They say death and taxes are the only two constants in life, so the question is, what happens to your mortgage when you die?
The short answer, according to Donna Lewczuk, a mortgage agent with Dominion Lending Centres, is “If you’re single and have no insurance, the executor of the estate will sell the property and pay back the mortgage. If you are married you can continue with the mortgage if you are able to make the payments.”
That’s because the mortgage stays with the property, not the person or persons, says Mary Wahbi, a partner at Folger Rubinoff LLP who looks after estates. “Not much will happen when you die, the mortgage isn’t triggered on your death and isn’t payable then but it is still your debt.”
The debt remains even after you die. Mortgages are also considered secured loans and the lenders want their money and they will come after your estate to get it. Secured creditors have a leg up when it comes to loans and if there is security, like your home, they will get paid first.
If you’re the sole owner of the property and you have a will, the executor of the estate will have the authority over your estate. They can either sell the property and use the money to discharge the mortgage or if there is enough money to carry the costs, the mortgage can continue to be paid. If you die without a will, Wahbi says that someone will apply to the court for authority over your estate and then the same decisions will be made regarding your property.
If you bought your home with a spouse, more than likely you’re considered joint tenants (check your legal documents from when you bought your home). When one joint tenant dies, the other gets the home automatically by right of survivorship and the home doesn’t pass through the deceased’s estate. So the spouse can continue to make the payments if they can afford it and then when the mortgage comes up for renewal, they can decide if they want to keep the home and negotiate a new mortgage based on their financial standing or sell it.
Now if you bought the home with a friend, you’re not considered joint tenants. You’re considered tenants in common and the surviving person doesn’t have the right of survivorship. The share of the home, the asset, becomes part of the deceased’s estate and is distributed according to their will. Even then, as there is still a mortgage, the secured creditors are still the first ones to get paid out of the estate.
“Banks don’t care who’s paying the mortgage once they get paid,” says Wahbi.
Buying a house with Mom and Dad? In competitive housing markets, this seemingly unconventional choice can be a smart strategy for attaining homeownership sooner. That said, any financial partnership requires planning. Avoid conflict by clarifying roles and formalizing financial agreements. Here are two common shared homeownership scenarios, along with tips for making a financial arrangement that works for everyone.
FAMILY HOMEOWNERSHIP SCENARIO NO. 1:
Housing your child during university
Why: Renting can be expensive. Some parents may prefer to buy a home for their child while they attend university or college. This option allows families to build their own equity, rather than pay a landlord rent for three to five years or more.
Size & lifestyle: Choose a home that is appropriate for a single young adult, such as a turnkey condo or small bungalow.
Future plans: What will happen once your child graduates? Will the property be sold? Will your child take over the mortgage payments? Discuss future plans openly to avoid unpleasant surprises.
Written agreement: Use a written agreement to solidify co-ownership responsibilities and expectations, including who is financially responsible for specific homeownership expenses (i.e., mortgage, utilities, taxes and so on), what happens if payments are missed, and what happens if either party wishes to exit the financial partnership.
Ask your mortgage professional about… Genworth Canada’s Family Plan program. This program enables qualified buyers with excellent credit to assist an immediate family member with their home purchase. To qualify, your dependent must have good credit, even if they lack sufficient income to meet typical mortgage qualification standards. The home must meet certain quality criteria, and qualified buyers can make their purchase with as little as five per cent down.
FAMILY HOMEOWNERSHIP SCENARIO NO. 2:
Parents and adult children living together
Why: Forget fleeing the nest. Increasing numbers of adult children are buying a bigger nest with Mom and Dad (maybe even Nan and Gramps too!). According to the 2016 census, a whopping 403,810 households across Canada are multi-generational households with at least three generations of the same family under one roof. Whether you’re inspired by tradition, cost savings or convenience, shared homeownership can be a prudent and fulfilling decision.
Size & lifestyle: Upfront, family members should be on the same page about living arrangements. Will this be a one-household home with shared living quarters? Or will the property be divided into suites, with each household residing in a self-contained unit?
Future plans: Involve the whole family in discussions around shared homeownership and include adult siblings who are not buying in with you. Be frank about family assets and the future care needs of older relatives. Is there an expectation that you shoulder this responsibility due to proximity?
Written agreement: As with any shared homeownership situation, clarify co-ownership responsibilities and expectations in a written agreement.
Ask your mortgage professional about… Genworth Canada’s Progress Advance program, which helps qualified homebuyers finance a custom-built home with as little as five per cent down. Dual master suites? A bachelor-size nanny suite? An approved home builder or contractor can create a house perfect for your multi-generational family’s needs.
Or, if you’d prefer to renovate a resale home, ask about Genworth Canada’s Purchase Plus Improvements (PPI) program, which can finance home improvements and combine them with your mortgage in one easy mortgage, also with as little as five per cent down. Check out our PPI calculator and guide at homeownership.ca/ppi.
Finally, if your family has immigrated to Canada within the last five years, consider Genworth Canada’s New to Canada program. Don’t let a lack of Canadian credit history derail your family’s homeownership dreams. The New to Canada program can help qualified borrowers who have full-time employment and a strong history of rent and utility payments in Canada buy their family home with as little as five per cent down.
The federal regulator plans to address uninsured mortgages granted only on the equity of the property and loans where the lender didn’t apply other ‘prudent underwriting principles’
A federal regulator says it will have to take further action to address mortgage approvals by Canadian banks that still depend too much on the amount of equity in a home, and not enough on whether loans can actually be paid back.
The Office of the Superintendent of Financial Institutions telegraphed the move in an update released Monday on the effectiveness of new underwriting rules it announced last year. Those rules included a new “stress test” for uninsured mortgages, where a borrower makes a down payment of 20 per cent or more.
According to OSFI’s October newsletter, the tweaks were needed after the regulator identified possible trouble spots caused by high levels of household debt and “imbalances” in some real estate markets that could have added more risk for banks.
There have been improvements in the quality of new mortgage loans since the revised B-20 guidelines came into effect this past January, OSFI says, “including higher average credit scores and lower average loan-to-value at mortgage origination.”
But even though OSFI said the new rules “are having the desired effect of helping to keep Canada’s financial system strong and resilient,” the regulator claims more work is needed.
“Although reduced, there continues to be evidence of mortgage approvals that over rely on the equity in the property (at the expense of assessing the borrower’s ability to repay the loan),” the newsletter said. “OSFI will be taking steps to ensure this sort of equity lending ceases.”
OSFI spokeswoman Annik Faucher told the Financial Post in an email that the regulator was referring to uninsured mortgages that were granted based only on the equity of the property — the difference between a property’s value and the amount remaining on a borrower’s mortgage for the property — as well as loans where the lender did not necessarily apply the other “prudent underwriting principles” laid out in the B-20 guideline, such as those aimed at proper documentation of income.
“Sound underwriting helps protect lenders and borrowers and supports financial system resilience,” Faucher said. “Having a larger amount of equity in a property does not mean sound underwriting practices and borrower due diligence do not apply.”
She added that OSFI “has a number of tools in its supervisory toolkit, and when we identify potential issues, we intervene and require financial institutions to implement remedial measures that are commensurate to the risk profile of the institution.”
OSFI said in its October newsletter that there are signs “that fewer mortgages are being approved for highly indebted or over-leveraged individuals.” According to the regulator, the amount of uninsured mortgage originations with loan amounts greater than 4.5 times the borrower’s income has dropped from 20 per cent from April to July of 2017 to 14 per cent for the same period of 2018.
In general, the Canadian housing market has cooled following intervention by regulators and various governments. But OSFI also said it realizes that its tighter underwriting rules might cause some would-be homeowners to use less-than-truthful means to obtain mortgages.
“OSFI recognizes that tightened underwriting standards may increase the incentive for some borrowers to misrepresent their income, while it has also become easier to create authentic-looking false documents,” the newsletter said. “Given that the revised B-20 calls for more consistent application of income verification processes, financial institutions need to be even more vigilant in their efforts to detect and prevent income misrepresentation. This is particularly important for financial institutions that depend on third-party distribution channels.”
Veronica Dy and her husband had their retirement plan all mapped out.
They recently sold their large family home in San Gabriel, California, for $850,000 and walked away with $250,000 in net proceeds to put toward a smaller home in Los Angeles to be closer to their son’s family. They figured it would be easy to find a quaint, two-bedroom home where they could age in place without overspending on housing.
They thought wrong. The couples’ home search came up empty week after week, and the few properties within their budget – about $550,000 – are selling well over asking price almost immediately, Veronica Dy says.
Now, the couple spends roughly $3,200 per month – nearly half of their monthly household income – on rent and other housing-related expenses farther out from the city as they keep looking. While they’re trying to remain optimistic, the uncertainty of their situation makes Veronica Dy, 61, doubt that they’ll retire anytime soon.
“I was waiting to retire when I’m 62 but with our current circumstances, now we’re playing it by ear,” says Dy, who works in health care. “I look every day for houses, but there’s nothing on the market that’s affordable. I wanted to live closer to our son and help them with our grandchildren, but it’s going to be hard.”
The Dys’ struggles are shared by a growing number of older Americans who wrestle with whether to downsize or age in place. The answer, as it turns out, isn’t so simple.
In its just-released 2018 Survey of Home and Community Preferences, AARP found that 76 percent of Americans age 50 and older prefer to remain in their current home, and 77 percent would like to live in their community for as long as possible. However, just 59 percent of older Americans think they’ll be able to stay in their community, either in their current home (46 percent) or in a different home still within their area (13 percent).
Rising mortgage rates, sky-rocketing home prices, and inventory shortages at the lower end of the market are converging to create a new housing crisis – this time for baby boomers, housing experts warn.
Aging in place vs. downsizing: Which is best?
By 2016, there were roughly 74.1 million baby boomers (people born between 1946 and 1964) in the U.S, according to a Pew Research analysis of U.S. Census Bureau data. By 2030, when all baby boomers will be between 66 and 84 years old, Census predicts boomers’ numbers will drop to 60 million people.
As boomers age, an alarming trend has emerged: they’re entering their golden years with mortgage debt. Americans over the age of 60 were more than three times as likely to carry mortgage debt in 2015 compared to 1980, according to an analysis of Census data by the Center for Retirement Research at Boston College. Much of the increase in seniors’ mortgage borrowing is in households with below-median incomes and assets, and no pensions, the analysis found.
Generally, past generations aimed to have their mortgage paid off before retirement to better manage their reduced incomes later in life.
Carrying mortgage debt may offer one explanation as to why many baby boomers prefer to remain in their current homes. Other factors, such as retaining home equity, staying in familiar surroundings, or a lack of affordable options, also drive the decision to stay put.
Aging in place, however, can be harder to do if boomers’ homes aren’t equipped to meet their future needs, says Jennifer Molinsky, senior research associate at the Joint Center for Housing Studies of Harvard University.
“There’s a growing linkage between housing and health care, and being able to stay in your house longer,” Molinsky says. “Making your house accessible for [in-home health care] is ideal, but this is harder to manage in lower density areas because of limited transportation and accessibility to doctors in rural areas. Communities need to think about how these services interrelate with housing, because that’s a real challenge for the future.”
Tapping equity to stay put
Mobility and health issues pose the greatest barrier to seniors who want to stay in their current homes. Older homeowners may need to add amenities, such as bathroom grip bars, walk-in showers, wheelchair ramps, and wider hallways and doorways to accommodate walkers or wheelchairs as their mobility declines. Some of these improvements are simple, but when you start redoing bathrooms, for example, remodeling projects can add up quickly.
Seniors who own their homes outright or have significant home equity typically borrow against their homes to help pay for modifications, says Sam Preis, regional director of sales with BBMC Mortgage.
Several loan products can help older homeowners pay for improvements that will make their homes livable for years to come. Preis recommends the following options:
Home equity loan – A home equity loan makes more sense if you have to make several modifications at once and need an upfront lump sum to pay for them.
Home equity line of credit, or HELOC – A HELOC works like a revolving line of credit that lets you withdraw on the line as often (or as little) as you need it for improvements in stages.
VA financing – Many older veterans who served in the military mistakenly think their VA benefits expire, but that’s not true, Preis points out. The VA offers cash-out refinancing, typically with no down payment requirement, to pay for home improvements. The VA also provides special grants for adapted housing for veterans with a service-connected disability. The grants help pay for a remodel or the purchase/building of a new home that accommodates their disability.
Reverse mortgages – A federally insured Home Equity Conversion Mortgage, or HECM, is the most common type of reverse mortgage. Insured by the Federal Housing Administration, HECMs allow people who are 62 or older to tap a portion of their home equity without having to move. You also can use a HECM to buy a home.
Low inventory, rising rates create barriers to downsizing
At the crux of boomers’ dilemma is the shortage of affordable homes on the market. That, along with rising mortgage rates – a trend that’s expected to continue – can create significant barriers to downsizing, says Laurie Goodman, vice president of housing finance policy and codirector of the Housing Finance Policy Center at the Urban Institute.
The national average rate for a 30-year fixed mortgage hit a record low of 3.41 percent in July 2016, according to historical data from Freddie Mac. As of Aug. 30, 2018, the average 30-year fixed rate was 4.52 percent – more than a full percentage point higher.
“Higher rates have a huge effect on mobility for everyone,” Goodman says.
Baby boomers who plan to stay in their current communities are likely to have the upper hand in competing for a smaller, less expensive home if they’ve paid off or have significant equity in their current home thanks to inflated appreciation. The key question is whether they’ll find the right home for their needs amid inventory shortages in the lower end of the market.
Seniors’ mobility could be impeded if they try to relocate to more expensive markets to be closer to family than where they currently live, especially given higher rates and rising prices, Goodman points out.
“There’s a limited supply of homes, along with rising prices – that’s a problem that’s not correcting and it’s getting worse and worse,” Goodman says.
Restrictive zoning laws and higher land costs are pushing builders to focus on producing luxury single-family homes (rather than economical multifamily projects) to remain profitable, Goodman says. The key to encouraging more building is a revamp of local zoning rules to enhance the variety of new housing projects, she adds.
Older Americans thinking outside the traditional housing box
In a lot of U.S. communities, a lack of housing variety complicates the picture for baby boomers who are seeking affordable options. And for some older folks, economic necessity is giving rise to creative solutions that buck tradition.
The AARP survey found that adults age 50 and older are open to housing alternatives, such as home sharing (32 percent), building an accessory dwelling unit (31 percent) and villages that provide services that enable aging in place (56 percent).
Whether it’s for economic viability or to gain companionship, seniors’ willingness to think outside the box is driving the growth of unconventional housing solutions, says Danielle Arigoni, director of livable communities with AARP. The “Golden Girls” style of roommates is one shared-housing arrangement gaining steam. There’s also intergenerational home-sharing; an online platform called Nesterly, for example, matches older adults with college students who are looking for roommates.
“An affordable housing crisis is brewing and, in many places, it’s already here,” Arigoni says. “[These solutions are] becoming less taboo and more accepted. And that’s partially just recognition of the financial realities we’re all accepting.”
The appetite for home-sharing is being driven by a resurgence in accessory dwelling units. An accessory dwelling unit is a smaller, secondary building that’s attached to the primary home or located on the same lot. This type of housing (think granny flat or mother-in-law suite) offers a livable solution for seniors who want to age in place and generate rental income, live near family, or eventually bring in-home care help down the road, Arigoni says. The key roadblock to add accessory dwelling units, though, is securing approval from local zoning or building authorities, she notes.
Whether downsizing or staying put is in your future, housing expenses will undoubtedly play a huge part of your overall retirement picture. Preis, with BBC Mortgage, suggests crafting a financial plan for retirement (if you haven’t already). Sit down with a financial advisor, a mortgage lender (if you plan to finance a home purchase or tap your home’s equity), and your accountant to figure out what options will help you live comfortably while maximizing your retirement income, Preis says.
The decision to downsize or age in place isn’t just about affordability or the place you call home. Consider how close you’ll be to family, friends, doctors, hospitals, transportation, parks, cultural attractions, and other key amenities that make a community truly livable, Arigoni says.
Canadians typically consider mortgages as a burden, to be paid down as quickly as possible, or at least before retirement.
It may seem counter-intuitive, but for the wealthy, mortgages are a tool to make more money.
Carrying a mortgage when you don’t need one might seem like a head-scratcher. Why borrow when you’ve already got plenty of funds at hand?
But as F. Scott Fitzgerald purportedly once said, “The rich are different from you and me.”
It sometimes makes sense for high-net-worth people to take on new debt, says James Robinson, mortgage agent at Dominion Lending Centres in Toronto.
“Using your real estate holdings to borrow money for investment purposes – either your principal residence or any other investment or personal-use property – falls under the ‘wealthy people become wealthy by using other people’s money’ category,’” Mr. Robinson says.
“If you can invest at a higher rate of return than you can borrow, you will increase your wealth and, therefore, your net worth.”
There are also tax advantages, though Mr. Robinson advises investors to seek professional advice about tax implications. In Canada, mortgage interest is not tax deductible; however, the interest paid on funds borrowed for investment is, so borrowing has to be structured carefully to avoid running afoul of the Canada Revenue Agency.
Remortgaging or taking a line of credit secured against property can also be advantageous for investors who are affluent but don’t quite reach the high-net-worth (HNW) category.
Financial institutions generally consider HNWs to be people with $1-million in liquid assets, while those with $100,000 to $1-million are considered “affluent” or “sub-HNW.”
One reason that HNW clients can consider taking on a mortgage is that “normally, they’re the ones who have access to assets for security [their houses and other properties] as well as the income required to service the debt,” says Paul Shelestowsky, senior wealth advisor at Meridian Credit Union in Niagara-on-the-Lake, Ont.
For those who are barely at the HNW threshold but want to boost their investable assets, “unless you can obtain a preferred rate from your lender, using secured debt is the only advisable way to borrow to invest,” Mr. Shelestowsky says.
Mr. Robinson cites several good ways to borrow to invest.
“The most common strategy used is to simply refinance your principal residence to access some of the equity you have built up over the years, and use the additional funds to purchase an investment property,” he says.
Wealthy borrowers who refinance in this way increase their asset base through leveraging, but this also is contingent on the value of real estate going up, Mr. Robinson adds.
“If you own $600,000 worth of real estate and prices rise by 5 per cent, you have increased your worth by $30,000. If you leverage and now own $1.2 million worth of real estate and prices rise by 5 per cent, you have increased your worth by $60,000.”
What could possibly go wrong? A few big things, the experts say.
For one, it’s never certain that the value of real estate will rise. There’s always the risk that you will be paying off a mortgage on a property whose value is drifting sideways, or even dropping. This could be happening, too, as your market investments are nosediving.
“Remember that when you leverage and asset values fall, the same multiplying effect occurs in the opposite direction. Don’t get caught in a get-poor-quick scheme,” Mr. Robinson says.
Real estate values do tend to go up over time, but it is not a straight line, he adds. In Ontario and other parts of Canada, the years from 1989 to 1996 were brutal for real estate values.
Debt-holders must be patient, says Andrea Thompson, senior financial planner with Coleman Wealth, part of Raymond James Ltd. in Toronto. “Investors must be able and willing to sit with a paper loss and continue to collect the monthly income, rather than panic and sell at a loss.”
Investors considering taking a mortgage should also be mindful of rising interest rates. The Bank of Canada is holding the line on rates for now, but it has hiked its key lending rate three times since last July, Ms. Thompson says.
High-net-worth borrowers also should consider the type of mortgage. “Looking at a variable rate or open mortgage might be preferable to some who want more flexibility, if they want to collapse or modify their strategy if and when interest rates rise,” Ms. Thompson says.
A different way to go, Mr. Robinson says, is to take what some lenders now offer as an “all in one” borrowing product, secured by real estate.
“This combines a mortgage with a home equity line of credit to allow you excellent flexibility in your borrowing as well as the ability to keep your borrowing segmented for interest calculation and tax deductability,” he explains.
Even the wealthy should be cautious in this volatile investment climate, Mr. Shelestowsky says.
“An overarching theme from the investment world is ‘lowered return expectations’ going forward,” he says. “Target expectations have been drastically reduced across all investor profiles.”
Source; DAVID ISRAELSON SPECIAL TO THE GLOBE AND MAIL
If it would sell for less than $200K, it might be a decent investment property
Q: My 91-year old father just moved into assisted living. His townhouse is in my name. It has no money owing on it. Unfortunately, it looked like a time warp circa 1979. We will spend just under $20,000 renovating it. We borrowed this money on a low-interest loan.
The home is in a nice section of town in Prince George, B.C. Renting seems like a long term play but risky, just after we put so much money into it. It is in a strata, which has a monthly cost of $200. We could expect monthly rent between $1,000 to $1,200. Does renting make financial sense?
A: Your situation is pretty common these days, T, as baby boomers are tasked with managing their aging parents’ finances. There isn’t exactly a manual on best practices either.
I’m assuming that your father has sufficient pension income or other resources to fund the assisted living costs, so that the income or the proceeds from the townhouse are not crucial for his day-to-day well-being.
You mentioned that the townhouse is in your name. Do you mean it’s 100% in your name or it’s joint with your father? If it’s 100% in your name, one thing to consider is that if you own a home of your own, you may have a capital gain when you sell your father’s home as you can’t have two tax-free principal residences.
If it’s held jointly with your father, assuming he added your name for estate planning purposes only, your father may still be able to claim a full principal residence exemption on sale. That said, if he’s in assisted living now and not ordinarily living there, delaying a sale may attract some capital gains tax, T.
If there are other people, like your siblings, who are beneficiaries of your father’s estate, you should seek input from them assuming the house proceeds are also meant for them.
And if the property is beneficially your father’s and your name has just been added legally, remember that the same logic applies to the house proceeds if you sell it. That is, the money is still technically your father’s money while he’s alive, even if it goes into a joint account.
I’m cautious about doing a renovation before the potential sale of a property, especially one as dated as your father’s. I’d definitely seek input from a realtor as to what to do and what not to do as renovations are often based on personal taste and may not return 100 cents on the dollar. Renovations for listing purposes should at least be high priority, marketable and ensure widespread appeal.
Even if you rent, I think you want to try to ensure your renovation money is well-spent to maintain the property, appeal to renters and eventually appeal to buyers.
Of note is that if you do rent the property, the interest on the borrowed money for the reno will be tax-deductible against the rental income, T. Rental income is taxable on your personal tax return, with an offsetting deduction for eligible interest, strata fees, property taxes, insurance, utilities and other associated costs.
Renovations are generally not deductible like other expenses, but get added to the cost of the property for tax purposes and you may then claim depreciation (capital cost allowance) of up to 4% per year on a declining basis.
Whether renting is the best option depends in part on your other options. If you would otherwise invest fairly conservatively, you might only be able to generate 2% interest or less on the net sale proceeds (back out real estate commissions, legal fees and as mentioned earlier, capital gains tax if applicable from what you’d ultimately have to invest).
If you would invest more aggressively, is this money going to stay invested the same way upon your father’s death? If so, a balanced portfolio might generate 4-6% over the long run and an all-stock portfolio might generate 6-8%. Will real estate do better? It’s hard to say.
But when evaluating the real estate, start with what you expect the rental income to be, T. You said between $1,000 and $1,200 per month and net of your strata costs of $200, you’re looking at $800 to $1,000. Depending on property taxes, insurance and incidentals, your net rental income might only be $600 to $800, let’s say. So let’s use the midpoint of $700 for our calculations.
As a landlord who already owns a potential rental property (as opposed to one who was thinking of buying a specific property), I think I’d want to be aiming for at least a 4% capitalization rate, meaning if $700 per month ($8,400 per year) was under 4% of the property value, you might consider selling. If you could only generate $700 in net rent per month and the property value was more than $210,000, you should possibly be considering your options. So if the property could sell for, say, $225,000, I think you need to at least consider selling. If, on the other hand, it would fetch much less than $200,000, you might have a decent yielding investment property.
Regardless of how the numbers shake out, I think you also need to consider simplicity with a rental property. If you live in Vancouver and the property is in Prince George and it would be a hassle to manage, you might lean more towards selling. Even if you’re in Prince George, if your time and attention would be better allocated to your father’s care, you should also consider selling.
Hopefully this helps you weigh your options, T. In the meantime, I hope your father’s transition to assisted living is an easy one for all involved.
How much are you paying each month in condo maintenance fees and what do those fees truly pay for? If you don’t know the answer to that question, you might want to read this study.
Maintenance fees (MF) are a constant topic in condo real estate, both during your search process and once you own a home. Back in 2015, we released a study that revealed the truths and myths behind maintenance fees in Toronto condos. But two years is a long time, especially in today’s real estate climate, so we’ve come back with our Maintenance Fee Report 2.0.
But first, a bit of maintenance fee 101
Every homeowner will pay maintenance fees in one form or another. Whether you have a freehold house or a condo apartment, a homeowner’s maintenance fees cover a wide range of home upkeep costs from lawn care to roof repair.
For a freehold house, the everyday upkeep costs will vary from year to year, depending on the condition of the house and whether there’s a need for sudden repairs. Unexpected costs are the most common worry with owning a freehold house. When a pipe bursts or the furnace quits, you can be hit with a sizable bill.
For condos, the maintenance fees tend to follow the rate of inflation, acting as a fund for the on-going upkeep of your unit and building in a range of ways. That fund, if managed well, can keep unexpected costs away for good.
That’s the key benefit of the structure of condo maintenance fees over freehold: the potential to remove sudden, unexpected costs.
It’s not surprising that there are a lot of misconceptions surrounding condo maintenance fees. In this report, we’ve picked the most common concerns that our Condo Pros hear from clients and broken them down into true or false answers.
1. Maintenance fees have no legal increase limit
There is no legal regulation regarding the amount that a condo building’s maintenance fees can be increased annually. There is a general rule that maintenance fees increase to adjust with inflation and/or the needs of the building. Condo corporations are non-profit entities made up of unit owners within the building, not an outside group. The cost of operation adjusts for the true cost of maintaining the building. The condo board members who may vote to raise maintenance fees are in the same boat as all other owners in the building.
2. Lower maintenance fees mean lower monthly costs
Maintenance fees cover different elements from building to building. Some buildings include the cost of water, heat, hydro, insurance, and other elements in the maintenance fees. Others may not. If those elements are not included in the maintenance fees, you will have to pay them separately. That’s why it’s important to know exactly what your maintenance fees cover. A low maintenance fee does not necessarily mean low monthly costs.
The maintenance fee that includes water, heat, hydro, and A/C is obviously more expensive, but these elements must be paid regardless. If you’re paying for these elements separately, the total monthly costs could be much higher than if they were included in the maintenance fees.
3. Smaller boutique buildings are less expensive than high-rise towers
Condo building maintenance fees depend on a lot of factors. At the top of the list is the building’s footprint and the number of units. Between two buildings of a similar footprint, it doesn’t matter if the buildings are five-storeys or forty. It will cost the same amount to maintain and repair the roof. That cost is dispersed across the units. The more units, the broader the dispersal; and the lower the fee for each individual unit.
Building amenities are another key contributor with a range of factors. But it still has to do with the number of units. A concierge service shared between ten boutique units will be more expensive per unit compared to a concierge shared between 400 units.
Between two buildings of a similar footprint and similar amenities, the one with more units will tend to have lower maintenance fees. However, the building with more units will have a higher opportunity for wear and tear of common elements, which might in the long run cost more to maintain.
4. Maintenance fees always spike within 3-5 years for new buildings
TRUE AND FALSE
Every building is managed differently. Builders often market new buildings with low maintenance fees to make them more appealing to buyers. Once the condo board takes over, it is common to see fees undergo slight increases as the board fills out the reserve fund. After an initial increase, however, fees should stabilize. In the case of well managed properties, maintenance fees even come down. For instance:
5. Low maintenance fees are a sign of value
Maintenance fees should be priced in accordance with the true cost of operating and maintaining the condo building. If that true cost is low, and the maintenance fee is low, then great. But if maintenance fees are low for the sake of attracting buyers, and are not adjusted to the true costs, then you could run the risk of a mismanaged reserve fund.
A better sign of value is smart building management. The maintenance fees fill the reserve fund and are used for big repairs, upgrades, etc. If a building is poorly managed, the reserve fund may deplete, at which point the condo board will have to issue “special assessments.”
During the condo search process, however, you may still want to look for buildings with low maintenance fees as a means of maximizing your purchasing power. With a lower all-in monthly maintenance fee, you can allocate more of your monthly budget towards a mortgage payment, thereby increasing the size of the mortgage you can carry. Just be mindful of the building’s true operating costs.
6. Cost of Parking Spot and Locker are included in maintenance fee
Parking spots and lockers are often separately titled properties, which means they have their own maintenance fee attached to them. If your parking spot or locker is separately titled, then you have to pay a separate fee on top of your condo maintenance fee.
Source: via Condos.ca as of Jan 4, 2018. All data is for 2017 unless otherwise noted.
Condos.ca has worked diligently to ensure the accuracy of this information and our calculations including the removal of any small samples and data anomalies that could skew results. However, we cannot guarantee the information with 100% certainty due to factors including but not limited to potential incorrect information entered by listing brokerages or agents on MLS. This information and the views and opinions expressed here are intended for educational purposes only. Condos.ca accepts no liability for the content of this study.