The Housing Situation – Rent vs. Buy…What we chose and why?

Like any other young couple, my fiancee and I dream of owning our home.  Start off with a condo, graduate to a house – you know how it goes.

We are in a position now to be able to put down 10% on our down-payment by using my RRSPs as a part of the First-time Home Buyer’s Plan.  We started looking at 2-bedroom condos in a couple of neighbourhoods that we liked.  We have been looking for a few months, and have now decided to rent a two-bedroom apartment in the same building that we have been living in for a couple of years now. 

We first started to look for a condo in order to build equity.  We also thought of buying a 2-bedroom condo so our visitors wouldn’t have to sleep on the couch (and with both our families being away, we expect a good amount of visitors).  We love the building we rent in.  It is right downtown, a 6-minute walk to work for me, maybe 10 for her.  There is a gym and sauna in the building.  Not to mention the great pubs, restaurants, shopping, parks and various other activities that are within walking distance.  We definitely don’t need to own a car while we live here.  The only problems with the apartment was the lack of room for visitors and there was no dishwasher (we hate doing dishes).

During our hunt for our condo, we just couldn’t find a suitable 2-bedroom condos in the areas we wanted. As a matter of fact, we only saw 2 of them in all our time looking for a property.  One was too expensive (way bigger than we needed – 1440 sq ft.) and the other one had a layout that made it feel smaller than the one-bedroom apartment we are in.  It was definitely a frustrating and disappointing period.  Eventually, I started reading about home ownership in preparation for….well….owning our home (I probably should have done that before we started looking, but better late than never, I guess). 

The more I read, the less sure I became of our readiness to own our home.  I spoke with my fiancee, and after some Q&A and some more research, we were certain that us not finding a place we liked had been a blessing in disguise.  In order to put down 10% on our home, I would have had to take out a major portion of our RRSPs and the amount wasn’t even close to the maximum $25,000 that you can take out tax-free to buy your first home.  This in turn would mean losing out on the compounding power of my RRSPs that has built up over the last 3-4 years.  Furthermore, 10% down would mean having to pay the CMHC insurance, which can be a considerable chunk of money depending on the price of your home.  The housing market here has boomed in recent years, and it was growing by 6-7% even during the recession.  It has finally started levelling out now.  I do not expect it to grow that aggressively again in the next year or two, simply because it is extremely difficult to sustain that kind of growth.  Another bit of good news for us was that interest rates were slashed further a few days after we made our decision.  I don’t see them sky-rocketing in the next couple of years either.

Waiting a year or two will enable us to put down 20% on our mortgage, keep my RRSPs intact until they reach the max $25,000 (that can be taken out under the FTHBP) or higher.  So, we will save on the CMHC insurance and putting down that much will also enable us to get a better interest rate than if we put down just 10%.  By putting down 20%, you are viewed as a low-risk borrower and the banks love that.  The lower interest rate will mean a huge amount of savings on what we pay in interest over the life-span of our mortgage.  I will also be earning more by then, and my fiancee will have started earning as well.  The additional income will allow us to make extra payments towards our principal, thereby cutting down our ammortization period by at least a few years. 

So, the bottom line for us is – yes, we will be renting for now and spending about $26,000 in rent (assuming we rent for 2 years), which is basically money down the drain, but it will allow us to save a lot more than that in the long run.

Now that we’ve made our call, watch as the interest rates go through the roof and property prices go up by 20% in the next two years!🙂

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The Road to Recovery

Honestly, all the reading I’ve done on numerous blogs and websites in order to get my finances to a healthy state has been quite overwhelming.  RRSPs, TFSAs, stocks, bonds, DRIPs, WTF??  (The last abbreviation is not a means of savings/investing as far as I know.  It has more to do with my frustration!)  In this post, I will outline the first few steps I have taken on what I hope will be my road to recovery.

1.  Creating a budget:

I know it sounds silly….and obvious, but just keeping track of where you spend your money can make a lot of difference.  This is what my monthly budget looks like at the moment.  I am not paying rent and associated bills this month since I am living in employer-provided accomodation until the end of the month.  I have started asking for all my receipts and updating the Excel spreadsheet below as and when I make a purchase.  As I get into the habit of doing this, I will probably be able to make all the updates once a week or so.

As expected, I’m going to need the most amount of discipline in the ‘Entertainment’ category.  If I stick to this budget, I will be able to have $1300 at my disposal for savings, investments and an emergency fund at the end of the month.  I am yet to nail down exactly how I will split up that $1300.

    MONTHLY FINANCES 2012    
January, 2012        
Expenses Budgeted Actual Difference Notes
Mortgage/Rent $1,100 $0 $1,100  No rent.  In company condo.
Electricity $55 $0 $55  Company pays bill.
Cell phone $65      
Cable/Internet $45 $0 $45  Company pays bill.
Entertainment $300      
Groceries $225      
Transportation $300      
Personal Care $25      
Miscellaneous $100      
Laundry $40      
         
         
         
         
         
         
Total $2,255      

2.  Opening a Tax Free Savings Account:

I have a pretty good RRSP (Registered Retirement Savings Plan) and Employee Stock Purchase Plan through my employer due to which I have a decent amount of money in my RRSP at this stage.  I have yet to figure out if a TFSA or an RRSP is the best way to go for someone in my specific situation (and tax bracket), but I chose to open a Tax Free Savings Account, specifically a Questrade Tax Free Trading Account last week.  Registration was extremely simple and they are easily the cheapest online discount broker in Canada.  I plan to use this account as a supplementary retirement account.  Having a TFSA in addition to my RRSP will give me more flexibility in withdrawing funds during my retirement.

I have been doing some research into stocks this week, and will be taking the plunge into the market next week!

A much more experienced blogger than myself, youngandthrifty, has posted a great article on the pros and cons of RRSPs and TFSAs here

3.  Take Advantage of Banking Outside Canada:

I am an immigrant, here on a work permit.  I will be applying for permanent residence soon.  However, I do not plan on getting Canadian citizenship.  My country offers quite a few financial vehicles that benefit non-residents.  One of these options is a ‘non-resident’ account, in which I can deposit an unlimited amount of money.  The money must be deposited from a foreign account – my PC Financial Chequing account will do just fine as a source.  The funds are converted into the local currency upon arrival, and are repatriable whenever you want for free.  Of course, you lose out a little on the currency conversion, but with the strength of the Loonie the exchange rate is strongly in my favour at the moment.  Finally, the best part of this account is the interest rate it offers.  On a short term (1-2 years) account, it currently offers a 9.5% interest rate!  Furthermore, any interest you accrue is tax-exempt!  If you don’t want to lock in your money even for a year, the interest rate is still a respectable 4%. 

I will be sending a lump sum into this account every quarter (to cut down on EFT fees) from now on.  This money should serve the purpose of providing me with money during my visit home, which will probably be once every couple of years.

This is the plan I’ve drawn out so far.  Very rudimentary, I know, but it’s better than my previous plan, which involved basically living pay cheque to pay cheque.

My Problems leading to Financial Anxiety

They (don’t ask who ‘they’ are) always say the first step to any kind of recovery is to admit you have a problem.  You follow that with defining your problems.  This is what I hope to achieve with this post.

I blame(or credit, depending on which way you look at it) the following for bringing me to this stage:

1.  Procrastination 

I would like to tell you how big a procrastinator I am, but I think I’ll do it in my next post.  (People have told me I’m funny.  Yes, really.)

Lame jokes apart, procrastination has caused me quite a bit of grief in my life.  Whether it is something as trivial as buying paper towel for the kitchen (I ended up using Kleenex as paper towel for a while) or something more serious like doing your taxes, I have procrastinated to great extents.  If I can get out of this old and dirty habit, I believe my life will be easier, simpler, happier and more efficient.

2.  Laziness

This probably ties into the aforementioned point, but I felt it deserved it’s own spot in the sun mainly because it ruled most of my life.  Take the elevator instead of climbing a single flight of stairs, eat out for lunch because I don’t want to make lunch and take it with me, don’t read my employer’s retirement savings and benefits guide, don’t exercise etc.  Thankfully, I have got around most of these hindrances, and I think it mostly stemmed from the fact that I enjoyed running.  Running gave me confidence, I found I was less tired, more active (both physically and mentally) and willing to take on more stuff that I was either too bored (read lazy) and too cool (read lazy) to do.

3.  Unawareness 

In this age, where pretty much everything is available, I think a majority of the population only has themselves to blame when they are unaware of common issues.  I am 28 and up until a few weeks ago, knew next to nothing about investing.  I thought just because my employer matched my RRSP contributions and also essentially provided me with one free share for every two that I purchased, I was way ahead of the game.  I thought it meant I could retire in luxury and didn’t have to worry one bit about any other financial stuff.  How wrong I was?!  I am still learning every day, getting shocked every day with new information on topics ‘I thought I knew about’ and learning all about making your money work for you. 

All of the above factors combined to me being unemployed for just over 6 months in 2011.  It led to my savings being slashed by about 40-45% (mainly through sale of my employer’s stock), me being stressed every day and night, not to mention my fiancee and the rest of my family being worried about me.  It was an eye-opener to say the least. 

Even after the rocky year that was 2011, I feel I’m lucky.  Through the support of my employer (I’m back working at the same company again), family and friends, I am gainfully employed once again.  My gross income has increased by more than 23% since May, 2011.  My girl-friend is now my fiancee, and life overall is great!

Now that I have covered everything that I think has played a part in me getting to this state, my next post will focus on what I plan to do to get me to a better financial position.

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Start slow, finish strong.

Every few years, I get the urge to significantly alter my life in some way.  So far, it has always been for the better (and I hope that trend continues). 

The last big change I made was a commitment to a healthier lifestyle.  Running became a cornerstone of that self-designed program.  As a beginner training for a race, the mantra from the experts was always ‘Start slow, finish strong’.  This refers to a runner’s pace during the race.  During my first 10-k race, I set myself a conservative target of finishing in under an hour.  This would have required me to maintain a pace of 6-min/km.  A combination of adrenaline, good weather and my stupidity led to me starting way too fast.  I ran my first km in 5:21.  This made for a torturous last 2-3 kms. 

On the other hand, a friend of mine trained and trained for a marathon, ran a great race, messed up their pacing and fell agonizingly short of their goal.  Not too mention, the thousands of runners that fail to finish races every year.

If you are still with me after that seemingly random running analogy, the point I’m trying to make is the key is to start.  You may start well.  You may start poorly.  However, if you don’t start, you will never get the satisfaction of finishing.

I look forward to this blog being one part of my slow start to a strong finish.

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