second house firstHow long do you plan on staying in your house? How do you expect your life to change in the next 5 years?

These are two of the most important questions we ask Buyers. The concept of ‘buying your second house first’ means skipping the traditional ‘starter house or condo’ and buying a bigger or better house or condo (the one you’d traditionally buy the second time) first. It might mean buying in a family neighbourhood before you have kids, or it might mean buying a home with better finishes than a first-time buyer usually buys. Here’s why you might want to consider this strategy:

  1. Buying and selling a home in Toronto isn’t cheap. There are legal fees (paid by both), land transfer taxes (paid by the Buyer), real estate commissions (paid by the Seller) and moving costs (paid by both).
  2. Interest rates are low! While the sticker shock of your second house might be real, $100,000 of mortgage money costs less than $500 a month at current interest rates. Is it worth $500 a month to get your second bathroom and finished basement now vs later? I’ve met too many people who got comfortable in their first house, despite the fact that it didn’t fit their long term needs but couldn’t afford to move. With interest rates so low, you can probably buy your second house for less than your first house a few years ago. (of course interest rates won’t always stay this low forever, so don’t stretch yourself too much).
  3. Historically, it can take up to 3 years to break-even on a property when all costs are considered. What do you expect your life to be like in 5 years? Marriage? Kids? More kids? Live-in nanny to take care of the kids? Mom or dad moving in? If the property you’re thinking of buying won’t be right for what you expect your life to be like in the short-term, you may be better off waiting – or buying your second home first.
  4. The gains on your primary home are tax-free. Because your equity increases in value and you don’t have to pay capital gains on it, it’s one of the best tax strategies available to Canadians. While it may be hard to justify spending more money on restaurants and clothes, the money you spend on your house is an investment – and very few investments are tax-free.
  5. In a hot real estate market like Toronto’s, homes are appreciating fast. If you can comfortably afford it, wouldn’t you rather enjoy the benefits of an $800,000 house increasing 20% instead of a $600,000 house? That’s an extra profit of $40,000. And because it’s your primary home, the whole $160,000 is tax-free! Of course this works in reverse too, so if the market is declining, you stand to lose more.

Whether or not you should buy your second home first depends on a number of factors:

  • How much mortgage you qualify for and can comfortably afford
  • How you expect your income to change in the next 5 years – will you get average salary increases or are you at a point in your career where you’ll likely make some significant jumps in pay range?
  • Your downpayment, which will impact how much you qualify for and if you have to pay CMHC insurance
  • How you expect your lifestyle to change

Of course buying your second home first means that you can’t afford to make a mistake! Make sure you work with an experienced REALTOR who knows the neighbourhoods you want to live in and has a good grasp of what’s going on in the market.

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