Earlier last week, columnist Rob Carrick of the Globe and Mail discussed the types of expenses home owners face when purchasing and maintaining a property. To the surprise of many, it is much more complicated (and much more costly) than making mortgage payments and settling property taxes. First-time home owners are dismayed by the fact property prices have risen above the average income level of young adults in Canada. What this means is that the bulk of the individual’s savings is being poured into up-front expenses, leaving little cash for down-the-road when most unexpected costs arise.
It seems that first-time home owners are notorious for getting caught up in the fees associated with buying a property — that is, the cost to maintain and protect the asset. While mortgages at this time may be in the dumps, it is only a matter of time before they rise, meaning mortgage payments won’t always be the viable option in comparison to renting. Of course, between buying and renting, one must consider that ownership builds equity, and as a result, that there are myriad expenses renters need not worry about. Utilities, for examples, will cost a home owner much more than a renter. Unlike renting, buying a home includes a great deal of closing costs. The federal agency of Canada Mortgage and Housing Corp. estimates that closing costs usually account for 1.5-4% of the overall price of a property. First-time home owners can expect to face the following up-front expenses when making the purchase:
- Representation by a lawyer
- Mortgage insurance if the down-payment is less than 20% of the property value
- One-time tax levy upon final sale, which is usually the largest closing cost a home buyer will encounter
- The appraisal of a property and the home inspection
- Immediate renovations and the cost of moving
TD Canada Trust reported last year that 6% of Canadians did not budget for anything more than the down payment and mortgage, while 13% knew about, but forgot to account for, the closing costs. On top of these statistics, many more home buyers did not think about the on-going costs such as home insurance, maintenance (roofing, plumbing, furnace, electrical, repairs, etc.), and rising premiums.
Since owning a home is much different than renting, the cost of ownership is not static — it is unpredictable. First-time home owners do not need to factor in the cost of upgrading a home right away, but they do need to consider a wealth of other expenses associated with purchasing the property, both up-front and spread out over the years. Before signing the contact for the new home, it is imperative to have extra funds in the bank to cover the expenses and to “weather-the-storm”, figuratively speaking, if the home proves to be problematic only months-in. Buying, owning, and maintaining are all synonymous in this situation, and the home-owner must be ready to take on all of the responsibilities of each.