The real cost of home ownership

Pira Kumarasamy 18 April, 2019 | 5:00PM

We’ve heard it all before – renting is like throwing money into a pit and watching it burn. There’s no greater investment than purchasing a home. Mortgage payments help build equity. A home’s value will grow over time.

Canadians prefer to own their homes, because it gives them the opportunity to build wealth while holding a tangible asset. However, what starts out as a dream could end up costing far more than originally anticipated. A recent RBC poll found that four in 10 Canadians identify or have identified as being “house poor” - a concept that refers to being overextended and spending a large portion of your monthly income on housing related costs.

The alternative to home ownership is renting, for a presumably lower monthly cost, and investing the difference into a well-balanced portfolio. Let’s take a look at both scenarios.

Option A: Purchasing a home

As millennials clamor to get into the market, it’s not unusual to purchase a ‘starter’ home as a way to get in with the intention of selling at a higher price within a few years. This example looks at a home in Toronto that costs $800,000 assuming an interest rate of 3.29% and a 20 per cent down payment ($160,000).

Table 1: Home Ownership Costs Over 5-years
Legal Fees & Disbursements $2000 (i)
Land Transfer Tax $25,000 (ii)
Mortgage Repayments $259,644 ($3,091/month) (iii)
Property Taxes $25,420 ($5,084/year)
Home Insurance $6,400 ($1280/year) (iv)
Utilities $12,000 ($200/month)
Maintenance $40,000 (v)
Agent Fees for Selling $26,000
Total Costs $396,464
i - Zoocasa, ii - Ratehub.ca, iii - City of Toronto, iv -  Mitchell & Whale Insurance Brokers Ltd, v - Assumes the 1% Rule


Table 2: Home Ownership Profits Over 5-years
Sale Price $883,264 (2% annual growth)
Outstanding Loan Balance $550,065
Gross Profit $333,199
Gross Profit Minus Costs $(63,265)


Table 3 - Monthly Cost of Owning
Mortgage Payments $3,091
Utilities $200
Maintenance Costs $667
Property Tax $424
Total Monthly Expenses $4,382


Option B: Investing in a portfolio

In this example, let’s assume that your initial down payment of $160,000 is invested. You pay rent of approximately $2,850 for a two-bedroom condo in the city or a three-bedroom home in the suburbs. Between your mortgage, utilities, property taxes, monthly maintenance your monthly disbursements while owning are $4,382 (table 3) - a difference of $1,532 per month. If you add this additional amount to your portfolio each month, by the end of five years you will end up with $309,522 assuming a conservative 5 per cent rate of return and monthly compounding.

It’s important to note that there are many assumptions in this example, and the numbers will vary based on a number of factors. The key takeaway is that the most profitable option is not always obvious.

Test drive the numbers

Nicole Wells, VP of home equity, RBC, believes it’s best to assess the kind of lifestyle you want to have and test drive the numbers before making this important decision.

“Set a budget and figure out what that lifestyle looks like,” she says. “If you think you can’t save enough to get into a home faster, then look into rental options.”

The costs of owning a home often take new home owners by surprise. Do your research and put your finances through a ‘stress test’ to ensure that you can comfortably take on not only the regular costs associated with your potential home, but the incidental costs that can arise. It’s also important to note that while interest rates might be relatively low today, they likely won’t stay that way forever.

Make an informed decision

Diversification is the safest bet.

When it comes to the cost of real estate and the benefit of investments and diversification, Jonathan Rivard, a financial advisor with Edward Jones recommends looking at a large portfolio like the Canada Pension Plan for a benchmark.

“The Canada Pension Plan would never put 100% of the money into just real estate or just stocks or bonds,” he says. “If you were thinking like a pension fund and how to create and protect wealth, you would diversify and look at all of your options.”

Homes can be wonderful investments that bring years of joy for you and your family, but they can also bring on added stress. Plan carefully and make the purchase if you’re confident that your finances can withstand the real cost of homeownership.

About Author

Pira Kumarasamy

Pira Kumarasamy  Pira Kumarasamy is a financial writer who writes for Morningstar on personal-finance topics, with an emphasis on issues affecting the millennial generation. She holds a bachelor of arts, economics and accounting from Wilfrid Laurier University.