Tag Archives: Home buying

Common Sense for Common Law

Deciding to move in with a significant other is a huge step in a relationship and any couple who gets to that point should be commended. There are many different people with many different opinions on the relationship / emotional side of moving in with someone. I’m actually a little glad my mom doesn’t read this, because I don’t want to launch into a hypothetical conversation about ethics.

What I want to pay some attention to is something that seems to be overlooked by people I know who have moved in together. I just want to point out that this isn’t a judgement in any way, only things that I have seen happen that I maybe would have done differently. That being said, I have never been in the situation and I can definitely see how all the positive emotions will cause the couple to gloss over some of the more practical issues, but as always I’m a firm believer that some practical thought when things are good make it much easier to handle when things are bad. Specifically, what does living together without having a formal marriage document mean for both of you financially, both when you’re together and if you split up?

In casual conversations I’ve had with people, the rules of common law seem very widely misunderstood. I will fully admit, before some research for this post, I had some incorrect assumptions about common law in Manitoba. I am happy to say that once I set the record straight, the laws aren’t as unreasonable as I once thought they were. Regardless, it is important to familiarize yourself with what you are and aren’t entitled to should you break up.

If you don’t agree with the letter of the law, based on how you and your partner are living, then it’s time for a difficult decision. I’m not a lawyer, but common sense would dictate that should you believe that you have a level of entitlement to certain possessions, but the law disagrees, a signed agreement needs to be created. If you decided to pursue this, then an even more difficult discussion needs to be had.

You need to sit down with your partner and agree to how the assets, monies and responsibilities will be split while you’re together, as well as if you break up. While I agree there is nothing less exciting than having this conversation, I’m a firm believer that it should be had during a happy time, when you still care about the person. You are thinking more clearly and don’t have all the messy, negative emotions you have when you’re doing through a breakup.

Once the agreement has been made and signed, then you have a basis to defend your rights on. This can be for anything from the owner of certain objects not having to split them, to not getting kicked out of your home too early. Another thing, is having a guideline to base all “who gets what” conversations on helps keep emotions out of it, as much as possible.

If this is the most unromantic thing you’ve ever read, I agree. One last thing I would say is to really think through combining finances. Even if you’re living together, it doesn’t mean you have to share every bank account. This is just another backstop against what could make a bad breakup, worse.

Mortgage Overview

A house is likely the largest purchase you will make in your life. It is a significant decision, not only because it will likely be for hundreds of thousands of dollars, but also because it is a high-emotion decision. You will be living there for many years; therefore it is important to love it.

Likely you will not be buying your home in cash, therefore a mortgage is a vital part of the purchase process. It is also likely that you don’t know much about mortgages and the explanations you are getting aren’t being too helpful. At the very least, you should really know why you can “afford” what the bank tells you you can.

The bank determines what you can afford based on your income and debt payment obligations (including the new mortgage), calculated as your Total Debt Servicing Ratio (TDSR). The lower the TDSR, the greater the mortgage amount a borrower will be approved for.

TDSR is calculated as {[loan payments] + [available credit maximum payment] + [new mortgage payment]} / [monthly income]. This sounds complicated, but an example will help explain.

Let’s assume you may have the following finances:

Car loan ­payment – $350/month
Line of credit – $0 balance and $5,000 available
Credit card1 – $500 balance and $1,000 available
Income – $3,000/month (before tax)

Your monthly debt obligation will be calculated as the following:

$350 + ($5,000*0.03) + ($1,000*0.03) = $530

Now taking that amount and determining the TDSR:

$530 / $3,000 = 17%

This means that if you take advantage of all debt available, the minimum repayment amount would take up %17 of your pre-tax income.

You may be thinking “But that doesn’t even include my mortgage,” and you would be right. The above example is still important for the following reasons:

  1. You learn how TDSR is calculated.
  2. You learn what that means in terms of real dollar amount paid per month.

These two points go a long way to show how the banks aren’t looking out for your best interest when calculating a mortgage. Here’s why:

  • In calculating the TDSR we (and the banks) use the pre-tax income. That means we haven’t yet accounted for the 25%+ that the government will take off our pay that we never see (taxes, CPP, OAS, erc.).
  • Any credit that is available to you, usually in the form of credit cards, is calculated into the formula. The key take-away from this is not to blindly accept limit increases from your cards, because it could come back to haunt you. If you don’t need the room, don’t take it!
  • When looking at the TDSR in the example above (17%) it doesn’t sound like a lot, but the real dollar amount paid per month ($530) is fairly substantial.

I make the point about 17% still equating to a fairly large payment, because most mortgage issues will allow borrowers to have a TDSR of 35 – 40%, even up to 45%, including the new mortgage payment.

While those numbers are great news for those who are looking to buy a house, especially younger people with lower incomes; you really must consider what it means to your lifestyle. Paying $1000+ in loans, not factoring in other bills associated with a house (water, heat, cable, insurance) can eat into your income rather quickly. Although owning a house is great, but so is being able to have fun in your 20s, so choose wisely.

The final amount you get approved for has a few factors, but can be simplified to [TDSR] + [down payment]. While a higher down payment can allow you to afford a more expensive house, only to the amount that the down payment is increased. Conversely, reducing current debt payments or increasing income have a greater impact than putting more money down.

I suggest going to online and playing with RBC’s mortgage calculators. Spending some time on this will teach you more than I can ever hope to. Also, if you find any mistakes, let me know!