When to make the leap from renting to buying

Here’s what you’ll need before you make the jump from renter to home owner.

10

by Gail Vaz-Oxlade
November 29th, 2012

Online only.

10

house_money_seesaw_1008_322
One of the things I hear most often is that people want to buy their own homes because renting is just flushing money down the toilet. Hey, if you have the “will” to move from renter to home-owner, that’s the first step. The second step: having the “means.”

Wanting to own isn’t just about the money; perhaps you want to know you can stay where you are with no fear you’ll be told to move just when you’ve got the place perfect. Or perhaps you’re looking for a neighbourhood with good schools and a strong community and there aren’t a lot of rental options. But buying a home is a big decision, and without some careful planning, it can end in disaster. Here are some things you must be sure you have in place before you make the leap from renter to owner.

Enough income: Seems obvious right? Yet loads of people move into their first home and then discover that their latest acquisition is eating so much of their money they have to use credit to cover the gap. Lenders will want to see a solid work history—minimum 1 year at your latest job—so if you’ve been quilting together an income, you may have difficulty being approved for a mortgage.

A downpayment: Again, obvious? Except that there are still people offering new buyers ways to get into homes without any money down. Whether it’s through a cash-back program, or through alternative lenders, it’s a bad idea. Don’t think that the bare minimum of 5% down means you’re ready. Having less than 20% down means that on a $375,000 home you’ll have to fork over nearly $10,000 in mortgage insurance premium, and pay more than $55,000 in interest in the first five years, assuming a mortgage of just 3.25%. That means you’ll be paying about $917 a month in interest. Pretty comparable to rent, don’t you think?

No consumer debt: Having no consumer debt means you’re in a better place to qualify for a mortgage. Having no consumer debt also means you’ve got your spending in line with your income so you’re less likely to hit the wall once you close and start paying all those new bills. If you carry consumer debt into the home-purchase phase of your life, it’s because you think you can have it all at the same time. You can’t. You’ll see.

10 comments on “When to make the leap from renting to buying

  1. My partner and I recently purchased a home, and we weren't fully prepared with all of the costs associated with buying a home. Make sure you have some extra money to pay for all of those!

    Reply

  2. I've always saved a portion of my paycheck each month and then bought a house within my means. I think we have trouble distinguishing between wants and needs, so people don't save and/or budget well anymore.

    Reply

  3. Just to expand on moneyaftergrad, this is a real deficiency in this article. Owning a home means upkeep and it usually means a few more other bills than apartment rental as well. It also means most of your utility and home insurance bills will be higher. These extra payments really add up on top of the mortgage. Unless you plan well and move right before repairs are needed (so every 10 years at most) there will be larger upkeep costs. I needed new shingles a few years ago but I can't do it myself and hadn't put money away for it so I had to remortgage. A good investment with todays rates but you can't count on them. Hot water heaters, emergencies from water leaks and other small things that always happen, and don't forget that furnace isn't going to last forever either.

    Reply

  4. Obviously a down payment is required. What was not mentioned when buying a home is the closing costs. When applying for a mortgage lenders want to see 2-3% of the selling price sitting in a bank to cover closing costs. Not only does it cover a lawyer and all his/her fees and costs but there also the land transfer tax. In Toronto buyers have to pay a double tax upfront. If you have less than 20% down youuu are required to get CMHC insurance on the mortgage. This can be added onto the mortgage but you are essentially paying for it over the length of the mortgage.

    Reply

  5. thumbs UP for this post! looking forward to read more of your post.

    Reply

  6. Thanks for sharing such wonderful thoughts. I am a renter but when I think of how much money I am paying, I feel the best option is to pay towards my own home. And based on your experience, what is the best option people have except making ready 20% down payment. For a renter to save 20% down payment is also difficult. I think you have presented the challenge well, and we may also need a suggestion.

    Reply

  7. As a mortgage broker, I could not agree more with you. You are 100% correct. But if you remember just 7 years ago, interest rate was 5% for even a 25% down property. Right now, some lenders are offering 4.59% with 0% down. As for the insurance premium. If property prices go up as they have in the last 5 years. It will be impossible to afford a home with 20% down. All I can say, it depends on the buyers personal situation. But 0% down is generally not the greatest idea.

    Reply

  8. Excellent topic and information, I do think it's important to understand the issues with buying a house in advance.

    Reply

  9. How long will a rented house last? Like is there a lease contract you have to sign, or is it as long as you want?

    Reply

Leave a comment

Your email address will not be published. Required fields are marked *