E#248 – Why a 1 million dollar home actually costs = $ 1,746,080.21
Let's hammer down on what is really going on here. A lot of people are about to get swept up in the craziness of the market again in the next handful of months. You need to know exactly what you are getting into.
This is not to detour you from purchasing but highlighting the true cost of real estate. People typically match the property to the monthly payment & hope they can get something they like. And that’s fine because we are shopping based on affordability, almost always…
2327 Central Ave – Port Coquitlam BC - $999,000
2107 – 550 Taylor St – Crosstown Vancouver BC - $999,000
$200,000 - 20% down payment (deposit)
P.T.T - $18,000
Notary fee - $900.00
GST – no tax, used home
Realtor – free
Now the first step of this process is earning the after-tax dollars you will need for a down payment. Now of course, if you are an employee, you are earning after tax dollars for everything you purchase. And a home is no exception. However, in efforts of clarity, we want to know exactly what it costs. In the example below we are taking into consideration the assumption that over the past four years, this buyer has earned the same amount and has been taxed the same amount to get to today’s conclusion below.
STEP:1 - COST OF DEPOSIT
$40,641 – income tax (0.27cents/dollar)
= $104,906.00 After Tax income
Save 50% of income = $52,453 x 4 years = $209,812 (down payment)
To make that $209k after tax dollars you paid $56,649.24 in income tax. There for the actual cost of $209,812 = $266,461.24
Now the next step is the big one. So, the assumptions here are that you purchase today and hold the property throughout the entire 25-year amortisation (unlikely). Additionally, that you hold or average the same interest rate throughout the entire 25 years (also unlikely). Also remember that your mortgage fee to pay your mortgage broker is worked into your payments.
STEP 2: COST OF MORTGAGE
5.540% fixed rate
Total interest payable over 25-year amortization:
= $800,000 loan + $670,530.97 interest = $1,470,530.97 total cost of mortgage.
So to break down total costs below, you will see that the purchase price is simply not really the amount you are paying to purchase the home…
House Deposit $200,000
Income tax for deposit $56,649.24
P.T.T - $18,000
House Mortgage $800,000
Total AM interest $670,530.97
= $ 1,746,080.21 total cost of ownership
Then if we want to get technical, a house can’t be functional without property tax and utilities. So below we add the averages in a further point of clarity.
Property tax: $3,530/yr x 25yrs = $88,250
Utilities (water) : $800/yr x 25 = $20,000
= $1,853,430.21 total cost of ownership
Now if we want to get really REALLY technically….. A house cannot function either without heat or electricity… So below please find those averages included also… If you were wondering…
Hydro - $1,923.78 / yr = $48,094.50
Fortis - $1,384.68 / yr x 25 = $34,617.00
= $1,937,041.71 total cost of ownership
So, there you have it… That is what you are paying in full… Now naturally this does not include any repair, upkeep or renovations to the home that may be needed over your 25 years of ownership in this example.
And again, in conclusion I do not tell you this to detour you from purchasing real estate as an investment or your principal residence. But to shine a light on what it truly costs you. In this current world of normalizing debt and holding balances and owing money, I felt this was important to clarify and important to dissect to get to the bottom of what a home truly costs you to own…
Thank you for your attention on this matter and I look forward to any questions with regards to this that you may have.
See you next week!