Renting vs. Buying
This is a decision which many people face, and the decision is not as easy to make as it may sound.
As a homeowner, you can reasonably expect the equity in your home to increase over time as your mortgage is paid down. That, combined with regular appreciation in property values, can be a rapid and rewarding way to increase your net worth. In contrast, the person renting over the same amount of time is left with no property investment but may have enjoyed lower living expenses and the opportunity to invest in other opportunities.
When comparing owning to renting, you have to add up all of the figures, including the cost of your home, the size of your down payment, utilities, immediate repairs, interest rates and insurance, and compare them with how much you are currently spending on rent.
Of course, you also have to place a value on the enjoyment and satisfaction that will derive from owning your own home.
The Home-Buying Decision
There are pros and cons to home ownership, and when you weigh them carefully, you will likely come to your own conclusion about whether home ownership is right for you.
Start by asking yourself this basic question:
What can I afford?
Home ownership should fit into your lifestyle, but it should not become your lifestyle. Many first-time buyers take on more debt than they can manage and quickly find themselves “house-poor” – meaning they have nothing left over at the end of the month.
Shop with Confidence:
Choosing a home that you can afford will allow you to enjoy the rewards of home ownership with comfort and peace of mind. Follow these three steps:
· Determine your debt load
· Use your debt load to determine your price range (take advantage of our calculators: www.firmwayfinancial.com/calculators/)
· Establish a realistic budget for other expenses
Determine Your Debt Load
To determine what you can afford, use these two simple calculations:
Gross Debt Service ratio (GDS)
The GDS looks at your proposed new housing costs (mortgage payments, taxes, heating costs, and 50% of condominium fees, if applicable). Generally speaking, this amount should be no more than 39% of your gross monthly income. For example, if your gross monthly income is $4,000, you should not be spending more than $1,560 in monthly housing expenses.
Total Debt Service ratio (TDS)
The TDS ratio measures your total debt obligations (including housing costs, loans, car payments, and credit card bills). Generally speaking, your TDS ratio should be no more than 44% of your gross monthly income.
Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle.
Before falling in love with a potential new home, you may want to obtain a pre-approved mortgage.
This will help you stay within your price range and spend your time looking at homes you can reasonably afford.
The pre-approval meeting is the time to find out about different mortgage products that are available to suit your particular needs. First-time buyers may want to ask about special programs such as the CMHC 5% down payment option and the federal government’s “RRSP Home Buyer’s Plan”.
A pre-approval meeting can also be treated as a fact-finding mission to go over closing costs. For example: land transfer tax, legal fees and other disbursements.
A good rule of thumb is to budget about 2% of the purchase price for closing costs. People who buy new homes from builders pay 13% HST, which is often included in the purchase price.
Once the mortgage is pre-approved, we commit to the interest rate for 90 days. You can shop with confidence, knowing how much you can spend for the home of your choice. And there is no obligation. If you do not find a home you like in the first 90 days, you can renew your pre-approval at the interest rate in effect at that time.