Sean Cooper and I share the same philosophy on frugality. We differ, however, on the importance of home ownership.
Nevertheless, most Canadians feel as Cooper does — that home ownership is an essential part of adulthood, it’s a forced savings plan and a long-term investment. In short, Canadians still yearn to own a piece of land and no matter how many personal finance bloggers insist people can become richer from renting and investing the savings in the stock market, only a small percentage in this financially literate country are likely to take that advice.
With that premise in mind, Cooper offers practical tips on both general financial planning, and also some fast-track tactics to pay off your mortgage in Burn Your Mortgage: The Simple Powerful Path to Financial Freedom for Canadians .
His advice stems from his achievement of managing to pay off his $255, 000 mortgage on a detached Scarborough house at 2.99% interest, in just 3 years, by the time he was 30 years old.
Most Torontonians will find themselves these days with a heftier balance, even on a condo purchase, but, as Cooper says “you don’t have to pay off your mortgage in my timeline. My story may be exceptional, but hopefully you can draw inspiration from it.” Undoubtably you can, or at least learn to be better with your money.
Cooper covers every aspect of the home-buying process in clear, easy to read language. His advice is sound — save for a hefty down payment, take your time looking, don’t buy more than you can comfortably afford and look at options other than detached housing. He tells you to choose a mortgage carefully — using a broker, reading the fine print and paying on an accelerated biweekly schedule.
To actually find the money to pay down a mortgage he suggests living frugally, and provides in-depth suggestions on how to cut cell phone plans, transportation costs and entertainment prices, among many categories of living expenses. That will help a bit, but the bulk of savings really comes from renting out a portion of your home (he lived in his basement and rented out the upstairs), and getting a second job.
All of these are good, financial fundamentals, helpful even to those who aren’t homeowners, especially his chapter on goal planning.
My only criticism is he barely mentions carrying costs. He never goes in-depth, an even stranger omission considering he has an entire chapter on closing costs. But carrying costs, like closing closts, are not inconsequential. You must account for them when both deciding how much monthly outlay you can afford and in calculating how much profit you actually end up making (if you’re pushing the idea the house you live in is an investment, a dubious claim in general, in my opinion). Your mortgage may only be $1400 a month, but with hydro, insurance, taxes and maintenance, your actual housing costs can easily climb to $2000 a month.
Here’s a flawed calculation he uses on page 8 to encourage home ownership over renting, which only works because he leaves out inflation, carrying and closing costs:
“Here’s an example that shows the power of leverage: Let’s say you bought a home a decade ago for $250, 000 with only 10% down ($25,000). You later sold it for $400,000, making $125,000 in profit (for simplicity sake, we’ll ignore associate costs such as mortgage interest, mortgage insurance, property taxes and closing costs). Even though your home only went up in value by 60%, that’s a 500% return on your initial investment (down payment) of $25 ,000. Try finding that kind of return in the stock market!”
But you can’t “ignore” associated costs, that go far beyond the ones mentioned.
First off, inflation over 10 years actually means that that $250, 000 you bought that house for in 2007, is really about $291, 000. in 2017 money, immediately lowering your profit to $109, 000.
And what happens when we subtract the following basic carrying costs, even at the cheapest they can possibly be?
•Insurance $80/month over 10 years = $10,000
•Hydro at $200/month over 10 years = $24,000
•Property tax at $2000/year over 10 years = $20,000
•Maintainance at 1% of the purchase price is $2500/year over 10 years = $25000
Not even including closing and selling costs, which in Toronto include double land-transfer tax, and 4-6% realtor commission, your actual profit is now only $52,500 — only a 47.5% return on your initial investment, or 4.75% per year, easily achievable on the stock market.
Of course, any housing calculation looking forward is going to miss the mark because anything can happen in the real-world. A $250, 000 house in Toronto a decade ago, for example, would probably be selling for at least a million now, making a 500% + profit more likely.
Conclusion: Gift this book to a would-be-homeowner
The best time to read this book is 3 years before you want to buy a home to fully implement the down payment saving tips. Cooper writes with a lack of jargon, and uses charts and bulleted summaries to make his points. His scope is comprehensive, while the advice is specific and achievable. It makes a great reference book to Canadians dead-set on owning a home and who want a single source to help them through every aspect of this major purchase. Ultimately, Canadians who want to buy a home want to buy a home and no rational thought is going to dissuade them. Since that’s the case, Cooper provides a blue-print for how to do it conscientiously.