Explaining RRSPs and TFSAs is key
Canadians who work with an advisor are much more likely to take advantage of tax-registered plans such as RRSPs and TFSAs
By: Rudy Mezzetta, Source: Investment Executive February 5, 2018
Financial advisors have a critical role to play during RRSP season in educating Canadians about tax-registered plans and helping clients take best advantage of the investment vehicles available, according to recent research from Mississauga, Ont.-based Credo Consulting Inc.
That’s because Canadians who work with an advisor are much more likely to own an RRSP or a TFSA, or to take advantage of both of these tax-registered plans, than are Canadians who aren’t getting the benefit of personal advice, the research found.
This research was drawn from Credo’s Financial Comfort Zone Study, an ongoing national consumer survey conducted in partnership with Montreal-based TC Media’s investment group. (TC Media publishes Investment Executive.)
“The results show clearly that advisors provide constructive guidance for clients by encouraging them to use accessible, simple and important tax-advantaged solutions,” says Hugh Murphy, managing director with Credo. “Investors who aren’t working with an advisor are missing the boat.”
This trend holds true at all levels of client net worth, but it’s most pronounced among Canadians with modest amounts to invest.
Specifically, 48% of survey participants who work with an advisor and have less than $250,000 in investible assets reported that they own both an RRSP and a TFSA, vs 17% who own neither. In contrast, only 25% of Canadians at this level of net worth who don’t work with an advisor said they own both an RRSP and a TFSA, while a whopping 42% of these Canadians said they own neither.
Among Canadians who work with an advisor and have $250,000-$500,000 in investible assets, 64% own both an RRSP and a TFSA, vs only 7% who own neither. As for Canadians at this asset level without an advisor, 58% own both plans, while 12% hold neither.
Finally, among Canadians who work with an advisor and have $500,000 or more in investible assets, 71% own both an RRSP and a TFSA, vs only 4% who own neither. And among Canadians at this level who don’t work with an advisor, 66% own both an RRSP and a TFSA, while 12% hold neither.
You can use conversations about the benefits of the RRSP and the TFSA, and the rules that govern each type of account, to initiate a broader dialogue with your clients about their overall financial plan, says Carol Bezaire, vice president, tax and estate and strategic philanthropy, with Mackenzie Financial Corp. in Toronto.
“The beginning of a new TFSA year, during RRSP season,” Bezaire says, “is a good time for investors to take a look at their financial plan to make sure it’s what they really need.”
Adds Sara Gilbert, founder of Montreal-based Strategist Business Development, “[Registered plans] are an entry point, a way to frame the discussion about a financial plan and to get it going.”
You also can help your clients determine which plan would be best to use, based on the client’s age, income, goals and overall financial plan.
Younger clients, in particular, tend to favour the TFSA relative to the RRSP, the research reveals. For example, among survey participants who were between the ages of 25 and 34, 58% own a TFSA vs 51% who own an RRSP.
In contrast, 52% of survey participants between the ages of 35 and 44 own a TFSA vs 65% who own an RRSP.
TFSAs are well suited to younger clients, who tend to have lower incomes and not be in a position to benefit much from the ability to reduce taxable income via contributions to the RRSP, says Myron Knodel, director of tax and estate planning with Investors Group Inc. in Winnipeg: “You need to compare your marginal tax rate today to what you expect it to be when you eventually withdraw money from your RRSP or RRIF.”
The TFSA’s flexibility – notably, any withdrawals result in an equal amount being added to the subsequent year’s contribution room – is an appealing feature for younger clients, Gilbert says: “For young people, retirement planning is really far off in their minds. Instead, [they wonder], ‘What’s the next step: buying a house, having kids or other goals?'”
You also can help your clients maximize the value of their tax-registered plans. For example, clients can give money to spouses and adult children to contribute toward their TFSAs without triggering the attribution rules that otherwise would make any income and portfolio gains taxable in the hands of the clients.
“With some high net-worth clients, advisors find the client has maxed out his or her [TFSA], but the spouse has nothing [in his or her TFSA],” Bezaire says.
“So, you can top up [the spouse’s TFSA] because there’s no attribution.”
You also can help older clients manage RRSP withdrawals in anticipation of receiving government retirement benefits, such as the Canada Pension Plan and old-age security (OAS). Doing so many help clients smooth out retirement income and avoid the OAS clawback. In addition, RRSP and RRIF withdrawals now can be directed toward a TFSA.
“We see more clients utilizing their TFSAs because their advisors counsel them to,” Bezaire says. “Advisors tell clients: ‘You don’t need that RRIF money; you’re going to pay taxes on it. But let’s not have you pay taxes twice. We’ll move your RRIF payment into your TFSA and invest it there’.”
Competition in reverse mortgage space a boon for consumers
by Neil Sharma 29 Jan 2018
With Equitable Bank’s recent foray into the reverse mortgage space, arguably the biggest winner is the consumer.
Long the single-player domain of HomEquity Bank, which offers the CHIP Reverse Mortgage, Equitable decided there’s enough pie to go around and just unveiled the Path Home Plan for homeowners 55 and over.
Kim Kukulowicz, vice president of residential sales and partner relations at Equitable Bank, noted that seniors are the fastest growing demographic in the country, but that, confoundingly, there’s little competition for their business.
“I think that there’s enough business to go around, and with favourable demographics and increased home equity, as well as values in people’s homes and a lack a lack of solid retirement plans, these are all good reasons for us to be in the market,” said Kukulowicz. “When you take a look, seniors are the fastest growing segment of the Canadian population, so if you look at the penetration rate from the publicly available demographics, it’s one out of 50 seniors, and it would make the market size $12bln.
“So it’s a good for Canadians to have choice with more than one player in the market. When you have competition it means better services and offerings. This comes down to Canadians having more choice.”
Equitable Bank’s entry into the reverse mortgage market isn’t spontaneous. It has studied the market’s potential for a few years now and concluded that the dearth of options available to seniors presented an opportunity.
The Path Home Plan will allow seniors to access tax-free equity without having to make monthly payments or repay more than fair market value.
“Allowing Canadians to stay in control and remain in their homes, as well as not having to make mortgage payments, is about giving Canadians choices,” said Kukulowicz. “It may not be for everyone, but for those who need it, it’s good to have an option out there.”
Reference: Reverse Mortgage FAQ's
Canadian market to face test of might
by Ephraim Vecina 18 Jan 2018
Canada’s real estate market will hit a slow patch in 2018 as tighter mortgage stress tests apply pressure and the impact could be exacerbated if an expected interest rate hike drives buyers to put off their home purchases, economists said earlier this week.
Observers added that further hikes from the Bank of Canada could heap stress onto buyers already combating stricter regulations that were introduced by the Office of the Superintendent of Financial Institutions on January 1 for uninsured mortgages, and elevated 5-year fixed mortgage rates that were pushed up by the CIBC, RBC, and TD banks last week.
“This is the most significant test the market has seen in recent years,” CIBC chief deputy chief economist Benjamin Tal said, as quoted by The Canadian Press.
Tal is expecting a market slowdown to be seen as early as the first quarter as people who were hoping to scoop up homes weigh whether renting or living with family for a bit longer will pay off later in the year, when the country has grown accustomed to the new conditions.
“The big question though is to what extent investors will stop buying,” Tal stated. “That will carry a big effect, but it’s still the biggest unknown.”
Read more: Canadians more anxious about higher interest rates, monthly bills – survey
The Canadian Real Estate Association slashed its sales forecast for 2018 to predict a 5.3% drop in national sales to 486,600 units this year, shaving about 8,500 units from its previous estimate due to the impact of the stricter mortgage stress tests.
Earlier this week, the association released a report revealing that national home sales rose 4.5% on a month-over-month basis in December, and that the average national home price reached just over $496,500, up 5.7% from one year earlier.
CREA noted that the bounce likely stemmed from buyers scrambling to nab homes before being forced to submit to the uninsured mortgage regulations, which requires would-be homebuyers with a more than 20% down payment to prove they can still service their uninsured mortgage at a qualifying rate of the greater of the contractual mortgage rate plus two percentage points or the five-year benchmark rate published by the Bank of Canada.
“It will be interesting to see if the monthly sales activity continues to rise despite tighter mortgage regulations,” CREA chief economist Gregory Klump said in the report.
The association also shared that the number of homes on the market increased by 3.3% in December from the month before and December home sales were up 4.1% on a year-over-year basis.
The improvements signal that the country is “fully recovering from the slump last summer” when there was a drop in sales before a set of policies introduced by the Ontario government in April produced the desired market slowdown in Toronto during the second and third quarters following a hot first quarter.
“The new OFSI measures and a shift to a rising-state environment should prevent speculative froth from building again, and contain price growth to a reasonable pace for the remainder of the cycle,” BMO Capital Markets senior economist Robert Kavcic predicted in a note.
Major lenders hike rates following BoC decision
by Steve Randall 18 Jan 2018 MBN
Canada’s major banks have been quick to react to the Bank of Canada’s decision to raise interest rates to 1.25%.
CIBC, RBC, Scotiabank and TD were among the first lenders to increase their prime lending rates by 25 basis points to 3.45%; the new rates take effect from today (Jan 18).
The BoC rate hike was widely expected but what happens next is the burning question.
Although BoC governor Stephen Poloz painted a rosy picture of the Canadian economy at the end of 2017, his speech Wednesday noted that growth is forecast to slow to 2.2% this year and 1.6% in 2019, compared to the forecast 3% growth in 2017.
NAFTA also presents a challenge to the economy and the governor sounded a cautious tone over its uncertainty.
Governor Poloz said that while interest rates would need to rise over time, the Bank would need to provide some continued “monetary policy accommodation” to keep inflation in check and keep the economy operating close to its potential.
So when might those increases come?
CIBC Economics chief economist Avery Shenfeld says one more increase is likely this year – he’s forecasting early in the third quarter – with two further increases (50 basis points) in 2019.
TD’s senior economist Brian DePratto says that July is penciled in for the next increase but notes that data may present a case for that to be moved forward or pushed back.
Credit unions feeling the love
by Neil Sharma Jan 2018 MBN
Under the newest lending rules, credit unions have emerged as among the most reliable lenders brokers can use.
Principal broker and Owner of CLN Mortgages Raj Babber says credit unions, which operate outside the purview of the Office of the Superintendent of Financial Institutions’ regulations, have been instrumental in closing deals.
“They’re regulated under DICO [Deposit Insurance Corporation of Ontario], as opposed to OSFI, and they’ve come out and said, ‘As of right now, it’s business as usual,’ and the rates are fantastic,” said Babber. “There’s going to be a big switch to credit unions with brokering or mortgages being sent there. There’s only so much money that can be sent, and they do have quite a bit, but they’re going to be selective of the people they deal with—people who are providing them volume and are efficient with closing, so it’s important to establish a relationship and build a good rapport with them.”
Although credit unions may be selective with whom they partner in the broker channel, most reputable brokerages already have strong relationships with them, and they’ll merely need cultivation.
Babber has been working with DUCA Credit Union and Meridian, as well as smaller ones like FirstOntario, and he exalts their rates, which he called “competitive, if not better than what’s being offered out there.”
Shane Bruce, founder of the ACME Group of Companies, says his base of St. John’s, Newfoundland, doesn’t have the same resources larger provinces do, but that credit unions have emerged an excellent solution to helping clients secure mortgage financing.
“Most credit unions in our area aren’t part of the broker channel; it’s different when you’re in bigger markets like Ontario and B.C., so we use off-the-book,” he said. “I’ve always felt credit unions have so much to give and could take over the entire market, but they don’t have the funding to take on the crazy level of business out there.”
In some cases, added Bruce, credit unions are by far and wide the best available option for clients, and he’ll refer the former to the latter, even though he doesn’t make money off the transaction.
“What we’ll do is bring their information to our contact at the credit unions. They (Nfld. credit unions) don’t pay us for this, but it’s all about the greater good of the customer. And we don’t charge the customer. We make no money off them, but the hope is the customer will come to us later and tell a friend who will tell another two friends.”
Mortgage rates and qualifying have become extremely complicated now. Here’s why.
If you’ve been shopping for a mortgage lately, you’ll have figured out that rates seem to be all over the map and qualifying has changed. That’s because of new mortgage rules introduced October 17, 2016 as well as the 'stress test' addition to conventional mortgages, that came into effect January 1st. Here’s what has changed:
The High-Ratio Rule (less than 20% downpayment)
- The change? If you require an insured mortgage, you must qualify for your mortgage using the Bank of Canada qualifying rate (currently 4.99%) OR 2% over the contract rate which can be as high as 6.99% regardless of what your actual mortgage rate will be. Although I can find you a much better mortgage rate – you’ll still need to show you can handle your mortgage using the qualifying rate. This financial "stress test" was already applicable for fixed mortgages with terms of 1 to 4 years and all variable mortgages. Now, it also applies to fixed-rate mortgages of 5 years or longer.
- Why the new rule change? The government wants to be sure borrowers can withstand any increases in mortgage rates when their mortgages come up for renewal.
- Will your mortgage payments be higher? No. Payments will still be based on your much lower actual mortgage contract rate. Keep in mind that mortgage rates are expected to stay at record lows into 2020. This new rule isn't costing you more. The change is in how much mortgage homebuyers can qualify for: up to 20% less. You may need to plan on purchasing a less expensive home, save up a larger down payment, or eliminate all or most of your other debts.
The Conventional Mortgage Rule (more than 20% down/equity)
- The change? Any mortgage loans that lenders insure using bulk/portfolio insurance from CMHC must now meet eligibility criteria applicable to "high ratio" mortgages, including the new qualifying stress test. This means that many types of mortgages will no longer be eligible for bulk/portfolio CMHC insurance and are now “uninsurable”, impacting rates and choice. If the banks cannot get insurance from CMHC on your loan, then your rate will be higher due to risk for the banks. What most did not realize is that even though you can have lots of equity in your property or you were over 20% down payment, the banks still wanted their mortgages insured from CMH. They were just paying it on your behalf to have their mortgage secured.
Is there an impact on rates?
- Rates are now all over the map. When you compare rates, you are no longer comparing apples to apples. The mortgage pricing matrix is suddenly much more complicated.
- Mortgages that are “uninsurable” can include rental properties and second homes, switch mortgages that move to another lender, 30-year amortizations, refinance mortgages, mortgages over $1 million, and even some conventional 5-year mortgages. These mortgages are charged a rate premium, or some lenders no longer offer them.
- Additionally, rate premiums are often charged if it’s difficult to prove your income or you have bad credit, the property is in a rural location, you want a long rate hold, you want the best pre-payment privileges and porting flexibility, and you don’t want refinance restrictions.
- Be wary of rates you see online, you might not qualify for them.
Without a doubt, the mortgage landscape is significantly more confusing and challenging for mortgage seekers. As a result, Mortgage Brokers have never been more important in the home buying process.
I have access to all the lenders I need and have the experience, knowledge and strategies to get you your mortgage. I am here to help you!
Call me 613-695-9250 or send me an email kelly@wilsonteam.ca .
Paying down debts the top priority for Canadians this year – study
by Ephraim Vecina 04 Jan 2018 MBN
Amid growing household debt and the possibility of more increases in interest rates, settling debts remains the top financial priority for Canadian consumers in 2018, according to the latest poll conducted by CIBC.
This represented the eighth consecutive year that paying off existing debts has topped the list in the annual survey. The CIBC study also found that other priorities are increasing in importance over more immediate financial concerns.
“While debt repayment is still the number one priority, Canadians recognize that it’s just as important to focus on building savings and growing your nest egg,” CIBC managing director for financial planning and advice Jennifer Hubbard said.
“With inflation outpacing average earnings and the risk of outliving our assets, it’s essential to set out your short- and long-term financial goals in a comprehensive financial plan that strikes the right balance between paying down debt and growing savings,” Hubbard added.
Read more: Canada debt-to-household-income ratio swells to 171% – StatsCan (see Post below)
25% of the survey respondents said that paying down debt is their top financial priority for this year, while others said that they will aim to grow their wealth (13%) or save for retirement (7%).
67% admitted that they need to get “a better handle” on their finances in 2018. Fully half of Canadians (51%) expressed regret at not paying down more debt while interest rates were low. To meet their financial goals last year, 46% of Canadians said they reduced their spending on non-essential items, and 31% set a household budget.
In 2018, 55% are planning to cut down on non-essential spending, while 27% will be establishing emergency funds. Meanwhile, 23% will be prioritizing savings by setting up automatic transfers into savings or investment accounts.
Canada debt-to-household-income ratio swells to 171% – StatsCan
by Ephraim Vecina 19 Dec 2017 MBN
The amount Canadians owe relative to their income hit a new high in the third quarter.
Statistics Canada said late last week that household credit market debt as a proportion of household disposable income increased to 171.1%, up from 170.1% in the second quarter.
That means there was $1.71 in credit market debt, which includes consumer credit and mortgage and non-mortgage loans, for every dollar of household disposable income.
Benjamin Reitzes, Canadian rates and macro strategist at the Bank of Montreal, said the upward trend in household debt continues unabated.
“And, with homebuyers rushing to get into the market ahead of the new OSFI rule change that takes effect on Jan. 1, 2018, we could see a further increase in Q4,” Reitzes explained, as quoted by The Canadian Press.
“However, that suggests we could see some flattening out of the ratio in 2018 — though don’t bet on it as housing has been persistently resilient.”
Read more: CREA slashes 2018 sales forecast amid tighter regulations
Household debt is often cited as a key risk to the Canadian economy by the Bank of Canada and others.
In a report last month, the OECD said high house prices and associated debt levels remain a substantial financial vulnerability in Canada.
“A disorderly correction would adversely impact growth and could threaten financial stability,” the organization said.
Statistics Canada said the household debt service ratio, measured as total obligated payments of principal and interest as a proportion of household disposable income, was relatively flat at 13.9%, while the interest-only debt service ratio was 6.3%, down from 6.4% in the previous quarter.
The Bank of Canada has raised its key interest rate target twice this year, moves that have led to increases in the prime rates at the country’s big banks used to set loans such as variable-rate mortgages.
Total household credit market debt grew to $2.11 trillion in the third quarter, up 1.4% from the previous quarter. The increase came as mortgage debt increased 1.5% to $1.38 trillion, while consumer credit rose 1.2% to $620.7 billion.
Meanwhile, the total net worth of the household sector edged down 0.1% to $10.61 trillion in the third quarter.
The move lower was due to a drop in home values as housing resale prices weakened. The value of household financial assets edged up 0.1%.
Home prices seen to rise by 4.9% in 2018 across 53 cities
by Paolo Taruc 15 Dec 2017 MBN
Home prices in 53 Canadian cities are expected to rise by 4.9% by the end of 2018 to about $661,919, according to a recent report by Royal LePage.
The estimate comes amid efforts by authorities to address housing affordability in Greater Vancouver and the Greater Toronto Area. These include the upcoming mortgage financing stress test by the Office of the Superintendent of Financial Institutions (OSFI), which takes effect on 1 January.
Existing and prospective homeowners applying for a mortgage will have to meet stricter criteria when applying for financing. Royal LePage expects the new measure will slow the housing market, particularly in the first half of 2018, as buyers adjust both their expectations and finances.
“With a large number of existing homeowners potentially failing the test when refinancing next year, a temporary reduction in consumer confidence may further stagnate price growth as potential buyers and sellers take a 'wait and see' approach,” it said.
The tightened criteria could also mean that that move-up buyers will likely delay listing their homes as they will not be able to access sufficient financing for their next purchase. The firm expects deman for entry-level properties will surge as affordability diminishes.
"It is prudent that policy makers introduce measures that help protect the housing market from runaway price inflation," said Phil Soper, president and CEO, Royal LePage. "However, natural supply and demand forces will always triumph over regulatory tinkering. Attempting to use public policy to steer property prices in huge, rapidly growing cities like Toronto and Vancouver is like a tugboat trying to turn an ocean liner. Consistent, measured policy can have a positive impact. Just don't try to turn the market on a dime or you risk sinking the ship."
Here are Royal LePage’s regional pricing forecasts:
| Region | 2017 Aggregate Home Price (Estimate) |
2018 Aggregate Home Price (Forecast) |
Year-over-Year |
| Canadian House Price Composite (53 Cities) | $631,000 | $661,919 | 4.9% |
| Greater Toronto Area | $844,000 | $901,392 | 6.8% |
| Greater Montreal Area | $387,000 | $408,285 | 5.5% |
| Greater Vancouver | $1,287,000 | $1,353,924 | 5.2% |
| Ottawa | $444,000 | $458,208 | 3.2% |
| Calgary | $483,000 | $494,109 | 2.3% |
| Edmonton | $388,000 | $382,180 | -1.5% |
| Winnipeg | $303,000 | $315,120 | 4.0% |
| Halifax | $319,000 | $326,975 | 2.5% |
| Regina | $327,000 | $329,289 | 0.7% |
Invis's Angels give back to less fortunate
by Neil Sharma 13 Dec 2017 MBN
For a 15th year, Invis-Mortgage Intelligence delivered goods to homeless shelters across the country on Tuesday, easing the burden of those less fortunate.
Hundreds of the company’s volunteers delivered over 100,000 items to their respective communities across the nation as part of Angels in the Night, an award-winning community program. The items, comprising pajamas, blankets, boots, hats, coats, food and much, much more, were purchased through fundraising drives throughout the year.
Mortgage Broker Lori Pollice decided to start an Angels in the Night chapter in Kitchener-Waterloo six years ago, and has noticed a sharp increase in annual participation.
“Our fundraiser has been a pub night for the last six years and we’ve doubled in attendees and money raised in those six years,” she said. “It’s amazing how responsive everybody has been to the need and what we do.”
Given how visible homelessness is in Toronto, Pollice didn’t think much of destitution in Kitchener-Waterloo, but a little research proved eye-opening.
“I was in Toronto and the need there is very visible,” she said. “A lot of people are on the streets sleeping, but here in K-W it’s not as visible, so I researched homeless shelters here and it’s unbelievable how many there are, and we didn’t realize they’re there. So the need in K-W is as great as it is in any other city. I thought it would be worthwhile to start a chapter here.”
In a true community effort, McWilliams Moving & Storage donated the supplies truck and Elliott Coach Lines provided a school bus for volunteers to ride to the shelters.
“I personally feel that everybody deserves a chance and I think by helping out and showing them that they’re supported it can go a long way towards making things look a little brighter for them.”
Michael Celuch, a Mortgage Intelligence broker in Windsor, participated in his first Angels in the Night and said he was gratified to be helping shelters for some of the most vulnerable people on the streets, like teenagers.
“I suppose there’s a bit of peace of mind that you’ve done a little bit to help out,” he said. “At this time of the year, we all have families. You get together with support and give gifts, but there are a lot of people out there who don’t have families. They need some assistance and help sometimes.”
Added Pollice, “With it being so cold in Canada, and K-W, everybody deserves to have some warmth.”