Home ownership is a dream for many Canadians. However, many prospective home buyers are ill-prepared when it comes to taking the steps towards becoming home owners. That’s because they do not understand the options available to them, in terms of home-buying choices. More importantly, first-time buyers don’t realize the longer-term financial consequences on their mortgage by owning a specific type of home.
In this post, we’ll explain some of those implications, including the financial impact of mortgages, ongoing home expenditure and potential opportunities for future resale.
Home Ownership Challenges
So, you’ve finally decided that you’ve had enough of being a renter – it’s time to move up the real estate ladder and become a home owner instead! You believe you’ve saved enough to put down a reasonable deposit too. And you feel confident that you’ll be able to manage your mortgage payments, ending in you fulfilling your dream of being a homeowner over time.
And that’s where most prospective Canadian home owners – especially first-time buyers – fall short!
You see, home ownership isn’t just about buying any home…it’s about buying a home that you can afford. Sure, mortgages are one of the bigger homeownership challenges out there. But that’s not all there is to owning a home. What about:
- Realtor fees
- Legal costs
- Moving and relocation charges
- Possible renovation costs (to make your new home move-in ready)
- Home insurance
- Condo or Homeowner Association Fees
- Electricity, Gas and Water bills
- Property taxes
- Regular home maintenance
To put some of these costs into perspective, here’s what you may have to provide for when buying a condo home in Toronto:
Some of these costs may vary, depending on location, size and construction, but the above is just for illustrative purposes.
When you factor in all of these other home ownership challenges and costs, over and above your mortgage, you could very well come to a stark conclusion: All of a sudden, that detached home is looking rather expensive! Could it be that you are overstretching your finances? So, what choice do you have?
Homeownership Choices 101
Before you decide which home you should buy, it may be a good idea to understand what your options are.
You may choose to buy a home in a condominium (Condo), which gives you ownership of everything within the home. Your condo could either be in a high-rise building, or it could be part of a row of multi-level townhouses. However, a Condominium corporation owns and maintains many of the exterior structures (called common elements) – such as the land on which your home is built, parking lots, green spaces, privacy fences, windows, roofs and lawns.
In a semi-detached condo, you’ll share common walls with at least one of your neighbours. However, there may be some detached condos too, in which case your home may not be attached with a neighbour. You pay a Condo Maintenance fee each month for services such as mowing the lawn or shovelling the snow.
Then, there are single-family residences, commonly known as freehold homes. These are detached properties that do not share common walls with homes on either side. You not only own the detached home and everything in and around it, but you also own the lot upon which your home stands. Freehold homeowners may also have a Home Owner’s Association (HOA) manage common elements, but homeowners are responsible for most of the upkeep and maintenance of the property.
So, what does this mean to you? Well, it comes down to affordability, since each of these options could have a direct impact on your finances. Depending on where in Canada (which Province, City or Municipality) you plan on buying that first home of yours:
- Condo’s are typically (but not always!) a cheaper option for first-timers than similarly-specked freehold homes
- Semi-detached homes are always a cheaper option than similarly-specked detached homes
Of course, as we said earlier – it all depends on where you wish to buy. For instance, in today’s housing market, an apartment in a newer down-town Toronto condo high-rise, might cost you significantly more than a much larger (even twice as large!) older semi-detached townhome in a GTA suburb.
So, this raises a question: How are prospective home buyers – especially first-time owners – supposed to decide which type of home to buy?
First-time Home Affordability
Well, as we noted earlier, mortgage affordability is not the only factor to consider, but it certainly is one of the key elements when making home buying decisions:
- The higher the value of your new home, they larger will be the down payment that you will need to put up before your mortgage is approved
- The larger your home loan is, the bigger will be your (weekly, monthly, quarterly) regular mortgage payment
- Bigger homes cost more to maintain, and need more upkeep and looking after
- All things being equal, first-time buyers will probably more easily be able to afford making those mortgage installment payments on a townhouse and/or a semi-detached home, than a detached freehold property
The Learning Hub at JustCompare.Ca is a great resource for first-time home buyers to explore for additional information.
Other aspects of home affordability also come down to the age of the home, its construction and location. Newer homes, even though they might be smaller, are more expensive than older units. However, newer homes – at least for the first 3 to 5 years of their life – may be less expensive to maintain – something first-time home owners need to consider carefully!
The best way to ensure you can afford the home you plan to buy, is to:
- Never pick a house before knowing how much you can afford to pay for it
- Assess your finances first, and see how much loan/mortgage you can get pre-approved for
- Look at all of the expenses discussed earlier, and see if your income supports your home ownership dream
- Make sure you have all the finances lined up in time for your closing
If you don’t plan on living pay-check to pay-check, not wanting to stress whether you’ll make that upcoming mortgage payment on time, then a semi-detached townhouse is likely your best option. You’ll never need to overstretch financially, and you’ll get just the right amount of home that you can afford.
Your Home as an Investment
But there might be one other home buying aspect to consider too; one that not every first-time buyer might be primarily focused upon. And that’s the investment opportunity from buying a home.
Generally speaking, home prices have appreciated over the long-term. And from an investment point-of view, freehold detached units appreciate much more in value (again, depending on where you buy) over time. The reason:
- Firstly, along with a detached freehold home, you also get title to the lot/land on which the home stands. And because of the enormous scarcity factor, land appreciates in value faster than most assets
- Secondly, and more importantly – freehold detached unit owners have greater freedom to make extensions and renovations within and outside their units – much more so than condo townhome owners do. As a result of many such enhancements, freehold units appreciate significantly in value.
So, while buying and owning a detached freehold home might cost you more – especially in terms of the mortgage and ongoing service and maintenance costs – it may offer a better long-term investment value proposition.
Using an online mortgage calculator might be a great way to start your assessment of home ownership costs. And if you are new at home buying, you can get a lot more information about First Time Home buyers (FTH) at the Learning Hub at JustCompare.Ca.
Looking to speak with an expert, click the below link to connect with a Mortgage Specialist from BMO. There is no obligation to you, and they can help you to not only understand what mortgage products you are eligible for, but which suit your financial situation and stage of life best: