by Multi-Prêts Mortgages
What you’ll learn
For many, the start of spring means deciding whether or not to move. The dream of owning a home is sometimes an important element in that decision. What are the pros and cons of renting and buying? How do you know which is right for you?
Have you fallen head over heels for a property that’s up for sale? The key thing to remember is that taking out a mortgage to buy a property is a long-term commitment. You need to have a certain amount of stability on both a professional and personal level. Having a steady income is crucial for determining your borrowing capacity and choosing a type of property.
When buying a property, you also need to have enough money on hand at the time of purchase to make the down payment. You must be able to prove that you have had these funds for at least 90 days. For a single family home or duplex, the minimum required down payment is 5% of the property price. You will also need to add the CMHC (Canadian Mortgage and Housing Corporation) mortgage loan insurance premium to this amount. In the case of a triplex or quadruplex, the minimum down payment is 10%.
For a $350,000 property with a 10% down payment of $35,000, the insurance premium would be close to $10,000. Keep in mind that mortgage insurance has nothing to do with life or disability insurance, such as that offered by financial institutions. It also does not apply if you are able to afford a down payment of 20% and over.
Your credit rating is another factor to consider. If it is less than stellar, you may want to think about a bigger down payment. This would lower your mortgage, speed up the approval process, and make it easier for you to pay back the loan. Use our online calculator to see how the size of your down payment will affect your monthly payments and insurance premium.
If you’re not the type to stay in one place for too long, a rental property can provide greater financial and personal freedom. You can invest where you want to invest and benefit from short-term returns. Given that property appreciates in value, the house or condo you buy essentially becomes an investment. Only once you sell the property will you realize a capital gain. You’ll need to be patient, however, as mortgage payments during the first few years will primarily go toward interest.
It’s only natural that your personal life should have an impact on your decision. If you share your life with someone and plan to have kids in the near future, make sure to compare the cost of buying a home with that of renting a place with several rooms. Taking a careful look at your situation and goals will point you in the right direction. Our online calculator takes all of these factors into account to determine whether it would be more profitable for you to rent or buy.
More than just a numbers game, choosing whether to buy a house is often an emotional decision. While some equate property with a way of life, for others it represents a long-term investment or a forced savings vehicle they are relying on to build retirement capital. Real estate assets can provide financial leverage for major renovations or other future plans, or constitute a legacy to pass on to one’s children.
Rental property fees are relatively stable: rent, electricity, renovation costs, and home insurance. The landlord is responsible for all unforeseen costs, taxes, and repairs. In this way, renting makes it a little easier to maintain a budget and requires only a short-term commitment (i.e., your lease). That said, unlike the purchase of property, the monthly payments you make to your landlord do not contribute to your wealth.
Plenty of fees come into play when you purchase a house or condo, starting with those associated with the transaction itself—notary fees, the transfer tax (welcome tax), and inspection fees must all be paid in the first year. If you have taken advantage of the Home Buyers’ Plan (HBP), which allows you to use up to $35,000 from your RRSP toward a down payment, you will have 15 years to repay the amount withdrawn from your RRSP tax-free.
In addition to these fees, which can be viewed as start-up costs, you will also need to take care of municipal and school taxes, home insurance, mortgage loan insurance, common expenses, and maintenance and repair fees, not to mention your monthly mortgage payments.
Your monthly payments may change significantly over the course of your loan term, which in most cases is at least 20 years. Fluctuations in the interest rates set by financial institutions, variable municipal taxes, and the possibility of urgent renovations will all have an impact on your monthly payments. That’s why it’s important to allow for some financial wiggle room when determining your borrowing capacity.
Not quite ready to embark on the adventure of becoming a property owner? There are a few things you can do to become better prepared. Nothing’s stopping you from saving regularly, such as by making tax-free RRSP contributions and eventually converting them into a down payment under the HBP.
You could also choose to live with your parents a little while longer after graduating; this would save you a bundle, and you could reserve those savings for a future down payment. It’s also essential to pay back your debts and avoid accumulating new ones. Since buying a property is a long-term investment, the earlier you buy, the earlier you’ll start to see the payoff.
Lastly, renting with the option to buy offers a way to gradually build up to property ownership and the responsibilities it entails. It is up to the tenant and the landlord to establish the conditions for purchasing the property at the end of the lease. For example, the parties could agree that all rent payments will contribute to the down payment.
So, should you rent or buy? The question is more complicated that it sounds. But thoroughly examining your financial situation, long-term goals, and priorities and making use of the right tools will help you find the answer.