Should I rent or buy a home?
The benefit of home ownership lies in the fact that equity in the property will increase over time as the mortgage is paid down. That, combined with regular appreciation in the value of the property could leave you with a valuable investment after the mortgage is paid off. In contrast, renting over the same amount of time gives you no equity in the property.
From an investment point of view, however, home ownership might not always be the right decision. When comparing owning to renting, it's a numbers game: you have to add up all of the figures, including the cost of your home, the size of your down payment, utilities, immediate repairs, interest rates and insurance, and compare them to how much you are currently spending on rent. Of course, you also have to place a value on the enjoyment and satisfaction that you will derive from owning your own home.
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Tip: Try to save at least 10% as a down payment. The insurance premium is 2.5% as opposed to 3.75%. Although this might mean delaying your home purchase for a while, it could ultimately save you thousands of dollars in interest costs.
To determine affordability, financial institutions use two simple calculations:
Gross Debt Service ratio (GDS) and
Total Debt Service ratio (TDS).
The GDS looks at your gross monthly income vs. your proposed new housing costs (mortgage payments, taxes, heating costs, and 50% of condominium fees, if applicable). Generally speaking, this amount should be no more than 32%.
For example, if your gross monthly income is $4000, you should not be spending more than $1280 in monthly housing expenses. As for the TDS ratio, this measures your gross monthly income vs. your total debt obligations (including loans, car payments, and credit card bills). Generally speaking, your TDS ratio should be no more than 37%.
Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle.
Here are a few other things to consider... If you are a new home buyer you should create a budget and calculate your debt service ratios. However, here is a rule of thumb that some choose to follow:
Start with your household's gross annual income (salaries, wages, and taxable income before taxes). Multiply by 2.5 (assuming a 8.5% mortgage interest rate). Example: a household with an annual income of $60,000 can reasonably afford a $150,000 home.
Below is a quick guide at a glance:
Family Income Affordable House Price
$50,000 $125,000
$60,000 $150,000
$70,000 $175,000
$80,000 $200,000
$90,000 $225,000
$100,000 $250,000
$110,000 $275,000
Probably the most difficult challenge is to save enough for a down payment. The more money you can put down, the more money you will save in the long run through lower mortgage interest costs. In order to obtain a conventional mortgage, homeowners are required to put down at least 25% of the purchase price or appraised value (whichever is less) as a down payment.
Programs are in place to assist people with the challenge of saving for a down payment. Below are two options to consider.
Start with a mortgage pre-qualification meeting and treat it as a fact-finding mission to go over closing costs. For example: land transfer tax, legal fees and other disbursements. A good rule of thumb is to budget about 2% of the purchase price for closing costs. People who buy new homes from builders also pay 7% GST, which is often included in the purchase price.
Once the mortgage is pre-approved, the interest rate is frozen for 60 days (90 days on new home construction). If interest rates drop, home buyers get the lower rate but if they rise, the home buyer still receives the frozen rate. There is no obligation to actually obtain a mortgage through the institution that prequalifies you. Pre-qualification is a service offered at no cost. You can continue to roll over your pre-qualification certificate if you don't find a home within the 60-90 day timeframe.
CHMC 5% Down Payment Option
CMHC or GEMICO may insure your mortgage against default for up to 95% of the lending value of the house. Therefore, as a purchaser you only need a 5% downpayment.
Eligible borrowers include anyone who buys a home in Canada intending to occupy it as his/her principal residence.
Here are a few things to consider...
Purchasers can use up to 35% of their gross family income for payments of mortgage principal and interest, property taxes and heating. A buyer's total debt load (including consumer loans, etc.) cannot exceed 40% of the gross family income.
If you insure a mortgage loan with CMHC or GEMICO, you will pay an application fee and a premium. The application fee ($75 - $235) covers the costs incurred by the insurer to review the application. The premium is based on the loan amount. Premiums range between 0.5% to 3.75% of the mortgage loan amount and can be added to the principal amount of the mortgage.
The Home Buyers' Plan (HBP) lets a first time buyer withdraw up to $20,000 from RRSPs for a home purchase. The withdrawn amount must be repaid within 15 years, subject to a minimum annual repayment that is 1/15 of the amount withdrawn. If the full $20,000 is withdrawn, the minimum annual repayment is $1,333. If less than the minimum is repaid in any particular year, the balance is added to the taxpayer's income.
