Short Version
Purchasing a Property should be a calculated move, lacking in surprises.
1. Speak to you Mortgage Broker ask if you ‘Qualify to Port your mortgage’.
It is not well known that although the mortgage may be ‘portable‘ both the clients and the property must still must re-qualify under today’s more stringent lending guidelines.
2. Speak to you Mortgage Broker regarding retaining your current residence as a rental. It may be more workable that you think, it also gives you a fallback position should you become homesick for the old neighbourhood.
If you are contemplating an upsize, lateral move, or a downsize, please read on and budget accordingly. In particular if you are contemplating downsizing in an effort to save money, as often the costs cancel out the ‘savings’ for years to come.
Long Version
Ten Costs to Consider;
1. Realtor Fees – Engage a full service, local, skilled Realtor in both your purchase transaction, and your sale transaction. A quality Realtor will save you thousands, possibly tens of thousands on both the buy side and the sell side. Often they will be a voice of reason cutting through your own cloud of emotions.
As a seller budget approximately 3.5% of your home’s value. More if under 500K, less if over 500K – in addition a sellers bonus is increasingly common on higher-end homes.
As a buyer there are NO Realtor fees, once again a quality Realtor working exclusively for you (the Buyer) can save you thousands, tens of thousands, and most of all can save you from yourself.
2. Fixing all of the little things that need doing.
Approx 0.5% of the value of your home. one of the best steps you can take is to order a complete home inspection prior to listing the property. This way you are able to head off any unwanted surprises that a future buyers home inspector may come up with. most importantly the repair work can be completed in advance on your own terms.
3. Legal Fees for transacting the sale.
There were legal fees to purchase the property, there will be slightly lower fees to process the sale of the property.
4. Movers.
Even when you are leaning on friends and rewarding them with pizza and beer, there is still a cost to this. Time, money, and or favours costing your additional time and money in the future. For a professional Quote click here.
5. Time off of work, meeting Lawyers, Realtors, Home Inspectors, and handling the wide variety of details around relocation. Often vacation days are expended for something that does not resemble a vacation.
6. Mortgage Penalties – although nearly every mortgage is ‘portable’ it is vital to be aware that due to sweeping changes in approval guidelines the current lender may or may not be willing to approve the current mortgage being relocated to another residence. The lender may have issues with the property you choose (Self-managed Strata, Small Strata, Co-Op, remediated Grow-op, etc.). In addition they may no longer be able to approve your mortgage based on reported income or credit status.
The question to ask is not ‘is my mortgage portable’. The question to be asking is; ‘Do I still qualify for the mortgage amount that I was approved for 2, 3, 5, or 10 years ago, or has a program been eliminated impacting me?
7. Property Transfer Tax on Purchase. click here for a PTT calculator.
8. Potential increases to home insurance. A wide variety of variables can trigger insurance premiums to rise on an older (even a less expensive) property depending upon location and various construction methods. (Poly B piping being a major concern)
9. Legal fees on purchase. One should budget approximately $1,100. ***The majority of my clients qualify for an ‘All-in’ $775.00 flat fee. A true bonus for First Time buyers in particular.
10. Increased transportation costs. Do not neglect the cost of operating a motor vehicle over a 10, 20, or 40 km longer daily commute. The social cost of spending a greater amount of time commuting is also very real and worthy of consideration.
Three examples with approximate costs outlined.
A. The Move Up Buyer
Perhaps income is expanding, perhaps the household is expanding, perhaps both of these things are expanding. As the recent spring market has shown, Vancouverites love to move, just give us something resembling an excuse to do so.
A. The Move-Up Buyer
Moving up from a $450,000 condo/townhouse to a $750,000 detached home with a basement suite.
1. $15,750.00 Realtor Fees
2. $2,250.00 Fixing the little things that need doing.
3. $850.00 Legal Fees for the sale.
4. $1,500.00 Movers.
5. $500.00 Time off of work meeting Lawyers, Realtors, and handling the wide variety of details around relocation.
6. $0.00 Mortgage Penalties (reasonably low risk in this scenario, although it is always prudent to have a conversation with your Mortgage Broker prior to listing for sale, let alone entering into binding contracts).
7. $13,000.00 Property Transfer Tax on Purchase. (no taxes are paid on the sale)
8. $1,800.00 Potential annual increase to home insurance. (Strata fees may be eliminated, but this is something those fees were covering, ongoing maintenance being another)
9. $1,100 Legal fees re purchase.
10. $400.00 per month increased transportation costs. Fuel, insurance, maintenance, depreciation.
This is a grand total of $34,950.00 in hard costs alone, which are effectively deducted directly from this client’s net worth.
There is also the increased monthly cost of $550.00 in property insurance and transportation. Arguably another 1% of the value of the property should be budgeted for in annual maintenance costs as well. ($7500 divided by 12 equals $625 per month)
Perhaps the increased monthly expenses are offset by the income from the basement suite of $1,200.00 per month.
However, in this example the clients also increased their mortgage by $300,000 (Possibly more if less than 20% down payment triggered CMHC fees).
Debt servicing the $300,000 mortgage increase would cost another $1200 per month, or $1425 per month if less than 20% were put down.
Bottom line; stepping up to detached home is a ~$35,000 expense. With $1200 per month coming in from a suite, there is still an additional ~$1200 per month over and above that added to costs.
Important considerations.
B. The Lateral mover
Moving for the sake of moving.
In this example we’ll use the case of clients neither increasing nor decreasing their mortgage or property value. Perhaps they’re buying a home a few blocks away, which they’ve always had an eye on. Perhaps they are empty-nesters downsizing square footage-wise and making a move from the suburbs into the downtown core.
A $750,000 purchase and sale price will be used for the mathematics.
1. $23,250.00 Realtor Fees
2. $3,750.00 Fixing all of the little things that need doing.
3. $850.00 Legal Fees for the sale.
4. $3,000.00 Movers.
5. $500.00 Time off of work meeting Lawyers, Realtors, and handling the wide variety of details around relocation.
6. $3500.00 Mortgage Penalties (An allowance for a 3 months interest penalty as we increasingly see various challenges for clients attempting to port a mortgage to a new property)
7. $13,000.00 Property Transfer Tax on Purchase.
8. $0.00 Potential increases to home insurance.
9. $1,100.00 Legal fees on purchase.
10. $00.00 per month in increased transportation costs.
A grand total of $48,950.00 in hard costs.
In this scenario it is unlikely the clients have either an increase or decrease in monthly costs, although in certain cases they may be slightly downsizing by moving into a property that no longer has basement suite rental income.
3. The Downsizer
Mortgage-free retirees are not anywhere near as sensitive to the following expenses. For such clients it is a matter of simplifying life and perhaps liquidating some equity.
This entire post was inspired by conversation with younger families trying to downsize.
Often young families in their mid-30s or early 40s with young children who took too large of a step too soon without realizing all the costs. Perhaps one spouse has decided to stay home with the children, perhaps a career trajectory has stalled and income has flat-lined unexpectedly, perhaps there have been other issues which have negatively impacted the clients ability to afford their current residence. In any event there is often a belief that reducing the mortgage by 300K will be a game-changer for them. Unfortunately, it rarely is.
We will use an example of clients making a move from a $750,000 detached home with a basement suite down to a $450,000 condo/townhome.
1. $23,250.00 Realtor Fees
2. $3,750.00 Fixing the little things that need doing.
3. $850.00 Legal Fees for the sale.
4. $3,000.00 Movers.
5. $500.00 Time off of work meeting Lawyers, Realtors, and handling the wide variety of details around relocation.
6. $3,500.00 Mortgage Penalties – It is far more likely that clients in this scenario will incur a prepayment penalty of some sort, once again we use a minimal amount. As prepayment penalties for even a partial reduction can easily be $3500.00 per $100,000.00 reduction in mortgage amount. (triple the amount used in this example)
7. $7,000.00 Property Transfer Tax on Purchase. ***in this scenario, there is the possibility of getting away with a property transfer tax exemption. Assuming one adult individual in the household still retains their first-time homebuyer status. (this touches on one of the key strategies we use in our office to preserve first-time homebuyer status for at least one party in a pair of First Time homebuyers)
8. $0.00 Potential increases to home insurance. A decrease in home insurance costs will likely be offset by strata fees.
9. $1,250.00 Legal fees on purchase. Slightly higher closing costs are shown as the subject property is likely strata, which tends to involve higher costs. Without a new mortgage being placed our ability to work a special deal on these fees is also limited.
10. $400.00 per month in increased transportation costs.
A grand total of $43,100.00 in hard costs.
The goal of this move may be to reduce monthly expenses. i.e. reducing a current mortgage balance by $300,000. And such a mortgage reduction will represent a cashflow savings of somewhere between $1200 per month and $1425 per month.
However this is potentially offset by an increased monthly commuting cost of $400.0 as a less expensive property typically finds one further from their place of employment. The nature of this move may also represent the elimination of $1,000.00 or more in basement suite income.
It is important to factor in \that ~45% of the monthly payment being eliminated is principal paydown of the existing mortgage – a forced savings plan of sorts. In addition to this $5400 per year reduction in ‘savings’ via mortgage paydown, also sacrificed is a conservatively estimated 1% gain on the difference in value of the property, or another $3000 per year. (A detached home is almost without exception notably more resilient to market declines than a Condo/Townhome)
Not to mention the immediate $43,100 reduction in net worth.
There are additional variables to consider as well. Aside from the economic impact of making a move there is a very real social impact as well. How far one moves from their current social circle, from family support, from a community they have been a part of for years is not to be taken lightly.
Taking a step back and recognizing that much of the decision-making process around moving is driven by emotion, far more than logic, is worthwhile. Often emotions are used to justify decisions as being logical, logic rarely justifies emotional decisions.
Take some time and put pen to paper and analyze the very real upfront costs and monthly changes that a move entails prior to planting a for sale sign in your front yard.
Step #1 – have a conversation with your Mortgage Broker about current Qualifications, your Realtor will thank you for having that conversation first as well.
Thank you.