Okay. So this is probably the longest post I have done so far so bear with me.
Now that we are debt free, the questions we keep getting asked from family and friends is ‘when are we going to buy a place of our own?’ My natural reaction to this question is to say ‘can I get some breathing room please…we just paid off $120k in 2.5 years and are building our savings while having some fun’. But instead I say ‘we will see, we are not in a hurry’. And that is pretty much the truth. I think I highlighted some of the reasons why my husband and I are content with renting for now in my previous post.
Some of the benefits we get out of renting include:
- Being able to save 30%-43% of our take home pay each month towards both short & long term savings like our ETFs, DRIPS (dividend income is the best), mutual funds with low MERs, GIC’s and basic savings account. This percentage does not include the 5% we each contribute towards our retirement savings plan at work of which our company matches.
- The ability to find competitive rent as the economy changes
- Freedom, mobility and an opportunity to catch up on some much lost savings during the 2.5 years we were paying off debt.
However, I still had to find out for myself where we would stand financially if we were to buy a detached home right now. So I thought it might be interesting to crunch some numbers based on hypothetical (we are not really looking to buy now) and the cost of owning a detached home in Calgary Alberta.
In looking at the expenses and determining on average the costs to not only purchase but ‘maintain’ a detached home with a purchase price of $500,000 (note: the image of the house on this post is just a generic image and not related to the content on this post) . Why did I choose this number? Well the average price for a detached house in Calgary as of March 2016 is $538,017. This number is also not unrealistic as the average cost of buying a home in Canada as of March 2016 was $508,567 based on Canadian Real Estate Association findings.
I split the expenses under one-time housing costs and recurring housing costs when looking at the cost of home ownership. Here are the categories:
|One-time housing costs||Recurring housing costs|
|Closing costs||Mortgage payments|
|Moving Costs||CMHC expense (added to mortgage)|
|Land transfer tax||Property Tax|
|Down Payment||Home Insurance|
Before I go through the numerical breakdown, I should mention some of the assumptions I made in coming up with my calculations:
- The purchase price of a detached home is $500,000. Keeping in mind that the average purchase price of a home in Canada is around this amount.
- A down payment of 10% or $50,000 is used. If I were to save 20% for a down payment that would be $100,000 down payment to avoid CMHC insurance costs. That’s a lot of money to put in one asset category for me at my current stage in life.
- I will not be receiving any financial assistance from parents (or anyone else) of any shape or form towards the down payment of our home. My parents did a great job raising 6 kids in Canada and I would not want to financially burden them as they are semi-retired.
- Because of the 10% down payment, CMHC insurance (Canadian Mortgage & Housing Corporation) is required. CMHC insures the banks that in the event that a home owner has less than 20% of a down payment for the purchase of a home, and they are unable to pay their mortgage in the future, CMHC will pay off the mortgage. CMHC is backed by the government (which of course is funded by the people). To receive this insurance, the buyer must pay the CMHC premiums at the time of the purchase, or include the amount onto the mortgage which will be amortized over many years (i.e. 25-30 years).
- The CMHC is added to the original mortgage of $450,000 over the amortization period of 25 years. Based on a $50,000 down payment, the amount is $10,800 making a total mortgage of $460,800 mortgage over 25 years. I got this number from using CMHC’s calculator
- A 2.59% 5 year fixed mortgage interest rate was used on the mortgage. This value was determined based on Rate Hub’s ‘Compare Mortgages’ These are historically low interest rates so I would assume that when the mortgage comes to renewal in another 5 years, the interest rates will be higher
- Bi-weekly mortgage payments were used when calculating mortgage payments with no accelerated payments included. There is a great mortgage calculator you can use found here.
- Numbers are rounded to the nearest dollar for simplicity
- Moving costs include hiring movers to move content for a 2-3 bedroom furnished home
Ok, now that I have overwhelmed you with all the assumptions and provided you with the general context. Here are the numbers:
This first table shows the amount of money we would need, to secure a $500,000 house in Calgary at 10% down + closing & moving costs. This $55,000 would need to be saved first before the recurring monthly expenses can even be considered. 10% down payment would be the lowest I would go (even though you can go as low as 5%). For me personally, this would mean redirecting all of my savings (including my emergency fund) to put towards the down payment. We probably have a total net worth of $22,000 right now ($0 debt), but about $16,000 of this we started rebuilding from Jan 2016. The thought of pulling all that cash out and then some scares me.
|One-time Housing expenses||Cash Outflow (money out)|
|1.Land Transfer tax||$ 0|
|Total One-time Housing expenses||$55,000|
1. Alberta & Saskatchewan are the only 2 provinces in Canada that do not have a land transfer tax so the amount is $0. There may be a small fee imposed but the cost is minimal. To figure out what the land transfer tax would be in your province, check click here
2.Closing costs can vary quite a bit so to get a general idea, I used the Calgary Real Estate property guideline provided by CIR Reality . This is just a general average but includes things legal costs, inspection costs, appraisal fees etc
Ok, so assume we scrambled together $55k to get our home & now needed the funds to maintain this home month to month. This is what our monthly costs could be:
|Recurring Monthly Housing Expenses||Cash Outflow (money out)|
|Mortgage payments (including CMHC costs)||$2,078|
|CMHC costs||(included in mortgage payments)|
|3. Property Taxes||$240|
|4. Home Insurance||$70|
|Utility Expense (gas, heat and electricity)||$250|
|Total Average Monthly Expenses||$3,472|
- Property taxes differ from city to city. The city of Calgary 2015 tax rate was used to come up with this number
- The average cost of home insurance in Canada is $840/annually or $70/month. For a province by province break down, check out this guide
- For maintenance expense, I used the general guideline that many financial coaches use of 2%-3% of the home value. I used 2% which is $10,000 annually or $834/monthly.
The $3,472 is assuming a historically low mortgage interest rate of 2.59% continues and that our home maintenance & repair costs are not astronomical. If these two factors significantly increase (interest rates & home repair costs), this number would be much higher. Our current monthly recurring housing costs for renting is $1,334/month ($1,269 + $65 for electricity). Internet, cable & washer/dryer & dishwasher are included in each suite & in the cost to rent). We live 3-5 minute walk from a train station & shopping center, 5 minute drive to downtown and 15 minute walk to local parks and trails. The difference between these monthly housing expenses is 2.6 times ($3,472/$1,334).
We would not be able to afford to live where we live now if we wanted to live in a $500,000 detached home. But most importantly, we would not be able to save to 30%-43% of our take home pay (not including RRSP contributions deducted at source + company matching) and own.
Ok, this last table accounts for our monthly life expenses. Whether we own or rent, these bills need to get paid and these are the current average costs.
|Monthly Life Expenses for Two||Cash Outflow (money out)|
|Fuel & Transit Tickets||$190.00|
|Date night & Eating Out||$120.00|
|Cell phone plan (2 of them)||$130.00|
|Other Monthly Expenses & Charitable Giving||$587.00|
|Vehicle service & maintenance||$120.00|
|Total Other Monthly Expenses||$1,737.00|
|TOTAL MONTHLY RECURRING EXPENSES||$5,209.00|
So after I completed this grueling but very informative exercise, I realized that it currently costs us $3,071/month to rent in Calgary ($1,334+ $1,737) and it would cost us about $5,209/month to own in Calgary ($3,472+ $1,737) + $55,000 down payment to get into the home based on the assumptions above.
In reflecting on this, I came to the following conclusions. This is just my own personal opinion at the current stage of my life:
- We will probably own one day but not anytime soon and not in Calgary. It’s just too expensive in my opinion.
- In order for us to get ahead financially and gain the momentum we lost in paying off our $120k debt, we will need to keep our savings rate high for now (40% +) and reduce it when kids come into the picture. With $0 debt and decent incomes, this is very doable.
- If we choose to forgo home ownership for now, our money needs to be working hard for us to make up for the potentially equity we would lose in not owning a home. This is why we invest in the stock market (among other things) & always for the long term. I learn a lot about investing from my husband.
- Lastly, it’s just me and my husband for now and we don’t own a lot of “stuff”. We live simply and don’t need too much to get by day to day. Renting seems to be working for us for now…so why ruin a good thing.