Gails Blog

I’m not sure when renting got such a bad name, but if I were to hazard a guess I’d say when real estate started zooming through the stratosphere and a “home” became an “investment.” Then renting  became “throwing away your money.” Never mind the fact that you were putting a roof over your family’s head. Only slugs rented. Anyone who wanted to be wealthy knew enough to get into a home. As you can see for the sub-prime fiasco in the U.S., that attitude left a lot of people homeless when they found they couldn’t CARRY their homes AND EAT.

When I was in my 20s, I lived in a neighbourhood that was suited to a single girl hell bent on a good time. Back then, renting was the perfect solution: one of limited responsibilities and commitment. If a window broke, I called the landlord. If the fridge stopped working, I called the landlord. Renting is virtually a worry-free existence. (All this is assuming you have a decent landlord). 

Home ownership can be a pain in the rump. There’s always something that needs fixing. But home ownership also brings a ton of warm and fuzzy feelings. You have complete control of your environment so, yes, you can paint your living room red. And if you enjoy puttering about, you’ve just secured yourself years of weekend entertainment. Course, when it comes to the rent versus buy question, you can’t just focus on the feel-goods. You’ve also got to get in touch with at the financial facts of life. 

People often believe that a home is a good investment. And virtually every rent-versus-own question is a lead into why you HAVE TO buy your own home. It’s funny how none of those arguments present the positives of renting. Maybe it’s because they’re all in the business of financing home purchases.

First there’s the calculation that compares the cost of carrying your own home (your principal and interest payments and property taxes) with the cost of renting. Sometimes that comes out a wash, which immediately brings people to the conclusion that renting sucks. Hang on now, there are some other factors that weigh heavily in the decision making.

Renters aren’t responsible for maintenance. Home-owners are, and generally the older the home, the higher the maintenance. A good rule of thumb is to estimate home maintenance costs to be 3-5% of the home’s value per year.  So if you’re home is worth $300,000, you should have room in your budget for about $800 a month for maintenance. Sure, this won’t happen every month. Sometimes you’ll go a year or two with little to do. But eventually there will be windows to be replaced, driveways to be repaved, a roof to be reshingled, a furnace, a water heater, a fridge, a stove… I could go on FOR EVER!

Renters also don’t have to shell out the whack of cash homeowners must. There are  “closing costs”:  legal fees, land transfer tax, and other miscellaneous expenses that you don’t pay if you are renting. Assume another 5% of the purchase price on the home will go toward these additional costs.

And first-and-last-months’-rent is a lot smaller than the typical downpayment on a home. Of course, all that MONEY YOU’RE SAVING AS A RENTER has to be balanced off against the fact that no matter how small the principal portion of your mortgage is (and it’s miniscule in the early years), as long as the market is stable or rising, home owners are building equity and increasing their net worth with every mortgage payment.  And that money is earned tax-free. Thanks to the principal residence exemption, the capital gains on the sale of a home is zip, zero, zilch.   The way to offset this downside is to use the money you would have put into things like maintenance and downpayment to building an investment portfolio.

Do you suffer from wonderlust? Are you upwardly mobile and constantly on the move in your career? Stick with renting. People who relocate for work are often better off as renters because they don’t have to worry about the horrendous home acquisition and disposal costs (real estate sales commissions alone are between 4-6%). Unless you get lucky and the value of the home you purchased goes up by at least 10%, you’ll be losing money.  Keep in mind, too, that In the first five years of ownership, most of your mortgage payments are applied to interest, with minimal paid to the principal. So you won’t get this money back when you sell, and you’ll have all the hassles and costs of putting your house on the market.

Buying a home in a neighborhood you don’t know well is one of the top mistakes home-buyers make. If you’re new in town, you may be better off renting a house for six months or a year to get a feel for it. If you like living there and you like your neighbors, you’ll feel much more comfortable signing on the dotted line later on.

Your employment prospects should be pretty stable before you consider buying your own home. Home ownership requires a number of regular payments - the mortgage, property taxes, utilities, maintenance, and insurance. Missing any of these payments can trigger dire consequences. And unless you have a steady work history, lenders will be loath to ante up with a mortgage. 

It’s clear that while there are a number of financial factors that will weigh in when it comes to the rent versus buy question, the decision involves much more than just running the numbers. You’ve also got to look at the emotional rewards and challenges of each alternative.

As a good friend of mine put it, “You can either own capital or you can own property.” If you’re making regular investments and have a well-developed portfolio, you may be content to rent while you’re focused on you’re putting your money through its paces in the market. But if you’d rather put your money to work where you live, then home-ownership’s rewards go far beyond the bottom line.

I’ve been a renter and I’ve been an owner and overall I like home-ownership. Course, like the weather and my underwear, that could change. Who knows what the future holds. 

Okay, I’ve done it. A Woman of Independent Means has been updated, edited, uploaded…

and now it’s ready to be purchased. You asked for it, so BUY IT!

Home ownership is The Big Dream for many people. According to the Stats Man, income is the determining factor in terms of whether or not a body will own a home. No surprise, really. After all, home ownership is a big financial commitment and without enough income there’s no way to swing the dream into reality. How much income is dependent on where a person wants to buy a home.

According to the Stats Man, families with a household income between $50,000 and $80,000 are getting into homes of their own, mostly in rural areas or small towns where 71% of people between the ages of 25 and 39 owned their own digs. Again, no big surprise, since the cost of buying a home in a major city has gone through the stratosphere. In Toronto, about 53% of people in this same age group owned; in Montreal the number was 48%, and in Vancouver 54%.

Ultimately, the amount you earn will dictate how much home you can afford to buy. The other factor that will influence how much home you can afford is the amount of the downpayment you’ve managed to accumulate. For people who want to use the RRSP Home Buyer’s Plan, read this so you know what’s what.

Zero down has become all the rage, but it isn’t a smart financial decision since the more money you put down the house the less money you will have to finance. And since less than 20% down means mortgage insurance, your no-downpayment strategy can be really expensive.

The interest rate you get on your mortgage can make a huge difference in terms of how much your home ends up costing you. The lower your interest rate, the lower your payment and, ultimately, the lower the overall cost of your home. How interest rates affect your costs isn’t just affected by market conditions and the current economic climate; it’s also affected by the type of mortgage you choose, your payment frequency, and by your credit score.

The next thing you’ll have to decide is what you will buy and where it will be. Will you live in the city, in suburbia, in the bush? Will it be a condo, a townhouse, a semi-detached or a mansion? There are almost as many options as there are people to buy them, and what floats one guy’s boat will sink another’s.

It makes sense, before you enter into what will likely be the most expensive purchase of your life, that you get some help. There are lots of people waiting to take your money in exchange for your sage advice. Who will you choose to help you?

Have you got your closing and incidental costs covered? Some experts say to estimate 1.5% of the value of your home for closing costs. Others say more. You need to know what to expect so you can make a budget that’s realistic.

The prospect of home ownership is very exciting. But it can also make your tummy flip and your head swoon. Being prepared is the best way to sleep at night while you wait for moving day.

Okay, I’ve done it. A Woman of Independent Means has been updated, edited, uploaded…

and now it’s ready to be purchased. You asked for it, so BUY IT!

 

When I started this website a half-year ago, I promised I’d answer one of your questions every week. I’ve been inundated with questions, and have been responding to two a week. But there are times when I’ve got so many great questions that need to be answered, that I just take a couple of hours and fire-through them. Here’s what I have for you today.

rinkrat_hockeymom wrote:

One of my employers is not taking enough tax from my paycheck. I have been having an extra $50 a pay taken out to cover this since the beginning of the year. I was telling a friend about this, and he suggested it would be more beneficial to take that $50 and put it into an RRSP and I would get thed same result, plus be able to save my own money instead of lending it to the government for a year. Is he correct?

Not quite. While every dollar you put in your RRSP is not taxable, you’d have to put the entire income you’re earning from your second employer into an RRSP to achieve the result your friend is suggesting. I’m all for that… but I don’t think that’s what you’re trying to achieve. So you’re doing the right thing.

If you want to calculate your tax exactly, you can go to Taxtips for a really thorough calculator. If that one makes your head spin, here’s a simpler one that will give you a basic of idea of how much tax you should pay.

 

L from B.C. wrote:

I have just come into to some money — $35,000.00 — and I am wondering what I should do with this money. I currently don’t own my place (renting) and just finished paying off my line of credit ($25,000.00) at the bank as well as my credit card ($25,000.00). I have been working as a cashier for six months at $10.00 an hour. I am looking for a better paying job right now. Can you give me any advice for this $35,000.00. Should I invest this money or maybe put the money into an ING Direct account at 4.5%? I don’t think I am eligible for a mortgage just yet…?

I get a lot of notes like this with people asking for advice on what they should do with a lump of money that’s just fallen into their laps. I like to tell people to:

1. Take care of past mistakes,

2. Have some fun in the present, and

3. Plan for the future.

So, L, on the Take Care of Past Mistakes front, congrats on getting all that debt paid off! Wow! You’re one determined young woman. You’re in a much better place now and you should be very proud of your accomplishment.

On the Plan for the Future front, you’re right when you say you aren’t ready for a mortgage yet, particularly in your neck of the woods.  But you are ready to set up an emergency fund, start an RRSP, even with just a couple of thousand bucks, and begin building your downpayment. As for where to invest the money for your downpayment to grow, you’ll need a financial guide for that. Ask friends/family for a referral to their GREAT financial advisor. Don’t settle for anything less than GREAT!

Using a high-interest account is smart. Making sure you know what you want to accomplish with the money is smart too. So ask yourself what’s important to you and by when you’d like to achieve that goal. Plan from there.

As for my number 2 point: have some fun in the present, don’t go nuts, but take some of your money and treat yourself and someone you love to a Nicey: Dinner out, a fun weekend of movies, a new piece of furniture you’ve been wanting, or a lovely new dress. Or you could decide to set up a Mad Money Account, putting $500 or $600 aside that you can spend on anything you want whenever you want, just for the hell of it.  Have a ball.

 

On a similar theme, K wrote:

I have an inheritance if 60,000 and wondered if I should double up on my mortgage payments each week (that is the maximum allowed) or wait put the money in a high interest account until the mortgage is up for renewal this December 2008 to bay off a chunk of the 120,000 principle?

The faster you put the money to work against the mortgage, the more you’ll save in interest. And any interest you earn is taxable, but the interest you save is not. So double-up and then use whatever is left to make the principal pre-payment at the end.

 

Carman wrote:

What is your opinion for a person to use RRSP savings to pay down debt? We have enough RRSP savings to pay off our debt (excluding Mortgage). Thanks for all you teach on your show, I think everyone could learn something.

I’ve answered this one before, but I’m going to answer it one last time since I get this question every week. Really.

The answer is: DON’T DO IT! I know there are some people who say this is a good idea, but it’s a terrible idea. A really terrible idea. First, there’s the tax you’ll end up paying on the withdrawal from the RRSP, and then there’s the tax you’ll owe because the amount withheld won’t have been enough.

If you’re determined to get rid of your debt, then you’re going to have to bite the bullet, tighten your belt and put your shoulder to the grindstone. If that’s not enough metaphors for you, I have plenty more!

 

T wrote:

hi gail i watch your show all the time and i was just wondering i am 17 and still going to school and planning to go to university soon i am extremely good with money and saving and i have about 7000.00 in my bank account right now. would u recommand when i turn 18 to get a credit card and always pay it off in order to get my credit rating started. i would never spend more than what i have or even come close to spending all i got so i dont think it wud be a problem but just asking for ur advice.

T, if you swear on your Mom’s head that you’ll never spend more money than you have, then I say getting a credit card to build a credit history is a good idea. I’ve seen a lot of kids (and elders) start out with the best intentions and then fall into the carrying-a-balance trap. But if you promise not to be one of the dopes, then I’d say go for the card, Bud, and build yourself a fabulous financial history.

 

Sarah wrote:

My husband and I love your show - yes I said both of us - you’ve got us talking about our finances - YAY! Our question is in regards to student loan debt. I’m in the process of finishing my PhD and my husband and I each have 3 degrees. Our combined students debt is $62,000 (not bad considering) and we have a new mortgage of $120,000. So many of our friends have just followed the plan offered by the bank/government - but 12 years to pay it off??  We gross $76K a year but we’re going to be starting a family soon and our plan right now was to add $200/month as a prepayment to our mortgage. What do you suggest - balance pre-payments and extra student loan payments? Should we make one a priority over the other (student loan interest is prime +1, mortgage 6.3 locked for 10 years)?  We would really appreciate your advice - the bank always says “follow the plan, then you have more disposable income” - yes and they make more money in interest! love your show and your kick-butt attitude.

Ah, yes, there are those Pesky Bankers again, telling you to keep more disposable income so they can rake in more interest. Hmmm. Is it any wonder Canadian’s don’t trust their advisors?

Sarah, leave your mortgage payments as they are, and use all your extra money to pay off your student loans, which is your more expensive debt. Once that is paid off, you can balance mortgage prepayment with long-term saving. As for starting a fam soon, have a great time with that. And while you’re preggers, live on the one income you’ll have during your mat leave so that you

a) get used to having a smaller income, and

b) have a nice pool of savings set aside for when baby gets here.

 

Kerry wrote:

I am a 21 year old full time worker. I graduated with a 2-year diploma in Bus Adm (major accounting) and have taking Intro to Financial Planning as well. After graduating from college with WAY MORE DEBT than I ever imagined from 2 years of school, I have got myself back on track by my own means and would like to offer a credit/debt counseling service outside of my full time job (which I love). I want to educate people before they make the same mistakes I did, and/or repair the mistakes already made. Only problem I have found in my plan is, how do you charge a fee when your clients are already living paycheque to paycheque? PS your show and outstanding way of making the obvious PAINFULLY obvious has changed my life and influenced my (hopefully!) future career path immensely!

Hey, Kerry, that’s a darned good question. Some people who work in debt management affiliate themselves with a company that will allow them to do debt-counseling. Credit counselors, for example, are often not-for-profit organizations that help clients consolidate their debt and set-up repayment plans. And I do know of at least one private company that builds their fee into the “consolidation” loan. You might want to look at that as an option.

So, all you debtors out there, what would you be willing to pay to have someone dig you out of a hole, and how would you come up with the moolah?

 

Mercedes wrote:

I am a 24 year old university student living on my own and paying all of my bills yet have still managed to save about 15000.00 in the past 2 years. I have no debts and am wondering what to do with this money to make it grow for the future. I feel as though it’s just sitting there. How much should I set aside for a rainy day/emergency fund? Thanks!

Okay, all you student debtors who tell me you can’t possibly save any money while going to school, heads up to this.

Mercedes, you are a shining light. Congrats!

As to what to do with the money, set side at least $5,000 in a high interest account for emergencies. Ultimately, you want to have 3-6 months’ worth of living expenses covered. As for the rest, it’s time to learn to invest. Read about investing. Choose a couple you think might work for you and watch them for a while to develop a comfort level. When you think you’re ready, take the plunge. Don’t be too aggressive too quickly. And never invest in anything you can pronounce or don’t understand.

 

Carrie wrote:

I am currently on mat leave with 2nd baby. We figured out if I return to work I will be contributing 2/3 of my take home pay to working expenses and only contributing 1/3 of my take home pay to the household. Does this make it worthwhile for me to return to work? Or is the smart thing to try to find a part time job to make up the money we are short? Or, with only about 6 years left on our mortgage, should we reduce our mortgage payments in order to live, until I can return full time in about 5 years?

You seem like a clear-thinking girl. You’ve certainly outlined your options well. Here are my answers

Does this make it worthwhile for me to return to work? Yes, if you need the 1/3 to make ends meet.

Or is the smart thing to try to find a part time job to make up the money we are short? Really? This is a question? Work less to make the same? Where’s the question?

Or, with only about 6 years left on our mortgage, should we reduce our mortgage payments in order to live, until I can return full time in about 5 years? This, too, is an option, if you’re prepared for the extra interest cost over the life of the mortgage. You don’t say how old you are, but how old could you be with a second baby just here? So you have lots of time to get this mortgage paid off.

Now, the question is, what do YOU think you should do?

 

S wrote:

I work part time as a nurse, so I actually bring home more money per hour with my liue of benefits. Is it better for me to work full time and “bring home” less money, but have job security, sick time and vacation? I am 41 married with two school age children. Thanks and I love your show-your sense of humour really makes it!

It’s hard to answer this question when I don’t know how much less you’d be bringing home, or how that would impact your cash flow. Assuming you don’t NEED the extra for essentials, then the security of full-time with benefits would be a huge blessing, particularly with young kids. However, if the extra money you’re bringing in is essential to your budget, then maybe not. What do you think?

 

Erin wrote

On your show, you give your clients an “office in a box” with all kinds of file folders and coloured tabs. I tried making my own and it doesn’t look as nearly detailed or full as yours. What categories do you have in your box?

Go read 12 Steps to Getting Financially Organized and the blog Paper Chase.

 

For Lynn who wrote:

How long should you keep your paperwork, such as bill statements, payments and income tax forms

Ditto

 

A wrote:

If I have a defined benefit pension plan with my employer, do I really need to contribute to an RRSP? Also, how do I figure out my “tax bracket” as I am planning to withdraw $10,000 from my RRSP to pay down debt - if the withholding tax is 30% then how do I estimate the additional tax I will pay next April - my gross income is about $60,000…

A, you likely don’t need an RRSP if you have a defined benefit plan. I’d be very surprised if you have much contribution room at all. If you do, then I would use it up, but not break your neck to do so. As for writhdrawing money from your RRSP to pay off debt: DON’T DO IT!

 

Tammy wrote:

I have 2 children: a son who is 20 and has finished 3 years of university and a daughter 19 who has finished 1 year of college. We have paid for the tuition and book for the 3 years for my son and paid the 1st year of college for my daughter and have enough to pay for her 2nd year, her course is 2 years long. I do not want my kids to finish school and owe money but my husband and I find that most of our money goes to the kids and there is none left over for us. We have been putting a lot of things for them on our line of credit and it just keeps going up, I know I need to stop but I don’t want to see them acquire any debt but I just feel that my husband and I are sinking further and further into debt and we have been arguing over the money spend on the kids. If you any suggestions on how we can work this out I would really appreciate it.

It’s nice that you don’t want your kids to graduate with debt, but you’re accumulating debt and that’s no good either. I hope your kids are contributing to their own education. If they are not, that’s the first place to start. There is no such thing as a free ride in life, and 19 and 20 are plenty old enough to start dealing with life’s realities. Help your kids. That’ great. Don’t do yourself damage in the process. That’s dumb!

 

Victoria wrote:

Hello. Congratulations with the show. I have been watching it daily for some time now. I have put my husband on a $200 a month budget. This money includes his gas and extra spending. We have been using the jars for three weeks now. So far so good. I am currently on maternity leave and working one day a week that I am allowed. I am making $430 every two weeks. I am trying to save this for our vacation at Christmas. Do you think it would be better to put this money onto the line of credit and then take it back out when we need it? Also, we just did a balance transfer on our one credit card. We have an interest rate of 1.9% until November. Should we penny pinch and put every last cent on it so it is paid off by then? Thanks so much and keep up the great work.

First the credit card question: Absolutely pinch every penny so the card is paid off before your great rate expires in November.

Now the line of credit question: Yes you should put it to the line first, and then take it back off when you need to, to minimize your interest costs. But I don’t think a fam on mat leave with a balance outstanding on their line of credit should be prioritizing a holiday over debt repayment. Once you return to work full time, I can see saving the money for a holiday. But while you’re living on a reduced income, and have debt, your focus should be on getting out of the red.

Are you sorry you asked?

 

M wrote:

My husband says that it’s not smart to start a RRSP because I owe $50,000 in student loans, which I am paying the minimum right now. I work part time as a RN and I have 2 kids. I’m 38 years old and I feel that I have to get started. What should I do?

You should get started, you’re right. But your husband is right too. Since you’re only working part time, your marginal tax rate isn’t high, and paying only the minimum on a $50K student loan is stupid. You’ll pay way too much in interest. So:

1. Up your student loan repayment amount to an amount that’ll have you debt free in five years or less, and

2. Start contributing $200 a month to an RRSP.

If you don’t have enough to do both, you’re going to have to find a way to make more money.

 

S wrote:

I would like to know if there is a way to save money on a disability pension.

I’m surprised by how often I get this (or a similar) question. There are a lot of people out there trying to make do on disability income, which should be a heads-up for all the people who don’t yet have disability insurance. As for this question, the answer is quite simple: If you have extra money after all your basic needs are met, you can save some. If you don’t, you can’t.

I’m sorry that there seem to be so many people living a marginal life on less income than they need. It’s a tough haul and you have my admiration for making a go of it.

 

Another M wrote:

My wife and I are a one-income family and even with a very tight budget our expenses are always more than our costs every month. I have mentioned taking some of the equity from our home (either re-mortgaging or a straight loan) to ease some of the expenses until my wife gets back to work. So, I was wondering, is it ever a good idea to take a home equity loan?

You don’t say why your wife is off work, or how long it may be until she’s fully employed again, and that affects the answer. If this is a short-term thing, then I’d say do the refinance and un-strap your budget. If it’s a long-term thing, you may have to sell your home to make it through. Good luck.

 

Karen wrote:

My relationship with my boyfriend of 8 years is strained to say the least because of this debt and not knowing how to budget. We have thought of calling it quits. I think the icing on the cake was when I was offered a job but would have to take a 14k cut in pay for 2 years from what I am making now, but then would make over 100k a year after that. I had to turn it down because each month I am going further and further into debt AND with a 14k a year cut in that!??! How would I make ends meet? Help! Please point me in the right direction.

I don’t often say this, but are you sure you’re in the right relationship? After all, is this the way you want to spend the rest of your life: giving up your hopes and dreams because your partner can’t get outside himself long enough to stop going into debt for crap? If you’re determined to stay in the relationship, then I’d separate the money - yes, you heard me say “separate the money” - and make the Boy Man responsible for himself. If he can’t do it, then either reconcile yourself to a life of misery with him, or get the hell out!

 

RC wrote:

What is the best way to invest money that I am intending to use toward the purchase of a home/condo, in one years’ time. I would be a first time buyer.

Since your time horizon is very short, you need to stick with something that has no volatility at all. Go with a term deposit, GIC, high-interest savings account… wherever you can get the best rate for one year.

 

Carol wrote:

I am 55 years old and will retire at age 64 with a good Omers Hydro pension. I was a single mother raising 3 children for most of their lives, so savings and retirement planning were not a priority. However, as my children are now grown I have more disposable income. Is it too late to start RSP’s or should I concentrate on paying off my mortgage?

Since you’re over 50 and have a good pension, I’d focus on paying off that mortgage so you’re retiring mortgage free. If you still have money left over, you can take me out for dinner.

 

Cynthia wrote:

I watch your show all the time and I noticed that you always talk in terms of household income and don’t discuss the differences in the amount each person makes. My boyfriend and I recently purchased a home, but we still have totally seperate finances, we live like roommates, simply splitting the common expenses in half and then we each pay our own credit cards etc. I would like us to be a more equal partnership, but he still thinks in terms of “your money” and “my money.” Is there a proper way to start combining finances?

Girl, you and your honey need to get on the same page. Go and read To Consolidate or Not to Consolidate and So You’re Getting Married even if you’re not.

 

Brett wrote:

My wife and I have recently realized that our parents are in rough financial shape, planning on relying solely on a single pension in retirement (no RRSPS). How can we approach them to talk about it and get them doing something about it? We feel as if we will be burdened by our parents within the next 15 years, and need help to get this situation under control!

Sorry Brett, it might already be too late if they have not been planning and are pretty close to retirement, with not enough money. Do they have assets they can liquidate to provide an income? Can they move to a less expensive community to cut costs? In terms of just approaching them about the issue, read Aging Parents: Talking about the Money. 

 

Okay, that’s it. My brain is mush and my fingers are cold from the breeze created as they’re flying across the keyboard! Ha! 

 

BTW: I’m planning to put up a series of articles on home buying. Are there any special topics y’all want me to cover? Speak now.

In some areas the country the housing market is still sizzling because of low interest rates and a sense that “everyone else is buying a house, I have to have a house too”. Some buyers throw caution to the wind in a desperate attempt to wedge themselves into the ranks of “home-owner.”

No matter how anxious you are to own your own home, don’t rush into the transaction. In tight markets like the one we’ve experienced in many parts of the country recently, buyers feel pressured to make an immediate offer. But if you haven’t taken the time to become familiar with the local market, you won’t know if you’re getting good value for your money - and it’s a lot of money.

Look at plenty of homes before you make your first offer. And don’t get so caught up in your “wish list” that you dismiss homes that meet most of your criteria. Your real estate agent should be able to guide you when it comes to prioritizing your list so you don’t end up tossing out an option that has good potential.

Sometimes in the heat of the exchange, sellers or real estate professionals suggest that a buyer put in an offer to purchase which is free of conditions, including foregoing the “financing condition.” Don’t do it. No matter how much you want that property. No matter how sure you are that everything will be fine. Don’t do it.

While you may not remember it in the heat of the buying frenzy, pre-approvals come with the proviso that they are financing approvals in principal only; they can still be revoked by the lender if they are perceived to be a bad decision - if your circumstances change, or if the house appraisal is lower than the purchase price. And that’s why the “conditional on financing” clause is important.

Two other clauses every offer should contain are the “conditional on sale of existing home clause” and the “conditional on inspection” clause. The first eliminates the likelihood that you’ll end up desperate to find a buyer for your house because you’re having to carry two mortgages since your old house hasn’t sold yet. With some markets entering a slower period, houses may take longer to sell, and if you have to carry two mortgages for three or four months, you’ll be motivated to accept less than your house may be worth. The second means you won’t end up with a house that is likely to fall down around your ears because in your desperation to buy THAT house, you ignored the potential problems inspections are designed to ferret out.

Be careful not to overextend yourself when it comes to choosing a price range for the home you’re seeking. It’s easy for the home-buying process to suck you in. Just add another $20,000 to your price range and your neighbourhood options become so much wider. Another $20,000 and you’ll be looking at houses with finished basements, renovated kitchens, or landscaped yards. But if at the end of the day you’ve added so much to your price range that you’re house poor, you’ll end up forgoing annual vacations, entertainment and the other good things in life. Or you’ll start using your line of credit to make ends meet. Dumb! Stay balanced and focused on what you can afford.

Being realistic about how much you can really afford is particularly import during periods of low interest rates like we’ve experienced most recently. Tempted by manageable mortgage payments, buyers often push the envelope on house price. Later, when interest rates rise - what goes down must eventually go up - they find their cash flow strapped, sometimes to the point where they must sell their homes because they can no longer afford to keep up with the mortgage payments. (This is exactly what happened in the sub-prime fiasco in the U.S.)

And don’t forget about your closing costs. From the home inspection to property tax adjustment, from the appraisal fee to the deed transfer tax, every little thing costs. One rule of thumb is to estimate between 1.5 and 2.5% of the value of the home for closing costs to finish off the transaction.

Buying a home is a complex process. Don’t rush into it and don’t rush through it. You’ll likely have to live with your decision for a long, long time. Talk to some friends and family who have bought recently and try to get a feel for the process. Pay attention to the details. And ask lots of questions. The more you know, the better a home-buyer you’ll be.

Some people believe the more credit they have the better off they are. Have a line of credit or three, multiple credit cards, a car loan or two, a mortgage, it all proves you’re “credit worthy.” After all, they wouldn’t keep throwing credit at you if you weren’t a good risk, right?

I did a search on “having too much credit” only to find multiple sites saying that there was no such thing. One site identified the things that affect your FICO score, pointing out, “… there is no calculation for having too much available credit.” While that may be true for the FICO score, that’s not the only thing that impacts a lender’s decision. And the implication that you can’t have too much credit is bad advice. Is it any wonder people are confused about what they should or shouldn’t do with their money?

Accumulating too much revolving credit  – lines of credit or credit cards — makes lenders nervous. That’s because they know that you can access that credit whenever you want. If you lose your job, hit a rough patch at work, split up with your spouse, or just go nuts shopping your little heart out, all that revolving credit is yours for the using. So they treat it as if you’ve already used the maximum when they’re working out your debt service ratio.

Debt service ratio? What the bejezus is that? There are actually two different debt service ratio calculations. The first, Gross Debt Service Ratio, or GDSR, deals with the percentage of your gross income it’ll take to cover your housing costs. But it’s the second one - Total Debt Service Ratio, or TDSR, that I want to talk about.

Your TDSR is the total of your housing along with all your debt payments divided by your gross family income and it tells lenders whether you’re going to be able to pay them back.

Let’s say you go for a mortgage and you have no debt. Your housing costs (mortgage payment, taxes, heating costs, condo fees) will be $1500 a month. Your gross family income is $4,500. Your debt service ratio would be 1500 divided by 4500 multiplied by 100.

1500/4500*100 = 33.33%

 

Your total debt service ratio is under the acceptable 40% or less level and so you’ll likely get the mortgage.

But let’s say you had a car loan that was costing you $400 a month. You’d have to add that $400 to the equation:

1500+400/4500*100 = 42.22%

 

That’s over the acceptable limit. Result: You’re declined.

Your car is paid for, and you have no other loans, so you’re in the clear. Or so you think. Do you have any credit cards in your wallet? How many? “Three,” you say. And what are the limits on those cards? “$4,000, $6,500 and $8,300.” So that’s a total of $18,600 in credit

“But I don’t carry a balance” you protest. “I pay my cards off every month. Besides I never even get close to those limits.”

The lender doesn’t care. Since you COULD run those limits to their max, that’s all the lender cares about. So s/he adds in the minimum payment you’d have to make to keep all that credit balanced. Assuming s/he used 2.5% (pretty standard for minimum payments), s/he’d add in $465. Hey, wait a minute. That’s even more than the car payment so there’s no way you’d qualify.

Do you even know what the total of all the limits is on all those cards in your wallet? Considering it’s going to affect the amount you can borrow, shouldn’t you?

If you find you have more cards in your wallet than you actually need - that’d be more than two - then you’re going to have to take some steps to lower your credit exposure and build up your credit attractiveness.

Now, I know there’s a lot of buzz out there about not canceling credit cards because closing accounts can affect your credit rating. And that’s true. When you close your accounts, you wipe out the history of that account, which can affect your credit score and your ability to borrow. Which is one reason why you should hang on to the two accounts that have been most active and have the longest credit history.

You can also call your credit provider and ask that your limits be lowered, as long as you don’t end up pushing against the  top of your limit or - heaven forbid - going over your limit, both of which won’t sit pretty with your credit score.

Credit, like everything else in life, has to be managed. It is a tool. You can use it well. Or you can use it to dig yourself a deep, deep hole of disappointment and grief.

People often write to tell me they want to buy a home but don’t know how much to save, how long it will take to save, or how much home they can afford. With rising real estate costs, some people are feeling a decided sense of panic: If we don’t get into a home soon, we’ll never be able to afford it.

First off, take a breath. Looking to the future with a sense of panic is no way to live a life. It’s fine to have goals - realistic goals - and work toward them steadily, but to already feel defeated, or to rush into something you’re not ready for makes no sense at all.

If you don’t own your own home in your 20’s, you’re not a failure. Home-ownership used to be a goal all in itself. Now it seems have turned into a stepping stone: buy a fixer-upper now, buy a bigger house in five years, then buy a monster home. Whazzup with that?

I didn’t buy my first home until I was 30 and I was making a crap-load of money. Even then, when it came time to sign the paperwork my hand shook. Actually, my whole body shook and I thought I was going to toss my cookies. That’s how big a deal it was for me.

Home-ownership should NOT be seen as a badge… something you measure yourself and others by.  Home-ownership is a lifestyle choice. People who choose to rent are not pathetic slugs with no ambition, no sense of family, no commitment.

Now to the practical answers:

One rule of thumb for deciding how much home you can afford is to take your annual income and multiply it by 2.5. So if your family income is $45,000 a year, you can afford to spend $112,500 on a home.

I know people are buying homes that are worth many times more than their income, but that’s a recipe for disaster. If you’re banking on both incomes to buy a home, and you overstretch yourself, how will you cope (without going deeper into debt) if you decide to have a baby and go off on maternity leave? How will you cope if one of you loses your job for even three months? How will you cope if there’s a downturn in your business environment?

Another way of calculating what you can afford is to figure out your debt service ratio: the percentage of your income it takes to pay off your mortgage.

Most lenders used to believe that you should spend no more than 32% of your pre-tax income on housing expenses. In my Life Pie, I use the 35% of your after-tax income as a guide. So if you had a monthly net family income of $4,500, you could afford to spend up to $1,575 on mortgage payments, taxes, house insurance, heating/lights and home maintenance.

I say, “most lenders used to believe” because many are taking the tack that since Canada Mortgage & Housing Corporation is insuring stupid mortgages (no money down, amortize forever), they’re off the hook in terms of smart lending practices. After all, you’re paying the insurance premium and CMHC is taking all the risk, so they’re off the hook. Hmmm.

As for how to save for a downpayment, that’s easy. If you want to save 20% as a downpayment (which you absotively, posolutely should), then take the amount you can afford to spend on a house, and divide it by 100 and multiply it by 20.

House value: $200,000

20%: $200,000 / 100 x 20 = $40,000

 

If you want to have that downpayment saved in five years, then you divide your downpayment goal by 60 (the number of months in 5 years) to come up with $666.66, which is how much you have to save every month. If that seems like too much, your options are to save for longer or to buy a less expensive home.

Home ownership is great, if you do it right. Buy a home you can’t afford, commit to payments that stress you out, and you’ll rue it. Yup. Your home won’t be something you can enjoy, it’ll be an albatross around your neck.

Remember, the point of life is to enjoy the moment. If all your moments are spent wondering when your house of cards will fall down, how much fun can you possibly be having?

 

Everybody wishes they owned their own home. Well, maybe not everybody. But lots of the people who write to me. And lots of them are looking for me to confirm what they’re hearing about no-money down, take-forever-to-pay-off-your-home plans. 

This never used to be an issue. To get a mortgage you had to come up with 25% down. Then Canada Mortgage and Housing Corporation (CMHC) started offering Canadians the opportunity to have a high-ratio mortgage… with as little as 10% down and a willingness to pay an insurance fee you could get into a home of your own. Amortizations started to lengthen … first to 30 years, then 35 years. Downpayments started to shrink, from 10% down to 5%. Finally, we’ve hit the current standard: zero down, amortize for 40 or even 45 years.  

The argument made is that most people can’t afford to save 25% down, not with housing prices where they are in big cities. And if you can get into a home with as little as possible, you can begin to build wealth through home ownership and the appreciation of your primary asset. I get that. I get how hard it is to save money in a world where everything costs a lot of money. I get that homes are expensive. My husband paid $28,000 for his first home in London, Ontario in the early 70’s. Compare that to the $350k we laid out in Toronto in 1993, or the $650,000 it sold for in 2003.  

But I also had other experiences that make me more balanced than some when it comes to how the housing market moves. I bought my first home in 1990, a nan0-second before the last real estate market slide. I paid $300,000 for my semi and then watched it erode away.  I was okay. First, I’d put down 25% so I was able to bounce back from the erosion in my equity faster than those who slid into seriously negative territory because they had little or no equity to begin with. Second, I hadn’t taken a mortgage sooooo BIG that the slightest change in interest rates had me squirming. I had room to move.  

And that’s the biggest problem I have with no-money-down plans. People don’t use them to just get into a home. They use them to get into a big, expensive, more-than-they-could-afford, how-the-hell-are-they-going-to-carry-it home.   

A single mom living in Montreal wrote to me recently asking for some advice about buying a home. She wants to know how much she should put down, and how much she should put aside for on-going maintenance. Both are very good questions. I hope she’s ready for the answers.

First off, you should know that lenders use a calculation called debt service ratio to calculate how much they’ll lend you based on how much you can afford to repay each month. They usually won’t allow your debt service ratio to go above 30 percent. So you can use this as a starting point to determine how much you can afford. If you make $5,000 a month before taxes, 30% of that would be $1,500 a month, which is what the bank will say you can afford in mortgage payments. With an interest rate of six percent, you could afford a mortgage of about $187,000. Add on your downpayment and violá, you’ve got the amount of house you can afford.

Now I say all this as a guide. And it’s a good guide. But since people are getting into houses today, who would never have qualified to buy five years ago, before you jump into the fray, you need to know the facts.

Let’s work with the following. Let’s assume you’re buying a $200,000 home (well below the average cost of a house at the time of writing: $335,000 but more reflect of the whole country), that current interest rates are 7.5 percent, and that you’re taking advantage of the no-money-down option.

First let’s look at how your amortization affects your long-term interest costs.

     Amortization     Monthly Payment     Total Interest Paid

     25     $1,463     $238,900

     30     $1,383     $297,880

     35     $1,332     $359,440

     40     $1,299     $423,520

 

So, if you take a 25 year amortization, you’ll pay more than double the cost of the home, and if you take a 40 year amortization, you pay more than three times the original cost of your home by the time the mortgage is paid off.

The big argument for extending the mortgage amortization from 25 to 40 years is that you’ll be able to work a lower payment (yes, the payment goes down from $1,463 to $1,299… that’s a whopping $164 a month) into your cash flow. And with no money down, you’ll be able to get into a home that will appreciate substantially, building up your equity. Hmmm. Equity. On a 40-year amortization my home would have to triple in value for me to break even on the interest cost. And equity is only something you can take advantage of if you sell your home and cash out. So, are you planning to sell your home and rent next? If not, then all your equity gives you is the ability to borrow more money.

But that’s not all. If you buy a home with anything less than 25% down, you’re going to have to buy high-ratio mortgage insurance. This insurance premium is calculated as a percentage of the loan amount, and the percentage depends on the loan to value ratio. The higher the loan to value ratio, the higher the premium cost. In other words, the lower your downpayment, the more expensive the insurance. This premium may be paid in cash (nobody does this) or added to the mortgage amount (making your mortgage even larger).

So, back to our example. On a $200,000 house with no money down, the mortgage insurance would be 3.1 percent of the value of your home or $6,200. Added into your mortgage, that mortgage insurance premium would end up costing you $13,605 if you amortized for 25 years, or $19,330 if you amortized for 40 years. Hey, that’s peanuts right? I mean, if you’re already prepared to lay out another $423,520 in interest for your home, what’s a measily little insurance premium of almost $20,000?

Now let’s see how it applies to the “average” house in Canada that’s valued at $335,000. Put no money down and your premium cost will be $10,385. Amortize for 40 years and your true cost will be $32,381. All that for buying a home you can’t really afford.

That’s what this all boils down to, people. If you can’t afford to save a downpayment - and by that I mean 25% down — what makes you think you’ll be able to afford to maintain the home (rule of thumb: budget 3-5% of the value of your home for up-keep every year), pay your property taxes (yes, they will go up each year), and deal with the general challenges of home ownership.

I’m not trying to scare y’all away from home ownership. I’m trying to impress upon you that home ownership is a BIG responsibility, not one to be taken on lightly. And I’m trying to show you that spending a little time saving for a downpayment makes way more sense than locking yourself into a mortgage payment that strangles your cash flow, while paying exorbitant amounts in interest and insurance premiums.