Weekend Reading – Guide for home buyers edition

Weekend Reading – Guide for home buyers edition

Well hello!

Welcome to a new Weekend Reading post: a guide for home buyers edition.

Before we get into this week’s theme, here are some of my latest posts:

As bad as the markets are or have been this year, the worst hasn’t happened, yet.

Here are the worst investing years on record and what you can learn from that.

Regardless of what the markets are doing – I’m focused on some saving and investing goals here.

In a previous Weekend Reading edition, here are some housing market predictions for 2022…

Weekend Reading – Guide for home buyers edition

Kudos to the team at MoneySense for putting together this comprehensive first-time home buyers guide.

To initiate Weekend Reading, some thoughts/commentary on this guide and my personal reflections with some lessons learned for others.

Part 1 – the costs of home ownership / saving for a home

I think the writers did a great job in this section.

First though, I would argue the costs of home ownership are far more than most people realize.

So, as a first-time home buyer, don’t underestimate the general maintenance costs at just 1% or so of your home or condo value – they could be more from time to time! That 1% rule is a good rule of thumb. So, if your home is worth $750,000, I would budget at least $7,500 per year in maintenance costs. It is worth $1.5 M? Lucky you, since you’ll need to budget $15,000 per year in those costs. A reminder those maintenance costs are beyond utilities, ignore major improvements, and routine property taxes.

Something to consider younger folks!

Also, when it comes to saving for a home or buying a home at all, I think the punchline to any rent vs. buy debate is far more emotional than math.

My personal experience has been: home ownership is a want not a need.

Yes, you need shelter, but you don’t need to own a home.

Homeownership is a math decision, for sure, but if you look hard enough in the mirror, I think it’s more about a lifestyle decision.

Also in this section from the authors, while very true there is the Home Buyers’ Plan (HBP) (a program that allows you to withdraw from your Registered Retirement Savings Plans (RRSPs)), and the new First-Time Home Buyer Incentive (a new federal government incentive announced in this year’s budget), I believe we already have enough ways to save for a home – including a missing point for many.

First though, the HBP – we don’t really need it.

With TFSA contribution room, per established adult Canadian, now standing $81,500 per person, that’s a lot of money to save and invest tax-free by your early 30s. Instead of creating various gimmicky, complex programs, I just wish the government would increase the Tax Free Savings Account (TFSA) contribution limit – simple and very effective. 

Now, you might be saying, what about 20-somethings?

Well, yes, your TFSA contribution room will not be as juicy since you can only begin accumulating/contributing from the year you turn age 18, even if you didn’t file a tax return yet. Still, even for most 20-somethings, you can save and invest tens of thousands of dollars inside your TFSA – far more than your HBP limit without fear of robbing your tax-deferred money from your future-self.

Check out this handy TFSA calculator here.

More importantly, to my missing point above, most money you save and invest for a home should be in secure assets – not heavy into stocks or alternative asset classes. So, there is only a modest “tax-free” benefit to be had beyond a savings account or use of GICs. Still, the TFSA remains a great vehicle to save.

What about this: The First-Time Home Buyer Incentive?

I mean, why on earth is our government so darn interested in sharing “in both the upside and downside of the property value” with Canadian homeowners? Certainly, some questionable priorities here over education and healthcare – but that’s just me.

Finally, from my personal lessons learned, a home is just part of your financial plan. Make sure you learn to manage debt before debt manages you…

Part 2 – understanding your mortgage

I think the writers did a great job in this section as well, but I struggle with any TDS or GDS metrics for a simple but important reason.

Yes, when you apply for a mortgage, your lender will look at your gross debt service (GDS) ratio and total debt service (TDS) ratio in order to determine how much mortgage a person with your debt and income level can reasonably carry. 

But these ratios only look at gross dollars or gross household income. Last time I checked, I pay taxes – lots of them. So, using any TDS or GDS ratio that does not look at estimated, after-tax dollars you can actually use misses the entire point. These rations create an unreasonable, ill-informed metric.

Bad ratios aside, I have always been a fan of the mortgage stress test – you do need to save people from themselves.

(Recall: under mortgage stress test rules, lenders apply a benchmark rate of 5.25% or the rate equivalent to 2% more than the rate you’re being offered—whichever is higher.)

Part 3 – finding the best home and mortgage provider

I’ll close off this commentary of the MoneySense article by reinforcing this: “going to your bank means your only option is one lender but going to a broker allows you to access multiple lenders,” including multiple banks and credit unions.

I can’t stress enough that if you want the best rates and terms and conditions on your mortgage – best to shop around and get a reputable mortgage broker to do the heavy lifting for you.

More Weekend Reading….

A good article here, how some 30-somethings perceive the housing market (subscribers only).

From the article:

“You just buy a place, and you make money off of it.”

Hummm….

Growing tired of housing inequality in Canada? You can consider the FIRE-like-lifestyle of living in Mito, Japan, for just $11,000 CDN per year. That is incredibly cheap.

I really enjoyed this article by Adam Collins: why perfectionism ruins portfolios.

Smart summary, including the final bullet I’ve embraced for many years now:

• “Missing out on investment fads is a feature, not flaw, of diversification.
• Instead of chasing short-term dopamine highs, build a portfolio around a short list of evidence-based rules.
• Exercise the discipline to follow those rules. Successful investors reduce fees and stick to something imperfect rather than endlessly pursue perfection.”

Well done and kudos to GenY Money in her mid-year review.

I echo what Dave wrote here and this has also been my plan all along, assuming my employer will have me in a few years??

“All I can say in the end is that based on my experience if you can afford to do so going part time is the perfect road to a phased retirement and a healthier life.”

Does the 4% rule work with higher inflation? At 3.5% or 4.5% or even 5.5% inflation??

Read on to learn about the results!

On how much is enough…

On some laws of wealth…

 

I’ll be back next week to hopefully answer some reader questions in a new post. Thanks for those reader questions!

Have a great weekend!

Mark