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Home Buying

Should I rent or buy a home?

The benefit of home ownership lies in the fact that your 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, 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.

Find out more...

Affordability and Debt Load

To determine affordability, financial institutions use two simple calculations:

  • Gross Debt Service ratio (GDS)
  • 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, your GDS ratio should not be higher than 32%. For example, if your gross monthly income is $4,000, you should not be spending more than $1,280 in monthly housing expenses.

The TDS ratio measures your gross monthly income vs. your total debt obligations (including loans, car payments and credit card bills). Generally speaking, your TDS ratio should not be higher 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...

Before buying a home, you should create a detailed budget and calculate your debt-service ratios. As a rule of thumb, a home purchase should cost less than two and a half years' worth of your income.

To calculate how much you can reasonably afford to pay for a home, s
tart by adding up your household's gross annual income (salaries, wages and taxable income before taxes). Then multiply the sum by 2.5 (assuming a 8.5% mortgage interest rate). For example, a household with an annual income of $60,000 can reasonably afford a $150,000 home.

Below is an at-a-glance guide that matches family income to house prices:

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

Your Down Payment Options

Probably the most difficult challenge you will face as an aspiring home owner is saving enough for a down payment. Keep in mind that the more money you can put down, the less you will pay in the long run due to lower mortgage interest costs. In order to obtain a conventional mortgage, homeowners are required to pay 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.

Getting a Mortgage

Start with a mortgage pre-qualification meeting and be sure to determine not only the cost of your mortgage but also other expenditures such as closing costs. A good rule of thumb is to budget about 2% of the purchase price of the home for closing costs, including land transfer tax, legal fees and other disbursements. 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 pre-qualifies 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

Mortgage insurers such as Canada Mortgage and Housing Corporation (CMHC) and Genworth Canada 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 and intends to occupy it as his/her principal residence.

A few things to be aware of when considering mortgage insurance...

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 gross family income.

If you insure a mortgage loan with CMHC or Genworth, 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 from 0.5% to 3.75% of the mortgage loan amount and can be added to the principal amount of the mortgage.

Home Buyers' Plan

The Home Buyers' Plan (HBP) allows first-time home buyers to withdraw up to $25,000 from their RRSPs towards the purchase of 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 you don't repay the amount due in a particular year, it gets included as income for that year. For more information, please refer to the Canada Revenue Agency's Home Buyers' Plan (RC4135).

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