Thinking about buying a home during residency? Resident physicians have many questions about home ownership and mortgages. Here are some answers.
1. Should I buy a home during residency?
There’s no one-size-fits-all answer to this question. Here are the main criteria:
- Location: If you plan to stay in the same city to practise, it might make sense. But if you think you might move, renting gives you more flexibility. Ask yourself whether you want to commit to a specific location and the upfront costs of home ownership if you may end up moving.
- Affordability: Most residents are carrying a large amount of debt, and salaries for resident physicians range from about $60,000 to $85,000. You’ll need to determine whether buying a home during residency is financially sound. Will you have the down payment you need, plus funding to cover all the closing and ongoing expenses, to qualify for a mortgage on the home you want?
2. If I don’t buy soon, will I be able to afford a home later?
Is a rising real estate market a sure bet? If you were born in the 1990s, you may not remember a time when home prices weren’t climbing (except maybe the short-lived housing dip in 2008). So far, predictions about this trend reversing have proved wrong.
As a resident physician, you might feel that buying sooner rather than later could mean the difference between affording it now and not affording it later. It’s really anyone’s guess where the housing market is headed, and you should make your decision based on your circumstances.
3. Will my medical school debt affect my ability to get a mortgage?
When you borrow money, the lender wants to be assured you can afford to make your payments. Normally, to qualify for a mortgage, you need to show that you have the income to service all your debts, including medical school debt. Even though you may not be making any payments on your student line of credit yet, a proxy amount will be included.
Scotiabank has flexible mortgage solutions for residents and uses two main guidelines to determine how the amount of mortgage physicians can qualify for:
Gross debt-service ratio should be less than 39%.
Your gross debt-service ratio is calculated by dividing your housing costs (i.e. mortgage, property taxes, heating expenses, 50% of condo fees if applicable) by your gross monthly income.
Total debt-service ratio should be less than 44%.
Your total debt-service ratio is calculated by taking your household costs plus any other debts you may owe, such as a car loan or credit card debt, and dividing that by your gross monthly income.
If you’re a resident physician seeking approval for a mortgage, your financial institution may use your future income as a physician rather than your current income as a resident physician.
At Scotiabank, the amount of mortgage you can qualify for is based on your projected income.1 So if you’re an anesthesiologist in training in Toronto, your projected income would be based on how far you are in training and the average estimated amount for this specialty in this region..
If you are pre-approved for a mortgage based on projected income, you’ll still have to ask yourself whether you can afford it while earning a resident’s salary.
4. How much down payment will I need?
Your down payment amount depends on the home price:
- under $1 million: a minimum down payment of 5% on the first $500,000 and 10% for the amount above that
- $1 million or more: a minimum down payment of 20%
If you have a down payment of less than 20%, you will need mortgage default insurance, which could add 2.8% to 4.0% of your total mortgage, plus the sales tax.
5. Where can I get the money for my down payment?
Residents may find it hard to save for a down payment. The minimum amounts in the above table are daunting.
Gift from family: We’re starting to see the transfer of wealth as baby boomer parents help their children with the down payment for homes.
Student line of credit: If you have a Scotia Professional® Student Plan, you can borrow a maximum of 50% of your down payment but you will need mortgage default insurance. MD Financial Management’s article on mortgage default insurance explains this in more detail.
First-Time Home Buyer Incentive: If your household income is $120,000 or less, you can access the First-Time Home Buyer Incentive. This offers first-time buyers an interest-free loan of up to 10% of the price of a newly built home or up to 5% on a resale purchase. However, the government will share in any gains to, or losses from, the value of your home.
6. Can I borrow from my line of credit, use the money to contribute to my RRSP and then withdraw from the RRSP as part of the Home Buyers’ Plan?
This is a strategy that might work if you have registered retirement savings plan (RRSP) contribution room. The advantage is that you get the tax deduction from your RRSP contribution. After the funds are in the RRSP for at least 90 days, you can then withdraw the money tax-free (at that time) through the Home Buyers’ Plan. You’ll need to repay what you borrow over the next 15 years. When you repay into the RRSP contribution, you don’t get the deduction. And if you don’t repay, 1/15 of the amount is included as income on your tax return.
7. How much will my mortgage payments be?
Once you’ve figured out your down payment, you can use MD Financial Management’s mortgage calculator to estimate your mortgage payment. Basically, it will take your purchase price, down payment, amortization period, payment frequency, term and interest rate, and calculate how much your mortgage payment will be.
A cash flow calculator can help you figure out whether this amount is reasonable for your budget. Be sure you also have money set aside for the upfront and one-time costs of homebuying (e.g., land transfer tax, legal fees, moving costs).
Once you’ve decided to look for a home to buy, you may want to speak to your financial institution about a pre-approval. A pre-approval lets you qualify for a mortgage — prior to purchase — to ensure you won’t have financing issues later. Pre-approvals are valid for 90–120 days and allow you to use the mortgage rate at the time of pre-approval or mortgage funding, whichever is more competitive.
An MD Advisor* can help you with your budget and help determine how a mortgage will fit into your financial plan. When you’re ready, a Scotiabank Home Financing Advisor can explain the different mortgage options available to you and help you determine the right solution for your needs.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
1 The projected income is an average estimated amount based on available industry data and is subject to change. Your actual income may vary.
All banking and credit products and services are offered by The Bank of Nova Scotia (“Scotiabank”) unless otherwise noted. Credit and lending products are subject to credit approval by Scotiabank. Terms and conditions apply to all reward programs and benefits and should be reviewed carefully before applying. All offers, rates, fees, features, reward programs and benefits and related terms and conditions are subject to change. Visit scotiabank.com or speak with your MD Advisor or a Scotiabank representative for full details
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.
