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What you need to know about the new mortgage rules

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On October 3rd , the federal government announced new mortgage requirements, which are designed to dampen the housing price euphoria.

Getting a mortgage approved at a great rate or maximizing the value of your real estate could both be impacted by these changes.  At TriDelta, we are able to help you or your children with getting the best mortgage, and also help those with their planning around whether to buy, hold or sell real estate.  Feel free to ask us for help in either of these areas.

These new requirements follow four rounds of changes made previously to tighten eligibility rules.  For new insurable loans between 2008 and 2012, the changes included:

  • the minimum down payment was increased to five per cent from zero
  • the maximum amortization period was reduced in stages to 25 years from 40 years and the maximum insurable house price was limited to below $1 million.
  • Buyers with a down payment of at least 5% of the purchase price, but less than 20% must be backed by mortgage insurance. This protects the lender in the event that the home buyer defaults. These loans are known as “high loan-to-value” or “high ratio” mortgages.

New rules include:

Applying a Mortgage Rate Stress Test to All Insured Mortgages.

Effective October 17, 2016, a stress test used for approving high-ratio mortgages will be applied to all new insured mortgages. This includes those where the buyer has more than 20 per cent for a down payment. This new stress test is designed to build in some wiggle room so new buyers can manage an interest rate rise. The home buyer would need to qualify for a loan at both their contract mortgage rate (currently +-2.5%) and the Bank of Canada’s conventional five-year fixed posted rate, which is currently 4.64%.

The stress test also requires that the home buyer spends no more than 39% (previously 32%) of income on home-carrying costs like mortgage payments, heat and taxes. The buyers also have to ensure their Total Debt Service (TDS) ratio, which includes all other debt payments does not exceed 44% (previously 40%). This shows the government easing up on previous limits as they allow home owners to allocate more of their income for housing and debt payments.

This new provision ensuring home owners have an ability-to-repay will put pressure on self-employed borrowers who will have to make sure they can document at least two years’ worth of sufficient income to get a mortgage.

Down payment requirements have also been boosted:

Under the changes Canadians can still put down five per cent on the first $500,000 of a home purchase, at least 10 per cent down on the portion of a home that costs more than $500,000 and for homes that cost more than $1 million will still require a 20 per cent down payment.

For those purchasing with less than 20% down, the affordability table below illustrates the impact of the new mortgage rules, indicating  the maximum house price before and after the October 17th changes.

Changes to Low-Ratio Mortgage Insurance Eligibility Requirements  –  Effective November 30, 2016, mortgage loans that lenders insure using portfolio insurance and other discretionary low loan-to-value mortgage insurance must meet the eligibility criteria that previously only applied to high-ratio insured mortgages.

Impact of Changes: Based on year-to-date 2016 data, it is estimated that a little over one third of insured mortgages, mainly for first time home buyers, would have difficulty meeting the required debt service ratios and home buyers would need to consider buying a lower priced property or increase the size of their down payment. Additionally, approximately 50% to 55% of new insurance requests, would no longer be eligible for mortgage insurance under the new Low Ratio mortgage insurance requirements.

This will affect all home buyers who are seeking a mortgage that may stretch them too thin if interest rates were to rise.The government is responding to concerns that sharp rises in house prices in cities like Toronto and Vancouver could increase the risk of defaults in the future should mortgage rates rise.

An additional change that may come as a surprise to many, is the new reporting rule for the primary residence capital gains exemption. As you know, any financial gain from selling your primary residence is tax-free and does not have to be reported as income. As of this tax year, the capital gains tax is still waived, however the sale of the primary residence must be reported at tax time to the Canada Revenue Agency. Everyone who sells their primary residence will have a new obligation to report the sale to the CRA. The change is aimed at preventing foreign buyers who buy and sell homes from claiming a primary residence tax exemption for which they are not entitled. However this will catch many off guard.

These new rules will definitely have an impact on new and upgrading homebuyers, but also come into effect at a time when many who are thinking of retiring, may not be able to sell their homes as quickly or for as much as they originally hoped to fund their retirement plans.

To review how these changes may impact your home purchase or retirement plans, please contact us for a no obligation review of your situation.

Lorne Zeiler
Written By:
Heather Holjevac
Senior Wealth Advisor
heather@tridelta.ca
416-527-2553

How will your Retirement be affected by a Divorce?

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There is a rising trend in Divorce after 50. Ending a marriage is one of the largest life events that can happen in a person’s life. You may have tried to make things work, but now it’s clear, the marriage is over. What do you do next? How do you ensure you will be OK financially? How will this affect your retirement plans? Knowing your options and how the Divorce will affect you is key. The first steps are:

  1. Gather financial documents and know your financial picture.

Make sure you know where all your financial and legal documents are, including pension statements. Having important documents on hand in the divorce process means you avoid time and expense trying to get copies of them later. Know what assets are shared and which are exempt.  

Did you know if you inherit money or receive a gift during the marriage (in most provinces) as long as it is kept in a separate account it does not have to be shared in a divorce. Once it is used to pay down the mortgage on a family home or put in a joint account, it will be considered the property of both spouses.

  1. Assess your credit.

Request a copy of your credit report, and correct any misinformation it contains. Good credit is the foundation of your financial future, so watch it carefully! Without credit it can be near impossible to obtain loans for any purpose, or even to manage the expenses of running your household.

  1. Open accounts in your own name.

You will need your own bank accounts and credit cards. It is not too soon to set these up. Use a different bank than where you currently have joint accounts, and open both savings and checking accounts in your name alone.

  1. Assemble a professional divorce team.

Today, financial portfolios –and the regulations that govern them –are much more complex, and you may need multiple layer of professional help to navigate all the legal and financial details.

  1. Be watchful.

No matter how much you may think you know someone, it is still very common for assets and/or income during divorce to be hidden –even though that’s underhanded, unethical and illegal.

It is common for one person to know more about the family finances than the other and one may not know the extent of their debts.

Resolve to get the help you need to start down the path toward your secure financial future.

For couples over 50 divorcing, generally the 2 largest assets are the house and pension. Splitting assets 50/50 may not result in the same financial picture now that is does in retirement. The goal is for both parties to come out equally and to keep income steady, so that retirement lifestyle is not negatively impacted by a divorce.

Knowing how your pension and your future monthly retirement income is affected by different asset splitting options is important. There are many ways to legally divide assets, to ensure both current and future financial needs are met.

It is a good idea to consult a financial professional as well as a lawyer if you are going through a divorce.

Your lawyer will focus on the legal issues and a planner can provide you a summary of the short, medium and long term implications of the proposed division of assets, including tax implications.

Additionally common-law relationships come with their own set of rules.

A CDFA – Certified Divorce Financial Analyst can assist you in getting the help you need to start down the path toward your secure financial future, giving you a better understanding of your financial situation.

Contact Heather for a no obligation review of your financial situation.

Lorne Zeiler
Written By:
Heather Holjivac
Senior Wealth Advisor
heather@tridelta.ca
416-527-2553

Don’t let divorce devastate your financial well being.

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Divorce is never easy.

While the goal is to separate lives with the least impact, this does not always happen. Divorce not only affects us emotionally, but also disrupts our financial situation.

I receive many calls from women inquiring about the best way to secure their financial future through separation and divorce.

The following basic steps will get you started and help you team up with the right professionals to get the job done properly.

Your  divorce must not only address your current separation of assets, but your financial well being and take into consideration things such as retirement planning, tax implications, the long lasting impact of the division of assets including:

  • Pension benefits
  • RRSP account balances
  • Canada Pension benefits
  • TFSA accounts
  • Cash flow
  • Housing options
  • Insurance requirements
  • Company benefit plans
  • Support options

 

What do you need to do during a divorce settlement to make sure you keep on track to retire comfortably?

  1. Compile a summary of all income, assets and benefits in both yours and your spouse’s name.
  2. Determine the net values and the tax implications of any sales or transfers of assets,
  3. Review past tax returns and use them to forecast your post divorce scenario.
  4. Revise your Financial Plan to reflect the division of assets, potential loss of benefits and its overall impact.
  5. Negotiate accordingly, from a position of understanding.

These simple steps provide a basic outline of some things to consider, but it is important to consult not only a lawyer, but also partner with a qualified financial professional specializing in divorce and separation of assets to ensure you get the best professional advice throughout the process. 

In my conversations with the divorcees I work with, areas that have often been overlooked are:

  1. The understanding of how Pensions, RRSP’s and CPP benefits can be split in divorce.
  2. Ensuring the continuation of your ex-spouses company benefits and health drugs plans or compensation to offset the loss of this coverage.
  3. Ensuring there is insurance in place, with an irrevocable beneficiary designation, for continuation of child support and spousal support payments on the death of the ex-spouse.
  4. Urgently establishing your own credit.
  5. Closing joint bank accounts and other joint debt obligations and structuring your new individual accounts efficiently.
  6. Partnering with a financial professional specializing in divorce before, during and after divorce to outline the real cost of your divorce agreement and to help protect your interests.

If you are considering divorce or in the process, consult a CDFA. We are financial professionals who specialize in assessing the long-term financial impacts of divorce settlements and work with your lawyer or mediator to help analyze your settlement before it’s too late.

Following these steps and having a plan of action will ensure your retirement plans stay on track after your divorce.

If you have any questions, please contact me at heather@tridelta.ca.

Written by Heather Holjevac, CFP, CDFA, EPC, Senior Wealth Advisor, TriDelta Financial.

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