I’m 25 years old, engaged, and starting to consider the next stage of life seriously. To me, that means saving for retirement, having a better routine, and considering homeownership. The first two seem like straightforward goals, but the idea of owning a home is so abstract, I don’t know how to assess my standing.
I live in Toronto, so there’s a constant buzz about how unattainable home ownership is for young people. But to be honest, I don’t know what that means or where I stand amongst my peers. I saw an ad in the paper the other day for a condo priced between $400-500K. After doing the math, I found that I could easily afford the maintenance fees plus property tax if my partner were to cover the monthly mortgage (also easily done).
My question is, once we have the down payment saved, should we look for a potential place right away? Should we be trying to stop paying rent as soon as possible? Or should we take it easy, save for some beautiful furniture, and buy when we have more than enough to invest?
– Elle Décor Wannabe
Dear Elle Decor Wannabe,
I was recently in a coffee shop in Rosedale admiring at the wallpaper – vintage newspaper ads proclaiming Toronto homes for $7,000. With the average price of a Toronto home now over $700,000 it seems like a great investment … but there’s more to home ownership than capital gains and contrived patina.
Here’s what you need to know to assess your standing as a potential homeowner.
The first thing to get clear on is your motivation: is homeownership important to you? Does it fit with your current lifestyle and goals? If your motivation is financial – i.e., as an investment – it might not be the best move for you. While the potential benefit of leveraged investing is undeniable, there are other ways to grow your net worth that require less effort.
Not to mention less commitment! When you purchase a home, you want to be prepared to stay for at least three to five years. With the transaction costs involved and buying and selling you could re-decorate your rental a few times in that same time span.
When people talk about home ownership being unattainable, there are a few factors to consider.
First, the down payment. Coming up with tens of thousands of dollars is no easy feat for most millennials. If you’re balancing saving for a down payment with saving for a wedding, paying down student debt, and managing the cost of living in the city – well, those can easily add up to more priorities than your paycheque can fund.
Next, the closing costs – land transfer tax, legal and inspection fees – which can run between 2-5% of the purchase price. These are the transaction costs I mentioned earlier. You’ll need to have this cash saved up in addition to your down payment.
Then, the ongoing costs – the mortgage, property tax and maintenance. You mentioned you could easily cover these payments, but “easily” is relative. How do you know if it’s actually affordable? Your total housing costs (mortgage and ongoing costs) should max out at about 35% of your after-tax income. If it’s more than that, then you might run the risk of feeling “house poor” – not very chic if you ask me.
And don’t forget the safety net! You should have an emergency fund saved up (3-6 months of living expenses) and the appropriate income and life insurance to cover the cost of your mortgage in case something happens.
Fools rush in
If you definitely “wannabe” a homeowner and are sure it’s attainable, there’s no harm is starting your search early. In fact, having a buffer of time allows you to build up your knowledge and enjoy the process.
I’d start with getting pre-approved for a mortgage. That way you have a clear financial limit based on what the bank is willing to lend you. But keep in mind the bank might be willing to lend more than is reasonably affordable to you. Make sure to check the 35% housing spend threshold to ensure you don’t bite off more than you can chew.
As for saving for furniture, that’s a personal choice. It’s certainly a lot of fun to have a budget to decorate when you move in, and it sounds like that might be important to you. But keep in mind furniture is a depreciating asset, meaning it’s worth less over time. It’s never wise to pour too much of your budget into these items. Your spending on wants – decor included – should be about 30% of your after-tax income.
In the meantime
When you add up all the expenses of owning a home – the closing costs, property tax, mortgage interest, cost of maintenance, life insurance – and the related savings you’ll need, you might be surprised at the total bill. Factoring all these costs into the equation, some people argue that you’re better off financially if you choose to rent and invest your money in the stock market. So, if your rent is affordable (remember that 35% benchmark) and you’re saving for your long-term goals (the key to success in this equation), then there’s no reason to rush.
It would be worthwhile for you to compare the total cost of ownership – the mortgage and operating costs – with your total cost of renting. Quite often, the cash outflow from buying is higher than renting. And yes, while a component of that is forced savings (read: paying down your mortgage), you’re still left with more fixed costs and less cash to cover your other needs and wants. Try the ownership budget on for size by saving the extra costs of owning while you’re renting. See how it fits – is the budget too snug, or is there room to breathe?
Home is where the heart (shaped pillow) is
When it comes to the rent vs buy decision, it’s never a straightforward answer. The numbers might skew in favour of renting, but that assumes you have the discipline to save. Ultimately your decision should be grounded in your values. If being the owner of a Pinterest-worthy home fluffs your accent pillows, then you should absolutely get in the market … as long as it’s affordable, and affords you the (designer) lifestyle you want to live.
The views and opinions expressed in this column are those of the contributor and do not necessarily reflect those of Equitable Bank. Any information provided is for information purposes only and Equitable Bank makes no representations as to the validity, accuracy, completeness or suitability of any content. You should seek the advice of a qualified professional or undertake your own research before making financial decisions.