With mortgage interest rates in Canada in the range of 3.5%, which is the roughly equivalent of the historic rate of capital appreciation of homes, particularly in conservative markets such as Winnipeg, home ownership can essentially be free. In other words, your home can be expected to be worth what you paid for it plus all of the interest you paid on your mortgage over the years when it comes time to sell. That is remarkable. Your property tax and utility costs essentially amount to the true cost of home ownership in Canada.
Let us set aside to tumult of the boom and bust housing markets such as Toronto and Vancouver, where your home may often feel more like your stock portfolio than the source of security and stability that I think one’s home should be.
Typically, about one-half of your mortgage payment goes to interest and the other to paying down your principal. The principal repayment operates as an informal savings plan where you might put aside somewhere in the neighborhood of 2% of the value of your home every year on top of a similar gain by way of appreciation. With the compounding effects of appreciation and the reduction in your monthly loan principal, both of these figures can be expected to increase year-upon-year.
As a renter, your payments will typically be quite similar to what you would pay for the same property with a mortgage and property tax, but you are financing someone else who is taking advantage of this appreciation/principle reduction savings plan with your money.
Early in one’s life when money is scarce and other priorities seem more appealing, it is hard to become too enthused over wise financial planning, but the sacrifice in putting aside that initial down payment on a home is one that will pay dividends for the rest of your life.