I’m super excited to be sharing the story of Jelani Smith of Bay Street Blog. Not only is Jelani a first-time homebuyer, he’s one in Toronto, Canada’s second most expensive housing market. Jelani is living proof that that dream of homeownership is still alive and well for millennials. His post walks you through the thought process of buying a home, including getting a mortgage approval and choosing between pre-construction and resale. Jelani is well on his way to financial freedom. Let’s hope he follows in my footsteps and burns his mortgage, too. Jelani, take it away!

During my third year of University, I decided to make the big decision of buying my first home, in Toronto. I bought a pre-construction home, where it would be ready by the time I graduate University of Toronto.

The home hunting process was rigorous; jumping from house to house, doing calculations, and determining the appropriate purchase price. Nonetheless, it was certainly a fun experience that I would definitely go through again.

I’ll be honest here; at the time I purchase the freehold townhouse (purchase price: $526,000), it was relatively approaching my ‘maximum affordability.’ However, the home didn’t close until 20 months later; which gave me the opportunity grow my savings, and invest within robo advisors, and options trading. Through a thorough savings plan, and multiple jobs during university; I did it.

Freehold Townhouse

I looked at many options, including, but not limited to, detached homes in the suburbs, condos within the city, and condo townhomes. All of these home types were great options, and had their own pros and cons. Choosing a particular home type really depends on your lifestyle, in my opinion. A family of 4 would typically prefer a slightly bigger home in the suburbs, whereas a young professional would be content with a 500 square foot condo within the downtown core.

In my case, I’m a ‘young professional,’ but I was looking for larger homes slightly outside of the downtown core, near a GO station. In fact, there are many affordable neighbourhoods for GO Transit commuters. This is why I decided on purchasing the freehold townhouse I’m in right now; which is a only 45 minute commute to Union Station. Another plus; I’m only 5 minutes away from my parents, and I’m close to all of my family and friends. This was another important factor why I choose to stay within Scarborough, Toronto.

Some say I should’ve opted for a 1 or 2 bedroom condo instead, instead of a 3 bedroom townhouse. I opted for a the latter for two main reasons: potential rental income from the other two bedrooms, and larger home equity gains.

Pre-Construction vs. Resale

Many homebuyers go through this dilemma. I debated on buying a home on concept or purchasing a resale property instead. Again, both have their pros and cons. Resale homes give you the advantage of occupying the home much sooner (i.e. no delayed closing), and pre-construction homes give you the advantage of customizing your home, and saving up additional money for the downpayment during the construction phase (which is exactly what I did in my case).

Pre-construction homes have the structural upgrades that many older, resale homes don’t – these include, but not limited to, standard 9 ft ceilings and open concepts.

Mortgage Approval

I inquired for mortgages with the Big 5 Banks, and smaller lenders. The mortgage application process can be extremely tedious, with all of the required paperwork/documents. For those who are planning on applying for a mortgage soon, I suggest creating a file of relevant mortgage documents on your computer (tax returns, liabilities, assets, and bank statements) – this will save you the hassle of scrambling through your records for each new application initiated.

With that being said, I did a hard credit check with two of the Big 5 Banks (A hard credit check is where the lender pulls your credit. It’s recommended to not have more than 2 – 3 active mortgage applications, otherwise your credit score will be affected. This is where a Mortgage Specialist would come handy; the can process applications in one go, with access to multiple lenders (in other words, only one hard credit check would be performed).

Down Payment

As mentioned previously, I saved up for a 20% downpayment through robo investing, options trading, and setting up an automatic savings plan. My automatic savings plan was done through my employer – where I take advantage of the RRSP matching program. I used these funds, as part of the First Time Homebuyer’s Plan (HBP) offered within RRSP accounts.

I took advantage of the robo investing offers available. Robo advisors invest your money automatically into ETFs – the holding of ETFs is based on your personal financial circumstances; this is determined through a questionnaire filled out during the account opening process.

I’m still active in options trading – in 2017, I achieved a return on investment of 357%. This certainly did help me save up extra money towards my down payment, and closing costs. I have written on Bay Street Blog about how I’ve made over 300% on options. To simplify it, options trading requires the same fundamentals and technical analysis as stock trading. The only major difference is that each options contract leverages on the return of 100 shares.

Closing Costs

Last but not least…closing costs. As Sean Cooper said in his Burn Your Mortgage book, closing costs is a hidden secret in real estate. Personally, I got caught off guard with the closing costs. But thankfully, I received $7500 a delayed closing compensation from the builder. This went straight towards my closing costs. After the credit, my closing costs came to approximately $5000.

Another factor that helped me was doing a down payment of at least 20%. Down payment less than 20% are subject to default insurance from CMHC. 8% of the default insurance amount is also taxable; and this cannot be financed into the mortgage (has to be paid upfront).

The one major difference between pre-construction resale homes closing costs are development levies, and tarion warranty enrollment fees. Otherwise, they’re relatively similar.

Bottom Line

I learned a lot throughout my home buying journey. Here are three main takeaways that I’d like to share with you:

• Buy within your means
• Have a short term and long term savings strategy
• Automate your investments (i.e. have an auto deposit into a registered savings account).  

Achieving a financial goal involves breaking it into steps. Achieving home ownership is possible (and yes, that includes Toronto). All it takes is to break the financial goal into steps, and holding yourself accountable.

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.