Homeownership has always been part of the “American Dream.” Because of that, many people accept owning a home as the right, even obligatory, thing to do. If you are contemplating buying a home, you should know the pros and cons of the investment you are about to make—as you would any investment decision—before signing on the dotted line.
Attractive Long-Term Investment
Appreciation represents the increase in home values over time. Real estate prices are cyclical and homeowners shouldn’t expect the property’s value to increase drastically in the short-term. But if you stay in your home long enough, there’s a very good likelihood you will be able to sell your home for a profit because of appreciation.
In fact, buying a home is one of the best long-term investments you can make. Real estate appreciates primarily because of the land on which the home sits. So the expression “location, location, location” is not just a real estate catch-phrase, but a very important consideration when buying a home. The neighborhood with the amenities it brings—school districts, parks, condition of roads, etc.—and the city where the home is located are all factor into the property’s appreciation.
Consider a home that is rundown and dilapidated to the point that it’s uninhabitable. The land underneath the home may still be worth a significant amount of money—more than the residence, in this case. A seller may consider selling it as is (with the structure still intact) or spending a little extra to demolish the home and sell the land at a higher price on its own.
Building Equity
Home equity represents the difference between how much you still owe on your mortgage and the market price or value of your home. Home equity and appreciation may be considered together. As noted above, your home likely would grow in market value over time.
Your equity also grows as you pay down your mortgage, with less of your payment going toward interest and more toward lowering the principal balance on your loan.
Appreciation is the change in the value of your home over time, while home equity is the difference between the balance on your mortgage and your home’s market value.
Building equity does take some time because it takes time to lower the principal balance owing on the mortgage loan—unless, of course, you make a large down payment or regular prepayments.
As you pay down your mortgage and reduce the amount you owe, without realizing it, you are saving as the value of your home is increasing—just as the value of your savings account increases with interest. When you sell, you likely would get back every dollar you paid out and more, assuming you stay in your house long enough.
Another plus is that home equity provides flexibility to get a loan that is tied to the amount of your home equity. Many investors follow their home equity and home appreciation simultaneously.
Pride
One often-cited benefit of homeownership is the knowledge that you own your little corner of the World. You can customize your house, remodel, paint, and decorate without the need to get permission from a landlord.
Tax Credits
There are numerous tax credits available for home owners. Here are a few of the main ones:
1. First-time home buyers’ tax credit
If you just bought your first home last year, or if you haven’t lived in a home owned by you or your spouse in the last four years, then you might qualify for the First-Time Home Buyers’ Tax Credit (HBTC) of $5,000, which adds $750 to your tax refund. Before you prepare your return this tax season, look into the home buyers’ amount and what to claim. If you qualify, those extra tax savings might come in handy as you run into unexpected new-home expenses.
2. Home buyers’ plan
If you and/or your spouse or common-law spouse are a resident of Canada with qualifying Registered Retirement Savings Plan (RRSP) contributions, one or both of you might be eligible for a tax-free withdrawal toward buying your first home. Under the Home Buyers’ Plan (HBP), first-time home buyers or previous homeowners who haven’t owned a home within the preceding four years can withdraw up to $35,000 tax-free to use toward a down payment on a home.
There is one thing to keep in mind: you have to ‘repay’ the borrowed amount via RRSP contributions within 15 years, and if withdrawals under the HBP aren’t paid back, they’ll become taxable. Learn what’s involved at the Canada Revenue Agency’s (CRA) Home Buyers’ Plan page.
3. GST/HST new housing rebate
Did you pay a Goods and Services Tax (GST) or Harmonized Sales Tax (HST) on a home that was newly built or substantially renovated? You might be able to take advantage of a new housing rebate on part of the tax.
4. Homeowner tax credits when you work from home
If you work remotely, these credits might come in handy this tax season. Eligible homeowners could be self-employed, working on commission, or even professionals working from a home office. Typical eligible home office expenses could include a portion of your utility bills, homeowners’ insurance, internet bills, office supplies, and so much more.
Invest with Confidence
Confident investing requires the right advice. If you’re interested in the Real Estate market and how home ownership can benefit you and your family, I’m here to help.