by Henry Choo Chong
Q: Currently, my wife and I are renting. However, we would like to buy a home and build some equity. Can you offer some advice for a young, upwardly mobile couple? Geoffrey and Diane, Toronto
A: There are many investment vehicles that can give you healthy returns. You do not necessarily have to buy a home to increase your wealth. However, a home is one of the only tax-free investments still available to the middle class. Buying a home is a long-term commitment and investment. Today’s historically low interest rates make purchasing a home extremely appealing – particularly if your rent paid is greater than $1,000 per month. Why should you pay someone else’s mortgage?
Consider the following:
Determine what you can afford and stick to that price. All too often, buyers tour several homes and the only one they desire happens to be thousands of dollars over their budget. Remember, keep your head out of the clouds. Commit to a mortgage, not a stress asylum.
Shop and negotiate with several financial institutions for the best interest rate, terms and conditions. You may be surprised at how competitive the banks are for your mortgage business. Shopping for a mortgage can be as easy as a few clicks of your mouse.
Set a formal plan to help save for a first home. Sit down, plan the steps necessary to achieve your goals, and follow through!
Improve/maintain your credit rating by paying all your bills on time. One-day-late payments are still considered late. This could influence your negotiating power for the best mortgage.
Make sure current monthly mortgage payments are manageable and will continue to be so even when interest rates rise in the next several years and payments increase.
Put down as much as possible to avoid taking out a high-ratio mortgage that incurs additional cost and interest. A five-per-cent down payment on a home leaves little equity.
Set aside an additional three per cent of the purchase price of the home for closing costs such as Land Transfer Tax, legal fees and disbursements, moving costs and other incidentals. Speak to your lawyer who will be able to give you the heads up on what to expect.
Take advantage of the first-time Home Buyers’ Plan (HBP) to use your Registered Retirement Savings Plan (RRSP) as part of the down payment. An individual and spouse, provided they qualify, may withdraw up to $25,000 each from their RRSP, tax-free, for a total of up to $50,000 toward your home and other purchase-related costs. If you have never used the HBP, contribute your savings for the home into your RRSPs and take advantage of the tax deduction. Then, use these savings for a down payment. You will have 15 years to repay the amounts to your RRSP, starting after the second year of your withdrawal.
Continue to follow the real estate market trends and buy when you are ready. Only you can decide when it is the right time.
Henry Choo Chong is a certified general accountant. He sits on many committees and provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416.485.5225. Questions to Taxing Issues can be emailed to firstname.lastname@example.org