It is well known that owning a home is a great way to build your wealth. Whether you are buying a house in cash or financing it with a mortgage, the price of a home is known to appreciate over time. This means that your equity is going to grow, and because there is no capital gains tax on primary residences in Canada you’ll see your wealth grow tax free!
More and more Canadians are seeing their homes as more than just shelter, but as a financial investment. According to Remax, Canada has seen home prices grow by an average of 6.8% for the last 10 years. Interest rates are at an all time low and so today is the best time to buy despite the fact that we have seen the federal government react to the rising home prices by creating tougher mortgage regulations.
Rent vs Buy
Renting or owning: the age old question. Which is better? Which is more lucrative? The answer isn’t so simple.
After a year of renting, the renter obtained nothing but shelter. If said individual would have purchased a home instead, a portion of those payments would have paid down part of the principal of the mortgage loan and thereby increasing the the individual’s net worth. If you scale this analysis to 10, 20 or even 30 years, it’s easy to see how a home owner is so much wealthier and a renter: the home owner is building his equity while paying a monthly amount similar to a renter.
Still, If you move a lot, renting would look like the more logical solution. The same applies if you are retired and don’t want to settle in any specific location. However, if you know you’re going to be staying in the same city for the long term then buying is definitely the way to go. The US Federal Reserve has demonstrated that a home owner’s net worth is 31 to 46 times that of a renter’s. What does that tell you? The other advantage to such an investment is the leverage: in what other investment would you be permitted to leverage a 5% down payment for equity to 95% in debt? The opportunity to grow your wealth by owning a home is safe and unique.
Saving for Retirement
The Financial Post has reported that ~50% of Canadians have not contributed to their RRSPs this year. Now that 70% of Canadian households now own their homes, it’s easy to see why. The money you contribute to your RRSP is fully taxable when you with withdraw it, while your wealth developed through home equity grows without any tax burden.
Check out our mortgage learning center to see what you need to get a mortgage and buy your next home.
