First Time Home Buyers: Starter vs. Permanent Homes

Written by Corrina Murdoch
Fact-checked by Caitlin Wood

First Time Home Buyers: Starter vs. Permanent Homes

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Homeowner Mortgage

Owning a home is a dream for many, representing stability and success predicated on a foundation built through hard work. Once you’ve gathered together a downpayment and upped your credit rating, the big question rears its head: starter or permanent? It all depends on your situation. A starter home assumes that you will move again down the line, perhaps following your career trajectory or living in a different area. Conversely, a permanent home highlights the will to settle down, identifying where you plan to live indefinitely. Though the choice can be challenging, by breaking down the two approaches, you can better find your fit in the housing market. 

Are you a first time home buyer? Check out the new CMHC First-Time Home Buyer incentive.

Starter vs. Permanent Homes

Of course, homes all come down to a piece of infrastructure used to support a family unit. Essentially, a starter home is bought by first-time purchasers, with the idea of upgrading to something bigger and better down the line. Based on this principle, a starter home is something you plan to live in for a handful of years, while a permanent home will be your main residence for at least a decade. 

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While there is no hard and fast definition for these terms, some things are consistent across the board. Starter homes are less expensive than permanent homes, including the purchase price and the land taxes. Starter homes are also smaller than permanent homes, generally with fewer bedrooms and bathrooms. Often, starter homes are locations like townhouses, small bungalows, or condos. Conversely, permanent homes are detached, larger, and tout more square footage. 

It helps to remember that, due to the mercurial nature of the housing market across Canada, a starter and permanent home won’t look the same nationwide. For instance, you can get a permanent home in rural New Brunswick for the same price as a starter home in Toronto. When making your decision, be sure to calibrate your expectations based on the location in which you’re looking. 

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Benefits Of A Starter Home

There are countless advantages to choosing a starter home, especially if you’re just starting a new chapter of your life and looking for something smaller or more affordable. Among the benefits are:

• Starter homes are more affordable. These homes require a much smaller downpayment and can often be paid off in less time, true to the spirit of starter homes. 
• Ideal for uncertain futures. Planning for the long-term can be challenging, with the ebbs and waves of commerce, career, and family. Instead of doubling down on a permanent home, a starter home gives you the liberty to make changes down the line. 
• Ultimately becomes an investment. Particularly if you consider the real estate market, the true value of the starter home, and the price you’re paying, you can make a return by the time you look to move forward. It’s an investment in your future, with the proceeds of the house sale going toward the downpayment on your permanent home. 
• Optional rental investment property. Of course, once your mortgage is paid off, you don’t have to sell the home. In fact, at that point, you are only responsible for land taxes (and other logical things like insurance and utilities). By converting it into a rental property, you can recuperate the cost of upkeep while also turning a profit. 

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Drawbacks Of A Starter Home

Starter homes aren’t the right approach for everyone, and choosing this route comes with its own set of disadvantages. Among the drawbacks are:

• Plan on moving before recuperating investment. If you are planning on moving within the next few years, you won’t have put in the time required to get the advantages of a starter home. If you don’t plan on residing in your starter home for at least five years, then opting for a low-cost rental may be a better approach. 
• Unstable job or career. Once you have a mortgage, you’re locked in. You’ve invested your down payment and are responsible for those payments. If you feel at risk of layoffs in the workplace (something that is often impossible to predict), then you may want to avoid purchasing a house. Unless you can find another position in the area with sufficient income to cover the expense of the mortgage, you can find yourself trapped in an unfortunate situation.

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• Growing families take up space. Starter homes are ideal for young professionals who haven’t yet begun a family; or, if they have, the family remains small. A two-bedroom starter home can accommodate a family with one child, even if it only has a single bath. However, if you add in another child, you won’t have the requisite space to accommodate their needs. Expect five years, minimum, when getting a starter home. Kids grow a lot in that time and pets take up a lot of room. If you are prepared to wait to grow your family, then a starter home can work. If not, then it is likely not the route for you.

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• Volatile housing markets. If you are planning to use your starter home as an investment, ensure that you are fluent in the world of housing markets. Say you invest $200,000 into your starter home and plan to sell it in seven years. Not only will inflation take hold, but there is also the risk of a market crash. Based on factors outside of your control, the house could be deemed worth $350,000 or $125,000. It all depends. With a permanent home, you’re not planning to sell. However, starter homes take the brunt of the risk when it comes to the unpredictable nature of housing markets. You take the chance of getting less back than you put in, hindering your ability to purchase the permanent home as planned. 

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Things To Consider When Buying A Starter Home

Assuming a starter home is your route of choice when pursuing housing, there are a few important things to keep in mind. By considering this decision from all angles, you will be better able to assess the merit of each individual home. 

Affordability

Yes, starter homes are more inexpensive than permanent homes, but they still cost a pretty penny. Set yourself a reasonable price threshold, typically done in conjunction with a mortgage pre-approval. This helps you ensure that, not only do you have the down payment, but that you also have the money necessary to make your mortgage payments for the whole period of the loan. 

Flexibility

Especially when it comes to starter homes, the idea is that it is a stepping stone — and these are seldom perfect. Sure, there are some things that remain steadfast: get an inspection, check the roof and foundation, say no to mold, etc. However, there are some expectations you may need to calibrate in order to be successful. You may not find the right starter home in a perfect neighbourhood, it might lack a yard, or be missing that half-bath you wanted. If you are willing to be accommodating in these areas, then you are much more likely to get the long-term results you seek. 

Thinking about refinancing your home? Check out our handy mortgage refinancing appraisal checklist. 

Professional Help

Real estate professionals are not only trained and certified to work in the housing market, they are often experts in the local area. An invaluable resource when making long-term housing plans, your real estate agent holds a plethora of wisdom. Be sure to find an agent with whom you are comfortable, who is both well-reputed and experienced.

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Final Thoughts

Your home becomes an integral part of your life, acting as a headquarters for your family. While the desire to settle down into a permanent home may seem tempting, starter homes pose a lot of opportunities. Requiring a fair bit of planning and prudence, it can save you money and help secure that dream home. Though it takes patience, taking your time to find the right home is important. 

Consider what you want out of life in terms of one-year, five-year, ten-year, and twenty-year goals. Using those details, you can map out the path of least resistance to get you where you want to be. Once you’re equipped with your truth and have solidified your finances at present, consult with a realtor. By putting in the time and the work, you can achieve your housing goals.