With the soaring house price in the populated city like Toronto or New York, home ownership has becoming a distance dream for a lot of us. Long term rent is a reality. Yet, unlike other investments, home ownership has an emotional connection for a lot of people. Many still struggle with to rent or to buy decision. Deep-down, many of us still want to own our homes. I don’t have to look far, my husband has been driving me up the wall with our house building project. He has a dream. Oh yes, he does! For my sentimental hubby, this house signals an accomplishment and a place to build long lasting family memory for our daughter. I will write a post on my first house building experience. It has been a painstaking project and I consider divorce him several times.
And, I digress… On the surface, real estate is a good investment. We all need shelters and we can’t grow land, so real estate seems like a must have. Moreover, the price of real estate has been rocketing in major metropolitans, thus it seems like buy is better than own. Apart from a purchase price of the house, there are other costs of home ownership that you need to take into the consideration.
The cost of mortgage default insurance for buyers who have less than 20% down payment
For Canadian, if you have less than 20% down payment, you need to have mortgage default insurance. In Canada, CMHC and Genworth are the biggest mortgage default insurers. You can add the mortgage default insurance premium into the balance of your mortgage or you can pay the premium upfront. Most of us don’t have money to pay the premium upfront because it is very expensive.
For example, you want to purchase a $500,000 condo and you have 5% down payment ($25,000), your mortgage default premium will be $19,000. Now, $19,000 premium on a 25 years amortization seems very small in monthly payment, but consider this: to repay a $19,000 balance on a 25 years amortization and at 3% interest rate, you will pay $7,974 in interest payment. Your “real” mortgage premium cost is $19,000 + $7,974 = $26,974. Suddenly, the mortgage default premium doesn’t seem cheap anymore. Most people don’t see the cost of mortgage default insurance because it is included into your mortgage payment. While it’s possible to purchase a house with as little as 5% down payment in Canada, it will just cost you more in mortgage default insurance premium. So, the more down payment you have, the less you will have to pay in mortgage interest payment as well default insurance premium.
The closing costs
There are a number of other closing costs that need to be taken into account when buying a house. Depending where you live, land transfer taxes can carry a significant price tag. Ratehub.ca has a decent calculator, and you can get an estimated land transfer tax amount including rebate. In some provinces and cities, there is a rebate available for first time home buyers. Land transfer tax rebates are available to first-time homebuyers in Ontario, British Columbia, and Prince Edward Island which will help to offset some land transfer tax.
Apart from land transfer tax, you will need to cover lawyer fees, seller/buyer property tax adjustment, appraisal fees, home inspection fees, moving cost as well as any furniture purchase. Most bankers will tell you that 1.5% of your purchase price is sufficient for all closing cost, but sometime it can go to 5% depending the purchaser’s needs. On average, aim for 2-3% of your purchase price for closing cost and watch every penny you spend, because you don’t want to dwindle to the last dollar before moving into your first home.
The home maintenance cost
When you own your home, you also need to fix it when thing breaks down. And things tend to break down more than you expect. Most of us underestimate the significant renovations needed to the property. When I moved into my second house, the pipe in the bathroom on top floor leaked. One week after moving into my new house, I looked at my water damaged ceiling and wanted to cry. So, it is a good idea to save 1-2% of your income every year as well as name and contact information of handy man or woman who can rescue you in a house maintenance crisis before you have a nervous breakdown. Better yet, learn how to fix things around the house by yourself.
There are a lot of how to video on YouTube and they have great tips. Bless YouTube and all the contributors. I got really good tips on fixing leaky pipe or patching a cracked wall. I have become very handy with hammer; drywall patching and IKEA furniture assemble.
The other monthly costs
During my time as a lender, I noticed that most people only budgeted for mortgage payment, property tax and condo fee (if applicable) as monthly cost of homeownership. There are other monthly costs associated with owning a home such as home insurance, alarm service and municipality utility service (i.e. solid waste, water etc.) cost. These costs will set you back a few hundred dollars each month, and thus should be part of your consideration.
Lastly, are you emotionally ready to own a home?
It may sound hokey. But this is a big lifestyle leap to take and an important question that you need to truthfully answer. Seriously, it is probably your single biggest financial commitment. The average house price in Toronto is $800,000. It is probably the biggest purchase you make in your life. Apart from the monetary obligation, you will likely have the mental shock of going from a tenant to a homeowner. When you’re a tenant, the month that cheque goes out, it clears your account, and then you don’t think about it for the next 30 days. If something breaks, you call the landlord. It is the landlord’s problem, not yours. But when you’re a homeowner, you have to fix everything in your house. So, yes it will be a shock for a lot of unprepared first time homeowners. When you take into account all these cost of owning a home, many will shake our heads and say: it is not for me and that’s maybe the best decision for you.
To rent or to buy is a personal choice and it needs to align with your lifestyle and financial situation. If you are not prepare for all obligations and costs associated with home ownership, you will likely end up with more headache than joy. So don’t force yourself to take on the home ownership responsibility if it doesn’t fit your life style and needs. Don’t get me wrong, I like real estate investment and it has had great return for my initial investment. But I also have to work very hard and put in a lot of painfully long hours learning and fixing my properties. Like I said: IKEA’s furniture assembles, patching drywall and very handy with a hammer. I had to scarify my manicure need for a long time. Those are things that I never imagine that I would be good at and yet here I am. Whichever decision you make, I hope this post provides you with useful information to make an informed decision. Share with us your story on buy vs rent. We love to hear from you.