Understanding Home Affordability in Canada
You might be ready to buy a home if you can see yourself staying in the same place for the long term and you have a general idea of what your future will look like. Perhaps your current home doesn’t meet your needs and you’re in a comfortable financial position with a manageable amount of debt, and you’re satisfied with your retirement savings at this point. Maybe you think it makes more sense to pay towards a mortgage rather than rent.
Key Costs of Canadian Home Ownership
Before you start your search for the perfect house, follow these steps:
- Calculate your gross annual household income
- Consider what it might look like if you lost one of the incomes in your family
- Factor in additional income or financial help you might receive
- Calculate your outstanding debt
- Factor in credit cards and loans that you are paying off
- Estimate the cost of:
- Property taxes
- Home insurance
- Possible mortgage insurance
- Utilities like heat and hydro, and also internet and television
- Household repairs and ongoing maintenance
- Calculate what your monthly mortgage payment might be based on the term length and interest rate
- Calculate the down payment you can afford
- A down payment of less than 20% of the property value requires that you purchase mortgage default insurance
- A larger down payment means your mortgage will be smaller
- Consider available programs that can help with this cost (like the Home Buyers’ Plan)
- Estimate closing costs like legal fees and title insurance
- Calculate the purchase price you can afford
Many online calculators exist to help you figure out what you can afford, but they may not consider all of the above. We recommend doing a thorough review of your financial picture and potential housing affordability as outlined in the steps above in addition to any online calculator you may wish to use.
The Tax Impact of Home Ownership
One of the best tax advantages that exists is that the sale of your principle residence is still tax free.
In recent years the tax filing rules have changed so that you now have to report the sale of your principle residence, but it is still considered tax free. This means that the entire increase in price of your home is pure profit – none of it is lost to taxes.
For context, if you made $10,000 on the increase in value of your house, you’d need to make $15,000 in investment income to achieve the same result.
Tax Implications of Canadian Home Ownership
Renting is a great option for people who aren’t in a situation where they can comfortably afford all the costs associated with home ownership. It also makes a lot of sense for people whose lifestyle is more transient or fluid and who prefer freedom to move and make big changes without being tied to a mortgage or certain location.
If renting is the comfortable choice for you, explore other ways you can invest and grow your money for your future.
Should You Buy or Rent a Home?
Buying a home is one of the biggest decisions you’ll make in your life, and it’s a personal choice that’s different for everyone. Consider your lifestyle and financial position as well as the future you envision for yourself and how affordable that future might be.
After calculating and estimating all related costs associated with home ownership, or how you would otherwise invest and grow your money while renting, make the choice that allows you to live as comfortably as possible – financially and otherwise.
For more information on how to calculate the financial impact of home ownership, visit these related blog posts:
- Home Ownership Changes in Canada | Are Canadians Still Buying Houses?
- Renting vs. Buying A Home in Canada | What is the Right Financial Choice for You?
- Programs and Financial Assistance for Home Ownership in Canada
Since writing this article, the Canadian government announced a new incentive for home ownership, the First Home Savings Account. You can learn more about it here.
Navigating Home Ownership Taxes in Canada
Unsure of how to analyze your financial situation and the impact of home ownership? We are happy to work with our clients to determine the best financial and life decision for you, your family, and your goals.
Connect with us today at kwbllp.com/!