up paying more in the long run because of fees and a prepayment penalty
- if you plan on selling your home soon, you may not benefit from the potential savings of a lower interest rate
- to qualify for a new mortgage at a bank, you will need to pass a mortgage “stress test” at a qualifying interest rate which will typically be higher than the actual interest rate in your mortgage contract
Introducing new FCAC web content: financial wellness in the workplace
For many Canadians, financial worries are the greatest source of stress. Financial stress can prevent people from focusing on the things that matter the most to them and that stress is not something they can just leave at home. According to the 2018 Canadian Payroll Association’s Employee Research Survey, almost half of working Canadians admit that stress related to personal finances impacts their performance at work.
Based on this and other research, FCAC has developed new web content (in collaboration with the Financial Literacy Working Group for the Workplace) dedicated to promoting financial wellness in the workplace. This recently published web content provides helpful information and strategies to implement financial wellness in the workplace based on best practices. Here is a quick overview of what you can find.
Resources for Employers
Highlights include best-practice strategies, tools and resources to build an effective workplace financial wellness program:
- How to build a business case for workplace financial wellness
- How to plan, build, communicate, deliver and measure a financial wellness in the workplace program – or improve upon an existing one
- A resources section providing turnkey and interactive tools such as an employee needs assessment questionnaire, workshops, checklists, infographics, videos, quizzes, calculators and more
Resources for Employees
The employee section explains the importance of investing in your financial well-being, and provides tools and resources to help working Canadians on their path to financial wellness. This section includes:
- Details on how financial stress impacts health and your life at work
- Why investing in your financial well-being can improve your overall health and wellness
- A resources section providing employees with planning and educational resources on various subjects, interactive tools and calculators, videos and more
What’s new at FCAC
FCAC launches the “Take charge of your finances” national advertising campaign
Be on the look out for new ads from FCAC that encourage Canadians to take concrete actions to better manage their money and debt, in particular their home equity line of credit (HELOC). Ads will be featured in public transportation in metropolitan centres across Canada, on the Internet and on social media.
Introducing Money Break campaign
FCAC is launching a new initiative that asks Canadians to talk about money. Canadians offer testimonials on their journey with personal finance and reflect on what financial well-being means to them. In this first iteration, the “Coffee Edition,” FCAC talks to people in the coffee industry. Roasters and baristas share their personal views on their financial goals and aspirations.
New Financial Basics web pages content
We’ve updated our financial literacy workshop resource, “Financial Basics.” It now has an updated look, new content including information on digital financial services, updated student financial loan information and we’ve added a new social media component in the fraud section. The updated version of “Financial Basics” is available for downloading or for ordering.
The City: A financial life skills resource sunsets
FCAC’s online learning program for high school students, “The City: A Financial Life Skills Resource,” has reached the end of its lifecycle, and will be taken offline as of June 30, 2019. The static PDFs will remain available online until December 31, 2019. If you have any questions, please contact: email@example.com.
Publication of report on financial literacy research symposium
FCAC held a very successful Research Symposium on Financial Literacy at the end of November in partnership with Behavioural Economics at Rotman (BEAR) at the University of Toronto. At the National Research Symposium, financial literacy researchers and practitioners shared ways in which research can be used to improve the financial well-being of Canadians. A report summarizing the research presented at the symposium will be released in the summer of 2019.
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