When I was growing up, I really thought I could live in this kind of house. It would have the butlers, the five-car garage, the indoor pool and the slide that led from my bedroom to the indoor pool. You know, pretty standard stuff.
Now, I’m realizing I’m probably going to have to think just a little smaller.
But it’s cool. I don’t really need things like a bowling alley.
Last week, I told you about my friend who didn’t know whether he should rent or buy his next living space. I’ve been hearing that this is a question that a lot of people my age are struggling with.
The Mortgage Question
I had the opportunity to speak with Bernice Dunsby. She’s RBC’s Senior Manager of Client Acquisition, Home Equity. Basically, she knows Mortgages. She assures me that purchasing a home (or apartment or condo or loft, etc.) is still a stable investment in today’s market.
“Over the past ten years, there’s been a 65% increase in the value of homes,” she says. “If you think about increase value, does it mean a good investment? Yes.”
I also asked Bernice about whether we Canadians should be worried about the struggling housing market south of the border. She insists that the Canadian markets are separate than those in the U.S. and that when it comes to home purchases, the intention to buy is still very strong in our country.
I wanted to know whether it was even a possibility to for a University student to think about signing him or herself up for a mortgage.
It’s Possible
Even individuals with little income can qualify for mortgages nowadays. “In the past, banks required a minimum of 20% on the down payment of a mortgage,” Bernice tells me, “but today you can own a home with no money down. You can literally purchase with no down payment.”
While this may seem like a gift, Bernice heeds warning that 'no money down' means you are financing more over the term of the mortgage, which means it's going to cost you more in the long run. But, that may be ok depending on the way you look at it: when you start paying off your mortgage, you build equity. Equity is the value of your home in the market, less what you owe in mortgage payments. So, every time you make a payment, your house increases in value because there's less money owing on it.
But alone?
I talked last week about wishing I had possibly got a mortgage with my current roommates. I was surprised to hear that this is something the bank doesn’t entirely frown upon.
“There’s always the option of co-investment,” Bernice says.
Co-investment can mean a mortgage with friends—or with family. Just make sure everyone is on the same track, though… no one wants a financial feud down the road.
Bernice stresses that the most important thing a person can do is meet with a Mortgage Specialist. They will sit down with you and pre-approve you for a mortgage. This means they’ll help you determine what you can afford based on your circumstances that day. There's no obligation to buy after this meeting.
“The beauty of mortgage specialists is you don’t have to go see them,” she says. “They’ll go see you—at your office, at school, at home, anywhere.”
And if you’re a little nervous about meeting with a specialist just yet, RBC has an online self-help pre-approval tool to assist you in determining whether that mortgage is just a dream.
Looking more closely hat the price of that small Toronto house, I’m thinking I just may need to look into some more realistic housing options.
Bernice, can I still get a mortgage for something like that?
Comments (6)
Great post Zach! I've been wondering about this too. And thanks for addressing the mortgage crisis in the states. I've been thinking about the spillover effects and wondering if buying was still going to be a good investment. I suppose it always is! 65% over ten years definitely beats inflation!
That's actually not a very good investment. A 65% return over 10 years means your money is only growing at 5.13% a year.
If you had invested in say the RBC Canadian Index Fund (a mutual fund), You would have a 296% return over 10 years, or 11.1% a year.
Check the math and the facts yourself: http://www.rbcam.com/pdf/information/rmfcdi.pdf
65% or 296%.... hmmmm, I'll take the mutual fund please.
Mortgages to university students? "Co-investment"? "Canadian markets are separate than those in the U.S"? Purchasing with 100 percent financing? Never in my life have I read such horrendously bad advice and market-pumping drivel coming from an official of a major Canadian bank. RBC will have much to answer for when the young people they lured into these debt traps become impoverished for decades.
WOW Zach! GREAT info! I never knew that I (a 20 year old university student) could actually start building equity in real estaTe so early! I'm gonna talk to Bernice ASAP. There's a great condo (with spa!) near campus that I'd just LOVE, and it's only gonna go up in price! Thanks for the inspiration!
Hey Zach,
Great topic to start getting people thinking. Home ownership is with out a doubt one of the best investments you can make (Chris' comments aside). I myself considered home ownership out of the question until, almost by accident, I was talking to a friend who happened to work at RBC 2 & 1/2 years ago. I was sick of flushing money into someone elses pockets, and having nothing to show for it, but what could I do? I was only 22, and home ownership seemed out of reach. I quickly found out that I could pay less than what I was paying for rent, and own my own place. When you think about it, it makes sense. Chances are your landlord is carrying a mortgage on that rental house you are living in. He wants a profit (understandably) so he will charge you that much more than the mortgage to own.
I bought my cute little 900 sq ft bungalow in 2005 for $71,000. Due to a relocation, I sold this property 3 months ago, for $169,900. Thats a huge profit in only two years. I basically made more in that two years, than lots of people do at their employment. Granted, this is not a typical example, I just got lucky buying in a low sask market, and selling after a considerable pickup in the market.
What I present as my argument for the owning is this:
1 - Not only do you have the value of your house increasing over time, providing more cash in your pocket when you sell, but you also have to factor in the money that is not going to rent as savings in your pocket. Sure you dont see it until you sell, but future you will be happy.
2- As for Chris' point about a mutual fund being better, I must argue against that. Yes, investment products such as mutual funds are great, and you should have these as well (consult your local RBC banker for your own tailored plan), however the housing market is no where near as volatile as an index linked fund (find me a year in the last 10 where the average home price has dropped in Canada? The same cannot be said for an index fund). And if you can only afford one option, if you take your hard earned money and put it into that fund, you are still needing to pay for somewhere to live (unless you are ok with your parents basement, thought it does make meeting girls harder)so there goes any profits you could have seen in the way of rental payments to a landlord you probably don't even like.
Whats the answer? Obviously if you can afford it, do both. Invest in a variety of funds/gics etc, and buy the house. This is not possible for all, especially us younger people, so each must decide on their own accord where their priorities lay. Ask yourself, are you going to be living in the same place for the forseeable future? (ie 2 years or more) Are you comfortable doing your own maintenace? Do you hate the idea of losing 100% of your payment to rent, would you prefer to maintain a part of it (remember, interest still takes a large chunk) as equity? If so, buy buy buy. Heck, maybe you should buy a place, and take on a few roomates. Their rent may just pay it for you, giving you a free house, with growing equity. Ask an RBC mortgage specialist, they can include rental income when qualifying for a mortgage.
Its not right for all, but it might just be for you.
Thats my rant. Back to work for me.
Thanks for all of the feedback, guys. I talked to Bernice again and I've posted a follow up blog regarding some of the concerns that Richard has raised.
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