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Orginally posted by Maharaj


When you are talking about Fresh Immigrants, think this as well ...

You are making commitement, to stay at that very place. Your mobility for NEW job is hampered. Guy living in Scarborough would find it difficult to travel to Mississauga everyday (40kms on 401 ... ).

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A Proud Indian Canadian

Buying your own home is one of the biggest financial decisions of your life and should be taken seriously by considering all options like your income, down payment, job stability, proximity of schools for kids, the neighbourhood, transit connectivity or mobility and the distance from your jobs or business place. While it is true that all this should be considered and one should not be guided by these catchy slogans ' why rent when you can pay your own mortgage' or ' why pay your landlord’s mortgage when you can pay your own', however, this is also TRUE that you can not create wealth for yourselves in this country if you do not own a house of your own. I am not saying this because I am a 'mortgage broker' my self but I am quoting some top Canadian Financial Wizards, who say that in order to retire with ease and create wealth, the first thing is to have your own house.

For the purpose of discussion on this thread I will consider my own example. I came to Canada in April 1997 and stayed with my brother for 2 years before I bought my condominium in April, 1999 ( 5 years ago) for $134,000. Though I paid 25% down payment at that time to save on CMHC insurance fee but could have bought this with only 5% down payment but would have had to pay a CMHC premium of $4773.25 (3.75% of the mortgage amount at 5% down payment. However, today this premium would be $4137.25 as the premium has come down to 3.25% if you make a down payment of 5%) plus 8% tax on insurance premium $381 + application fee of $165. This CMHC premium would have been added to the mortgage making a total borrowing of $132,073.25 ( Condo value $134,000 – down payment $ 6,700 + CMHC premium)

For easy comparison, I would take as if I bought this condo on 5% down payment ( by putting only $6,700 down as a new immigrant would have done) and has resided here for last 5 years. My mortgage at that point was @ 5.75% for a 5 year term (though the rates today are much more attractive). The mortgage payment ( principal and interest) was $400 bi-weekly.

Since I did not rent prior to buying this house, I would compare as if I rented the same place for these 5 years ( to make it truly apple to apple comparison). The rent in my building was around $1100 at that time which is now $1300 per month now. (Yes the rent keeps on rising every year based on demand while the mortgage payments largely remain fixed for a 5 year term if you have not chosen a variable rate. but for simplicity we will consider 5 year fixed rate term). In this rent I would have gotten all the facilities which I now have being an owner of this unit, such as 2 swimming pools (one out door and one indoor heated) Tennis court, Squash and Table Tennis room, sauna, whirlpool and access to a party room for various occasions. I also have water, cable TV & one parking covered in maintenance fee. In addition to that I would not have to do grass cutting or snow removal or worry for garbage disposal. The heat is not covered in maintenance fee and I have to pay an average of $120 per month for heating costs. The maintenance fee was $230 and remained constant for 3 years and is now $250 for the last 2 years, making an average of $240 per month per year.

For simplicity I would consider rent as an average of $1,200 and I would have paid a total of $ 72,000 as rent in these 5 years. I am not taking insurance for personal belongings in the house for comparison, as it would be same whether I owned or rented. The fire insurance is paid by the condominium corporation and is covered in the maintenance fee.


Now lets do the comparison about the total cost of owning the house for 5 years.

Mortgage payments for 5 years. $400 X 130* = $52,000
Property tax for 5 years =$ 7,200
Maintenance fee for 5 years $240 X 60 = $14,400
Heating costs for 5 years $120 X 60 =$ 7,200
Land transfer tax & lawyers fee =$ 2,200
Maintenance over a 5 year period =$ 1,000
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Total =$84,000

* (26 bi-weekly instalments every year)

If I had not made the down payment and invested the same in a conservative fund, I would have earned approximately 6% p.a. (before tax) $ 2966 which after tax would have been app. $ 2,000.

Hence total cost of owning the house would have been = $86,000

The total rent paid in 5 years would have been = $72,000

Extra paid in owning in comparison to renting = $14,000

Out of $52,000 in mortgage payments the principal payments are $17,000 and interest is $35,000. Hence this $17,000 is my savings/equity over 5 years making it $3000 more than the amount I paid extra in owning versus renting. Further, the cost of the condominium has now escalated to $185,000 to $190,000, which means I am clearly a winner in my case by more than $50,000 in 5 years time. This savings could have been much more had I bought a house as the prices of house have escalated much more than in comparison to condos. In fact at the same time I bought this condo, my brother with whom I was living, also sold his old house and bought a brand new house in Markham for $199,900 the price of which has escalated to $335,000 in the same 5 years period.

Even if he paid $500 extra per month by way of owning than renting, he would have paid $30,000 extra in 5 years but would have saved app; $20,000 in equity by way of paying down the principal and escalation of more than $135,000 in price in 5 years. Vow. One more thing, since there is no 'Capital Gain' on the profit of selling your own house, my brother made a profit of over $60,000 by way of selling his old house for $255,000 (after expenses) which he had bought some 10 years ago for $187,000.

There is one more thing to consider. Since I was owning it throughout I did not have to move any where, while in renting you may have to move a couple of times in 5 years, if the land lord wants to have the condo/house for him self and it could be very cumbersome and upset your routine as you would have to again start searching for an accommodation which would fit in your criteria of kids schooling and neighbourhood and distance from your work place.

Hence, I would strongly suggest those people who are paying a high rent and can afford paying the same easily, should take advantage of lowest interest rates in the last 50 years and should go for a house by locking for at least 5 or 7 years mortgage. However, each person’s case is different. Every one has his own priorities and compulsions and if any one needs any help or further clarification, I can do an assessment of his/her situation and advise if he/she would be better off renting or buying. My service/advice is free to all fellow desis.

Thanks and regards.

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Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada

Absolutely fantastic post!

I think this post of Pramod Chopra explains everything that needs to be understood in making a decision of buying or not buying real property - not only in Canada, but perhaps in all parts of the world.

Except in the US, an additional reason to buy a property is to be able to write off your mortgage interest against your income!

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If we can unite, we can be the greatest!

Interesting.
this is what exactly i wanted for discussion on this forum. I would invite all others as an owner, to express your opinion as real facts!

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Sunil Sharma, P.Eng.

Another big benefit of owning a house is that it can help you in creating wealth. You build up equity in the house over the years and should always try to pay down the mortgage faster by putting in whatever extra money you have in your hand which brings down your principal owing and saves you money over interest. What more is that this interest saving is better then interest earning as interest saving is tax free while if you invest that money somewhere else and earn interest, you have to pay tax on that.

Now suppose you have a mortgage at a 5% p.a. rate and if you have $5000 spare in your bank, then instead of investing it somewhere for earning 6% before tax (which can come out to be less than 4% after tax) if you put this in paying down the mortgage, not only you are building your equity but saving or I shoud say earning a after tax interest rate of 5% which would be equal to 7-8% before tax earning depending on your tax bracket.

Secondly, sometime because of some unexpected expenses we may have to borrow money from credit lines (which could be 7-8% p.a. or through credit cards which can range from 10% to 24% or more. Then you have to pay a minimum of 3% per month of these balances to keep your credit fine, which could be an additional of $200-$500 per month (depending on the debts you have) which may cause unbearable stress to most of us. Even after paying these high monthly payments to pay down these debts, we do not seem to come out of it and borrow from some other credit cards which offer a low introductory rate for a 3-6 months and then again do the same thing after 4-5 months and got ourselves into a debt trap. Not only this causes stress but also affects our credit rating. However, if we have equity built in our house over the years, we can refinance funds against the house ( interest on housing loans is the lowest interest you can pay in Canada in comparison to other types of loans) and can come out of this debt trap and save our hard earned money in paying down the loans which charge us an exhorbitant rate of interest. This options is not available to people who are renting as they have over the years paid down only their landlor's mortgage but have not done anything for themselves.

Because of my profession, I have come across people who have equity sitting idle in their home but are paying through nose for the credit cards debts. I advise them to either take a 'secured line of credit against the house of do a refinance at a much lower interest rate' and believe me that they thank me for this.

Thirdly, if a person has paid down most of the mortgage and has built up equity in the house, then he can borrow funds against this equity to invest in RSP (unregistered), Stocks or Bonds or any other investment and then the interest he is paying on the borrowed funds are 'tax deductible' even though the mortgage is not. This is one of the main strategies used by people to build their retirement nest.

There are so may options available mainly to house owners which generally are not available to 'renters' and that brings us back to the same statement that 'you can not create wealth in Canada without owning real estate'.

Thanks

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Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada

Is the new rule in Ontario about no down payment going to benefit people with temp jobs. I make around 1600 plus my brother makes 400. So wil a total of 2000 get us into the housing market?

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I once made a mistake, but I was wrong about it.

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Orginally posted by mercury6

Is the new rule in Ontario about no down payment going to benefit people with temp jobs. I make around 1600 plus my brother makes 400. So wil a total of 2000 get us into the housing market?

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Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada