Adrian Mastracci, portfolio manager at KCM Wealth Management, says “I’m firmly in the camp of repaying the non-deductible mortgage as soon as possible."

Vancouver, BC (August 7, 2007): First time home purchases don’t have to be scary propositions. Hopefully, they bring feelings of joy and excitement.

Jane Austen once said, “There is nothing like staying at home for real comfort.”

Adrian Mastracci, portfolio manager at KCM Wealth Management says, “First time home buyers develop many apprehensions. Typically along the lines of am I doing the right thing? Can I afford it? How will I finance the home? What about the mortgage rate? Is it the right time? And a few others."

These times can be a touch intimidating. Real estate prices have been rising for some time. Mortgage rates are inching up again.

Some clients ask about this for their children’s and grandchildren’s first home requirements. Others ask about it for their own first home. Getting everyone into a discussion conquers many fears.

There is a mystique about one’s own home. It’s a very personal decision with long-term implications. It's easy to become attached to our home. The space called home turns into our safe haven in the universe.

First home buyers may not be able to remove all the risks and anxieties from the equation. However, it’s best to proceed so that the financial bits and emotions coexist happily. It is a sizeable task.

I highlight some key tips for first time buyers:

1. Rent vs. buy debate

Often, the first question is whether it makes more sense to rent or buy. Generally, it’s whether one needs the flexibility of moving without many fanfares, versus wanting to build the personal nest. Renting is frequently a better financial value. However, one is exposed to the whims of the landlord.

Either rent or buy can be a very large expenditure. A level of comfort with one’s job security plays into the debate. So, it’s important to consider all the implications before making that vital decision.

2. The planning

Purchasers may have to consider home ownership as a series of steps. A condominium or townhome may be the first step before the traditional detached home. Especially in high cost centres like Vancouver, Calgary and Toronto. If one can swing the finances, try to stay in the preferred area to live in. It can be more difficult to move up from a less expensive area.

It’s important to figure out what the home is to provide. Then start mulling over how much money one can safely allocate to its purchase without undermining the finances. The cost may include the property purchase tax and all closing costs.

Finally, consider all the operating costs of owning a home. Such as property taxes, strata fees, repairs and maintenance, insurance and utilities. In addition, the cost of moving and new furniture required.

Check credit history for accuracy. Start accumulating the down payment as soon as possible. For most, a saving account is the minimum requirement. Direct fund transfers from the paycheque work well. The funds should not be invested in the stock market as the short-term risks are too high.

3. The mortgage

One smart strategy is to shop for a mortgage pre-approval. Rates typically held for 90 to 120 days provide time to identify a suitable home. RRSP withdrawals up to $20,000 per spouse reduce the mortgage. The money will need to be repaid over 15 years, otherwise it becomes taxable income.

Try to stay within conventional first mortgage terms. Say a down payment of 20%, or greater. That avoids the additional fees and complications of high-ratio mortgages. Some financial help from the family may be required to make the numbers work. In particular, in the high cost markets.

Another question is whether the mortgage rate should be fixed or variable. Perhaps, a combination of the two. Even closed mortgages generally allow annual prepayments without penalty in the 10% to 20% range, along with doubling up of monthly payments.

4. The aftermath

Forget investing outside the RRSP while the home mortgage is outstanding. Particularly, if the interest is not deductible. The best risk-free investment is the mortgage repayment. The example below of a 5.75% rate translates to an 8.2% risk-free rate in the 30% tax bracket. Once the mortgage is repaid, the payment normally allocated to it opens up flexibility and options to focus on investing.

One fear is how to protect oneself if something happens. Such as losing one’s job or becoming unable to work. A smart technique is an emergency fund covering three to six months of expenses. Held in a simple saving account at an institution where one has no loans or credit cards.

Become aware of the impact of reducing the amortization. The example shows savings exceeding $92,800 from a 25-year to a 15-year amortization. I caution not to view the purchase of a home as an investment. It’s more about a personal decision. If it turns out as an investment, it’s a bonus.

5. Condominium purchase example

Overview of purchasing a condominium in a high cost market:

* To cover 30% gross debt service of principal, interest and taxes.

6. The wrap

I maintain that mortgage amortizations longer than 25 years bring new meaning to home ownership. Or, more to the point, I think of them as “long-term renting” from the mortgage lenders.

I’m firmly in the camp of repaying the non-deductible mortgage as soon as possible. Then the borrower can devote full attention to accumulating the investment portfolio.

Design a suitable game plan. It helps in reaching the personal goal. There is a lot at stake.

Your comments are welcome.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.