Upgrade, Downsize or Renovate?
According to Statistics Canada, home ownership rises quickly to the early 40s, and continues to climb at a slower pace until reaching a plateau of more than 75 per cent near age 65. The home ownership rate changes little from age 65-74 but starts declining after 75.
The first choice of a new household is typically an inexpensive apartment close to amenities that cater to a younger demographic. At the dawn of the child-rearing years, the household may seek single-unit housing, perhaps a detached house in the suburbs or a townhouse in the city, in neighbourhoods where families with children dominate. The elderly may choose a condominium in a community of their contemporaries to free them from the burden of housing maintenance and enhance their sense of security.
As households move through this life cycle, their financing needs change along with their housing requirements.
Vancouver’s tight rental market pushes many young people who might otherwise be expected to rent an apartment into home ownership. Canada Mortgage and Housing Corp. recently estimated Vancouver’s rental vacancy rate at 1.4 per cent, compared with the Canadian average of 2.4 per cent. The average rent for a two-bedroom apartment was $1,237, up 2.4 per cent from a year earlier, and the highest of any census metropolitan area in the country. No wonder 22 per cent of those under 25 and living away from their parents’ home, have chosen to become homeowners.
It’s not a choice everyone can make. The average qualifying income to buy a standard condominium in Vancouver is $74,700, while the median household income is under $68,000.
Once the qualification hurdle has been passed, lenders can provide up to 95 per cent of the purchase price if the mortgage is insured. There are federal and provincial programs to assist first-time buyers, such as the federal home buyers’ plan — allowing for withdrawals up to $25,000 from a registered retirement savings plan — and the B.C. first-time new home buyers’ bonus, a rebate of five per cent of the price of a newly built (or extensively renovated) home to a maximum of $10,000. First-time buyers were the subject of a separate article in this series.
As family composition, age and incomes change, many households will be faced with the decision to move or renovate to accommodate these new circumstances. Neither option is worry-free.
Moving can be an expensive undertaking. There are commissions, legal fees and taxes on the sale of one home and purchase of another as well as moving costs, utility relocation charges and minor repair and staging expenses. In a world where time is money, the hours spent finding a new home should be considered too.
It is also probable that moving to a new home will mean a bigger financial commitment on a more expensive property. The TD Canada Trust repeat home buyers’ survey last year found that B.C. homeowners move to larger and more luxurious homes sooner than they had expected.
And they do so more often than elsewhere in Canada, being most likely to have owned more than four homes in their lifetime.
“Our research indicates that British Columbians aren’t staying in one home too long,” said Barry Rathburn, manager, residential mortgages at TD Canada Trust. “There are costs associated with a move, so I’d recommend people explore all their options before making the decision to change homes.”
This restlessness, or rootlessness, is one reason the fine print on a mortgage can be as important as the rate. Depending on its terms, a lender may port the mortgage and increase the amount. The borrower gets the lender’s current rate on the “new money,” and that rate is then blended with the rate on the existing mortgage. A “port and increase” clause also eliminates the penalty for breaking a mortgage on the sale of the home.
Alternatively, the seller may be able to use an existing low-rate mortgage as an incentive for a buyer, if the mortgage has “assumability” provisions. This also avoids the penalty.
While moving can be expensive and traumatic, renovating could be even more so.
Besides the cost, there are challenges to living in a building site during a renovation and dealing with contractors.
What’s more, an extensive renovation could add more value to a home than its neighbourhood is worth.
A house is a consumption good, a product, and as such has a price limit.
Given the frequency with which B.C. homeowners move, it’s unlikely the cost of a major renovation can be recouped. Renovation experts say the best returns on investment come from the simplest things: curb appeal, flowers, well-groomed shrubbery, power-washed siding; and interior paint and new carpeting. A kitchen makeover may return only 50 per cent of the investment, but new counter tops, fixtures and appliances could add more to the selling price than their cost.
One of the most popular means of financing renovations is with a home equity line of credit, which allows the homeowner to draw on equity built in the home. But there may be appraisal and legal costs to arrange it, which could be avoided by opting for a personal line of credit or a personal loan.
Mortgage refinancing is another way to obtain funding, but borrowers need to be confident that the larger monthly payment is manageable.
As StatsCan has pointed out, homeowners tend to retain ownership until 75, by which time most owners are not facing financing issues.
They can sell their property and use the proceeds to buy a condo or rent, or take out a reverse mortgage and leave the debt obligation that accrues to their heirs.