Looking for your first home can feel like a full-time job. From choosing the right neighbourhood to finding the best real estate agent, there is always something to do. Not to mention, the money side of things can feel impossible.
How will you come up with a reasonable down payment and still manage to afford your current lifestyle? Well, some experts might suggest a starter home.
What is a starter home?
A starter home is a smaller property, like a condominium or townhouse, that is more affordable for you in the present. But, that might not provide enough space for you to grow into depending on your lifestyle.
The lower purchase price may mean that you have an easier time breaking into the real estate market, which can help major cities, like Toronto or Vancouver, and allow you to build equity in your home by staying put for a few years. This means that you may have to sell your starter home somewhere down the line and look for something bigger.
The bright side is that you can become a homeowner significantly sooner than you may have otherwise been able to. The problem? Every time you move, you spend money.
How often do people move over their lifetimes?
As someone who has moved ten times in the past 11 years, I can tell you that moving is absolutely out of the question now that I am a homeowner. Not only would we have to sell our home, but the cost wouldn’t be as simple as it was for a renter.
You see, when moving as a renter, all we had to worry about was transporting all of our belongings and paying for a damage deposit or first month’s rent at a new residence. As a homeowner, the cost of moving includes a lot more than that and many more expensive budget lines.
Not only would we have to pay for transporting our belongings, but we would also have to cover the cost of a real estate agent, cleaning our home for showings, and a down payment and closing costs on a new property. Closing costs alone can go as high as 5% of the buyer’s purchase price and 10% for a seller. When you sell a home and move to a larger property, you will have to pay for both of these expenses out of pocket.
But, this isn’t an unrealistic expense for many homeowners. On average, Canadian homebuyers will own around 4.5 to 5.5 homes throughout their lifetime. Therefore, if you bought your first home at 20 and last at 60, that means you’ll move around every seven years.
How much does moving from a starter home to a bigger home cost?
Now that we know what closing costs can look like let’s do some math using an example.
Say you buy a starter home for around $250,000 to break into the real estate market. You pay 3% of the purchase price in closing costs, for a total of $7,500. It’s not an overwhelming amount of money because you aren’t selling a property on top of this purchase.
But, just seven years later, you require a larger home for your growing family. This time, the house you plan to buy is listed for $450,000. Again, you will pay 3% in closing costs as a buyer, for a total of $13,500.
Keep in mind, though; you also have to sell your starter home. Say your first property increased in value of around 5.5% year over year, bringing the new sale price of your home to $337,500. If closing costs are about 8% of the purchase price, you will spend around $27,000.
Your total of just closing costs to sell and buy a new home is now up to $40,500. Let me pick your jaw up off the floor for you.
On top of closing costs, you’ll also have to cover at least a 10% down payment on the $450,000 home of $45,000 and the costs associated with moving.
So, although you’ve managed to build some equity in your home, the increase in the price of $87,500 will cover the $85,500 you’ll need to move and leave around $2,000 to cover the move, and maybe one piece of furniture to fill all of the new space you’ll have!
Is a starter home for you?
After looking at the numbers, you may already have an answer for whether or not a starter home is a good decision for you, personally. If not, it’s never a bad idea to run the pros and cons to see what makes sense both financially and otherwise.
The pros:
- Buying a home isn’t always a financial decision, so it does provide you with an easier way to purchase a home if you cannot afford to wait
- If you start with a smaller home, like a condo or townhouse, there may be fewer expenses and the transition from renting to buying may be more manageable
- If you can stay long enough to build equity that will cover your next move, it could be a good financial decision
- You could keep your starter home as a rental property or investment property down the line
The cons:
- The cost of moving is higher than we realize because if you move five times over your lifetime, you could spend a full mortgage on closing costs alone
- You know you will eventually move, making it hard to feel settled or stable, which is comparable to renting but with a higher price tag
- The home may not appreciate, and you could be stuck in the same spot you were in as a first time home buyer
Ultimately, buying a home is a personal decision that requires weighing many factors, from the price to the type of property. It can feel like you have to buy a home when you see your peers and family reach this very milestone, but it’s important to remember to put your own financial well-being first.
Any money decision we make should be something we take time to evaluate from every perspective – and it’s okay if now isn’t the right time.
Do your research, speak with professionals you trust, and don’t be afraid to ask tough questions to yourself and the real estate experts you encounter.
