Your First Home. Kimberley Marr
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and have been for the past several years. Compared to the last three decades, interest rates are exceptionally low. Combined, these factors make home ownership attractive, but don’t forget the lifestyle benefits of owning a home.
One of the lifestyle benefits is being able to put your own creative mark on your home. It is your own space to decorate as you wish. When you rent, you may not want to spend the time and money decorating (e.g., painting, adding nicer light fixtures, upgrading old carpeting or appliances). This is the psychological plus of home ownership!
Let’s compare renting versus buying and owning a home. Everyone needs a place to live. Consider that when you are renting, you are probably paying a mortgage — your landlord’s mortgage! Over time, you are paying off your landlord’s mortgage, and for that, your landlord is grateful. But where does this leave you in the future? Have you ever calculated just how much money you are contributing toward your landlord’s mortgage?
1. Renting Is Paying Someone Else’s Mortgage
Let’s assume you are renting for $1,500 per month, which equals $18,000 per year. Over five years (assuming the rent does not increase), this equals $90,000. Over ten years, this equals $180,000. Over 25 years (which is a popular mortgage amortization time frame), this would equate to $450,000!
What do you have to show for it? Probably a stack of rent receipts. Even worse, you may continue renting in the future, continuing to pay off your landlord’s mortgage. Although your income may keep pace with the cost of living (and annual rental increases), what happens when you retire? Monthly rental amounts may continue to rise, but your retirement income may not, or worse, it may become less. This may necessitate that you move to a smaller home or farther away, or both.
Buying your first home is an exciting and emotionally charged event. It is also a major life decision. As with most new experiences, you don’t know what you don’t know. How can you ask questions about things you don’t even know exist?
2. Build Your Own Equity
Why not channel your monthly shelter payment into your own mortgage and over time build equity and net worth for yourself? Equity is the difference between the home’s value and what is owed on it. Over time, as you pay your mortgage, the principal loan balance decreases and, in some cases, the home’s market value may increase.
Home ownership can be looked at as a forced savings account — especially if you commit to paying off a mortgage faster than the amortization period. It is possible that your mortgage can be paid off in 25 years (or sooner), and then you would own an asset — free and clear — that may even increase in value over time. Don’t you think this would give you security and peace of mind?
Did you know that some mortgages offer a prepayment option that gives you the option to pay a little more each month or year toward the principal debt so that you can own your home even faster?
The low interest rates available at the time of this book’s printing make the prospect of buying and owning your own home more possible. Home ownership can be a foundation for you to build security and wealth even if you earn ordinary income. In other words, you don’t need to be wealthy to buy or own a home.
You may wonder if real estate values will continue to increase. Nobody has a crystal ball. Over the last 30 years, residential real estate has increased in most major markets, but who knows if this will continue and, if so, at what rate. Past performance is no guarantee of future results. Real estate is an investment, and like any other investment, there are pros and cons and risks.
Think about why you are considering home ownership. Try to look at real estate as a long-term investment — an investment that you get to live in and enjoy.
People also invest in stocks, mutual funds, and commodities. While these investments (although not the topic of this book) may or may not be good investments, and may or may not be part of your current or future financial plan, one thing we know is that you cannot live in a stock, mutual fund, or commodity, but you can live in your real estate investment.
Unlike most other investments, in Canada, currently there is no tax on your principal residence capital increase or gain. This means if your home increases in value by $100,000, when you sell, as a Canadian taxpayer, you are exempt from paying tax on the capital gain as long as it is your principal residence. Consult with a tax professional for additional information on the rules (especially if you were renting out a portion of or operating a business in the home while you lived in the home — special tax rules may apply).
Home ownership eliminates the possibility that you will be notified that an owner is selling the property and you may need to move in the future. Also, there is no more waiting around for the landlord or maintenance team to repair items. You are in control now!
3. Creating Your Home Buyer Plan
Uncertainty can make the home-buying process intimidating and scary, but it doesn’t have to be that way. Fear, which is often linked to lack of knowing how to do something, can prevent you from taking action. You have taken a first big step by acquiring this book to educate yourself on how to accomplish your dream of buying your first home.
Some of the questions you should consider for your Home Buyer Plan include:
• Should you buy a brand new home or a resale home?
• Would you prefer a condo or a freehold ownership (and do you know the difference between the two)?
• What type of home appeals to you? Do you prefer a two-storey, bungalow, or split-level home? (Real estate professionals can provide insight into the types of homes that are popular and available in your price range.)
• Have you thought about what your budget is and how much you can afford?
• Should you speak with a bank manager or perhaps interview a mortgage broker, and what is the difference between the services and mortgage products they each provide?
• Where can you get the best mortgage interest rate, terms, and conditions?
• Do you need a real estate broker or sales representative? How can he or she assist you and does he or she represent you?
• Where can you find a real estate professional and what types of questions should you ask when you meet with him or her?
• Have you spoken with an accountant about potential tax benefits and obligations, and an insurance company or broker about insurance and liability options?
• Where do you think you would like to live?
• Do you plan to accelerate or prepay against the principal debt of your mortgage to pay off the home quicker? If so, what options do you require in your mortgage for this to be possible? What is the maximum annual prepayment contribution allowed and are there any fees or penalties?
• What mortgage amortization and term do you need and how does this tie in with your anticipated time frame for living in your first home?
There is no need to feel overwhelmed. It is understandable that you may not know where to begin and what to ask. As you read through this book, you will find the answers to things you were thinking about as well as information on other options and considerations you may not have thought about yet.
Many people spend more money on a home than any other single investment. There are also many lifestyle factors and decisions that you will take into consideration as you prepare your Home Buyer Plan. For example, how long do you anticipate you will live in your first home? Based on my experience, average first-time buyers live in their first home for approximately five years.
Other questions you will need to consider:
• How much space will you need during this time?
• Do you have the option of working from home, thereby needing adequate work space, and perhaps parking? If you work from home, a portion of your expenses may