Erica Alini is a personal finance reporter at the Globe and Mail and the author of the bestselling book "Money Like You Mean It, Personal Finance Tactics for the Real World." Erica started out her career in journalism as an economics reporter, chronicling the ripple effects of the financial crisis of 2007-2008 for the Wall Street Journal in New York. That background is why she's always exploring how larger trends -- from the housing affordability crisis to the impact of climate change on insurance -- affect Canadians' money struggles.
Her book argues that economic, social and technological changes have complicated personal finance for everybody, but especially for Millennials and Gen Z. She then provides practical tips on how young Canadians can achieve middle-class financial goals despite the challenges they face.
In my interview with Erica, we discuss:
1. Creative ways the dream of homeownership can still be achieved.
2. The money-bucket system and how it can help manage the cost of homeownership.
3. Four powerful strategies to reduce the financial pain of mortgage renewal.
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Full Transcript
Sean Cooper
Hi, Erica, it's great to speak with you today. How are you doing?
Erica Alini
Hi, Sean, thanks for having me. It's great to be here.
Sean Cooper
Yes, I wanted to have you on the podcast a lot sooner. I was planning to reach out when your book first came out there. But I had to take a pause on the podcast, unfortunately, because I was doing this all on my own. But now that I have an editor, I definitely wanted to reach out to you and interview us. So I know that you're very busy. So I appreciate you taking some time out of your day here and super excited to talk to you about your book that came out as well as your wonderful articles that you write now for the Globe and Mail. So yes, I'm really looking forward to this.
Erica Alini
Thanks for having me. I'm very happy to be in the pocket. And you know, you've been a go-to source of mine on mortgages for a very long time, and you feature in the book. So I'm very happy to be here and speak on your podcast.
Sean Cooper
Wonderful. Thanks so much for the kind words here. So yes, let's jump into our conversation then. So the first conversation that I have for you is for anyone I mean, you're pretty well known in the personal finance and financial related article area there. But I'm sure many people know that you came with a book there for but for anyone that didn't get a chance to read your book yet. Can you tell us a bit about your book? And what inspired you to write it as well?
Erica Alini
Yeah, so the book is called Money Like You Mean It: Personal Finance Tactics for the Real World. It came out in December of 2021, which is hard to believe it's already been that long, but it's meant to be a comprehensive guide to personal finance for millennials and Gen Z in Canada. So the content is Canada specific. There's so much out there so many books that are primarily aimed at a US audience. This book is not like that. This is like Canada only. And it's a very pragmatic book, it's basically your starter guide for a young adult or trying to set up your own financial life.
So really aimed at anyone I'd say between, you know, in their 20s and up to their 40s. But it's also a look at the wider context, that's making it harder to reach some of those sort of middle class financial goals that a lot of millennials like me and Gen Z sort of grew up thinking that, you know, we're giving it for granted that we've reached these goals, and now we find ourselves struggling mightily to reach them. And so this book is a broader look at some of the bigger forces, the socio economic forces that are making it harder to get there to get where our parents are.
Sean Cooper
No, very well said that Lee summarizes the book very well. And you actually lead us into the next question there. So you talk about it like on the back of the book there but yes like the expectations that for the last generations like the baby boomer generation and all that, and yeah, things have definitely changed. Homes are a lot more expensive. It takes people a lot longer to save up the down payment than it did even two decades ago there. So you've talked about this in the book. And this is a recurring theme in your articles as well.
But how can millennials and Gen Z still achieve the middle class goals despite the challenges that they face? Maybe you can give some examples of the typical middle class goals expectations that people thought that they should achieve in the previous generations like Baby Boomer and yes, how that's still possible in this day and age with the challenges like rising cost of living and other challenges people face?
Erica Alini
Yeah. So what am I talking about when I'm saying bigger forces, and you know, I'm making it harder. So it's actually much easier if people get what I'm talking about much more easily. Today, even then, when the book came out right now, like everyone's talking about inflation, and the cost of living and what the Bank of Canada is doing with housing prices, right and write, that's what I'm talking about in these things like this has been building up for a really long time. It's now just so obvious, inflation is something it's a new problem that emerged, sort of later in the pandemic. But these forces, especially the erosion of housing affordability, has been an issue in parts of the country for quite some time. And now it's spreading, and it's getting much worse. And so everyone really is starting to become aware of it. And so obviously, housing for young people that some of these challenges affect everybody. So one of the things that I talk about is the fact that we've had interest rates, so low by historical standards for such a long time, before inflation spiked, later in the pandemic. And then the Bank of Canada was forced to raise interest rates to try to get inflation under control. Again, before that, we've had a very, very long time of very low interest rates. And what that does is yes, in part, it makes it easy to take on debt, right. And so it's the reason why we have one of the reasons why we have such high household debt in Canada is because interest rates make it very cheap to borrow, right? We have huge mortgages, because for a very long time, it was very cheap to borrow. Financial innovation is another sort of larger phenomenon. It's great in many ways. But the flip side of financial innovations of things like first it was credit cards emerged, and then you can pay with your phone. And there are so many ways to borrow. And borrowing became not just cheap, but also easy, right. And when borrowing is cheap and easy, it becomes cheap and easy to follow into all kinds of debt traps that it becomes, it can be very difficult to get out of.
Sean Cooper
Yes, like this subscription creep, I believe I've heard that term. The services are like, Oh, Netflix, that other thing, oh, only $10 a month. But the problem is, when you sign up for 10, 15 of these or 20 of these services, it really adds up to a lot of money, and you forget about a lot of them. So like you said, it's just so easy to spend our money these days. And studies have shown like you don't get the same pain of spending, it's nowhere near like when you hand over money to someone versus like swiping a credit card, or even putting in the information online, like you just don't feel that kind of painted spending that you did with cash back in the day.
Erica Alini
Absolutely. And you know, just to continue for a second in that vein, and the other sort of two sides of financial innovation is in investing. So a great upside of financial innovation and investing is, you know, sort of the democratic decision of investing, it's so easy to start investing in the financial markets these days, you really don't need to, you can start investing with very little money, and buy good quality of financial products at low cost and very little effort. That's great. At the same time, though. It's also extremely easy. If you don't know what you're doing to make financial mistakes, investing mistakes that you make and losing money that you can't afford to lose, right. And so obviously, some of these challenges affect all of us regardless of age, but the one that really stands out, and that disproportionately affects my generation, which is millennials and the generation after me, which is Gen Z is housing and the incredible erosion have housing affordability, by which I mean not just homeownership sort of slipping further out of reach, but also increasingly renting becoming less increasingly unaffordable. And so yes, housing, I would say, is the number one financial challenge for my generation. And this whole argument of the book is, you know, for housing, and for every one of these other challenges that we face, it is possible still to achieve sort of the classic, middle class goals that we grew up sort of thinking, you know, we'd achieve when they travel. But you have to be aware of how economic forces affect your daily life and your pocketbook. You have to know more about personal finance, you have to know what your options are, you have to know how to choose. And there's a lot more planning ahead, a lot more sort of being strategic and being creative. That's required to get there, I would say compared to previous generations compared to the past.
Sean Cooper
No, very well said and that actually leads us perfectly into our next question here, Erica. So what are some creative ways the dream of homeownership can still be achieved, you talk about it. Again, it's a recurring theme in the articles that you write as well as your book. But examples like buying with family and friends, buying a house and renting it out like myself, maybe you can just talk about a few of those things as well. And yes, I definitely see the challenge. These days as a mortgage broker, I help people achieve the dream of homeownership. And yes, people definitely have to be creative these days, like my sister was looking to buy a property on her own. So I definitely know how challenging it is to earn a good wage, and it can be difficult to even qualify. But yes, maybe we can talk about some of those creative ways that help people still get their foot in the door and start building up equity so they can eventually move up in the market there.
Erica Alini
Yeah, for sure. So homeownership is definitely a great example to like, what do I mean by being strategic and being creative? So you have to approach the question of affordability and sort of being rational. And you have to have your eyes wide open. Right. So the first step is to understand how much house you can afford, right? This is something that used to be an issue, just for those who wanted to buy a house, like used to be a question of how much house can you buy right? Now, it's become an issue for renters, too.
Erica Alini
It's like, how much can you spend to keep a roof over your head? Because I've seen so many people who are, the rent is so high, they don't have any money left whatsoever, at the end of the month, and they don't have any kind of financial safety net. And as a renter, that's very precarious, and that's very dangerous. So the classic general rule to gauge that, then something that many of your listeners are probably familiar with, is that your housing cost should be around 30% of your before tax income. Now, it's a valid rule for sure. It's a little bit tricky, because people aren't used to budgeting with their gross income, and generally budget, what's your take home pay? And it's also you know, what are your housing costs, like people might think, Oh, my mortgage, and that's not that, by far not your only housing costs, you have to think property taxes, if you're buying, you have to think utilities, all of that should be in that 30%.
Erica Alini
And some, you know, likewise, if you're renting that would be rented to us last utilities. A simpler rule that I really like, and it comes from personal financial planner, Shannon Lee Simmons, and it works equally, it's the same rule, whether you're renting or owning is try to keep your fixed expenses at 55% of your after tax income. So I find that that's like a more intuitive rule for a lot of people. And it's much easier to understand what fixed expenses are. And obviously, housing for most people is by far the largest fixed expense. So that's really like the rule you have to live by, you cannot go beyond that. 55% Or you're going to end up in trouble.
Erica Alini
Now, how can you buy a house and become a homeowner and still be within that? 55% Assuming that, you know, obviously, you don't have the privilege and fortune of having a family that can help you financially. So the traditional solution to that used to be sort of elsewhere, right? Like if you cannot find a house that you can afford, wherever you are, move. And you know, that used to be the classic solution for people here in Toronto, in the saying was "drive until you can buy" now with the pandemic. There's been such an exodus of people outside of Toronto that the discount for, you know, moving out of Toronto has shrunk dramtically, so many people are looking all over Southern Ontario, and they're failing to find something that's reasonably priced that they can't afford. And that still allows them to come into work even not every day, maybe, you know, a few times a week, or even a few times a month, that makes sense, within southern Ontario.
Erica Alini
So buying elsewhere, increasingly has become maybe buying a different province, going quite further afield. And unfortunately, that is not a solution that works, it's not an acceptable compromise. For everybody, you may have a job that physically requires you to be in a big city, or you know, your ability to have a career. And your earning potential is closely tied to a large city, or maybe you have family in the city. And you don't want to move out, there's all kinds of reasons why people are limited in sort of where they can move to. So the other sort of broad strategy to try to improve affordability is to sort of bring many incomes together, right? There's strength in numbers. That's the basic idea.
Erica Alini
And that means teaming up with somebody else who also has an income and maybe your incomes combined, can meet that 55% rule. And that generally means maybe you team up with your family, and that's a multi generational home, you buy, maybe with parents with your in laws, a bigger home, that you can live in together, maybe the in laws are ready to downsize and they go live in the basement, or, you know, there's all kinds of arrangements, or maybe you buy with friends and you co-own with them. But the basic idea is bringing together more incomes, so that the house price to income ratio makes sense again.
Erica Alini
And then finally, and then I guess the other creative solution is also bringing in an income. Another way of increasing the income is with the classic sort of the mortgage helper suite, so called. And that means by the house, where you're able to rent part of the house, which is what you've been doing, Sean, and what there is to know about that is that it should be a legal secondary suite, right? Like, if it's a legal secondary suite. And if you have an arm's length rental agreement, then that can make it easier for you to qualify for a mortgage, because the lender will take into account at least part of your rental income.
Sean Cooper
Yes, that's a good point. If I could just jump in there. Yes. So if you're buying a house you're able to do that there, if it's like a legal suite with a separate entrance kitchen, as well as a bathroom there. But for example, if you're buying a condo, you lenders, like mainstream lenders, typically won't allow you to include, like, if you're renting out a room or something like that there. So yeah, that definitely helps it can help you afford a purchase price of $50,000 or more there. But yeah, it only really works in a house instead of a condo there.
Erica Alini
Yeah. And to be clear, you mean you can still own a condo and have a roommate, right? And that roommate pays your rent, and it still helps you with your mortgage. The problem is, that solution won't help you to buy the house, it will help you pay the mortgage, but not qualify for the mortgage.
Sean Cooper
That's great.
Erica Alini
Yeah. And then just one thing I wanted to add about co-ownership, whether you're coming with family members or friends, is that it really pays to get a lawyer involved to sort of iron out house rules and get them in writing, to have a system for making decisions for issues and things that you can't foresee like a system for, how are we going to tackle that in a way that we're all ok with. And then another decision you're going to have to make is whether you're going to own the house, jointly as joint tenants or as tenants in common and that really has nothing to do with renting and the word tenant.
Erica Alini
But joint tenancy is generally how, you know, couples own a home together. And it's equal shares. And if one person passes away, then ownership bypasses probates and passes on to the other owners and joint tenants in common. You can have unequal shares of ownership and if one person dies, then their ownership shares goes through their estate. And so it really pays to talk to an estate lawyer about these things who has experienced and in exactly this area.
Sean Cooper
So that's some great advice there and yes, it's important if you're buying with someone just to realize that the arrangement isn't forever. So yes, have that conversation about the extra strategy upfront there. Because otherwise, if this is like a friend or family member, like you don't want to ruin that relationship. So it's good when you're buying a property together just to have all that figured out in advance. And like you said, have everything in writing so that you avoid any disagreements later on, because you wouldn't want to ruin your relationship with a family member or friendship there.
Sean Cooper
So yes, very well said. Thanks so much for the great answer there. And yes, I read about something interesting. In your book there. You were talking about the money bucket system. Maybe we could talk a bit about how you use that yourself but Erica, and in your own life, and how that can be helpful in managing the cost of homeownership.
Erica Alini
Yeah, so the money bucket system is a way of budgeting, and managing your expenses and savings goals without a budget. And so the idea is you use multiple bank accounts, or investment accounts for savings, and you assign a job to each account, as if it was like a broad budgeting category, right. So instead of using a spreadsheet, you have many so-called Money buckets, or accounts, and then you set up transfers either one off or automatic transfers to each of these accounts.
Erica Alini
So this can work really well to manage expenses related to homeownership. Everybody can think of you know, paying off the mortgage is a no brainer. Canadians have a very solid track record of not missing their mortgage payments. But there's all kinds of other things that really land people in trouble often. So one is property taxes. So especially if maybe you've put down a bigger down payment, and the bank is not automatically withholding, you know, an amount for property taxes every month, that's a big chunk of change that you're going to have to pay infrequently, right? Like it's not a monthly expense.
Erica Alini
And so it catches people off guard sometimes. And so it can be very helpful to set up a savings account for your property taxes, and you just sort of, you know, more or less how much it's going to be divided by 12 months, and you set up automatic transfers to that account. And when the bill comes, do you just withdraw from that account, you know, there's utilities that sometimes catch people off guard. So for example, in Toronto, we have waste, and water, they're not charged monthly, they can do quarterly, and it can be several $100, every so often. So that's a number one that is usually treated as a monthly expense.
Erica Alini
You know, sometimes they have some utilities that allow you to pay in frequent builds a sort of monthly, but that's not always an option. And when it's not an option, it's very handy, again, to have another savings account, and then you know, more or less how much it's gonna be. So every month, you put some money towards that, so that it's never a surprise. And then the trickiest part of homeownership is thinking ahead to the inevitable repairs, right? That you're going to have to take care of. So I'm not talking about saving towards renovation or upgrades, which obviously, you know, the money bucket system works great for that, too, you can just set up a savings account and call it renovation, and then you save into that, but repairs.
Erica Alini
And so it's really helpful to try to estimate how much you might spend on repairs every year. If you've been a homeowner for a while, you probably have an idea. If not, you know, estimates vary depending on you know, how they're pretty good estimates online, they're based on the square footage of your house. So you can do a quick Google search. There are also some older rules of thumb in personal finance that are based on the price of the home. Because they're so expensive right now, it's honestly better to go with square footage estimates. But you know, get an idea and then have this sort of minor emergency fund that's specifically dedicated to your house. And that way, you know, you won't necessarily have to tap into your line of credit, which you know, now might carry an interest rate of 7% or 8%. You'll have this little pool of cash that you can tap into to help you with the repairs that come up all the time. No matter how new your houses are.
Sean Cooper
That's some great advice there because yeah, like especially when you own a house there can be some really big ticket items like the furnace and the roof and the windows and yes, if you don't plan them for them in advance, then they can really sneak up on you there and you can end up having to put that on your line of credit. So yeah, it's really great advice to plan ahead there. And yeah, especially with some of these expenses like if you choose to pay the home insurance on an annual basis, sometimes you might not have the option of paying monthly. But yeah, having that money going into a savings account so that it's ready when that annual payment comes out is especially helpful. And yes, I can say firsthand, the water and waste bill can be very expensive.
Sean Cooper
And it's sent tri-annually in the city of Toronto, which means three times a year and I've seen some of these amounts, like $400 or $500. It's pretty crazy there. And yeah, you can actually get it switched to monthly but you have to like jump through a ton of hoops like I had to do. I mean, it's not a ton of hoops, but they asked for you to send some forms so you get it switched to monthly by fax or drop it off in person. I sent it by fax, but it got lost, apparently. So I went to a city office and dropped it off in person. And yes, they switched me to it monthly there.
Sean Cooper
But yes, definitely for those non regular monthly bills it is definitely important to put money aside because they can really sneak up on you later on when you least expect it. They're so great. And I just want to wrap up with one final question that I think will be really relevant for a lot of the listeners. And you've written at least a couple articles on this I've seen for the Globe and Mail here. So yes, a stress point for people with a mortgage coming up for renewal is they perhaps are like they're locked into a fixed rate. And then their mortgage is coming up. And they have like a low fixed rate, maybe like two or 3%. They're seeing mortgage rates and like the five 6%, like doubling in some cases there.
Sean Cooper
So can you talk about some strategies that you discussed in the article there when you interviewed a bunch of people in the mortgage industry here. But yes, I can talk about some strategies people can use these days to make their payment more affordable if the mortgage is coming up for renewal, so they don't have to eat Kraft dinner for the next five years, or however long their mortgage term is.
Erica Alini
Yeah, so lots of people are losing sleep about their mortgage renewal right now. And it's another perfect example of how it pays off to plan ahead. Do your research, be strategic, and know what your options are. And so starting with planning ahead is a really good idea. And this is one of the some of the advice that I've heard from the mortgage professionals I've talked to about this is, try to understand what you're facing, what kind of mortgage renewal rates you're looking at, and what your new payment might be, it's a ballpark, and then see what kind of changes like, what does that mean for your day to day budget, right. So try to test drive that new rate and that new mortgage payment and see if it's manageable or not. Now, if it's not manageable, then one of the options, and one of the sort of the most of them, all of these things that people are doing is to see if you can lengthen your amortization.
Erica Alini
Now, if you've been sort of a few years ahead of schedule with your amortization, and the amortization, and sort of the total amount of time that it will take you to pay off your mortgage in full. So for most people, at the start of you know, when they take out the mortgage for the first time, it would be 25 years or perhaps more and more commonly 30 years. So if you've been aggressively paying off your mortgage, maybe with accelerated payments, or maybe you've made a few lump sum payments towards your mortgage, you're ahead of schedule, right. And so you can go back to the original amortization schedule, without refinancing your mortgage. And that's an easy option to give yourself a little bit of breathing room.
Erica Alini
So it means that it will take you you know, you'll lose sort of that advantage. But if that gives you a little bit of breathing room right now, when you're financially stretched, it may be worth it. And even if you're not ahead of schedule, you know, even if you say maybe you have a 25 year amortization, and you're coming, you're at the end of your first five year mortgage, you have some wiggle room to re extend the amortization. Now, that would require refinancing, which has, you know, comes with some costs that you should definitely ask your mortgage broker or mortgage professional about. But again, once again, you know, stretching out the amount of time that will take you to pay off the mortgage in full means smaller monthly payments. And so that could give you just you know, the financial breathing room that you need right now.
Erica Alini
This, however, is not an option. If you are with a variable rate with fixed payments, and your monetization has already stretched beyond the original amortization schedule, then you really have no wiggle room there. So it's important to highlight that. So then another strategy I thought was: It's really interesting. If your mortgage, so obviously, the obvious thing to do is if your mortgage is coming up in the next like three to four months is to get pre approved and get a rate hold so that if the Bank of Canada, if not just the Bank of Canada, but if rates rise more in the next few months, you know, you're okay, you're locked in something. But if your mortgage is coming up, say in the next five, six months, one possible strategy is to still get pre approved and get a rate lock. And then you know, if rates do rise, just break your mortgage and take that rate that you locked in.
Erica Alini
In an environment of rising rates. Mortgage penalties are such a concern, even if you have a fixed rate mortgage. So it's not going to cost you all that much to break your mortgage. And yeah, and that way, you've at least protected yourself from the last few rates, rate increases before renewal. And then another thing that a lot of people are doing is they're going fixed, you know, very few people are brave enough to go double variables right now and very understandably so. But they're not locking. Few people are locking into the traditional sort of five year term. And they're choosing shorter terms. And it tends to be so. I've heard from several mortgage brokers that the three year term, three year fixed is very popular right now, maybe two year fixed, very few people are going for one year fixed, just because the rate premium for that has to be very high.
Erica Alini
I did a quick search last night. And the difference that I was seeing in the interest rate for a fixed rate, one year mortgage was almost one percentage higher than a three year fixed rate. Whereas the difference between a three or fix and a five year fix was half a percentage point. So the three year fix looks to a lot of people like a good compromise where, you know, gives you a little bit of stability and tranquility, and the short term but also the ability to renew, hopefully at a lower rate if interest rates start to decline in a little while.
Sean Cooper
Great. Well, thanks so much for your insightful answer to Erica. And yes, like with mortgage clients, abiding by a strategy that I've heard as well prompts extending the amortization during periods of high interest rate. And then when your mortgage comes up for renewal, if rates are lower than then you can short the amortization to get caught up. So that's one good strategy. And something important to be aware of is if you have a specific type of mortgage called a collateral charge mortgage.
Sean Cooper
Now, that's typically when you have a home equity line of credit attached to it. But some mortgages like the ones offered by TD and Tangerine, all of them are collateral charge mortgages, you're able to with a lot of lenders extend the amortization to 25 years. And the benefit of that is you don't have to pay the refinance costs associated with that and you get a more competitive interest rate. So yeah, there's all sorts of strategies.
Sean Cooper
So like Erica said, figure out what your payment is going to look like. And if that's affordable for you, a mortgage professional like myself can help you with that. But yes, know that there are all sorts of strategies that can be used. And we've talked about a few of them there. But yeah, definitely make sure your payments are manageable because you don't want to be eating Kraft dinner for the next five years. That's definitely not something healthy to be doing there. So wonderful. So thank you so much for being on the podcast. Erica, it was great chatting with you today and appreciate you sharing all your personal finance and real estate and mortgage insight with our listeners.
Erica Alini
Awesome. Thank you so much for having me, Sean.
Sean Cooper
Thanks for listening to another episode of the burn your mortgage podcast. Besides being a podcast host, I'm also an independent mortgage broker. If you or anyone you know, family, friends, co workers or neighbors could ever use any unbiased mortgage advice or a second opinion, feel free to reach out. Email me at Sean that's s e a n at burn your mortgage.ca or call or text me at 647-867-3711 for a free mortgage consultation. Also, be sure to head on over to www dot burn your mortgage.ca and sign up for my free weekly newsletter as a small token of my appreciation you'll be able to download my ultimate mortgage checklist on choosing the perfect mortgage. I look forward to hearing from you and helping you with all your mortgage needs. Once again, thanks for listening.
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