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Podcast: Buying a house as a resident or young physician

Buying a home is a massive undertaking for anyone. In this episode, hosted by Tanis Roadhouse with special guest Gareth Canning, we talk about the decision of whether to buy property as a resident or new-in-practice physician, the advantages to owning a home, the extra costs and additional responsibilities that come with it.

 

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You’re listening to The Financial Literacy Podcast, brought to you by MD Financial Management.

Canada’s only national financial services firm dedicated to helping physicians and their families with their unique financial needs.

TR: Hey listeners! Thanks for joining us today. My name is Tanis Roadhouse and I will be your host for today’s episode. I am so excited to be here today as we discuss the decision of whether to buy property as a resident or new-in-practice physician. And we’re joined by a very special guest, Gareth Canning, Financial Consultant with MD.  Gareth, thank you so much for being here with us today.

GC: Thanks for having me, I can’t wait to get started.

TR: Alright then, let’s jump right in.

GC: Great!

TR: Now, obviously deciding to buy a home is a big decision for anyone. But for residents or physicians new-to-practice, it can be even more daunting, for a variety of reasons. Can you touch upon some of the major factors that could maybe make someone hesitant to make that leap into the housing market?

GC: Yes, of course. So, like you said, buying property is a massive undertaking for anyone, especially with the cost of housing rising as it has over the last decade. Now add to that the already massive debt from medical school, plus the stress of finishing your residency or starting practice. It’s a lot to think about.

TR: So, do you think it’s ever a good idea for residents or new-to-practice physicians to buy a home?

GC: It really depends. There are some great advantages to owning a home, but residents and new-to-practice physicians need to ask themselves if they think they can handle the extra costs and responsibilities. It’s not impossible, but it requires a lot of thought and research.

TR: Where, do you think, is a good place for them to start?

GC: I think, before you even begin to look into the financial factors you have to look at the situation logically. It’s not uncommon for physicians to have done med school in one city, and then their residency in another, and then practice in another. So, you really have to consider where you see yourself geographically over time. Starting your practice, getting married, and starting a family are all things that may affect where you decide to settle down. So, if you’re not sure about whether you will want to stay where you are for those things, the flexibility of renting might work better for you.

TR: Right, makes sense. Now, let’s say you have a resident, they’ve fallen in love with the city their training in. They’re saying to themselves, you know, “I never want to leave here. There’s so much opportunity. The community is great. I can really see myself settling down here.” What would you say to that resident if they wanted to start looking into buying a home while still training?

GC: I would say, “That’s amazing! What is your financial plan?”  And I don’t mean that as in I’m trying to crush their dreams, but a lot of people, even those in not in massive debt from med school, don’t fully see the whole picture when it comes to buying property. Your upfront costs are more than just a down payment. And mortgage payments don’t work the same as rent payments. There are many other factors that will affect your financial ability to afford a home, so I would say that step one is always to speak to an advisor so you can get a better idea of what you can afford to take on.  

TR: And that’s where advisors like the ones at MD are especially helpful, because they are professionals in the financial needs through all the stages of a physician's journey.

GC: Absolutely. Because while physicians may accumulate a significant amount of debt through their student loans and lines of credit, certain financial institutions have created programs to make it possible for them to purchase a home. And an advisor that specializes in these situations will be more familiar with those options.

TR: And that gives residents and new-to-practice physicians more confidence in their decisions.

GC: Exactly.

TR: So, speaking of financial advisors, let’s start breaking down the financials of when a resident or new-to-practice physician starts to consider buying property.

GC: Alright. So, the first thing you’re going to want to do is get a clear picture of your current financial situation. This means getting a solid understanding of the total amount of debt you have including your student loans, lines of credit, credit cards, and knowing what your monthly payments for that is going to look like. Then, you’ve got to look at your options for coming up with a down payment; how much you have saved, how much you need to save, and if it’s possible for parents or other relatives to help out. From there, you can begin to evaluate what you own, what you owe, and if you will have enough cashflow to cover all your housing expenses.

Your expenses should include all your fixed costs and financial commitments that will be there whether you decide to rent or buy, plus all your variable expenses, like groceries, entertainment, buying clothes, et cetera.

Also, keep in mind that buying a house comes with a lot of upfront costs, so you will need to significant funds saved and on hand to cover those.

TR: Now, when you say, upfront costs, you’re talking about a down payment, right?

GC: Yes, that’s the main part of it. And there is actually a lot of flexibility in how much you can put down on a home, which is great for physicians with limited assets.

But that being said, even though paying less for your down payment might sound great, it’s a little more complicated than that.

TR: Ok, so let’s break down how to determine what you would need for a down payment.

GC: Alright. So, first things first, you need to look at the sale price of the home. If the purchase price is 500 thousand dollars or less, you need a down payment of at least 5%.

For a home that is prices between 500 thousand to 1 million dollars, you still only need 5% of the first 500 thousand dollars. Anything above that 500 thousand requires a minimum of 10%.

And then any home over a million dollars needs a minimum of 20% down.

However, for houses under a million dollars, even though the minimum down payment is 5-10%, you need to pay at least 20% to avoid having to apply for mortgage default insurance, which will be added to your mortgage. 

TR: Wait, so then what’s the point of the 5 or 10% minimum if it’s going to cost you more in the long run? What is mortgage default insurance?

GC: So those 5 or 10% minimums are actually really helpful for getting more people into the housing market in spite of the rising housing costs. There are lots of people who would be able to afford their monthly mortgage payments based on the cost of their home. It’s just saving the large down payment that is holding them back. Making that initial cost lower provides more buying opportunities.

Mortgage default insurance protects lenders in case a buyer defaults on their mortgage, for example not making their payments. This can cost between 0.6 – 4.5% of your mortgage, which can be paid up front with your down payment or added to your mortgage payments later.

So, while this insurance isn’t meant to protect you, it can help make it possible to buy you home in cases where coming up with a 20% down payment is not possible.

TR: Ok, so we have a down payment plus, possibly mortgage default insurance. You mentioned earlier that there are other upfront costs as well?

GC: Yes.

There are closing costs, which includes legal fees, but is mainly your land transfer tax. This can range between 1.5 to 4 percent of your house’s purchase price.

And then there are things like home appraisals, inspections, and land surveys, which could add a few thousand dollars extra on top of your down payment.

TR: So, let’s say you’re looking at buying a 2-bedroom condo in downtown Toronto. I think the average price is between 700 to 800 thousand. And let’s say you want to put 20% down to avoid mortgage default insurance. You’re going to need between 140 to 160 thousand plus extra for closing costs. That’s hard to come up with by yourself. So, is there any assistance available to help residents and new-to-practice physicians come up with that down payment?

GC: Yes, there are a few ways you could get some help with your down payment.

Nowadays, it’s not uncommon to see parents or grandparents helping their children or grandchildren by gifting them large amounts of money, usually for things like down payments for a home. If this is something that is possible for your family, then it’s a great way to get a little bit closer to purchasing your home. And if your family is really nice, it’s a great way to avoid interest and extra fees that you would encounter from lenders.

If that’s not a possibility for you, there are some borrowing options specifically for residents and new-to-practice physicians. Scotiabank, for example allows anyone with a Professional Student Plan, which is a student line of credit, to borrow up to 50% of your down payment. However, this is another instance where you will need mortgage default insurance[ME1] .

TR: Alright, so even if residents and new-to-practice physicians think that “Wow, a I’ll never be able to save up a down payment by myself,” they should know that there is still hope. I mean, it looks like there are lots of options that help make that goal of buying a home possible.

GC: For sure, it’s definitely possible with the right planning. The most important thing is to keep in mind is that when you start to consider borrowing for your down payment, how much that is going to add in debt on top of your student debt. And that’s before we’ve even factored in your mortgage debt.

TR: Right, because once you’ve got your down payment out of the way, that’s the next step. So shall we start to break that down a little bit?

GC: Yea, absolutely. So, mortgages for residents and new-to-practice physicians are calculated a little bit differently. But before we get into that, I think we should break down what your mortgage is actually made up of.

So, your mortgage is the remaining purchase amount of your home not covered by your down payment. The bank loans this amount to you, and then you have to pay it back over a determined period of time. Plus, interest, of course.

Now, the overall period of time that you have to pay off you mortgage is your amortization. This can be 15 years, 20 years, 30 years, et cetera, you have different options to choose from.

Within your amortization are shorter periods of time called terms. Usually these are 5 years, but they can range anywhere between three months to 10 years. Your term determines what your monthly payments will be and your interest rate for that specific period of time. Once a term is over, you can renew, or you can establish a new term.

TR: What is the point of a term? Why not just keep the same payments throughout your whole amortization period?

GC: Well, over a span of 20+ years, the economy and interest rates are going to change. Not to mention, people’s personal circumstances may change too. Having these shorter terms gives borrowers the opportunity to adjust to those changes. In fact, interest rates can change frequently, so there are even different options for how you want to pay the interest on your mortgage within your term. You can pay based on a fixed rate or a variable rate.

A fixed rate mortgage means that you agree on a specific interest rate for the duration of your term. This is good option for those who need a steady pace for repayment because your monthly payment will be the same for that period of time. However, this also means that sometimes you may be paying more in interest than someone with a variable rate.

And that’s because with a variable interest rate, your interest changes with the bank’s prime rate. So, when the bank’s prime rate goes down, your payments might be less, and when they go up, you might have to pay a little more. This will save you money in the long run, but it might make keeping track of your monthly expenses a little tricky.

You just have to decide what makes the most sense with your other financial obligations.

TR: Ok, so there are a lot of options to structure your mortgage in a way that works for you, which for residents and new-to-practice physicians is great for helping them prioritize their expenses. But what should they expect when it comes to how much of a mortgage, they will qualify for?

GC: Right, so first thing, it’s a good idea to go see a lender for a pre-approval before you start looking at homes. Not only will this give you a better idea of your budget, but most sellers now are looking for that information to know that buyers are really serious.

Typically, to get pre-approved, there’s a number of things you need to provide to your lender. You need proof of your income, and you need to verify your employment. This is mainly so that the lender knows you have a steady cash flow and can be trusted to make your payments. If you have any assets, you have to show proof of those. Your assets will include the funds you’ve saved for you down payment and closing costs, plus any other cash reserves you may have. Then you will also have to undergo a credit evaluation to see whether or not you have good credit. Most lenders look for a credit score of at least 620. You will also need ID and other paperwork in order for your lender to complete your credit report.

Then, once your lender has all that information, they usually calculate it using their mortgage stress test for a 5-year term, to see how much you would be able to afford. That total minus your down payment is your total mortgage.

TR: But the pre-approval is just an estimate, right?

GC: Sort of. It’s the maximum amount that the lender is willing to give you based on the information you provide.

Obviously, depending on the actual sale price of your home and how you structure you mortgage, your actual mortgage may be different.

And I know this sounds like a lot just for a pre-approval, but it will save you a lot of time and stress compared to if you found a home you loved and then had to scramble to get all of this done afterwards. Plus, your pre-approval usually lasts about 90 days, so once you go through the whole process you have a pretty good amount of time to find a home and finalize things.

TR: And you mentioned earlier that this process can be a little different for physicians. How so?

GC: Well, for physicians, the great thing is that there are some lenders who understand that while you are still training you will have large amounts of debt, even if you may be earning income through residency. So, rather than say, “Well, you already have all these other loans you have to pay off, why would we let you borrow more,” instead they look at your projected income of your specialty when you begin practicing. So, for example, if you are planning to become a thoracic surgeon, or cardiologist, they use a portion of your specialty's future income to determine your mortgage.

They know that the rate of loan repayment for physicians is usually much faster than other careers, and this is where mortgage terms will benefit you. Because you can have smaller monthly payments while you are starting your practice and focusing on repaying your student loans. Then, down the road, you can renegotiate your term agreements to increase your payments and pay off your mortgage a little faster.

Keep in mind, depending on the payment arrangements in your mortgage agreement, you can make extra payments toward your mortgage if you have spare funds.

TR: I mean, that sounds like a great advantage, being able to get a mortgage based on projected income, rather than what you have now. So, do you think it’s better for physician to, in that case, get into the market sooner rather than later?

GC: You’re right, it is a great advantage. But I think it still really depends on how much responsibility a resident or new-to-practice physician can handle while they are going through many different life events at the same time. While you can get approved for a mortgage, you still have to think about if you can balance that with your other financial obligations, or if you would rather wait until you are further into your career and have less financial stress.

TR: Very true. Now we are almost out of time for today, so is there any final advice or even just encouragement you’d like to offer our listeners who are thinking about buying a home while pursuing their medical career?

GC: Sure. I know we went through a lot here, and I don’t expect anyone to grasp all of this information in just the last, what, 20 minutes or so. And I don’t expect you to make your decision just based on what you’ve heard here today. There is a lot that we didn’t cover; you could make an entirely separate podcast on this topic alone. But I do hope that this has given you some confidence or reassurance that it is absolutely possible to buy a home as a resident or new-to-practice physician. There are lots of options out there for you, there are lots of ways to get help along the way.

You shouldn’t have to put every other aspect of your life on hold just because you’ve chosen a career in medicine, or any career for that matter. So, speak to an advisor, do some research, I know you will find something that works for you.

TR: Absolutely! And if you’re listening to our podcast you’re already off to a great start. Like <guest name> said, there’s a lot we couldn’t cover today, but we’ve got a lot of great resources on our website here for you to check out. And, of course, our advisors can help you every step of the way.

So, if you’re a resident or new-to-practice physician, a recent graduate, or even if you’re already practicing and are ready to buy your first home, contact an MD advisor and get expert guidance tailor specifically to your needs as a physician.

Gareth, thanks again for joining us today. It’s been a great chatting with you.

GC: Thank you. And best of luck to all you future physicians out there listening.

TR: Yes, listeners, thank you so much for tuning in. Once again, my name is  Tanis Roadhouse, it’s been a pleasure hosting the episode today. We hope you’ll tune in again soon. Bye-bye.

This has been The Financial Literacy Podcast brought to you by MD Financial Management.

For more information or to speak to an advisor today, visit our website at md.ca

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