Interest rates have been a major component of advisors’ conversations with clients looking to buy.sorbetto/iStockPhoto / Getty Images
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Buying a home is one of the largest financial decisions most Canadians will make in their life and it’s only becoming more complex as prospective purchasers face ultra-high prices in many markets and interest rates that have risen sharply in the past year. Advisors say they have a key role in helping clients prepare for the purchase.
But, according to a survey released in May from IG Wealth Management, many Canadians are not seeking out their help. The majority (78 per cent) of Canadians see homeownership as the centrepiece of their financial plan. But less than half (44 per cent) consulted with an advisor before getting a mortgage, and less than a third (29 per cent) with a mortgage said their advisor provided “a great deal of advice” on how their mortgage fits within their overall financial plan.
Alexandra Boland, certified financial planner with Caring for Clients in Toronto, says advisors are really well positioned to provide clients with advice not simply in isolation.
“A house purchase decision could be made on the [mortgage calculation] that you have X dollars in the bank and XYZ salary, so this is how much you could qualify for,” she says. “[But] we come to the table knowing their objectives and future life developments.”
Ms. Boland says she often works with clients years in advance of a home purchase to advise them on which savings vehicle is the best one for their time horizon and situation.
Taking other factors and obligations into consideration
Mark McGrath, wealth advisor with Sweeney Bride Strategic Wealth Advisory at Wellington-Altus Private Wealth Inc. in Squamish, B.C., notes that a lender’s pre-approval doesn’t take into consideration people’s current financial obligations, such as saving for retirement, funding their kids’ education or supporting elderly parents.
“Oftentimes the amount they qualify for might actually be detrimental if they were to pursue it,” he says, adding that he models clients’ prospective mortgage costs against their current cash flow and future goals to see if they would need to make financial trade-offs now or in the future to buy a house at the mortgage level for which they qualify.
“Some people don’t think that far ahead. So, for us, being able to model the potential impacts can be enlightening,” Mr. McGrath says.
Interest rates have been a significant component of advisors’ conversations with clients looking to buy. Ms. Boland says she built sensitivity to rising rates into analysis for clients long before the Bank of Canada started rising them rapidly. When rates were hovering around 1 or 2 per cent, she would assume that after a five-year mortgage term, clients would renew at 5 per cent. Today, with the benchmark rate at 4.5 per cent, she builds in the assumption that they will renew at 6 per cent.
If interest rates are lower than expected come renewal time, she says the excess cash flow that was planned for mortgage costs can go toward other areas of the financial plan, such as savings, lifestyle spending or paying down debt more quickly.
Role of insurance in home buying
Alana Riley, head of mortgage, insurance and banking at IG Wealth Management, notes in the report that advisors can provide guidance on the best insurance for their clients’ mortgages. The survey found that less than half (45 per cent) of Canadians understood how insurance can be used to maximize the value of their estate.
Advisors can also help clients consider the implications of purchasing with another person, such as a spouse, common-law partner, family member or friend, and whether a joint ownership or tenants-in-common ownership structure is more appropriate, Ms. Boland says.
For common-law partners, depending on how long the relationship has existed, she says putting together a cohabitation agreement in advance of the purchase may be helpful “so the terms of ownership are very clear to mitigate complexity in the event of a relationship breakdown.”
An-Lap Vo-Dignard, senior wealth manager and portfolio manager with Vo-Dignard Provost Wealth Management Group at National Bank Financial Wealth Management in Montreal, says there can also be an estate planning component for clients to consider, particularly those who are mulling the purchase of a vacation or retirement property. He’s had multiple conversations with clients about the implications of passing these properties down to their adult children in their will.
“If the goal is to leave it in the family, but you’re transferring a house with a mortgage [the child] can’t afford, it’s tremendous pressure,” he says, noting that some clients may need to consider how to use their life insurance to reduce or eliminate this burden.
Not having ‘enough money’ to fund retirement
Homeownership has long been seen in Canada as a primary way for individuals to build their wealth. But Mr. McGrath says that with real estate being as pricey as it is now, particularly in major metropolitan areas where even condominiums can cost north of $600,000, clients who are buying very expensive properties may be hamstringing their ability to grow their wealth in other ways and setting themselves up for a cash flow challenge at retirement.
“It’s very common for me to meet with newer clients in their mid-50s, look at their net worth statement and it’s 95 per cent their home because they haven’t had the cash flow to contribute to their retirement fund,” he says.
“Now, they’re thinking about retirement and they don’t have enough money to fund it. … [They] end up with an illiquidity crisis.”
In those cases, managing the transition to retirement requires using less ideal options such as taking out a reverse mortgage, working longer or selling their home. Mr. McGrath notes that while the value of their house has likely appreciated significantly, all other properties on the market have also, making even downsizing a challenge.
“That transition [may not] free up a meaningful amount of capital for retirement,” he adds.
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