What it would cost us to buy a $500k home

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
Utilities
Maintenance costs

 

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)
Down Payment $50,000
1.Land Transfer tax $          0
2.Closing costs  $3,000
Moving costs   $2,000
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
5.Maintenance expense $834
Total Average Monthly Expenses $3,472

 

  1. Property taxes differ from city to city. The city of Calgary 2015 tax rate was used to come up with this number
  2. 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
  3. 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)
Auto Insurance $86.00
Life Insurance $104.00
Fuel & Transit Tickets $190.00
Groceries $400.00
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.

 

 

 

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Categories: Budgeting, Debt

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33 replies

  1. This is a great post to keep in mind/take into consideration after divorce. I recently divorced and stayed in the home (mortgage was in my name only-he didn’t want to get financing to take it over). While I LOVE my home, maintaining the home is sometimes daunting. There are quite a few things to keep up on and annual inspections needed to insure your home is safe and pest free. Some of the things I forgot about, some I took for granted in a sense because the now ex took care of it while he lived here. I’m doing fine but for poops and giggles I’m going to run the numbers!!

    Liked by 1 person

    • I am sorry to hear about your divorce, but I am glad that you found this post useful. Yes there are a lot of costs that come with home ownership and although I think it can be a good investment, I also think that many people rush into it without really understand the costs involved. Society focuses on whether or not one can afford the mortgage payments but there is so much more to it then that. All the best on your future decisions!!

      Liked by 1 person

  2. Love this post and of course I’m sharing it. Can I please tell you that I love your blog, but your font is too small for me to read? Is there any way you can adjust the font larger? Thank you.

    Liked by 1 person

    • Thanks so much. And thanks for your input. I will see if I can find a slightly larger font size. I saw that you re-tweeted this post on Twitter. Thanks for that. I enjoyed righting this piece. I hope the links and calculators will help people figure our the true cost of home ownership.

      Liked by 1 person

      • You’re welcome. Okay, it just shows up like an 8 point font and I have to increase the font size to 200 to be able to read it and I wear glasses. LOL.

        Yep and shared it on my Facebook page. Great advice and sometimes we all need a chart to let us know if we can truly afford the dream of home ownership. People say to downsize your dream, but why should you have to keep moving every few years?

        Like

  3. Thank you so much for writing this post in such a great level of detail! My girlfriend and I are in the same process and we are forecasting the different scenarios, much like you did here.

    Calgary is expensive! That’s probably my first takeaway!

    If you’re still looking to gain exposure to real estate in your portfolio without buying a property, you can always look into investing in REITs. Personally, I’m in a similar boat as you since we invest nearly all our portfolio (outside of cash for our emergency fund) into the stock market.

    You mentioned you didn’t want to burden your parents on that 10% extra downpayment. I don’t mean to budge in, but maybe they want to help you. I say this because my parents are also semi-retired and I had the same initial thought about not wanting to burden them. Then one day, my mom mentioned they would be open to helping me if I’m short on a downpayment.

    If your parents can help, its a win-win where you pay them the interest and they can feel great about helping you. I don’t know if I would burden them myself, but I’m still in the process of thinking about this. Plus, given your track record with debt, I would imagine you can repay them the loan in a relatively short time frame.

    Thanks again for taking the time to write this post!

    Like

    • I am glad you liked it. Yes in terms of dividend income my husband and I have DRIPs in CREIT, Bank of Nova Scotia, Fortis and Enbridge right now which we put money into regularly. Our exposure in these stocks are bringing us great dividend income which we reinvest for more stocks. Canadian Real Estate Investment Trust (CREIT) has been doing well in terms of bringing in dividend income and some capital gains. In the future we will buy DRIPS in Telus CP or CN rail, something in foods. In terms of my parents. I might mention it to them one day. Will just need to feel it out and see what there financial situation is like.

      Liked by 1 person

  4. nice post Pamela!
    your site gives valuable information to us, keep it up.

    Like

  5. You have obviously put a lot of thought into the prospects of homeownership. Your post is thorough and covers all of the bases. I agree that makes the most sense for you to continue renting for a while.

    As a US citizen, I am intrigued that the nuances of the Canadian real estate market and mortgage process are so similar in many ways. The biggest difference I noticed is property taxes. For living in/near a population dense area such as Calgary, I expected much higher property taxes. Living in Chicago, I would gladly trade you any day of the week. 🙂

    Like

  6. I’m one of those in the “buy your home!” boat. With the way housing is appreciating in Canada, yes, we bought it when it was expensive (at $560,000) but had we waited, there was no way we would be able to afford a home now, even with 4 years more to save. A duplicate of our home is currently listed for just under 1 million.

    What another comment said was true – I’ve “locked in” my house at $560k – had we rented, it would probably go up every year. However, I know your flexibility to be able to move around is important so that’s something I would’ve taken into consideration if I were in your shoes.

    My younger brother and his wife have been holding off on buying as well. They’ve saved quite a tidy sum and could put 20% on a decent home here but similar to you, are holding off for flexibility’s sake. They are about to start a business so it wouldn’t make sense to tie up their equity in a home at the same time, and they’re also undecided about location (e.g. Live closer to the business, or live closer to the family for when the kids come). However, prices of housing here in the GTA are increasing at a much higher rate than incomes are so it might not have been a bad idea to have purchased a house say last year and if anything, rent it out now while renting at the location they want to be living. This way, they can take advantage of the increases in equity due to the home prices while living where they want to – best of both worlds!

    Like

  7. Nice Post. Buying a home and committing to a mortgage is a huge decision in regards to financial obligations and security. I think its great that you are considering all of this in such a thoughtful manner before you have kids.

    Our mortgage is the only debt we have left and we have 2 kids so we can’t save or throw as much money towards the mortgage as we would like but we aim to have our mortgage paid off in 7 years (by the time we are 40).

    I’ve always loved the idea of owning real estate but if you can rent for substantially less and want more flexibility then owning a home isn’t always what’s best for everyone.

    I also agree that putting as much down as possible on the home and making sure you can truly afford it is key. Luckily, we were able to put 30% down on our house which gave us a jump start into the equity vs if we would’ve only paid a 5% down payment.

    Liked by 1 person

  8. Great post, I would have separated your mortgage payments into interest & principal. The interest portion is your actual cost and the principal is equity which you will get back when you sell the house. Being Canadian, you probability know that you can borrow $25,000 each from a self directed RRSP. It is an interest free loan that needs to be paid back over 15 years plus you get a two year grace period.

    Based on being in the 30% tax bracket, putting $50,000 into an RRSP will produce a tax refund of $15,000 which can pay for moving cost etc. First time home buyers also get a one time $5000 tax credit which will add another $2000 to your income.

    Finally, house prices in Calgary will be going back up if the price of oil rebounds to higher levels. I estimate that your $500,000 home could be out of reach within 2 years. Interest rates will be higher and house prices could easily rebound 3% per year. A house is one of the few investments that are exempt from taxation when you sell.

    Liked by 1 person

  9. Well thought through. 5k plus every month is definitely not something to sniff at.

    Like

  10. We currently rent in Melbourne (Australia), a fairly expensive city compared to income. We can’t afford to buy and won’t be able to for an extremely time (until we’ve had IVF children).

    I think renting, in most cases (and if you invest) financially the way to go. But, owning your own home is one of the ultimate luxury lifestyle choices. Do you want to be able to renovate your house? Put pictures up? Paint a new colour? Put a pool in?

    All of those things can only be done if you own your own place. We’re happy to rent, but eventually we want to buy. We’re just going to make our money work as hard as we can until then.

    Tristan

    Liked by 1 person

  11. I like tangible assets so owning my home is very important. The first home doesn’t have to be a dream home, but I think it’s important to get your foot in the market. Food and shelter are humans two basic needs, so my strategy is to first secure those then build up from there. My priorities are 1. emergency fund 2. down payment or house payment 3. other investments.

    Like

  12. Few would go through the pain staking details you did, but your conclusions speak for themselves. Sometimes I think owning a home is overrated. Everyone thinks this is the natural path in life just like marriage and families. Stepping back and making the decision based on facts as well as needs and wants makes greater sense. I think your financial future will work out just fine. I think you will likely find greater happiness than most.
    Have a great work week.

    Like

  13. I’m very impressed with the detailed comparison you put forth on whether it’s worth renting or buying. We are homeowners and really enjoy living in a house. In fact, we have been aggressively paying down our 15 mortgage in hopes of getting rid of it in less than ten years. We are both attracted to living mortgage free and know this will be key in our ability to retire early. We were renting an apartment before and felt like we were throwing our money down the toilet. Plus, we can take advantage of the fact that our payment will not change for entirety of the loan. Rentals here in the U.S. have already increased by 12% on average and are expected to continue to rise so we do save money.

    On the other hand, buying a home is a very big financial decision to make and you really do need to know exactly what you can afford. Kudos on your great analysis! When we purchased our home, we made sure that we could still afford it on one income in case of job loss, etc. We wanted to make sure we lived IN the home, rather than live FOR the home.

    Liked by 1 person

    • That is so well said. House prices in the United States for the most part are much more reasonable than in Canada in my opinion (overall atleast). Both options have their ups and downs though. I think we would move to a smaller town if we were ever to buy. Not only are prices there more reasonable but the general cost of living is better. It is expensive to live in Calgary from housing, groceries etc. If we were to purchase a home where we live now on one income, money would be tight and we would be living paycheque to paycheque with little to nothing going towards savings. The savings rate that renting has afforded us right now is great, and with two incomes, its even better. Rent prices have actually gone down on account of the falling oil prices so we are saving even more. I think its great that you guys made sure you can afford a house on one income, so many people don’t do that. Thanks for leaving a comment.

      Liked by 1 person

  14. Good that you have done such a detailed exercise… IT helps to see clear. It sounds you are fine in renting now.

    In my case, I never wanted to rent, so I bought fairly young. Maybe that is because most Belgian people are raised with the idea that owning a place is the best thing to do. Reading some FI blogs, I now do realise there are other options out there.

    Liked by 1 person

    • Yah sometimes I wondered if we didn’t graduate with so much debt if we would have owned. Probably. From a financia sense I think it would have worked depending on where we lived. I think Canadian culture is the same. About 70% of Canadians own and lots of millennials are encouraged to own right after graduating school. But I think the climate has changed. House prices are astronomical in Canada (much higher than in the States for what you get) and incomes are stagnant if not declining. Finally, with the average Canadian will graduate with $30,000 student loan debt. For me and my husband personally, we needed to think about what would work best for us and I think we made the right decision. If keep saving and investing we will make up for lost time.

      Liked by 1 person

  15. I really admire your analytical skills, Pamela! My husband and I went through a similar (though not nearly as thorough) exercise a few years ago when our house flooded from roof to basement, and in our case we determined that it made more sense economically to rebuild and stay. But every case is different, and you make that point eloquently: It’s a matter of weighing where YOU are at a particular stage in your life, and weighing the cost of housing against the rest of your goals. I think you’ll help a lot of people with this post. Well done!

    Liked by 1 person

    • Thanks. Doing the research on this was eye opening for me as well. I always new that emotionally we were not ready ro own, but I never really took the time to do the math. Now that I have done some preliminary numbers, I can really put things into perspective and confirm what my gut was telling me. Maybe one day buying a home will make sense for us. I am definetly not ruling it out but we will have to see.

      Liked by 1 person

  16. I bought a house 2 years ago but I wished I had not. for me renting is more convenient and sometimes even looks more affordable than owning a house. for example, mortgage is one thing and the long term care and repairs of a house is something else. best of luck with your plans 🙂

    Liked by 1 person

  17. Really interesting analysis. Gosh the figure for buying comes out 2.6 times, such a big difference. I think if you aren’t in the right mindset, you will end up feeling really trapped and unhappy. And even though family and friends say you ‘should’ buy a house, they are not the ones who will have the pressure to pay the repayments, so you have to do what is right for you. The trick is making sure you keep up the saving but given you’ve paid off $120k I’m sure you will.

    Liked by 2 people

    • Thanks so much for the support. That’s what I keep thinking and telling myself. For us, it was really not a choice to not aggressively pay off our debts. Our minimum payments over 10 years would be $1,205/month and we did not qualify for repayment assistance or loan forgiveness for our student loans (both my husband and I). For many people that is how much their mortgage payments are. I would love to move to a smaller city/town one day where house prices are still affordable and cost of living is reasonable. We will see though, I enjoy the work experience I am getting living here for now.

      Liked by 1 person

  18. Wow, that was informative and l agree with your calculations. The location of the property is really important and deciding what quality of life you want at each stage in life is vital. So proud of you. Take care Cally.

    Like

    • Thanks Cally. Yes I totally agree. Location is super important when buying a home. For the places we would want to live where we feel safe and there are other amendities near by would require around $500k +. I am also not too crazy about long commutes & the traffic here in Calgary. Where we currently live works for us for now. Quality of life is super important to us as well. I think we woud need to really scale back on going out and charitable giving in order to accomodate a purchase. This is something I am not too excited about doing. Thanks again for your comment.

      Liked by 1 person

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