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How to Prepare for the Upcoming Tax Season

Many Canadians’ year-end tax prep may be a little different as 2020 draws to a close. Taking a close look at your personal balance sheet before December 31 is a routine exercise that can help you make the most of your savings, reduce your tax bill and boost your tax refund in the new year. But a slew of pandemic-linked emergency benefits and relief measures this year means there may be some additional financial housekeeping you need to do this time. Here are some tips to make sure you start off the 2021 tax season on the right foot:

Paying Taxes on Your Emergency Benefits
The first round of emergency benefits Ottawa rolled out during the pandemic did not have any tax withheld at source. If you received either the Canada Emergency Response Benefit (CERB) or the Canada Emergency Student Benefit (CESB), you’ll have to include 100% of those payments in your 2020 tax return. The government will send you a T4A tax reporting slip for 2020 showing the total amount you report.

How much tax you’ll actually end up paying depends on your overall income for 2020. For example, if you made $27,000 from work in 2020 and received $8,000 worth of CERB, your taxable income for the year would be $35,000. Both the income you received from CERB and your job would be taxed in the same way.

You May or May Not Have to Pay Taxes
“If you’re under $12,000 in total income for the year, you don’t have to worry about any income taxes next year,” says Frank Fazzari, a chartered professional accountant at Fazzari & Partners. With the second round of COVID-19 benefits that became available in September—the Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB), and Canada Recovery Caregiving Benefit (CRCB)—the government is withholding 10% in taxes at source.

This, however, may be insufficient to cover your tax liability, Jamie Golombek, managing director of Tax and Estate Planning with CIBC Private Wealth Management. In addition, when it comes to the CRB, you may have to pay money back if your additional income for 2020 is more than $38,000. The claw back rate is $0.50 for each dollar of CRB received for net income over this amount. If you’ve received either round of benefits you may want to set aside some funds to cover any taxes or payments, you may owe come tax season next April.

Repaying Emergency Benefits You Don’t Qualify For
If you have to repay any COVID-19 benefits you didn’t qualify for, it would be best to return the funds by the end of the year. There is no obligation to return the payments by the end of the year. But repaying after December 31 means the amounts will show up on your T4A for 2020 and you may have to pay taxes on them. If you end up paying taxes on money you return, the CRA will eventually make you whole but you may have to wait until you file your 2021 tax return in the spring of 2022 until that happens. The process is based on general tax rules in the Income Tax Act that apply to repayments of taxable income.

The Simplified Home Office Deduction
If you’re one of the 2.4 million Canadians who’ve been working from your couch, the kitchen table or the kids’ bedroom this year because of COVID-19, you’ll likely be able to claim some home-office costs on your 2020 tax return without having to sift through receipts or ask your employers to fill out forms.

If you’re an employee who’s been toiling at home more than 50% of the time over at least four consecutive weeks in 2020 due to COVID-19, you’ll be able to claim a deduction of $2 for every work-from-home day up to a maximum of $400. This is what the CRA is calling a temporary flat-rate method of calculating the home office deduction. If you’re an employee with significant home office expenses, you can use the current “detailed method” of calculating the home office tax break, the CRA has said.

TFSA Withdrawals
There are no COVID-19 rule changes affecting tax-free savings accounts, but many Canadians have ramped up their contributions this year, according to a recent study from BMO. While a smaller percentage of Canadians was able to put as much money as they had planned into a TFSA this year, those who did were able to save up a little extra, the data suggests. Overall contributions were up 9.5% year over year.

If you’re planning to draw down on some of your TFSA savings soon, you may want to do so before the end of the year. Whenever you take money out of a TFSA, an equivalent amount of TFSA contribution room frees up in your account—but that doesn’t happen until the following calendar year.

RRIF Withdrawals
If you turned 71 in 2020, you have until December 31 to convert your registered retirement savings plan (RRSP) into a registered retirement income fund (RRIF) or registered annuity—that’s standard. If you already have an RRIF, though, remember Ottawa reduced the required minimum withdrawal for 2020 by 25%.

One-time COVID-19 Payment for Persons with Disabilities
Ottawa has also established a one-time, non-taxable payment of up to $600 for persons living with disabilities to help soften the impact of extra expenses caused by the pandemic. Being eligible and applying for the disability tax credit is one of the qualifying criteria to receive the payment. If you haven’t applied for the DTC yet, you’re still in time. Ottawa moved the application deadline from September 25 to December 31.

Charitable Donations
Charitable donations are especially important in a year that has seen jobless numbers skyrocket, domestic violence spikes, and marginalized communities struggle disproportionately with the impact of COVID-19. Both the federal and provincial governments offer donation tax credits that, when combined, can result in tax savings of around 50% of the value of your gift in 2020, depending on where you live. From the federal government alone, Canadians get a tax credit of 15% credit on the first $200 of charitable donations and 29% on anything beyond that amount.

January 4, 2021
Money Management Tips for 2021
Have you made your New Year’s resolutions? You might have already dusted off some of those perennial favourites: lose weight, drink less, travel more, etc. But what about resolutions for your wealth? Just as “lose 10lbs by visiting the gym twice per week” is a better goal than “get fit,” setting specific, measurable goals for your finances is an important step in achieving them. If you’re unsure of what to focus on beyond “spend less, save more”, let these 6 money-saving tips guide your resolutions to make 2021 a financial game changer.

1. Invest in Yourself
One of the best investments you can make is in yourself. The best areas to focus on are your earning potential, financial literacy, and mental health. 2020 was a difficult year for most, and caused significant upset to people’s careers, savings, and lifestyles. While no one could have prepared for a global pandemic, we can fix any vulnerabilities it identified. Now, more than ever, people are understanding how big their Emergency Fund should really be and why investing in the stock market is essential to financial security.

This is a great time pursue extra education and credentials that can increase your earning potential. You might even want to switch to a new career entirely. Likewise, the stress of the past 12 months has emphasized how important it is to take care of your health. Go ahead and adjust your budget to fit essentials like a gym membership or therapy to ensure you can really go into 2021 ready for whatever the year has in store.

2. Get Rid of Your High-Interest Debt
Carrying multiple balances, especially at varying interest rates, can feel like death by a thousand paper cuts when your bills come in the mail. If one of your goals is to get your debt under control in 2021, consolidating that debt on a low-interest loan or line of credit might be the answer.

Debt consolidation means moving all or most of your debt to one place, so that you can experience the joys of having only one interest rate, one minimum payment, and one repayment term. You can do this by taking out a line of credit, debt consolidation loan, or credit card and using it to pay off all your existing balances. Not only will credit consolidation alleviate the headache of managing a number of different payments, it can also reduce the carrying cost of your debt and even get you out of debt faster. It’s also likely to give your credit score a boost right off the bat!

3. Start Saving for a Big Goal
If you really want to start the New Year off right, take your first steps to accomplishing something big with your money. This can be anything from saving up a down-payment for your first home or finally starting a retirement savings account. Whatever your goal, make sure you know exactly what you’re saving for and the specific dollar amount you need.

Once you know your money wish and the price tag, it’s time to plan. If you want to hit your target by the end of 2021, all you need to do is divide the amount you need to save by 12, and that will tell you how much you need to set aside each month. For example, this might be the year you finally make good on your promise to yourself to have an emergency fund. If you want to have $2,000 saved by the end of the year, you’ll need to set aside $167 per month to accomplish this goal.

Once you know what you’re saving for and how much you’ll need, open a dedicated high-interest savings account, and start saving right away. Bonus points if you open the account with a financial institution other than your primary bank, so you don’t see the cash and are tempted to spend it every time you log in to your online banking. To give your goal an extra boost, don’t wait until your first paycheque in January to start saving. Even if you only have $10 to spare right now, deposit it in your new savings account to give your goal some momentum.

4. Introduce Good Financial Habits
The best way to ensure your meet your financial goals in 2021 is to set up good routines and habits that ensure your success happens automatically.

Commit to “No-Spend” Days
One of the best things you can do is commit to 1 or 2 two “no-spend” days per week. These are days where you don’t spend any money. You make coffee at home, you don’t order-in dinner, and you definitely don’t make any online purchases or visit any stores. No spend days help get you identify what spending is really necessary and how much you do just out of habit.

Check Your Finances
Another great thing you can do is set aside 1 or 2 hours each week to review your finances. This is a great thing to do Sunday night before the start of your week. Block off some time to review your spending, pay any outstanding bills, and check up on the performance your investment portfolio. Even if you have a budgeting app that tracks all your spending, you still need to go over everything and make sure there are no mistakes that are costing you.

5. Reduce Your Financial Stress
Managing your debt, saving for the future, and trying to earn more money all at one time can be exhausting, and make it difficult to do any one of those tasks well. To free up the emotional and mental energy you need to tackle big financial goals, focus on optimizing the little things first.

Here are some quick ways to reduce the mental load of regular financial housekeeping, so you can focus on bigger tasks at hand:
- Sign up to receive your credit report emailed to you monthly so you always know exactly where you stand
- Automate all your regular bills to a single cash-back or rewards credit card
- Set up a weekly transfer from your chequing account to your retirement investments to ensure you’re always saving for the future
- Look for discounts by bundling services from one provider
- Review your insurance coverage, and make sure you have the often-neglected but always-needed coverage, like disability insurance
- Rid yourself of subscriptions
6. Plan for the Future
As soon as you have assets, whether they be in the form of property, stocks, investments, or a vehicle, you should start thinking about putting together a legal will. If anything were to happen to you, this is the only way to ensure your wishes are respected and your assets are disbursed how you want them to.

Every day is a chance to start fresh with your finances, but there’s something about the New Year that can inspire that extra boost to get your bank account in order. There’s never been a better time to remedy old mistakes and reach new money milestones, so when you sit down to make your 2021 resolutions, make sure to include a few that will put more money in your pockets–now, and for many years to come!
December 1, 2020
How to Set Up Your Holiday Spending Budget
Did you know Canadians spent $25 billion last holiday season? And retailers expect shoppers to spend even more this year, despite the pandemic. That’s a lot of photo cards, candy canes, CD’s, and sparkly ornaments. But unless you plan on skipping Christmas this year, you’ll find yourself a part of that $25 billion machine. To enjoy the gift-giving season without any guilt-ridden overspending, set up your Christmas budget now—and then stick to it like sap on a fir tree.

First things first: It’s time to do some digging into your Christmas budget. That means you need to ask yourself the following questions to see where you stand now so you can know how much to spend on presents later.

How much do you have saved? Before you know what you can spend, see what you’ve got to work with. Hopefully, you started saving early. If not, we’ll talk about how to get extra money, so you don’t end up just doling out coal this year.

What budget lines can you tweak? Even if you started saving early, you might still need more cash to cover all the Christmas costs. Look through your normal budget and figure out what budget lines can get trimmed down to free up gift money for your Christmas budget.

Don’t know where to start? Here are a few nonessential budget lines you can probably cut back: restaurants, clothing, personal spending, entertainment, and gourmet coffee.

How can you boost your income? If you’re able, boost your income for a couple weeks as a way to up your spending power. You could sell some things, take on extra hours at work, or start a side hustle. Get creative: Babysit so parents can go Christmas shopping alone, shovel driveways and sidewalks, offer gift-wrapping services… you get the idea!

What Christmas traditions can you skip? You can save money this year by cutting some expenses—and that includes traditions that don’t really matter (like the annual office ornament swap). Be open and honest with your budget and your loved ones.

Do you have a shopping list? If not, make one! You need to list out every person you’ll need to buy for and start brainstorming present ideas.

How can you save on gifts? Shop sales. Use coupons. DIY and make homemade gifts. Skip random gift exchanges. These are just some of the ways you can save serious cash this Christmas on presents.

How to Set Up Your Christmas Spending Budget
1. Plan how much you’ll spend this year.
  Last year, the average Canadian was expected to spend $1,593 on holiday spending. And remember, retailers expect even more this year! First of all, you should never feel pressured to spend that much. You should spend what you’re comfortable with based on what you make, what you’ve saved, and what you can move around in your budget to get the job done. So, crunch some numbers and see how much you’ve got to play around with this year.
1. Add the names of everyone who need a present.
  Once you’ve set up your budget, make a list of each person you have to buy for. Now, go ahead and assign spending limits to each person.
1. Track your spending as you go.
  Want to know how you don’t overspend? You track. You track hard. You track often. Keep up with all that spending as you go.
1. Move amounts around when needed.
  Oh no. You overspent on Mom by $5. What will you do? It has to come from somewhere. You can lower Dad’s line (sorry, Dad!) by $5 and use it to up Mom’s line. Move that money around until your budget balances again.
1. Budget early for next Christmas.
  Here’s a quick shout-out to planning early—do it! Put a sinking fund in your budget as soon as January to start stashing away cash for next year’s Christmas. If you do it little by little, month by month, coming up with Christmas money won’t hit you like the reindeer that ran over grandma in that song that’s now stuck in your head!
November 1, 2020
Inside the Mortgage Approval Process

Documents Required to Get the Best Mortgage Rate

So, you’ve found the perfect home, you put in an offer and it’s accepted—with the condition of financing, of course. Now it’s time to seal the deal and this boils down to money. So you call your lender to finalize the mortgage. That’s when you’re going to get hit with a list of paperwork that’s required for your application. Below is a list of paperwork that you may need to complete your mortgage application:

Personal information: Age, marital status, number, and age of kids.

Employment details: This includes proof of income (such as T4 slips, copies of your last two paystubs, personal income tax returns, Notice of Assessments from CRA for the last two tax filing years, and a letter from your company stating your position, length of employment and salary).

If self-employed you’ll need to provide: Incorporation documents, if applicable, as well as financial statements for the corporation for the last two to three tax years. You’ll also be required to submit full personal tax returns as well as CRA Notice of Assessments for both the corporation, as well for you personally. The lender may also ask to see portions of your books, such as your General Ledger or Profit & Loss statements. Talk to your accountant or bookkeeper for these reports.

Other sources of income: Typically this is a statement on your part, but the lender could ask for back-up documentation. Other income can include pension, rental income, part-time work, etc. You’ll probably be asked for copies of your tax returns, or copies of paystubs or rental income documentation.

If you already own property: A copy of the mortgage statement on your current property and a copy of last year’s property tax statement and, perhaps, this year’s up-to-date property tax statement.

Current banking information: Including bank, branch, accounts, and balances.

Verification of your down payment: This can be a snapshot of a bank account where the money is currently deposited, or a letter from a family member stating that the money is a loan or gift.

Consent to run a credit history search: Every lender will either verbally ask for permission (and then obtain your Social Insurance Number) or ask you to sign an authorization form allowing them to pull your credit history.

List of debts (otherwise known as liabilities): This is where people sometimes opt to exclude a few items owed, but you need to resist this urge. Your credit history will show all outstanding money owed, so be upfront and honest. Provide a list of what is owed, to whom you owe it to and what monthly payments, if any, you put towards paying down the debt. The list should include student loans, credit card balances, car loans, monthly lease (or lease-to-own) arrangements and personal loans.

Copy of the listing: You will need to print off a copy of the listing and include this in your mortgage documentation package.

Copy of purchase document: You will need a copy of the document you signed to buy the home. Known as the Agreement to Purchase and Sale, it’s the document that states the address, what’s included/excluded and the price, deposit, and down-payment you agreed to.

Condo documentation: If you’re buying a condo or strata-townhome, you’ll also need to include the condo corporation’s financial statements and status certificates.

Rural property: You’ll need to include the certificate for the well and/or septic tank if you’re property isn’t on municipal water and sewer.

If you want to reduce your stress during the financing phase of your home purchase, and you don’t want to or can’t submit all this information prior to finding a property then consider gathering up all this documentation ahead of time. Just having all the documentation at the ready will reduce your workload and free you up to concentrate on last-minute requests.

October 16, 2020
Tips for Reducing the Overall Cost of Your Mortgage

Should You Pay Off Your Mortgage Early

When you get your first mortgage, it’s hard for many people to focus on the end game, especially given that so many people put so much effort into saving up the minimum down payment, or even making use of grants or various cash-back programs that some lenders offer. It’s important that you keep all your options on the table so that when you’re ready to focus on your long-term strategy, your mortgage allows you to take action, whatever that may be.

Option #1: Start smart and maximize your down payment.
While it’s possible to get away with only putting 5% to 10% down on a home purchase, the single biggest cost-cutting measure you can do is to maximize your down payment. Not only will you owe less, reducing the overall interest you pay, but you’ll avoid having to pay mortgage loan insurance premiums—a fee buyers pay for the privilege of putting less than 20% down on a home.

Option #2: Buy what you can afford.
It sounds simple. Buy a home that fits your budget; the reality is when it comes to buying a home most of us struggle. On one side we want our dream home. On the other is the desire to be fiscally smart. Quite often, it’s a trade-off. But if you focus on buying within your budget (not the maximum mortgage amount your bank has agreed to lend you, but the mortgage that works with your financial plan), then you’re less likely to dip below the 20% down payment, and more likely to stick to your plan of paying off the debt sooner.

Option #3: Shop for the best rate.
Buying a home is stressful. Quite often, buyers will stick with banks or financial institutions they know. But when shopping for the best mortgage rate, it’s actually better to cast your net wide and far. Consider credit unions, as quite often these institutions can offer much better rates and terms than some major banks.

Option #4: Pay attention to when interest is charged.
Most standard mortgages in Canada charge interest semi-annually—that means twice a year the lender calculates what interest you owe, based on the outstanding principal debt and the accumulated interest on that outstanding debt. This is known as semi-annual compounding interest (compounding because it’s interest on interest). The rate at which compound interest grows depends on the frequency of compounding, the higher the frequency, or the number of compounding periods, then the greater the compound interest. For that reason, a loan with a 10% interest rate, but compounded annually, will actually accrue less interest than a loan with 5% interest that is compounded semi-annually, over the same time period.

Option #5: Accelerated payments.
When finalizing your mortgage consider going from one monthly payment to accelerated payments. This adds two extra payments per year, which reduces your principal debt just a tad bit faster.

Option #6: Lump sum or extra payments.
But the real key to paying off your mortgage debt faster is to get a mortgage that allows you to make extra payments. Most mortgages allow borrowers to make annual prepayments of 10% to 20% of principal, without extra fees. These extra payments go directly towards paying down the principal. If possible, however, try and avoid mortgages that only allow you to make extra or lump sum payments on the mortgage anniversary—as this can reduce the likelihood of the extra payment.

Option #7: Lower your amortization.
Those who want to pay off their mortgages sooner should choose the shortest possible amortization. While typical amortization periods are for 25 years, you can opt for as short as 10 years or as long as 30 years (if you made a down payment of 20% or more on your home). Forcing yourself to pay off the mortgage in fewer years translates into lower interest costs and substantial savings. The hitch? Your regular monthly or accelerated payments will be much higher.

Option #8: Increase your regular payments.
To give yourself the best of both worlds, consider going with a longer amortization, but increasing your regular payments using your mortgage loan prepayment privileges. For instance, if your monthly mortgage payment is $1,000 you could increase this to $2,000 per month if your loan terms allowed for double-up payments. In effect, you would be paying off a 20-year mortgage in just 10 years. Better still, you’d have the flexibility to switch back to the lesser regular monthly payment if you were to experience any changes like a sudden job loss or the birth of a child.

In the end, the answer as to whether or not you should pay off your mortgage early really boils down to what’s important to you in both your short-term and your long-term financial plan.

October 1, 2020
How to Get Around Canada’s New Mortgage Rules

The tighter lending rules that came into force July 1st are making it harder for some Canadians to buy homes, but mortgage professionals say there’s no reason to panic. The Canada Mortgage and Housing Corporation (CMHC) announced plans in early June to reduce borrowing limits, demand higher credit scores and restrict down payments for anyone who needs default insurance from the agency. That kind of insurance is mandatory for ‘high-ratio’ buyers putting less than 20% down on a home. While the change is scary, buyers still have ways to shape up in the eyes of the CMHC — or dodge the agency entirely.

Evan Siddall, President & CEO of CMHC, explains the changes are meant to steady the economy in the age of COVID-19 by controlling debt and protecting lenders from people who pose a high risk of defaulting. While the rules will sting for some people trying to crack their way into the real estate market, they could be a boon for others. By reducing the number of buyers, the crown corporation hopes to quell demand and balance out home prices.

“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” Siddall explained in a statement. These actions will protect homebuyers, reduce government and taxpayer risk, and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.

What are the new rules?
First, homebuyers seeking a high-ratio mortgage are no longer able to submit a down payment with money borrowed from credit cards, unsecured personal loans, or lines of credit. Only ‘traditional sources’ of cash, such as savings, equity from the sale of a house or financial support from relatives, will fly.

Second, the minimum credit score to qualify has jumped from 600 to 680. If you don’t know your credit score, you can check it for free online. If it’s too low, you’ll have to take steps to improve it.

Third, borrowers are now capped at spending 35% (GDS) of their gross income on housing. That includes the mortgage itself, property taxes and utilities. They’re also only able to spend up to 42% (TDS) of their gross income, taking into account all of their other loans and credit.

Before, buyers could spend up to 39% of their gross income and borrow up to 44%. That means potential buyers saw their purchasing power cut by up to 12%. For example, someone with a $100,000 income buying a single-family home could have qualified for a $490,000 mortgage with 5% down before July 1st. Now, their limit has dropped to $435,000.

What should homebuyers do?
It’s important to recognize that, if you’re not a risky borrower in the eyes of the CMHC, these changes may not affect you at all.
“They are impacting a subset of borrowers who need mortgage insurance,” says Toronto-based broker Sean Cooper, author of the book Burn Your Mortgage. Even those homebuyers, he says, “still have options.”

You see, the government doesn’t care whether it insures your mortgage. It just needs to know your mortgage is insured. Homebuyers excluded by these changes should look around for a lender that also works with Genworth or Canada Guaranty, the country’s two private-sector providers of mortgage default insurance. Those companies have decided not to tighten their restrictions.

“They are usually lockstep with the CMHC, so this is definitely out of the ordinary,” says Cooper. So even if the CMHC thinks you’re a bad bet, you’ll still find a range of lenders that want your business.

Is anyone else affected?
The other good news is that the new lending rules don’t impact homeowners who want to take advantage of today’s historically low rates.

“As of right now, the rules haven’t changed for refinancing,” says Cooper. “The fact that Genworth and Canada Guaranty didn’t match the CMHC’s changes makes me think that there’s less likelihood of more changes in the future.”

Today’s rock-bottom rates are predicted to last for at least 12 to 18 months, until the economy starts to stabilize from COVID-19 crisis. That means there’s no better time to see how much you can save on interest and your monthly mortgage payments. The opportunity to hold on to more cash is especially welcome while the country’s financial outlook remains uncertain.

September 1, 2020
Is Your Credit Score Good Enough to Buy a Home?
Three little digits can make a big difference when you’re trying to get a mortgage you can afford. Whether you can land a mortgage with a low interest rate or even get any home loan at all often comes down to three little digits: your credit score. Does your credit score need some help? And could it keep you from buying a home? Let’s find out.

How do credit scores work?

Canada has two main credit bureaus — Equifax and TransUnion — that collect and share data about how you’ve used credit in the country. These private companies draw up credit reports that summarize your activity and use it to assign you a credit score. Lenders like banks rely on your credit score to tell if you’re a good investment.

Credit bureaus assess a lot of information in their reports, such as:
- How long you’ve had a credit card
- Whether you miss payments
- Whether you stay close to your credit limit
- The number of times you apply for credit
- The size of any outstanding debts
Credit scores range from 300 to 900 and they play a big part in being approved for a mortgage. A higher score means you’re managing your credit well and making payments on time. A lender will be more likely to let you borrow their money. A low score suggests you’re a risk, so you could be refused outright.

When your credit score is decent but not spectacular, a lender will compensate for that risk by saddling you with a higher mortgage rate. A higher interest rate means a higher monthly payment and steeper total interest charges over the life of the loan.

How do I know if my score is too low?

Plenty of third-party services and a few banks will give you a free look at your credit score online. Other companies will ask you to sign up for a paid service that may have other benefits, like credit monitoring and support. According to Equifax, most lenders smile when they see a score of 660 or higher. Anything above 760 is excellent. Anyone with a score below 560 will struggle to get a decent interest rate and may not get a loan at all.

Each lender has different standards, and those standards can change depending on what’s happening in the mortgage market. Some private lenders won’t be as demanding as major banks but may offer far worse deals to compensate. These “subprime” lenders work almost exclusively with people who have low credit scores.

If your credit score needs work, you’ll want to carefully consider whether the cost of a higher interest rate is worth it. You may decide it’s better to delay your home purchase to give yourself time to improve your score.

How do I raise my score?

The easiest way to bring up your credit score quickly and snag that mortgage is to obtain copies of your credit reports from the major credit bureaus and make sure everything on them is accurate. Canadians are entitled to a free look at their credit report at least once per year from both Equifax and TransUnion. If you find any mistakes, dispute the errors so they can be removed.

Paying bills on time, even if it’s just the minimum payment, is one of the most important factors. Contact your lender right away if you fear you might miss a payment, and don’t skip a payment even if it’s in dispute.

Try not to use too much of your available credit. The federal government suggests using a third or less of what you could be using, even if you always pay off the balance. Paying down your credit cards to cut your credit utilization can give your credit score a nice boost.

Another option is to enroll the help of a free credit monitoring service. You’ll get instant access to your score and be able to check your credit history regularly. You have a few other options — like using different types of credit rather than just credit cards, keeping old accounts active and trying to limit the number of credit checks — but these basic steps will put you well on your way to home ownership.
August 4, 2020
COVID-19: Should You Buy a Home Now, or Wait?

Housing markets across the country are changing swiftly—but with interest rates at historic lows, this might be a good time to buy. Here are all the factors to consider.

It almost goes without saying that COVID-19 has had a far-reaching impact on the Canadian economy and healthcare system in the first half of 2020. As expected, the spring housing market was much cooler than 2019, with the Canadian Real Estate Association (CREA) confirming that May 2020 recorded the lowest volume of sales in May since 1996. Despite the significant drop in sales volume due to the pandemic, though, national home prices remained relatively stable.

After a quiet April, market activity began to pick up in local housing markets across the country in May: more buyers resumed their home searches, and more sellers began to list their homes. With more home buyers and sellers hopping off the sidelines, housing competition is starting to heat up in many regions. In Toronto and Vancouver—Canada’s largest markets—demand and supply were evenly matched in May, whereas in Southern Ontario markets like Ottawa and Hamilton-Burlington, buyers faced ever fiercer competition for available homes than last year.

Given how swiftly conditions have changed and continue to evolve in housing markets across the country, prospective home buyers may be wondering: Is now a good time to jump into the market? Perhaps. With interest rates at historic lows, if you are able to buy and hold a home for the medium to long term, this might be a good time to buy. Here are all the factors you should consider as you make your decision.

Account for your finances and your lifestyle needs.

For many Canadians, finances are just one part of the story, and the decision to buy a home often goes beyond the dollars and cents. To put it simply, people need to make changes in their lives and move—regardless of whether there is a pandemic or not. If you have done the math and are confident about your financial ability to carry a new home, this is a great opportunity to take advantage of low interest rates.

Consider why you want to buy in the first place.

Perhaps you’ve had a relationship or family change; a divorce or a baby on the way are common reasons people choose to move. Alternatively, do you want to be closer to family, in a good school district, or have better transit access? If you started planning a move before the pandemic, consider whether and how COVID-19 has altered these priorities.

Once you’ve determined why you need to move, consider how your lifestyle needs may evolve. After all, you will be living in the home you purchase for at least a few years, so you need to think about whether the home you buy is a fit for your needs both today and tomorrow. If you can find what you want, in the location you desire, and are comfortable living there for at least five years, take the leap.

Get local with market data.

When you’ve made the decision to move forward with a home search, you’ll likely turn your attention to how the housing market is performing. After all, buying a home is a major personal commitment, and also one of the biggest financial investments most people will make. With everything going on, in addition to sales updates from national and local real estate boards, a number of Canada’s most established financial institutions, economists and housing corporations have attempted to predict the size and duration of the impact of COVID-19 on the housing sector.

While high-level data from real estate boards and financial institutions can provide valuable perspective on how the housing market is performing at the macro-level, real estate is hyper-regional, and in many respects, local. The type of property, the neighbourhood you’re interested in, and your budget will all play a role in the level of competition you’re likely to face and ultimately the price you can expect to pay.

Working with a real estate agent you trust is one way to cut through the noise and understand how far your dollar will go in real estate based on your situation and your needs. A good real estate agent acts as a trusted expert who can provide you with the facts, data and insights that are most relevant to your purchase decision, so you can make an informed choice that you are comfortable with now and in the future.

Remember that real estate is a long-term decision.

Finally, remember that real estate is a long-term investment. If you are looking to make short term, speculative investments, this is a particularly risky time to do that in real estate. Further, churning real estate has real costs that eat into any sale price, which include but aren’t limited to land transfer taxes, realtor professional fees and moving costs.

Once you’ve carefully weighed your personal needs against your financial appetite and obligations and have also considered the context of the real estate market in your area, take the plunge if you’re confident that everything lines up. If you can buy and hold for the long term, there are some great pockets of opportunity out there.

July 15, 2020
Canada’s Climbing Debt-to-Income Ratio: What You Need to Know

Here we break down what the debt-to-income ratio means—for the nation’s financial health, and for yours. The latest headlines tell a now-familiar story: Canadian household’s debt loads have increased once again, with the debt-to-income ratio hitting 176.9% in June 2020. But what is this ratio, why is it rising, and—most importantly—do you need to worry about it?

What is the debt-to-income ratio?

First things first. The debt-to-income ratio is a measure of how much debt a household is carrying, relative to its disposable income—that is, the money you have available to spend or save, after taxes and other non-discretionary expenses, such as EI and CPP contributions, are made.

A ratio of 176.9% means that, across all Canadian households, we collectively owe almost $1.77 for every dollar of disposable income we have. That’s very close to the all-time high of 178% in late 2017.

How did we get here?

There are two overarching reasons why we’ve ended up with our current level of collective debt.

Debt is cheap.
The basic laws of economics tell us that when prices fall, demand increases. Here’s why that’s important for the debt-to-income ratio: what really matters is not the total amount borrowed, but the cost to service that debt over time—that’s the debt-service ratio. The lower the interest rate, the cheaper it is to borrow money and service that debt, and thus the more debt a household can afford to carry.

Over time, the debt-service ratio has remained pretty constant even as the household debt-to-income ratio has risen. In 1980, for example, the ratio of household debt to personal disposable income was just 66%, or $0.66 owed for every dollar of disposable income. Back then, however, the bank rate—the minimum rate of interest that the Bank of Canada charges on one-day loans to financial institutions, now superseded by the target interest rate—was 12.89%, compared to just 0.25% today.

In practical terms, $100 borrowed for a year at 1980 rates would cost nearly 20 times as much as it would to borrow today. This astonishing drop in interest rates accounts for why the debt-service ratio has remained relatively steady over time, fluctuating between about 12% and 15% from 1990 to the first quarter of 2020, and falling from 14.81% in the last quarter of 2019 to 14.67% in the first quarter of 2020.

Our relationship to debt has changed.
Over time, we’ve become more and more accepting of borrowing as a normal part of household finances. When the ability to borrow became available as a tool to “bring forward” our household spending, lots of us decided to do so. And as the cost of borrowing progressively dropped, we ramped up our debt.

This behaviour is consistent with what financial economists call consumption smoothing, or the idea that we can maximize happiness by spreading our resources over our lifetimes to achieve the highest possible total standard of living. From this point of view, in the words of former Bank of Canada Governor Steven Poloz, “Simply put, debt is a tool that allows people to smooth out their spending throughout their life.”

Does the debt-to-income ratio matter?

The general consensus is that excessive levels of debt make households financially vulnerable. Economic shocks are sudden and unpredictable changes in the variables that affect the overall economy, such as an unforeseen rise or fall in the cost of commodities, an unexpected shift in consumer spending, or a housing or stock market crash.

At the individual level, however, you’re likely more concerned that too much household debt might mean you can’t make your mortgage, student loan or car payments if something unexpected happens—such as normal fluctuations in interest rates, or the loss of your job. (These are personal financial shocks, compared to the economy-wide macroeconomic shocks of falling commodity or housing prices.) Research into Canadians’ debt shows that younger people, those with household income of at least $100,000, and those with mortgages have more debt than older Canadians, non-homeowners, and those with lower incomes.

The use of debt is also correlated with optimism about our financial futures. People who expect their financial situation to improve over time are much more likely to have more debt: a Statistics Canada study shows that peoples’ expectations about their financial situation are strongly correlated with both their levels of indebtedness and their debt-to-income ratio. Even the most optimistic households, however, are still subject to borrowing rules set by lenders, such as the new mortgage insurance rules for the Canadian Mortgage and Housing Corporation, which will go into effect on July 1, 2020.

What do I need to know about the debt-to-income ratio to plan my financial life?

Here are two ways to think about whether the debt-to-income headlines affect you.

The average might not apply to you.
The debt-to-income figure represents an average for all Canadian households, including those who have little or no debt—meaning it must also include some very highly indebted Canadians. In fact, research from the Bank of Canada shows that the number of highly indebted Canadians —those with a debt-to-income greater than 350%—doubled from 2005 to 2014, from about 4% to 8% of all households. So a rising average amount of debt may not capture individual household changes, including yours.

Your individual circumstances matter.
The more debt you have, the more vulnerable you are to “shocks” that can impact your ability to repay it. At the same time, however, your age, income, appetite for debt and expectations about your financial future will all combine to impact your approach to borrowing.

If you want to maximize your financial peace of mind and protect yourself from the risk of being unable to meet your debt obligations over time, you could minimize borrowing while prioritizing paying back any existing debt. A personal debt management plan, which maps out how you’re going to repay what you owe over time, will allow you to see past headlines to understand debt as one tool in your financial toolbox.

July 1, 2020
Start an Emergency Fund

We never know what the future holds for us, so it’s always best to be prepared. Having an emergency fund is extremely important so you’re always prepared to deal with what life brings—good or bad. It’s a good idea to make an emergency fund one of your highest savings priorities. Put $20 a week in an emergency fund and your account will grow to over $1,000 in just one year. That’s often enough to cover a repair bill or emergency travel. An emergency fund can also shield you from the high cost of borrowing and keep you from sinking into debt. Follow these five tips to help you set goals and take steps toward starting an emergency fund:

Chart your monthly income & expenses. Grab a piece of paper and write down how much money your earn and how much you spend for each month. Be sure to include recurring expenses such as your rent or mortgage, utility bills, childcare, and estimates of other out-of-pocket expenses for things you might buy such as movie tickets, dinner out and clothing.

Set your emergency savings goal. An emergency fund should cover three to six months’ worth of realistic living expenses. If you feel your income is stable or have access to home equity or other forms of credit to use if needed, then you may be able to plan for the lower figure. If your credit is near its limit and your income outlook is less secure, you might want to save more.

Develop a plan to start saving. Setting a goal and developing a plan to achieve those goals go hand-in-hand. Part of your plan may include specific and measurable targets to work toward. For example, one specific goal may be to save an extra $300 over the next six months to put into an emergency fund.

Put your emergency fund in an accessible place. The best place for your emergency fund is in a liquid account (accounts where your cash is easily accessible). A liquid account might be a regular savings account at a bank or credit union that provides some return on your deposit and from which your funds can be withdrawn at any time without penalty. If you consider other options, like a certificate of deposit, money market fund or mutual fund, be sure to figure out how accessible your money will be in an emergency.

Stick to your plan. Once you’ve created your plan, make sure you stick to it. This can sometimes be the hardest part of saving for an emergency fund or any financial goal in general. If your goals are realistic and attainable, sticking to the plan will be much easier. A good way to stay on track is to save automatically. Set up a systematic transfer from your regular checking or savings account at your bank. Be sure to keep your rainy-day funds separate from your other accounts, and label it “for emergency use only.” Just writing down an account’s purpose can keep you from spending the money for any other reason.

Starting an emergency fund is a necessary building block for long term financial stability. Anyone can do it; you just need the right plan.

June 1, 2020