When you’re buying your first home, bigger might be better.
Choosing a house over a condo could unlock a lot of potential. Choosing a house could help you maximize programs for first-time homebuyers, qualify for a bigger mortgage, and even help you preserve thousands of dollars in equity over the long run – especially if you think you’ll want to move to a house eventually.
But choosing a house for a first home isn’t always the right move. Let’s consider some of the factors in your decision between buying a house or a condo.
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Mortgage qualification favours a house
While the best mortgage rates in Canada are the same for either type of property, you might qualify for a bigger mortgage if you choose to purchase a house.
The reason lies in the way lenders determine how much you can afford to borrow: a set of calculations called your debt service ratios. Your gross debt service ratio (GDS) looks at your total cost of ownership as a percentage of your income. Your total debt service ratio (TDS) looks at this plus your other obligations. These ratios can be no more than 39% and 44%, respectively.
When calculating your total cost of ownership, there are four contributors: your mortgage payment, property taxes, heating costs, and 50% of condo maintenance fees. The more you spend on these, the higher your debt service ratios will be.
Notice that maintenance fees are only calculated when they relate to condos. Even though your overall maintenance obligation will probably be higher if you purchase a house, you will be able to afford a bigger mortgage because the cost isn’t factored into how much mortgage you can afford.
If you choose to buy a house with a secondary unit and rent it out, you may also be able to add up to 50% of the potential rent to your income for qualification purposes. That’s not an option when you buy a condo.
You’re only a first-time homebuyer once
The programs for first-time homebuyers are all one-shot deals. When you buy your first home, you can withdraw up to $35,000 tax-free from your RRSP, get a rebate on the land transfer tax, and claim a $750 rebate on your income tax.
The land transfer tax component to this is especially important if you’re buying your first home in BC, Ontario or PEI. Depending on your province and city, you can get a full land transfer tax rebate on homes up to $500,000.
If you’re thinking about buying a condo to start and then moving up to a house after a few years, you might want to consider the long-term tax benefits of starting with the larger property. You could potentially get a bigger land transfer tax rebate as a first-time homebuyer and save yourself the later expense of paying the full land transfer tax.
According to Ratehub’s land transfer tax calculator, if you buy your first home for $500,000, your land transfer tax will be $4,475 in Toronto, $2,475 in the rest of Ontario, and $0 in BC.
If you buy a first home for $350,000 in any of those places your land transfer tax will be nil. But if you choose to move up to a $500,000 home later, your land transfer taxes will add up to $12,950 in Toronto, $6,475 in the rest of Ontario, or $8,000 in BC.
Of course, this plan only works if your budget allows it. It’s not worth jeopardizing your financial well being to save a few thousand dollars in tax.
Selling a home is expensive
Another argument for buying a bigger home first is the cost of selling. Real estate commissions are typically 5% of your sale price, plus tax. Closing costs can easily cost a few thousand dollars too, as can moving.
Since the simple act of selling your home can erase tens of thousands of dollars in built up equity, it may be worth buying a larger house that will meet your needs for longer. If you’re thinking of buying a condo to start and moving up to a house after a few years, your long-term financial picture might be better if you go directly to the house market. If you think a condo will suit you for at least five years or longer, the cost of selling and moving won’t be as much of a consideration.
Houses cost more to own and maintain
If a house is looking like a better choice, you may change your mind after considering that house owners spend significantly more on maintenance than condo owners.
Even though house maintenance costs don’t factor into mortgage affordability, they certainly factor into your monthly budget. With a condo, most of the maintenance is covered by your monthly fees. When you buy a house, you’re personally on the hook for every repair to every component at the time it comes up. A failed furnace or leaky roof will easily cost you thousands of dollars. And you’re responsible for mowing the lawn, shoveling the snow, and all the day-to-day activities that are covered for condo owners. House owners spend 1.5% of the home’s value per year on maintenance on average – sometimes less, sometimes much more.
Big repairs come up with condos too, but if the complex and reserve fund are well-managed condo owners will usually be spared from inconvenient surprises.
Your budget is the true decider
When buying your first home, the most important decider is your budget. Being house poor is no fun, and it can cause a lot of unnecessary anxiety.
The right first home is one you can afford. Even though choosing a larger property first can lead to some tangible benefits over the long-term, it’s not worth it if the expense is beyond your reach.