Before You Buy a Home: 5 Questions for New Physicians

May 21, 2019

           

At some point, most new physicians will think about owning a home. After years of renting during medical school and residency, you may have a strong desire to buy. Not to mention the sometimes-intense pressure to keep up with your peers.

And when you’ve spent years in medical training, you probably haven’t had much time to learn about the world of finance—a place with a language of its own. There’s conflicting information from different sources, a ton of options and little time to make sense of it all.

Before you start hunting for a home, here are five questions to think about.

  1. Can you hold off to give yourself more time in practice?

Buying a home shortly after residency may not be the best plan. If you’ve moved to a new city to practise, it takes a while to get to know it and appreciate what the real atmosphere of the city is like. Not owning a home provides you with the flexibility to change your location and set-up. It also leaves you freer to focus on establishing your practice. Ask yourself whether you really want to commit to a specific location, and the responsibilities of home ownership so early.

  1. Do you have a good sense of your current debt level and any upcoming expenses?

Most new physicians have a lot of debt, with 40% of medical school students reporting a debt of $120,000 or more. If you couldn’t pay down your debt during residency, now is an excellent time to do so, with the spike in your income. You may also have purchases to make that you’ve put off, like a car, clothes or furniture. Maybe even a well-deserved vacation. Everyone’s priorities will be different. What are yours?

  1. How much house can you afford?

The vast majority of Canadians need to borrow money to buy a home. Banks will determine how much they’re willing to lend you, and any med school debt would be factored into this calculation. Start by figuring out how much of a down payment you can make and use a mortgage calculator to explore your mortgage options. Estimate the upfront and one-time costs, including land transfer tax, legal fees and moving costs. Be sure you have assets set aside in a secure investment for the down payment. See How to finance your first home purchase—we’re here to help.

  1. What are your requirements in a home?

Think about what you need in a home, and what your preferences are. What type of home (detached, condo, etc.) are you looking for? Do you like the idea of a brand new build, or something older in an established neighbourhood? If you plan on having a family or already have one, nearby amenities like schools will be very important.

You should check the closest school’s catchment area. In Toronto, for instance, some new condos have posted signs from the school board stating that the residents’ children are not guaranteed a spot in the area’s public school due to space restrictions. See our checklist for buying your first home– it’ll remind you of things you might be forgetting along the way.

  1. Do you understand the home-financing terminology?

Like medical jargon, there’s an entire vocabulary for real estate and mortgages. Here are the basics, to help you navigate the financing aspect of buying a home.

Fixed versus variable: A fixed-rate mortgage gives you the stability of knowing what your interest rate, and therefore payments, will be for the full term of your mortgage. A variable-rate mortgage, on the other hand, will have a rate that varies according to the bank’s prime lending rate. Although the payments can still be fixed, the portion of the payment that goes toward the principal versus the interest can waver with changes in the prime lending rate. This potential fluctuation requires a certain degree of risk tolerance, but can create potential interest savings.

Term: The term of the mortgage is the length of the mortgage contract. The contract will specify interest type, rate and payment terms. If you break the mortgage contract early, there could be penalties to pay. Mortgage terms can range from three months to more than 10 years, with the most common being five years. At the end of the term, if you are not yet debt-free, you will renew for another term or obtain a new mortgage.

Amortization: Amortization is the period over which the entire loan is repaid. The amortization you choose (15, 20, 25 or 30 years) will have a significant impact on how much interest you will pay over the life of your mortgage. It is possible to have multiple terms over the full amortization.

Down payment: You must have a down payment of at least 5% for the first $500,000 of the home’s purchase price and 10% for the portion of the price that’s above $500,000 (for properties up to $1 million).

Note that a down payment of less than 20% will require mortgage loan insurance from the 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. As such, if you can make a down payment of at least 20%, you will save a considerable amount in insurance and interest charges. 

Closing costs: Aside from your down payment, the largest single upfront expenditure will likely be your closing costs. The most significant of these is the land transfer tax (typically 1.5% to 4.0% of the purchase price of your home — rates, terms and calculations vary by province, territory and municipality). Others include moving costs and legal fees.  

Other fees: Home inspection fees can vary widely, but $300 to $500 is typical. Your lender may require an up-to-date survey, and a survey fee can run from $1,000 to $2,000.

Buying a home is one of life’s biggest decisions and your home will become one of your largest financial responsibilities. Having the right information can guide you, make this a better experience, and save you money.

A financial advisor can help you with your budget and help determine how a mortgage will fit into your financial plan. But remember to think about what's most important to you and assess whether you see yourself staying put for a few years, and whether you're ready for a longer-term commitment, before saying “yes” to buying.

Talk to MD Financial Management’s team of advisors to learn more.

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