Renting vs. Home Ownership

This is a decision which many people face, and the decision is not as easy to make as it may sound.

As a homeowner, you can reasonably expect the equity in your home to increase over time as your mortgage is paid down. That, combined with regular appreciation in property values, can be a rapid and rewarding way to increase your net worth. In contrast, the person renting over the same amount of time is left with no property investment but may have enjoyed lower living expenses and the opportunity to invest in other opportunities.

When comparing owning to renting, you have to add up all of the figures, including the cost of your home, the size of your down payment, utilities, immediate repairs, interest rates and insurance, and compare them with how much you are currently spending on rent.

Of course, you also have to place a value on the enjoyment and satisfaction that you will derive from owning your own home.

Greater Saving with a Larger Down Payment

The size of a down payment can vary. Depending on the type of mortgage, down payments generally range from 5% to 25% of the purchase price.

To obtain a conventional mortgage , home buyers are required to put down at least 25% of the purchase price or appraised value (whichever is less) as a down payment. If you don't have the necessary time or resources to save a full 25% down payment, you can choose a high-ratio mortgage and buy a home with a down payment of as little as 5% . This option is called a high-ratio mortgage and it requires you to purchase default insurance.

Whether you choose a conventional or a high-ratio mortgage, one thing is almost always certain: the larger your down payment, the more you save in the long run. A larger down payment --

- Reduces the amount of your monthly principal and interest payment

- Reduces the total amount of interest you pay over the life of your mortgage

Ask about the RSP Home Buyers' Plan

The RSP Home Buyers' Plan (HBP) lets a first-time buyer withdraw up to $20,000 from RSPs for a home purchase. The withdrawn amount must be repaid within 15 years, subject to a minimum annual repayment that is 1/15 of the amount withdrawn. If the full $20,000 is withdrawn, the minimum annual repayment is $1,333 . If less than the minimum is repaid in any particular year, the balance is added to the taxpayer's income.

Want more information? Check the Canada Customs and Revenue Agency Publication .

Insuring Your High-Ratio Mortgage

CMHC or GEMICO may insure a mortgage for up to 95% of the lending value of the house. Therefore, purchasers only need a 5% down payment. Eligible borrowers include anyone who buys a home in Canada intending to occupy it as their principal residence.

Purchasers can use up to 32% of their gross family income for payments of mortgage principal and interest, property taxes and heating. A buyer's total debt load (including consumer loans, etc.) cannot exceed 40% of the gross family income.

People who insure a mortgage loan with CMHC or GEMICO pay an application fee and a premium. The application fee ($75 - $235 ) covers the costs incurred by the insurer to review the application. The premium is based on the down payment and loan amount. Typical fees range from 1.00% to 3.25% of the principal amount of your mortgage.