Get money-saving tips in your inbox.

Stay on top of personal finance tips from our money experts!

News & Resources

First Time Home Buyers Underestimate Home Ownership Costs

April 4, 2013
3 mins
A professional woman in trendy glasses sits outside at a table while working on her laptop and talking on the phone

Roughly 40% of Canadians planning to enter the housing market over the next two years will be first-time homebuyers, according to a recent RBC poll.

Their dilemma: Should we buy now or are we better off waiting and trying to muster up a larger down payment?

It’s a tough question. To many people, the psychological benefits of buying are almost impossible to overcome. For them, owning a home isn't just about dollars and cents; it's about freedom and independence.

Plus, owning a property gives them the secure sense that, if nothing else, they have a solid asset to fall back on if something goes awry.

Unexpected Costs Of Home Ownership

However, homeownership is also a choice that ties up tens of thousands of dollars that might be invested more safely, and perhaps even more lucratively, elsewhere.

And while the real estate industry likes to play it down, homeownership often carries a set of unexpected costs, particularly for first-time buyers. Ask anybody who has had to fix a roof and rip up an entire driveway in the same year.

Nonetheless, although it varies widely from city to city, the upfront cost of buying a home is seemingly only a little more than renting in some areas of the country – except that it isn’t.

Still, with interest rates still relatively low, this is a great time to seriously evaluate the decision of whether to rent or own.

Compare Renting Versus Buying

Let's say you’re renting now for $1,300 per month. Assuming a mortgage rate of 3%, $1,300 will be equivalent to a monthly payment on a mortgage of $270,000, based on a 25-year amortization.

That’s the cost of a modest starter home in markets like Halifax or Gatineau, Ottawa’s sister city, for instance. But it doesn’t buy you that much house in larger urban centres. So, maybe you’re looking at a condo instead.

Either way, it all comes down to cash flow. Many people think that they can afford a mortgage because they pay roughly the same amount as a mortgage payment in rent each month. But the true cost of homeownership is often around 40% higher than your mortgage payment alone.

When you add on all the extras like property taxes, condo fees, utilities, insurance and normal maintenance and repairs you can easily be looking at an actual monthly housing payment that’s closer to half as much again as your debt service costs.

On the other hand, while you can’t do much about taxes, a big portion of your condo fees goes towards expenses that you may already be paying in addition to your rent, such as heating, water, etc.

Housing Boom Likely Over

And the potential growth you’re hoping for? Well, be cautious. While home prices have increased by an average of 5.4% per year since 1980, most economists don’t expect that to happen again.

TD Economics, for instance, expects the annual return for real estate will be about 2% over the next decade, meaning that prices will simply match the pace of inflation.

If the community you’re living in can expect some job growth – one major driver of housing costs – prices might rise a bit more over time. But, if you live in an area where jobs seem to be shrinking, you’re probably better off renting for awhile longer.

Need a visual? Use this quickie graphic from the New York Times to give you a rough comparison, keeping in my mind that U.S. homeowners get a tax break on mortgage costs that Canadians don't enjoy.

Gordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a consulting firm focusing on retirement readiness. Gordon was a columnist for the Globe & Mail and Morningstar for many years and is also currently a columnist for Investment Executive, Canada’s national newspaper for financial advisors.

Latest life insurance articles

10 Life insurance myths debunked
Life insurance is for someone older or has kids, right? Wrong. Let’s debunk life insurance myths and learn why everyone needs some form of coverage.
6 mins read
Do you need life insurance? A primer for Canadians
Life insurance isn’t a one-size-fits all solution. But if you have dependents, it can be an important financial safety net for those you love.
7 mins read
Why life insurance should be part of estate planning for new parents
Life insurance is one of the best ways new parents can protect their family and help loved ones in the event of your unexpected death.
5 mins read

Subscribe to our newsletter

Stay on top of our latest offers, relevant news and tips!

Thanks for joining!

You'll be hearing from us shortly - stay tuned.