Ready for Home Ownership?

I received letter from a young lad recently that asked a very good question. He wanted to know how he should prepare for home ownership. While I’ve written about what you have to do when it comes time to buy a home, there are also things you should do well in advance of hitting the pavement to go shopping.

1. Save a downpayment. When I tell people they should have a  minimum of 20% of the purchase price for a downpayment on a home, they balk. TWENTY PERCENT! How are we ever going to come up with that kind of money? Well, sweat is one way. Cutting back on what you’re spending is another. Here’s the thing about NOT having 20%: You immediately make the home more expensive because you have to incorporate mortgage insurance fees into the equation. On a $210,000 house with only $10,000 down, the mortgage insurance would be 3.1% of the value of your home or $6,200. Added into your mortgage, that mortgage insurance premium would end up costing you $13,605 if you amortized for 25 years, or $19,330 if you amortized for 40 years.

2. Calculate your carrying costs. I can’t believe the number of people who leap into home ownership without a clue about the financial responsibility they’re undertaking. Home ownership is NOTHING like renting, so if you figure you can afford a home because the mortgage payment is almost like rent, you’re a dope. You’ll have utility costs. You’ll have taxes. You’ll have insurance. And then there’s maintenance… the cost everyone likes to ignore. Resist the urge to guestimate what these costs will be. Find out. Ask friends and family in the area what they pay for heating, electricity, water, oil, whatever your house consumes. Look at real estate listings to see what the taxes on comparable homes in the area are running at.  Use the rule of thumb of between 3% and 5% of the value of the home for maintenance every year. If you can’t afford to carry the sucker, then you’ll know you’re not ready to buy.

3. Calculate your closing costs. Some experts say to estimate 1.5% of the value of your home for closing costs. Others say more. You need to know what to expect so you can make a budget that’s realistic. There are legal fees and expenses, a home inspection fee (don’t skimp), adjustment costs for things like pre-paid property taxes, an appraisal fee, land transfer tax, title insurance, an interest adjustment, a property survey (maybe), water quality inspection if you’re living in a rural area, and hook-up fees for setting up your new services like a phone line. And don’t forget GST.

4. What will you need or want to buy for your new home? From window coverings to appliances, from a new bed to new broadloom, there are always ways to spend money on a home. If you have grass, you’ll need a lawn-mower. If you buy a house with a pool, you’ll have calculate the on-going costs to open, maintain and close the pool each year. If you have a driveway, you’ll need a shovel or a snow blower, or you’ll have to hire strong backs to do the shoveling for you.

Once you’ve worked out what you’ll need to have ready in cash, you can get busy accumulating the money. Let’s say you decide you’re buying a $250,000 house.

  • Your downpayment will be $50,000
  • Your closing costs will be $3,750.
  • Your new stuff budget will be $6,000.

In total you’ll need to save $59,750.

Alrighty then. Now to the cost to your cash flow:

  • If you’re buying a $250,000 with 20% down, at 4% amortized over 25 years, your monthly mortgage payment will be $1052.05.
  • Let’s say the property taxes run at $2400 a year, so that’s $200 a month.
  • And you’ll have to pay house insurance, which we’ll estimate at $100 a month.
  • Then there are the utilities, which we’ll estimate at $300 a month.
  • And maintenance. Following the rule of thumb you’ll need to budget about $625 a month.

For a grand total of $2,277.05 a month… which is what it’ll cost you to actually live in your new home.

So now we come to the Gail’s Great Advice part. This is where you figure out if you’re ready for the responsibility of home ownership. If you can come up with $2,277.05 a month for your savings (less whatever you may be paying to keep a roof over your head right now), then you’re ready.

Hey, I’m not talking about if you can THEORETICALLY come up with the money. I’m talking about taking that money and socking it away every single month. So if you’re currently paying $1,000 a month to keep a roof over your head, you’d be committing to socking away $1,277.05 every month to your Home Buying Account.

Here why you’re going to do it this way:

First, you’ll learn to live on less disposable income. You better start practicing before you buy your home so you’re ready for the adjustment in your lifestyle when you do take the big steps. Loads of people buy a home and then keep on spending like they did before they became home-owners… racking up gobs of debt.

Second, the $1,277.05 a month is going to get you to your 20% downpayment in under four years. Yup. In just four years, not only will you have enough to put 20% down on your home, you’ll have your closing costs and your new stuff budget covered too. In the mean time, you could have friends and family gifting all the stuff you’ll need for your New Home Adventure for all the birthdays and Christmases in between.

So, whaddaya t’ink? Are YOU ready to take the dream of home ownership from the I-wish-we-could stage to the I’m-gonna stage?

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58 Responses to “Ready for Home Ownership?”

  1. Holy crap! Good food for thought there Gail. Thanks! I knew home ownership isn’t right for me right now, and sadly I make good money! How the heck do people afford these things without at least two sets of hands tackling the money responsibility?! I think that if people saw the $2,277/month rather than the $1,052/month for just the mortgage, people would stop comparing apples to oranges, because yes, it clearly is that different. $1,000 in rent is not the same as $1,000 in mortgage.

    What’s even scarier? You’re using 4%! Just look at the environment we’re in just to get 4%! Yeah, you know that’s not a long term feasible rate, so in reality, you’re better off expecting a more “reasonable” rate of 6-8% over the long term, so that when rates increase (and oh will they increase in time), there will be even less surprises when the mortgage payment raises even higher. Looking at Gail’s example, a more stable outlook would be probably around $2,500/month all in. How’s that for insight?

  2. Gail, this is by far the best, most concise “Home Ownership 101” I’ve ever read.

    Crunching the numbers as you have done illustrates very clearly and quickly whether buying a house is a realistic, feasible option. There is nothing worse than becoming “house poor” with no financial flexibility available to enjoy life. The unplanned expenditures can take the shine off a new house mighty fast!

    Now, the challenge will be how to spread the word on today’s blog – maybe have this article published in The Globe and Mail or every local paper in Canada! That would be a start! I’m certainly going to share this valuable information with people in my life considering home ownership.

    As always, you continue to provide stellar, take-the-mystery- out- of- finances-and-save-yourself-major-stress advice!

  3. avatar Melanie Reformed Spender Says:
    March 13, 2009 at 7:40 am

    That’s a great way to look at things… You should hand out pamphlets at the bank!

    I’ll admit that I just recently bought a house with a 5% downpayment (even though I’m a frequent Gail reader) but we did calculate closing, utilities and other costs. I focussed on debt reduction instead and now have 0$ on credit cards, no car loan and 800$ per month more cash flow because I’m not throwing it away to the credit card companies.

    So I guess I learned some lessons but not others… I’ll just keep on reading!

  4. YES!

    HUbby bought a very expensive house before I came along, and I “married into it”, if you will. While I love our house, I really miss renting, and I’ve had a first-hand look at just how expensive owning can be.

    If I had a dime for every time someone said to me “renting is like throwing your money away!”, I’d have paid off the mortgage by now.

    I often repeat the same advice you’ve given here, and yet, somehow, people still seem incredulous. It’s as though they just don’t want to believe what I’m saying… There is so much more cost involved in home ownership than just the mortgage cost. If you really think you can afford a home, sit down, figure out your mortgage cost, maintenance costs, property tax cost, etc. Then try and live on that for at least a year. Do that, you’ll have a substantial downpayment, and a more realistic idea of what home ownership is going to do to your cashflow.

    Renting isn’t throwing your money away, it’s letting someone else assume the (many) risk(s) for you.

  5. And don’t forget that crystal ball! We could easily afford our house 7 yrs ago but in that 7 years our property taxes have gone from $85/month to $216/month!!! And they will be going up. Our hydro and gas rates have also gone up – thankfully not as much. Our equity has doubled but what good is that if we aren’t selling? Our monthly utility, taxes and upkeep costs are now higher than our mortgage payment. I can pay down my mortgage but those other costs will be there no matter what.

  6. Gail – such an interesting analysis. Thank you!

    I’m a law student, and so many of my colleagues seem to be rushing into buying a home because, well, our jobs often pay 6 figures right out of the gate and many of us assume we can afford it. That, and with 7 years of student life and renting behind us, we feel like renting is getting old.

    Thanks for reminding me that holding off until my partner and I are truly ready to take on such a commitment is the smartest financial move of all.

  7. ” Following the rule of thumb you’ll need to budget about $625 a month”

    I’d say that’s a bit overboard.. nobody needs to repair the roof EVERY YEAR.

    We owned our home for the past 9 years, I don’t think it’s ever hit that much any one year.

  8. Ioana, I am wondering about the $625 a month too. We’ve owned our home for 13 years and have probably only spent $10K on maintenance and updates during that entire time.

    Gail, if you see this, what “rule of thumb” did you use to come up with that number?

  9. Ioana- Saving that much per month doesn’t mean you have to spend it every year, but it WILL be there if you get hit with any double (or triple) whammys.

    We were REALLY glad we had put a bunch of money away for maintenance when the fence went, and dismayed when we realized the roof was leaking and had damaged the inner walls- you need that 625/month put away if you’re going to deal with both!

    If you have an older home like we do (1902!), the costs can be even higher.

    Maintenance would include things like the roof (as you said), in our case the fence, inspection costs if you suspect there’s a problem, contractor visits, plumbing, shovelling, lawn-mowing, etc. They add up!

  10. Gail forgot one thing that should be in the bank before you buy:
    3-6 month’s worth of mandatory expenses!
    If you paid $1000/mo in rent and are now paying $2277, that is a BIG number! So you need more than $60 000 in the bank!
    Good luck!

  11. That whole post was making my head spin. 🙂 I’m not in the market for a house, looked, but never even come close to considering buying. I recently saw a news program, canadian I believe talking about mortgage insurance. How the premium is always the same, even as your balance is declining. Somewhere in the conversation, someone said instead of getting the insurance offered by the bank, they opted for a life insurance policy, for half or so of the bank’s mortgage premium was. Not sure if anyone else saw this. I’ll search and see if I can find the info to post here.

  12. I’m thinking now it might have been CNN.Oops.

  13. […] Ready for Ownership? […]

  14. Cynthia — yes they have that product, its called Mortgage Insurance and it’s a terrible product. Far better to get a Term Life or Whole life policy (pros and cons to both) that covers the mortgage cost than do Mortgage Insurance where your coverage dwindles while your payments remain the same.

    I do take a minor issue with Gail on her firm 20% down policy, though I do get it. I mean an entry level 3 bedroom house in Toronto proper costs we’ll say $400,000. It’s hard to come up with 20% of that (80K) plus closing, plus plus plus. I know she’d disagree but to come up with 80K while renting may just mean renting until people are in their 40s. There’s nothing wrong with renting and it’s not wasting money, but there’s also somethign to be said for being able to upgrade a dishwasher or remodel a bathroom to make it work better for you and your children too. I don’t think 0 down is good either, but 10% is a reasonable number ($40k). And that’s 40K saved, with all other debts cleared off before home ownership too.

  15. wow! you have given me a lot to think about. My partner and I desperatly want to get out of renting, and I know that we’re just not ready yet – reading today’s post you’ve given me a lot more to think about. Realistically we would like to be buying in three years from now – but we wish it would just happen Right Now. Which is I’m sure, what’s gotten a lot of people into trouble.

    So, we wont – but it’s so nice to fantaize about home ownership. Thank you for giving us some points to ponder so our dream home doesn’t turn into a nightmare.

  16. avatar michelle Says:
    March 13, 2009 at 9:25 am

    Just after we moved into our home we had a flood only to realize there was NO weeping tile around our house. The sump pump went as well…It ended up costing us well over $2000. Of course this wasn’t saved up, and you don’t even want to know how we paid for it (well I guess we are still paying in a sense) so wish I had found Gail before we bought. Now we need to do some insulating, and we have to wait (post Gail) to do it, and in the meantime I’m sure we are spending more in heating…ugh! …and yay for me, I was approved for refinancing our house and using some of the equity to pay off some stuff, and it was appraised even higher than we had expected, I still need to sign the papers, but already I feel a weight is lifted. And the interest rate is over 1% lower than our original mortgage!!! I also have arranged to make payments weekly as opposed to monthly and I feel great!! Thanks again Gail for all the advice, I just hope I distribute the money the best way, but at least I feel prepared thanks to all the great stuff in here!!!!

  17. avatar michelle Says:
    March 13, 2009 at 9:27 am

    …to Jessie, keep fantasizing…go out looking at homes – it might motivate you to really buckle down and save up that downpayment even faster! Good luck… 🙂

  18. avatar michelle Says:
    March 13, 2009 at 9:32 am

    …one more thing…boy am I glad I live on the east coast, my home was appraised at $112 000, which is high for my area!!! So 20% is very attainable!!!

  19. avatar RMWaterloo Says:
    March 13, 2009 at 10:02 am

    Perfect analysis. My rule of thumb for calculating the costs of a home are between 2 and 2.5x the cost of the mortgage. So 1k/month mortgage means that ownership actually costs between $2000 and $2500/month.

  20. RMWaterloo — your math seems suspect depending on the neighbourhood. While in a small town yes a bigger mortgage = bigger house (with more upkeep, etc) in Toronto a big mortgage doesn’t equal a big house. For instance we have about a $2K a month mortgage on a 1300 sq. ft house. We are not paying an extra $2K – $2500 every single month for home ownership costs. Yes some big expenses come up periodically but even if you drop $12K on it every year, thats only an extra $1000 per month MAX. (For instance, we have no planned expenses this year but are saving up for a furnace repair which will come hopefully not before 2011).

  21. 20% down versus 10% down:
    The housing market is based on what people are willing to pay. Does anyone have the number on the increase in the cost of houses as the average down payment percentage decreased? Is it greater than the average cost of living (although that number includes housing in part)?
    How much of it has to do with “I deserve”?
    Gail: What is the history behind the 20% rule?

  22. 3-5% for maintenance? I guess you must be talking about older homes (i.e., a “handyman’s dream”). My 4-year-old house hasn’t cost me much more than a couple cans of paint and a few nail in terms of maintenance.

  23. avatar Short Shrimp Says:
    March 13, 2009 at 10:35 am

    While I agree that you really need to be prepared for home ownership, I don’t believe that you absolutely must have 20% down to purchase your first home to make it work. I agree with Geoff, 10% is more attainable.

    My husband and I bought our first home almost 6 years ago now. We purchased with 5% down. We had almost wiped out our existing debt prior to buying, and we did NOT buy for as much as we pre-qualified for. Just because you qualify for $300K, doesn’t mean you should spend it. We had saved a good amount of money in our savings account to cover costs and fees and necessities. We worked our butts off prior to buying, and sacrificed alot.

    Sure, we had to pay fees to CMHC, but the price of the new-build home we were looking at buying kept increasing, and time was not on our side. The longer we would’ve waited, the more we’d have needed. The value of our home increased dramatically, and no, it hasn’t lost value in the area where I live. We have been aggressively paying down our open mortgage. Now at 6 years ownership, we are at less than 12 years owing.

    We are not house-poor… but we don’t spend on frivolous purchases. I had no problem using a second-hand lawn mower for 5 years. A snowblower is not a necessity, our driveway is short. Sewing skills and a good sale at a fabric store is more money-friendly than custom fit drapes or blinds. We don’t take vacations. We don’t buy each other expensive gifts. We have upgraded our furniture and decor over time. We have one vehicle.

    I have seen many families and couples come and go in our neighbourhood. Many, I’m sure, because they really couldn’t afford it. Buying with 5% down is not for everyone. Buying with 20% down is not always possible… but for many, it is advisable.

    Gail makes many good points with this blog. Although, I think the estimates for insurance, and taxes, and utilities, and maintenance, are inaccurate. Some too low, some too high. Check with your family and friends to see what they are actually paying out on a monthly basis besides the mortgage payment.

    Do your research! Trim your expenses while you are saving, and once you buy. And don’t be afraid to start small. Good luck.

    p.s. – yes, I agree with Geoff on this point too… Life Insurance is a much better tool than Mortgage Insurance.

  24. avatar Short Shrimp Says:
    March 13, 2009 at 10:42 am

    p.p.s – i didn’t want to come off as ‘tooting my own horn’, i just wanted to convey that it IS possible to buy with less than 20% down and be successful at it. that’s all. 🙂

  25. avatar RMWaterloo Says:
    March 13, 2009 at 11:08 am

    The calculations include taxes, insurance, AND maintenance. Moreover, maintenance amortizes all the huge costs that happen once/10 years, but you have to save for. That new roof, possible foundation repairs, etc. The fact that your 4yr old house hasn’t had major repairs yet doesn’t mean you should prepare for them by saving. If you never need to draw on the money, great…but it’s better to save it and not need it, than not save and need it.

  26. avatar edgarella Says:
    March 13, 2009 at 11:28 am

    @ B

    Just wait…

  27. […] But here’s a quick link to a great post I found on Gail Vaz-Oxlade’s blog (she of the Till Debt Do Us Part tv show) about transitioning from renting to home ownership. […]

  28. We bought our house 22 years ago and now have no mortgage. We were lucky they used to have a home ownership plan and they were quitting it so if you did not buy a house youd have to pay taxes on it. we bought for 82.5K and had to put 25% down back them. Very tough but we scrimped and saved. I would say the most valuble lesson i would pass on is to pay bi weekly. Saves you so many years off of your mortgage. Not much difference between weekly and bi weekly but huge difference between bi and monthly. We also had our taxes incorporated with our mortgage which really helped. Hard now with no mortgage and we get that tax bill. We are lucky though cause our taxes are 2500./yr so we put just over 200 a month away for it. 🙂

  29. avatar Melanie Reformed Spender Says:
    March 13, 2009 at 2:01 pm

    Michelle: here here! We just bought a beautiful house for $60 000 and it’s in perfect condition. We know the seller very well and know she was great with the upkeep.

    Even with the tiny price, it was hard to save the downpayment and clear all of our debts while I was on a educational leave at work, but we didn’t have much of a choice as there are no rentals available in our area next year. I can’t imagine how hard it must be to save up for a 400k house!

  30. avatar Stephanie H. Says:
    March 13, 2009 at 2:28 pm

    I bought a house last August and only put 5% and I pay PMI as part of my monthly payment. I could have put more money down but I knew the house needed some work. Since I bought the house I have put another 10% into it. I just had the house reappraised for a refinance (interest rates are about 2% lower than when I bought last year. My house has increased in value enough to cover the money I have put into it. I feel it is important to note that I have 5 months of living expense (3 months worth of paychecks) set aside in an account that takes a little work to get to. I have an account I use just for home related costs where I move money every time I get paid. This account helps me know exactly what it costs to run my home. It also has on average an extra months worth of housing costs in it so it doesn’t matter when the bills come out of the accout (it is also an interest checking account). Directly attached to my regular checking account I have an account that is for anything vehicle related. One thing those who own new homes need to understand is that it is very likely that you will have several very expensive home repairs happen in the 5-15 year age of the house all at once. How long major appliances and mechanical equipment last depends on how diligent a homeowners is about regular maintenance (not just when something is broken). My parents in one year had to replace and central air unit, fence, roof, patch the ceiling, new garage door, garage door opener and paint the house.

    Just on a side note PMI (private mortgage insurance) is different from mortgage insurance. PMI is paid through your excrow account generally when you do not put 20% down on your house although if you are deemed high risk you can be required to pay beyond that point. While mortgage insurance is a policy that you take out on yourself in case of disability or death to pay your mortgage. If you have the right amount of life and disabilty insurance there is no real need for mortgage insurance. The lender determines if you are required to pay for PMI.

  31. Gail,
    wonderful post as usual. For those that don’t spend much money on maintenance yet take advantage of it and save. LOL As your home ages it will need more and more maintenance. We moved into our home 22 years ago and have: finished the basement so the kids had somewhere to play when it is 30 below, pulled out carpet and put in hardwood when the boys allergies were getting out of control, putting in a new bathroom when the toilet tank split, the sink cracked etc, after years and years and fixing the doors and drawers many times in the kitchen we are doing a kitchen reno using Ikea and our labour to save money, over the years we’ve replaced the roofing, added insulation to the attic, insulation and siding, new windows (leakage), new water tank, new furnace (energy efficient), new fence (old one rotted out), new washing machine and new dryer. (luckily the last 2 were with our Sears points and so free). Things to come, fixing the driveway (caving in in places), regrading the backyard so it isn’t sloping towards the house (we currently add dirt every year by shovel but it keeps packing down) and it will all start over again I’m sure.

    We saved 10% down and went looking for a home we could AFFORD and so 2 years later (while continuing to save) we finally found what we could AFFORD, our mortgage was $22,000. Why did we think that’s all we could afford? Because we live in Alberta and my hubby’s job is never secure. The payments had to be low. The house was paid bi-weekly and 10% extra each year. It was paid off in 3 1/2 years as opposed to the 7 year term. That was during the last huge country wide recession. Our home now has an estimated value (over inflated by my estimation) by the city of $285,000 now.

    We pay $147/month property tax, $374 house insurance/year, $210/month power & water, $137/month natural gas. The natural gas as little as 7 years ago was $38/month. So we are looking at the costs to install an instant on water heater. Our washer and dryer are the front load and energy savers. We turn the heat down at night and during the day while it is only me at home. We have a small home at 1,000 square feet so I can’t imagine what others pay who have far bigger homes and who haven’t redone their windows, doors, insulation etc for this area.

    Since moving into the house our property taxes have gone from just over $700 per year to almost $2,000 per year. House insurance is approximately $347 per year. It comes due in a couple months so we will be shopping around again.

    @Sandra, we have a monthly payment plan for our taxes. You could check into it for your city/town. It comes out automatically each month and doesn’t cost a cent extra.

    Anyways, for what it’s worth, those of you saving remember that housing prices are going in the right direction for you at the moment. So save save save so you can take advantage of the buyers market in a few years. 😉

  32. Stephanie H.
    I think PMI might be in the US. Canada has CHMC and one or two more places to go to that charges extra insurance if you do not have the 20% down. This is on top of additional insurance you might choose to purchase.

  33. After reading this I realize that I’m not ready for home ownership.

    My old roommate got married a few years ago and they moved from our old apartment to a cheaper basement apartment. Their other newly married friends were buying houses with 0% – 5% down and were openly making fun of them. They thought they were going backwards instead of forwards. However, when my roommate & her husband bought their house, the mortgage payment was less than the rent they were paying at the original apartment. Guess who’s laughing now??

    I filed that lesson in the back of my head. Only buy a home when you are truly ready financially. I don’t care if I’m older when I buy my home, it’s not a race and I need to sleep at night.

    Thanks for the advice Gail…..

  34. If a $250,000 home costs $2,277 per month, your take home pay must be $6,506 per month (35% rule).
    Ouch! That will make you think!

  35. To clarify a point, Gail isn’t talking about mortgage life insurance when she says there is insurance you have to pay if your downpayment is under 20%. She is talking about CMHC insurance which is insurance against default. It is not insurance that pays out when you die (mortgage life insurance). They are two completely different things.

    If you put down under 20% you MUST pay CMHC insurance, no choice.

    Check out: http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm
    For more details . . .

  36. Of course I save up for future maintenance costs. I’ll have no problem coming up with what’s needed in future, but I see setting aside $13,140-$21,900 per year (in the case of my home) for maintenance as a tad excessive.

    Thinking back to my parents’ home, in the 25 years that we lived there, the only major maintenance projects I recall were that they replaced the shingles, put in a new tile floor in one of the bathrooms, and replaced the kitchen cabinets. And my dad finished the basement himself. It was a well-built house. If they had put aside 5% of their home’s value in a separate account for maintenance expenses, they’d probably be rolling in about half a million dollars right now. I guess they were just lucky.

  37. I don’t want to be house rich and cash poor when I finally buy something. I don’t mind paying rent (I have to live somewhere!) knowing that maintenance costs are covered…when the a/c went, landlord replaced it; furnace broke down, landlord replaced it; driveway needed to be done, landlord did it; roof needed reshingling, landlord did it. I agree with Cathy – it’s not a race. Some of my friends are literally living paycheque to paycheque (and it’s a decent paycheque they get, same job as I have!) because they’ve overextended themselves with buying a house. They can hardly afford it if their hydro bill is higher one month than they’re used to…not the life I want to live. Thanks for the eye opener Gail…I hadn’t really thought in terms of actual numbers how much it would cost when you factor in maintenance, utilities, taxes and mortgage payments..and I still have to eat, save some money, I like to go on vacation etc etc etc!

    People have told me that I should buy a house with a basement apartment, but I don’t want to have to rely on someone else to allow me to meet my financial obligations. I don’t want or need the stress of wondering when I’m going to get the space rented, if the tenant’s cheque is going to bounce, what kind of a tenant I will end up getting, all those questions. I’m a great tenant, but I know there are lots of lousy tenants out there too and I don’t want to have one living in my house!

  38. avatar Melaniesd Says:
    March 13, 2009 at 6:53 pm

    I think the 20% down rule really depends on how much of a mortgage you are taking on. I totally understand Gail’s reasoning for it, but 5% down was fine with us. I would sooner have that difference in an emergency fund or repair fund.
    On the other hand, should we sell our current home and buy another, we would certainly put down a higher amount as we would have made a profit on this home.
    As for tyhe CMHC/Genworth insurance the percentage you must pay depends on how large your down payment is. Even having 10% down rather than 5% can make a big difference.
    We were lucky to be offered a good deal on our home as we bought from a friend of the family. Our cost was easily reduced $25000 buying privately so I don’t feel bad about only having 5% down.
    What I wish we had have done was save for emergencies first and have more money aside for the little things that easily add up to several thousand before you know it – the landscaping, paint, curtains, lawn mower, wheel barrel etc.

    I feel so lucky that we did buy when we did. Prices have jumped dramatically in the last 4+ years. My house has increased in value almost 100% already. The other benefit was that even though our home is older, the person we bought from had done a lot of major upgrades/renos such as new windows, roof, oil tank, decking, wiring, pipes. Hopefully, we will be okay for a while.

  39. avatar Mountain Girl Says:
    March 13, 2009 at 11:27 pm

    My husband and I are Smug Renters.
    We make well over the average family income in Calgary, and we wouldn’t even consider buying here. The whole city is ludicrously overpriced.
    We have a great little rental in a great neighbourhood. We enjoy a house and neighbourhood for a fraction of the cost it would take to own the same place.
    And we are banking the difference.
    Home ownership is really overrated.
    And, as many foolish people are finding out, paying the interest on a mortgage like the 0%/40 year debacles is pretty much exactly the same as paying rent – you’re just handing over your cash to the bank instead of a landlord. Seriously, you barely touch the principal for about 10 years.
    Everyone’s situation is different, but I think it’s pretty safe to say that the whole “renting is throwing your money away” crowd don’t have a whole lot to brag about these days. Equity is getting creamed, just like the rest of the markets.
    In fact, a lot of the global economic mess we are in right now is because people believed that ridiculous saying, rather than working through the numbers for their own particular situation.
    I won’t even consider buying without 20-25% down, and not until affordability gets back in line with incomes. It hasn’t been this out of whack for many many years. I also wouldn’t consider buying unless the mortgage/other costs were pretty darn close to my rent. And real estate in Calgary is such a joke that I don’t even bother. A run-down bungalow from the 1930s is not worth half a million dollars to me. Nor is a junky, cookie-cutter particle board McMansion in the ‘burbs. We’re not even tempted to be house poor.

  40. 🙂 I love this post. It’s a great reminder to save, homeowner or not. But of course no-one likes being told you HAVE to save!! so I found some comments amusing. : ).
    We bought our home before I had ever read or knew about Gail-and really wished I had 20% down, I’m glad we’re in the market and have a home to call our own (and decorate).

    Renting may be cheaper but it comes with fear of a wondering when a landlord is deciding he/she is selling the place now, or living in fear of unknown rent hikes or living with white paint. When you own you are the so-called landlord. Yes it’s scary & expenses always rise & pop up when you never want to expect them. But homeownership is also a life accomplishment. Renting for life doesn’t mean you’re lazy or irresponsible, but going to sleep each night in a home you actually own is beyond satisfying.
    And if we’re smart and save like the dickens’ like Gail implies, then when that least expected thing pops up even if it’s a decade or so away, we’ll see a little Gail angel on our shoulder smiling & with her great laugh saying, “See, I told you so”.

  41. Thank you, Gail — this is sensible and frank. A few years ago, before house prices went nuts in Saskatoon, I sat down with a realtor, thinking about buying. But I didn’t want to buy unless she could tell me what I’d pay *over and above* the mortgage. She insisted that there where no other costs, beyond CMHC insurance.

    I didn’t buy — paid off my student loans instead – because I really didn’t believe that there were no costs beyond the mortgage. It took about three years to figure out the truth.

    I make very good money, and I can afford to buy a 250K house, but bluntly put, I don’t want to pay 2500 a month for my housing when I can rent the same thing for 1,000.

  42. I think it’s a really good idea to be patient and conservative when buying a house. I knew I wanted a house, but couldn’t afford a place of my own. I lived with my parents for a while, paying rent. Then I moved into a basement apartment (same rent, but closer to work), scrimping and saving for a down payment and looking for a house.

    When I had about a 40% down payment, I found the house that I wanted and got it. It’s been really easy to carry because of the low payments, which I appreciate – so much so that I decided I could afford a vehicle.

    I scrimp and save still, to pay off the mortgage faster, and calculate that because of that, the mortgage interest “rent” on the house is less than 300 bucks a month.

    Hopefully, it’ll be paid off 1 year after the first 5 year term. (Dang it, it’s the car that put me over, I’m SURE of it! … but I didn’t want to lease/finance, so I took a year’s ‘prepayment’ and bought a car with it.)

    My income is pretty good at $4000/month (gross). That seems to be less than many, though. So it’s quite possible with some effort and strict budgeting!

  43. This is a wonderful, detailed and informative post, perfect for someone like me who would definitely love to own a home someday, but who is not nearly ready to take the plunge.

    As for those folks who say that you don’t need to save that much on maintenance – while you may not to spend that money each year, what will you do when you are hit with an expense that will cost two or three thousand dollars? I grew up in an older home, so I am used to seeing costs spring up all the time – water in the basement, for example. But my parents, who just bought a brand new home, have also been recently surprised with many new costs, including water issues. So you never know and it’s better to be prepared than up the creek.

  44. there is no wrong or right answer to buying your own home. It’s different for everybody. Gail’s recommendations are good but don’t work in every circumstance. We live in the Vancouver area where housing prices have tripled in the past 10 years. People come up with creative ways to buy their first homes and it seems to work if it’s well thought out and luck is with them. My fiancee and I moved in together to a rental 5 years ago. We looked at buying but were afraid of the comittment since we had only been together for one year. We rented a house for $1350/month in the suburbs. Since then housing prices have doubled and our rent is now $1600/month. We should have bought. We only had 5% down but even if we didn’t work out, we would have made a huge profit on selling the house – more then we ever could have saved.

    We are now getting ready to buy our first house. We are looking at a $500,000 house and we only have $40K for a down pmt but we are getting creative. My fiancee’s mom is going to be our tenant, which means our mortgage will only be $1000/mo. That’s how people do it here – they live with family and share costs. Since $500k will only get us a fixer upper, we will be using the extra $600/mo for property taxes (2k/yr) and a maintenance account.

    PS. We are 48 and 50 and it’s a first home for both of us, so it’s now or never.

  45. Toronto, Vancouver, Prairie towns: Housing prices go up more than expected when people agree to pay it!

  46. I love this post!

    My brother and I clubbed together to buy our grandparents house when they passed away, and luckily there had been loads of maintenance done on it.

    We had 10% each and were separately looking for properties but we got together and it meant we didn’t have to pay mortgage insurance.

    We also put the whole monthly mortgage amount into a savings account and I have arranged a direct deposit to the mortgage weekly, this has meant a saving of thousands and thousands of dollars over the four years we have had the loan.

    As my brother is in Hong Kong and I work in Sydney and the property is more than two hours away from my work, we rent out the property to the Department of Housing (public housing in Australia).

    They are FANTASTIC!! They pay market rent, they pay for ALL tenant damages and we don’t pay any agents fees.

    It also means I get fantastic tax deductions and end up getting a two to three thousand dollar tax refund where in the years leading up to owning the house I was getting less than $100- a year in tax refund!

    We are not putting much aside for maintenance as we are extremely lucky to have a plumber in the family, a handyman in the family and a roofer in the family.

    Have a good Monday everyone!

  47. If you’ve ever watched Holmes on Homes (which you can watch online for free on the Home & Garden Channel – I think) you’ll see that even with new homes, shaddy contractors, and those just looking to cut costs or save time, can result in expensive repairs even with new ones. There is something to be said about dropping the money in order to get quality.

  48. Yea quality builders thats the key to the building of a home. 20 years we have been in our home and we have not done anything to the structure of our home. Its still really sound no cracks in the plaster or anything.
    We are in huge drought here at the moment and there are lots of houses cracking. But ours is standing strong.
    When we built we shopped around a lot checked out the builders final products not the displays either the ones they where building for normal customers.
    When people go into our roof (we had some computer cabling done) they are amazed at the amount of wood framing that is up there so yes we might have paid a little dearer but hey it was worth every penny.

  49. I thought your maintenance was far too high, especially for a newly built home. But then I thought about these extra things that we’ve had to put in: A driveway (legally required within 2 years) is $2000. A fence is another $2000. We’re going to need a shed soon if we want to keep the car in the garage (is this worth $1000?).

    Property taxes are the real killer. Never mind the mortgage payment — our property taxes ($5000/year) alone are about what our rent used to be. Good thing we researched the city hall web site and started saving, cause we thought it would be much less.

    Another thing: If you go out looking for a $250,000 house, you will end up buying one for $280,000 or more. It’s very hard to stick to your guns, especially when you find your dream home and it won’t be there in a week.

  50. Gail – thank you again for bringing another fantastic post. My significant and I have decided to start looking to purchase a home – as I just can’t seem to win the fight about why we wouldn’t rent together first. Your post is a great conversation starter about why we can’t afford a home just yet and why we should be looking for a rental property first instead – I mean if we rent a house at least there is an option that we might be able to buy the property from the owners later right?

    Also – he has it stuck in his head that we only need 10% to buy the house, and can do it and have his eyes fixed and his truck painted and buy really expensive furniture and get a new bicycle and …and…and…see the issues!!!

    This post is being printed. Since i am the only one of us with any kind of savings – and believe me the accounts I have are for emergency, and shorter savings things than a house, and I do NOT want to borrow against my retirement to purchase something I’m afraid I’ll be the only one handling afterwards, this house purchase will not be happening for a few years.

    I have a debt I want to get out of first, I have a car I’ll be finished paying off in three months, I have a degree that will be expensive to finish – and with all this money talk and the answers I keep getting from my significant, I’m not even sure we’ll make it past the signing date for this house!!

    Needless to say, I am printing your post and making sure he reads it. I would prefer to purchase without having to use CMHC – but he thinks it’s not that bad to have to have an extra 2-5% put on top of the purchase cost – perhaps i’ve answered another personal question about the relationship also – something about savers/spenders.

    And since we aren’t married yet, I’d really like to rent a place on our own (that isn’t his mother’s house for crying out loud) to make sure the relationship works before getting into this kind of union – buy a house together and you are pretty much married without the ceremony.

    Thanks again for intuitively posting something that will resonate with me for a while!!

  51. @ Pam — good for you to think it through. I highly suggest to everyone I know to live together renting before buying a house together.

    However, I should point out that buying a house together is NOT quite the same as being married. Though you didn’t mean it this way, the property rights that legally married extends are not the same as common law relationships. In other words, it’s clearly explained in legal terms that no matter who owns the matrimonial home, in the event of divorce it gets split up 50/50. common law rights specifically do NOT extend to property, so it matters who’s name is on the deed. Probably a minor point but one to consider.

  52. So what should people in Vancouver do? The cheapest house in the entire city is $400,000 (not really liveable) and something you can live in is at least $450,000. Condo ownership is not appealing, as I have heard too many horror stories about strata committees, and they do not appreciate in value over the long term.

    What is a Vancouver girl and her family to do?

  53. avatar Vancouver Boy Says:
    March 17, 2009 at 7:11 am

    kate – My advice if you want to stay in Vancouver or its immediate suburbs is to wait and rent for the next couple of years. Don’t let the real estate hypesters get in your head. Any analysis of fundamentals (income, supply, immigration, etc.) will tell you that, despite a small plateau or even uptick every spring, Lower Mainland real estate prices have much further to fall over the coming years.

  54. I found your blog doing a web search Monday night. Look forward to more from you next time around. (If I can get the Briggs & Statton fixed!)

  55. Using Gail’s numbers, 20% down would save you $65,800 in interest and pay your mortgage off 7 years earlier than with no down payment. Increase the interest rate from 4% to 6%, and the savings almost doubles (to $117,200).

    Again using Gail’s numbers, 5% down would save you $19,700 in interest and pay your mortgage off 2 years earlier than with no down payment. Increase the interest rate from 4% to 6% and the savings almost doubles (to $38,000).

    It’s the magic of compound interest.

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