When you decide when to buy, you need to decide on the type of home you want: a starter home or forever home. According to the Genworth Canada’s 2015 First-time Homeownership Study
, half of typical first-time homebuyers see their first-time home as a “starter home” (50 per cent) and plan to move within the decade. A slightly smaller segment of first-time homebuyers (40 per cent) regard their first home as their “forever home” and plan to stay put until they grow old.
A starter home is slang for a home that you buy in order to get on the property ladder. It starts your foray into the world of property ownership. It’s typically a home that’s small and easy to manage, with good resale potential. One of the simplest explanations for why people buy a starter home is because it’s the home that they can afford right now. Rather than figure out how to afford the 4 bedroom home with a swimming pool on a tree-lined street in a well-established area, someone will buy the 2 bedroom home or the 400 square foot condominium in the transitional neighbourhood. Buying a starter home is a fairly modern trend; a couple of generations ago, people bought homes with the intention of staying there for the long haul. But in an increasingly mobile society, many people no longer expect that the first home that they own will be the last one that they own.
Kevin Joelson has been a realtor in Winnipeg for almost 10 years, and says that the key things to look for when buying a starter home are “buying in a good location with good bones in it and something you know will be more of an easier sale down the road.”
A starter home is almost always a small home, which means that a mortgage – as well as general maintenance and upkeep – is generally much more manageable and affordable. For first-time home buyers, this manageable mortgage means that you have less of an adjustment to your current lifestyle and if you’re buying when you’re relatively young, you still have the capital to invest into your long term savings goals, which is crucial so that you can let the magic of compound interest work.
If you’re in a job or an industry with a fair bit of volatility, then a forever home may not be a good idea because you might end up needing to move for another position within a short time frame. Unless the rental market where you live is particularly strong for you to rent out your home if you have to move, you might not have many options. In this case, a starter home is a better idea, especially if you work on a contract basis.
In a report by Vancouver City Savings Credit Union (VanCity), Downsizing the Canadian Dream: Homeownership Realities for Millennials and Beyond
, “many Millennials that currently want to get into the property market are targeting condos. No doubt many would hope that this ‘starter home’ would be the first stop on the way to the ultimate goal of upgrading to a home that is more family friendly. However, since 2005, the condo market has only increased by 43%, while the average property has increased by more than 126%. This shows that the jump up from a condo will soon be out of reach, with many condo owners finding themselves financially stuck in their starter.”
The study is looking at Vancouver and the surrounding areas in particular, but another comment in the report is true for various housing markets across the country: Zoning for high-density multi-unit buildings must be increased, recognizing that a starter home may very well end up being a forever home for some people.
If you can only afford a starter home but don’t want to buy a home that you know you’ll only be in for a short period of time, you always have the option to wait longer to buy a home. After all, moving is expensive. Closing costs are a big chunk of your upfront costs, and depending on where you live, land transfer taxes can add tens of thousands of dollars to the cost of moving. Not to mention any small renovations that you may have to do to prepare your current home for sale. Depending on how quickly your home appreciates in value, and how much more your new house costs (upgrading on the property ladder usually means a more expensive home), it may wipe out any financial gains that you may have thought you’d saved by buying the starter home.
It’s impossible to see into the future, so how can you buy a home that you expect to accommodate your life in another decade?
You don’t want to stretch yourself too far on your first mortgage. If you can only afford a smaller condo or townhome to start out with, then you shouldn’t try to buy a detached home with 2,000 square feet.
Joelson says that first-time buyers have gotten a little older over the years, and this may have something to do with the number who are choosing to buy longer-term homes. He does say that buyers should be cautious, even in affordable markets such as Winnipeg.
“I would say just with the interest rates and everything right now with mortgages, they’re able to carry a little more debt-wise, which isn’t always a good thing.”
If you truly can afford to buy now, though, there are some ways to plan for a home that you plan to stay in decades down the road. Presumably, people move up to a home that is more family-friendly (and larger) when they expand their family, whether that be by adding a partner, pets, children, aging family members, or any combination of the above. It can be tricky to plan for these eventualities when you’re just starting out, but you can make some generalizations. For example, if you live very close to family and friends, you probably don’t need a guest space as much as you would if you lived far from family who visited often. If you want to have children, maybe your children will have to share a room instead of each having his/her own room.
You will probably have to compromise more than you would if you buy a starter home. With a starter home, you know that you will probably be moving in a few years, so you buy what you can tolerate rather than what you want. With a forever home, you want to buy a bit of both. Usually a forever home is bigger than a starter home, but it can still be manageable if you have some kind of idea as to how much space you’ll need. If you plan on working from home or need a studio, you may have to purchase a space with the potential to build an addition or a separate guest house in the backyard. You have to keep an eye out for the potential of the property as opposed to living in it for your needs today. But the flip side to that is that with a forever home, you’re a little freer to renovate to suit your tastes and desires as opposed to keeping such a close eye on what renovations and materials will get you the best return on your investment when it comes to resale.
Joelson says that for a longer-term home, the most important factors to consider are size and layout.
“You want to make sure you’re able to grow into it and be comfortable with it. Upgrades can always be done later. If they want to customize that kitchen or that bathroom and it’s not updated yet, then they should get the equity themselves and make that investment while they’re in the home and make it how they want it.”
If you buy a forever home from the get-go, you’re also much more likely to pay off your mortgage while you’re still working, which gives you a lot of financial freedom to then contribute more to your savings and retirement accounts, travel, or scale back on your working hours. Housing-related expenses can be your most costly monthly expense, so once you no longer have to pay that, you’ve got a lot more money in your pocket.
When looking for a long-term home, you’re also looking at things like school districts and planned developments or future projects. You’ll want to talk to the neighbours and local realtors to learn as much as you can about how the neighbourhood may change in the coming decades. The number of owner-occupied properties versus rental properties in the area, for example, can tell you a lot about how vested people are in the neighbourhood and the community.
The most important thing is to buy a property within your means that can withstand a little fluctuation in your life situation, whether that means a change in income, family size, or the housing market. Buy a home within your means and whether you’re there for five years or 50 years, you’ll feel good about your purchase.
Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate