Upgrade, downsize or renovate?

Different stages of life demand different housing and financing options

The housing needs of a single 20-something are not the same as a parent 20 years older, which differ from those

of a senior citizen.

 

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 lowrate 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.

 

MORTGAGE ESSENTIALS:

 

The second of a six-part series taking an in-depth look at aspects of home lending.

 

APRIL 20: Advice for first-time buyers.

TODAY: Upsizing, downsizing or renovations.

MAY 4: Laneway homes

MAY 11: Recreational properties

MAY 18: Mortgages and strata

MAY 25: Your home, your investment

 

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.