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Posts from the ‘Financial Planning’ Category

Mar 27

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What to Do If Your Kids Are Not Too Cool for School Part Three: All About In Trust For Accounts

A good education can be invaluable, but it seldom comes for free. In these days of rising housing costs, interest rates and taxes, it is getting harder and harder for some families to help younger family members get that education. In my last article, I devoted a few thousand words to the most common way of funding these pursuits – Registered Educational Savings Plans or “RESPs”.   Today’s missive focuses on another way to help fund an education, even for families that have already maxed out RESPs: In-Trust for Accounts or “ITF Accounts.”

Despite their benefits, RESPs may not be a one-stop solution, particularly if Junior has Ivy League aspirations or educational pursuits that seem to span decades. For other families, the  numerous rules surrounding RESPs and penalties that can arise if a child doesn’t go to school or use up all of their grants and gains, may cause them to look for a more flexible alternative.

That’s why families look at other educational funding strategies as either an alternative to or in addition to RESPs. ITF Account are one of those choices and, on first blush, there seems like there is a lot to like:  less initial paperwork, no funding limits and more flexibility on the back end should junior wishes to busk rather than earn a baccalaureate. The tax savings while junior is a minor also offer appear to offer tantalizing tax savings – accounts funded through an inheritance, a gift from a foreign relative or by the Canada Child Tax Benefit allow all income and gains to be taxed on the child’s return, although ITF Accounts funded from other sources usually tax income (but not capital gains) in the hands of the contributor while the child is a minor.

Unfortunately, despite the surface appeal, there are some significant drawbacks to ITF Accounts and some practical complications that might get in the way of some of the theoretical tax savings. Read on and decide for yourself whether ITF Accounts are an ingenious solution or a problem just waiting to happen. Before I begin, a quick shoutout to Canadian Moneysaver Magazine reader Claire Scribner for her invaluable questions and comments!

 Basic Principals

From a legal and tax perspective, ITF Accounts are informal trusts, which means that they operate according to the same basic principles of those elaborately detailed written trusts that I’ll talk about in my next article, but without all the structure, details, costs and paperwork that goes along with their more glamorous cousins.  That means that there is someone managing the assets (“the trustee”), on behalf of the person who is entitled to the benefits of the account (the “beneficiary”). Thus, many parents are the trustees of ITFs for which their children are beneficiaries. Theoretically, ITFs should be taxed inside the trust and all income or realized gains not distributed or deemed to be distributed taxed at the highest margin rate for the trustee’s province.

Is It Really AN ITF Account?

As is so often true, however, life is more complicated than it may appear at first glance.  First, it may be debated whether you’ve actually created a trust at all by the CRA since certain legal formalities are required and ITF Accounts rely on solely the account opening documents rather than the lengthy trust documents that go with a formal trust.  It could be that you’ve merely opened a non-registered account earmarked for the child that should be taxed in your name or you’re acting as agent for the child and their babysitting funds rather than as a trustee. If all of this sounds confusing, then you’re not alone. If you want to establish a true ITF account, you’d want to confirm the intention to gift, the items to be gifted and identity of the person entitled to benefit from the largesse. The account opening documents should hopefully clarify the trustee and the beneficiary. Ultimately, this can be a lot to expect from ticking some boxes and filling in a few blanks.

Moreover, the CRA would also look at who has been paying the tax on ITF Accounts. Since ITFs generally don’t apply for a trust number (which is like a SIN number for trusts) and minors cannot establish their own investment accounts, ITFs are typically opened using the trustee’s SIN number.  As a result, all tax slips for the ITF will also be issued in the trustee’s name. That means that if the trustee doesn’t report the income and gains on their own tax return, the CRA automatically picks up on that and starts sending out nasty reassessment notices.  Although an accountant friend of mine advises that it may be possible to then go back and forth with the CRA about this every year, the hassle factor and potential accounting costs if someone else is doing this may not be worth it, particularly if the ITF is not a large account and / or the income would have otherwise been taxed in the adult’s hands anyway (such as if a parent funded the ITF).  As a result, despite the best of intentions, if the trustee has been paying tax on the income and gains, that might be enough for CRA to deny that a true ITF had been created.

In some cases, in fact, this denial may be a blessing in disguise. If the account is treated like a trust and none of the income or gains have been paid out of the trust or promissory notes for these amounts payable to the child issued, the CRA can argue that the income and gains should be taxed in as trust, which means at the highest marginal rate inr the trustee’s province of residence. In other words, the ITF account might become a tax albatross rather than a tax saver.

For those willing to go the extra mile and fight this battle, such as when many years of tax savings still lie ahead and you think you’ll be able to tax even income in the child’s hands, I suggest that the trustee treats the ITF like a formal trust, which requires the following:

  • All taxable income or gains should either be taken out of the account and spent on the youngster, or the trustee writes formal promissory notes on behalf of the ITF to the beneficiary for these amounts that are immediately cashable, although mom and dad are still entitled to blithely ignore junior’s demands for the cash until (s)he come of age.   This hopefully prevents the CRA from taxing the income in the trust at that province’s highest marginal tax rate.
  • Document your intentions to create a trust through a separate document when opening the ITF Account and be consistent in stipulating who pays the tax on the income and gains each year.
  • Investigate getting a formal trust number from the CRA and using that number for the ITF’s bank or investment accounts rather than the trustee’s personal SIN number. Expect a lot of questions from those financial institutions and hassle regarding where the money has come from and request for details.
  • Assuming you survive the administrative quagmire of actually opening accounts in the ITF’s name, be prepared to file annual trust tax returns on behalf of the ITF.  The rules and disclosure requirements for trusts are in the process of changing significantly. At this point, the proposed legislation suggests that ITF Accounts worth less than $50,000 owning things like GICs and publicly traded securities may not always have to file tax and information returns, depending on their activity that year, but this may change.
  • If hoping to get all income taxed in junior’s name under one of the previously listed exceptions to the general rule, don’t commingle (a word I try to fit into daily conversation) money qualifying for an exception with money that does not or risk having income taxed in the trustee’s hands.
  • Keep records, records and more records. This means tracking the source of the ITF funds, particularly claiming an exception to the general tax treatment of income, as well of the expenses mom and dad paid on junior’s behalf that the trust is reimbursing.

Some other Potential Benefits of ITF Accounts

Although having capital gains and, perhaps, income taxed in the youngster’s hands can be a wonderful thing, particularly it’s still many years before (s)he’s old enough to buy their first drink, ITF Accounts may provide some other benefits in the right circumstances, including:

  • Protecting assets for the child if the parents get divorced or, perhaps, against creditors, since the money in the ITF no longer belongs to the person funding the account. If it doesn’t legally belong to the trustee and (s)he didn’t fund the account 10 minutes before filing for bankruptcy, ITF Accounts should ultimately live to fund another day.
  • Avoiding Will challenges, taxation, probate fees and unexpected results at the trustee’s death. Although ITF Accounts can have other problems if a trustee dies within money still in a child’s ITF Account, it should still belong to the child beneficiary, regardless of the deceased’s Will.  If the money was just kept in a separate non-registered account in the dead trustee’s name, it would be distributed according to the deceased’s Will.  Accordingly, unless the trustee’s Will specifically says that the non-registered account passes to the child, it would be distributed as part of the residue of the estate where it might pass into unintended hands, could be scooped up by estate creditors or tied up in Will challenge litigation.

Why ITF Accounts Keep Lawyers up at Night

Even if you thrill at the thought of the extra paperwork and never turn down the chance to bicker with the CRA, there are many other reasons why you may wish to give an ITF Account a hard pass. Here are some of those scary contingencies:

  • Loss of flexibility and control. Once the money is gifted, the money belongs to the child. That means that before your child is old enough to drink in the US, they have the absolute right to demand their money and spend it as they wish. Accordingly, if you’re worried if your child has a thing for fast cars and trips to Maui, an ITF Account might be a ticking timebomb. On a related note, the money cannot be used for anyone but the child, no matter what life surprises await. A non-registered account without the tax advantages of an ITF Account allows the parents or grandparents to retain control of the money if the child goes off the deep end or it turns out later that the money would ultimately be better spent on themselves or another family member.
  • Estate complications on the child’s death. If the child dies with money in the ITF Account, it becomes part of that child’s estate. Since most children can’t or don’t have valid Wills, that means that the money will be distributed according to the laws of intestacy in that province. In addition to potentially paying probate fees and expensive court applications in order for someone to manage that estate for the dearly, the money may end up in the wrong hands. For example, how would you feel about your ex-spouse getting 50% of the ITF Account you funded by working overtime and forgoing vacations if your child died without dependants or a spouse?
  • Complications on the trustee’s death. Unless the trustee’s own Will stipulates who manages the ITF account, the task will generally fall to his or her own executor. This person may not be right person for the job, particularly in blended family situations when your new wife ends up managing the account a stepkid.
  • Potential liability for inappropriate investment decisions. Admittedly, this is a stretch, particularly for smaller accounts. All the same, I strongly recommend against a penny-stock heavy strategy, as trust law says that all investment decisions should be reasonable ones depending on the timeline and intention for the account.  

The Bottom Line

While ITF Accounts can play a valuable role in educational funding in the right circumstances, I don’t see them as the best alternative in many others. I am far more comfortable with them in the following circumstances:

  • The child is already close to university age and has already demonstrated that they have their act together. 
  • The person funding the account is okay with the child using the money for other purposes should the child not go to university or have money left over afterwards.
  • The funder has ample other resources should life through them a curveball.
  • The account size isn’t so small that it’s not worth the hassle or complications and not so large that it would be a catastrophe if things went wrong. For larger amounts, a formal trust is a far safer option that cover off what happens if things don’t work out and provides the trustee with far more control, including not requiring a full payout at age 19 or allowing distributions to other beneficiaries in some circumstances, such as a single educational trust for a group of children or grandchildren rather than pinning all of your hopes on a single child / grandchild.
  • The trustee is a details person.
  • Income and capital gains will both be taxed in the child’s hands (or the account is set up to minimize taxable income until the child is an adult) and would otherwise be taxed in the gifter or trustee’s hands at a much higher rate so that there will be enough tax savings to make the risk and hassle worthwhile.

Dec 5

What To Do If Your Kids Aren’t Too Cool For School: Educational Funding Strategies for Tax Stingy Families

It takes a lot to pay for an education these days, without even considering all of the bonus expenses in addition to paying for tuition and textbooks. And it’s been getting harder. Tuition costs have been consistently increasing at a rate higher than inflation and some of the previous tax-efficient funding options, such as paying dividends to students over 18 from the family business, are no longer on the table in most instances. Adding to the pain, tax rates for higher income earns have increased drastically over the last 5 years, making it that much harder for these families to accumulate and grow enough sufficient funds to put the next generation through school, particularly when saving for multiple children. And let’s not even talk about how the cost of housing eats into many family’s savings plans. Although a good education can be priceless, actually paying for it may be beyond the means of many. Alternatively, the resulting student debt can leave many struggling students financially crippled and stressed for years to come.

Although there is no universal silver bullet that can save the day or convert pennies into portfolios, there are some strategies that can at least make life slightly easier and more affordable in some cases. In others, however, the savings can be far more profound.

Basic Principles

As is so true with many planning strategies, the earlier you can put things in motion, the more significant the potential benefits. Just like any other savings strategy, the more time the money is left to percolate and grow, the larger the benefits.  Obviously, this isn’t always possible. But if the problem is simply a lack of knowledge of some of the options available, then that’s an entirely different kettle of fish. If any of today’s or my future offerings resonate with you, your pocketbook and your reality, I encourage you to take the next step, whether that means gathering more information or actually putting one of these ideas into motion.

Planners typically start by looking at the big picture before drilling down into the minutiae and, because no one likes to feel like they’re not fitting in, I will do the same. Before weighing the different ways of funding junior’s liberal arts degree, here are some BIG PICTURE musings I suggest contemplating first.

  • The Early Bird Gets the Educational Worm

As is so true with many planning strategies, the earlier you can put things in motion, the more significant the potential benefits. Just like any other savings strategy, the more time the money is left to percolate and grow, the larger the benefits.  Obviously, this isn’t always possible. But if the problem is simply a lack of knowledge of some of the options available, then that’s an entirely different kettle of fish. If any of today’s or my future offerings resonate with you, your pocketbook and your reality, I encourage you to take the next step, whether that means gathering more information or actually putting one of these ideas into motion.

  • Sometimes Education Can Be a Family Affair

This point ties in nicely with the last one. For many parents, there are far more pressing financial concerns than funding a child’s university education 15 years hence.  Paying the mortgage, maximizing RRSPs, saving for that first home, ensuring they have enough insurance in place to protect the family upon death or disability, paying off their own student debt or simply keeping their own financial head above the water may all take priority over hopefully sending junior to Harvard or trade school someday. That’s where other family members may be able to lend a hand. Many of my grandparent clients are passionate about ensuring that those cute little people that are part of their gene pool are given every opportunity to achieve their educational dreams and career aspirations. While I strongly encourage these grandparents or other family members to first ensure that their own financial nests are well feathered with a large margin of error, if this is not a concern, then they might want to take a more active role in ensuring that young Dick or Jane will be able to afford school when the time comes.

In some cases, grandparents are reluctant to pry into what they see as their children’s financial affairs.  And, in other instances, I have seen parents who are reluctant to talk about these issues with their own parents if money is tight or to accept assistance when offered. In both cases, the ultimate losers might be the grandkids. Accordingly, although I know this isn’t always possible or even desirable, I encourage both parents and grandparents to consider proactively discuss plans for educating that those fingerpainting youngsters who may one day want to become astrophysicists. In fact, feel free to share this article with parents or children as a springboard to making this happen.

  • One Size Doesn’t Fit All

One of my pet financial planning peeves (yes, I know that this makes me sound like a geek) is reading articles that seem to suggest not only that there is one way to skin a cat but telling you which cat to skin first. Admittedly, some suggestions like “get a Will” are hard to contest, but this is not one of those instances. Each family is different, both in terms of their finances, but also in terms of their needs, goals, values, problems and interpersonal dynamics. 

Figure out your own priorities and values and then act accordingly. And, in some cases, this may mean requiring the child to fund their own education in full or part rather than making life too easy for them or sacrificing some of your other financial needs or goals.

Meet the Players

I will eventually devout a separate article to each of 4 different ways of savings for a child’s education but wanted to first introduce you to the entire cast of characters before shining a separate spotlight on each.  Accordingly, the summaries below are not intended to provide you with a complete list of the good, bad and ugly. As a final warning, this article is written based on the assumption that all parties involved are Canadian residents and citizens. If this is not the case, you’ll need to discuss how this affects your potential plans, particularly if someone is a U.S. citizen or resident.

  • Registered Educational Savings Plans (“RESPs”)

A Registered Educational Savings Plan provides 20% government matching on qualified contributions and allows income and gain within the plan to grow tax-free along the way, with the government grant money (“CESG”) and all plan profits / income taxed in the name of the student upon withdrawal if still in school. The original contributions, which were made with after-tax dollars, are tax-free upon withdrawal, while the grants and gains will be taxed as income. There is a lifetime funding limit of $50,000 in contributions per child and the government CESG are capped at $500 per year, but with an extra $500 in catchup grants per year, to a lifetime CESG grant maximum of $7,200.

The government grants and tax-free compounding make this a very enticing option for many families, but yearly funding caps and maximum funding limit per child both get in the way of maximizing the size of RESPs by the time the children finish high school, which can be of concern if the student has Ivy League potential or has plans to be in school for a long, long time. Accordingly, in some cases, the RESP may be part of the solution but not a complete answer to the question. Moreover, if the child doesn’t use up all of the taxable money, it may need to be taxed in the hands of the parents, with an extra 20% added on, but up to $50,000 can be rolled into an RRSP if the funding parent has enough leftover room, although that parent won’t get the normal tax deduction associated generated by RRSP contributions when taking advantage of this option.

  • In Trust For Accounts (“ITF Accounts”)

ITF accounts are considered as informal trusts, which means that they don’t have the written trust deed, contingency planning and specifications that go with a formal trust, but they also avoid the resulting setup and ongoing administration costs. There is no limit on how much can go into these accounts, nor when. As well, all capital gains earned in this account will always be taxed in the child’s hands at the child’s rate, but any income (think interest or dividends) will be taxed in the contributor’s hands while the child is under 18, unless the money in the account came from an inheritance left for that child or the Canada Child Tax Benefit, in which case the income would be taxed in the child’s name.

Although taxation is not deferred in ITF accounts, if the youngster is not a child model or the proud owner of a very lucrative paper route (assuming those still exist), there would likely be no or a minimal tax hit on all income taxed in the child’s hands.. Because dividends are far more tax efficient than interest income, which is how RESP taxable withdrawals are essentially classified, there may be less of a tax hit and more tax flexibility over these funds after the child is 18. Moreover, there is no restriction on how the money is used, so if the child wants to be a student of life rather than a podiatrist, there aren’t the same potential tax problems faced when a RESP is set up in that child’s name.

On the other hand, there are some significant potential problems with all that flexibility I just discussed. In fact, as soon as the child reaches the age of majority in their province of residence, they have the legal right to demand the money and do what they want with it. Just like for most formal trusts, once the money is contributed to an ITF account, it is no longer owned by the gifter. Accordingly, if the child wants to spend all of the carefully accumulated cash on a fast car, designer clothes and a trip to Maui, then that child might be off to the mall.

On another note, if the ITF account wasn’t funded with the previously mentioned inheritance or Canadian Child Tax Benefit dollars, then any dividends or interest will be taxed in mom and dad’s name at their rates until the year the child turns 18. As a result, if the funder is in a higher tax bracket, the money will not compound nearly as much as within an RESP. Although many of us love, love, love eligible dividends, for people in the highest tax bracket, we could still be looking at over 40% taxation in some provinces.

Finally, if anything happens to the child or the person in charge of the account, there could be a mess. As the funds belong to the child, it will become part of the child’s estate, which could mean the wrong person eventually inheriting. If something happened to the person managing the money, then that person’s executor would take over management of the ITF account, which may not be ideal, unless perhaps the deceased’s Will specified who would be handed the reigns. 

Ultimately, these accounts can work well when the stars align but you will need to ask yourself whether you inhabit such a world or, at least, what you can do to minimize risk. Ultimately, I  suggest investigating other options when larger sums are involved or the youngster in question has a habit of playing with matches, playing online poker or buying $500 jeans with rips in them.

  • Formal Trusts

As also a practicing Wills and Estates lawyer, I admit to having trusts on the brain. But hear me out. In this instance, there are a couple ways that trusts can go a long way towards paying for a few university degrees or trade certifications.

Put simply, a trust a separate entity for tax purposes set up with specific assets and instructions, particularly how the assets are to be distributed. Many trusts are set up to allow the person administering the trust (the “trustee”) maximum discretion as to who gets what.  If done correctly, the income and gains from the trust investments can be taxed in the hands of the recipients (the “beneficiaries”) rather than the original owner. And if the beneficiaries are earning no or minimal income, the tax savings over time can be massive.

  1. Trusts Created and Funded by Living People

The trusts I draft for parents trying to pay for their children’s current or future educations require mom and dad (or whoever else sets up the trust) to loan the money to be invested inside the trust at a minimum government rate (currently 1%) that is fixed for the life of the loan. Without these low-interest loans, income would be attributed back to the contributor while the child was under 18 just like for most ITF accounts. With the required loan in place, mom and dad, can allocate income and gains earned in the trust to their progeny or other family members with impunity.

If the child is already incurring significant expenses, the trust can essentially repay mom and dad for covering these expenses on behalf of the wee ones or pay those costs directly. If there is excess income or gains, the trust could instead pay these amounts to the parents to be taxed in their names or essentially write the kid an interest-free IOU or Promissory Note and leave the money in the trust to compound. Down the road, such as when the child starts university, these IOUs can be paid out tax-free to the child to cover education costs.

Besides set up and annual costs, one of the biggest concerns if what happens if the child goes off the rails. If all of the annual income has been paid out to cover ongoing expenses, then the child has no right to demand anything else from the trust. On the other hand, just like for an ITF account, the child can demand repayment of any Promissory Notes owing when an adult without restriction. Similarly, if the child died prior to cashing in the Promissory Notes, they would become part of the child’s estate, which might see the money eventually end up in an unintended place. Accordingly, it may be a good idea for the child to write a Will or have a Power of Attorney in place when the amounts start to get significant.

I’ll have a lot more to say on this type of trust in a separate article, but I hope this teaser is enough to give you an idea of the potential benefits. And it’s not only mom and dad who might end up loaning money to the trust – grandma and grandpa might be the ones loaning the cash, which might help them keep more of their OAS pensions by reducing the amount of income that might otherwise be reported in their hands, or allow them to drawn down their RRIFs if worried about a big tax bill at death. And, if grandma and grandpa are setting up this type of trust, they might add additional beneficiaries, such as both children and grandchildren, while also stipulating how the money gets divided at their death.

  1. Trusts Created in Wills

Grandparents hoping to help fund a child’s education if no longer around may set up trusts in their Will to make this happen. For smaller amounts, it isn’t usually feasible, but for larger amounts or if creating a single trust for multiple grandchildren, this might be a very tax efficient way of educating the young.  And, unlike the trusts mentioned in the previous section, there is no 1% loan requirement so 100% of the net income can be allocated to the grandkids.

In addition,  I am helping grandparents fund their grandchildren’s education in another way by setting up Wills where they leave their children their inheritances in trusts rather than in cash. These trusts allow the children to control what happens to the inheritance but also names their own children (i.e., the grandkids)  as discretionary beneficiaries for income splitting purposes. As a result, the child can make their inheritance go further by allocating income and gains to their own children so it is taxed at child’s rates.  That parent could control the capital of the trust and could prevent too much money from getting into the grandchild’s hands too soon by only paying out enough income to cover expenses if the trust was drafted to be flexible, unlike an ITF. On the other hand, the trust could instead provide specific instructions regarding funding the grandchild or grandchildren’s education if grandma and grandpa wanted to make sure that their children abide by their wishes.

As a final benefit, the trust could stipulate that the grandchildren inherited whatever was left down the road when their parent also benefiting from the trust died. By contrast, if that parent had inherited directly, (s)he would typically leave the remainder to their spouse instead, which can lead to many unintended circumstances, particularly if that surviving spouse is a poor money manager, remarries or has other children. Needless to say, many grandparents aren’t too keen on those alternative outcomes.

Again, there is a lot more to be said on the subjects of trusts. This article is merely intended to whet your appetite and to seek out additional information from your legal advisor if this option sounds intriguing.

  • Permanent Life Insurance on Children

Buying life insurance on the young is simply too ghoulish for some and I understand that completely. On the other hand, there are many practical reasons for buying policies on children or grandchildren that you may wish to explore. For example, permanent life insurance can be a very tax efficient long-term savings vehicle. Certain policies allow additional contributions that compound more or less tax-free, and the policies can be transferred to adult children or grandchildren without triggering tax so that any withdrawals (such as when the child decides to go to grad school and the RESP is now only an empty husk) can be taxed in the child’s hands. Moreover, unlike ITF accounts, the policies still belong to mom and dad until they officially roll the policies over to the children, which may provide far more peace of mind that setting up an ITF account shortly after a child’s birth and rolling the dice on the child’s future good behaviour.

Just as for the other introductions, there numerous other details to discuss, but let’s leave that for another day.

Conclusion

Paying for a child’s education can be daunting task for some and near impossible one for others.  And it’s been getting harder. On the other hand, with the right plan and proper execution, things can at least get a little bit easier. The next articles in this series will both flesh out the details on the options summarized above and also provide suggestions on how to optimize each approach. Next time, I’ll share some strategies to maximize RESPs.

Feb 16

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Putting The”More” into Mortgage – How to Best Choose, Arrange and Structure Real Estate Loans

Purchasing and funding a home is one of the most significant financial decisions you will likely ever make. Knowing the ins and outs negotiating and selecting mortgage terms can make a profound difference to your financial future. It’s not as sexy as talking about that junior mining stock you purchased that quadrupled in value or how you saved thousands in taxes through clever tax planning (okay, perhaps that’s not so sexy), but locking in the best mortgage for you and your situation, then managing it properly going forward can have as big an impact or more on your future success, if not more. The benefits of making the right decision can compound and unfold for years to come, one mortgage payment at a time.

I’ll try to limit my use of jargon as much as possible but won’t be able to avoid it completely. In penitence, I have also written a separate article that defines most key mortgage terms and their ins and outs on my website that I also consider essential reading. That article will have a lot more to say about things like the benefits of weekly or bi-weekly payments and prepayment privileges and a bunch of other things that people don’t discuss at cocktail parties.

Getting Started

As a first step, I suggest working with a mortgage broker, like my friend Russ Morrison who has helped me prepare this article and regularly assists my clients. It doesn’t cost you anything, you get the expertise of someone who lives and breathes mortgages on a daily basis and working with a professional allows you to canvass the whole mortgage market rather than just one bank or credit union’s stable of products. Even better, it may also help you get better rates, as banks may not always offer you their best deal unless they know that you can get a better deal elsewhere.

Banks’ posted rates may be 2% or more higher than what they will charge you if push comes to shove. Working with a mortgage broker can hopefully get you lenders’ best rates right off the bat. Although rates aren’t the only ingredient in a great mortgage, they will always be a huge slice of the pie. Almost as importantly, a good broker can also walk you through the fine print regarding penalties, explain how your rate would be determined if you do lock in a variable mortgage later and negotiate better terms with your lenders regarding features like prepayment privileges and porting your mortgage.

The bottom line is that the right broker can not only help you get the best rates and help you weigh the cons of fixed vs variable, but (s)he can also help you weigh the non-rate mortgage features offered by different lenders, as not all mortgages are created equal. In some cases, it may actually save you a lot more money later to go with a lender whose rate may be slightly higher than a competitor offering a similar product if the extra perks of the higher rate mortgage pay for themselves should you want to break your mortgage later or pay it down faster. That is some of the stuff I discuss more in my separate article on mortgage terms.

Big Picture Stuff

Setting up your mortgage is not just about shopping around for the best rate. In some ways, setting up a mortgage is like setting up a proper investment portfolio – balancing risk and reward while also hopefully building in some protection if life goes haywire. Here are some of the things to keep in mind when deciding on the size and type of mortgage that is right for you:

• Can You Afford It? Will You Still be able to Afford it Five Years from Now? Just because you qualify for a high mortgage doesn’t mean that you should borrow as much as the bank will give you. Or, even if you can, will it put too much of a cramp in your lifestyle and too much worry into your Sunday nights? Will taking out that big mortgage chain you to a job or career that makes you feel like a wage slave or mean that you only have time to see family and friends on major holidays? Are you planning a family and, if so, do you or your partner want to stay home, or work reduced hours as a result? How would things look if interest rates were 2% higher when it was time to renew? How old will you be when you pay it off and is this after the time you’ve hoped to retire? Are you still able to invest and save for your future? Do you have enough savings or financial backing behind you if you lost your job, got sick or had huge, unexpected expenses?

For better or worse, the mortgage “stress test rules” imposed by the government-linked Office of the Superintendent of Financial Institutions (“”OFSI”) do some of that worrying for us. These rules require that our finances allow us to qualify for a mortgage that is commonly 2% or more higher than the rate we’re actually paying. This applies even for borrowers looking at longer term fixed rate mortgages that won’t fluctuate prior to renewal! Although these rules may protect some potential borrowers from getting in over the heads (and prevent others from buying the home they can actually afford), don’t rely on the government to do your worrying for you. Take an honest, realistic look at your current situation and future plans, crunch some numbers and then borrow only the amount that makes sense to you.

• How much certainty do you need? If finances are going to be tight, look long and hard at a fixed rate 5-year (or longer) mortgage, particularly when rates are already low. According financial guru (a Finance Professor at the Schulich School of Business) Moshe Milevsky’s 2001 study, variable mortgage rates beat 5-year fixed rates between 70% to 90% of the time. Other experts more recently echo this conclusion. Although you may win far more than you lose going with a variable mortgage, if you lose on a variable, you might lose big. In the end, even if you may ultimately have done better using a variable mortgage, taking on a 5-year fixed mortgage means taking a bunch of risk off of the table for half a decade and might have also increased the quality of your sleep along the way. If you do go with a variable mortgage, plan ahead to see what your payments would be like if rates do rise to ensure that you can afford to take that risk. Just as importantly, confirm how your rates will be calculated if you do switch into a fixed-rate mortgage at a later date. Some lenders offer far more generous rates than others. If your leading lender contender is on the parsimonious side, it might be worth a second look at some of their competitors. As noted in the next bullet, when making this decision, it’s important to factor in the likelihood of breaking this new mortgage before it comes due and consider the potential penalties you’ll have to pay at that time – the potential costs of breaking a fixed rate mortgage may be many times higher than paying down a variable rate mortgage if rates have gone down. Admittedly, at the time of writing this article, it’s hard to see rates going significantly lower than they are at present.

• How Set Are You in Your Ways? If there is a reasonable chance of you moving within the next 5 years, that might have a big impact on your mortgage decision. As many have found out the hard way, if rates have fallen, fixed rate mortgages can carry a far heftier penalty than their variable friends. Read my last article if you want to know more. In this situation, unless you can’t see rates going any lower, take a second look at a variable mortgage. You might also look at selecting a shorter-term mortgage if you do have your heart set on fixed rates, as the interest rate differential (“IRD”) penalty is based on the remaining term of your mortgage. Thus, the less time left on your current mortgage when you are looking at moving, the smaller the potential IRD penalty. As I’ll talk about in a later article, you would also want to have a “portable” mortgage and rather expansive prepayment privileges so you can either take your mortgage with you from your old home to your new abode or so you can hopefully pay down as much of your current mortgage as possible before breaking it in order to reduce the penalty. A final option, particularly if you’re likely to move sooner rather than later, is taking out a big line of credit or an “all-in-one” mortgage to avoid potential penalties completely. Although you might pay more interest, it could still be worthwhile if the potential penalty would be even higher than the interest you’d pay over the short-term.

• Is your Total Debt Load Structured as Efficiently and Effectively as Possible? Many of us with mortgages also carry other debts, 0% car loans aside, that are at higher interest rates, whether it’s unsecured lines of credit, credit card balances, amounts owing on a margin account and more typical car financing payments. (As an aside, when looking at those 0% car financing deals, be sure to ask how paying up front would reduce the purchase price – often, dealers fund the 0% rates by not offering buyers purchasing on credit the same prices they’d offer someone paying cash or borrowing from other sources. If so in your case, this spread represents the hidden interest you’ll be paying on your so-called interest rate loan, none of which is potentially tax deductible.)

When looking at taking out a mortgage, consider whether it makes sense to roll all of those high-interest debts into a lower rate mortgage. Although you’ll still owe the same total amount, you’ll often be paying less over time and will have simplified your debt payments. If some of these other loans are interest-only, you’ll need to keep in mind that rolling them into a mortgage will mean paying back some principal each month and make sure that the cash flow calculations still work. You might also want to look at ensuring that you have a secured line of credit that goes with your new mortgage so you have some wiggle room if you need to borrow additional funds along the way.

What if some of this pre-existing debt is tax deductible, you ask? Many lenders allow you to separate deductible and non-deductible debts into separate mortgage. You may even be able to have different amortization periods for the deductible and non-deductible portions, with a shorter amortization period on the non-deductible debt so that more of your money goes towards debt that doesn’t save you taxes along the way. You can also direct any prepayments you make during the life of your mortgage exclusively towards the non-deductible debt! If you don’t separate out the deductible and non-deductible debt, each payment is applied proportionately against the debt you can and can’t write off. Put another way, if you owe $100,000 and $60,000 of that is deductible, every $10,000 you pay against your debt reduces your deductible debt by $6,000 and your non-deductible debt by $4,000. If you were able to separate out these debts and prioritize paying down the non-deductible debt first, you’ll likely save a lot more over time. In fact, in some cases, you might even consider an all-in-one mortgage where you can pay interest only on the deductible debt until you’ve either obliterated the non-deductible portion or reduced it to a small percentage of the total amount owing.

For those of us with non-registered investment portfolios who are shopping for mortgages, consider whether it makes sense to cash them in and put that towards your mortgage. You will need to take into account any capital gains tax bills that might arise from selling your existing portfolio (although if you’re worried about capital gains inclusion rates increasing anyway, this might be something to consider doing anyway for that reason alone.) Want to stay invested? You can take out a separate mortgage for the amount you want to invest and then put that back into the mortgage. When the dust settles, your mortgage will likely be about the same size as if you left your stocks well enough alone, but now you get to write off the interest on the investment loan mortgage. You may need to work carefully with your real estate lawyer to ensure that you create a clear paper trail showing the investment mortgage money going from the lender to your investment portfolio, preferably without it mixing with any of your other funds. If considering this, I suggest working with a financial professional to weigh the pros and cons and to ensure that you do things right. Finally, if it’s too complicated to take out a separate investment mortgage or if you don’t want to pay any principal on it right now, consider qualifying for a HELOC (“Home Equity Line of Credit”) instead and using this account to buy back your investments. You will likely be paying at a higher rate than if it was part of a mortgage, but you will still have created an interest write-off each year. Borrowing on a margin account instead? Compare the different interest rates and consider using your HELOC to pay down your margin account balance if the HELOC rate is cheaper.

• Are you Better off With Different Mortgages: It’s Okay to Hedge Your Bets. Since it’s possible in many cases to chunk your mortgage into different portions, this can open up a lot of different possibilities. We’ve talked about sequestering deductible and non-deductible debt and having shorter amortization periods for the non-deductible portion. That’s not the only way to successfully split your mortgage into multiple chunks. Not sure if you want fixed or variable? You can instead have a bit of both so you can benefit from lower variable rates but still have some protection if rates increase before your mortgage renews.

Likewise, if you might pay down a bunch more of your mortgage along the way than allowed penalty-free, you might have a separate portion as variable to minimize those penalties if you decide to do that, but taking a fixed rate on the portion of the mortgage that you plan on carrying until renewal. Although it still means a potential penalty, it provides maximum flexibility in case you decide not to pay down any extra part of the mortgage along the way and don’t want the hassle of having to renew your mortgage within the next few years, or committing to higher payments each month that go with a shorter amortization period.

You might also want to have different terms for different portions of your mortgage. example, you might want to protection of a 5 year fixed-term mortgage for most of your mortgage, but are expecting a sizeable chunk of money in the next year or so that you’d like to apply to debt. Having a shorter term for a similar amount of your mortgage, whether fixed or term, means that you can pay down that part of your mortgage in full when the cash comes in without having to worry about any prepayment penalties.

• Can You Build More Flexibility into Your Regular Payments? In addition to picking longer amortization periods for deductible debt and shorter ones for debt you can’t write off, borrowers who want to build more wiggle room into their monthly budget but can currently afford payments based on a shorter amortization period can have the best of both worlds. If that is you, consider having your mortgage based on a longer amortization period than you actually intend but using the prepayment privileges in your mortgage that allow you to increase your regular payments penalty-free asap so you’re actually on track to pay down your mortgage according to your true target. If your cash flow tightens in the future or interest rates on your variable rate mortgage increases, you can reduce the extra payments without penalty or having to renegotiate your mortgage.

Conclusion

When looking at mortgages, think iceburgs – there is a lot more hidden under the surface than you might see at first glance. The goal of this article is to help you see the full picture so you determine how a mortgage best fits into your overall financial picture and some of the ways you can cut off some edges and round some corners to make it fit even better.

Feb 6

Definitions for a Surprisingly Long List of Key Mortgage Terms and Insight into How They Might Impact Your Mortgage Choices

Introduction

Today’s introduction will be short and sweet, as I think the title above and definitions below largely speak for themselves. My goal today is to provide with a glossary or cheat sheet you can use when learning how to speak Mortgage in order to hopefully guiding you towards making the most informed decision possible about the best mortgage for you and yours. My fervent thanks once again to my friend and mortgage guy, Russ Morrison of The Morrison Mortgage Team for his input in creating and shaping this article.

  • “posted rate”: the interest rate lenders advertise to borrowers for mortgages with different features and for different rates of time. Lenders provide posted rates for both fixed-rate and variable mortgages.
  • “discounted rate”: the actual rate your lender charges you on your mortgage because you’re special rather than the rate they quote to the unwashed masses. You’ll likely need to haggle to get this rate, which is one way having a mortgage broker can help.
  • “amortization period”: the amount of time using a set interest rate and a fixed payment schedule before your mortgage is paid off and you can sleep better at night.  In reality, you will likely negotiate a number of different mortgages for smaller chunks of time (“terms”) at different rates and for different amounts before your mortgage is finally a thing of the past. You may need to reduce payments upon renewal or add to your debt to finance renos or junior’s quest to be a plastic surgeon. Conversely, you may be able to make additional payments ahead of schedule in order to get your debt paid down faster. As a result, your amortization schedule is a moving target that adjusts with each payment that calculates how long until you are debt-free if you keep making your regular payments under the terms of your current mortgage if rates never change.
  • “term”: the length of any mortgage agreement, generally expressed in years, with 5 years being the most common. For most younger mortgagees, the term of your mortgage will be significantly shorter than your amortization period. For example, if you have a 30-year amortization period and a 5 year term, you are currently on pace to take out 6 separate 5-year term mortgages before you’re done unless your amortization schedule changes, which it almost certainly will . When your mortgage term expires, you will need to either renew with that lender, shop around for a new lender who offers you a better mortgage or you have enough cash to pay down the remaining balance. Before it expires, there are usually penalties that apply if wish to pay down more of your mortgage than allowed under your mortgage agreement.
  • “payment frequency”: how often you make payments towards your mortgage. Most mortgage amortization periods are calculated based on you making monthly payments. In reality, you have several other options which call for smaller, but more frequent payments that can often shave several years off your mortgage freedom date.  Each of the first 4 options have you paying the same amount each year as would be the case under a monthly payment scheme, but your mortgage balance declines faster the more frequently your regular payment. Under each of the two accelerated payment options, you are effectively paying an extra month’s worth towards your mortgage each year, which further shortens your amortization period. The bottom line is the longer the remaining amortization period in your mortgage, the more you’ll save by making more frequent payments and accepting an accelerated payment schedule. Your payment frequency options include:
  • Semi-monthly (payments twice per month or 24 payments per year). 
    • Bi-weekly (payments every two weeks or 26 payments per year).
    • Weekly (52 payments per year)
    • Accelerated Bi-weekly (26 payments per  year but each payment is equal to what you’d pay under a semi-monthly payment schedule);
    • Accelerated Weekly (52 payments per year)  Each payment is equal to what you’d pay under a bi-weekly payment schedule; 
  • “closed mortgage”: the most common type of mortgage, a closed rate mortgage offers a lower rate than an “open mortgage” but charges you penalties if you want to make extra payments above those allowed in the mortgage agreement or if you want to pay it down before your mortgage term elapses. Most of the options and features below are designed to provide more flexibility within closed mortgages, but there is seldom a free lunch – you generally pay for this flexibility through a higher interest rate. A closed rate mortgage, as well as an open mortgage, can be fixed or variable.
  • “open mortgage”:  a mortgage where you can do what you want, when you want, including paying it down ahead of schedule, renegotiating along the way or getting a new mortgage from a different lender. You pay for this flexibility through a higher interest rate. If you’re looking to potentially, then this might be the mortgage for you.
  • “fixed rate mortgage”: a mortgage where the interest rate used to determine your regular mortgage payments does not change over the term of your existing mortgage, such as 1, 5 or 10 years. Under a fixed rate mortgage, your minimum required payments won’t change during that period, which offers protection to borrowers on tight budgets or worried about future interest rate increases.
  • “variable rate mortgage”: a mortgage where the interest rate charged on the balance of your mortgage is calculated according to a formula based on the lender’s posted prime lending discounted by a set percentage (i.e. prime minus. 75%). In other words, your interest rate isn’t guaranteed and can either increase or decrease during the term of your mortgage.  Although each bank’s prime lending rate often moves in lockstep with the Bank of Canada changes its own prime lending rate, this isn’t always the case or lenders may not always decrease their rates as significantly as the Central Bank.  In any event, when your interest rate changes, your regular payments change as well to keep you on target to pay down your mortgage based on the amortization period you selected. This can mean increased payments when the rates increase or decreased payments when rates go down. During times of lower rates, small increases to rates can mean significant increases to regular payments. For example,  for every $100,000 owing, mortgage your payments will increase or decrease by approximately $12 a month if the prime lending rate increases by .25%.   

One strategy to consider is to structure your regular payments as if your variable interest rate was perhaps .50% to 1% higher than is actually the case. That way, you’re paying your mortgage down ahead of schedule so long as rates don’t change and your regular payments won’t increase until the actual interest exceeds this threshold. Some lenders also offer variable rate mortgages where your payments stay the same even if rates go up, which means no effect to your current cash flow but the amortization period for your mortgage gets pushed back.  Be sure to know whether or not this applies in your case if this is a concern.

  • “hybrid” or “combination mortgage”: a mortgage that is really two smaller mortgages, one portion of which is a fixed term mortgage and the other is variable.  This may be a way of hedging your bets if you have a larger mortgage, really like the idea of a variable rate mortgage, but want to minimize the impact if rates do end up rising more than you expect.
  • “convertible mortgage”: a variable mortgage that allows you to change your mind and switch to a fixed rate mortgage midstream.  Expect this flexibility to be priced into your original fixed interest rate and don’t expect to get your lender’s best interest rate when converting to a fixed-rate mortgage and expect to pay a fee if exercising this option. Your rate will depend on what the lender is offering at that time and it is often the case that you’ll need to actually lock in at a higher fixed rate than the variable rate you’re paying at the time you make decision, particularly if locking in while rates are rising.
  • “interest rate cap”: some lenders issuing variable mortgages may be willing to cap the maximum interest rate they charge even if rates rise far more than expected.  This may be something to explore if you want to go variable but would like to limit the downside. As you might expect, there will likely be a charge for this extra protection.
  • “breaking your mortgage”: paying down your mortgage before the current term of your mortgage expires (“prepaying”) when amount you’re prepaying exceeds the maximum amount you can prepay under the terms of your mortgage. As you might expect, there is a price to pay, which leads us to . . .
  • “Prepayment Penalty”: If you need or want to “break” your mortgage, then the prepayment penalty what this will cost you.  For a variable mortgage, this cost is typically the interest otherwise owing on your remaining mortgage balance over the next three months.  For a fixed rate mortgage, the penalty is whatever is higher: interest otherwise owing over the next three months or, if interest rates are currently lower than your current rate, you will have to pay the “Interest Rate Differential” or “IRD.”
  • “Interest Rate Differential (“IRD”)”: If breaking a fixed-rate mortgage when rates have decreased, your penalty is the IRD over the remaining term of your mortgage after you’ve made all allowable penalty-free prepayments (see “prepayment privileges”). More specifically, the IRD looks at the difference between rate you agreed to pay originally and what someone could get if taking out a mortgage today for a time period equal to the number of years left in your current mortgage and then factors in the remaining balance of your mortgage. For example, if you’re 36 months into a 5-year mortgage with $200,000 left after all allowable prepayments, this means looking at the difference between 2-year mortgage rates and essentially either the rate you’re actually paying on your 5-year mortgage ( the “discounted rate”) at or, in some cases, the “posted rate” at the time of your original mortgage on $200,000, which is the usually higher advertised rate for that lender.

As I explained in my last article, some lenders calculate the IRD in a very punitive way, as yet again, all lenders aren’t created equal. For example, lenders using the posted rate rather than the discount rate will generally charge a much higher penalty. Put another way, if you were actually paying 3.25% on that $200,000 mortgage just discussed and the current two-year rate was 2.25%, you’d think the IRD would be 1% (3.25% – 2.25%). If the posted rate three long years ago was 5.25% rather than the 3.25% you actually agreed upon, some lenders would use a 3% rate (5.25% – 2.25%) for calculating the IRD. As a result, knowing how the different lenders calculate IRD should be a crucial part of your decision of where to borrow if looking at a fixed-rate mortgage and there is a more than hypothetical chance you might break your mortgage along the way. Not all lenders will calculate their IRD in exactly this way,  but the outcome will be very similar in most cases to this example.

  • “Prepayment Privileges”: There are typically two different types of prepayment privileges – the ability to pay down a set percentage of the original mortgage balance each year without incurring a penalty through one or more lump sum payments, and the right to increase your regular payments that year by a set percentage, also penalty-free. Generally, these benefits range from 10% to 20% paydowns of the original mortgage or 10 to 20% increases to your regular payments each year and it is common but not guaranteed that borrowers can maximize both benefits. For example, you may be able to both pay down 20% of your original mortgage and also increase your regular payments by 20% that year without paying any extra fees. Unfortunately, however, if you don’t take advantage of that year’s prepayment privileges, you can’t carry them forward to later years.  Furthermore, once again, different lenders have different rules and rates for their prepayment privileges:
  •  Some lenders use a calendar year (i.e. December 31st) as the deadline for using up that year’s prepayment rights, while others base it on your mortgage anniversary.
  • Some allow as many prepayments as the heart desires above a small minimum, while others may be far more restrictive. Some lenders allow you to make extra payment whenever the mood strikes,  while others may only restrict extra payments to as little as one day per year, such as the mortgage anniversary.
  • Some offer 10% annual prepayments while others might bump that up to 20% per year.

When looking to “break” your mortgage, maxing out on your prepayments just prior to that time reduces the penalty you would otherwise be stuck paying. If timed just right, you might be able to even take advantage of two years of lump sum prepayments rather than just one to further reduce your penalty. I discuss this in more detail in my previous article. Having more flexibility in how much and when you can prepay can save thousands of dollars in some cases.

  • “blending your mortgage”: When you need to borrow more money before your current mortgage has expired  and you want to roll that into your existing mortgage rather than triggering prepayment penalties and taking out an entirely new mortgage (aka “blend and increase”). The old and new rates and conditions will be combined into a single mortgage and payment with a rate that is somewhere between the old and new rates. Because the banks know that you want to avoid prepayment penalties or want to hang onto an older mortgage at a better rate than currently available (which isn’t today), you may not get the best possible rate for the new portion of your mortgage. Accordingly, it still might be worth determining whether or not it makes sense to break the mortgage instead and start from scratch. You might also look at blending and increasing if you are moving and have the option to “port” your mortgage or transfer it to your new home as discussed later.
  • “blend and extend”:  When your new blended mortgage starts a new mortgage term, such as an additional 5 years from that point onward. You may lean towards that option for fixed rate mortgages if rates are currently delightful and / or you worry about future rate increases and want to lock in for a longer period than the remaining term of your original mortgage. The calculation of your new payments and rates will not extend the rate on the remaining term of your original loan past its expiry, so it’s not like you can extend the savings if the original mortgage was at a lower rate. Instead, the rate on your original mortgage and its remaining term be taken into account when determining the overall interest rate you’ll need to pay for the new term of your mortgage.
  • “blend to term”: When your new blended mortgage doesn’t extend the term of your old mortgage. Thus, if you had 2 years left to run on your original mortgage, your new blended mortgage will still expire when those 2 years have come and gone. This may be the way to go if the goal is to remain as flexible as possible going forward, such as expecting rate drops, considering a potential move or wanting to be able to canvass the market again in a couple years, particularly if you’re not convinced that you got a great rate on your new borrowing but don’t want to break your current mortgage and pay a penalty.
  • “portable mortgages”: when you move, this mortgage moves with you. Even if you aren’t planning on moving, it’s a great thing to have as much flexibility as possible to deal with as many of life’s little surprises as possible, assuming that the cost (i.e. the increase to your interest rate) isn’t too steep.  Unfortunately, however the purveyors of small print now include many “ifs, “ands” and “gotchas” so that many so-called portable mortgages are in fact as portable as the tower of London. Some of the potential caveats, requirements and drawbacks include:
  • Requiring that you restart your mortgage term when you port, which isn’t so wonderful if you wanted the flexibility to shop the market when your original mortgage term was due to expire.
  • Either not allowing borrowers to port variable rate mortgages or requiring that you convert them to fixed rate mortgages at that time. If you have a HELOC (home line of credit), you may also not be able to port that along with your traditional mortgage.
  • Only transferring your existing balance with no right to “blend and increase”, which means having to come up with a bigger down on the new place or having to break your mortgage anyway.
  • Going through the entire mortgage application process again from scratch, including proof of income and reviewing your credit scores, which can’t fall below a certain level, and current debt levels. The lender also has to be willing to lend against your new place, which might not happen with certain types of property.
  • Having to come up with bridge financing to cover the down on your new place before being reimbursed from the sale of your old one if your lender won’t offer you this option.
  • Limiting the geographic area to which you may port. For example, some credit unions may not allow out-of-province porting.
  • Specifying that you must close on your new place within deadlines as tight as 30 days after you’ve sold your old home;
  • You will likely still have to pay a fee to port and have your new place appraised.
  • “assumable mortgage”.  A mortgage that allows someone else to take it over midstream “as is” if they purchase your current home. The new borrower would need to qualify. This option can save money if it means not having to break your current mortgage and may be an attractive selling feature to buyers when your current mortgage is less than the current interest rate offered for new mortgages. In some cases, you will remain liable for missed payments if the new borrower defaults, so find out this detail in advance. On the other hand, mortgage guru Russ Morrison has never actually seen anyone assume a mortgage in his 20 years of inhabiting mortgage-land.

Conclusion

Congratulations for making through this list alive and best wishes in selecting the perfect mortgage to suit your situation. Despite taking the time to educate yourself on this subject, I still recommend using an independent mortgage broker to walk beside you during the mortgage process. Getting a mortgage is a huge financial commitment for most of us. Having someone to walk beside us along the way, access the best rates, crunch the numbers on our behalf and play devil’s advocate as necessary can go a long way to making sure the choices you make are the right ones. Even better, they’re free!