Back in 1992, I bought my first place for $55,000. It was a 2 bedroom town house style condo. At the time, the average house price in Edmonton was about $100,000 and the government just introduced the ability to borrow money from your RRSP to buy a home. I borrowed $5000 from my RRSP and added another $5000 of cash for the down payment. I remember both the $10,000 down payment and also the $55,000 price tag seemed like a lot of money.
Today, the average house price in Edmonton is about $375,000. In 2004, only 3 years ago, the average house price was about $175,000. Many first time home buyers here in Alberta are finding that the real estate boom has made it more difficult to buy their first home. In other parts of the country like Toronto and Vancouver, this scenario for first time buyers has been a reality for many years.
Regardless of the boom and the city you live in, buying your first home is always tough. Here are some tips for those looking to get into the housing market.
- It's better to get into the market. I believe owning over renting is better for your personal finances. Some people I've talked to delay buying in order to wait to buy the right house. Let's face it, your first place is your starting point. I say it's better to get into the market because everything moves together. You'll always want to upgrade no matter what kind of house you start with. For me, a town house condo in the West End was not the ideal place but it got me into the market. It got me started into a world of ownership. From there I have owed a lot of places and upgraded a number of times. I'm thankful I got in even though it was not the ideal place.
- Buy what you can afford. I know you might think this is tough in this type of market but don't push yourself to the limit. Too many people are stretching amortization periods and putting down very small down payments. As far as I am concerned, you are better off buying less house so that you can minimize the debt and minimize the amortization. Back in 1992, I could have bought a $100,000 house with the same $10,000 down payment but it would have meant more interest costs. Instead, I chose a smaller mortgage to build more equity, which consequently allowed me to upgrade a year later. When you go see a mortgage professional, they will always tell you the biggest mortgage you can qualify for based on your income. Don't necessarily buy the biggest house you can afford according to the mortgage brokers.
- Use the Home Buyers Plan. The government allows first time home buyers to borrow up to $20,000 out of their RRSP to buy their home. Although you don't have to pay interest or tax on that money, you do have to pay that back over a 15 year period. Some critics will argue that you lose the opportunity to make money inside the RRSP but you will have the opportunity to make money with your property. For me I had saved some money to buy the home but borrowing out of the RRSP allowed me to get my down payment up to almost 20%. As we all know, Real Estate has been a pretty good investment since then.
- Don't speculate. Real estate prices go up and down. Fortunately, they tend to go up more than they go down and that's why long term, it is better to own than rent. There's always someone quick to predict what house prices will be in the next months or years but the fact is nobody knows. Anyone predicting is guessing. Buy because long term owning is better than renting. Buy within your means so that you can weather through some of the tougher times.