Consider The Cost Of Maintenance When Buying A Home
A mortgage is the biggest financial burden of home ownership, but it’s not the only one.
The cost of maintenance is often overlooked when buyers plan their real estate purchase, but is a major expense that should be considered in the decision.
Both Canada Mortgage and Housing Corp. and the Financial Consumer Agency of Canada estimate annual maintenance costs at one to three per cent of the value of the property.
On a $500,000 home, that amounts to $5,000 to $15,000 a year, or more than $400 to $1,250 a month.
Those sums might sound crazy, and in the unique market of Vancouver, it probably is for reasons we’ll examine.
Assuming a mortgage of $350,000 at 3.5 per cent with a 25-year amortization, the monthly payment works out to $1,756. Even the low end of maintenance costs would add 22 per cent to that payment, for a total of $2,156. That could make the difference between happy and house poor.
Unless a homeowner is especially handy, many jobs will need to be performed by skilled tradesmen, particularly if a repair involves gas or electricity. As any homeowner can tell you, things wear out, fall apart or break down more frequently than you might imagine.
A minor job such as a clogged drain can easily cost $200 or more if the work is done by a licensed plumber; a new roof will set you back a minimum of $10,000.
Then there are exterior and interior painting to do, carpets or flooring to renew, plumbing and electrical fixtures to repair or replace, furnaces and hot water tanks to service, appliances and furniture to buy, fences to fix, decks to rebuild and lawns and gardens to maintain.
Still, setting aside a fund to cover these expenses may not be the best use of money.
The cash could be used instead to pay down the mortgage more quickly, thereby saving thousands in interest charges; or invested in the stock or bond markets.
Besides, the estimation of maintenance costs based on property value is illogical.
A new home under warranty will not have the same maintenance profile as a 100-year-old character house in an advanced state of deterioration, although both may carry the same price tag.
While painting, plumbing, lawn care and weatherstripping are frequent recurring expenses, replacing the roof happens once in 20 years while appliances have a life of 10-15 years.
Calculating a monthly cost for these expenses is useful only as an exercise in arithmetic.
The reason the maintenance estimate makes even less sense in Vancouver is that most of the value is in the land.
B.C. Assessment puts a value of $818,000 on an east-side bungalow, but only $85,000 of that value is for the building. Based exclusively on building value, the estimate of monthly maintenance costs is about $70 to $200 a month.
Homeowners obsessed about these things might want to arrange a sinking fund in which to set aside a certain amount of money according to a depreciation schedule, as businesses do for accounting purposes.
But following the advice from many financial planners to build up a fund of three months income as an emergency reserve should be more than adequate to serve as a cushion for major events such as roof leaks, furnace breakdowns and appliance failures.
Regular repairs should be manageable from cash flow. That’s why buyers need to carefully consider their financial resources before taking on a big mortgage.
It’s one reason lenders prefer home buyers allot no more than 30 per cent of gross income to carrying costs. They’ll need some of that remaining 70 per cent one day to spend on drywall and caulking.