Readers of this newsletter have used the Ask Rob feature to send exactly 2,006 questions my way over the past few years. Thanks, and apologies for not being able to answer every one in the newsletter. I pick questions that can be answered in a concise way and are of broad interest to readers.
Here’s a question that came in not too long ago and will be of interest to everyone in the market to buy a house, or who already owns: Does it make financial sense to buy a “starter house?” Here’s the full question...
Hi! (love your newsletter btw). My partner and I are in our mid to late 20′s and are thinking about buying a house in the next three to five years. We are good savers, with only one of us currently in debt (tuition costs that he plans to pay off in one to two years).
An average three-bedroom house in the city we live in ranges from $360-$550,000. We don’t want to be house-poor, so our goal is to save up 20 per cent for a down payment and have a mortgage payment of around $2,000 a month. That being said, there is some debate as to whether we buy a cheaper starter house first ($350-$400,000) we will stay in for two to three years, or save longer to buy a bigger house ($400-$550,000) we will stay in for 10-plus years. What would you recommend?
I dislike the idea of starter homes, although I understand the logic behind them. People want to get into the house market and are willing to buy small homes so they can start building equity and move up to something bigger. I see two problems with starter homes, the first being that there’s a presumption that house prices will rise a lot and enable the buyer to sell at a nice profit in a few years. That is by no means guaranteed, though. In a weak or stagnant housing market, you could find your home is worth the same or less than you paid a few years earlier.
Or, maybe your house has gone up in value. Will it be enough to cover real estate commissions, closing costs, moving and such? Possibly not. A lot depends on what city you live in and how healthy its housing market is when you bought and when you sell.
Starter homes are a gamble. The alternatives: Save longer to buy a home with room to accommodate your life now and in a few years, or figure out a way to make that starter home work for the longer term. Ten years would the ideal minimum stay in a home. That’s a good amount of time for building equity and working through any temporary dips in home prices.
If you are not sure how much house you can afford – and still have a life – check out our Real Life Ratio housing affordability calculator. The last thing you want is for your mortgage payments to leave you house poor.
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Rob’s personal finance reading list…
Seven small but handy things parents really need
An investing guy turns to parenting in assembling this real life list of essential parenting tools. A good cordless vacuum and comfortable sweat pants are on the list.
Advisers and their invisible woman clients
This article urges investment advisers to stop ignoring the wives of their male clients, a situation that happens often. I’m including it here as a reminder for women to demand more of advisers who act like their husband is the client, not the couple. Almost 80 per cent of women change their adviser after the death of their husband.
Cheap and cheerful gifts for newlyweds
Invited to a wedding this spring or summer? Lots of ideas for $30 to $279.
The latest on bereavement fares
A recent edition of the newsletter included a link to an article on cheap flights than mentioned bereavement fares. Here are some further details from Air Canada and WestJet.
Air Canada: Will provide reduced bereavement fares, subject to availability. There is no set discount.
WestJet: Bereavement fares are available at a 30 per cent off discount off base fares for WestJet's Econo, EconoFlex and Premium.
Today’s financial tool
The Cranial Cash Clash is a series of online quizzes designed to help build your understanding of investing, debt, scams and more.
What I’ve been writing about
- Asphyxiation by pension: Why one millennial feels smothered by retirement saving
- How a hot trend in electronic banking is making life easier for seniors
- Balanced fund smackdown: Old-guard mutual funds versus upstart ETFs (for Globe Unlimited subscribers)
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