This is guest post by Kathryn.  She goes over why it’s a great time to be a first time home buyer.

If you have been considering jumping into the housing market for the first time, this may be the ideal time to do so.

Here are 7 reasons why this may be the perfect time to buy a house:

  1. Interest rates have recently been cut to the lowest rate ever. Mortgage rates are amazingly low. ING’s 5 year fixed rate is at 4.24% and PC’s basic 5 year fixed if 4.34% as of early March. There are great deals out there right now.
  2. Housing prices are dropping. Yes, it’s possible that house prices will continue to drop. Next year may even be a better time to buy a house. We don’t know what the markets will do in the short haul but right now they are looking better than they’ve looked in a long time.
  3. It’s a buyer’s market out there. People are selling homes they can’t afford. Others are moving for a new job opportunity. There are lots of choices. It wasn’t that long ago that bidding wars were normal and conditions were easily waived. Even when we bought our first home in 2004, we put an offer on the house before the ‘for sale’ sign even went up on the lawn. Two other people wanted to make offers. We were the only one that didn’t have to sell a house first. Not having to sell your house first puts you at a huge advantage over other buyers who need to make the sale of their house conditional on the purchase.
  4. Land Transfer Tax Refund. You can get a refund on the land transfer tax in Ontario for new or resale homes if you’re a first time home buyer. Before 2007 this applied only to new homes.
  5. The Homebuyers Plan has increased to $25,000 for this year’s budget. That’s $25,000 each if you’re a couple! See this post on the Home Buyers Plan (HBP) for more info.   My only caution would be that it may not be the ideal time to cash out your RRSP for the Home Buyers Plan unless you have your money in very conservative investments. You may want to sit down with a professional or do some serious math to figure how if it’s worth using your RRSPs for the HBP in this economy.
  6. Tax Credit for Initial Expenses. First time home owners can get a tax credit on up to $5,000 worth in expenses while purchasing their first home.  Since this is a federal tax credit, they would get 15% back which is up to $750 cash back.
  7. Renovation Tax Credit.  If you’re willing, then you can purchase a fixer upper and get a tax credit (15%) on $10,000 in renovations to your home.  Note that this credit is for the 2009 tax year only.  Here’s more information on the home renovation tax refund.

For second time home buyers, there aren’t nearly as many incentives. We’re looking at a move to another city in the next year or so. The expenses on a second move are much more considerable than on the first.

  • We’ll have to pay the land transfer tax.
  • It’s the seller who pays the real estate fees and that’s going to amount to a chunk of change. In this market, we don’t want to sell our house on our own but looking at the fees involved it’s tempting to give it a try.

We’re going to have to downsize. A big city is simply more expensive than where we live now. We don’t want a larger mortgage so we’ll have to buy less house.

Had I known what I know now, would we still have bought in 2004? Absolutely! If you can afford it, owning your own house is a wonderful investment opportunity. Our house is worth $50,000 more than what we paid 5 years ago. In some neighborhoods, increases are even higher than that.

Home ownership comes with a price tag, but for those wanting to take the leap, it may be the perfect time to buy.

Do you have any advice for first time home buyers or for those looking to sell and buy in the next year?

Kathryn is a regular contributor on Million Dollar Journey and has a passion for personal finance.  She volunteers her time as a money coach meeting with ordinary Canadians, teaching them the basics of budgeting, no fee banking, saving for the future and other basics of personal finance.

82 Comments

  1. Ed Rempel on March 19, 2009 at 1:30 am

    Hi Bullseye & Archanfel,

    There are areas like condos in Toronto where renting is clearly better than owning. We have quite a few clients with a rental condo in Toronto. Nearly all are paying $4-500/month or more out of their pocket, because the rent does not cover the mortgage, property taxes and condo fees.

    I you own a condo in Toronto and your neighbour rents an identical condo, you are paying $4-500/month more, plus you are making nothing on your down payment and you have to pay all your own maintenance.

    Normally, renting and owning are relatively close. In Toronto condos, either the rent must go up or the condo prices must come down.

    Ed

  2. Ed Rempel on March 19, 2009 at 1:48 am

    Our advice to home buyers:

    1. Always have 20% down. The CMHC fee is very high with no benefit for you.
    2. Only buy a home if you will be comfortable living there at least 5 years. You likely won’t make anything in less than 5 years once you consider real estate commissions, legal fees, the cost of moving, and the cost of fixing up a place to your taste. It is better to wait a bit longer and buy the home you really want.
    3. Do not get caught in the “5-Year Mortgage Trap”. Variable or 1-year rates almost always save you thousands over any longer tem mortgage. High interest rates like they had in the 80s will not come back. We have recommended variable or year rates for 15 years. With the discounts available, our clients have been between 4-5% almost all of the last 15 years. There were short periods with rates as high as 5.4% and as low as 1.65% now (which you can’t get on a new mortgage).
    4. Never lock in a mortgage longer than you expect to live in a house. “Porting” a mortgage and”blend and extend” are bad deals for you and good deals for the bank, because any addition to the mortgage is at posted rate.
    5. Don’t take cash back, since you only get it if you pay more than that amount by locking in a long term mortgage at stupidly high rates.
    6. Shop around to find out what discounts on mortgage rates are available and never take the posted rate or renew a mortgage at the posted rate.
    7. Just because you qualify for a mortgage does not mean it is smart to take it. Don’t forget your long term goals and your lifestyle.
    8. Don’t fall in love with a house. Look for a good deal, not the perfect house. A good deal is either a house you can get at a great price (for many posible reasons) or one that has tons of upgrades that add little to the value of a house.
    9. Renovations are not investments. Unless you do all the work yourself, most renovations only add a portion of the cost to the value of the home.
    10. Don’t be a landlord for the prestige. Renting is profitable in your basement or older, multi-unit properties (live in 1 and rent the rest), but is usually not profitable renting newer homes entirely or condos.

    Ed

  3. Kathryn on March 19, 2009 at 8:39 am

    If it’s about equal or a little more to buy, wouldn’t it make more sense to buy since one day it will be paid for? I see owning as part of my retirement plan. It’s my goal that by 55 (I started late) the house will be paid for and I’ll only be paying property tax and maintenance. If I hadn’t bought, then I’d be paying rent all my life.

  4. Archanfel on March 19, 2009 at 9:14 am

    Kathryn, you are still not getting the point. Even after you paid off your mortgage, the cost of owning does not change. The bulk of the costs are opportunity cost associated with the equity tied up in the house. Why does bank charge you an interest for your mortgage? It’s because they would have been able to invest that money in the market and make money. After your mortgage is paid off, you are essentially lending money from your investment portfolio to yourself and you should essentially charge the same interests from yourself, thus the situation does not change. Unfortunately, historically house price appreciate with inflation (the inflation adjusted chart for US house price is fairly flat until 2000 and it spiked to 2007 and we all know what happened after that), thus under perform the market significantly. FT posted an analysis of the 30 year rolling real return over the last 60 years. The lowest return was 4.32% from 1960 to 1990, the highest was 7.93% from 1976 to 2006. I would think 4% is a safe number. Therefore, in exchange for not paying rent, you are losing 4% of your potential net worth every year. By the time you are 55, it should be a very significant amount.

    Another way of looking at buying a house is to develop a split personality (not literally :) ). First look at the house from a renter’s perspective, how much would I pay to rent this house. The look at the house from an investor perspective, does it make sense to buy this house to rent to this very nice lady. Only buy the house if it satisfies both the renter inside you and investor inside you. As you can see, the renter will never stop paying rent anyway since the investor will always need to be satisfied with the rent and house appreciation or she would sell and invest in something else.

    Of course, here is Canada, so everything centers around taxes. Owning a house is very tax efficient for retired people. That’s why I plan to buy a house when I am 55, use 10 years to suck my RRSP dry and pay off the mortgage. Then live in a beautiful home with all my investment hiding in my TFSA or index equity fund (which is not taxed until you sell), draw OAS and possibly GIS as well. Well, we can always dream. :)

  5. DAvid on March 19, 2009 at 11:44 am

    Ed Rempel said: “Always have 20% down. The CMHC fee is very high with no benefit for you.”

    I have to disagree on this one Ed! There are times when paying the CMHC fee makes sense — when the inflationary cost of housing exceeds the the fees or the ability to save, but the individual has the financial ability to pay the mortgage. For instance, in the past six years, houses in our neighbourhood have increased 120% in value. Had we rented, instead of purchasing, we would have been shut out of the market in short order, as we could not afford the additional 15% or more per year in additional mortgage costs to purchase the ever increasing house price.

    DAvid

  6. Archanfel on March 19, 2009 at 12:40 pm

    David, 6 years is nothing in the housing market. The boom and bust cycle can run 10-20 years.

    Here is a chart of inflation adjusted house price for the US from 1890 to 2008. http://mysite.verizon.net/vzeqrguz/housingbubble/united_states_1890-2008.png. As you can see, from the late 90s to 2007, US house price jumped from less than $150,000 to close to $275,000. Well, what happened in 2008? I think it can be safely assumed that the price will drop back to the $150,000 range if the government hasn’t shameless intervened. Inflation is simply not that high right now and there’s no reason to believe there’s such thing as “inflationary cost of housing” on top of normal inflation.

    Of course, there are always exceptions in local market, oil field could be found, there might be a gold mine under the town, market could have overshot to the down side due to extraordinary circumstances (Quebec in 1995 for example). In that case, I would agree with you.

  7. CanadianFinance on March 19, 2009 at 2:47 pm

    Ed Rempel,

    I would have agreed with you a year ago about going with variable over a 5 year fixed mortgage. However, I think right now there’s a strong argument that a 5 year fixed is the way to go. With variables being above prime now, the gap is closing between variable and fixed.

    I wrote more about this last week…
    http://canadianfinanceblog.com/2009/03/12/fixed-or-variable-rate-mortgage.htm

  8. Ms Save Money on March 19, 2009 at 7:07 pm

    @ Bullseye, how are u so sure that the home prices will hit rock bottom in 2 or 3 years?

  9. mojo30 on March 19, 2009 at 8:19 pm

    buying a house based on interest rates is ludicrious..with all the cheap money in the market and stimulus money we will have an inflation problem sometime in the next few years. And there is only one way to fix that, high interest. There are alot of people currently who are just making it monthly with the current rates, what happens when they tack on another 3%+..and yes..it can and will most likely happen sometime in the near future.

    Everyone has to live somewhere..so the proper way of buying is if the ownership is pretty close to what it would cost to rent. In the last few years I have seen friends buy property that is 3x times what their rent was and now they are living on bread and water just to keep afloat..too many people follow the herd and get burned..buy if you can afford it without it eating up 50%+ of your monthly income. There is no proper model on home purchase, besides mortgage there are alot more thngs involved in home ownership..people need to consider it all before they buy..just because Tom and Dick bought..it dosent mean that Harry can also.

    my 2 cents..thanks for reading.

    Good points Ed!! I agree with all

  10. Ed Rempel on March 19, 2009 at 8:58 pm

    Hi Canaidan Finance,

    Where do you get a 5-year fixed at 4.15%? Even with that rate, though, it always seems to take a lot of big assumptions for a 5-year rate to possibly keep up with variable.

    Today, you would save at least 1.25% with a variable over a 5-year mortgage for probably 1/3 of that 5-year period. And there is a good possibility of another .25% rate cut to come. To be even, the variable would then have to go up to about 5% and stay there for the following 3-4 years.

    We have been recommending variable mortgages (or 1-year fixed) since the mid-90s, and there have been only a few relatively short periods where the discounted variable rate was as high as 5%.

    One study I saw from a mortgage broker showed that five 1-year mortgages would have been cheaper than one 5-year mortgage 100% of the time since 1950. Variable mortgages would also have almost always saved money.

    To take a 5-year mortgage now means you lose money unless rates rise 3-4% and stay that high for 3-4 years. Anything less, and the “5-year mortgage trap” will have lost you money again.

    Also, the variable above prime will likely return to a normal variable rate below prime once the credit crisis ends. Prime will go up at some point, but variable mortgages will likely return to below prime as well.

    Ed

  11. Ed Rempel on March 19, 2009 at 9:05 pm

    Hi DAvid,

    There are often extra steps buyers can take to get the 20% down, such as an RRSP loan to withdraw under the Home Buyers’ Plan, getting an unsecured credit line, or financing it in some other way. The extra financing costs are tiny compared to CMHC fees.

    Your situation of 120% growth in homes in 6 years is extremely rare and usually would only happen before a real estate crash, as Archanfel pointed out. Real estate historically grows only a bit over inflation It has grown 2% over inflation in the last 30 years in Toronto, which includes 2 big booms.

    Ed

  12. DAvid on March 19, 2009 at 10:42 pm

    But Ed, all those options depend on the ability to obtain that extra financing. In instances where those options are not available, and prices are increasing fast enough, it may make more sense to pay the 2.75% premium than watch house prices increase by 5% (or more) before you can effect a purchase.

    I fully agree that the increases in housing prices as I described is rare. I don’t expect it to continue, and am waiting for the fall, however, I could not afford to enter today’s market, and am very happy I do not have to do so.

    Archanfel, I do not expect this trend to continue. I believe our neck of the woods played “catch up”, and we were fortunate to arrive at the time in the cycle we did. My point was that given the increase in housing costs our community has experienced, we could not afford to enter today’s market. I don’t really see the increase in costs as having any real benefit, as it has just made our community inaccessible to many potential residents.

    DAvid

  13. archanfel on March 20, 2009 at 12:30 am

    DAvid, why would you want to enter today’s market if the market is unbalanced? Is there any reason that you find renting unbearable?

  14. DAvid on March 20, 2009 at 10:49 pm

    There is about a 0.1% vacancy rate in our area just now, what is available is of poorer quality, or very pricey. Rental costs are comparable to mortgages, ifyou can find a suitable place.

    The rapid increase in housing costs over the past few years has far exceeded the increase in salaries, making an area that was affordable to families with an average income, unaffordable. Most folks who move here need to find a place to live in short order, and while there is a considerable selection available, it is not cheap, nor available for rent.

    While house values have dropped across much of the country, our neck of the woods has been insulated from that drop, and saw a modest increase in value of about 2.8% between Jan. 2008 and Jan. 2009. While volume is down, much to the disappointment of local Realtors, prices are up.

    Thus, it’s not that renting is unbearable (ask our tenant) its simply not available!

    DAvid

  15. pacific on March 21, 2009 at 10:39 am

    16. mjw2005
    “I always love listening to homeowners (like the lady who posted today) talk about how much money they made on there house, based on price increase alone….but they never take into account all the money they have spent to get there….on a $200,000 mortgage at 4% your spending around $8,000 a year in interest alone, plus property taxes and house maintenance. Then when you sell you have to pay a RE agent 3%, plus more lawyer fees, plus land transfer taxes….and on it goes….”

    Try renting a decent place for less then 8000 a year.

  16. john on March 22, 2009 at 4:32 pm

    It’s a good time to buy if you like losing lots of money month after month for the next two or three years. It’s an even better time if you like the idea paying twice or more on your monthly mortgage payment in a few years when interest rates shoot up.

    The best time to buy is when the house you want is either:
    1) Cheaper than rent
    or
    2) Is 3 times your annual income

    In either case use 25 year amortization and a 25% downpayment otherwise you have no business owning a home.

  17. Dwight on March 23, 2009 at 11:25 pm

    I am currently in a tough situation, i live in ottawa where house prices have generally not been effected at all, they have stopped rising but are definatley not going down. I am young, recently married and a would be first time home buyer, i am currently renting and am having a hard time convincing my wife that continuing to rent is by far the best option for us right now. we pay roughly 1000/mth in rent, weve worked hard to erase student debts, our car is paid off and we both have decent jobs. right now we are able to save 1-2 thousand a month, but our savings is just starting to build, at around 20 G’s now (mostly in RRSP’s), how can i convince her that continuing to save for say another year would save us huge in the long run, especially with house prices still at an avg of 325,000 for a bungalow. shes so set on buying a house, it has been the topic of many arguments, and now that weve gotten a dog, “we NEED a yard”……..i enjoy reading these posts and would appreciate any help on my own million dollar journey.

  18. FrugalTrader on March 24, 2009 at 8:37 am

    Dwight, there is no right answer to your predicament. If your wife is dead set on purchasing a house, perhaps you can sit down together and see what the costs would be relative to renting. Once it’s on paper, it’s easy to see if you can afford the payments or if the extra costs will affect your lifestyle.

    Here are some mortgage/rent calculators to try:
    http://www.dinkytown.net/java/ca.html

  19. DAvid on March 24, 2009 at 11:55 am

    Dwight,
    Have a look at any of the ‘Rent vs. Own’ calculators on the web as well.

    A house can be a millstone. There are times when renting is the best choice, and times when owning is the best choice. Do your research before jumping in to the ownership muddle.

    Having a dog in a yardless apartment does increase the labour (unless you can teach it to flush…..)

    DAvid

  20. Elbyron on March 24, 2009 at 12:08 pm

    “A house can be a millstone”

    Lol, this is one of the funnier typos I’ve seen lately. It made me want to go and find an appropriate photo. This is the best I could find: http://www.letheringsettwatermill.co.uk/images-temp/Millstones-lift-27.jpg

    “teach it to flush”
    http://blog.pennlive.com/thrive/2007/08/large_ToiletDog.jpg

  21. DAvid on March 24, 2009 at 4:00 pm

    Actually, this millstone is the one I was referencing.

    DAvid

  22. J. on March 24, 2009 at 7:21 pm

    I have a couple of newbie questions, which I hope somebody could answer:

    – If (as somebody said above) we can’t rely on information from real estate agents (because they are interested in selling), where do I go to get reliable information on real estate market trend and assess if the market looks fair/overprices/underpriced?
    – Where do you go to gather information on neighborhoods? I’m new to town, and I have been talking to some people to get there opinions on different neighborhood, but I’m thinking there must be some more systematic information somewhere. Also, when you “scout” neighborhood, what exactly are you supposed to look for?

    Right now I’m happy with renting (The rent + all utilities consume 13% of my gross), and I hope I can save enough for a good chunk of down payment when my time comes.

  23. DAvid on March 24, 2009 at 10:17 pm

    Your bank or better yet, Credit Union might be able to answer questions on market trends and pricing / value.

    Start with a Realtor for information on neighbourhoods, then corroborate it yourself by spending some time there, to determine if it meets your needs. Folk usually look at available amenities (Shops, and other services), recreational facilities & parks, access to transit or reasonable commute, schools, age demographics, etc. Once you have narrowed it down some, walk around, talk to the folks who live & work there, read local (neighbourhood) papers.

    Since you are renting (I’m envious of your low costs), you have some time to test drive a few neighbourhoods to see how they feel. Go out and poke around as though you were living there, spend some time & money in the shops, wander the streets, talk to the folks doing garden work. You should get a good feel for things in short order.

    Another option if you are a member of a Service Club is to ask your fellow members. The folk you will meet in most such clubs will usually offer their unbiased opinion. If you join an organization with many local clubs (eg. there are often a number of Rotary Clubs in any given area) you can often find information about the local scene that might be unavailable through other avenues.

    Hope this gives you a starting point.

    DAvid

  24. Alexandra on March 25, 2009 at 3:44 pm

    My husband handles the finances in our family, and when we bought our Toronto house last year, he insisted on paying as little in terms of down payment as possible. We have a 40 year mortgage. He wanted to invest the difference (we could have afforded to pay way more down). He also wants to use the interest we pay on the mortgage as a tax write-off since he has a large home office (w/ it’s own bathroom, basically 25% of our living space) and we also have a renter in a basement apartment.

    Does this make financial sense, or should I be insisting that we pay down some of our mortgage? We currently owe $550k in mortage (we both make about 100k each). He does tend to be more of a risk taker than I am, but this has served us well in the past ;-)

    Thanks for any answers.

  25. J. on March 29, 2009 at 11:20 am

    Thanks, DAvid.

  26. Voice_of_Reason on April 2, 2009 at 4:37 pm

    I read this post and finally decided to reply for the very first time on this site. I currently rent in Toronto and am in the market to buy a condo. I have seen a lot of arbitrary arguments and comments so far. Here are some of the facts, since I have very raw data.

    archanfel, Ed Rempel,
    I am going to challenge your numbers a bit.

    My friend was just approved for a 4% 5 yr fixed mortgage with Scotia bank. On a 250K mortgage, using a 25 yr, the monthly principal+interest payments are ~$1300. Average property tax is $100-150/month for 1 bedroom condo downtown. Average condo fees (the ones I have seen anyway) including Hydro are $250-300. If you do the math: 1300+150+300=$1750. Since I have done the research, in the same building where I’d want to buy, I can rent for approx $1450-1500/month. Based on this you can buy a condo with an additional $250/month on top of your rent.
    Assumptions: 20% down to avoid the CMHC charges, 4% 5 yr fixed (although, my friend has informed me that some other institutions are offering as low as 3.82% for the same product which would bring the P+I payment down to $1270/month).

    The lower interest rates make a HUGE difference, you can’t discount this fact. Buying due to lower interest rates DOES make sense (see the math above). Mind you, this rate is only locked for 5 yrs, after the 5 yrs I’d personally go for a variable mortgage rate, at which point time the sub-prime variable rates will likely return. The ONLY reason I would even consider touching the 5-yr fixed is due to the historically low rate compared to variable. You’d have to have completely lost your mind to lock into anything more than 5 years.

    Some of the numbers you used for interest rates are either out of date or are not representative of the best rate you can get these days. Eventhough I believe that condo/house prices may yet drop further, you will see substantial savings through lower rates. Moreover, Toronto is not Calgary and Vancouver. The house/condo increases in Toronto have been more steady and based on sound market economics. I would not be buying into the Calgary, Edmonton or Vancouver bubble. (See the CMHC average house price increase over the last 30 years for various Canadian cities). Also, Toronto is home to 100,000 new immigrants every year, the most in the country. The demand for housing should remain for the forseeable future.

  27. Victor on May 22, 2009 at 6:44 am

    A quick question for the lot of you: I live in Ontario and I bought my first home in January 2007. I chose to use the Homebuyer’s Plan offered by the government to finance part of my downpayment.

    As I understand it, I should have received papers from the government telling me how much to pay back and when to pay it back.

    It is now May 2009 and I have received nothing.

    Can anyone comment? Thanks!

  28. Coop on May 22, 2009 at 5:58 pm

    My husband and I are first time “contemplating” home buyers. We have been renting here in a small town in Alberta for 6 years and have seen our rent increase from $415/mth to $815 a month (not including power) for a one bedroom. We are told due to the nature of my husband’s employement we can get a 3% interest rate, we have $10,000 for down payment and both have secure employment in the emergency services (gross family income $110,00). After reading all of these posts I am more confused than before. This is a scary venture for us and are currently looking at houses around $200,000-$220,000. We don’t want to continue to throw our money into somebody elses morgage by paying rent, yet we plan to relocate in about 2 years from now. I would love feedback from anyone about wether this is a good time for us to buy. Thanks

  29. DAvid on May 23, 2009 at 2:19 pm

    Coop,
    The usual advice is to rent for short periods. Here are some numbers:

    A mortgage of $210,000 at 3% over 25 years would be about $993/ mo. plus all utilities and municipal taxes.
    In two years, you would have about $12,000 in equity, plus what ever the price of the house increased
    You will have closing costs on your house.
    Realtor fees in two years would be about 6% or $13,200.
    Plus you may have to wait to sell when you want to leave.

    If you put the difference between your rent, and your housing costs into a TFSA ($178 on mortgage + $150 for utilities & taxes) plus what ever you estimate closing costs and moving costs to be (say $5000), you could have an additional $13,000 to add to your down payment savings in two years.

    In my opinion, unless you expect the house you buy to increase by 15% or more in the next two years, renting is the more cost effective option.

    DAvid

  30. Coop on May 24, 2009 at 1:29 am

    Thank you very much for your wise advice David. My husband and I discussed something very similar last night and decided that its best for us to wait two more years, pay off all of our debts (my student loan(from obtaining my Masters Degree)C and a little bit of his own debt) together over the next two years while putting in money to add to our down payment for a house in a couple of years. This way we will be debt free when we enter into our house purchase with a nicer down payment. Just means we have to get through another two years in a very materialistic town in Alberta with “big oil money” as the odd ones who continue to rent. But with a long term plan this is the best option for us. Thank you for breaking down some numbers for us. Best regards,
    Coop

  31. Coop on May 24, 2009 at 1:33 am

    Thank you!

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