Buying a house is a huge decision in a person’s life. It is also often seen as the “entrance” into adulthood. But is home-ownership everything that it is cracked up to be? Is it really as easy as mortgage lenders want you to believe? In this week’s article, we look at what to expect when buying a house.
Before we get into what to expect when buying a house, let us look at some home-ownership data. The percent of Canadians that owned a home in 2017 was 66.4%. According to Wikipedia, Canada ranks in the top 40 by home-ownership rate.
In February of 2020, the average Canadian house hit $504,350. This is roughly 8 times the average annual after-tax household income of Canadian Families ($61,400 in 2018).
The Median mortgage debt of Canadian households in 2016 was $180,000. This is nearly double what it was in 1999 ($91,900).
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How Long Does it Take to Buy a House?
The first thing you need to do when buying a house is to be sure home-ownership is right for you. To determine this you can ask some of the following questions:
- Are you financially stable?
- Do you have the financial means?
- Are you responsible enough?
Once you have determined that home-ownership is right for you, you need to figure out how you will pay for the house. Most people do not have enough cash on hand to purchase a house. This means that you will have to get pre-approved by a mortgage lender.
Pre-approval will tell you how much you can afford, what your interest rate will be, and monthly payments. The pre-approval process will usually take 1-3 days. Note that pre-approval does not guarantee being approved when you actually apply for the mortgage.
Now that you are pre-approved, you just need to find a suitable house. When that is accomplished a formal offer must be submitted. The offer should include the following:
- The legal name of the purchaser, name of the seller, and address
- Purchase price
- Amount of your deposit
- Any extra items you want to be included in the purchase
- The closing date
- A request for a current land survey/building inspection
- Offer expiry date
- Any other conditions
The closing date is the part that will dictate how long this process takes. It is usually 30-60 days after the agreement is signed. If your offer is accepted, great! However, there is often a negotiation. In some cases, the seller will present a counter-offer.
Once the offer is accepted, the mortgage lender will then verify that you are approved for the mortgage. Make sure that you read and fully understand all the terms and conditions of the mortgage. You may be surprised to find that if certain terms or conditions are broken, other than just missing payments, the bank can foreclose on your house.
In all, if you have determined that home-ownership is for you, and everything goes smoothly, the process should be done in around 3 months. However, sometimes your offers are declined, and you have to continue hunting for other houses.
Cost of Buying a House
We all know that when you borrow money, you have to pay it back. In addition to paying back the principal (the amount borrowed), there is also interest to be paid. Interest is not a foreign concept to most people, however, how it is calculated is often misunderstood.
Mortgages are described as having a dollar amount and an interest amount (i.e., $200,000 at 2.5%). There is also what is called a compounding period. Most of the time the compounding period for a mortgage is 6 months. So on a 5-year term, there are 10 compounding periods.
The interest rate you are quoted, 2.5% mentioned above, is the nominal interest rate. However, because of the compounding periods, there is also an effective interest rate.
The effective interest rate is always slightly higher than the quoted nominal rate. For example, if the quoted, or nominal rate is 10%, the effective rate is actually 10.25%.
So in the end, even though you are quoted at 10% interest, you are actually paying 10.25% because of compounding periods.
Other Costs Associated With a House Purchase?
In addition to the straight-up cost of buying the house, there are some other potential costs you could incur.
When purchasing a house, 20% of the purchase price is needed as a downpayment. However, mortgage lenders will accept down payments of as little as 5% if the borrower has mortgage insurance.
By obtaining mortgage insurance, the borrower receives comparable interest rates with a 5% down payment as others would with 20% down. In Canada, mortgage insurance is generally done through the Canadian Mortgage and Housing Corporation (CMHC).
The cost of CMHC insurance is dependent on how much you put down. Although mortgage insurance is generally not needed with a down payment of 20% or more, it can still be acquired.
With only 5% down, mortgage insurance could cost up to 4.5% of the total mortgage. Nearing 20% down, the cost can drop to around 2.5%. As mentioned earlier, down payments of above 20%, insurance is generally not required.
The additional 2.5%-4.5% insurance cost can be a substantial sum on more expensive houses. If you look at the average house in Canada (~$500,000) it could add anywhere from $12,500 to $22,500.
Note: do not get mortgage insurance confused with house insurance. That is completely separate and will be touched on later.
In the grand scheme of things, lawyer fees when buying a house are quite small. In the end you could be looking at $500-$1,000. Although, quite small, it is still another expense to be aware of.
Land Transfer fees are dependent on the purchase price of the home. In Manitoba land transfer tax is calculated as follows:
|Value of Property||Rate|
|On the first $30k||0%|
|On the next $60k||0.5%|
|On the next $60k||1.0%|
|On the next $50k||1.5%|
|On amounts in excess of $200k||2.0%|
When purchasing a home, the lender wants to be sure that the home is actually worth enough to cover off the loan. This cost is normally “covered” by the lender. However, in reality, is it just included in your mortgage costs.
Although home inspections aren’t mandatory, they are definitely recommended. When you do not get a home inspection you a relying on the seller to disclose everything that is wrong with the house.
For a fairly modest cost, $300-$500 you can get a professional to inspect the house and see if anything was not disclosed by the seller. This could end up saving you thousands of dollars if it is determined that there are major issues that weren’t disclosed.
In addition to the upfront cost of buying a home, there are continual costs of owning it. This includes things like utilities, property tax, maintenance, and house insurance.
It is hard to project what these exact costs will be. Utilities depend heavily on how well the house is built and insulated, as well as where you live.
Property tax depends on the province and municipality you live in. We have heard of some property tax for a modest home being as low as $800 and some as high as $15,000, depending on location. A large factor is also the size of your lot and the market value of the property.
Maintenance may be a little easier to estimate, but there are some variables at play as well. If you live in an area with more crime, you may have increased maintenance costs. Maybe you find that your family is a little reckless or rambunctious, you may have higher maintenance costs. If you live in an older house, it is safe to assume costs will be higher as well.
House insurance is fairly standard. You expect to pay between $800-$1,200 a year. This is dependent on where you live. If you live in an area with lots of flooding, or natural disasters, you will probably be at the higher end. According to MIG Insurance considerations that affect house insurance are:
- Where you live
- Type of neighborhood and its claim history
- How close are you to a fire hydrant/station
- Personal claim history
- Your home’s electrical wiring, piping, whether you have a wood stove, and the age of your roof
- Your credit score, if you consent to one.
In the end the cost to buying a home is a lot higher than the listed sale price. Other costs have to be considered. However, for a lot of people these added costs are worth the price if you have a place you own and the stability that comes with that.
Although it may sound as though we are cautioning against buying houses, that is not the case. In a lot of scenarios home-ownership is a great option. However, the “rule of thumb” that says home-ownership is always better than renting does not hold water.
If you are thinking about buying a home because everyone is telling you renting is a waste, take pause. Below is a great spreadsheet that gives a lot of insight into renting vs. buying in a particular situation. You may be surprised to find out that renting is better in a lot more cases than you think.