As the average Canadian house price tops $400,000, bidding wars are erupting in bigger markets like Toronto where the media price of a single family home is now over $1 million. But in spite of the high price tags, younger Canadian buyers are still keen to enter the market. According to a survey from RBC, 36 percent of young Canadians between 25-35 plan to buy a home in the near future (up from 2013). Is that a good idea in this pricey market? Here are a few important questions to ask yourself:
1. What happens after the down payment?
You’ve saved and saved and now you have a substantial down payment to obtain a mortgage. But the cost of owning a home goes way beyond the money you put down. There are a host of other expenses you need to cover including property tax, maintenance, heating bills, and more. To find out how much you can handle, check out this Real Life Ratio calculator from The Globe and Mail’s Rob Carrick.
2. How long do you plan to stay there?
The average price of a condo or house is sky high right now but it’s not just the property that costs a bundle; the costs of buying and selling are high too. From land transfer tax to real estate agent fees to legal costs it can be expensive to sell and move if you need to. For example, if you sell your house for $400,000, you’ll have to fork over around 5 percent of the price to your real estate agent, depending on what commission you negotiate. That adds up to $20,000! Sell too soon after buying and you could end up losing money on the property, especially if you have to sell for less than the purchase price. Bottom line: It’s a good idea to consider a home purchase if you plan to own the property for five years or longer, otherwise you could end up losing out on the costs of selling.
3. Can you handle rising interest rates?
Back in 1981, the prime rate in Canada was around 20 percent; today it sits at 1 percent, which shows that mortgage rates today aren’t normal by historical standards. And while they aren’t likely to hit 20 percent any time soon, you do need to make sure you can weather an increase when it comes time to renew your mortgage. Ask yourself how a 2 percent or 3 percent rise in your mortgage rate would affect you?