Updated: Sep 9, 2021
With home prices skyrocketing these past few years, it 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. But we must not assume that buying a home is the only way to build your net worth.
There are certain 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 to qualify for an investment loan of the same amount.
You need to live somewhere; it may make sense to own rather than to keep paying rent since it can provide some stability.
Mortgage payments are like forced savings. Most people would be comfortable skipping their monthly savings contributions before they ever think of skipping 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 to sell our homes when the real estate market is down, as we do when stocks are down.
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 that can go from a low of 1.5% to a high of 4% of the purchase price of the home.
Then there are property taxes, sewage, water, and 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 with no backup source of income in case you lose your job.
Renting vs Owning:
The cost of owning a home is often higher than renting. If a renter were to invest the difference of the cost of buying vs. renting and building equity that way, they may be better off renting.
Homeownership makes sense when you have a family. 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. You cannot take it for granted that you can build equity quickly through increases in home prices.
Prices could fall or remain stagnant for years. In 2008, the global financial crisis resulted in an unprecedented number of foreclosures. Home prices dropped. It left the people that had put little to no down payment to purchase their homes with large mortgages and no equity in their homes.
Government policies can change. The government can take a punitive stand against “flipping” houses in order to make a quick buck.
Bringing It All Together
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 the purchase of a house. The onus is on you, to be honest with yourself about how much you can truly afford.
Once you’ve paid your income taxes, your housing costs could be closer to 60% of your net income. In Vancouver, BC, residents spend almost 80% of their income on housing costs.
Remember that owning a home is not always about the math. How does it fit into your overall financial picture? And beyond that, will owning a home add to your quality of life? Or take from it? Only you can answer that question.
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