Despite a recent slowdown in Canadian housing markets, the dream of home ownership remains very much alive. But in an era of economic uncertainty and tight credit, the challenge of saving to buy a home is greater than ever. Here are some ways you can help your clients make their home-buying dreams a reality.
> How much house?
The rule of thumb is that clients can afford a house worth two-and-one-half times their annual salary. But it’s also essential to understand how income, debt and expenses affect affordability.
“You may have to reset your clients’ expectations,” warns Frank Wiginton, a certified financial planner with Toronto-based Tridelta Financial. “Can they afford a mortgage at 8%? If so, they should be okay for the next decade. If not, they may have to make adjustments, such as living outside the city limits, where land transfer taxes are lower.”
Help clients understand the additional costs of home ownership over renting. “People often think $1,200 in rent equals a $1,200 monthly mortgage payment,” Wiginton says. “But they forget about utilities, taxes and insurance.”
Help clients determine a realistic time frame.
“Get them to think about when they want to buy and how much they can save for a down payment in the meantime,” says Jeanette Brox, a CFP and senior financial consultant with Investors Group Inc. in Toronto. “That will determine whether they’re dreaming or not.”
> How much down?
Canadians can buy a home with a minimum down payment of 5% of the purchase price. But lenders typically require mortgage loan insurance if it’s less than 20%.
Encourage your clients to save as much as possible for a down payment. A higher down payment can help them avoid mortgage loan insurance premiums and reduce their monthly mortgage payments.
> The Home Buyers’ Plan
Under the federal Home Buyer’s Plan, clients can withdraw up to $25,000 from an RRSP for a down payment on their first home, says Brox. As long as the money is repaid within 15 years, beginning in the third year after the withdrawal, there is no tax on it. Generally, clients cannot withdraw funds from a locked-in RRSP.
> Payroll savings
The client can ask their employer to deposit a set amount from each pay directly into a savings account or Canada Savings Bond. The money should be kept apart from any other savings and no withdrawals should be permitted. If the client gets money from a tax return or gift, that should go directly into this special account.
Where to put the money the client is saving is an important issue, says Wiginton. The choice will depend on the time frame.
“If it’s less than three years, the money should be liquid and fairly conservatively invested,” he says. “If they’re saving for five years down the road, they can take more risk. Conservative, dividend-based investments or preferred share-type mutual funds are options. Conservative fixed-income funds also yield 5%-5.5%.”
> Provide value
Your job is to provide solid advice, says Wiginton. “Help them think outside the box. If you’re just processing orders they might as well do it themselves.”