How to help younger clients achieve home ownership
Home ownership is a dream, but that dream has turned feverish for some. With home prices doubling or more over the past decade, Baby Boomers have seen their net worth soar, while their Millennial and Gen Z children have been left wondering if they’ll ever be able to afford a home.
As a financial advisor, home ownership is a crucial issue to address with younger clients. Although retirement planning always matters, it might be hard for them to focus on long-range concerns when they are fixated on getting into the property market now.
Here are some of the ways you can help would-be homeowners balance their objectives and make the right moves.
Create a home ownership plan
No plan will succeed without a realistic understanding of a client’s goals and budget, so these are good places to start.
- Goal-setting. Home ownership is a complex financial goal, and the price of the home is just the beginning. At closing, there will be legal fees, land transfer tax, and moving costs. You will need to furnish the home, potentially repair the home, and continually maintain the home. Mortgage rates may continue to change. You will have utilities and property tax to pay. If you don’t already have life insurance, it will be time to get some. The more precisely you spell out the financial realities of home ownership, the more clear and attainable the goal will be.
- Budgeting. How much is your client able to save today? How much will they be able to carry tomorrow? And what trade-offs are they willing to make? Skipping their annual vacation in order to accelerate their savings might be a good decision. Never taking another vacation is probably not healthy or realistic. Pausing their RRSP contributions could make sense in the near-term, but only if there’s a plan to restart them in the future.
Another thing to consider: Sometimes the process of goal-setting and budgeting will reveal that home ownership is not the right choice at this time. If you help a client weigh the pros and cons and decide that renting instead of buying is a better decision at this time, you will have done them a great service.
Put together a down payment
Here are some financial planning tools that can help younger clients put together a down payment and offsetting some other costs.
- First Home Savings Account (FHSA). This is a new type of registered investment account designed for first-time home buyers. Clients can contribute a lifetime maximum of $40,000, and deduct their contributions just like an RRSP. They can also transfer amounts from their RRSP to their FHSA. Money in this account can grow tax-free and be withdrawn tax-free as long as it is used to purchase a qualifying home. Many are not aware of this program.
- Home Buyers Plan. This is an older plan for first-time home buyers. It allows RRSP owners to “borrow” up to $35,000 from their RRSP to put towards the purchase of a first home. As long as the funds are repaid to the RRSP within 15 years, there are no taxes payable.
- First-Time Home Buyer Incentive. The federal First-Time Home Buyer Incentive can offer clients up to 10% towards a down payment in exchange for having to repay the same percentage of the home’s price whenever it is sold. This is one of many government programs that you can learn about and coach your clients on. There’s also a federal New Housing Rebate and a First-Time Home Buyers’ Tax Credit that could be worth up to $750. At the provincial level, British Columbia, Ontario and PEI offer Land Transfer Tax Rebates, and there are a number of Down Payment Assistance Programs that vary by province.
- Family gifts. Another common down payment source is family gifts. As a financial advisor, it’s always beneficial to have cross-generational family relationships, and home ownership is a topic that makes these connections particularly relevant. If older clients are interested in helping their children get a start in real estate, consider how you might assist them in reviewing their retirement and estate plans to see if an early inheritance makes sense for them.
Obtain home purchase financing
Once the down payment is in place, it’s time to shop for a mortgage. Here are two ways you can help:
- Credit score. A stronger credit score could be one of the benefits of working with you on a budget and financial plan. Clients should understand that paying bills on time and reducing their overall debt level are two strategies that can help them qualify for a mortgage at a competitive interest rate. Two other factors that can help are reviewing their credit file to make sure it’s up-to-date, and trying to limit their requests for new credit.
- Life insurance. Most lenders will offer loan and mortgage insurance to your clients when they sign their mortgage papers. These policies tend to be pricey and to name the lender as the beneficiary rather than the client’s loved ones. Buying a home is one of the most important times to conduct an insurance needs assessment, so make sure your clients know that they should not agree to mortgage insurance without speaking to you first.
A mortgage broker can be a great person to have in your professional network. There’s strong potential to share referrals and work together as your clients navigate one of the biggest financial decisions of their lives. Having an accountant in your circle can also be helpful, as your clients try to balance and maximize the benefits of the FHSA, RRSP, Home Buyer’s Plan and other tax-saving opportunities.
Many younger people look forward to the pride of purchasing a home and the opportunity to build home equity that comes with it. As a financial advisor, you are in a unique position to help make that dream come true. Along the way, you can be sure that Beneva will be here to support you with great investment solutions.
