Purchasing your first will likely be the most memorable purchase in your life. It is extremely gratifying and overwhelming at the same time. We understand how confusing and stressful the process of buying a home can be, so we’re here to help! Whether it’s finding a reliable real estate agent or understanding the process of obtaining the best mortgage solution for you, and everything else in between.

Though daunting, homeownership comes with a wide range of benefits. Owning your own property earns you an increased sense of stability: you can renovate your space to your own tastes, even using your equity to make home improvements. Some homeowners also find they are able to build stronger ties to their communities. Aside from lifestyle benefits, homeownership also makes a lot of fiscal sense as well.

The most well known benefit of buying a home is the accumulation of equity over the term in which you are paying off your mortgage principal. 

So what exactly is equity?

Simply put, equity is the difference between the market value of the property and the balance owing on your mortgage. It’s the value of your ownership or the portion of the property value that you actually own.  

With each mortgage payment, you are adding your hard-earned money into a “high-interest” financial reserve. Unlike most things we buy, the value of a home will almost always appreciate in the long run. Investing is all about the effects of compounding.

It is important to note that calculating the equity in your home requires more information than your outstanding loan amount from your purchase price. You must also consider the current market value of your property, which is determined by analyzing market trends and sales comparables in your region. Need a clearer example? Take a look at these examples below:

Consider a condo townhouse for sale in Whitby, Ontario at $499,900. Comparable units in the building are listed for rent, at $2,700 a month.

Scenario 1

Let’s assume you buy it with 5% down with a 25-year amortization with today’s best mortgage rate (2.59%). You can replicate these calculations using any asking price of your choice using our mortgage calculator.

  • Down payment: $24,995
  • Amount borrowed: $474,905
  • Mortgage payment per month: $2,152.00
  • Principal paid over seven years: $180,768
  • Amount outstanding after seven years: $294,137
  • Appraised resale value with appreciation: $614,813
  • Home equity gained: $614,813-$294,137= $320,676.95
  • Equity gained after resale: $147,391

Scenario 2

Let’s compare renting the same condo over seven years:

  • Rental price: $2,700 a month
  • Total amount spent over seven years: $226,000
  • Equity gained: $0

These calculations are based on an estimated 3% annual appreciation rate.

It’s clear to see which outcome is more attractive. A homeowner would sell the home and leave with $147,391. A tenant may leave with nothing. Even after taking into account maintenance costs and selling fees, the difference is still astronomical.

But that’s not all. The fiscal benefits of homeownership go beyond building equity:

  • Homeowners can create passive income by renting out a spare room in their home, or leasing out the entire property if they invest in an income property.
  • For the less financially disciplined, owning a home is a forced savings plan. With each mortgage payment, you’ll be routinely putting money away towards your equity while increasing your overall net worth.
  • First-time buyers are eligible to make tax-free withdrawals of up to $35,000 from their RRSP to contribute towards their down payment under the Home Buyer’s Plan. Buyers of new construction or buyers undergoing substantial renovations can also be subject to GST/HST and QST rebates. And you can reap tax-free profits because any gain on the sale of your principal residence isn’t taxable.

But that doesn’t mean buying is always a better bet than renting.

Buying is advantageous, but only when the homeowner can comfortably maintain said responsibilities. 

Ideally, your total housing costs (including your mortgage) should only amount to 30% to 35% of your gross (before-tax) income. If your monthly income is less than 2.5-3 times the mortgage plus carrying costs, homeownership may be a risky move. Additionally, equity perks only start to kick in after three to five years of having a mortgage, most of your payments go towards the interest in the first few years of your mortgage. 

If you are uncertain of your lifestyle choices over the next few years, i.e. changes in employment, relocation or starting a family, it may be wise to hold off on homeownership. 

That does not mean holding off on your savings plan and working on your credit.

All in all, homeownership is a great way of building a strong financial future. Just be realistic about your costs and budgeting and be patient enough to find the right property. Pair that with the right agent and a current comparative market analysis, and your mission of homeownership will be complete!