It's Your Money  

What to think about before buying a home

Becoming a homeowner

For many Canadians, owning their first home is a significant milestone.

However, when you look at today’s environment of high interest rates and the resiliency of home prices, entering the housing market involves more than just finding the perfect place to call home. Let’s consider some of the variables that Canadians should look at before taking the plunge in home ownership.

One of the primary reasons people are drawn to homeownership is the leverage it provides. Leverage, in the context of buying a home, means borrowing a significant portion of the purchase price through a mortgage.

That allows buyers to control a valuable asset with a relatively small upfront investment. However, leverage is a double-edged sword. While it amplifies returns when the housing market is booming, it also magnifies losses when the market faces a downturn.

In recent years, the Canadian housing market has experienced significant price appreciation in many regions. Low-interest rates had made borrowing more affordable, making homeownership seem like an attractive proposition. But the rising rates have increased monthly mortgage payments, potentially even getting to the point where some people’s monthly payments are less than their borrowing costs.

With that in mind, Canadians considering buying their first home should carefully assess their ability to manage higher interest rates in the future.

Another important factor to consider is the limited diversification of assets that comes with homeownership. When you invest a large portion of your wealth in a home, you become heavily reliant on the real estate market's performance. While real estate has historically shown steady appreciation over the long term, it's important to remember that past performance is not always indicative of future results.

Investors are often encouraged to diversify their portfolios to spread risk. By holding assets in different classes such as stocks, bonds, and real estate, one can reduce their exposure to the volatility of any single market. When your main asset is your home, you lack this diversification, making your overall financial situation more vulnerable to changes in the housing market.

The Canadian housing market is known for its regional disparities. While some cities have seen housing prices skyrocket, others have remained relatively stable. This can create challenges for those looking to enter the market. Buying a home in a city with high volatility can be risky, as the potential for a significant drop in value is always present.

Additionally, the housing market can be influenced by various factors, including economic conditions, government policies, and global events. These factors can lead to unpredictable fluctuations in property values, which may impact the decision to buy a home. It's crucial for first-time buyers to conduct thorough research and consider their own financial stability when assessing the risks associated with market volatility.

Affordability is a key consideration for prospective homebuyers. The real estate market's current state in Canada is characterized by rising home prices in many areas, making it challenging for first-time buyers to find affordable properties. Buyers should evaluate their financial preparedness and ensure they have a stable income, a substantial down payment, and a manageable debt-to-income ratio before committing to a mortgage.

The Canadian government has implemented various policies and incentives to encourage homeownership, including the First-Time Home Buyer Incentive and the Home Buyers' Plan. These programs can provide financial assistance and tax benefits for first-time buyers, making it more accessible for them to enter the market. It's advisable for potential buyers to explore these options and determine if they qualify for any assistance, as it can significantly impact their decision-making process.

While the above points mainly focus on the risks of home ownership, there are also many rewards. The key is to fully understand the risk and do a proper evaluation of your situation before jumping in blindly.

Ultimately, the decision to buy a first home in Canada should be done carefully and be based on individual circumstances and long-term financial goals.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett Millard is vice-president and a member of the executive leadership team at FP Canada, the national professional body for the financial planning industry. A not-for-profit organization, FP Canada works in the public interest to foster better financial health for all Canadians by leading the advancement of professional financial planning in Canada. 

He has worked in the financial advice industry for more than 15 years and is designated as a chartered investment manager (CIM) and is a certified financial planner (CFP).

He has written a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges they face in every stage of life. Enhancing the financial literacy of Canadian consumers is a top priority for Brett and his ongoing efforts as a finance writer focus on that initiative. 

Please let Brett know if you have any topics you’d like him to cover in future columns ,or if you’d like a referral to a qualified CFP professional in your area, by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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