To own or not to own? With home prices skyrocketing these past few years would convince most people that homeownership would be the ultimate goldmine. And tough luck for those who can never afford what appears to have become a luxury.
While it does seem like a dream for many, there is more to it than merely crunching the numbers. Not all that glitters is gold!
There are many advantages to homeownership:
● You are building equity.
● Most of us would not put away, in savings, what we would allocate towards a mortgage payment, especially if we were renting and trying to save at the same time.
● Size of leverage — it is much easier to qualify for a large mortgage than for an investment loan of the same amount. In general, you only need to put 20% down and the bank is willing to loan you five times more to buy a home if your credit is clean and employment is steady.
● You need to live somewhere; it may make sense to own rather than keep paying rent since it can provide stability.
● Mortgage payments are like forced savings. Most people would be comfortable skipping their monthly savings contributions before thinking of missing a mortgage payment.
● Making regular mortgage payments increases your credit score.
● We don't respond to real estate downturns as we do with extended downturns in the stock market. We don't think about selling our homes when the real estate market is down, as we do when stocks are down.
What we need to remember about buying a home:
With the real estate bull market over the recent years, many people may have forgotten that home prices can drop — and they can drop significantly.
There are many costs associated with homeownership over and above the mortgage.
● Land transfer tax when purchasing a home can go from a low of 1.5% to a high of 4% of the home's purchase price.
● There are property taxes, sewage, water, house maintenance costs, and strata fees (for condominiums). When renting, the landlord handles all these costs.
● If you are single and with only one income to rely on, homeownership can daunt you with no backup source of income in case you lose your job.
Bringing It All Together:
The cost of owning a home is often higher than renting. So if a renter were to invest the difference between the cost of buying vs. renting and building equity that way, they might be better off renting.
Homeownership makes sense when you have a family since you will probably need a larger home than if it was just the two of you. A larger home is higher in rent. Putting that money towards a mortgage payment would make better financial sense.
A home can provide stability. However, you cannot take it for granted that you can build equity quickly through increases in home prices.
Government policies can change. The government can take a stand against "flipping" houses to make a quick buck.
Homeownership is a long-term commitment. In cities where houses are expensive, many people are "house poor." They may own a house but have little left for anything else. In Canada, banks may lend up to 32% of total income (before taxes) towards purchasing a house. So the onus is on you, to be honest about how much you can genuinely afford.
Once you've paid your income taxes, your housing costs could be closer to 60% of your net income.
Remember that owning a home is not always about math. Will owning a home reduce your quality of life? Or add to it? Only you can answer that question.
If you’re considering buying a home to make you rich, remember that home ownership is not the only way to build wealth. There are alternative ways to increase your net worth, earn passive income, and even help you retire early.