In our previous post, we covered what a homebuyer needs to consider before buying a home in Ontario. In this post, we will go through what you need to know after you closed on your home purchase.
Expenses Of A Homeowner in Ontario
Owning property in Ontario comes with a price tag. Below, we will go through different types of expenses to consider before entering the real estate market.
01. Property Tax
Property tax is based on the assessed value of the property. Read more about how the properties are assessed here. The assessed value is then multiplied by the tax rate as proposed by the municipality. Differently zoned and used properties are taxed differently.
Tax is billed twice a year in a form of interim and final bills. Each bill will have multiple installments outlined along with due dates for payments. Most municipalities allow pre-authorized payments to be set up for the tax to be paid automatically in periodic installments.
02. Mortgage
Whether or not you need to make a monthly mortgage payment obviously depends on whether you took out a mortgage to buy your property. It is good to remember that there are fixed and variable rate mortgages. With different types of rates come different types of payments.
With fixed rates, you would have a stable payment for the duration of your mortgage term, most commonly, 5 years. With a variable rate, your payment OR interest within the mortgage payment will fluctuate depending on the prime mortgage rate changes. However, variable rates provide you with a flexibility to pre-pay/payout the mortgage before maturity with a lower penalty.
Make sure you know your mortgage before you sign the mortgage contract with a bank.
03. Hot Water Tank / Furnace Rental
Many homeowners in Ontario chose to rent hot water tanks and furnaces instead of owning them. Lease costs are sometimes paid together with the total natural gas usage fee, and the rental agreement provides the homeowner with certain maintenance and repair guarantees. The agreement of purchase and sale must outline all of the rental items that would have to be assumed by the purchaser. The monthly cost of the equipment can be confirmed through your realtor or lawyer.
The rental equipment agreements are sometimes registered on title of the property for additional security. The agreements are normally registered in a form of document called Notice of Security Interest. It is important to know whether your rental company is looking to register the notice on title as it will essentially create security in second position after your mortgage (if you have it). This may require a postponement of interest should you want to obtain a secondary mortgage in the future (for example, a line of credit).
04. Home/Fire Insurance
As discussed in the first part, home insurance is a standard requirement for those buyers requiring a mortgage to close on their purchase.
Contrary to many buyers believes, you cannot simply purchase the insurance for closing and then cancel it. In your mortgage agreement, you covenant, promise, to the lender to maintain a valid fire insurance policy throughout the duration of your mortgage term. Even if you do not have a mortgage, home insurance is a sound investment to make sure that you are insured from a multitude of damage to your home.
05. Mortgage Insurance – Life and/or Disability
Mortgage insurance protects the mortgagor from mortgage default in case of their death of disability which would preclude them from earning funds required to make monthly mortgage payments.
There are different coverages available to choose from, your mortgage broker and sometimes the lender would be able to offer you options before the closing date. However, this coverage is not a requirement, and you are not required to accept your mortgage broker’s or lender’s offers right away. Do your own research on prices and coverage before signing the insurance agreement.
06. Property Maintenance Fees
When you buy a condominium or a condominium townhouse, you will be required to pay monthly maintenance fees required to pay for maintenance and repairs of the common elements of the whole property.
The corporation may change the amount of the fees from time to time depending on the financial health of the corporation. A few months before the start of the new fiscal year, the corporation must give a notice of the new maintenance fees to all the unit owners.
It is normal for the fees to increase year-to-year in accordance with inflation. However, if the maintenance fees increase significantly or if they increase more than once during the fiscal year, this may be a sign of a financially weak condominium corporation. As the owner, you can always request an up-to-date status certificate of your condominium to learn more about the current affairs of the corporation and get an inside into reasons for maintenance fees increases.
Five Year Plan
Now that you know the expenses that come with owning a property, let’s talk about what you can do to grow your equity and net worth.
Most mortgages nowadays are taken out for a 5-year term as the banks tend to offer the most attractive rate for that term. What can you do during your mortgage term to facilitate the grows of your equity?
01. Set up alerts for properties selling in your area
There are plenty of resources offering a detailed look into a real estate market in Ontario. My personal favourite is Housesigma.ca. The service allows you to review current and past real estate sales in Ontario, building an accurate representation of the market. The user can set up alerts for properties currently listed for sale to get notified when they are sold. The site will also show you the sold price.
This free resource can be a useful tool to monitor current market value of your property through comparable sales. This will allow you to time refinancing or selling the property to pull out the most equity from it.
02. Watch the mortgage market to refinance or sell to be able to reinvest intelligently
Monitoring the mortgage trends is just as important as monitoring your property value. Learning about how the mortgage terms & conditions and laws affect you is key to becoming an intelligent real estate investor.
With all that mortgage knowledge, once you have confirmed that your home value grew significantly, you can refinance the property to pull out equity to reinvest it. The equity you pulled out could be re-invested in a new property purchase.
To Buy Or Not To Buy
In this post, we learned about expenses to consider at every stage of planning your real estate purchase. Start planning early to avoid major financial surprises down the property buying and owning road.
