Conventional wisdom suggests it’s a no-brainer – buying real estate is a worthwhile investment with a high return.
Despite record low interest rates, the sky high prices and carrying costs are causing many to rethink the allure of home ownership.
When you factor in the costs of repair, maintenance and other expenses associated with owning a home, Toronto-based financial planner Shannon Simmons argues that renting and putting saved money into another investment – such as a stock portfolio – could earn more in the long run.
Simmons gives new clients a questionnaire asking where they see themselves in 10 years. Many answer “buying a house.”
“Then we meet in person, and they say, ‘Oh I don’t really care if I buy a house, but shouldn’t I want to?’”
Based on advice from financial planners—both independent and those employed by banks—Global News has compiled a list of questions (and some context) to help you decide whether buying or renting is the right move for you.
1) Do you have 10-20 per cent of the home’s purchase price saved for the down payment?
While it’s possible to purchase a home with as little as five per cent down in Canada, big banks prefer first-time home buyers to have an average of 10 per cent.
“If this is the property of your dreams and it’s a really good buy, and you don’t have the full 20 per cent down,” says Royal Bank of Canada’s Rachel Wihby, it may make sense to pay the mortgage loan insurance charged to anyone who doesn’t put 20 per cent or more down on the home.
But “the less you put down, the higher the amount that you’re actually being charged,” Simmons said. That could mean you end up paying an additional $10,000 or more.
2) Do you have another 1.5-5 per cent saved for closing costs?
First-time home buyers don’t have to pay realtor fees, but there’s a number of other closing costs that need to be taken into account.
Depending where you live, land transfer taxes can carry a “significant” price tag, said Farhaneh Haque, director of mortgage advice for TD Canada Trust.
“Lawyer fees, seller/buyer property tax adjustment, appraisal fees, home inspection fees, even just your moving costs,” Haque said.
David Stafford, Scotiabank’s managing director of real estate secured lending, added fire and loss insurance to the list, suggesting $50-$100 per month as a ballpark figure.
Stafford also stressed the value of a building inspection, particularly for first-time home buyers, who may be easily impressed by granite countertops and hardwood floors but miss such other details as an old furnace, a leaky roof, or electrical wiring that’s in need of repair.
“Given you’re contemplating a multi-hundred thousand dollar purchase, a building inspection for a couple hundred dollars isn’t a bad idea.”
3) Can you keep debt servicing below 40 per cent of your income?
Your total debt service ratio measures the percentage of your gross annual income needed to cover housing payments (principal, interest, property taxes and heat, known as “PITH”) plus registered debts like car loans, personal loans and credit cards if applicable. Simmons says this 40 per cent rule is “specifically to please the bank” and is the general eligibility criteria when applying for your mortgage at most financial institutions.
So if you add it all up, housing payments and other debts should be between 35 and 40 per cent of your gross annual income.
4) Are your monthly fixed costs at 50-60 per cent of your after-tax income?
These “fixed costs” include housing and transportation, groceries, toiletries, and “everything you have to pay every month whether you like it or not,” Simmons said.
“When the money hits your bank account, if more than 60 per cent is tied up in things that you can’t get out of every single month, then you have no room after that for spending money which is not a fixed cost – things like going out for dinner, going out with friends, weddings, anything else that’s not just a bill.”
Keeping this ratio under control ensures you have enough money left over to keep saving, and avoid becoming “house poor.”
“Once you buy a house, it’s not like retirement’s done; you still have to save for other things,” Simmons added. “You also want to make sure that you have enough cash flow every single month that you don’t have to go into credit card debt – and that’s what I see: house broke, all the time.”
5) Can you save 1-2 per cent of your income in a “housing maintenance fee” each year?
The top mistake Canadian homebuyers make? Underestimating “significant renovations needed to the property,” according to a recent RBC poll.
Stafford suggests asking your realtor, and getting a home inspection.
“Even if it’s in pretty good shape, most homes of any age, there’s something you’ve got to do every year…and you need to factor that into your cash flows,” he said.
Simmons advises setting aside 1-2 per cent of your after-tax income each year to what she calls a “house maintenance fund” to avoid going into debt.
“When there’s not that extra cash sitting in an emergency fund, if there’s a $10,000 renovation or if you get cockroaches … It has to go on debt, because you’re not going to live in a place with cockroaches,” she said. “That can take a long time to pay off if you don’t have flexibility with your cash flow.”
6) Do you plan to stay in your home for at least three years?
Haque said TD advises clients to think about their life in three- to five-year chunks when considering purchasing a home.
A young couple buying a condo, for example, should consider how soon they’ll need a bigger space if they want children in the near future.
Wihby suggests regarding a home as a long-term investment – it might not be worth it if you buy a home and sell it a year later.
7) Is your job stable?
Are you planning to stay in your field? What would happen if your income decreased?
These are some of the questions RBC planners ask clients to determine how monthly payments and lifestyle would change as a result of job fluctuations.
“So you need to think of things like, will you be on a single income household instead of two?” Wihby said. “Maybe that means you won’t be taking those trips you thought you’d be taking or maybe you won’t be going to the gym as often.”
8) Are you emotionally ready to own a home?
It may sound hokey. But this is a big lifestyle leap to take.
“A lot of people heard that it was almost a no-brainer to go into property, especially when we saw property prices rising like we did in the past,” Wihby said. “But I think a lot of people got into purchasing a home before they were ready emotionally.”
The impact of what Stafford calls the “single biggest financial commitment for most people” includes the mental shock of going from a tenant to a homeowner.
“When you’re a tenant, the month that cheque goes out, it clears your account, and then you don’t think about it for the next 30 days,” Haque explained. “But when you’re a homeowner, you have those multiple payments like home insurance, maintenance fee, utilities, property taxes, that you have to account for on an ongoing basis. And sometimes it’s very much a shock to your system.”
Simmons emphasizes that homeownership is a personal choice, and isn’t the imperative it was 30 or 40 years ago.
“I know a lot of professionals who just don’t want to be bothered cutting the grass on Saturday, and doing the gardening. … They would much prefer to rent and save a bunch of money, so they can travel every weekend,” she said. “If you’re not actually going to enjoy the house, what’s the point in buying it?”
