Building Home Equity

Courtesy of CREB     By Kathleen Renne


A long-time renter transitions into home ownership and begins building tax-free capital gains

Nathan Magee knows a thing or two about renting. Since moving to Calgary in 1999, he has rented apartments, duplexes, houses and rooms in neighbourhoods as disparate as Bridlewood, Marda Loop, Forest Lawn and downtown.


Magee rented for 14 years in Calgary before deciding it was time to buy in 2013.


“What really pushed my wife and I over the edge was a combination of things. We were renting a house in Marda Loop at the time and the place got broken into four times. Plus, the rent was going up to $2,000 a month. That’s when we thought, ‘Let’s get out of here and look at buying,’” recalled Magee.


A self-employed business owner of Backflow Solutions Inc., all was not easy in securing a mortgage. Magee found that the proverbial key to convincing a bank to offer him a mortgage was having a 20 per cent down payment.


The Magees ended up buying a brand-new, 2,300-square-foot spec home in New Brighton for just over $500,000. It ended up meeting all their needs: a quiet neighbourhood, a large back yard, and proximity to schools.


“My mortgage payment was cheaper than what my rent was going to be for the house in Marda Loop,” said Magee. With a 20 per cent down payment, he avoided the extra cost of mortgage-insurance premiums.


“Renting was easy. I didn’t have to worry about anything. When the furnace went, the owner had to replace it. The downside, however, is that I was throwing my money away. There’s no investment. Every month that money was going to somebody else. Now, it’s benefitting me.”


Lai Sing Louie, a regional economist with the Canada Mortgage and Housing Corporation (CMHC), says rent can be considered analogous to interest payments on a mortgage. You can either pay rent every month, and see that money go to a landlord, or you can have mortgage payments and see the interest component of those payments go to a financial institution. Unlike rent, a portion of your mortgage payment is actually going towards buying your own home. He says about 70 per cent of Calgarians own property, while 30 per cent rent.


It’s essential to buy something affordable if venturing into the world of property ownership, says Louie. Financial wisdom suggests you should not allocate more than 30 per cent of your income to housing.


“Thirty per cent is a benchmark. Try to keep it under that,” advised Louie. He adds that buying a home also forces the homeowner to save money.


“Monthly mortgage payments help you be disciplined about saving. When you sell your home, most people will get some money out of it. There are also a whole bunch of ways to take advantage of a property you own as you move into retirement (such as becoming a landlord).”


Property is something that tends to increase in value over the course of one’s lifetime and your principal residence serves as a tax-free capital gain as opposed to investments such as stocks.


“You don’t have to pay any interest on the property’s appreciation when you sell it 25 years down the road,” said Louie.


“However, you have to get over the emotional and psychological hurdle of being in a mortgage commitment for 25 years or more … It’s a big commitment and it takes maturity to handle that thought.”


While the bank approved the Magee household for a mortgage in the $600,000 range, he and his wife didn’t buy a house at that price.


“Just because you can get it, doesn’t mean you should max it out. If you can afford it, and are financially stable, buy something. We had the money and we did it. I rented for nearly 20 years. I could have bought a house and paid for it by now and have $500,000 equity in a home,” lamented Magee.


“It’s liberating to be able to hang a flat-screen TV and not have to ask the landlord if I can put holes in the wall.”


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