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If the 2000s have taught us anything, it's that buying and owning a quality primary residence is a cheat code for tax-free capital gains.
Looking back over every 12 months since 1980, property prices have increased by an average of 5.78 percent. This means that if you are sufficiently qualified and financially sound, entering the real estate industry earlier in life can put you on the fast track to a secure retirement.
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Of course, there are would-be market experts who argue that the price risk is too great at this point. But I've never met an expert who can consistently pinpoint the point at which property values bottom out. You might as well read tea leaves in the dark.
As a young potential homeowner, how do you know when the time is right – when you are ready to take out your first mortgage?
Use this checklist to check your potential for buying a house. Photo from Getty Images
What follows is a checklist for examining your own home buying potential. Check all of the following boxes to confirm you are ready.
- You are over the age of majority in your province (lenders are not allowed to discriminate based on age as long as you are of legal age).
- You are a permanent resident of Canada.
- You have a secure job and have completed your probationary period at work.
- You have a down payment of at least five percent, the minimum for a home worth up to $500,000 (or someone is willing to gift or loan you the down payment).
- You have at least 1.5 percent of the property value available for closing costs.
- You've built good credit with a credit score of over 680, but preferably 720 or better – it's like a high school grade, but for money.
- You have at least two credit accounts with meaningful credit limits (a credit card with a limit of $5,000 or more is far more meaningful than one with $500).
- Your estimated housing expenses are less than 39 percent of your gross income. Some personal finance gurus recommend 32 percent or less, but that's no longer realistic. From the lender's perspective, housing costs mean your mortgage payment (calculated at your expected interest rate plus two percentage points – the government's stress test requirement), monthly property taxes, heating costs and half of all condo fees.
- Your total housing expenses plus debt payments are below the typical bank limit of 44 percent of gross income. (You can find lenders that offer a higher down payment of 20 to 35 percent, but payment stress is linked to hair loss. Avoid it if you can.)
- You can demonstrate sufficient income or have a co-signer (Note: In most cases, a two-year track record is required for self-employment, side hustle and commission income, but there are exceptions).
- You'll be prepared for rising property taxes, rising condo fees (if applicable), rising utility costs, and ongoing costs of maintaining your home.
- You're a disciplined spender (new homes are money pits, and there's nothing worse than getting yourself into a housing-related debt hole with expensive revolving loans).
- You have a time horizon of five or more years – so you can ride out market difficulties and not be trapped in a home that's worth less than the mortgage.
- They've done the math to show that buying makes more sense than renting or occupying a parent's basement when you take into account monthly savings, homeownership costs, appreciation potential, government rebates and incentives, opportunity cost of investing in something else, etc.
- You've been pre-approved, meaning a lender has reviewed your application – and preferably your income and down payment documents.
- You've created an honest monthly budget (a purchase is just the start of ongoing home costs).
- You've researched what mortgage term you're best suited for (variable and short term have proven popular in the long term, but a lot depends on what stage of the economic cycle we're in).
- Just in case, you have access to living expenses for more than three months.
- You can buy in an area with good appreciation potential (e.g. an area where household growth exceeds new housing construction and an area where there is a sustainable catalyst such as strong job growth, excellent nearby amenities, scenic beauty , a top-notch school nearby). and so forth).
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This is not an exhaustive checklist, but if you check all of these boxes, chances are good that you should buy. If not, take advantage of the freedom of rent and invest the monthly cash flow savings. It doesn't have to be much more complicated.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
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