It is important to understand what it is like to be a responsible borrower in order to properly understand your mortgage.

According to the Mortgage Broker Regulators’ Council of Canada (MBRCC), several questions are important to consider, when applying for loan and here are the top 6:

1. Do you have a good credit history? Your credit history determines your credit worthiness and your ability to get a mortgage. Lenders will always ask to check your credit history to decide if they want to offer you a mortgage.
2. How stable is your income and employment? This is especially important for seasonal and contract workers. A decrease in pay or losing your job could seriously change what you can afford and your ability to get a mortgage. Typically, lenders like to see a minimum of 2 years of stable employment and constant pay.
3. How much does owning a home cost? Owning a home costs more than the amount of the mortgage. When you purchase a home, there are closing costs, including legal and other fees, along with appraisals, etc. Once the home is yours, there are also other expenses that rise such as moving expenses, property taxes, insurance, condo fees, home repairs, etc. Make sure to include all of these expenses as part of the total cost when you are considering if you can afford a mortgage.
4. Will owning a home affect your other financial? Mortgage payments could limit your ability to manage other expenses. After making your mortgage payments, would you have enough money to also pay for your everyday expenses or future projects? You might need a vehicle, wish to travel, have children, etc. Consider if a mortgage could prevent you from being able to manage other commitments or goals.
5. What happens if you can’t pay for the mortgage? Not paying your mortgage on time and in full can lead to breach of contract, penalty fees and foreclosure. That means, if you default, the lender has the right to take possession of the property to recover the money still owed on the mortgage.
   If this happens, all of the previous mortgage payments you have already made, all the money you have invested into the home and any equity (value beyond what is owed on the mortgage) in the home could be lost. If the lender sells the home for a price that is less than what was left on the mortgage when it went into default, you might even have to pay the difference. Also, it will be much harder in the future to find a lender willing to offer you another mortgage.
6. Will your property value increase or decrease? A home is often a good asset. But not always, the value of a home can go up or down. Decreases in value can result in losses of equity. This is why we always strongly recommend hiring a building inspector prior to the purchase to secure the state of property you are looking to buy.

Finally, always consider not just how much money you have today, but your financial position for the length of the mortgage (mostly for the next 20-25 years). Ask yourself if you will be able to continue to make the full payments on time, for example, consider how the payments will affect your spending money and your ability to deal with sudden or unexpected financial needs. Did you plan for an emergency fund to cover those unexpected expenses? Will you have difficulties making sure you have enough left for other things you need?

Source: Mortgage Broker Regulators’ Council of Canada., https://www.mbrcc.ca/BeingaResponsibleBorrower

Individual life insurance

• The insured owns the policy and is the only one who can make changes to the policy and can choose his own beneficiary (ies).
• The protected capital is based on a financial security analysis (other variables are considered, including taxation of the product and particularities of the mortgage transactions and not just the mortgage amount) and, therefore, you have the option to take out single life insurance dedicated to your needs.
• In individual life insurance, the protected capital and premium paid remain the same throughout the term of the contract.
• The underwriting process (medical analysis) for an individual life insurance policy is done at the beginning, during the application. Variables such as your age, gender, smoking or non-smoking rate and medical history are considered when applying. After two years, the contract is incontestable and even the suicide clause lapses.
• The policy remains in effect after the mortgage is paid. The policyholder can convert his or her term life insurance into a permanent life insurance policy before the age of 71[1] without medical proof.
• Coverage stays with you for the duration of the contract: if the owner changes a mortgage lender, the life insurance policy stays in force; there is no need to requalify.

Mortgage life insurance

• The lender (the bank) is the owner of the policy. The terms of the policy can be changed by the lender at any time and the lender names itself as the sole beneficiary.
• The protected capital (death benefit) linked to a mortgage decreases over time, corresponding to the balance of the mortgage and unlike the death benefit, the premiums increase with the age of the person insured.
• Premiums are not guaranteed and may increase depending on the claim rate of the group covered under group insurance.
• As part of mortgage-related life insurance coverage, eligibility for life insurance coverage will not be made until the time of death claim. This could lead to unpleasant surprises for your estate (refusal of claim).
• Mortgage-related life insurance at the bank does not allow you to transfer your coverage to another financial institution in the event of a better mortgage rate at the time of renewal or refinancing and ends with the final payment of the mortgage.
•  No possibility of converting this insurance into a permanent life insurance contract.
• If the insured changes mortgage lenders, he or she will lose his or her life insurance coverage and will have to requalify.

[1] The maximum conversion age may change depending on the insurance company.

You should always have an emergency fund available and secure at least 3 to 4 months of salary. This fund will help you get by if you get sick, lose your job or any other situation that requires urgent action.

• The key to saving is to pay yourself first and others later.

You also need to save for your retirement. Try to save a fixed amount each paycheck, even if you do not have much money. A good baseline would be to save at least 10% of your after-tax income.

• Set a budget.

It is fundamental that you set up a budget that includes a savings portion, this exercise will help you understand how much you can afford to save each paycheck.

Saving is important, but setting a goal is even more essential, as it will help motivate you and keep your focus on the goal you want to achieve. For example: do you want to build up the capital for a down payment of a future home, a new car, or renovate part of your house?

• Small changes can add up to big savings.

Try avoiding unnecessary lunches and coffees at restaurants, you can probably save up to $2000 a year (or more depending on your lifestyle).

Another effective way to save money is to shop around for the best deal on your everyday expenses such as: your smartphone, the internet, cable TV, home or car insurance, etc.

• Reduce interest costs.

When you use a credit card, it is much more cost-effective to pay for all your purchases on credit once a month, directly with the money you had planned for those purchases. This practice will allow you to improve your credit score. On the other hand, if you do not have enough money to pay the entire bill, one idea would be to open a small line of credit of less than $5000 with your bank, use the money from your line of credit to pay your credit card. The interest rate on the credit card can go over 18% per year, while the interest rate on the line of credit can be negotiated to an average rate of 6%.

• Start a Tax-Free Savings Account (TFSA).

If your income is less than $40,000 per year, it is better to invest your savings in your TFSA than in your RRSP. Eventually, when your income increases, you should review your investment strategy. Under the current rules, when you retire, the income from your TFSA will be tax-free. This will benefit you by paying less tax and taking advantage of government tax credits based on your taxable income.

• Start a Registered Retirement Savings Plan (RRSP).

Registering your savings in an RRSP will provide you with years of tax deferral, build your retirement plan for your golden years, and provide you with a strategy to help you buy your first home in the future.

You can use your RRSP investments for a down payment on your first home. This program is called the Home Buyer’s Plan (HBP) and is available to individuals and couples. You can use the registered amounts to make a down payment on a condo or house and avoid paying the CMHC insurance premium. To date, the maximum eligible amount is $35,000 per person (April 2021). After you purchase your property, you have 15 years to gradually repay your loan into your RRSP.

Remember, it is the simple changes and resilience that help people achieve their goals and budget their money well.

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This video was designed and produced by Flavio and Violetta Vani, an Investment Funds Advisor with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities. Mutual Funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated