READY TO START CLIMBING THE PROPERTY LADDER?
Complete this checklist and start using a cheat code for tax-free equity gains
If the 2000s have taught us anything, it's that buying and holding a quality primary residence is a cheat code for tax-free equity gains.
Looking back at every 12-month span since 1980, prices have risen an average of 5.78 per cent. That means, if you're adequately qualified and financially fit, getting on the property ladder earlier in life can put you on the fast track to a secure retirement.
Of course, there are wouldbe market psychics who argue there's too much price risk to buy right now. But I've never met an expert who can consistently time when home values will bottom. They might as well read tea leaves in the dark.
So, as a young potential homeowner, how do you know when the time is right — when you're ready to get your first mortgage?
What follows is a checklist to audit one's home buying potential. Tick all of the following boxes to confirm you're ready.
■ You're past the age of majority in your province (lenders can't discriminate based on age, as long as you're a legal adult).
■ You're a permanent resident of Canada.
■ You've got job security and are past any probation period at work.
■ You've got at least a five per cent down payment, the minimum on a home valued up to a $500,000 (or someone is willing to gift or loan you the down payment).
■ You've got at least 1.5 per cent of the property value for closing costs.
■ You've built up strong credit with a 680-plus credit score, but preferably 720 or better — it's like high school grades, but for money.
■ You have at least two credit accounts with meaningful credit limits (a credit card with a $5,000+ limit is far more meaningful than one with $500).
■ Your estimated housing outlay is less than 39 per cent of your gross income. Some personal finance gurus recommend 32 per cent or less, but that's not realistic anymore. In lender terms, housing outlay means your mortgage payment (calculated with your expected rate plus two percentage points — the government's stress test requirement), monthly property taxes, heating costs and half of any condo fees.
■ Your total housing outlay plus debt payments are less than the typical bank limit of 44 per cent of gross income. (You can find lenders that'll allow higher on a 20 to 35 per cent down payment, but payment stress is correlated with hair loss. Avoid it if you can.)
■ You can prove enough income, or you have a co-signer (note: in most cases, self-employed, parttime and commission income require a two-year track record, but there are exceptions).
■ You're prepared for rising property taxes, rising condo fees (if applicable), rising utility costs and continuous home maintenance costs.
■ You're a disciplined spender (new homes are money pits, and there's nothing worse than digging yourself into a housing-induced debt hole with high-cost revolving credit).
■ You've got a five-plus year time horizon — so you can ride out market hiccups and not get trapped in a home that's worth less than the mortgage.
■ You've done the math, and buying makes more sense than renting or parental basement squatting, after factoring in the monthly payment savings, home ownership costs, appreciation potential, government rebates and incentives, opportunity cost of investing in something else, and so on.
■ You've been pre-approved, meaning a lender has reviewed your application—and preferably your income and down payment documentation.
■ You've developed an honest monthly budget (a purchase is just the beginning of ongoing home expenses).
■ You've studied which mortgage term you're best suited to (variable and short terms have won over the long term but much depends on which stage of the business cycle we're in)
■ You've got access to three-plus months of living expenses, “just in case.”
■ You're able to buy in an area with good appreciation potential (e.g., one where household growth exceeds new housing units and one where there's a sustainable catalyst like strong job growth, terrific nearby amenities, scenic beauty, a top-notch school nearby, and so on).
This is not an exhaustive checklist, but if you check all these boxes, odds are you should be buying. If you don't, embrace the freedom of renting and invest the monthly cash flow savings. It doesn't have to be much more complicated than that.