Student loans for law school and my undergraduate degree did not completely enslave me for the next 25 years. However, the shackles were clamped firmly on my (and my new husband’s) ankles when we recently purchased our first home. My bosses cackled something like “you’ll never be able to quit work now that the mortgage man has you in his grip” when they found out about the purchase. That was certainly reassuring.
The purchasing experience left me digging for loose change in the couch cushions in my mom’s rec-room. Crazy housing prices, a mortgage amortization period that gives a whole new meaning to “Freedom 55,” but mostly the annoying hidden cost surprises have made me wonder if the whole thing is worthwhile.
The first surprise for many first time home owners is that Property Transfer Tax of 1% is owed on the first $200,000 of purchase price and 2% on the rest. With the average price of a single-family home in Victoria currently going for approximately $600,000.00, a bill of $10,000 for property transfer tax is the norm. Most first time home buyers have a vague idea that that there is an exemption that will save them from transfer tax. Ha.
The B.C. First Time Home Buyers’ Program is mis-named. To qualify for the exemption, amongst other things, the value of the land plus improvements must fall below the threshold amount of $425,000 (or between $425,000 and $450,000 for a partial exemption). There were three single family homes under $425,000 in Langford (where we purchased) on April 29, 2008. The Program should be re-named the First Time Condo Buyer’s program.
The second even more annoying surprise was the charge for “CHMC mortgage loan insurance.” This is another completely mis-named charge.
Mortgage loan insurance is generally required if the homebuyer puts down less than 20% of the purchase price. For that average priced single family home in Victoria, unless you have $120,000 saved up to put towards a down payment, the financer will likely require CMHC mortgage loan insurance. How much the insurance costs will depend on how much of the purchase price will be paid for through financing. After coming to the realization that my mortgage broker was not trying to pull a not very funny joke on me, I tried to figure out what risk I’m insuring. If I die, does the insurance pay off my mortgage? No. Eventually a mental light bulb turned on and I realized that my CMHC insurance helps the banks reduce the risk of lending me money. If I default, the lender repossesses my house, sells it and (barring a U.S. subprime crisis) make a profit. CMHC has a 10 to 1 premium to payout ratio. In 2005 it took in over $1.2 billion and paid out about $117 million. This program should be renamed “The Federal Tax Cash Grab Disguised as a Social Safety Net Just Like Employment Insurance Program.”
Of course, there must be an upside to this purchase or who would agree to sign their life away for the next forty years? After all, let’s face it, for many (but not me) that’s a bigger commitment than marriage. I’m banking (a pun!) on the assumption that someday down the road when we decide to sell our newly acquired home, we’ll have a tax-free capital gain thanks to the principal residence exemption. Also, real estate has historically been a fairly safe investment. Most importantly, buying a home is the only financial investment I can think of that I actually get a tangible benefit from on a daily basis.
Finally, I can’t forget that I need to live somewhere. The true cost of ownership is the cost of my mortgage minus what I would be paying to rent my house. The situation doesn’t look so bad from that angle. Despite all the costs incurred to get into our first home, the bottom line is that we want somewhere to call home. We may as well be investing in our own real estate rather than our landlord’s.
-- Shelley J. Spring
The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.
