The sucker's analysis of whether it's affordable to buy a first home is to compare the cost of rent and a mortgage payment.
Any veteran homeowner can tell you that mortgage payments are only a portion of what it costs to own a home. First-time buyers may be familiar with additional costs such as property taxes, but there's a whole range of other expenses that are sporadic and thus hard to quantify.
Here's an example: Last month, we had to pay to have a raccoon family evicted from our attic. Other costs of the past few years at our house in Ottawa include new shingles for the roof, a plumber's visit to replace a leaky water shut-off valve in the basement and a service call for our central air conditioner. There was also a bathroom renovation made necessary by the natural deterioration of house components over time.
Affording these expenses is part of the financial juggling that has always come with home ownership. But these costs require extra attention from today's prospective buyers. While the housing market has lost momentum in some cities, prices have still risen much faster than incomes for the young adult demographic in the past decade or more (I'll have more on this in an upcoming column). If you buy today, you may find you're using up a sizeable share of your household income just to pay the mortgage.
Mortgage rates are still near historical lows, and that's a big help. But rates will eventually rise. If you're taking out a five-year mortgage today, expect to pay a higher rate on renewal.
Lenders and real estate agents offer all kinds of help in deciding whether you can afford a house (read my take here). But today's savvy buyer has to look at affordability from the perspective of both buying and owning. To help first-time buyers understand what they're getting into, let's look at the cost of buying a $400,000 house with a 10-per-cent down payment and a five-year mortgage at 2.89 per cent.
Before we get into the costs of owning this house, let's quickly consider closing costs. The federal agency Canada Mortgage and Housing Corp. estimates that legal fees, land transfer taxes and other costs amount to roughly 1.5 per cent to 4 per cent of the purchase price, or $6,000 to $16,000 in our example.
Not included here is the cost of moving, or of making immediate changes or upgrades in your home. At the low end, you may spend a few hundred dollars at Rona. In a discussion on home ownership costs on my Facebook personal finance page (facebook.com/robcarrickfinance), someone talked about spending $6,000 on changing light fixtures, painting, adding window coverings and such. A small but worthwhile cost when you move in: Spend $200 or so to have the locks re-keyed.
Monthly mortgage payments for our $400,000 home would be $1,860 (accelerated biweekly payments have been converted into a monthly cost), which may be cheaper than rents in some cities. In comparing renting to buying, you have to consider the fact that you're building equity as an owner. But here we'll just look at the month-to-month costs of keeping a roof over your head.
My colleague Claire Neary blogged this week about her troubles finding a large one-or two-bedroom apartment in Toronto, and the listings she's seen are in the $1,700 to $2,200 range. Of course, houses cost more in Toronto, too.
Another basic cost of owning is property tax. Many cities offer online property tax calculators; a Google search will help you find them. Let's plug in $300 per month here to cover an annual tax bill of $3,600.
Next, add the monthly cost of home insurance. Renters need to pay tenant's insurance, but the bill is much less than what owners pay. Let's budget $65 per month, based on an annual premium of around $800. This brings our monthly costs of ownership to $2,225.
One more thought on monthly budgeting: Both renters and owners pay for utilities every month, but you should expect hydro, heating and water bills to be double or more if you own a house.
Now we come to the random home ownership costs that make renting look good: replacing a furnace, reshingling a roof or major paint jobs. For a sampling of these costs, check out a Google spreadsheet I created to get input from readers. Feel free to add your own notes and share the document.
Don't just think about whether you can afford the various costs of owning a home. The real question is what's left over afterward for saving and living your life.