You’re poorer than you think

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This article was published 11/05/2019 (2374 days ago), so information in it may no longer be current.

There’s a sweet spot in Winnipeg’s housing market… that’s also a hot spot that can put unprepared buyers into a tough spot these days.

Realtor Gina Gabriel works with plenty of first-time buyers — millennials, newcomers and others on tight budgets, who have put in monumental efforts to save five per cent for a down payment on a home.

“Usually their budget is around $200,000 to $250,000 for their starter home,” says the agent who works for Landmhel Real Estate Services Inc.

“There are lots of options in this range, but most homes… are in a not-so-nice location, and there are a lot of things that need to be done to the house.”

That can present even more challenges, as buyers must then consider how much to borrow above the purchase price — if they can — to pay for repairs and upgrades.

But a recent RBC survey indicates many Canadians are willing to pay the price, and suffer the consequences financially, to put a roof over their heads and build equity along the way.

Among its findings are that four in 10 Canadians believe being house poor is the new reality of home ownership and that one in four, in fact, indicated they were house poor.

At the same time, more than half stated they did not want to put themselves in that position. (By the way, RBC defines “house poor” as having more than 40 per cent of total income going to running the household, such as paying the mortgage and utilities.)

The study also found many respondents — 47 per cent — are looking to save more for a down payment, at least 15 per cent, while almost three in 10 are seeking help from family.

Besides a boost from mom and dad, first-timers often also have the luxury of taking their time to prepare, says Nicole Wells, vice-president of Home Equity Financing with RBC.

“When it comes to first-time homebuyers, they have an advantage to step back and say, ‘What do I really want? What’s on my wish list? What am I willing to sacrifice?’”

Buying a home will inevitably involve sacrifice — at least financially — for most new buyers. Some elements of their pre-ownership budget will probably be slashed to make their new homeowner budget work. Best to plan ahead, and envision what home ownership might look like financially, because having as much clarity as possible on costs is essential to surviving the first few years of running the fort.

“I’m a huge fan of home ownership, but you really want to make sure you’re not setting yourself up for failure,” says Kelley Keehn, award-winning author, personal finance educator and consumer advocate for FP Canada (the professional body for certified financial planners in Canada).

Many first-timers are pretty pumped up about ownership — so much so, they may stretch their finances to get into the home they want. That’s not entirely a bad thing, Keehn says, but it can be if they are unprepared for the Pandora’s box — or more like money pit — ownership may entail.

It’s not just a mortgage payment. It’s property taxes, utilities, maintenance, repairs, furnishings… the list can feel endless, especially if you haven’t done plenty of homework in this respect.

That’s why Keehn suggests having a very “sober look” at your budget even before you go to a bank to get pre-approved for a mortgage.

“Millennials have so many other goals that previous generations didn’t have… like to travel much more… so they need to ask themselves, ‘Are we going to be able to do all that in the same manner if we strap ourselves into a mortgage?’”

Looking at where you can cut costs on discretionary spending is critical, and the sooner you start, the more you can save for a home and likely end up less stressed once you’re living in it.

This is the old-school approach to buying a home, suggests Angela Calla, a B.C. mortgage broker, radio host and bestselling author.

“It’s never been easy to get into real estate,” says Calla, of Dominion Lending Centres in Port Coquitlam.

She bought her first home at age 21, because she was highly motivated to do so by her parents, who had immigrated to Canada from Italy. In her childhood, Calla and her immediate family lived with extended family so they could save for a down payment to eventually own their own place.

“(Home ownership) was a cornerstone of our family.” And it still is for many Canadians today with about 70 per cent of the population owning a home, Calla adds.

Looking further ahead, if you want your kids to lord over their own personal fiefdom one day, Calla says it’s best to have the “talk” often and early.

“My parents were talking to me about home ownership at the dinner table as young as 10 years old.”

If you need ammunition for making the case, consider this: “It’s fair to say a home is a great investment,” Calla says. “The sooner you can use time and compound interest to save to get into the market, I believe the more advantageous it is for you.”

That doesn’t mean blindly jumping into ownership.

Rather, “test drive” a mortgage payment and the additional costs for a few months first, maybe from the relative comfort of the parents’ finished basement. After all, practice makes perfect sense with regard to the largest purchase of your life, Wells says.

“The people who get into trouble are often the ones who haven’t done their research, haven’t talked to an adviser, haven’t taken the time to understand the cost of home ownership and haven’t figured out what they really want.”

Even though home prices are much higher than for previous generations, she adds ownership is still very much achievable.

“Interest rates are still low,” Wells says, noting every generation is faced with its own particular challenges. “I started in this business 22 years ago… with eight per cent interest rates.”

Certainly, a financial adviser at your financial institution can help first-timers prepare, Wells adds. Then again, realtors will also help buyers get ready.

Gabriel certainly does.

“When we write an offer, we discuss one by one with them the expenses they should expect,” she says.

“We make sure they are ready for their new lives in their new home.”