You know that it's never too early to start your child's college fund, but when your kid goes to university, there are many additional costs that accumulate -- ones that we often don't even think about.
While first year students can usually expect to stay in a campus dormitory, in their following years they may want to rent from private landlords. While this seems like the logical next step as a young adult becomes more independent, their financial status is relatively unstable, and even a low monthly rent can add up over a three-year period. And all too often, the apartments or houses with affordable rents aren't in the best of neighborhoods.
For these reasons, some parents have chosen to purchase second homes for their kids to live in while they're at university.
While purchasing a home is a huge investment, the payoff can be well worth it. Even if your kids are toddlers who are just beginning to play house with tiny toy pots and pans or little plastic vacuum cleaners, it's not too early to invest in their college home. In fact, doing so might give you an even better chance for a great ROI.
But the Canadian housing problem has stood in home buyers' ways for some time now. Many Canadians have struggled to afford one mortgage, let alone two.
Before the recent mortgage reform announced by Finance Minister Bill Morneau, one barrier to home ownership was the high debt burdens that many Canadians carry. Though 51% of those who invest in real estate finance their new propertywith a down payment of up to 50%, the majority of home buyers today are putting much less down, and dragging out their payment periods. Because of extremely low interest rates, Canadians have been encouraged to overextend their budgets, which poses a threat to both their fiscal well-being and the country's financial system.
Previously, regulations required all home buyers who take out short-term or variable-rate mortgages less than 20% to prove that they are able to pay higher interest rates than they will end up paying. However, those who have fixed-rate mortgages that extend beyond a five-year payment period have their income stress-tested against the interest rate that they will actually pay.
As of Oct. 17, all borrowers with insured mortgages must qualify for the most common rate, as per the Bank of Canada. Currently, that rate is just 2% higher than the discounted rates granted by the majority of lenders.
Under these new regulations, qualified individuals are at lower risk when financing their homes. This means that, if possible, now is one of the best times to invest in a home for your future college student.
In the meantime, income generated by renting out the home can contribute to the mortgage payments, as well as assist in their cost of living. Homes are only going to become more expensive down the road, especially in large metropolitan centers like Vancouver and Toronto. If you're thinking about buying your child a home in the future, there's no time like the present.
Before you make your decision, be sure to consult your financial advisor to see if you qualify for an insured mortgage, and assess the possibilities that could come with the acquisition of new property.