Lifestyle | How to take over your mortgage on your own?

When it comes to buying their first home, some young people are lucky enough to have a parent who guarantees their loan, who puts his or her name on the mortgage contract and agrees to make the payments if something goes wrong. But there comes a time when the parent wants out of the contract and the child must prepare to fly on his or her own.

The situation

Sylvain*, 33, bought his first home with the help of his father, who became a 1% co-owner. The agreement is that when the loan is renewed, Sylvain will have to become the 100% owner of his residence. This will happen in two years and he is not without concern.

“I have no problem making my monthly payments, but I am afraid that the bank will not want to grant me the loan because of my other debts,” says Sylvain. “I often hear influencers say how personal loans have a very negative impact when it comes time to apply for a mortgage.”

That’s because in addition to accumulating balances to pay on two credit cards, Sylvain has a loan for a spa that costs him $152 per month and he has just taken out a car loan at $1,155 per month. Both will be paid off in five years.

Sylvain, who contributes to the Quebec Government and Public Employees Retirement Plan (RREGOP), still invests $100 per month in his registered retirement savings plan (RRSP) at the Fonds de solidarité FTQ and approximately $1,500 per month in his tax-free savings account (TFSA) since he has unused contributions.

“What strategy should I use,” he asks, “to ensure that the bank will grant me the mortgage on my house without my father having to remain a co-owner?”

The advice

The first thing that strikes André Lacasse, financial planner and financial security advisor at Services financiers Lacasse and mutual fund representative attached to Services en placement PEAK, is that Sylvain seems to seek generic advice on social networks from people who are not legally qualified.

“For example, we often see influencers saying how important it is to maximize your TFSA,” he says. “That’s true in general, but not when the person has several debts with high interest rates. Sylvain needs personalized advice.”

To grant a mortgage, banks look at different elements such as the credit score, but also the gross debt service ratio (GDS) and the total debt service ratio (TDS). To obtain the GDS, you must add up the monthly costs of the mortgage payment, heating, property taxes, and divide it all by the monthly gross income. To meet the criteria, you must obtain a maximum of around 32% (this can vary between different banks).

For the ATD, you have to take the same costs calculated for the ABD and add the minimum payment of credit cards, the payment of the car loan, other debts, so the spa and the student loan. Again, this can vary depending on the bank you go to, but you should get a maximum of around 40%.

“We don’t have all the information to calculate Sylvain’s ratios and he would probably be able to do so because he has a very good salary, but the fact remains that he is accumulating significant debts with high interest rates and it is in his best interest to get rid of them now,” says André Lacasse.

Emptying your TFSA to pay off your debts

While Sylvain seems to attach a lot of importance to his TFSA, André Lacasse dares to make a recommendation that will certainly raise his eyebrows. “Having $80,000 in a TFSA is very good, but not when you have more than $100,000 in debt apart from the mortgage at high interest rates,” says the financial planner. “So I suggest that Sylvain sell everything he has in his TFSA now and pay off his debts starting with those with the highest interest rates.”

Why? “Because it’s possible that in some years he’ll be able to make returns with his TFSA that will exceed some of these interest rates, but in the long term, he won’t be able to do so,” explains André Lacasse. “There are good years and bad years on the stock markets. It’s better not to take the risk and pay off his debts.”

Sylvain would quickly get rid of his credit card balances, his spa loan and the majority of his car loan. “Sylvain would then have to use the amounts he used each month to repay his debts as well as the amounts he invested monthly in his RRSP and TFSA to repay the remainder of his car loan,” says André Lacasse. “He would also have to repay his student loan. It would go quickly.”

Getting back into good financial habits

Since Sylvain benefits from the RREGOP, he doesn’t have to worry too much about his retirement savings and will be able to quickly get his situation back on track, according to the financial planner. However, he emphasizes that learning to manage his credit cards is a priority so as not to start getting into debt again.

“Sylvain has every advantage in paying his balance in full each month to avoid paying interest,” he says. “It’s a matter of habit. I also advise him to make a budget to be aware of his expenses.”

Once his debts are paid, Sylvain will be able to start investing heavily in his TFSA again. “He will regain all his contribution rights on the 1^er January after his withdrawals from his TFSA, says André Lacasse. With all these sums now available each month, his TFSA will replenish itself very quickly.”

Sylvain will also be able to stop worrying about his mortgage.

“With no debts, with such a salary, he will be proud to present his balance sheet to his bank and tell his father that he will be OK with the financing,” says André Lacasse. “In addition, he will stop leaving money each month in interest payments and will be able to take full advantage of the investments in his TFSA. And of course, with a house in his name!”

* Although the case highlighted in this section is real, the first name used is fictitious.