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Cost of living and retirement savings are barriers to homeownership

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Cost of living and retirement savings are barriers to homeownership

Anyone living in a big Canadian city such as Toronto knows the cost of living is high. Everything from basic needs, such as food, clothing and shelter to non-essentials are expensive, and according to a new survey they are also barriers to homeownership for young families.

Basic living costs biggest barrier

Conducted by Sotheby’s International Realty Canada and the Mustel Group, the survey found that “across Canada’s key metropolitan areas, young, urban families identified the cost of covering basic living expenses, such as rent, groceries and utilities, as their leading financial barrier to saving for homeownership.” One third of Canadians surveyed said this was their primary obstacle. In Toronto, the number was slightly higher with 35 per cent saying basic cost of living was keeping them from saving for and owning a home.

But the barriers don’t stop there. Would-be homeowners say even non-essential lifestyle expenses such as dining out, travel, entertainment and fitness memberships were also preventing them from breaking into the real estate market.

Giving up a lot to get there

The report surveyed more than 1,700 families living in Canada’s largest cities, including Toronto, Vancouver, Calgary and Montreal. It focused on families where the heads of the family are between the ages of 20 and 45. The majority, 51 per cent, said they were willing to minimize or reduce non-essential lifestyle spending to reach their real estate ownership goals. This includes cutting out dining out and travel. Many were also willing to give up clothing or technology purchases. To save, more than 37 per cent of families said they have reduced or eliminated health and fitness expenditures. A further 15 per cent say they are reducing if not eliminating car ownership.

Retirement on the back burner

The most concerning finding is one in five homeowners worried that prices will continue to rise are delaying saving for retirement. The implications of this can be significant. The shorter time you save for retirement the shorter time that money has to grow. A 2018 CBIC poll called “Am I saving enough to retire?” found the magic number Canadians needed to retire is $756,000 but they found as many as 90 per cent don’t have a retirement plan. The poll findings also show that almost a third of those nearing, or on the cusp of retirement aged 45 to 64, have nothing saved for their retirement. For those who have saved, the average value of their nest egg is $345,000 – only half as much CIBC says you need to retire.

What is the best decision?

Buying real estate should not come at the cost of ignoring other financial obligations. One easy solution is the look for properties that are less expensive. Condos are often the best choice for first-time homebuyers. If a more expensive property is what you desire, spending more time saving for your down payment will lower your payments when you finally purchase. The reason many young families are willing to sacrifice, is 78 per cent of those surveyed by Sotheby’s and the Mustel Group believe their home will either outperform or match the performance of their financial investments in the next five years. If the last 10 years is an example, that would be true, but it’s important to understand that as interest rates rise, so will the cost of borrowing and that will put downward pressure on home prices, too.

The bottom line? Financial sacrifice is necessary when buying a home in most Canadian urban centres, so plan and prepare.

Rubina ahmed-haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney.

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Till debt do you part, looking for love in all the wrong places?

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Till debt do you part, looking for love in all the wrong places?

Dating can be complicated, especially later in life. You’re probably carrying some extra baggage, which can come in many forms. And, there still might be an ex in the faded picture, as well as children and grandchildren. It can be a difficult world to navigate.

When you’re younger there are any number of reasons of why you might fall for someone. But, when you’re older, you’re hopefully a lot wiser too. In addition to emotional baggage, financial baggage could be holding you back from finding the perfect partner. A personal finance website called Finder, found that 68.5 per cent of Canadian adults say that they would reconsider a relationship based on a person’s financial debt. Baby boomers might be a tad more savvy, as 70 per cent of those surveyed would consider their partner’s debt unacceptable and a roadblock for the relationship to continue.

Deal breaker

Some debt is considered worse than others. The Finder survey found that payday loans were viewed as the least acceptable form of debt. More than 58 per cent of Canadians said that if they found out that their partner was carrying this type of liability, then it would be a deal breaker for them. Pay day loans have notoriously high interest rates, and are often used as a last option to get funds.

Other types of debt that may have your love interest rethinking, also include credit card debt, and money owed to family and friends.

Acceptable debt

Angus Kidman is the editor-in-chief at Finder and he says, “The uncomfortable truth is that the majority of Canadians are turned off by personal debt. Given so many people in relationships aspire to share finances, it’s not surprising that individuals view partner debt unfavourably. In saying that, not all types of debt are equal. Prospective partners are more likely to accept mortgages or business loans.”

These types of loans don’t evoke the same feeling as high-interest debts do. Mortgages or business loans are viewed as ‘good’ debt, as they relate to assets and the potential of increasing your earning capacity.

Indebted romantics

If you’re searching for love, and think that your debt might be holding you back, then your first step is to figure out how you are going to pay it down. Make a plan to cut out the variable spending, and commit to the plan.

Also, sit down and have a serious talk about money with your love interest. If your debt is hindering your relationship, it’s better to find out now, rather than later. You may learn that they, too, have some debt issues that they haven’t been able to discuss, or that they’re very supportive. While honesty is always the best policy, it’s never more important than when dealing with personal finances.

“While it can be difficult to talk about debt, it’s important to have open and honest conversations about the state of your finances to minimize relationship friction,” says Kidman. “You should also have frank discussions about the level of debt you’re willing take on in the future, and the circumstances under which it’s acceptable.”

One of the most common reasons that couples split up has to do with their relationship with money. To get your new relationship off to a good start, it’s best to be open and direct, and make a plan to become debt-free.

Rubina Ahmed-Haq is a journalist, personal finance expert and HPG’s finance editor. She appears on CBC TV and radio, CTV Your Morning, Global Toronto, and writes for ratesupermarket.ca. Follow her @alwayssavemoney. AlwaysSaveMoney.ca

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Debt Consolidation

Debt consolidation in Canada – how it works and why you may need it

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Debt consolidation in Canada – how it works and why you may need it

There’s no sugar-coating – the journey to financial freedom is tough. The good thing is, there are effective ways to get out of debt fast. If one of your current goals is to be debt-free, debt consolidation is worth considering. Keep in mind that the only way to keep your finances in order is to learn how to save money and make smarter financial decisions. With that said, we’ll share some more information on debt consolidation to help you decide if this is for you.

What is debt consolidation?

Put simply, debt consolidation in Canada involves bringing together small loans, bills or money you owe from different sources into a single, new loan and then make one monthly payment. Since you are consolidating different types of debts together into a combined loan, the term debt consolidation is used. Remember, each loan has its own repayment terms and interest rates so, in reality, you cannot combine them. What happens is that you take a new loan to clear all the smaller loans you had and then start paying the new loan only.

Who issues a debt consolidation loan?

Debt consolidation is offered by banks, credit unions and other financial companies that deal with credit. When you apply for the debt consolidation loan and your application is approved, the company will deposit the cash to your account and it’s your responsibility to clear the debt or they pay out the debts on your behalf.

What are the benefits of debt consolidation loan?

There are many reasons to consolidate different debts into one payment.

  • Simplifies the repayment process: You never have to keep track of multiple debts, there’s only one payment you need to make each month.
  • Saves money: Sometimes you end up paying lower interest rates especially if you had high interest credit card debt.
  • Can make life manageable: If you get a debt consolidation loan with a lower interest and amortization period then you can repay the loan in smaller monthly payments.
  • Can get out of debt faster: With a lower interest rate, it means most of the monthly payment you make will be going towards repaying the principal hence you’ll be able to clear the debt faster.

How do they determine interest rates on debt consolidation loans?

There are two main factors that determine how much interest you’re likely to pay for debt consolidation:

  • Your credit score: Banks and finance companies consider borrowers with a low credit score as more unlikely to repay debt as agreed in the agreement. Therefore, if your credit score is not good enough, lenders are not confident in your ability to repay the new loan as agreed. You are considered a higher risk borrower and hence they will offer you a much higher interest rate.
  • Collateral: Other finance companies will offer you a debt consolidation loan with lower interest if you provide good security. There are only specific things that the bank can accept as security, mostly stuff that they can easily convert into cash such as real estate or a new vehicle.

Is a debt consolidation loan for you?

There are certainly downsides to debt consolidation. One thing that most people do not understand is that you have to deal with poor financial habits before consolidating debt. Most people take debt consolidation loans with a lower monthly payment compared to their previous payments. This means that they now have something extra to spend every month. They then continue to spend more money than what they earn instead of creating a plan to stop overspending and get their finances back on track. This makes their financial situation worse and in the long run, their credit score becomes worse and qualifying for a new loan is almost impossible.

Therefore, the important thing to do when you take steps to get out of debt faster is to create a budget and follow it making sure you work with how much you spend versus what you earn.

What are your options for debt consolidation?

There are different ways to go about consolidating debt:

  • Home equity loan: This is often considered a second mortgage which you can qualify for if you have acquired equity in your home.
  • Line of credit: There are unsecured and secured lines of credit offered by banks for borrowers with a good credit score and a good income.

Don’t be fooled!

Debt consolidation should help you to get out of debt, not put you in further debt. Therefore, be keen on people who try to sell you a debt consolidation loan that has hefty up-front fees.


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Where are interest rates headed in 2019?

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Where are interest rates headed in 2019?

The Bank of Canada has raised interest rates five times since July 2017. As of the Oct. 24 announcement, the overnight lending rate is 1.75 per cent and prime at commercial banks is 3.95 per cent.

Higher rates means money is getting more expensive to borrow and if you have a variable mortgage rate your monthly payments have gone up.

In its latest announcement the Bank of Canada indicated the various reasons they raised rates. This included the finalized trade agreement that replaces NAFTA called the United States Mexico Canada Agreement or USMCA.

In its press release after the announcement the Bank states that the USMCA agreement will help “reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment.” The trade agreement was the biggest roadblock for the Bank to raise rates. This was evident when they held rates steady for the several past announcements while the U.S. Federal Reserve continued to hike its benchmark rate. Although not always the case, in most instances, if the Fed raises rates, Canada does as well.

The Bank also points to a solid global economic outlook as a reason to hike rates. Here at home it says “The Canadian economy continues to operate close to its potential and the composition of growth is more balanced… Real GDP is projected to grow by 2.1 per cent this year and next before slowing to 1.9 per cent in 2020.”

After the announcement, Bank of Montreal economist Benjamin Reitzes noted that the BoC statement shows, “Policymakers are clearly upbeat on the outlook, and assuming the economy doesn’t face any big speed bumps, expect rates to continue to push higher at least through early 2019.”

BMO economics predicts three rates hikes in 2019. In January, April and July.

So as rates are expected to rise, what costs can Canadians expect to go up?

Mortgages

Anyone with a variable mortgage rate or any loan with a floating rate, like a line of credit, is already seeing their costs rise. Commercial banks usually hike rates as soon as the Central Bank does. If you have a variable rate mortgage on your condominium, you may want to inquire about fixing your rate today. If you’re worried about your affordability, by fixing your rate you will know how much your payments will be for the remainder of the term.

Savings rates

One of the positives of a higher rates is we get better return on the money we’re putting away. This includes money we have in our savings account. Fixed income rates will rise as well and banks are able to offer a higher rate of return on any money you invest with them.

Stronger dollar

A rate hike almost always means our currency gets stronger. This can be great for Canadians travelling abroad as you get more money during currency exchange. But a stronger dollar can spell trouble for companies trying to export their goods and services. The stronger dollar makes it more expensive for any foreign buyer.

Life could cost thousands more

A report by Environics Analytics released after the October rate hike reveals in the long run the interest rate hike could cost Canadians thousands. They say, so far, the effects of higher rates has been limited to short-term debt and variable rate debt. But when fixed rate debt starts to catch up life will get more expensive. They say “the true long-term effect of these interest rate hikes will be approximately $2,516 a year per household or 5.0 per cent of discretionary income.”

The sense from economists is interest rates are expected to rise going into 2019. If you’re concerned you need to stress test your finances, calculate how much your debt would cost if rates were 2 or 3 percentage points higher. If you find that might be unaffordable make the changes now to prepare for what seems to be inevitable.

Rubina Ahmed-Haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney

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The financial pitfalls of downsizing

Higher rates and new rules cooling the condo market

 

 

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Finance: To Move or Not To Move?

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Finance: To Move or Not To Move?

To Move or Not To Move? That is the question

An overwhelming number of Canadians over the age of 65 want to stay in their family home. A survey, commissioned by Home Equity Bank and conducted by Iposos, revealed that 93 per cent wanted to stay in their current home throughout their retirement.

While this may be the preferred choice for many, smaller retirement nest eggs, as well as rising health care costs and maintenance on a larger property, often make it impossible to do so.

Take the time to figure out what it actually costs you to carry your home.

Do the math

When you have several people living in a house during the child rearing years, you expect expenses to be higher. As the children move out, those higher costs don’t add up – especially if you’re only using a portion of the the house. If you still have a mortgage, add that to what it costs to maintain the property, as well as utilities, repairs and property taxes. If, when totalled, that number represents the same portion of your retirement income as a mortgage did when you were working, then it might be a sign that you need to move. Retirement income is often lower, so it doesn’t make financial sense to pay the same costs as when you were working.

It’s a wonderful idea to preserve the family home for when children and grandkids come to visit. But, in reality, how many times do they actually spend the night? If you moved, would an extra bedroom be sufficient? Or, maybe, there’s a guest suite in your condo building. There are lots of options for visitors.

Lifestyle changes

Where you live may have been, partly, determined by where you worked. If retired, living in a specific place is no longer a requirement. If you’re helping with grandchildren, or find that much of your social life is outside the area in which you live, it might make sense to move closer. If you’re a traveller, having a smaller living space, like a condo, makes economical sense and it’s a great no-worry option when you’re away.

Make staying more affordable

If, after weighing all the pros and cons, you decide to stay in your home, there are still ways to save money. Consider renting an extra bedroom to a student or to a person who’s on a temporary contract in your area. Another great option is Airbnb. Or, go a step further and create an income suite in your basement for long-term tenants.

It may be possible to refinance your home. In this case, it means that you will have to make mortgage payments, and when the home is passed onto your beneficiaries, that loan will be settled first by your estate. There is also the option of a reverse mortgage. Read the fine print carefully, as the rates on such loans are often much higher, which means it’ll cost you more.

Selling the family home, and downsizing, can be an emotionally difficult period of time. By looking at it from a financial perspective, it could prove to be a responsible decision, so that you have the money to do what you want to do during your retirement.

Rubina Ahmed-Haq is a journalist, personal finance expert and HPG’s finance editor. She appears on CBC TV and radio, CTV Your Morning, Global Toronto, and writes for ratesupermarket.ca. Follow her @alwayssavemoney. AlwaysSaveMoney.ca

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Higher Rates and New Rules Cooling the Condo Market

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Higher Rates and New Rules Cooling the Condo Market

Higher Rates and New Rules Cooling the Condo Market: But It’s Not Bad News

After remaining at a record low for close to a decade, the Bank of Canada has started to raise its benchmark interest rate. A strong economy and positive job growth are some of the reasons behind the hike. This increase means anyone with a variable rate mortgage is now paying more for the same loan. Money is getting more expensive to borrow.

More Cooling Effects

Added to this, new mortgage rules brought in at the beginning of 2018 are making it harder for borrowers to qualify for more. The lender is now required to stress test all mortgages, regardless of the down payment or the amount being borrowed. These new rules mean borrowers have to show they could pay their mortgage if rates were two percentage points higher than their contract rate, or the Bank of Canada posted fixed rate, whichever is more. Overall this is keeping homebuyers away and has had a cooling effect on the housing market, including condos. One report by the Mortgage Professional of Canada claims 18 per cent of home buyers can’t pass the stress test, even though they can afford the mortgage payments.

What Industry Critics Are Saying?

No surprise mortgage brokers, and the association that represents them, are concerned homebuyers will no longer be able to borrow enough for the home they want. The recent report by the Mortgage Professionals of Canada found that, “New government policies are causing consumers to have a more negative outlook for housing and real estate in Canada.” The Report on the Housing and Mortgage Market in Canada says most consumer still see real estate as a good investment but “overall strength of consumer sentiment has been weakened by increasing interest rates and the new rules making it harder for homebuyers to secure mortgage financing.”

One Solution

The report argues that the stress test, albeit important, is too strict (or maybe too stressful), for first time homebuyers in particular. Paul Taylor is the president and CEO of Mortgage Professionals Canada. He says, “We support a stress test, albeit at a reduced rate of 0.75 per cent, as it is a useful tool to test a borrower’s ability to make future payments. However, the cumulative impact of rising rates, a two percentage or greater stress test, provincial government rules in Ontario and British Columbia, and further lending restrictions are negatively supressing housing activity not just in Toronto and Vancouver, but throughout the country.”

Managing Expectations

The Bank of Canada is hinting rates are poised to go higher. Before the end of 2018 the Bank could raise rates again, making money even more expensive. They are warning debt seeking homebuyers to pull the reigns on the amount they agree to borrow, because it will cost more when rates rise. The stress test represents where rates could be by the end of the mortgage term. They are realistic and frankly, in my opinion, they are needed. Canadians are close to a record level of debt. Statistics Canada data shows in June 2018 Canadians owed $1.68 cent for every dollar of disposable income. That is actually down slightly from the beginning of the year, indicating the new mortgage rules are already working.

Canadians shopping for a home need to be realistic about what they can now afford. Looking in the rear view mirror is not helpful. Where prices were and what you could afford then is not the reality now. Crunch your numbers based on this new reality, higher rates and stricter rules, and see how much you can afford. Even then, you don’t have to borrow the whole amount the bank offers. By borrowing less, you will automatically save yourself thousands in interest payments. Mange your expectations of the house you are buying. Maybe a smaller home, or a condo in a different area is the solution. Keep your options open.

Rubina ahmed-haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney.

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Finance: Getting Ready to Manage Your Money in Retirement

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Finance: Getting Ready to Manage Your Money in Retirement

For anyone getting close to retirement the anticipation can be incredible. This is the time your focus shifts to enjoying life to its fullest, rather than how we are going to make enough to pay all the bills. If you organize your finances, retirement can be wonderful. If you’re lucky enough to have a work pension and enough money saved in your RRSP this is the time to start making some real plans about your retirement. But starting the process to manage your nest egg can be tough. Here’s how to get started.

Calculate Your Income

At this stage you should have a good idea of what you’re retirement income will look like. Based on what you will be getting each month, start planning a retirement that you can afford. If you’re feeling stretched, think of ways you can cut back to enjoy all the things you want to do. Consider downsizing your home or moving to a less expensive town. Also consider getting rid of one car if you’re a two-car couple.

Talk to Your Older (Wiser) Friends

One of you best resources are your slightly older friends, the ones who are going through right now what you will be experience in five to ten years’ time. Ask them about what you should do with your finances, whether there are any mistakes you can easily avoid? This helps you plan better for the unexpected. Make sure you talk to people who are living a lifestyle you admire and can afford. Don’t talk to seniors with more wealth than you, as you will be setting yourself up for a financial let down.

Move Money to Safety

The time to start spending your retirement savings is here. Make sure you have at least five years of expenses saved in the safest of investments. Remember retirement will hopefully last for many decades so leaving some money in higher risk investments is okay, as long as you don’t plan to use it for at least 20 years. The key at this age is having the best asset mix — enough money in safe investments to spend now, and the rest in slightly riskier investments that you don’t need until later.

Decide When to Retire

Not everyone retires at age 65. Some wait to retire later, others take early retirement. By taking a look at your work pension, see what your monthly income would be if you decided to leave work early. How much more would you get if you waited until 65 or even 70 to retire. It’s important to know that Old Age Security (OAS) and Canada Pension Plan (unless you take that early) don’t start until you turn 65, so make sure you are calculating your income carefully.

Be Tax Efficient

Government benefits like OAS start to get clawed back after a certain income threshold. For 2018 it’s $75,910. Once your income starts to go over that your benefits start to decline and is completely gone when your income is more than $123,019. Make sure you’re setting up a withdrawal plan that will keep as much OAS in your pocket as possible. If you’re still saving, use your Tax Free Saving Account. Also, you can voluntarily defer OAS for up to five years. This will result in higher benefits when you do start to receive it.

Finally, this could be the most relaxing time in your life. Now you can start to enjoy your savings. Feel proud of getting to this point and start planning for the most enjoyable retirement possible.

Rubina Ahmed-Haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney

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Special Report: A Changing Market

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Special Report: A Changing Market

Millennials are Facing New Challenges

But there are plenty of options for first-time buyers to enter the real estate market

By Mathew Ablakan

Last year, we experienced many significant changes with regards to qualifying for a mortgage. In addition, the Bank of Canada increased their overnight rate twice in 2017 for the first time since 2008. What does this mean for first-time homebuyers? A more difficult process to qualify for a mortgage, less purchasing power and more compromise.

As of January 1, buyers that have a down payment of less than 20 per cent will have to qualify using the Bank of Canada’s Benchmark Rate, which is currently at 4.99 per cent, or 2 per cent more than the interest rate they are being offered by their lending institution (whichever is higher). And the Bank of Canada has already signaled that Canadians should prepare for a series of interest rate hikes in 2018.

So, it seems that this year will be filled with optimism as well as uncertainty. But there are still plenty of opportunities for first-time homebuyers to enter the market. With financial support such as the Land Transfer Tax rebate, HST rebate, Home Buyers’ Tax Credit and the ability to use your RRSPs for your down payment, there is still a lot of hope.

I recommend using a licensed broker who has great relationships with builders as well as banks and alternative lending institutions. This will give first-time buyers more flexibility, as well as options when it comes to making a purchase.

Some lending institutions — not the big banks — have more flexible guidelines that allow them to make certain exceptions when it comes to qualifying for a mortgage. And some builders offer incentives especially for first-time homebuyers.

Purchasing pre-construction real estate, whether a condo or a new home, offers flexibility as well as different options for first-time homebuyers. You have the opportunity to enter into the marketplace without having to dish out money for a mortgage and other expenses right away. All you need to worry about is the deposit the builder requires, as well as a mortgage pre-approval. This gives you lots of time to prepare for your final closing.

With that being said, if you purchase a condo that is going to be ready in three to four years, you might be able to afford something a little more expensive than if you were to purchase it right now. In the intervening years, you may be more established in your career, have a spouse who can contribute and you may be starting a family. All of these factors play a role in purchasing a home. Purchasing a new home or condo gives you flexibility in the event these things change.

But it is important not to overextend yourself when making a purchase. There are more costs to owning a home then just your mortgage payment. You must be prepared for things like property taxes, utilities, maintenance and upkeep, as well as things like cable, Internet and phone bills.

Another helpful tip is to move away from your parents’ way thinking. What your parents were able to purchase just doesn’t exist anymore. That is a fact. That is the reality that first-time buyers are faced with today. There is nothing wrong with purchasing a one-bedroom condo to get your foot in the door. This will allow you to build wealth and help you get one step closer to that dream home.

When it comes to purchasing real estate, there are many different factors involved. I strongly recommend you do your own research as well as consult with different experts. There are some professionals who offer things like buyer seminars.

It is also important to know what you qualify for before you start your search. This will save you lots of time. Also, ask your real estate broker if he/she can recommend a lawyer as well as a mortgage broker. This will save you the hassle of finding someone that is trustworthy and reliable. Always remember that a real estate salesperson or broker cannot provide you with legal advice. The onus is on you to show your contract to a lawyer, who can then provide you with that peace of mind.

MATTHEW ABLAKAN is the founder of Millennial’s Choice, a team of experienced real estate and mortgage brokers dedicated to serving the millennial generation.

MillennialsChoice.com

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Finance: Three Ways Your Personal Finance Situation Will Change in 2018

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Finance: Three Ways Your Personal Finance Situation Will Change in 2018

There’s a great deal of uncertainty about how our finances will change in 2018. New mortgage rules that kicked in January 1st are threatening to further cool the real estate market, economists are expecting a jump in interest rates this year and investors are weary about how much longer the 10-year bull market can last. Here’s what you should pay closer attention to in 2018.

Real Estate Prices

The new, stricter mortgage rules will affect not only the volume of sales, but also the purchase price. The Bank of Canada has already noted that 10 percent of Canadians will not qualify for the same amount as did before. The interest rate comparing site RateHub.ca suggests it could result in purchasing power being reduced by up to 21 per cent this year. This means there are fewer people bidding, with less money.

TD Bank says this could depress demand by up to 10 per cent and shave up to four per cent off the average price. That’s the national average, so in some areas those declines could be steeper.

One unintended consequence of the mortgage rules is many Canadians may find freehold homes less affordable and look to condo ownership as a solution. This could drive condo prices higher as demand rises, especially in places like Toronto.

Rents Creep Higher

One of the bleakest forecasts is these new mortgage rules will result in higher rents and job losses. This is coming from Will Dunning, the chief economist for Mortgage Professionals Canada. He predicts this year, landlords will hike rents and 50,000 jobs will be lost. That’s because, according to him, things like housing starts will fall, as fewer people are likely to buy. This can impact many areas of the economy, including construction, retail and banking. For condo renters, already saddled with high rent costs, this could be another financial blow.

Interest Rates

Economists are expecting the Bank of Canada to raise rates again in 2018. The Bank of Canada says higher rates, are “likely overtime.” TD Economics notes that forecasts continue to point to a hike sooner rather than later. Their long-term forecast is rates will rise another full percentage point by the end of this year. Anyone with a floating rate loan or a variable mortgage should expect money to get more expensive. Our economy seems ready for it too. Canada’s economic growth has been better than expected, and national unemployment is at near-record lows. Add to that, consumer and business confidence is up.

Investments

Global stock markets hit record highs in 2017 as investors showed confidence with better than expected data and business friendly tax cuts being promised south of the border. The S&P500 was up more than 20 per cent this year. 2018 could be much different, Wall Street heavyweight Morgan Stanley is forecasting volatility in 2018, after a stable and positive 2017. Add to that, Sam Stovall, chief equity strategist at CFRA, says, “One could say that in 2018 investors should expect more for less — more volatility for less return.” CFRA is one of the world’s largest independent investment research firms.

In 2018 we have to adjust our expectations about our money and our personal finance, because things are about to change in a big way.

Rubina Ahmed-Haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney

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Finance: New Mortgage Rules Kick In January 2018

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Finance: New Mortgage Rules Kick In January 2018

For the sixth time since the financial crisis in 2008 Canada’s top banking regulator is making it harder for Canadians to qualify for a mortgage. Starting in January 2018 Canadians applying for a new mortgage will be subject to a stricter set of rules to prove they can afford the loan.

The most significant change is to guidelines around the mortgage stress test. Now all new mortgage applicants, regardless of down payment amount, will be subject to it. This stress test also includes those with an existing mortgage who choose to switch banks once their term is over.

Now financial institutions require all borrowers to qualify at the greater of the two, either the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate plus two percentage points.

Previously only those with less than a 20 per cent down payment had to undergo a stress test to show they could make their mortgage payments at a higher rate. Those borrowers still require mortgage insurance provided usually though the Canada Mortgage and Housing Corporation (CMHC).

The new guidelines, announced back in October 2017, are published by the Office of the Superintendent of Financial Institutions Canada (OSFI) in the Residential Mortgage Underwriting Practices and Procedures.

OSFI Superintendent Jeremy Rudin, in a press statement, says these rules are needed to “reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada.” OFSI also makes clear that financial institutions must adhere to these rules going forward, which are “reflective of risk and are updated as housing markets and the economic environment evolve.”

There are more guidelines for lenders as well. All federally regulated financial institutions are also prohibited from arranging a mortgage with another lender, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum Loan to Value (LTV) ratio. This means banks can’t arrange other unsecured loans that make the borrower appear to have a larger down payment.

The good news for current homeowners is these new rules only affect new mortgage applications. If your mortgage is coming up for renewal, these changes won’t affect you if you stay with your current bank.

If you’re shopping for a home right now beware that your purchasing power will be lower than what it was prior to 2018. For first time homebuyers and those applying for a new mortgage, forecasters say these new rules will affect your affordability by as much as 15 per cent.

They also predict existing home sales will fall by up to five per cent and home prices will fall another up to four per cent, because of the new mortgage rules.

From a personal finance perspective I applaud these new rules for protecting Canadians who are stretching themselves to the financial limits to get into their dream home. As I have been saying for years, you should always calculate your affordability two percentage points higher than what the bank offers you, and pay your mortgage at that rate as well. Remember, even if the bank offers you a large mortgage it’s not always financially prudent to take it.

Rubina ahmed-haq is a journalist and personal finance expert. She is HPG’s Finance Editor. She regularly appears on CBC Radio and TV. She is a contributor on CTV Your Morning and Global Toronto. She has a BA from York University, received her post graduate journalism diploma from Humber College and has completed the CSC. Follow her on Twitter @alwayssavemoney.

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