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Exploring the pros and cons of home ownership
The day you sign the papers and buy a new home is likely to be both exciting and stressful – exciting because you get a new space to call your own, and stressful because you’re making a huge financial commitment.
Whether you’re jumping into the housing market for the first time or are upsizing or downsizing from your current home, the decisions you make can affect your finances for many years. That’s why it’s so important to take the time to make the right choices for you and your family.
WHAT’S IN YOUR CRYSTAL BALL?
First off, you need to consider if you’re planning to move cities in the next few years for work or lifestyle reasons. If you are, it’s probably a good idea to wait to buy a home in your new location. Beyond the obvious – that hefty mortgage – there are numerous additional costs associated with buying a home, so it’s usually not worth making the investment unless you plan to stay put for a while.
In addition, a short-term purchase makes you more vulnerable to short-term price fluctuations – just as it would in the stock market. You don’t want to have jobs lined up and the plane tickets booked and then be forced into selling when prices are rock bottom.
If you already own a home and are considering relocating across the country or around the world, start researching sale prices in your neighbourhood. In some situations, when markets are strong, it may even be worth selling a couple of years early to lock in high prices. Of course, renting until you move only makes financial sense if you are confident prices in your area are dropping and you have taken into account the costs associated with discharging your mortgage and moving from your home into an apartment.
As a general rule, if you aren’t planning a big move and can comfortably afford it, owning is better than renting because with every mortgage payment you own more of an asset that will likely appreciate over the long term. In contrast, when you rent, your monthly payment goes to your landlord and you don’t get any long-term benefit in exchange.
HOW MUCH DO YOU NEED TO SAVE?
A larger down payment immediately increases your equity in your new home and means a smaller mortgage with lower payments. But how much is enough?
The minimum down payment in Canada is five per cent. However, when you make a down payment of 20 per cent or more of your home’s purchase price, you get a “conventional mortgage.” This generally means lower interest rates because lenders see you as a lower-risk borrower. If you put down between five per cent and 20 per cent, you’ll have a “high-ratio mortgage” and have to pay for mortgage insurance on top of your regular mortgage payments. Mortgage insurance with the bank typically works out to between one per cent and 2.9 per sent of the principal amount or your mortgage, however personal Life Insurance can be less expensive and offer more benefits.
AS WITH ALL OTHER FINANCIAL DECISIONS, IT’S IMPORTANT TO EXPLORE THE PROS AND CONS OF OWNING A HOME IN SOME DEPTH.
If your home savings need a boost, don’t buyers’ Plan (HBP forget that, under the Home), first-time home buyers can withdraw up to $25,000 tax-free from their Registered Retirement Savings Plan (RRSP) to put towards their down payment. Withdrawals under the HBP will need to be repaid to your RRSP within a period of no more than 15 yeas and if the amount due in a given year is not repaid, it will be included as income for that year. Also keep in mind that, if your mortgage allows it, topping up your payments early in the life of your mortgage makes a big difference to the amount of interest you’ll pay – and you’ll be mortgage-free much sooner.
HOW DO YOU FEEL ABOUT RAKING LEAVES?
You’ve made the decision to buy and you have your down payment ready. Now, make home ownership work for you by choosing the type of home that suits your lifestyle.
If you’re not keen on yard work, a condominium may be the right solution. You own the inside of your unit and are responsible for its upkeep. Outside your front door arre “common elements” that are maintained through your monthly condo fees. Those fees are the price condo owners have to pay so they don’t have to worry about mowing the lawn or repairing external elements of their home, for example.
On the other hand, with a freehold home – where you own the inside and outside of your building and the property that surrounds it – you can skip the condo fees.
In addition, you have much more flexibility to renovate and landscape if you choose. On the downside, you’ll be out there shovelling the snow on blustery January days.
Another way to approach home ownership is to buy a property that includes a self-contained unit you can rent out to someone else. This is a strategy some empty nesters are taking to generate additional income in retirement. You could certainly benefit from a regular stream of rental income – but you would also by responsible for maintenance. So, if the toilet overflows over a holiday weekend, you would need to arrange and pay for the repairs.
WHEN IS THE BEST TIME TO BUY?
Housing markets rise and fall and the price you pay really does depend on “location, location, location.” And it’s no easier to “time the market” when buying a home than it is when you’re buying any other type of investment. Usually, the best time to buy is a very personal decision based on whether you’ve saved a significant down payment and can negotiate reasonable interest rates for your mortgage.
As with all other financial decisions, it’s important to explore the pros and cons of owning a home in some depth. Remember that your advisor is in a perfect position to discuss the options you have and help you integrate home ownership with your other short-term and long-term goals in the context of a comprehensive financial plan.