Homeownership for Young People

Looking Ahead

No one likes to think they will get old but we all seem to. Equally, no one likes to think that they will be living in their parents’ basement until they’re thirty-something! While saving for a mortgage may be the last thing on young minds preoccupied with sports, dating, or academics, it’s never too early to plan for the future. A few small steps can become giant leaps towards financial security!

Every dollar counts!

If there are two key words every young adult and teenager should know they are “compound interest”. A simple mathematical calculation demonstrates how savings can build. If the initial investment is $100 at a conservative interest rate of 5% per year, by the end of that year the investment will be $105. If the money remains invested through the next year, the investment will grow to $110.25 ($105 x 5% = $110.25). The following year it would be $110.25 x 5% = $115.76. So it is easy to see how quickly an investment can grow. It’s a great habit to get into setting aside a certain amount from every paycheck. Regular “payments” to your investment not only result in greater savings, they can help even out the ups and downs of the marketplace. There is nothing worse than investing one large sum of money and immediately afterwards seeing the stock market or interest rates plummet. Also try to think of invested money as being out of reach and avoid dipping into those savings.

Elephants aren’t the only ones with good memories…

A credit history can go as far back as the first loan (even those co-signed by a parent) or the first credit card. A bad credit rating can make it hard to lease a car, get a mortgage, or any type of loan. Always pay at least your minimum monthly credit card payment and pay it on time. Of course, the best plan is to never carry a balance. The lure of credit, however, can be too hard for anyone to resist especially for a young adult on a limited budget. If you can establish good habits early, think of how much you will save by avoiding years of paying 18-20% credit card interest. (That’s compound interest too, by the way.)

A poor credit rating can haunt you for years but a good rating can help you get a loan or mortgage in the future. Most lenders need to see that a borrower is financially responsible. Credit cards can be a great beginning. Most credit card companies will give accounts to students in their last year of university or most applicants over the age of 21.

Research the area where you would like to live.

No one can predict where the future will take him or her. Society is more mobile than ever. Educational pursuits or new jobs often force people to leave their hometowns and relocate in other cities or provinces. Wherever a person decides to put down roots, it’s important to research the market. Talk to local real estate agents. Most will be happy to share their knowledge and experience. Some important questions to ask include How much will I expect to spend in order to purchase a house with a certain number of bedrooms or a certain square footage? What sort of features should I look for in a home? Is there a strong resale market in this area? Also check out the local real estate companies on the Internet to get an idea of local home prices and sizes.

Mortgage Calculators

The best place to start is a mortgage calculator on the Internet. You can simply type in “mortgage calculator” and several options come up. (Ensure that you are using a Canadian mortgage calculator since rules differ between countries. A good calculator can be found at (www.canadamortgage.com.) A mortgage calculator is a quick, easy way to see what you can afford. If you enter an approximate home value and current interest rates, the calculator will show the required monthly payments and the value of the mortgage. By changing the amount of your down payment or the length of the mortgage payment period (amortization period) you can see how monthly payments change. Remember that this calculator only provides general information. When an individual applies for a mortgage the lender will take numerous factors into account including income, length of employment, and of course that omnipresent credit rating!

The tortoise and the hare…

Even if buying a home is years away it’s a good idea to start planning today! The slow steady building of your investments pays off richly in the end. Save a specific percentage of your income on a regular basis starting from your very first part-time job. Also try to make payments to your credit card on time and don’t carry a balance. Eventually we all get to the finish line but it’s nice to get there in style!