Marie-Claire AssekoDisclaimer:
The content of the Kaizen Gal website, its podcast and blog posts should not be taken as an investment or financial advice. I am not a financial planner, nor do I pretend or intend to be one. I am solely sharing what works for me, what is specific for me and for the stage of life that I am in.
🡪 Always make sure to do your own research and due diligence before making any investment or financial decision.
The goal of the Rags to Riches series is to share tips and habits I picked up and honed over a seven-year period of time in order to help me manage and automate my personal finances. Financial anxiety is real and scarcity mentality will hinder you from expanding the reach and ROI of your money.
So here is my 5-part story on how I went from being thousands of dollars in debt, expelled from my apartment to buying a 3-bedroom with basement house by myself in 6 years. My rags-to riches story, except I am not that rich…yet ^^
As a believer in Jesus, I am aware that God is the One who makes the impossible possible. My life is a continued demonstration of His undeserved Grace towards me and us all.
This is a summary of the Season 3 – Episode 5 of The Kaizen Gal podcast titled “How I Bought a House”, the fifth and last installment of my series on Personal Finances.
After 5 years of consistent effort and sacrifice, strategic decisions about my career, I was not only debt-free but I had also saved enough to realize one of my dreams: take a one-year sabbatical to Japan! I had my working holiday visa, my itinerary planned and then….Covid-19 hit and borders closed!
Staying at home 24/7 – to work, relax, work out – started to feel debilitating over time. My 1-bedroom apartment, which I absolutely loved, felt small and I felt cramped by life itself in a way.
A crazy idea crept by my thoughts: what if I bought a house?
Was that even possible?
Can I Afford to Buy a House?
How many times have you thought of buying a house and have been intimidated by the process? I certainly was!
Buying your first house is scary, especially if it’s your first time purchasing anything (that will put you into debt) of this magnitude. So I went at it the only way I know: budgeting and planning.
I followed the steps in the order that made sense to me:
- I wanted to know what type of house I could afford so I focused on the financial aspect first, then on my personal taste.
- I had a couple of obvious dealbreakers (e.g. I didn’t want a backyard nor a pool) but nothing too specific regarding the layout or architecture style of the house.
You might want to do the opposite if you value these attributes more.
Step 1 – Get Your Financial Life in Order
I had already gotten my financial life in order so I knew where I was at that moment.
Additionally, I calculated a few personal finances ratio (which I learned through McGill Personal Finance Essentials course) such as:
- Price-to-rent ratio => You calculate this by dividing the price of a home by the annual rent for a similar property (since I loved my apartment, I used its annual rent).
- The ratio basically shows you how many years it would take for the price of the house to equal annual rent.
- Typically, when it’s 10 or below, it could be more financially beneficial to buy a house.
- While if it’s equal to or greater than 20, it might be better to keep renting!
- I particularly like this one because it helps you assess whether it’s more cost-effective to rent a home or buy one.
- The ratio basically shows you how many years it would take for the price of the house to equal annual rent.
- Housing expenditure ratio => You calculate this by dividing your total monthly housing expenses (rent, utilities, renter’s insurance) by your monthly income.
- The ratio is the percentage of your income that goes toward housing.
- A ratio of 30% or less means that you have enough of your income left each month for other expenses and savings.
- While a ratio above 30% may indicate that you’re spending a significant portion of your income on housing, and it may negatively impact ability to save and cover other expenses.
- Simply put, it answers the question: are you living in a place beyond your means?
- The ratio is the percentage of your income that goes toward housing.
My apartment’s rent was ridiculously low compared to others in the area so my ratios (including my debt ratio) were pretty low. What a relief! This gave me reassurance that I was on the right path to buy a house.
Step 2 – Set a Budget
Having that runway actually allowed to calculate the reverse numbers:
- By setting the price-to-rent ratio at 10% then at 19%, I was able to define a range for the price of the house I could afford and still meet the benchmark.
- I proceeded the same way with the housing expenditure ratio at 25% then at 30% to find a range for the acceptable total monthly housing expenses (in this case to cover a mortgage, owner’s insurance, property taxes and utilities).
The housing market was pretty heated at that point so I had to do some research:
- I reviewed how much houses cost in my neighborhood (which I also love) and other boroughs of interest. And I eliminated areas based on high they would push my ratios.
- With the help of a wonderful real estate agent, I started to understand:
- Attributes or characteristics of a house that would drive the price up;
- How intense the bidding would get based on the foot traffic at a house visit.
By the end of our first month of visit, I could tell how much above asking price a house was going to sell and I could pinpoint why. This greatly empowered me to feel confident in my numbers when I submitted my own commitment to buy.
Step 3 – Decide on The Down Payment
Obviously, I didn’t have the entire sum necessary to pay any type of house. So I would have to contract a loan from a bank.
In Canada, there are two main schemes to support first-time home buyers and I used both:
- The First-Time Home Buyer Incentive;
- Unfortunately, the First-Time Home Buyer Incentive has come to an end 👀. It is no longer accepting applications and no new approvals will be granted after March 31, 2024.
- The Home Buyers’ Plan (HBP).
On the other hand, I also asked myself: What is the price of the house I can afford with my current lifestyle without making sacrifices or altering my savings objectives?
Yes I wanted to buy a house but not at the expense (pun intended) my savings goals!
- I knew houses were currently overpriced so I had to be careful to pay the “right” price, including the bidding process. So I sacrificed my criteria of “proximity to downtown Montreal”.
- Having solidified the habit of tracking my spending, I had created a comparative spreadsheet to analyze how my spending had changed over the previous years. So I could identify areas to make budget cuts and change my lifestyle to either
- Either make a greater down payment;
- Or specifically make a greater bid if need be.
There are two thresholds for down payments:
- You have to put a minimum down payment of 5%;
- For down payment of less than 20%, you’ll need mortgage loan insurance from the Canada Mortgage and Housing Corporation (CMHC).
So I also compared the impact of a 5% down payment vs. a 20% down payment on the monthly mortgage payments, the interest paid at the end of the term, the house insurance, etc.
Step 4 – Go For it!
With all the data points mentioned above in hand, I created an Excel sheet that provided me with two key numbers:
- On one side, I could input the asking price for a house and get the corresponding monthly mortgage payment and down payment; based on set down payment %, interest rate, term and amortization period).
- On the other side, I could enter an interest rate to get the corresponding house pricing; based on a set down payment and, the same term and amortization period.
This table greatly helped me to make a decision and confidently buy the house at a price I was comfortable with on all aspects.
TL;DR – I bought a house!
There are many factors to consider when it comes to budgeting to purchase a home. The fact is that there are a lot of different ways to go about it, but all of them entail educating yourself and making some serious decisions based on the information you have access to; yours and publicly-available information.
Some people buy a house as an investment and others to make it a home. The choice is yours but my advice to anyone in that position remains the same:
- Set an informed budget, decide what you’re willing to sacrifice (criteria, lifestyle, etc.) and stick to it;
- Review your numbers with a mortgage or financial advisor;
- Do real and deep research on the housing market in the areas that you are interested in;
- Be okay with not getting the house you crushed on. Don’t get too in the dumps and move onto the next;
- Do NOT go on a crazy bidding spree. You’ll already be tired, frustrated and bitter for finding a house – don’t impoverish yourself in the process!
I personally aim to own multiple properties one day with one of them being my forever house. The 🎯 question of my lifelong personal finance strategy when it comes to real estate is then to decide on how and when to best pay off my current mortgage. But that, that’s a story for another series 🤓😎
I hope that this series gave you a sense of the steps that led me to eventually buy a house. But know that I did not set this as an objective when I got started!
I was young and could not see the light at the end of the tunnel. So my main goal was to remain consistent in my repayment and finance management efforts. It’s that consistency and discipline that quite literally paid off and led me to be financially able to afford a home.
Aside from my finances, I also started to make more informed and strategic moves when it came to my professional journey. Increasing my yearly salary more than 4x in 6 years definitely helped! I will cover that in season 4 of my podcast, The Kaizen Gal. See you there!
