Today a tenant, tomorrow a homeowner

first timers imageToday a tenant, tomorrow a homeowner

Recently I have been helping a real estate agent and his clients, a young couple in their twenties who are paying almost $2,000 per month to rent a single bedroom loft apartment on Queen West. They would love to own their first home, and are determined to remain in Toronto, as opposed to the suburbs.

Together they pull in around $100,000 gross income per year, have excellent credit, and can cobble together a five percent down payment. They don’t want to be house rich and cash poor though. After looking closely at several properties, they found a winner.

Rick and Zoe decided $500,000 was their price ceiling, and their realtor quickly concluded they would not find anything suitable in the area they now live in. If there are any reasonably priced semi-detached homes around or even north of Queen West, it seems you can expect to find pretty much a “gut-job” requiring very serious money to bring it up to par.

The search thus focused on the east side. Rich and Zoe wanted to buy a property which could be divided into two discrete units. They plan to live in the basement apartment, and rent out the larger upstairs portion. This will allow them to reduce their monthly costs considerably, while still giving them more space than they currently enjoy in their loft apartment.

It’s often a great buying strategy to venture out in the dead of winter – fewer buyers and less chance of frenzied bidding wars. There were three houses they focused on, two of which were cheaper but required some improvements to make them ideal. They settled on a large semi-detached for $500,000, as it was in move in condition.

We recommended they go with a five year fixed rate mortgage at 2.89%, and the mortgage payment and property taxes combined add up to $2,500 per month. (With less than 20% down, the amortization period can be no longer than 25 years)

If they rent out the main floor, they can reduce this to around $1,100! But even if they choose to rent out the basement and live upstairs, they can still reduce their monthly expense to $1,700.

And the math works even if they had zero down-payment; they could borrow the entire purchase price and these monthly amounts go up by $500.

Related Article: 100 percent financing still possible

Deal highlights: Rick and Zoe quickly converted from tenants, paying someone else’s mortgage, to homeowners and landlords, living in more space and comfort, with their monthly housing cost lower than it was when they rented.

And the icing on the cake is that with every mortgage payment they make they build their equity (reduce the principal amount owing) by over $1,100!

After five years, their mortgage balance will be $418,000. Check out how much equity they will have through the monthly reduction of their principal and annual growth of between 2% and 4%.


Purchase Opening Mortgage Annual Home Equity
Price Mortgage Amount Growth Value Value
$500,000 $489,962 $417,905 2% $552,040 $134,135
$500,000 $489,962 $417,905 3% $579,637 $161,732
$500,000 $489,962 $417,905 4% $608,326 $190,421

Points of Interest

  • As first time homebuyers, their land transfer taxes were only $6,475 after the rebates
  • As first time homebuyers, they will have to prepay six months property taxes to their mortgage lender. Total dollars needed to close will be around $35,000, including their deposit
  • Although a variable rate mortgage of 2.3% is available to them, they chose a five year fixed rate mortgage for peace of mind, and budgeting purposes

Related Article: Variable rate mortgage harder to qualify for than fixed rate mortgage

  • If they do decide to occupy the smaller apartment when they take possession, their long term plan is to move into the bigger apartment when they feel more financial power
  • Rick had a preference for buying a condo, but they realized they would qualify for a much smaller mortgage after considering monthly maintenance fees.
  • They feel their earning power is only going to increase in the years ahead, and they are not worried about their ability to service the mortgage and maintain the house long term
  • They do not feel they could save up anywhere near as much if they remain tenants paying someone else’s mortgage for them

The conclusion of course is there are lots of ways to enter the market for people who are currently tenants, but dream of home ownership.  If you are interested in understanding your mortgage financing options, Ross Taylor’s personal email address is rosst@rosstaylor.org and his mobile