uying a home is a big deal. For many, it’s the single most defining investment of their lives. For others, it’s a stepping stone to other wealth building opportunities.
If you’re just starting your dentisting career, you may have a thought or hope for practice ownership in the future. It’s also likely that you’re sitting on a large student loan you have to pay off as soon as possible.
Yes, dentists do earn very well compared to others. Yet, a $300K student loan can be overwhelming!
Is home ownership even a question at this point?
The good news is, yes! As a dentist, especially in Canada, you have many opportunities available to you that most others do not. Even though you may have a student loan, your future is usually bright enough that lenders are willing to provide avenues to mitigate the risks of your debt and help you achieve home ownership much faster.
So, if you’re considering home ownership and need to know where you stand, here are 5 things you should know about mortgages and homeownership as a dentist just starting out.
1. Why lenders love dentists
There are always two things that lenders will look at before deciding to lend money to anyone; the property, and the borrower. Let’s assume the property (i.e house) is in good condition and meets all the lender criteria. The second piece is the borrower.
Lenders are usually want to make sure that borrowers are responsible, have the capacity to pay the loan back with little risk of defaulting, and that borrowers have not taken on too much debt relative to their earnings.
Naturally, how much you earn and your potential to earn is taken into consideration. This is one of the biggest reasons that lenders love dentists. You have a lucrative opportunity, have proved that you are dedicated and have the smarts to take on financing. Looking at trends in the industry, whether you decide to own a practice in the future or continue to associate, your income bracket will be high enough that lenders would feel safe.
What you need to be aware of, however, is not to over burden yourself with the wrong kind of debt.
There is good debt and bad debt.
If you have a student loan, set up a disciplined plan to pay it off as soon as possible. If you are maxing out your credit cards, you need to put the brakes on, and re-evaluate your lifestyle. Understand that income does not equal wealth. The better control you have over your spending, the more opportunity there is to make your money work for you. If you’ve taken out a very expensive car lease, consider switching over to something more modest for the time being.
As I’ve said before, lenders love dentists because of your earring potential and the security of your opportunities. This doesn’t discount the rest of your spending and saving habits. You still have to show that you are responsible with your debt intake.
2. Don’t fixate on the rate
Have you started browsing through different websites and apps for the current mortgage rates on the market? Have you gone to your local bank branch and found out what loan amount you might be approved for? Are you excited to hear that we currently live in a time where interest rates have never been lower?
If you answered yes to any or all of the above, then I’ll let you in on a little secret:
Low interest rates are phenomenal, but are only one rate you need to look at. There’s another, little known rate, that most borrowers don’t even realize they are getting until it’s too late. In fact, this is the rate that can determine if you’re left out of pocket at the end of your mortgage term or not.
Consider this case study:
*Hypothetical scenario for illustrative purposes only*
Dr. Raj is about 5 years into his career as a dentist in Ontario.
2 Years ago, he bought a house in a sought after neighbourhood in the suburb of Vaughan. Relatively peaceful area with a school nearby, easy access to shopping malls, and a 7 minute drive to the highway close by.
Dr. Raj decided to move into this house because he was able to find 2 great practices to associate in. Each of these practices are about a 25 minute drive from Dr. Raj’s house and he anticipated staying with both practices for at least another 6 years.
Recently, Ontario was hit with a major pandemic (go figure!) and things have been tough for the practices he works at. Dr. Raj hadn’t really considered practice ownership before and doesn’t feel it’s the right time to jump into it; especially since this pandemic has created an environment of many unknowns for himself.
So, he decides to sell his house and has found work at another practice that is faring very well despite the general situation. His current mortgage is set to mature 3 years from now. It’s a fixed rate, closed mortgage with a penalty of the greater of 3 months interest or IRD (interest rate differential).
Since he hadn’t seen the pandemic coming, and anticipated staying at his current place, Dr. Raj didn’t consider the implications of the penalty policy in his mortgage. On the lower side (3 months interest), Dr. Raj could be looking at a penalty around $3800. On the IRD side, however, Dr. Raj could be looking at $22,500 depending on the lender he goes with!
That’s right. It’s a matter of almost $20,000.
Why the huge difference?
Some lenders, usually on a fixed rate mortgage, will use a “posted” rate to determine your penalty. This is how it generally works:
- (Posted Rate - Contract Rate)*(Years remaining on mortgage) = IRD Rate
- IRD Rate * remaining balance on mortgage = Payout Penalty
In Dr. Raj’s case, this looks like:
- (3.5%-2.25%)*3 = 3.75%
- 3.75% * $600,000 = $22,500
Lesson: Make sure to ask your mortgage broker, specialist, or lender about ALL the features of your mortgage. Sometimes, low rates upfront can mean expensive rates later on!
3. Mortgages can help with your future goals
Not all mortgages are made the same. Some mortgages can actually act as an investment tool for you to achieve your future goals faster. Some of you may have heard the terms “HELOC” or “Readvanceable mortgage” at some point. These are great opportunities for dentists to look into.
Many banks already offer great rates on Lines of credit for dentists. Take advantage of those where and when you can. Be smart and consult an expert before you do, of course. In addition to the flexibility of a line of credit, Home Equity Lines of Credit can allow you to tap into your home's equity when you need it. This could be for upcoming renovations, an investment opportunity, or even improvements to your practice!
A readvanceable mortgage is a mortgage that includes a HELOC as part of the package. This means your HELOC can automatically increase as you build equity in your home and paydown the debt. There are many different types of readvanceable mortgages and are definitely worth assessing especially if you have practice ownership and home ownership in your sights within the next 5 to 10 years.
4. Not all dentist programs at banks are created equally
It’s no secret that all banks love dentists. You are a rare breed, and should be proud of this. Yet, you should also be aware of the different opportunities available to you. Just because the bank you’ve always gone to has one great product for dentists does not mean you should discount all the rest.
There is a growing trend in the industry where banks are starting to offer innovative and creative “comprehensive” banking programs for dentists. These can include products on the banking side, credit accounts like a LOC or mortgages, practice financing, and wealth planning. It’s important to understand the nuances and assess your personal situation to decide which programs will give you the most mileage in the short and long term.
For more information on all the different dentist programs out there, check out [insert link to dent247 page that has the different programs]
5. Discipline is the key
Credit is a great tool that can help dentists advance their careers in very creative ways. It’s also a dangerous tool and should be kept in check.. If you haven’t already done so, take some time to understand your end goal and work backwards from there. What are you looking to accomplish by the end of your life? How would you like to get there? What are your options? How can you get there in the best way without spending too much money and wasted time/effort in the process?
These are 5 things every dentist should be aware about when considering homeownership and taking on a mortgage. If you’d like to connect with a mortgage specialist directly, click here.