Your home as an investment

Buying a home is a common way to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition money. It provides you with a place to live and may also grow in value if housing prices increase. Your long-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition financial planFinancial plan Your financial plan should cover every aspect of your finances: saving and investing, paying down debt, insurance, taxes, retirement planning and estate planning.+ read full definition could include selling your home in the future to build your retirement fund or grow your wealth.

On this page we answer

How could buying a home fit into your investment plan?

Buying a home can be an important part of your financial plan. Like any investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition, there are benefits and risks. It can be a valuable investment, but your home shouldn’t be the only part of your long-term financial plan.

You can reduce risk in your portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition by making sure you have a number of different investments — diversification. That way, if one does poorly, others may do better. Owning a home can be part of that diversificationDiversification A way of spreading investment risk by by choosing a mix of investments. The idea is that some investments will do well at times when others are not.+ read full definition.

Consider how purchasing a home fits into your whole investment portfolio by learning about the different types of investments. Your investment mix should be a good match to your long-term goals, risk tolerance, and time horizon.

In Canada, the cost of real estateEstate The total sum of money and property you leave behind when you die.+ read full definition has risen significantly in recent years but has also fallen in some years. Depending on where you live, it may make sense for you to rent rather than buy a house — and put your long-term savings towards other large goals.

How does buying a home compare to other investments?

There are a few differences to keep in mind between home ownership and other types of investments, including:

1. Planning for costs involved with a home can be difficult

Most investments have costs like commissionsCommissions What you pay to a broker or agent for their services. Often called a “sales commission”. For example, you pay a fee to someone who buys or sell stocks or real estate for you.+ read full definition and fees. The costs to maintain a home are different, and include property taxes, utilities and maintenance costs. Improvements, such as renovations or upgrades to appliances, will mean additional costs. You’ll also pay interest on your mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition. And interest rates can go up, making your home more costly to own.

If you decide to buy your first home, do your best to budgetBudget A monthly or yearly estimated plan for spending and saving. You work it out based on your income and expenses.+ read full definition for the costs you can predict on a monthly and annual basis. Try to have an emergency fund so you can more easily manage unpredictable expenses.

2. It may be hard to get your money out if you need it

When you purchase real estate, you lock your money into that investment for the market priceMarket price The amount you must pay to buy one unit or one share of an investment. The market price can change from day to day or even minute to minute.+ read full definition at that time. The real estate market can swing up or down. Your home may increase in value, but this can take years.

Other kinds of investments lock in your money, but you can usually pay a penalty to get your money out if you need it. Buying a home may tie up a large amount of your savings. In addition to taking on mortgage debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition which you’ll need to pay off before you own your home outright. Turning the purchase into cash means selling or renting out your home — and that can take time and effort, depending on the market.

3. The value of your real estate purchase depends on many factors

Like many investments, the value of a home can be affected by the economy and interest rates. But it can also be affected by other factors, including:

  • Location – the return on investment for homes in some areas is higher than it is in others.
  • Size, age and condition of your home.
  • The housing market – if you’re buying to rent, or sell later, ensure you’ve done research on the local housing market before committing.

4. Buying real estate means borrowing money

Most people make a down paymentDown payment The money you put into buying a large item like a car or home.+ read full definition on a house and borrow money to cover the rest of the cost by taking out a mortgage. This means you take on debt when you buy real estate as an investment.

A mortgage is a long-term commitment for you to plan for. The amount you pay each month may change depending on the type of mortgage you have and the current interest rateInterest rate A fee you pay to borrow money. Or, a fee you get to lend it. Often shown as an annual percentage rate, like 5%. Examples: If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest. It uses your money until you need it back.+ read full definition.

Our mortgage payment calculator can help you plan your payment schedule based on your expected term and interest rate.

If you pay down your mortgage debt according to schedule, it can have a positive impact on your credit history — you will be considered credit-worthy.

Before taking on a mortgage or another kind of loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition, consider these questions to ask yourself before you borrow.

What are the benefits of investing in a home?

The benefits of owning a home include:

1. As you pay off your mortgage, you accumulate savings and equityEquity Two meanings: 1. The part of investment you have paid for in cash. Example: you may have equity in a home or a business. 2. Investments in the stock market. Example: equity mutual funds.+ read full definition. With each mortgage payment, you own a little more of your home. You’re closer to owning the large assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment, property, a car, investments, or cash. Can also include patents, trademarks and other forms of intellectual property.+ read full definition that forms a big part of your financial plan. You’ll also accumulate home equity, which can allow you to borrow for future needs.

2. You’ll own a place to live. Everyone needs somewhere to live, whether they rent or own their own home. Depending on where you live, and the size of your down payment, your monthly mortgage payments may be similar to the amount you would have paid in rent.

3. You’ll own an asset which could increase in value. Once you pay off your mortgage, your home is an asset you will own outright. You could sell it or rent it out to earn income.

What are the risks of investing in a home?

All investments come with risk. The risks of home ownership include:

1. Housing prices can fall. You could lose money if you buy your home when prices are high, and then sell when prices are lower.

2. You’ll need to maintain your investment. Unlike renting, when you own a home you’re responsible for covering costs of repairs, upgrades, or any damages not covered by insurance. These can be costly and come at unexpected times.

3. Homes can get damaged. Owning any large asset usually comes with the need for protection, such as insurance. You may need to prepare for damage from water, fire, wind, or other safety concerns. Home insurance doesn’t always cover everything. When you buy your insurance policyInsurance policy A written contract for insurance. It describes how long you are covered, what you are covered for, any part that you have to pay (the deductible) and what you will pay for the insurance (your premium).+ read full definition, read the fine print to understand what you are and aren’t covered for.

As you weigh the pros and cons of home ownership remember you can get support from a financial advisor, mortgage brokerBroker A registered person who brings together someone who wants to buy investments with someone who wants to sell. Brokers often charge a fee or commission for buying and selling investments for you.+ read full definition or insurance brokerInsurance broker See Insurance agent.+ read full definition. Consider including family members in the discussion too.

Summary

Buying a home may be one of the biggest investments you ever make. It can offer you housing stability and become a valuable part of your investment portfolio. It differs from other types of investments in several important ways. Before you buy, make sure home ownership is the right choice for you. Consider:

  • There are many benefits to home ownership, including owning a large asset and building equity.
  • There are also risks of home ownership. You’re taking on debt, as well as investing.
  • It can be difficult to plan for all the costs involved in home ownership.
  • Returns on your investment are unpredictable. It can be difficult to get all your money out if you want to sell, depending on the housing market.

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