For as long as I can remember, it has been drilled into my head that it is better to own than to rent. So I delved into the housing market as early as I could at age 23. That lasted for two years before I had to move into the basement of my parents’ house - wife, son and all. Did I make a mistake getting into the market? I did not think so at that time, but as I have gained some wisdom over the last twenty-two years, I realize that I did make a few mistakes and so I hope to pass them onto you to help prevent you from making the same mistakes.
The first mistake that I made was the assumption that my household income would increase. We believed that my wife would finish Teacher’s College and go into the work force and I would be in my second year of practice and my income certainly had to increase - neither occurred. My wife did not get into Teacher’s College let alone finish it and my income stayed the same rather than increase. LESSONS #1 – do your calculations based on the present and the past, but definitely not the future.
The second mistake was that we did not have the house inspected. We were advised that the house was in great shape by the real estate agent who was also the vendor’s agent. Today I realize how naïve that was because within two months we had to replace the furnace and re-shingle the roof. LESSONS #2 – Always have the house inspected.
The third mistake we made was that we were not prepared financially for any emergencies. We used our credit cards to pay for the furnace and the roof. Further, because of the lack of increase in income, we carried a balance on the credit cards for quite some time. LESSON #3 – Make sure to set aside money for unforeseen events in a short-term savings vehicle (e.g. a high interest bank account) and/or establish a line of credit.
The above mistakes certainly set the stage for the return to my parents’ basement. Thankfully, I learned from my mistakes and have been a home owner again for quite some time.
One additional issue that faces first time buyers today is whether or not to use money from their RRSP’s to fund the down payment for their home. Although this may be the only way for many to afford the down payment, it is not a way that I recommend to my clients. The reason for this is simple. In order for it to make financial sense, the money that you save on your mortgage interest has to be greater than the loss of compounded interest on the money while it is outside of the RRSP. Whenever I have run the numbers for clients, it has not made sense to use the RRSP’s. The reason is that most people will only repay the RRSP’s at the minimum repayment required each year. This means that the majority of the money stays outside the RRSP for over seven years. Further, if one has to make a repayment each year, it is usually at the expense of any new RRSP contributions. So, the loss of new RRSP contributions and the loss of compounded interest make using the Home Buyers Plan a last resort only.
A final piece of advice - LOCATION, LOCATION, LOCATION.