How to Invest When You Use Your Savings to Buy a Home

Think today's mortgage process is complicated and stressful. You're right, it is. But it doesn't have to be. This is the House Rich podcast and we've simplified the mortgage process. Your host, Matt Parker, AKA Mortgage Matt, delivers practical advice in a fun and entertaining way to help you understand your mortgage so that you can start making money, not the bank. So let's get your homeownership journey started. Here's your host, Matt Parker.

Hey, Matt Parker here. Very excited. Always a pleasure to have Kelly Ho with me. Kelly, thank you so much for joining us.

Thank you for having me, Matt.

Kelly's a great resource. She's a partner at DLD Financial. She's a certified financial planner, certified cash flow specialist. So she's an expert in money. And we're really looking forward to get your insight in terms of what you're thinking, what you're seeing and just get your feedback, especially in a. I think it's a very difficult time from a real estate point of view in Vancouver and, well, pretty much across Canada. But primarily we'll talk about sort of our local market and with appreciation, values, unaffordability, inflation, all these different things. I'd love to talk to you about how clients and homeowners and home buyers can position themselves properly, where they can utilize the funds they have available for the purchase, down payment wise and closing cost wise, and then also position themselves so they can plan for the future, retirement, education, all the different things that we need to be thinking of into the future. I'd love to just pick your brain and get your insight into that.

Absolutely.

Yeah. So when you're sitting down with a client and my side as well, and we sort of go back and forth, I know we work a lot together, but the idea is really here, you know, when they're looking at that purchase and they're looking at securing that property, how do you walk them through that planning side of it? Of how much of my assets should I use towards the purchase versus the amount that I should use or keep aside, is there sort of a framework that you walk them through?

Yes, there is. And it really depends on what the client's situation is at and when I become involved. So the ideal scenario is, is that I become involved at the beginning where they're like, hey, we'd like to save a down payment, we'd like to purchase a home. Here's our time horizon, here's how much we earn as a household, or here, how much they earn as an individual. And when they come to me that early on in the process, I can actually map it out properly. Right. And then I can actually go, okay, well, let's take a look at your cash flow. Where are things now, today? And then obviously, usually most of my clients will work with someone like yourself, right. And they'll give me an approximate breakdown of what the English increased costs will be. And so I consolidate all the information together to show them. Here's your new cash flow situation. And then I take it a step further by actually integrating the cash flow scenario into a retirement plan to go, hey, if you do intend to retiring or slowing down one of these days, here's what that looks like in combination with your cash flow situation. Paying down a mortgage and trying to save. Right. So it's like juggling a bunch of balls. But what it is is we don't want it to be a surprise because oftentimes you hear from your friend, circle, social circle, other people that you know going, like, they're so focused on buying that home that they can't focus on anything else. And then there's that sense of regret to go, hey, I kind of wish maybe I did a little bit of more homework. I just got way too into the frenzy and hoping that they would have done things a little bit more differently.

It's interesting in the sense that real estate's such a hot topic, especially in Vancouver, that I think a lot of people fall into that, everyone's doing it or whatever that mentality is. But I do see that just seeing clients over the years, us personally, just appreciation and equity growth in real estate is substantial or can be substantial. And is there a sort of set percentage that you generally work off of where it's like, well, if I have X amount available, I should allocate this percent of my investable assets towards the purchase, or is it more based on cash flow and how we can potentially utilize cash flow to a maybe reestablish the investment side of things or position ourselves long term, knowing that we're taking out a larger percentage of our assets today or we're planning to recoup that over time so we're still diversified. Does that make sense?

Yeah, I would say all of the above, because not everyone is okay with taking home equity to replenish their retirement. Right. Like, it's a pretty scary idea because in reality, for people that are like, well, I've already taken on this massive of debt and you want me to take on more debt. Right. So then it really comes down to what is their cash flow situation? And if their cash flow situation allows them to go in that direction. And we understand the good, the bad and the ugly that's associated with going down that route, then. Absolutely. But for a lot of people, we have to go through all these different scenarios and see what their earning potential is. Is there any inheritance that's coming down the line? Right. As morbid as that sounds. But for a lot of people in our generation, it is a reality. Right. I'm already starting to see that with my clients in 50s and their 60s because people are living longer. So these are people with parents in their 80s and 90s who were still alive and well, but have finally decided that they're going to downsize and have decided that, hey, you know, I'm still around. I'd like to see you enjoy some of these funds versus waiting for me to actually die before you get any of this. Right. So there are all sorts of scenarios and I think regardless of what it is, we shouldn't go into the situation blind. Right. And I also think there's a sense of fear too. Right. It's that fear of missing out to go, hey, prices are going to go up. My house is going to be 3 million, it's going to be 4 million. And I'm never going to be a buy place. And I think I'm not a realtor, I'm not a real estate professional, so I can't speak to that. What I can speak to is what people bring in and what their expenses are going out. You know, at the end of the day, we have to buy our groceries, we have to pay for mortgages. We do want to go on vacation, hopefully sometime in the not too far distant future and do fun things too. And we have to talk about, you know, know what are we willing to sacrifice if that's the case, to make this happen. Right. And if we can make everything happen, fantastic. But it all has to be within the context of a plan. And there is a way I map it all out. And therefore, when people go into situations, they can comfortably place offers. They know what their ceiling is, they know exactly what their cash flow is. Right. And you know, oftentimes, you know, Matt, like with our mutual clients, I often go, go ask Matt, what are the closing costs? I can actually factor that in, you know, stuff like that. Right. So it' disclosure, knowing what you need to know up front so that I can actually punch out these scenarios for clients. And they're very well informed and they feel confident going into these, what I feel are ridiculous bidding wars.

Yes. And hopefully that shifts. Hopefully it's Just overly stressful. I think you bring up a good point of just the team, like having a team of professionals that are versed in what they do and then, and then working together to position yourself properly to make sure that you, you know, you are situated properly for the future. I think that's a great point. And also with the fact that you said that, which I always talk to clients about too, is yes, sure, we want to get the property, but we still want to make sure that we're working on and we're focusing on cash flow so we can live life, have fun, do the things we want to do. Right. Because we're only here X amount of times. We want to enjoy that as best we can. And like you said, we are seeing a lot more as they early inheritance gifting from family, whether it's they're utilizing the equity growth in properties over time or just cash that they've accumulated and helping the younger generation get into properties. So a lot of these higher value homes, there is a lot of transfer of money and wealth happening. So I think that that is sort of helping the market along too, where it's not just relying on just I'm there. So because of the fact that the older generation are sitting on such a large amount of real estate wealth in Vancouver that it's very interesting to see that being passed. And the other side of that is a lot of them actually are sitting on it and not selling. So you have a lot of, let's say the older generation that their property's gone up X amount of value. Whatever the case is, maybe the deferring property taxes now and just selling that property creates just a tax problem for them that they don't want to handle that so they're just going to stay there until the end and then that will then free up more properties as well, which is creating another part of the supply challenge. So no, that's very interesting. I mean, any thoughts around percentage of income that you recommend allocating towards real estate or anything along those lines.

But you're referring to like the mortgage payments.

Yeah, mortgage payments or even property ownership. Do you get that detailed with clients when you're planning it out?

It's different for each set of clients, right? Depends whether it's a single income or double income. So I know from your perspective that you look at total debt ratio, so I leave that to you as an expert. But on my end, I look at the bigger picture. I literally go like, what are we spending on traveling? Is this mortgage payment going to inhibit your ability to Travel. If it is, then that's a deal breaker. Then that's not okay. Maybe we need a lower mortgage or how much money do you want in retirement? Do you need 10 grand a month in today's dollars or are you okay with seven? Right, so if you need 10, then no, your mortgage payment cannot be that big because then I won't be able to provide advice on how to actually save towards earning 10 grand a month. But if you're okay with 7 grand a month, then yeah, by all means we can have a larger mortgage payment as long as your lender will lend it to you.

I mean really, when you look at it, sure, cash flow planning, but it's really life planning.

Absolutely.

Yeah. That's very interesting because it really just gets that detailed where you're looking at spending. You're breaking it down into different buckets of here's how much we want to spend on this or for travel or for even groceries if you want. I'm sure you get quite detailed as that keeps going up. So question for you because we have a lot of self employed clientele as well and maybe cash flow is not consistent where it's not the same month over month. What's a good approach when looking at that from a cash flow plan? Is it an average of the last X amount of months when figuring out these numbers or how would you recommend sort of business owners or people with variable income handle that situation?

Yeah, I mean it's both. Right. So it's looking at how have they done over the last few years and what is the current trajectory of where they're going to be. Right. Because it'd be quite stressful to take on something and they're barely making it. Right. And neither would the lenders approve them to begin with. But one of the biggest things, and this encroaches a little bit on the accounting side as well is the issue of taxes. Right. Because the self employed individuals, you know, they're really driven people, entrepreneurs and oftentimes they're focused on running the business. And I tell everyone, I'm like, you have to treat yourself like an employee of yourself. Right. What that means is if you were working for someone, you would not even have the luxury of deciding when you want to pay your taxes. Right. The taxes are taken off the top and you work with what you have left over. Right. And that's one of the joys of being an employee is you don't have to worry about that. But as a business owner and self employed individual, we oftentimes have that Option to go, you know what? I need this extra money, so I'm going to hold back. I'll deal with the taxes later. And oftentimes that will get people into cash flow trouble, right? Because all of a sudden the next thing they know is they have to file their taxes for the previous year and now they need 15,000, 20,000, 30,000 bucks for taxes and they don't know where they're going to find it because they spent too much.

Yeah, no, good point.

That's dangerous. And that I would say my first piece of advice for all those people, I'm like, anytime you get paid, I don't care how much, whether it's $1,000 invoice or 100,000 doll, you have to set the appropriate amount of taxes aside as per their CPA as what their CPA has told them to do.

So even like setting up an account for that, the tax account or whatever you want to call it, whatever they.

Want to call it, or they remit it directly to CRA if they want. I mean, that's to the discretion of how they arrange it with their accounting professional.

Kelly. So we get the property, right? We do the mortgage, we get to the end, they get possession, they get keys and they move in. And we've probably talked about this before we get to that point, but there's a lot of questions around insurance and do I need insurance, Should I get mortgage insurance? Should I get the bank mortgage insurance? I mean, there's a lot of confusion around that term life, all these different things. From your point of view, knowing a lot more about the insurance world than me, what is your recommended sort of timeframe to handle that? Would that be before you actually take ownership of the property or. Or what would be the best sort of path to start that discussion?

I would say once there's an accepted offer, Right. And you know that it's just a matter of time before the closing. Right. Because I will say the insurance industry has made vast improvements in getting the underwriting done more quickly. But depending, sometimes, you know, we'd love everything to be straightforward, but depending on the client and their health history, sometimes things could take a little bit longer. Right. We don't want there to be a gap in coverage. Right. We want to make sure that when they move in, they know that if they were to be hit by a car that the mortgage is taken care of. Right. And then secondly to your comment about the different types of life insurance. Yes. Like, especially when you sign off on a mortgage. Right. And I know in your industry, like you're required to say, hey, there's this mortgage life insurance. You know, do you want to do it? Right? And the issue with that is usually it's specific to the lender. Right. And oftentimes, you know, what happens is if the person dies, the money goes directly to the lending institution. So there's no option for the survivor to even say, hey, you know what? Actually, maybe I don't want to pay off that mortgage yet. I'm okay, I'll take the money and I'll decide whether I want to pay off partially or maybe not pay it off at all and just maybe have that money sit and grow, and I'll just take what I need to pay off the mortgage. And then as well, over the course of 25, 30 years that people have mortgages, you may not be with the same lender the entire time. So do you really want to be qualifying that many times for life insurance? And also, one of the traps of mortgage life insurance is there's very minimal underwriting and assessments that's done at the beginning, which leads to a lot of litigation. From what I hear, horror stories of, hey, they told me they approved me. But how come after the person's gone, they're like, hey, how come they're saying, no, we cannot pay out based on xyz? So when you think about it, there's a reason why certain things are easier to get than others. And the cost generally could be about the same or less. When I say less, it's usually on my end, we actually cost less. But obviously, I'm the one that asks the very invasive questions. And sometimes I might say, sorry, a nurse will have to come see you and draw some blood and take a urine sample, and then we need a doctor's report. That's mainly because we want to make sure if and when the time comes, we can get the money to the family, you know, with no further information required. Because the insurance company has already made a promise that, you know, what if something were to happen? Here's a check.

Yeah, and like you said, and with the bank offered insurance options, and they're generally protecting themselves a lot.

Yeah, they're the beneficiary.

They're the beneficiary.

They're the beneficiary.

You know, with anything with the banks that I talk to clients about, a lot is, yes, you are a customer of theirs, but their primary focus and customer are the shareholders, and they are for profit, and they want to make money, and that's really what they're out there to do. So yeah, it does take away the opportunity of looking at all the options, if that makes sense. So I think that like you said, it's plan and really get into that plan of what do we expect? How is cash flow? How much do we have set aside? Do we need coverage? If you stop working, can you still make payments? I mean, there's so many things that that discussion entails that it's not just a quick talk from my point of view.

It's not. And quite frankly, I actually the whole insurance discussion ties into the financial planning part. Right. So oftentimes when I'm running those scenarios for clients, it often warps into the risk portion where we talk about insurance to go, hey, let's take a look at your group benefits. Right. To make sure that in the event you can't work, right. Because of XYZ reasons that you have a decent long term disability plan. Right. And we also all know, I don't know if anyone's well versed in this, but ICBC has changed some rules where they have a certain maximum that they'll only pay out if the employer doesn't pay. That's a whole other issue that's come about. And what if we get sick? Unfortunately, a lot of people getting cancer, that type of thing, we all know someone who's gone through that, but they're not sick enough for the long term disability to pay out. Now what? And depending on the familial situation, we're also thinking, okay, well if the one spouse is gone or if one partner is gone, great, I can pay off the mortgage. But what if I wanted to work part time? So then income replacement, right? Because when a person dies, their ability to earn income has also died with them. So it's a whole host of issues. Not simply pay off the mortgage. Done. So as opposed to having a million insurance policies, why not have that discussion and just spend that extra half an hour, an hour with a professional to decide what works best for your situation.

Simply put, talk to Kelly. And there are other people too, right? But yes, or someone like, or someone like myself, right. That is an expert and knows what they're talking about and has all the different options available and really can map out the plan that best suits your life and your goals. So thank you so much, Kelly. It's always a pleasure. I love connecting, I love working with you. And where is the best place for anyone wanting to reach out, connect with you? Where's the best place that they can do that?

Our website. That's www.financial.com.

Wonderful. I'll put that in the notes in the show and thank you again and we'll be in touch very soon.

Thank you. Matt.

Thanks for listening to the House Rich podcast with Matt Parker. We hope you enjoyed this episode. For more information and resources to get you started on your homeownership journey, visit www.mattparker.ca and don't forget to rate and review this podcast. Thanks again for listening.