Are You Ready for Homeownership?

It seems that the culture of homeownership is starting younger and younger. While some are complaining that the kids aren’t ever moving out of the basement, many are seeing their sprogs go straight from college to mortgage.

There are arguments for both sides — a mortgage is indeed an anchor, but starting young will help set you up later. Indeed, there is a pro and a con column on just about every aspect of it from purchase to maintenance. It starts with an upside — if you are in the market, we’re blessed with a number of programs that will help you get started.

Although it’s now available to anyone, the original purpose of putting just 5% down was to help first-timers get into a home of their own. The big caveat here is that any high-ratio mortgage (above 75% of the purchase price) must be insured to the tune of 3.25% of the value through CMHC. The good news is that as long as you can put down at least 10%, you can add that fee to your mortgage.

Qualified first-time buyers can also use funds from their RRSPs up to $20,000 (each, so $40,000 per couple) without penalty to put down on a principal residence. The flipside is that you must repay the amount withdrawn in even increments over a 15-year period. If you repay less, it’s a taxable benefit added to your income and you’ll be taxed at your usual rate. There are some tricks you can play to help you out, too, like borrowing money to top up your RRSP limit (or topping it up yourself), and then taking advantage of the income tax refund you get to add to your down payment.

Ontario also offers an Ontario Home Ownership Savings Plan, which doesn’t provide a spectacular return, but it does provide a tax credit. You can only use this one if your net income is less than $40,000; there’s no limit on how much you can contribute, but the tax credit is based on a $2,000 maximum. You can contribute for five consecutive years, but you must buy within two years of collapsing the account. (It’s certainly an up and down process, isn’t it?)

via OPUS Homes

Homeownership is a great idea, but it isn’t a great idea at every stage in life or for everyone, and the biggest caveat I would offer is this — in order to maximize the appreciation on your home, plan on staying in it for a while. Selling a home and moving is expensive, and buying property isn’t for the nomads among us. Here are a few other points to ponder:

Be prepared to give up some spare time. In order to both protect your investment and maximize enjoyment of your home, you’re going to have to maintain it properly, inside and out. Besides the price of entry, it’s another reason condos are such a popular choice with first-timers. In a house, you’re going to have to be prepared to not just mow, shovel and muck out the eavestroughs, you’ll have to look down the road and anticipate big ticket items, such as replacing the windows and roof; although you only need to worry about such things every couple of decades, it’s a considerable expense and a pain in the butt to boot. You also need to think about quarterly filter changes on your furnace and air conditioner, repainting the deck, keeping fences in good repair and a hundred other semi-regular tasks — plus the remote possibility of something really wonky happening, like termites.

With any home purchase, you’ve got to take into consideration more than just mortgage payments, property taxes and insurance; you also have to consider closing costs, which include land transfer tax, appraisal fees, title insurance (optional) and lawyer’s fees.

Where a freehold home might have it over a condo is that as you pay off your mortgage, your mortgage payments come down year over year, whereas maintenance fees are likely to go in the other direction. You will one day be free of a mortgage – you will never be free of maintenance fees as long as you live in condo; however, depending on the type of home and size of the property, when you factor in everything, a freehold purchase can still end up costing you substantially more each month.

There are times when buying a home is probably inadvisable, such as when it would leave you so cash-strapped that being out of work would make you default. If you are thinking about going back to school, I’d be thinking twice about buying, unless you’re in such a neighbourhood that you are practically guaranteed enough rental income to cover all (all!) your expenses. I’d also hesitate to settle on a neighbourhood just because it’s what you can afford, which is not the same as compromising. If you want to live in Yorkville and can only afford buy in Liberty Village, OK. If you want to live in Yorkville and can only afford to buy in Ajax, you are not going to be happy.

The good news is that one day, you will be free of mortgage payments. Renting is forever. You’re also, over a lifetime, going to benefit from real estate appreciation that historically performs at least as well as the stock market. You’ll build valuable equity that can help you borrow for RRSPs or other sound investments, and you’ll get certain tax breaks, such as on mortgage interest and property taxes. You won’t normally be taxed when you do sell and realize some equity, and staying on the property ladder is the only way to climb it — if you’ve got dreams of one day living in a big, beautiful family home, even the smallest condo can be a great first step.

Buying a home doesn’t have to make you old (or even mature) before your time — you can always buy something and rent it to a trusted friend while you see the world.