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Value of advice: when it comes to buying a home early in your career

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When you’re just starting out, owning a home can seem like something that’s totally out of reach.

The latest statistics aren’t helping to dispel that notion either.

A recent study shows that Canadians between the ages of 25 and 34 will have a much harder time buying a home in today’s market.

Ontario and British Columbia are the two provinces where that affordability gap is felt the most.

To give you a rough idea as to how wide that gap actually is, the average price of a home in Ontario would need to fall by $307,000 (over half the current value) in order for Millennials to achieve mortgage affordability in this province. Alternatively, their typical full-time salary would need to increase to $109,000 per year, which is more than double current levels.

With numbers like those, going from renter to homeowner can feel like even more of an impossible leap.

So, what course of action can you take when it feels like your home-buying options are limited?

“Reach out for professional financial advice,” says Educators Certified Financial Planner professional Graham Walker. “It might sound simple enough, but you’d be surprised at just how far the right advice can take you when it comes to achieving the types of goals that are seemingly out of reach.”

And yet younger Canadians tend to seek financial advice from friends, family, or the Internet first—whereas their parents or grandparents are more likely to reach out to an expert.

“It usually comes down to the comfort factor,” states Graham. “It’s natural to want to turn to the people you know and trust when you’re looking for guidance. Which probably explains why many parents of adult children end up being the ones to either provide their kids with the financial help they seek, or serve as the gateway to someone who can.”

As it happens, Graham ended up being that certain someone for a pair of Educators clients.

Graham goes on to explain, “Over the years, I’ve been helping Dan and his wife Joan, a teacher nearing her 85 factor, with their financial goals. Knowing they were both on track for retirement, Dan and Joan started thinking about their daughter Rachel’s future—particularly as she was looking to move from a basement apartment in Guelph, to a home of her own. So, they referred her to me.”

For Rachel, timing was of the essence due to a change in jobs in another city.

“Shortly after meeting (with) Rachel, she received an offer for a new position in Hamilton,” continues Graham. “This would make for a long commute, especially in the winter, which neither Rachel or her parents were very keen on. So, I then discussed the possibility of her purchasing a home. But with the real estate market being red-hot, the down payment she had saved up didn’t go very far. This can be an obstacle for many potential homebuyers. However, an advisor’s experience can reveal creative financial solutions to overcome these types of obstacles.”

What kind of creative solutions was Graham able to come up with for Rachel’s situation?

“I would call them multi-tiered,” describes Graham. “We explored various options, including the idea of creating income from Rachel’s new, primary residence. This is where I was able to share my personal experience on creating an income unit, along with all of the taxable benefits that come with it. At the same time, we looked into ways for her to lower expenses so that she’d be able to maintain her desired cash flow. Since the commute to her new job also had to be factored in, I showed Rachel a community located right on the highway about a half hour’s drive from Hamilton. Plus, using the model we discussed (about creating a revenue stream from an income unit), Rachel would be able to afford the kind of house she otherwise wouldn’t have been able to get—a place she now calls home. That’s the value of advice.”

If you’re looking to purchase a home early in your career (or at any point in your life), Graham recommends setting yourself tangible goals.

“Having goals is great,” says Graham. “But if they’re too lofty or have no structure, they might only ever remain as goals and nothing more. Instead, be specific with home-buying aspirations. For example, if you’re hoping to save for a down payment on a home, decide exactly how much of a down payment you want to make. Then, go one step further by developing a timeline in which your goal is to be realized. If you’re aiming to save $50,000 for a down payment on a home within the next 5 years, you will then be able to gauge how much money you’ll need to put away each month in order to achieve that goal.”

Once your home-buying goals are established, the next step is creating a budget.

“As an education member, you have a few advantages when it comes to developing your budget,” explains Graham. “Take the pay grid for instance. Having a sense of your earning potential over the course of your career enables you to assign how much of your cash flow you’ll be able to direct toward big financial goals, like saving for a down payment. Plus having a pension plan in place means you’ll be able to gauge retirement income down the road. This is beneficial for those of you who might be making home purchases later in their career and potentially carrying a mortgage into retirement.”

Tips for developing your home-buying budget:

  • Know your net worth: Mark down what’s coming in and what’s going out (money-wise)—whether you jot the numbers down manually or use our online tool, a budget won’t work until you get the full 360 of your financial situation
  • Trim unnecessary expenses: Once you have a list of your monthly expenses, divide it into three categories—‘necessities’ (I.e. food, gas, rent, utilities, phone); ‘debt payments’ (loans, credit cards); and ‘luxuries’ (coffee, eating out, online gaming/shopping, entertainment, etc.), then see which areas you can trim back on, or cut out altogether—then allocate the extra cash flow towards saving for your home-buying goals
  • Build (up) an emergency fund: Becoming a homeowner also comes with having to deal with unexpected curve balls every now and then—putting extra money away into a separate account will ensure you’ll have the funds to deal with these types of emergencies (without having to take out a loan or take money away from other savings goals)
  • Leverage the Home Buyer’s Plan (HPB): If you’re contributing toward a Registered Retirement Savings Plan, the HBP enables first-time homebuyers to withdraw up to $35,000 from their RRSP to use for a down payment—if you have a partner or a spouse, they can also withdraw from their RRSP for a total of $70,000 to put towards a down payment (if the amount withdrawn is paid back within 15 years, it’s not taxable)

There are many tips and tricks to buying a home early in your career; Educators Financial Group can help you to successfully navigate them all.

From the pay grid to your pension plan, our financial specialists are knowledgeable of your income at every life stage. This gives us the unique insight to offer the kind of educator-specific strategies and advice you won’t find anywhere else.

Discover the real value of advice by having an Educators financial specialist reach out to you

Sources:
https://www.canada.ca/en/financial-consumer-agency/programs/research/canadian-financial-capability-survey-2019.html
https://www.globalopp.ca/news-blog/2020/5/25/what-is-the-average-salary-in-canada

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