Where do you see yourself in the next five years?
What does your future hold? “It’s important to project your plans and needs over the next five years. You wouldn’t buy a house if you planned on moving in two years. You wouldn’t buy a 600-square-foot condo if you planned on having two kids in the next three years, either,” explains Louis-François Ethier, Director of Mortgage Products at the National Bank. Your family situation and civil status should also be taken into account. Are you looking at a possible divorce? Are you single? Will you be solely responsible for paying your mortgage? Sometimes it may be more prudent to continue renting for a while.
If you’re a newcomer to Montreal, Quebec or elsewhere in Canada, whether you’re here temporarily or permanently, to work or to study, you should also take a good look at your plans. The length of your visa shouldn’t stop you from renting now so you can buy in the future, or even from buying now, as your financial advisor will be able to suggest different mortgage solutions adapted to your needs.
Are you emotionally ready to become a homeowner?
If you want to own a house or condo, you need to think about the various repairs and expenses that are sometimes required after purchasing a home. Renovations, urgent repairs, additional or unplanned expenses… No one knows for sure what the future holds. “If you’re not big on renovations or don’t have a lot of money saved up, maybe it’s best to continue renting. Because when you’re the owner, you’re the one in charge of repairs,” explains Louis-François Ethier.
“If you just immigrated to Montreal, it may be better to start out renting, because it will allow you to explore the neighbourhood and its amenities before buying. But you don’t have to if you don’t want to,” he says.
Have you thought about all the costs related to buying a home?
It’s important to compare how much you’re currently paying for rent to the cost of monthly mortgage payments if you buy a home.
Some fees are recurring when you’re a homeowner (mortgage, insurance, condo fees, municipal and school taxes, etc.) while others are only paid out once. “As soon as you buy a home, you start incurring different fees: notary fees, appraisal fees, the welcome tax, etc. This could cost you thousands of dollars and impact your budget,” adds Louis-François Ethier.
In some cases, your monthly rent may be equal to or lower than your potential mortgage payments. Even if this may seem beneficial, you definitely have to calculate the overall costs related to owning property to make an informed decision.
If there isn’t a big difference between your monthly rent and the total costs related to buying a property, buying may be a good idea since the cost will be recouped further down the line through capital gains.
As for the interest on mortgage loans, “financial institutions can generally guarantee a fixed rate for five years, once the mortgage loan has been given out. This will allow you to pay out the same amount for the next few years and to make a more accurate budget,” adds Louis-François Ethier.
Did you practice being a homeowner by saving?
To find out whether you should rent or buy, you can practice saving to see whether you’re truly able to absorb the difference in cost between paying rent and owning a home. “If you determine that the monthly cost of owning a home amounts to $1,800 per month and you currently pay $1,300 in rent, try saving the difference for a few months to see if you can afford it. Systematic savings can help you simulate and get used to the type of payments you’d incur if you were a homeowner,” says Nicolas Stephan, Mortgage Development Manager at the National Bank.
Have you been qualified by a bank to buy?
A bank must verify certain elements before giving you a mortgage loan. This is called getting “qualified” for a loan.
First, you must have secured a down payment. Although securing 20% of the property’s value is recommended, a minimum of 5% is required. “The CMHC (Canada Mortgage and Housing Corporation) offers solutions that allow you to buy property with just a 5% down payment. And if you’re a newcomer, most financial institutions have programs to help you buy a home,” Louis-François Ethier asserts.
Then, the bank will analyze your credit and your financial situation by checking your debt-to-income ratio (assets vs. debts) and your ability to pay back a loan.
The bank will also take a look at your job stability and the type of job you have. For newcomers, financial institutions require that you have a job and generate income in Canada. These two prerequisites will help qualify you to buy a home in Canada.
Do you keep track of the real-estate market?
If you’re thinking of becoming a homeowner, it may be a good idea to keep a closer eye on the real-estate market and interest rates.
You need to keep in mind that when the market’s on the rise, property prices increase as well, but it might still be a good to buy property. Because even if prices are higher than before, they could get even higher in the future!
Conversely, when the market slows down, property sale prices may be more attractive, and your real-estate agent may negotiate a lower price. That’s why it’s wise to keep a watchful eye on the market.
Do you see property as an investment?
“When you have a mortgage, you’re building home equity and financial value as a buyer. As the years go by, you’ll pay off the capital, which becomes forced savings. Part of your monthly mortgage payments becomes capital and the rest is used to pay off the interest,” explains Louis-François Ethier.
You can even determine when it’s profitable for you to become a homeowner and what your long-term financial value is as a renter vs. a homeowner by using this calculator.
Did you know that property is a tax-sheltered investment?
Capital gains can be just as profitable as an RRSP, and in today’s market, your property will appreciate with time.
For example, “a condo that was bought in Verdun six years ago for $200,000 can now be worth $450,000, which represents a non-taxable gain of $250,000 (except if it’s a rental property). If you can afford a mortgage and all the related costs, you’ll miss out from such gains if you keep renting,” explains Nicolas Stephan.
Is becoming a homeowner important to you?
Buying a home is a stage in life that not everyone has the privilege of reaching. “For many people, becoming a homeowner in the city where they live is a personal goal,” admits Louis-François Ethier. It is admittedly an emotional factor, but an important one nonetheless if you’re thinking of going from renting to owning.
Fact or fiction?
It’s better to keep renting if your rent is cheap.
It may be better to keep renting if your rent is very affordable. Nevertheless, it’s important to save to build financial value for the future.
You have to rent before buying a home.
“No, it’s not a golden rule. You can move out of your parents’ home and into one you own. You can also move here from another country and become a homeowner as soon as you arrive. There’s no law against it, as long as you meet the criteria listed above,” adds Nicolas Stephan.