The Tax Free First Home Savings Account (“FHSA”) explained

If you or someone you know is saving for a downpayment on their first home, the Federal government announced a new program aimed at first-time buyers in their recent budget. The First Home Savings Account combines the features of an RRSP and TFSA to give prospective homeowners some tax relief and a boost toward their homeownership goals.

Here are the highlights: 

• Account holders can contribute up to $8,000 annually, up to a lifetime maximum of $40,000. 
• Just like an RRSP, contributions made to an FHSA are tax deductible.
• Like a TFSA, funds can be withdrawn from an FHSA tax-free – provided the funds are used for a home purchase. 
• Funds in an FHSA can be invested in allowable (not yet disclosed by the government) investment assets such as stocks, bonds, mutual funds, etc. and any growth/income from these investments are not taxable. 
• Transfers can be made from an RRSP to an FHSA but are subject to the annual contribution limit of $8,000. However, when money is transferred from an RRSP to an FHSA there is no adjustment to available RRSP contribution room
• Transfers can be made from an FHSA to an RRSP or RRIF if not purchasing a home and this will not affect RRSP contribution room – essentially giving qualified account holders  an additional $40,000 in RRSP contribution room.

For those who are in the saving stage of their homebuying journey, there is no downside to the FHSA as a savings vehicle. You’ll get the tax deduction on contributions, like an RRSP, and the tax-free growth and withdrawal of funds when it’s time to purchase a home. If the home purchase doesn’t materialize, funds can be transferred to an RRSP or RRIF tax-free and added to a retirement nest egg. 

The FHSA does not replace the existing RRSP Home Buyer’s Plan but provides another tax-advantaged home-savings opportunity for Canadians buying their first home. The two programs cannot be used in tandem. Unlike the RRSP Home Buyer’s Plan, however, the FHSA does not require that funds withdrawn from the account be repaid.

The First Home Savings Account is expected to be up and running sometime in 2023. There are numerous eligibility requirements, and rules and conditions and I would be happy to explain the details to you – if this is something you think you’d like to take advantage of. 

Did you know?

The Bank of Canada will make their next rate announcement on June 1 and many industry experts are predicting another .5% rate hike. Let’s review your mortgage strategy now and determine the best way for you to navigate the rising rate environment. A short-term adjustment might pay off in the long run. It all starts with a conversation. Get in touch today.

Spring clean your finances

Spring finally arrived after a long winter, and with inflation and the rising cost of living on everyone’s mind, there’s never been a better time to do a little spring cleaning… of your finances. A few quick and easy adjustments can make a difference to your bottom line each month.

Here are a few items for your spring-cleaning checklist:

• Start with a self-audit. Look back over the last six months to see where your money went. Has your online spending slowly crept up? Is the food or grocery delivery service that used to be a once-in-a-while convenience now a regular staple? These little indulgences seem inconsequential but a couple of small habit ‘corrections’ could make a significant difference for your wallet. It’s important to set yourself a budget and stick to it. If living on a budget is something you’re not used to, challenge yourself to do it for a short time period – a month, or maybe over the summer – and work your lifestyle into it. It’s never too late to develop good financial habits. 
• Review all your subscriptions. It’s easy to subscribe to services or order something ‘on repeat’ with the intention of cancelling later. Before you know it, you have multiple recurring payments for goods or services you may not even be using. So, take stock of all your recurring expenses and decide if that mobile app is still useful to you; if the gym membership is necessary since you’ve gotten into a routine of working out at home during the pandemic or; do you really need 2, 3 or 4 streaming services? Trimming the excess not only saves you money, it’s a great way to declutter your finances! 
• Negotiate for the best rate. Call your internet, cellphone and cable company and ask if your current plan provides the best value for your specific needs. Very often, you can negotiate a better price for the same plan, or upgrade your plan and get more service for the same price. You may even find out that your current plan is far more than you need based on your usage. A downgraded plan could meet all your needs, and it’ll save you money each month. 
• Find out what might be hiding in your credit report. Reviewing your credit report is something everyone should do at least once a year as part of having good financial health. It’s very common and very easy to miss a bill payment and have it show up on your credit report. Ensure you don’t have any skeletons in your credit report that could prevent you from getting the best interest rates from lenders when applying for a mortgage. Here is a link to the Government of Canada website with information on how to order your free credit report. 
• Your home equity could be your best financial tool. Give me a call for a free mortgage review. We’ll take a look at the equity in your home as a possible way to save on monthly interest payments through debt consolidation. By doing something as simple as a refinance and rolling your high-interest debts into one lower monthly payment, you can create some real cash flow into your household bottom line. 

You never know, taking a few easy steps may save you money every month. Give me a call and let’s talk about how you can leverage your home equity to help you save money and take the heat off your finances this summer.

Did you know?

The Bank of Canada recently announced a rate increase and many believe that we’re in for multiple rate increases throughout the year. I can help you navigate this by locking in your rate until midsummer. If your mortgage is coming up for renewal within the next 12 months it might be advantageous to renew early. If you’re planning on refinancing, buying an additional home, or selling your home and buying another, now’s the time to have a discussion and get a rate hold. This will ensure you benefit from today’s rates no matter what the Bank of Canada does.

HIGHER INTEREST RATES ARE HERE. WHAT DOES THAT MEAN FOR YOU?

The Bank of Canada has been signaling for a while now that they will respond to inflation by raising interest rates. Sure enough, on March 2^nd they announced a hike in the overnight rate by 0.25%. Here are answers to the most commonly asked questions. 

How does this affect my current mortgage?

It depends if your mortgage is fixed or variable.  A rate hike will impact variable-rate mortgage holders immediately as more of your monthly payment will now be going to pay interest and less toward your principal. Fixed-rate mortgage holders will not be affected until it’s time to renew or refinance. 

Should I refinance now?

According to many economists, the March 2^nd rate increase was the first of several expected this year. Despite that, rates are still at near-historic lows so if you’ve been thinking about refinancing to secure a better rate or to consolidate debt, it’s a good idea to get the ball rolling before the next rate hike. An analysis of your situation will determine if it makes sense for you to stay in your current mortgage until it’s time to renew or if it’s advantageous for you to pay the penalty and break out of the mortgage, but the potential savings diminish slightly with each rate increase.

Should I convert my variable-rate mortgage to a fixed rate?

It’s natural to be tempted to lock in as soon as you see rates starting to climb but just keep in mind that it’ll take a few more rate hikes to narrow the gap between variable-rate mortgages and their fixed rate counterparts. If nothing else about your situation has changed then the reasons you chose variable over fixed still apply and you’ll still be paying less for the next several months at least.

If you can afford to, a great tactic to consider is to increase your mortgage payment to the equivalent of what you’d pay in a fixed rate. The extra payment goes directly to principal which lowers your cost of borrowing (the amount of interest you pay over the life of the mortgage) and protects you from “payment shock” when it comes time to renew your mortgage. 

If you’re still feeling uneasy, let’s have a conversation about your conversion options. 

I am thinking about a purchase in the coming months. Should I get a mortgage preapproval?

Yes! A preapproval is a smart move anytime you’re considering a purchase but especially in a rising rate environment. A preapproval will lock in your rate for up to 120 days so you’re protected from any rate increases while you shop around. 

You are unique and so are your home financing needs.  Call me so we can determine what is the best plan for you, whether you have a fixed mortgage, a variable rate mortgage or you are simply looking for advice. I am happy to put my expertise to work for you.  

IN CASE YOU MISSED IT…

If you’re applying for a mortagge in Canada, you must pass a mortgage “stress test” regardless of whether your mortgage is insured or uninsured. The test gauges your likelihood of default in the event of an interest rate hike. Stress test rates for uninsured mortgages are set by the Office of the Superintendent of Financial Institutions (OSFI), while rates for insured mortgages are set by the Minister of Finance. 

In December, OSFI announced that the stress test rate for uninsured mortgages will continue to be the higher of 5.25%, or the contract rate plus 2%. Rates for insured mortgages are currently identical.  

Sensible strategies to help you thrive in 2022

Canadians keep talking about the housing market! Are we in a housing bubble, will rates rise in 2022 and by how much, is this the right time to buy or refinance, is a lender’s renewal offer the best available, and on and on! For many, it feels like some uncertain times ahead. Often, it’s just a few sensible strategies that can help you thrive in the current climate. Here are my top tips for the year ahead:

1. Take care of your credit. It’s so important to have good credit behaviours so you always qualify for the best mortgage rate. Pay your bills on time. Don’t let your credit accounts exceed 30% of the credit available. Before you cancel any credit cards, get advice. And don’t apply for a store card just to save on your purchase that day!
2.  Get advice before locking in your variable mortgage. It will take several prime rate increases for variable rates to be on par with a fixed rate, and you are likely better off sticking with your original strategy of focusing on payment vs. rate. Get in touch if you want to discuss the best strategy for your situation. 
3. Consider a refinance if it makes sense. Whatever your need might be – paying down high-interest debt, renovations, helping a child buy a home – you may want to refinance your mortgage and take advantage of rates that likely won’t be around too much longer. I can complete an analysis to help you determine whether it makes sense for you. 
4. Speed up your mortgage pay-down. Change from monthly payments to accelerated weekly or accelerated biweekly, which increases your number of payments and takes years off your mortgage. Also consider putting found money like raises and tax refunds against your mortgage principal. Check your mortgage contract for the amount you can prepay each year. If you can increase your payment amount, you’ll be accustomed to paying the higher amount should rates be higher at renewal. 
5. Renew with your eyes open. When your lender sends out a letter suggesting you renew your mortgage at their current offer, that’s a signal to get in touch. This is your opportunity to negotiate the best possible deal!
6. Get a pre-approval. A preapproval will tell you how much you qualify for, what your mortgage payments will be, and you’ll get an interest rate that will be held for up to 120 days so you are protected should rates rise. If you are house shopping, you won’t fall in love with a home you can’t afford, and you can act quickly when you find your dream home. Pre-approvals also make sense for renewals and refinances when rates are rising. 
7. Let renters help pay your mortgage. A home with a rental suite can be a great option for homebuyers, especially if the area you love is pricey or you don’t want to buy a condo at a lower cost. It’s also a great option for existing homeowners looking to lower their mortgage payment.
8. Don’t neglect your savings. In managing debt, you want to make sure you don’t need to use credit to get you through a financial emergency when your car breaks down or your washing machine quits. Make a point of setting aside a small sum every paycheque into a special emergency fund. Having a budget can provide the discipline you need. It might not be the most thrilling task, but it’s one that will give you a clearer picture of where you stand and how much you can truly spend.

New year and a new chance to make sure your mortgage plan is helping you build wealth and thrive! Get in touch at any time for a discussion on your best mortgage strategy. 

Preparing for higher rates

Given inflationary pressures, the Bank of Canada indicated in their last rate announcement that rate hikes could take place earlier than previously indicated, in mid-2022, which means variable rates that rise and fall in tandem with the key rate will start climbing. Views among economists vary as to how many hikes we’ll see in 2022 and 2023 because no one really knows whether inflation is truly transitory given supply chain issues, or even if it won’t be a long-term issue at all. 

Keep in mind that even with the projected increases, we’ll still be in an ultra-low-rate environment and an incredibly stable market. We’ve also seen increases before to only see them decrease again. But rates will likely rise, so here are answers to the questions I’m getting:

What is the impact on my current mortgage? With variable rate mortgages, as rates rise so too will be the amount of interest you pay. While your payment often doesn’t increase, you’ll pay less principal and more interest. Fixed-rate mortgages - which are based on the bond market – have already been trending slightly upward, although if you have a fixed mortgage, you aren’t affected until it’s time to renew. Consider taking advantage of your prepayment privileges and increase your payment so at renewal, you are accustomed to paying the higher amount. 

Should I refinance now? Many have already taken advantage of low covid mortgage rates to refinance their current mortgage to get a lower rate, for debt consolidation, renovations, or to help a child buy a home. If you feel this is a good opportunity and want to access these low rates that won’t be around too much longer, please get in touch for an analysis of whether it makes good financial sense.

Should I lock in my variable rate mortgage? A key question to consider is - why pay more money than you have to? It will take several prime rate increases for variable rates to be on par with a fixed rate, and you are likely better off sticking with your original strategy of focusing on payment vs. rate. Preparing for higher rates is different than locking in. You can prepare by increasing your payment amount if your budget allows, so you are paying down more principal and building a buffer for later. 

But if it’s going to keep you awake at night then let’s talk about your conversion options. Remember though, you should be confident you’ll stay in a 5-year fixed mortgage for the entire term. Breaking a fixed mortgage can result in some onerous penalties. If you aren’t sure you’ll stay in the mortgage for 5 years, the interest rate risk of a variable mortgage may be a better option than the penalty risk of breaking a fixed mortgage.

What if my mortgage is coming up for renewal? Don’t feel rushed or pressured by a renewal letter or call. Let’s discuss your options. We’ll review your renewal offer together and I’ll shop around to see if it’s really the best deal available. Do you have too much other debt? This may be the time to roll it into a new mortgage to boost cash flow and save on interest costs. 

Should I jump into the market now? The prospect of higher rates could cause a sense of urgency among homebuyers to get their mortgages before those increases take place. My advice is always the same: buy when you are financially ready. Don’t jump the gun just because rates “may” go higher. But, if you’re thinking about buying, I can arrange a pre-approval, so you’re protected from rate increases for up to 120 days while you shop around. 

Should we talk? Yes for sure. You should have confidence in your mortgage plan and that’s why professional mortgage advice is so critical.  I have access to a wide range of lenders and know the right questions to ask to assess your situation and make sure you have the best mortgage strategy for whatever is ahead.