I have a house-hunting problem.
Even though The Boyfriend and I are years away from buying a place, I can’t seem to kick the weekly habit of checking out the new listings in our neighbourhood. I’ve even dragged him to some open houses in our price range, “just to see!”
Sometimes, as I scroll through the listings, I’ll be like “Hey, let’s just live here!” The listing on my screen is invariably a gorgeous, ridiculously expensive house that looks like something out of a movie, with marble counters and a three-car-garage and two acres of yard.
It’s a joke, because of course we can’t afford to spend $1,000,000 on a house.
That seems like a pretty reasonable statement – we can’t afford a million dollar house – because we’re two millennials who haven’t won the lottery. But it only seems reasonable because we live in Ottawa.
You’d be forgiven for forgetting that there are housing markets in Canada outside of Vancouver and Toronto, because they get all the press – and rightfully so, they are hideously expensive. Articles like this one from Rob Carrick feature couples who aren’t that different than The Boyfriend and me, and yet they’re looking at houses that are almost double our maximum budget, because Toronto.
Lowest Rates took a look at the hard numbers behind keeping the detached-housing dream alive in Toronto, and to an Ottawa resident who has the luxury of ignoring downpayment rule changes that impact houses priced over $500,000, it’s shocking.
The Detached Dream — GTA Edition by LowestRates.ca
They reached out to me to see if I could share a bit of what this picture looks like in Ottawa, and again, as someone who has a serious MLS problem, I was all over it.
Especially because when I heard the average house price in Toronto might hit $1,000,000 in the not-too-distant future, I almost wept.
I did some digging, and according to the Ottawa Real Estate Board, the average residential house price in Ottawa as of May 2016 was $403,603 (that’s as opposed to condos, which rang in at an average price of $261,017.) I don’t know what that’ll be in a year, but I think we can all safely assume it won’t jump up to $1,000,000.
So I took a look at what that means for potentially buying a house in Ottawa, on some of the same variables that Lowest Rates looked at for Toronto.
Minimum Downpayment
If I was going to buy an average house in Ottawa, I’d be dodging all the new down payment rules, because I’d be buying a house that’s under $500,000. I would only have to put 5% down, which on a $403,603 house, is $20,180.15.
Now, would I ever buy a house with only 5% down? Not a chance, but that’s an opinion for another post. For now, let’s just assume we stick with the minimum, and do math things from there.
Closing Costs
Closing costs in Ottawa are a bit different too, because we don’t have Toronto’s municipal land transfer tax to worry about. That said, we’ve still got a fair amount of closing costs to budget for: provincial land transfer tax, CMHC insurance, admin costs and life-happens moving costs.
Provincial land transfer tax: $4,547.06
Pretty simple: if you’re in Ontario, you have to pay land transfer taxes. You can calculate what they would be here.
CMHC insurance: $13,803.19
This.
This is why I don’t think you should only put down 5% on a house. If you put down $20,180.15, and then you get charged an extra $13,805.19, you effectively have $6,374.96 in equity on your house – that’s 1.6% of the original purchase price.
But again – that’s a rant for another post. This is not the end of my opinions about 5% down payments. You can calculate potential CMHC premiums here.
Admin costs: $2,000
This is everything from home inspections to lawyer’s fees, and yes, they come up. Budget accordingly!
Life-happens moving costs: $3,000
Maybe it’s a new couch, maybe it’s paint to freshen up the house, maybe it’s lawn care equipment, but I’m just going to put it out there: I’m factoring this into my budget for a new house. I have no illusions that I’ll be able to move and not find some kind of unavoidable purchases involved (especially the paint thing. I am all about fresh paint to make a space feel like home.)
Mortgage Rates
As much as I am not about that squeezing-things-into-your-monthly-budget life, mortgage rates have one of the biggest impacts on whether or not you can afford your house, because they directly impact your monthly payment.
If you’re buying today, you’re basically winning the mortgage-rate lottery, because rates are low af. That said, they will go up again someday (probably) so let’s take a look at what your monthly payment would be on the average Ottawa house using a few different rates.
- The average 5-year fixed rate from LowestRates.ca is 2.34%, which on that average Ottawa house with a 5% downpayment, gives you a $1,748 monthly payment.
- Keeping everything constant, but using the average rate from 2014, which was 2.97%, you’d be looking at $1,874 each month – a $126 difference.
It just goes to show you that what seems like a fairly minor difference can make a big impact on your monthly budget, which is why you should always compare rates. It’s not the only thing that matters when choosing a mortgage, but it’s definitely worth knowing your options.
That $126 difference? Yeah, it’s $7,560 over a 5-year mortgage term.
Yikes.
So… Can I Afford The Average House in Ottawa?
The general rule of thumb I like to use for “is this housing situation affordable” is whether I can cover all my housing expenses on 30% of my take-home pay (you can check what that is for you using the One-Minute Budget, in – obviously – less than 60 seconds.)
The CMHC guidelines give you a bit more wiggle room, recommending your housing costs ring in at no more than 32% of your gross income, and to calculate that, they add up your principal and interest payments (i.e. your mortgage payment), your property taxes and your heating bill.
For this average house in Ottawa, here’s what that number looks like annually.
Mortgage payments: $20,976
Property Tax: $4,036.03 (1% of purchase price, approximately)
Heating: $1800 (going with Lowest Rates’ estimate, because ¯\_(ツ)_/¯)
You’d ring in at $26,812.03 in annual house costs, which using the CMHC affordability guidelines means you’d need an annual income of $116,000 to handle the housing payment.
And even though I’m conservative like nobody’s business when it comes to affordability, my 30% of take-home pay rule only puts you at about $126,000 a year, pre-tax. (Although OK, fair, that is a $10K difference and nothing to sneeze at.)
At the end of the day, the question Lowest Rates posed in the infographic was whether or not the dream of a detached home is still within reach. In Toronto – especially if prices top $1,000,000 and trigger a 20% downpayment – it’s a little iffy, but in Ottawa?
I’m going to say it’s more doable.
But like, please don’t come drive up the Ottawa prices all at once, OK Toronto? We don’t have a basketball team, and it’s very cold here, I swear. You wouldn’t like it.
I’d love to hear from other people on this one, Ottawa or not! Do you think homes in your area are affordable? How did you figure out how much house you could afford?
This post was a collaboration between me and Lowest Rates, but as usual – and obviously from the ridiculous stories – all opinions are mine!
The biggest advice I can give anyone when they are looking for a house to buy is come up with your own budget, don’t use what the bank says you can buy. My wife and I qualified for WAY more than we can realistically afford. Luckily, we had our number in mind and didn’t let outside people influenence us!
Totally! Sometimes I like to plug numbers into bank calculators, just to see how much mortgage they would give us and laugh about it. Because omg! We’d never buy anything else ever again, we would be so house poor! This is phenomenal advice. *Always* know your own numbers.
The 5% downpayment thing is so tricky. Yes you have to pay CMHC, but in Toronto houses prices have risen so quickly that paying the insurance premiums is actually cheaper than waiting to save up more money! Also, people think it is better to put down less and invest the rest since mortgage rates are so low (ie- its like taking a $10,000 CMHC “loan” at 2.4% and then making 6%+ on the markets). Its quite the catch-22.
I paid CMHC on my first place as I put down only 11%. But my next place I was able to roll enough equity over and top up with savings to put down 30%. If I hadnt bought the first place I dont know if I would have had as much for the 2nd place so I think paying less than 20% and getting in the market worked well for me. It can be a risky move if you lose your job, or housing prices fall, or have to sell prematurely though.
Honestly, I’m probably going to fall into the 15% down range too, and that’s *with* the much more reasonable Ottawa prices! As much as I wouldn’t put 5% down, 20% is also a HEFTY chunk of money – I’m happy to fall in the middle ground, as long as I’m over 10%. And I like your point about the CMHC “loan” idea! I also feel like if we could juuuuust make the 20% number, but it would tap out most of our savings, I’d rather put down 15% and have a big buffer in emergency savings anyways.
I live in the United States, in a college town surrounded by a rural area. Our 1,500 sq. ft. home cost $122,500, and the down payment could be as low as 5%. PMI (which seems similar to the insurance) is $50 a month, until you reach 20% equity in the home. So, obviously we are living in a wildly different manner even than other people in the US that live in cities. The costs mentioned in your post and in major U.S. cities are completely staggering to me. Our mortgage payment, even with PMI, is only $703 per month on a 30/year fixed rate. We decided we could afford it since it was literally the same price as our rent on a 750 sq. foot apartment. We paid about $6000 in fees to get the whole thing done.
I have a question about this portion of your post: “This is why I don’t think you should only put down 5% on a house. If you put down $20,180.15, and then you get charged an extra $13,805.19, you effectively have $6,374.96 in equity on your house – that’s 1.6% of the original purchase price.” In the U.S., when people say down payment, that is purely to principle of the house. You need the fees in addition. In Canada, the down payment means the sum total of fees, insurances, etc.? (The processes sound really different, so pardon my ignorance.)
I’m with Thias on this one! The most dangerous thing a person can do when buying a house is to take the banks word on how much house they can afford. When I plug my info into the “How much house can I afford?” calculators, they typically come up with a home price twice what I currently have. Banks don’t take into consideration monthly expenses (other than debt) and retirement savings. I really think a person needs to run their own numbers AND be conservative (repairs and maintenance can be expensive).
I do understand the MLS addiction. I try not to wonder over to the real estate websites because it’s a time suck for me. I have a perfectly nice, affordable home with no desire to move, but LOVE looking at houses!
Hahaha I’m glad I’m not alone on that! I’ll make a point to kick the habit once we end up moving, but since we know we’ll be actively looking in a few years I justify it under the banner of “market research”! I know, I know, but it actually has helped me get a sense of what’s a reasonable price in our neighbourhood, haha. And I could not agree more with the calculations – everyone needs to run their own numbers for sure!
This is a great analysis! When I visited Ottawa last summer, I (of course) hopped on MLS to see what the low-down was on your housing market. It’s fairly robust! Definitely about $100k higher than here in Halifax.
When I set out to figure out how much house I could afford, I definitely started from what my monthly budget could afford. I factored in the mortgage payment, property taxes, insurance, heating bills and utilities and aimed for no more than 35% of joint net full-time income. That doesn’t include any freelance I bring in on the side, which, if I included that, would drop that number down to about 30% of our net income.
Then I worked backwards. I figured out what mortgage rate I’d like qualify for, how much my down payment was, and then adjusted my purchase price until it came in line with what I wanted to spend monthly. The percentage down, etc, are all after thoughts. My first priority was to keep my monthly fixed costs on target.
That’s so smart Jordann – and can we just talk about how you’re my MLS soulmate, because I do that EVERY TIME I go somewhere new! San Francisco was pretty hilarious (horrifying?) I’m also all about the monthly payment not exceeding a certain amount – and knowing (approximately) what our target price would be, every time I see something much below that I just start dreaming about the low monthly payments (or a faster payoff date!)
Two important differences between Canada and the US:
1. Mortgages are NOT tax deductible in Canada.
2. There is no such thing as a 30 year fixed rate mortgage. In the US, most people buy a house and lock in their interest rate for 25 or 30 years until the house is paid off. In this case, you no longer have to worry what will happen with interest rates in the future. You know your payment for each month until you pay off everything. The most common mortgage in Canada is a 5 year fixed rate, 25 year amortization mortgage. In this case you only know what your payment will be for the next 5 years and then you need to get a new mortgage for the next 5 years (at the new interest rate). The longest fixed rate mortgage in Canada I have seen was 10 years and you had to pay a HUGE interest rate premium for that.
Interest rates are currently REALLY low. When I bought my house 15 years ago, the 5 year fixed rate was 7% and we all thought that rates were low THEN. When buying a house in Canada, a smart buyer will consider if they would be able to afford the new mortgage in 5 years if the rate was ~5-10%. Of course, over 5 years you gain some equity so although the rate may be much higher, you have a smaller loan at that point.
Economists are not currently projecting that level of rate increase in the next 5 years but over the next 25 years it would be VERY reasonable to expect Canadian mortgage rates to move closer to their traditional norms of 5-10%.
Housing, mortgages & mortgage insurance and related costs are one of the key areas where there is a very big difference between how the US and Canadian markets work. In this particular space it is really important that potential buyers ensure that all the information and advice they are getting is specific to the country where they plan to buy!
This clears up so many questions I had when reading! Thanks so much!
Hey! Good to see a local Ottawa blogger online 🙂
Most of the things look on-par. One thing not to forget is the first time home buyer tax credit. This reduces your bill a bit, so thats one good thing in the midst of these elevated home prices. We ended up buying our house 2 years ago after a lot of debating where to buy or continue renting. Renting is not a bad option….most ppl seem to think that renting a place means you are throwing money away, which is not really the case.
Few pieces of advice that I can offer:
– Once you buy a house, there can be a lot of unknown expenses that crop up…so, make sure you have a decent sized emergency fund before you jump in.
– Also, second Thias’ comment above. Never buy what the bank approves you for. They will try to push a bigger mortgage on you, because they can make more money on the interest payments.
– Try to make the 20% down payment figure….that way you can avoid that nasty CMHC insurance fee.
– Also, do NOT buy mortgage insurance from banks. They will try to push this on you, but you dont have to get it and it simply adds an expense. All it does it protect the bank than you.
Best wishes
R2R
Hey – yes, it’s awesome to connect! I’m always jealous of Calgary and their community of personal finance bloggers, haha. I actually also work in high tech (which ok, is not a huge coincidence in Ottawa, it’s really that or government!)
And all your points are so spot on – especially that renting is a great option in soooo many cases! Thank you so much for chiming in!
Finally a post about home ownership Des! haha. The house I just bought was $180K, less than the minimum down payment on that projected average $1 M house. The mortgage payments are going to be less than my rent, and very very similar after factoring in insurance. There are two incremental costs that I’m going to have; property tax (less than $200 per month) and extra gas (my drive to work is going from 15 minutes to 30 minutes). Ultimately my housing costs will be going up a bit, but a (teeny tiny portion at the start) will be going into my house equity. I’m also going to have a (small) yard that I don’t have now, and even though it’s a townhouse I won’t have anyone living above or below me. It wasn’t a decision I made lightly, but looking around at the housing market in other cities makes me feel like I made the right choice!
That’s so so so awesome Justin, congratulations! Lmao and I love that your total house price was less than the downpayment on a Toronto house. Plus, if there’s anyone I know who would run the numbers and make a smart call about buying vs. renting, it’s you 🙂
Oh boy. I live in Vancouver. People talk about the housing market more than they talk about the weather (I mean did you read that article about the $30 mill house being owned by a student…sigh)
I don’t live in Vancouver proper, I actually live in one of the cities just outside (it’s like a 20-30 minute drive) so we don’t get the exact same housing jumps they do. But I mean, my moms house today will sell for double of what she bought it for 5 years ago. Almost a million dollars. A similar house about a 10 minute walk away was sold for $100,000 over asking price. There’s a newly built house on my street that did sell for over a million.
And by no means are any of these houses amaaazing. They’re just…decent houses in a decent area.
One of my aunts has a house in Vancouver (not downtown). Ancient house. Not a bad house, but not a “this is a really nice house”. It’ll sell for way over a million. It’s cheaper fro them to tear down the house and build a new one than it is for them to move. Go figure.
So as a 20something without the giant down payment saved…well one day I looked up MLS in Charlottetown,PEI until I remembered for someone who is always cold, your weather in the East sucks.
Hahaha oh gosh Rue I’m so sorry, because I totally did hear about that $30M house! The Vancouver market is just another world (I definitely blame your weather, because you’re right, we’re basically human popsicles out here for like half the year.) I used to think about moving there for work – there are some seriously cool companies in Vancouver! – but honestly, all those trend pieces about how companies and universities are having trouble recruiting people make total sense to me. It’s just not a move I’d make, even for a great job, because I couldn’t see myself putting down roots there!
Then again, that’s easy for me to say since my family is in Ontario, haha. We just love the -40 Ottawa winters, what can I say (cries.)
I mean city wise, I love it. It’s beautiful here, and there is soo much to do. I can’t really imagine living anywhere else…but never say never right. I’m think some island somewhere, with warm sun and fresh fruit all year round…
We were extremely fortunate to get in to our house when we did (a few years ago) because the comparable houses in our neighbourhood have been going for $200,000 to $300,000 more lately. If I were to check now, we would not be able to afford our house…
That’s awesome! Congratulations! We have neighbourhoods like that in Ottawa that have gotten very trendy recently, and the prices in those small neighbourhoods have definitely caused a lot of “We wouldn’t be able to buy the house we have if we bought it now!” But such is the property market, haha.
I bought a condo 5 years before. A little sad that I didn’t thought of buying a detached house at that time. At least I own my place, and able to pay the mortgage without trouble even when my spouse lost job.
That is wonderful! So smart that you bought something so affordable that it was able to handle a spouse losing a job – not a lot of people would have been able to handle that!
I’m already a homeowner and cruising MLS (in Ottawa, TO *and* Montreal, lol) is sadly one of my hobbies 😉
Shockingly, banks weren’t falling all over themselves to give hefty mortgages to self-employed couples who’d only been in business 2 years – WHO KNEW? 😉 – so we needed to stick to $300k and under. At the time, we didn’t want to move too far out, so we had a very limited number of places to consider.
Ottawa is pretty reasonable compared to TO and Vancouver, but I still find some of the prices (in Hintonburg and Centretown especially) outrageous for what you’re getting. I guess it’s all relative though!
I also wanted to add that, even if we had gotten a bigger mortgage, we still would have bought modestly. Very into not being house poor!
Not being house poor is like my favourite thing ever – and you guys have a lovely house! But you’re right, some of our neighbourhoods are BONKERS, Hintonburg especially. I uh… may or may not cruise those listings just for fun, lol, and they’re nuts. Like “Hey, if we win the lottery, we can WALK to the brewery festivals!” Yeah. Winning the lottery is the key point there, haha.
Also, TO? Montreal?! Are you guys looking at a move? NOSY DES WANTS TO BE NOSY.
20% down in cash
No more than 35% take home to run the whole bloody house (repairs, Maintenence, insurance, annual tax, hoa dues, electricity, TV, internet.
All in on a 15 year mortgage, which could be a legal NIGHTMARE with a BF instead of a husband (less legal protection). Oh, trust me on this one.
The newness of the house wears out in a year and if you watch any of the reno shows from Canada, they’re always finding asbestos, black mould, knob and tube and cracked pipes.
Remember, MLS can stand for “My Loan Sucks”
Keep dreaming, go see houses to fuel the dream. Renting is patience.
Patience, my young Pattowan 😉
Hahahaha oh totally Suze – it’s all dream stage at this point, and I’ve seen my fair share of the Property Brothers, so I know that any renovation *will* go over budget because everything goes wrong, all the time! Trust me, we’re not going to rush into anything (and there will 100% be a more “legal” arrangement before I buy a house with anyone 😉 Just my style, and also, I’ve heard some of the same horror stories!)
Sounds like you can do it, just go for something older and you can renovate it to how you like it 🙂
At the moment Melbourne (Australia) prices are very high, probably very similar to Canadian ones in some cities. We can’t really afford this, so we’ll be waiting. But we’re saving our money for IVF treatments, so that doesn’t matter what property prices are doing. We’ll stay in our rental. (Australia is much warmer, you should consider here instead of your cold city 🙂 )
Tristan
Hey Tristan – thanks for the comment! And I am no stranger to the glorious Australian weather, I actually spent a semester abroad during school in Sydney. Every -40 day in Ottawa breaks my heart a little bit when I remember what “winter” was like there! Friends there have kept me up to date on the housing market struggles too, because omg. Sydney house prices are ridiculous!
I’m always interested in how fellow millennials tackle the “home ownership” thing. It’s just so different now than how it was for our parents and grandparents. Even with my partner (who’s already bought and profited off 2 houses before meeting me) has very different ideas about buying our first house together. He’s also much more experienced and older than I am – so to me, it goes to show housing market has changed quite a lot very recently!
I’ve come to accept that online people like you Desirae have the right idea about how to buy smart. In my everyday life, I see peers posting photos of their new condos/homes with the #homeowner and I cringe because I’m pretty sure many of them only put the 5% down payment – meaning they really only own 1.6% of the house.
We need more people educating young people about home ownership! Like the truth of it, not the “you’re accomplished when you get a mortgage” side of it 🙁
Thank you so much Jaymee! It means a lot because I love the way you write about getting into the housing market too – especially since you’re a lot closer to doing it than I am, and our budgets are just about the exact same!
And re: the people posting photos of their new houses bought with 5%, you should see some of the Facebook messages I get from people who did exactly that, haha.