From Renting to Buying: Calculating the Full Cost of Home Ownership

Home ownership is an exciting prospect. For many people, it’s part of achieving the Canadian dream. Having your own space, more of it and the freedom to design and decorate that space the way you want, is a liberating idea. And of course, there’s the added bonus that, unlike rent, every monthly payment you make builds ownership equity in your home.

People considering buying a house often approach their bank to determine what size of mortgage they will qualify for. This is determined by the amount of down payment they can make, their annual income, their credit score, the amount of other debt they are carrying, the interest rate the bank is willing to offer and more often than not, several other factors. The prospective homeowner will come away with a figure which represents the upper limit of the house price they can afford.

But house affordability cannot be determined based solely on a mortgage approval. Once you are house-hunting, you can become a bit giddy with all the possibilities - and it’s easy to overlook the additional costs your new house may demand, both immediately and in the future.

Starting with the mortgage payment itself, some additional consideration is required. Over the past several years, interest rates in Canada have been at historic or near-historic lows. You may feel confident you can afford your monthly mortgage payment at the rate you have been offered by your bank. But if interest rates should rise by a percent or two (they really only have one way to go), how much will your new monthly mortgage payment be? There are many mortgage calculators available online. It might be helpful to experiment with these calculators to see whether your payment would still be affordable if interest rates were to increase.

Right at the time of purchase, some of your money may have to go toward paying the land transfer tax, levied by some provincial governments and municipalities. This can often amount to several thousand dollars, depending on the location and purchase price of the house. Some provinces / municipalities offer first-time homebuyers a land transfer tax rebate which will help offset some of these costs, but there may still be an up-front amount to pay.

Of course, the way to reduce both mortgage payments and land transfer taxes is to consider buying a more modestly priced house. Just because you have been pre-approved for a mortgage amount does not mean you must buy a house up to that limit. It may be wise, where possible, to choose a lower-priced house and save the extra money for house related expenses or current and future repairs. Admittedly, in some very competitive markets where house prices have risen substantially in the past few years, finding a more modestly priced house is becoming difficult.

Once you move into your new house, you may find that you have to pay for costs that previously went unnoticed, because they were imbedded in your monthly rent payment; property taxes, general insurance, upkeep, repairs and even some utility costs. These are things you will be responsible for paying yourself once you become a homeowner. It’s a good idea before buying a house to determine how much the average property tax, electricity and heating costs are, and whether there are any additional costs for things like equipment rentals.

If you’ve never had a lawn before, you may find you need to buy lawn seed, fertilizer and a lawnmower / trimmer – and gasoline or an extension cord to power these things. If you’ve never had a driveway before, you may need sealer, snow removal tools and road salt. While these things may seem obvious to the seasoned homeowner, they may be overlooked by the prospective home buyer and can add up to significant additional costs you didn’t have while renting.

Besides the additional costs of maintenance, there are inevitable repairs. While your landlord was responsible for fixing plumbing or roof problems when you were renting, these things are now your concern. If you are aware of a possible repair cost at the time you make an offer on a house, you may be able to negotiate a lower purchase price, or budget to save the money needed for that repair down the road. That’s why it’s important to request a home inspection prior to finalizing your offer. Unfortunately, this is a condition of sale that is often waived in some very competitive real estate markets these days, to the disadvantage of the buyer.

What are the risks of not budgeting for the costs of home ownership before buying? For folks who find that their income does not fully meet their household costs, home ownership can be a disappointing experience. They may not have the additional funds needed for proper repairs, the decorating they had hoped to do, or to maintain the lifestyle they previously had. Some will turn to unsecured credit such as credit cards to supplement their income, and end up paying a lot in interest charges. Over time, such debts may balloon to the point where the monthly payments consume much of the household’s remaining income. In these cases, people meet the cliché definition of “house rich and cash poor.” In extreme cases, people have even had to file a Consumer Proposal or bankruptcy to get relief from the additional debts they have accumulated. If a homeowner finds themselves in such a situation, it is best to consult with a Licensed Insolvency Trustee such as MNP Ltd. to find out that options are available for managing their debts and getting back on track financially.

Home ownership can be a satisfying and rewarding experience. It can be a good savings plan and long term investment. With that being said, it can also become an unexpected burden if the costs of ownership are underestimated. Tempering the excitement of buying with some sober expense calculations will make for a happier homeowner experience in both the short and longer term.

Wes Cowan is a Licensed Insolvency Trustee serving our Kitchener region. To learn more about how MNP Debt can help, contact our local office at 519.741.1999.