Are you a medical resident or new-to-practice physician wrestling with the question of whether to buy a home? In Canada, there’s no shortage of articles and news about home prices and affordability, especially for millennials who are trying to buy their first property.
Buying a home can be scary — it may be the largest purchase of your life, especially if you live in the Toronto or Vancouver areas. It’s a massive financial commitment that could tie up your finances for the foreseeable future.
For most physicians, the question of “rent or buy” comes down to a matter of timing. Of course, some of it is emotional — you want a place you can really call your own. As you start thinking of getting your first home, here are some considerations.
- How long will you be in your current city or town?
- Is renting throwing money down the drain?
- Will buying a home leave you strapped for cash?
- Do you have the down payment for a home?
- How expensive a home can you afford?
- What about the other costs of buying a home?
- What are some of the hidden costs of home ownership?
Let’s go through them one at a time.
How long will you be in your current city or town?
If you plan to move in a few years, renting makes more sense than buying. If you’re doing a residency in a place where you don’t plan to practise, or you’re doing a locum, renting keeps things flexible.
Generally, because of the upfront costs of home ownership — as well as the ups and downs of house prices in the short term — it’s unwise to buy unless you keep the home for several years at minimum.
Is renting throwing money down the drain?
The idea that renting is money down the drain does not give the full picture. When you rent, you’re renting your home from a landlord. When you buy, in a sense you’re “renting” money from the bank (interest) and land from the town (property taxes). When you own a home, you’re still renting something — it’s just structured differently.
Keep in mind that when you first start paying your mortgage, a significant portion goes to the interest payments. Only a small portion of the mortgage payment goes toward the equity in the home, so you most likely won’t see much change in the principal amount in the first few years.
Over the lifetime of your mortgage, the amount you’ve paid in interest could be a substantial. The graphs below shows the total interest you would pay (orange) over a 25-year amortization on a $400,000 mortgage at 3.5% and 5.5%.
Source: Financial Consumer Agency of Canada, “Mortgage Calculator” .
Will buying a home leave you strapped for cash?
First-time buyers should be aware that there is a big difference between being able to afford a home and being financially comfortable owning one. Oftentimes, financial institutions will pre-qualify you for a lot more than you can really afford. You need to figure out how much is reasonable so that you don’t end up “house rich but cash poor.”
MD Financial Management’s rent or buy calculator can help compare the monthly cost of home ownership against renting. Be aware that while it suggests interest rate, inflation rate and minimum down payment, you will have to enter other costs such as property tax, land transfer tax and homeowner’s insurance — which can leave a lot of guesswork.
Let’s say you’ve decided to practise in Edmonton. Assume you find a three-bedroom house that you can buy for $400,000. A comparable rental would run about $1,800 a month. According to the calculator, if you have the $20,000 minimum down payment and 25 years to pay the mortgage (called the amortization period), property tax of $300 monthly and the condo fee of $400 monthly, owning would cost about $2,700 a month.
Do you have the down payment for a home?
The down payment is the portion of the home’s purchase price that you pay upfront. The rest, you borrow.
You must have a down payment of at least 5% for the first $500,000 of the purchase price and 10% for the portion of the price above $500,000 (for properties up to $1 million). For homes above $1 million, you need a minimum down payment of 20%.
You might be able to scrape up the minimum, but remember: the smaller your down payment, the more you have to borrow; and the more you borrow, the higher your monthly mortgage payments.
If your down payment is less than 20%, you’ll have to get mortgage loan insurance from Canada Mortgage and Housing Corporation or Genworth Financial Canada. The typical cost for this insurance ranges from 2.8% to 4.0% of the amount of your mortgage, plus tax, and this amount can be added to your mortgage payments.
How expensive a home can you afford?
As a young physician, consider how taking on regular mortgage payments might make it hard to keep up with other bills — especially if your payments are large.
If most of your income is going toward affording the property, you’re left with very little cash for things like hobbies, vacations or just living a comfortable day-to-day life. Owning a home may cause a lot of financial stress.
The financial institutions that you borrow money from want to be assured that you can afford what you borrow. That said, if you’re a resident getting approved for a mortgage, your financial institution may use your future income as a practising physician rather than your current income as a resident.
Lenders use two main guidelines to determine how much mortgage you qualify for.
The table gives a general idea of your monthly mortgage payments for a range of home prices, assuming you make only the minimum down payment:
What about the other costs of buying a home?
Remember that, besides your mortgage, there are other home ownership costs that have to be paid monthly or annually. More startling to some new buyers, there is the pile of cash you’ll need at purchase time. Known as closing costs, these are in addition to the down payment. All the figures below are for guidance only.
- Home inspection: $250 to $500
- Appraisal: $250 to $350
- Legal fees: $800 to $1,000 (fee) + $400 to $500 (disbursements)
- Provincial land transfer tax
- Municipal land transfer tax (Toronto only): about 1.5%–2%
Note that in some provinces, land transfer tax rebates are available for first-time buyers. The same is true for Toronto’s municipal tax.
Other one-time costs
- Moving expenses: $1,500 to $5,000
- Painting and/or renovations
- GST/HST (new homes only)
- 13% of purchase price
- for homes below $450,000, there’s a potential rebate of the GST portion (5%)
- Adjustments (if seller prepaid property taxes and any utility bills): $400 to $700
- Utility bills: heat, water, electricity
- Property tax
- varies widely across Canada from 0.25% to 1.8% of the assessed value of your home
- Homeowner’s insurance
- covers smoke and fire damage, water damage, weather-related damage, etc.
- $1,000 to $2,000 per year
- Condo fees (if applicable)
- anywhere from $150 to more than $1,000 per month
- fees depend on your province, building, size of unit
What are some of the hidden costs of home ownership?
There are costs for the upkeep of your home that can be unpredictable and hard to quantify. This list will give you an idea:
- Maintenance and repairs (e.g., replacing the roof, furnace repairs, damage from flooding, rotting wood)
- Renovations (e.g., painting, installing new kitchen tiles, upgrading a bathroom)
- Outdoor maintenance (e.g., trees, driveway, fences, walkways)
- Problems with insects, rodents, mould, etc.
The right decision about whether to rent or buy your home as a young physician depends on your future goals and plans and your current financial situation. Talk to your MD Advisor* about what would be the best fit for your personal and professional plan.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
1 Total mortgage was calculated including mortgage loan insurance of 4% plus tax.
2 Monthly mortgage payment was calculated using a 3.5% interest rate, a five-year term and 25-year amortization. We did not include property taxes, which some homebuyers arrange to pay monthly with their mortgage payment.