Your First Home: Is Buying a Home the Right Decision for You? Posted on October 8, 2021Your First Home: Is Buying a Home the Right Decision for You? Introduction A home purchase is most likely the largest financial decision a person, couple or family will make in their lifetime.A home has an important purpose, it provides you with shelter. In addition to shelter, your home can be a place to rest and relax, provide opportunities to entertain your family and friends, and perhaps raise your own family.There could be numerous reasons why purchasing a new home could compel you to venture into the real estate market. If you’re renting, you may have driven or walked past a ‘dream’ home that was for sale and wondered “what if”? Perhaps a home of a friend or acquaintance came up for sale, a home you could see yourself living in, which compelled you to look at or visit the home’s ‘open house’.Can I Really Afford To Purchase a New HomeRegardless of the reason for looking at first time home possibilities, at some point during your ‘thinking about it’ home purchase exercise, you ask yourself “Can I really afford to purchase a new home” The primary information within this post is intended to guide the first-time home buyer who is thinking about buying their first home and is comparing home ownership with renting. The first-time homeowner may need answers about whether they can afford to purchase their first home or not.Although this post is written for first-time home buyers, there may be insights within the post which may help some buyers who have previously purchased a home.Let’s get started. Taking Your First Home Buying Steps Deciding to finally purchase your first home can be somewhat overwhelming. Where exactly do you start?Before you get started with your ‘First Time Home Purchase’ research on Google and visiting realtor websites, take some time and reflect about whether buying your first home is the right decision for you. The answer to this question is based primarily on an individual or family’s financial resources and whether buying vs. renting is a better investment or decision.AffordabilityMost prospective homeowners start with affordability, which we will expand upon in the following pages. Do you have the financial means to save enough for a down payment, pay realtor and legal fees, and sustain the ongoing costs of owning a home?Most first home buyers start with comparing the costs of owning a home vs. renting. In addition to a mortgage payment, home ownership costs also include many other factors such as on-going municipal taxes, home insurance, maintenance and upkeep, furnishings, day-to-day items, among others. In most cases, renters don’t have to worry about most, if not, all of these ownership related costs.These home ownership costs and financial responsibilities should be ‘top-of-mind’ when you are deciding whether you should continue to rent or purchase your first home.Home Ownership Vs. RentingWe’ll be going into a bit more detail in the next section, however it’s critical that you reflect on your own situation and whether home ownership is a fit for you. Perhaps you’re better off renting and continue building a first home down payment nest egg or investing elsewhere?Home Ownership Investment Advantages From an investment perspective, home ownership may have an advantage over renting, although your specific situation may differ.On average, the Toronto real estate market has increased 5% year-over-year, for the last 50 years. This type of growth can fluctuate and vary, meaning there are peaks and valleys and highs and lows. While this growth hasbeen the average, there are never any certainties. With the understanding that home ownership will likely cost more than renting, you may wish to compare whether you are able to save/earn on investments, at an equal to or better rate, than the average increase in home prices. You may be surprised by the comparison.If you are purchasing your first home strictly for investment purposes, perhaps having a discussion with a financial planner may be beneficial. There may be other investment alternatives that may be best suited for you from a strictly investment perspective, depending on whether the investment is short-term or long-term based. Home Ownership ResponsibilitiesHome ownership has many responsibilities, including the on-going repair and upkeep of your home and its structure.Structural repairs such as plumbing, electrical, heating and air conditioning and the roof for example, are critical home components which need to be kept in working order and functional. These repairs need to be performed by qualified and or licensed professionals.If you’re not sure about a repair, call a qualified professional first. Most maintenance, and minor home repairs like painting or cosmetic changes, or lawn mowing for example don’t necessarily need a qualified or licensed expert. Many homeowners do the simple stuff on their own, with varying levels of quality and success.If you’re not familiar or comfortable with minor home repairs, your maintenance costs may be higher if you have someone else do it.In most cases, working on your own home, such as gardening, painting, minor repairs etc., can be very enjoyable and rewarding. Ultimately, the decision is yours to decide whether home ownership is a fit for you or to continue renting without the benefits of home ownership. These are only a few examples of additional costs that you should be considering if home ownership is a serious consideration. The ‘Pros and Cons’ of Renting vs. Home OwnershipAs we mentioned in the previous section, it’s imperative you explore the benefits and risks associated with renting and home ownership specific to your financial affordability and lifestyle, for example.Home Ownership ResearchHome Ownership Research includes (but is not limited to) understanding the following:Realtor contracts and their rolesThe role of your real estate lawyerHome inspection and other possible stakeholdersUnderstanding how mortgages work, along with the role of financial institutions, including financing and lending optionsYour credit history and debtHome ownership insuranceHome contractors for any renovation needsMoving expenses and closing costsHome Ownership Benefits and DisadvantagesIn addition to providing shelter, home ownership is an investment. You are building equity. A home is in a general sense, a forced savings planFinancial loss. Your home value is not a liquid asset. If you need to sell during a low real estate market, you may lose money (lower property value, mortgage penalties, realtor fees, legal fees)Eventually your home will be paid off, with the benefits of increased property growth and equityYour first home can be your entry point into the real estate market and allow you to upgrade your home based upon your family, lifestyle, or geographic needsYou can renovate or upgrade your home and its property based upon your personal preferences and tastes, and have the benefit of potential increased property valuesRental income. Homes can be a flexible asset. If you want to move on from your current home, but don’t want to sell, you can always rent itStability, control over your living space and the pride of ownershipRenting Benefits and DisadvantagesIf you are currently renting, you are already aware that it usually costs less to rent, here are a few advantages and disadvantages of renting:AdvantagesLower costs. Aside from your rent, and perhaps a couple utility bills (e.g., electricity, cable), your total monthly costs are much lower than they would be with a mortgage payment. However, your monthly rental payments can increase each year, as is permitted under the Residential Tenancies Act.Less worry about repairs and maintenance. In most rental situations, it is up to the landlord to look after any major repairs to the propertyA shorter commitment with renting. Which makes it much easier to move to a new premises, home, or geographyThe difference between what you would be paying for a mortgage and other home ownership costs and your rent, can be saved and is readily accessible, or used for other investment purposes or to save up for a new homeIf you’re renting, you don’t have to worry about municipal taxes, repair, maintenance, and upkeep of the unit you are renting, those fees and costs are usually the responsibility of the ownerIf the property value of the rental decreases, it’s of no concern to the renterDisadvantagesRenting is not an investment. As the rental unit’s real estate value increases, you do not share in that investment value. Your rent continues to be due every month, without any ownership benefits and your rent may be increased from time to timeIf the property owner decides to terminate your rental (within the terms of the rental agreement), you will have the burden of finding a new place to liveHome Ownership AffordabilityIf you don’t have the financial means of:Saving for a minimum down payment (usually 5% of the home purchase price)A sustainable income and savings to make your mortgage payments and weather any future income or employments gapsPaying to keep your home maintained and structurally sound… then perhaps home ownership may not be for you.If you don’t have the funds for a down payment, however you have the financial means to save for a down payment, then now is the time to start.Home Purchase Down PaymentIn most cases you will need a minimum of (not including closing costs, which we will get to) *:Home Purchase ValueMinimum amount of the down payment$500,000 or less– 5% of the purchase price$500,000 to $999,999– 5% of the first $500,000 of the purchase price – 10% for the portion of the purchase price above $500,000$1 million or more– 20% of the purchase price*Government of Canada According to the Canadian Real Estate Association, the average home value in Canada is $538,831, a 5% down payment for this average home would be $30,826. Obviously, that home value may be much higher in major Canadian cities.Home values in the suburbs of major cities may offer a lower home value and subsequently a lower threshold for a down payment. The average home value in the Greater Toronto Area in April 2021 was $1,090,992, which would represent a down payment of at least $54,550.Home values on the border of the GTA may be even lower. Whitby, Ontario for example, may have average home values which are slightly lower than the GTA, which would mean a lower down payment.Whether you need to save $25,000, $35,000 or $55,000 or more, saving up for a down payment will need focus, discipline, sacrifice and hard work.There are a variety of ways to start, and grow your first home down payment, including:Focusing on your career. Putting in longer hours, along with promotions and raises in salaryFreelance or gig work as an extra incomeNot upgrading your car, or buying a less expensive oneLimiting your discretionary spending. For example, less restaurant meals and take out, and more home cooked mealsReducing your entertainment expensesPerhaps putting those vacations on hold until you have saved for your down paymentFinding a rental that costs lessContribute to your RRSP. The Canadian government will allow first-time home buyers to use up to $35,000 (no withholding tax) of their RRSP for a qualifying home purchase, provided they pay it back over 15 years ($35,000/180 months = $195 per month). For those that have used this plan previously, there may be exception, if you haven’t owned a home for a minimum period.Government Assistance and ProgramsHome Buyer’s Plan (HBP)First-Time Home Buyer IncentiveHome Buyers’ AmountGST/HST New Housing RebateCanada Greener HomesMortgage Loan InsuranceMortgage loan insurance must be purchased if you are obtaining a mortgage from a regulated bank and your down-payment is less than 20% of the price of your home. Obtaining a mortgage from a private lender does not carry with it the same requirements to obtain mortgage insurance, but does carry with it increased closing costs. You may wish to read our post on private mortgages ‘Six Factors To Consider Before Contacting a Private Lender’.Mortgage insurance protects the mortgage lender in the event you fail to make your mortgage payments and are in default. The premium can be added to your mortgage; however, you will pay interest on it and in some cases provincial tax will be applicable.If the home value is $1 million or higher and if the loan doesn’t meet mortgage insurance standards, mortgage loan insurance will not be available.The fee for mortgage loan insurance ranges from 0.6% to 4.50%, the rate depends on how much your down payment is, the larger the down payment, the less the mortgage insurance rate will be.Mortgage loan insurance providers:Canada Mortgage and Housing Corporation (CMHC)SagenCanada Guaranty Mortgage Insurance CompanyClosing CostsClosing costs are ‘all’ the fees that will need to be paid to finalize the closing and sale of your home. Approximate closing fees range up to 3 to 5% or more of your home’s value.Closing Cost FeesThese fees may include:Appraisal feesLegal fees, including disbursements, title, mortgage, adjustments, and administrative feesTitle InsuranceLand Transfer taxHome inspection feesInterest adjustments if there is a gap between the closing date and first paymentH.S.T on new homes or commercial propertiesRebatesAs a first-time home buyer, there may be rebates available to help with some of these closing costs, which should be investigated. Of note is the first-time home buyer land transfer tax rebate, which provides a rebate of up-to $4,000.00 on Provincial Land Transfer Tax and a rebate of up to $4,475.00 on Toronto (Municipal) Land Transfer Tax. Qualifications for the rebate are subject to a number of factors, so it is best to speak with your lawyer to determine whether you qualify or not.Conclusion – Next Steps Congratulations! You’ve made it to the end of this article, and perhaps you’ve already started your first-home purchase journey.In our next article “You’ve Decided To Buy: 9 Insights To Help the First Time Home Buyer” we provide insightful details about the first-home purchase process. You will learn about the critical next steps once you have decided that you can afford your first home.In addition, if you’d like to read more about purchasing your first home, we have linked several articles below discussing similar topics. In addition, please visit our Real Estate Law and Buying A Property sections on the Nichols Law Professional Corporation website. Sources and Additional InformationDisclaimerSources and links are provided for source credit and attribution, and for additional information purposes only. Nichols Law is not affiliated, associated, authorized, endorsed by, or in any way officially connected with any of the sources or links provided.CMHC: Home buying Step by Step: Your guide to buying a home in CanadaYour First Home; A Buyer’s Kit for Condos and Houses book, by Kimberley Marr, CAAP, ABROttawa Sun, When To Contact a Real Estate LawyerGovernment of Canada, Before You Sign Any Contract: 10 Things You Need To KnowGovernment of Canada, How Much You Need for a Down PaymentCanada Mortgage and Housing Corporation (CMHC), Debt Service CalculatorTD Bank, Mortgage AffordabilityGlobal News, Banks Sell Mortgage Insurance, but Independent Experts Say You Shouldn’t Buy ItCanada Mortgage and Housing Corporation, CMHC mortgage loan insurance costsGovernment of Canada. RRSP. 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