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The mortgage stress test gets … a tad less stressful?

If you’re going to be in the market for a new home this spring, pay attention to the news in the next few weeks. On Tuesday, Ottawa announced it’s modifying some rules around the mortgage stress test, with more tweaks likely coming down the pike.

For now, the changes are about insured mortgages, which affect homebuyers with a down payment of less than 20 per cent. Starting April 6, when applying for an insured mortgage, most borrowers will have to show they can afford a payment based on a so-called “qualifying rate” equal to the median five-year fixed insured mortgage rate from mortgage insurance applications, plus two percentage points.

Previously, the qualifying rate was tied to the posted five-year fixed rates of the big banks. Posted rates are the ones the banks advertise publicly. Nowadays, though, financial institutions regularly offer fixed rates at a heavy discount to their posted rates.

Pegging the qualifying rate to banks’ posted rates turned out to be a problem. For more than a year, the banks barely touched their posted rates, even as market mortgage rates declined. This meant that even though borrowing for a mortgage was getting cheaper, passing the mortgage stress test wasn’t getting that much easier. The new rules will make the test easier when mortgage rates are falling and tougher when they are rising.

Ottawa has said it is mulling a similar change for uninsured mortgages, which borrowers take on when they’ve made a down payment of at least 20 per cent.

Here’s the good news for now: if you’re applying for an insured mortgage after April 6, the new rules might boost your buying power by about 3 per cent.

Now for the bad news: this will likely attract more buyers to the market, pushing up home prices.

Here are more details about the new rules.

 

Got a beef with your bank? Good luck.

Canadians with complaints against their bank have their work cut out for them if their case happens to be a complicated one.

That’s the main finding of a lengthy government report out this week that looked at how Canada’s big six banks handle their customer complaints.

One glaring problem?

There are two independent organizations in Canada in charge of sorting things out if you and your bank can’t resolve the issue on your own. And the bank gets to decide which of the two you’re going to use.

CIBC and BMO belong to the Ombudsman for Banking Services and Investments (OBSI), while RBC, TD, ScotiaBank and National Bank belong to the ADR Chambers Banking Ombuds Office (ADRBO). While both are funded by the banks, OBSI is a not-for-profit and ADRBO is a private, for-profit entity.

The government report found shortcomings with both but came down much harder on ADRBO. That might be something to keep in mind if you’re shopping for a new bank.

Here’s more on how the big banks deal with complaints (warning: it ain’t pretty).

Teaching kids about money

This week, my four-year-old will get his very first allowance: $1.50.

That’s the price of one Hot Wheels car, which we occasionally buy for him as a reward for doing a particularly good job at something. For a while, he’s been quite content with that arrangement. Lately, though, he’s been inquiring about getting Lego sets instead, which are far more expensive.

That’s when I saw that as an opportunity to get him started on the concept of saving. Instead of getting a Hot Wheels car, he will now receive a loonie and two quarters, which will go into a piggy bank. When he’s got enough to buy a small Lego box, we’ll head to the toy store.

For now, he’s very excited about getting his own coins and the prospect of being able to choose a toy. I’m not sure he grasps the fact he’s not going to be able to buy Lego with his first $1.50, but that would be part of the learning process. We’ll see how it goes.

If you’re looking for more ideas about how to teach kids about money, Robin Taub, a chartered professional accountant, shares plenty of them in her new book Raising Money-Smart Kids. (Apparently, there are now multi-slotted piggy banks that allow one to save for multiple goals — who knew!)

 

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– THE QUESTION –

“I am young and would like to put my savings into an account where they are still accessible to me before retirement. From what I understand, this means a tax free savings account (TFSA) would be a better option than a registered retirement savings plan (RRSP). However, I’m also a dual citizen of Canada and the U.S., and I’ve read that U.S. citizens are advised NOT to put their money into TFSAs because, while these accounts are tax-free in Canada, the U.S. government can still tax your investment earnings in a TFSA. Are there any other options for someone who is looking to grow their savings without having them locked away until retirement?”

— A Money123 reader

“Congratulations on starting a savings habit while you’re young. You’re right that I would recommend that you steer clear of the TFSA, one of many tax traps that exist for U.S. citizens in Canada. Not only is the income taxable in the U.S., but also the IRS is likely to view the TFSA as a foreign trust, which results in additional complicated and costly annual foreign trust reporting.

I would suggest that you reconsider investing in an RRSP because it will still allow you to benefit from tax deferral even if you plan to withdraw the money before retirement. RRSPs allow for a tax deduction in the year of contribution, so naturally the tax becomes due when you take the money out. That said, there’s no penalty for withdrawing money out of your RRSP before retirement.

Another advantage of RRSPs for U.S. citizens in Canada is that it gives them more investment flexibility by letting them invest in Canadian mutual funds and ETFs without complications. When these funds are held within non-registered accounts, the IRS subjects these investments to punitive tax treatment under the Passive Foreign Investment Company (PFIC) rules, but this treatment is avoided when held within an RRSP.”

– Matt Altro, president and CEO, MCA Cross Border Advisors

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