What would you say to a young person who has given up on the idea of owning a house in today’s economy?
If you’re in the BC or Ontario market especially, or any other market in Canada where prices have skyrocketed such that homes have increased in value between 2 and 5 times in the last 10-15 years, it can feel daunting to get in.
It can feel like coming up with the down payment is out of reach. The mortgage payments can be daunting to at 30-45% of your take-home pay.
If you can work remotely, and it’s an option for you to live in a different city or province, consider that there are a number of cities in Canada where real estate is still quite affordable.
Alternatively, if you are tied to your location and homeownership is simply unaffordable for you there, consider purchasing a rental property in a different city.
Also consider that you can successfully accumulate wealth without real estate at all. You would just have to be mindful of the amount you spend on rent. By rethinking your financial resources and potential areas of saving, you might find that you have considerable savings to allocate to lifestyle experiences such as travel or hobbies as well as towards growth-oriented investments outside real estate.
Ultimately, the size of the home isn’t what matters. It’s the equity you are building – and you can build equity in assets other than real estate.
With people moving out of cities due to remote work, are houses becoming more affordable for families who want to live closer to the heart of the city?
There has indeed been an increase in demand for housing outside the core of many of the larger cities in Canada. However, it does not seem that this has significantly diminished the demand in the center of the major cities. With real estate prices in general going up drastically, more first-time homebuyers are entering the market—often out of fear of missing out. First-time buyers are getting in on the smaller properties such as condos which are within reach. There is also continued immigration which is driving population growth and first-time buyers in Canada.
How are increases in the cost of living impacting budgets for those presently renting? Outside of equity, is it becoming more cost-effective in the long run to purchase a house?
Like everything else in real estate, it all depends on the location. Typically, I would suggest running an analysis based on someone’s actual current costs of renting compared to the actual cost of a house that would meet their needs and be within their budget. We would have to make a few assumptions to project the numbers longer term, but it would provide a clear sense of which is better in that particular market.
For young people who enjoy the flexibility offered by rentals, what advantages would you like them to know about when it comes to purchasing a home of their own?
Owning a home comes with a lot of responsibility and potential expenses—it isn’t for everyone. In cases where someone is putting less than 20% down and cannot afford to pay off the home quickly, relying solely on the value of the home increasing in order to build equity can be risky. However, certainly, there is the potential for building equity as markets increase. Other benefits to owning include not having to move frequently, not needing to negotiate rents, being able to have pets, and choosing a location with good amenities. Where it’s really advantageous to buy a home is when you’re handy or willing to learn hands-on skills and can handle a lot of the repairs and upgrades yourself. Then you have the ability to force an increase in the value of your property even in the worst-case scenario.
Are there environmental retrofit support or incentives for young people who wish to buy and renovate a home for rental suites?
Most subsidies and incentives I have heard of are targeted at homeowners who live in their homes, but I am not aware of programs that support creating rental suites.
It’s no secret that corporations are buying up single-family homes in Canada. A young person planning on purchasing a house in the future is starting to feel the pressure to get in before it’s too late. Is there any advice you can offer them?
I am not aware that corporations are purchasing single-family homes in Canada. My understanding is that this is more of a US phenomenon.
In any case, the decision to buy a home should be made from a position of strength, i.e., because it’s what you want and based on your financial plan. Try not to let outside factors that you cannot control pressure you into doing something. FOMO (Fear of missing out) is not your friend.
How does one even start to save up for a downpayment?
It all starts with taking control of your expenses. Rather than tracking expenses after the fact, give yourself an allowance. The easiest way to do this is to use a prepaid credit card such as KOHO. Resist the urge to swipe the credit card just to get points. While credit cards offer great benefits, these programs add a lot of complexity that, for most people, ensures that they don’t get as far ahead financially. In my opinion, the opportunity cost of not having control is greater than the benefit of the rewards.
If you have a system or limit for spending, you automatically also have a target for savings (income that you don’t spend). If you need help establishing this system or being held accountable, contact us at Grow Your Wealth Financial Planning.
If you own a home, you must pay for the repairs out of your pocket. Surprise costs can be a real deterrent for young people looking to buy a home. What sort of tips can you offer to those anxious about making regular home repairs?
If you’ve done a good home inspection at the time of purchase, you will have a timeline of potential repairs. This will help you plan and save.
It is also important to get educated on the basics of home construction. Understanding the basics means you have a sense of what could go wrong and how much repairs generally cost. You will also feel confident that home infrastructure can be fixed, so you’re not in as much of a panic. It’s also helpful to build a network of trusted contractors so that you’ve got someone to call when something goes wrong.
What other financial costs should you plan ahead before buying a home?
You should always have a generous emergency fund to ensure that you don’t need to go into a line of credit or credit card debt. If you haven’t figured out how to consistently have a cash balance in your bank account that is sufficient to cover at least three months’ worth of your expenses, you should get help from a Financial Coach or Certified Financial Planner to achieve this first. It will allow you to go into homeownership much more comfortably. Grow Your Wealth Financial Planning has helped hundreds of millennials obtain homeownership—just reach out, we’re happy to chat!
Who should I talk to if I want to make a clear plan to share with my family before asking for their financial support in purchasing a property?
You should talk to a fee-for-service Certified Financial Planner. They can help you analyze your cash flow and tangibly compare the impact on your finances of renting vs owning. They can also show you what impact either choice has on your long-term wealth accumulation, which might leave you better off in retirement. If you’re approaching your family for support towards a down payment, a Certified Financial Planner can show you what the impact of that additional down payment amount will be.
Importantly, they can help you clarify and articulate not only your home purchase goals but also the rest of your goals such as education, raising a family, travelling, purchasing investment property, starting a business and more. If you have an extra $500/mo you need to allocate to a mortgage payment, that’s going to take away from some of these other goals, so you want to be clear on your order of priority.
Impress your family by showing them you’ve thought of your finances holistically – not just about homeownership.
What should I consider if/when asking my parents for help with a down payment?
Given that home values have increased so much, many parents are helping their children by providing all or a substantial portion of the funds required for a down payment.
If you are considering either asking your parents for cash or accepting an offer they’ve made, think about what impact this financial decision will have on their financial situation in both the short and long term. If they are dipping into their home equity or retirement funds to provide you with this down payment, consider that debt and running out of money in retirement are two of the greatest stress factors for retirees.
As well, be very clear as to whether you are asking for a gift or a loan. Many parents expect the funds to be paid back but feel bad asking for it. If you establish that this will be a loan, make sure you discuss how you will pay them back and then stick to that schedule. I would suggest you make monthly payments the same as you would with a mortgage. If you can’t afford to pay them or can’t realistically see when it would become possible, be honest and upfront.
What are the pros and cons of having a parent co-sign on your mortgage?
Many millennials may ask a parent to co-sign a mortgage. This means that the parent (or other co-signer) signs the loan agreement with the bank (in addition to the millennial child).
The benefit to the purchaser/child of doing this is that they might qualify for a home loan that they would not have been able to acquire on their own. This is because the bank uses the ability of the co-signer to make payments on the loan, which may be higher than your own.
The greatest disadvantage of having a co-signer is that both you and your parents are FULLY on the hook for the payments – it is not 50/50 or some other split. If you default, the bank can go after your parents and their assets to recover the loan balance. This can be a significant risk to your co-signer/parents’ finances, even though they may be more than willing to sign off. Consider whether you want to put them in this situation. If you do get them to sign, have a plan to remove them from the loan as early as possible. For example, go with a 2-year mortgage term instead of a 5-year term and position your finances so that you can take over completely at the end of the first term, thereby removing your co-signer from further liability.
Will someone who has student loan debt be able to get a mortgage?
Having other loans doesn’t prevent you from being able to get a mortgage – it just reduces how much you can borrow because lenders want to make sure that your income can cover all your payments.
With 1 in 3 young people expected to be paying mortgages past the age of 60, what sort of advice can you offer for paying off a mortgage faster?
My advice on mortgages is first and foremost to put the highest possible down payment and to set up a 25- or 30-year amortization to keep your payments low. Next, put a plan in place to pay off the mortgage faster using lump-sum payments or additional regular payments – but let this faster pay down be your choice instead of forced contractual payment. That way, in a worst-case scenario, you can go back to the minimum payments.
In addition, set up a Home Equity Line of Credit on your home once you have more than 20-35% equity. This strategy allows you to be able to borrow back any funds in case of an emergency. Even better is if you don’t need that money for an emergency, you can consider borrowing to invest it. A HELOC will have a higher interest rate, but you can pay interest only, and you expense this interest when you use the cash to invest. While this requires a well-thought-out strategy, it can be an effective way to grow your overall net worth more quickly.