Smart Investing: How You Can Afford to Buy a House in Vancouver

By using your home as a second source of revenue, you can make your Vancouver homeownership dreams feasible.  

In this post, we will explain how you can afford a house in Vancouver by seeing your property as both a home and revenue generator.  With Vancouver being one of the most unaffordable places to live in the world, homeownership can seem like a mere pipe dream, leaving renting in Vancouver as seemingly the only option. However, this is not necessarily the case. For some qualified couples and individuals, one way you can attain your homeownership goals is by purchasing a property that allows you to earn rental revenue, which you can then use to put towards your mortgage payments.

Meet David and Sarah:

David and Sarah have two daughters and are looking for a place to call their own to raise their young family.  Currently, they are renting, but have amassed enough savings that they feel like now it is time for them to make the step towards homeownership. Ideally, they want to live in Vancouver, as this is where their friends and family are; but, they feel like monthly mortgage payments on a Vancouver home would be infeasible. 

Although Vancouver homeownership may seem out of reach, buying a property with a mortgage helper, like a basement suite, could allow David and Sarah to afford to buy a house in Vancouver.

With the help of revenue from a rental unit, you can take the rental revenue each month and put it towards your mortgage payments. Also, by paying monthly mortgage payments instead of rent, you are investing in yourself and towards your own equity, whereas rent can be essentially considered a sunk cost. You would have to pay rent regardless, so it makes sense to pay it to yourself rather than someone else.  

First, they need to talk to their financial advisor for an understanding of how mortgages work, and what financing would look like if they were to buy a property.

By taking out a mortgage, the bank gives you the money needed to purchase your new property. This is in exchange for an agreement that over the next however many years that you will pay them back for the money you borrowed each month, along with interest - the cost of borrowing the money.  

With the help of their financial advisor, they decide on a 5-year fixed mortgage with a 25-year amortization period. Meaning that each month for 5 years, they will pay the same amount every month. Once those 5 years are up, they will renew their mortgage with a new interest rate, and continue the process until the loan is paid off.

In the beginning, most of the monthly payment will be made up of interest, with a smaller amount going towards paying off the principal – the actual amount they are borrowing. However, as time progresses and the principal gets less and less, so does the amount of interest they are paying, and eventually they will be paying off more principal than interest.

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David and Sarah can also pay directly towards the principal when they have money available.

They can either pay an additional sum each month that is equal to or less than their recurring monthly payments, or an annual contribution that is around 10% of the remaining loan value. These specifics however depend on the bank.  By directly paying off the principal with their extra cash flow, David and Sarah can reduce how much interest they will need to pay.  If all goes as planned, within 25 years David and Sarah will have paid the bank back, be the sole owners of their home, and have a significant personal asset.

What if They Want To Move Within That 25 Years?  

As they pay off their mortgage, David and Sarah will be building equity, and hopefully, the value of their property will be appreciating as well. As such, when they sell their house they will have the total sum to pay the bank back and hopefully some profit that they can then put towards their next property.

Vancouver Home Ownership Costs:

Expenses and Taxes

Property Tax

As a homeowner, you are legally required to pay property and applicable taxes to the City of Vancouver.

Home Insurance

With a home being such a significant investment and importance in your life, it is important to take the precautions to protect it and yourself. Coverage needs are specific to each home, so it is best to talk with a specialist to learn what home insurance would look like for you.

Average annual homeowners insurance costs approximately $924 in B.C.. This is slightly higher than renters insurance which comes in at $588 annually, given the increased liability.

Utilities: Hydro, Natural Gas, and Internet

While some landlords include these fees in your rent, now as your own landlords and that of your new tenants, you are on the hook for all three.

House Upkeep  

Landscaping  

Basic landscaping services to regularly come mow and ensure the health of your lawn and garden, is a home maintenance expense that can contribute to the long-term livability and aesthetics of your home, and can affect resale value down the road.

Rainy Day Fund

The general consensus is that 1-4% of the property’s purchase price should be set aside each year for maintenance, depending on the age of the home. You don’t want to be caught completely off-guard if your plumbing fails, or you need a new roof. These costs can be unpredictable and quite pricey so it is best to be prepared.

Also, if you want to resell your property later down the road for a profit, buyers will want to see that the home has been well maintained, adding value in the long run. This money can be put into a high-interest savings account, so it is growing and not just sitting waiting to be used.

‍The Rainy Day Fund Can Help Pay Your Loan Faster

If at the end of the year the money has not been spent, or there is a significant amount remaining, David and Sarah can decide to put part of their rainy-day fund towards the principal on their loan.  By doing so, they could pay off their mortgage faster, plus they will be paying less interest as well; for the amount of interest is proportionate to the amount left of the principal.

Closing Costs (Property Transfer Tax and Sometimes GST)

When buying a home in British Columbia, you need to pay Property Transfer Tax (PTT) to officially seal the deal on your new home. If the home is a new build, then you also have to pay 5% GST on the sale price. However, that is not the case for David and Sarah, who are buying an older home, so they just have to pay PTT.  PTT is charged at a rate of 1% on the first $200,000 of the purchase price, then 2% on the remainder over $2 million for residential properties. This tax will have to be paid before the possession date.

Although homeownership is still considerably more expensive than renting, there are other factors, tangible and intangible, that contribute to real estate being worth it:

1. Real estate appreciates

While appreciation is not guaranteed, using a skilled realtor can help mitigate the risk that you may lose money on your investment. But, the beauty of real estate is that if the market value drops below what you paid, it is likely that the market will bounce back and you can eventually make a profit; thus, making real estate an arguably reliable investment.  Also, if the value of your property rises above what you paid for it, you can take the equity you have accumulated, and purchase something of higher value, in turn climbing the real estate ladder.

2. As a principal residence, the capital gains are tax exempt

When you sell your property and the value has appreciated, you do not need to pay tax on your capital gains.

3. You are building equity

Home equity is the current market value of your home minus what you still owe, as such as you pay down your loan and your property (hopefully) appreciates, your equity will grow.  That means that every month that you pay your mortgage payments you are increasing your net worth, whereas when you pay rent you will never see that money again.

4. Long-term stability

Mortgage payments end, rent does not. With a fixed mortgage, you have certainty for the length of your term what your monthly payments will be. Also, there is light at the end of the tunnel, for you know at the end of your amortization period that you will own where you live. Homeownership gives you a sense of permanence and certainty as well, for when you move it is on your own terms, not the landlord.

The Bottom Line:  

Everyone is different, so it is up to you to decide whether homeownership is for you. While it is not for everyone, there are proven long-term benefits to owning property.  If you are looking to become a homeowner, you can mitigate your risk by using a qualified realtor to help you find the property that is a good fit for you and will act as an investment in the long term.  

Thanks to the help from David and Sarah’s Icon&Co. realtor, they were able to find a property that ticked all their boxes, and are now establishing their family’s roots in their new home with the monthly help from their basement rental suite.  

If you too are looking to become a homeowner in Vancouver, contact one of our agents at Icon Marketing at info@iconco.ca.  We can help you make sure one of the biggest transactions of your life is the right one for you and your family.

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The above is provided for informational purposes and does not constitute expert opinion or a solicitation to invest.  Opinions given do not constitute professional advice.  Real estate investments, like other investments, are subject to risk and the possibility of loss.  Consult with an expert prior to acting on any information provided above.  All rights reserved.