In my time as a mortgage broker, I have spoken with many people who were renting, and considering buying a home. Most have concerns about housing values and being able to afford carrying a mortgage. Often the thought that they owe $300,000 or more is mind boggling to them. It is with this in mind that I wrote the following analysis of the benefits of having the courage to step forward and make the decision to buy a home.
1. GOVERNMENTS REWARD DEBTORS Structured correctly, governments will reward debtors for borrowing money by making debt tax-deductible. Governments do not provide a tax credit to people who put money beneath their mattresses. Additionally, they charge the same amount of tax on interest-bearing investments as they do on employment income. As a result, GIC’s and term deposits offered by banks are unprofitable after taxes and inflation. Here is an example: $20000 term deposit earning 4.5% interest = $900 tax @ 40% = $360 inflation cost @ 2% inflation = $400 True return after taxes = $140 Rate of return after taxes and inflation = 0.7% In the above example, 4.5% interest results in only a 0.7% return on investment! Please note: If you are happy with this rate of return, I will be more than pleased to borrow your money and will even offer you a 5% rate of return!
2. INCREASE YOUR NET WORTH There is no guarantee that real estate will appreciate in value. However, real estate values have performed well in the long term. The B.C. Assessment Authority assessed that B.C.’s real estate values have increased by 16% in 2007! Let’s look at an example of how this could benefit you: Average rate of appreciation = 5% Property Value = $300,000 Value of home after 1 year = $315,000 Value of home after 5 years = $382,884.47 In this example, you would have made $82,000 tax-free over 5 years. How would you feel to have this equity available to you?
3. USE YOUR MORTGAGE TO PAY OFF OTHER COSTLY DEBTS Do you have much debt on credit cards, and are you finding it a burden financially? With a home, you can use the appreciation in value to consolidate debt into a much more affordable payment. Consider the following example: Payment Type Amount Monthly Payments Existing Mortgage @5.5% $ 230,362.61 $ 1,227.74 Credit Card Debt $ 35,000 $ 1050.00 Car Loan @ 6.5% $ 15,000 $ 450.00 Total $ 280,362.61 $ 2727.74 New Mortgage @5.5% $ 348,511.27 $ 1434.22 Monthly Savings $ 1293.52 Paying off expensive after-tax debt such as credit card debt can be a wise investment. This would only be possible with a home and mortgage.
4. REAL ESTATE IS HIGHLY LEVERAGED Were you previously happy with the 4.5% return on a GIC from the bank? If you were, you are about to be shocked. If not, it still might surprise you. Down payment (Investment) = $60000 Increase in value during year 1 = $15000 Return on investment = $15000/$60000 x 100 = 25% Equivalent pre-tax rate of return = 41.6% (assuming 40% tax bracket) Return on investment with no mortgage = 5% In this example your after-tax rate of return was 25%! This is where a mortgage is its most powerful. If you owned the home without a mortgage, your rate of return would only be 5%. Leverage is a powerful tool to put to use for your family. To learn more about leverage, please read my material on (the power of leverage.)
5. IT FEELS GOOD TO BE IN YOUR OWN HOME I often meet with my clients after they have moved into their own home and have been amazed by how much happier they appear to be. They are not happy for any of the other reasons mentioned above (although they will be in the future when they are realizing the benefits mentioned above). I have found that they are happier because they are living in a place they know is theirs, that they chose, and they can change to be whatever they want it to be for them. Often, when they were renting, they lived in basic spaces that just met their necessities.
The space was maybe a bit small for their comfort, or it was created as an afterthought for the home owner to find a way to make some rent money. Each of their homes was a significant upgrade for them over where they were. Landlords can change, and the threat of always having to move is always there. Now they are in a place that they chose, and do not have to move unless they choose to. If they do not like their mortgage provider they can choose to change at any time.