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Would you pass the test when it comes to these 5 financial literacy questions?

The latest financial literacy report card is in and the results are… interesting.

‘Interesting’ because according to a national online poll conducted by Ipsos, 76% of Canadians ‘believe’ they are financially literate. Yet 57% (that’s nearly 6 out of 10 Canadians surveyed) failed the test on basic financial literacy.

The survey also discovered there is a generational gap when it comes to passing basic financial literacy questions:

  • 52% of Baby Boomers (born between 1946 and 1964) passed
  • 45% of Gen Xers (born between 1965 and 1981) passed
  • 31% of Millennials (born between 1982 and 2000) passed

Where do education members stand on the subject of financial literacy?

Interestingly enough, according to the over 2,400 Ontario education members that have taken part in the Educators Financial Kickstart Challenge (to date)—only 44% believe they are financially literate.

With the national ratio of household debt to disposable income remaining at record-breaking levels (Canadians currently hold a whopping $1.70 in debt for every dollar of income as of May 2018)—there is definitely room for significant improvement when it comes to financial literacy.

So in the spirit of financial literacy, here are the top 5 financial literacy questions that are stumping Canadians—along with the answers (in order to give you the edge on getting a passing grade):

#1:  A ‘mortgage term’ refers to the length of time it will take to pay off your mortgage (true or false)

This is false (70% of Canadians surveyed answered this question incorrectly).

A mortgage term is the actually the length of time you commit to a particular lender at the agreed mortgage rate (and its associated terms and conditions).

So what proper ‘term’ speaks to the length of time it will take you to pay off your mortgage?

That would be the ‘amortization period’.

A few tips to consider when it’s time to renew your mortgage term:

  • Research rates: A bank’s posted mortgage rates are typically not their lowest—so before you renew (or sign that first-time mortgage application), shop around and compare rates because knowing your options could be your best bargaining chip when it comes to negotiating your (next) mortgage term
  • Consider a broker vs. a bank: A Bank of Canada study found that using a mortgage broker could actually result in getting a lower mortgage rate than the big banks—since brokers have access to multiple lenders (therefore having access to even more competitive quotes)
  • Look into pre-payment privileges: The more interest rates rise, the bigger portion of your monthly mortgage payments will go toward interest (versus the principal)—so ask your lender what kind of pre-payment privileges your mortgage allows, should you decide to make lump-sum contributions a few times a year or increase your monthly payments (to pay your mortgage down faster)
  • Ask if there are any penalties for breaking your mortgage term: In Canada, if you have a variable-rate mortgage with one of the big banks, you would typically have to pay 3 months of interest in order to break your mortgage term—whereas a fixed-rate mortgage term would require you to pay the greater of either 3 months of interest or something called the interest rate differential (which is based on current mortgage rates and your remaining mortgage balance) should you happen to ‘break your mortgage’ before the term is up

#2:  You must pay for government insurance on a mortgage where a down payment of less than 20% is made (true or false)

This is true (67% of Canadians surveyed answered this question incorrectly).

Mortgages with a down payment of less than 20% of the purchase price are referred to as ‘high-ratio mortgages’.

The less of a down payment you make under that 20% threshold, the higher the insurance premium you would have to pay.

Boost your financial literacy even further when it comes to making mortgage down payments.

#3:  You never have to report interest and profits gained in your Tax-Free Savings Account (TFSA) when filing your taxes (true of false)

This is false. Surprised? (So were the 65% of Canadians surveyed that answered incorrectly).

While it’s true that interest or capital gains earned on investments in a TFSA are typically not taxable in most situations (either when held in an account or when withdrawn)—there are instances when taxes may have to be paid in respect to your TFSA.

These instances include:

  • Over-contributions: If you’ve accidentally exceeded your maximum TFSA contribution room for the year, you may be subject to a TFSA tax on excess contributions—and yes, it does happen (with reportedly 20,000 Canadians having over-contributed to their TFSAs during the last tax year according to the Canada Revenue Agency)
  • Non-qualified investments: A one-time tax is payable by a TFSA holder when a non-qualified investment is acquired or previously acquired qualified investment becomes non-qualified (hence the importance of always consulting with a certified financial planner for professional investment advice)

For specifics on all instances when tax is payable on TFSAs, be sure to visit the CRA’s website.

#4:  Applying for a credit card can negatively affect your credit score (true of false)

This is true (54% of Canadians surveyed answered incorrectly).

How can the process of simply applying for a credit card negatively affect your credit score?

This is due to the fact that each time you apply for a credit card, the company issuing the card will check your credit rating to determine whether or not to approve you. Too many applications for credit cards (or other forms of credit) will raise red flags with the credit bureaus and you may be perceived to be a credit risk—which then may cause the credit bureaus to lower your credit score (lowering your borrowing potential in the process).

Learn more about the steps it takes to build and maintain your credit history.

#5:  Checking your own credit score has no impact on the score itself (true or false)

This is true (52% of Canadians surveyed answered incorrectly).

Checking your own credit score is known as a ‘soft inquiry’ and does not affect your credit score (negatively or otherwise).

When it comes to your credit score, did you know?

  • Everyone has several credit scores that lenders can pull when considering a loan application
  • While the actual numbers on these scores may vary, lenders will consider you to be in the same ‘risk range’ no matter which credit score model is being used
  • It’s much easier to lose points than to gain points when it comes to your credit score
  • According to the Fair Isaac Company (FICO), just a single 30-day late payment could knock a credit score of 780 down by 90 to 110 points
When it comes to boosting your financial literacy, tap into Educators Financial Group and The Learning Centre for a wealth of information and resources—geared exclusively to you.

From pay grids to pension plans, serving education members since 1975 has given us a unique understanding of your finances. That means we will always strive to go beyond the simply ‘generic’ in order to provide you with the kind of financial information and advice that is ‘educator-specific’ in nature.

If you have a specific financial question or goal, we’re here to help.

 

Financial literacy survey results above are pulled from an online Ipsos poll of Canadians conducted in May of 2017.

Brokerage license 12185. The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.

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