I didn’t come up with the title, it was the subject line of an email I got from Jenny. Jenny is in a very common situation, she’s just about the graduate school, currently has some income, and is looking to purchase a house in the very near future.
I’m 24 years old and really concerned about my financial future, I come from rather meager upbringings and I want to be sure that I’ll be able to live/ retire comfortably.
- I’m currently a full time student and full time employee making about 32,000 a year and am living on my own with bills to pay.
- I currently have about 9,000 in savings (plus a small RSP savings account with Scotia Bank that pays less than 2% interest)
- I would like to make sure that I’m on the right track, and would like to own a condo/ apartment within the next couple years, but worry that with such low funds and only 1 credit card in the way of credit I’m not going to have much luck!!
- I’m living in BC approximately an hour outside downtown Vancouver and figure that I’ll be paying about 250,000 for a condo in my suburb.
- As for graduation the details get a little foggy there, right now I’m fairly content with my job but am getting my bachelors degree just as an insurance policy so to speak. I figure that by the time I graduate (probably in 3 years or so) I’ll either be ready to try my hand at a new career unrelated to my education (but be able to earn a higher salary since I have it), or will have been led certain way by the courses I’m interested in/ skilled at.
- Absolutely no debt and am not yet married.
To start, I’ve said this before, but I’m not a financial advisor so anything I say should be taken with a grain of salt. With that out of the way, looking at the details indicated, it seems that Jenny is far from clueless. As a young person still in school, it’s commendable to be debt free and have some savings put away even if working full time. Lets take a look at some of the financial goals
Rent vs. Buy
Jenny’s first goal is to purchase a $250,000 condo. Assuming a 5.5% fixed interest rate, and 5% down, the payments would be $1,450/month + property tax + condo fees. Assuming 1%/yr property tax and $250/month in condo fees, the total housing cost of approximately $1,900/month not including utilities. To rent in the same area, according to Jenny, it would cost around $1,200/month for a 2 bedroom apartment.
The initial problem with purchasing is qualifying for the mortgage at her current salary. Purchasing the condo would result in a month housing expenses of at least $2,000/month with utilities. The maximum a lender will give is a gross debt servicing (GDS) and total debt servicing (TDS) of 32% and 40% respectively.
In Jenny’s case, even if $32,000/year would result in a GDS of 75% which is way outside the qualification range. Even if her salary got boosted to $50,000 in a couple years, it would still result in a GDS of 48%. Jenny’s (or family) income would need to increase to $75,000/year to qualify for a mortgage on this home. The point being is that unless Jenny’s income (or down payment) increases significantly, then purchasing a home at this price may not be an option.
The alternative, not that it’s a bad one, is renting. Renting has always gotten a bad rap as they say that you’re paying someone elses mortgage. While this may be true, paying lower housing costs and investing the difference between renting and mortgage payments, can put you ahead over the long term as home ownership is historically known to only keep up with inflation. If home ownership is something that you want for yourself, then I would suggest to rent first (as cheaply as possible), save as much as possible, then consider buying when the income levels are high enough to support the housing costs after a large down payment.
In conclusion, I think that Jenny is already on the right track. She should keep up her savings habits even while her salary increases, index her portfolio for the long term, and wait for the right time to purchase a home.
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