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With average house prices reaching record levels in many parts of Canada earlier this year, new home buyers are increasingly stretching themselves financially to meet home ownership obligations – in some cases, at the expense of saving for emergencies or the long-term.
For advisors, helping them get back on track financially is a matter of helping set priorities and considering creative solutions.
A recent National Bank of Canada report showed housing affordability in 10 Canadian cities deteriorated for a fourth consecutive quarter in last quarter of 2021. The mortgage payment on a representative home as a percentage of income climbed 2.1 percentage points from the previous quarter. Affordability has now worsened at the fastest pace in more than a quarter-century over the past year, the report said.
Indeed, with interest rates starting to climb, many mortgage holders are already feeling overextended, according to a recent Angus Reid Institute poll. Almost half of the survey participants (46 per cent) say their mortgage payments are squeezing their budgets to the point at which they have to watch their discretionary spending.
Shyam Ganesh, certified financial planner (CFP) at Grow Your Wealth Financial Planning in Edmonton, works with millennials across Canada through his virtual practice and has seen the financial challenges of home ownership weighing on people for the past few years – and says it’s getting worse progressively over time.
“They’re exhausting all of their savings – including cash and the [assets from their registered retirement savings plans (RRSP) for the] Home Buyer’s Plan,” he says. “A lot of them are finding ways to maximize any value they have in those.”
Mr. Ganesh says the first two to five years are often the most challenging period for clients who have depleted their savings and are dealing with mortgage payments and other home-related costs.
Setting up an emergency fund and boosting income
To help these clients build a sustainable plan to work toward future financial objectives, he starts by setting up a simple framework for spending that outlines expenses and goals to get a sense of what clients might be able to put aside for emergencies.
It comes down to being clear to the client that they can’t have it all, he says. They will have set priorities for allocating any funds left after required expenses, which will vary from one person to the next.
“I want to try and hit everything, but in what order do you want to allocate the available savings and how can it be flexible?” he asks.
After qualifying for the largest mortgage possible based on their current income, others are choosing to take a longer-term approach to getting their financial situation in order, he says.
“They’re upskilling because the greatest or best way for anyone to save more, achieve all of their financial goals, especially for this market in which all the savings are exhausted, is to try and increase their income,” Mr. Ganesh says.
For Anna Knight, CFP at Simplicity Financial in Mississauga, discussions around expectations versus reality about the costs of owning a home happen ideally before clients buy.
“My first advice to new homeowners is always, ‘Don’t get yourself in over your head.’ And it’s hard right now because of where prices are,” she says.
But for clients who are feeling financially exhausted after they’ve bought their first home, the conversation will prioritize rebuilding their emergency fund.
Ms. Knight reviews their budget to focus on either carving down 10 to 15 per cent of their expenses or generating extra income – for example, by renting out part of the home or starting a side business – to work towards re-establishing three to six months of savings.
“I want them to have six months of their fixed expenses – mortgage payments, property taxes, utilities and perhaps food, the basics – in their emergency fund so they don’t tap into their credit cards if there’s an emergency,” she says.
“Once that’s been accomplished, that same 15 per cent can now be re-allocated toward long-term assets and investing.”
Focus on the long-term plan
Asif Khan, senior wealth advisor and financial planner with The Khan Brothers Wealth Advisory Group at BMO Nesbitt Burns Inc. in Mississauga, says with only so much budget to go around if most of a client’s income is going toward housing expenses, conversations can help explore the most ideal action to take over the next one to five years.
The first step is to ensure they’re participating fully in any employer-sponsored pension plan. He also advises clients to fit mortgage, disability or life insurance protection into their budgets.
“Eventually, as clients get older, they get promotions, start earning more, and then, hopefully, the budget starts to loosen up [to the point at which] they can save more aggressively later,” Mr. Khan says. “But at least, at a minimum, get in that work plan and max [it] out.”
For those who don’t have a workplace pension plan but have the flexibility in their budget to create their own retirement savings, even setting up small monthly contributions to an RRSP or a tax-free savings account might be a first step to getting their finances back on track.
Otherwise, if a client’s monthly budget is being completely absorbed by necessary expenses, it’s time to be diligent about increasing debt payments, even by small amounts.
“That allows you one day to have that cash flow that will give you the ability to accelerate your investment or retirement savings,” he says.
Ultimately, Mr. Khan says, it is important for clients facing the large financial obligations of home ownership not to feel embarrassed or ashamed that their investment or retirement savings aren’t accelerating right now.
At the same time, these shouldn’t be ignored.
“It’s always in the back of your mind that this has to happen,” he says.
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