Maintenance Fees and How They Affect Your Mortgage
Knowing all the upfront costs is not all that you must consider as a first-time homebuyer. Various hidden costs come as an after-math when getting your mortgage, and maintenance fees is one of them. Although your mortgage will make up the largest chunk of your monthly repayments, you will have to pay several others costs. These include the following.
- Property tax
- Home insurance
- Utility bills
- Condo fees, i.e., maintenance fees
Your maintenance fee can cost a substantial amount, especially if you are considering buying a condo in an old building. This may require you to fork out money for expensive building repair and maintenance frequently. So, how do you determine what the maintenance cost is going to be? And how much impact it will have on your monthly mortgage repayments? Without ado, let us dive right in.
What is Maintenance Fees?
A maintenance fee is also known as condo fees or strata fees that you pay to the organization responsible for the upkeep of your building. The fee comprises several components that include the following.
- You will have to pay your condo maintenance corporation for some of the utilities such as water and electricity. However, heating is not typically a part of your condo fees, with the exception to certain older buildings.
- Some of your condo fees goes to a maintenance reserve fund. The building maintenance management can access these funds for any repairs in the building, including your condo.
- A portion of your maintenance fees goes towards common area maintenance such as snow removal, trash removal, and upkeep of any common spaces.
How Much Is the Maintenance Fees?
Your maintenance fee may vary based on various factors. For instance, the province you live in, the area, the present condition of the building, and the condo itself. The average maintenance fee you can expect to pay in Toronto is $0.64 per sq. foot . So if you are living in an 800 square foot condo, you can expect to be paying in the range of $512 (800 x 0.64) towards maintenance every month.
Remember, this is typically on top of your monthly mortgage payments. Therefore, if you are already in a kind of monthly debt, and you have to really consider if a condo is a good option as a first-time homebuyer.
Can You Afford to Buy a Condo?
After reading the above-mentioned information about how much maintenance fees can cost, you may be wondering how to know if you can afford a condo. Well, there is a standard formula known as the gross debt service (GDS) ratio. Many institutional mortgage lenders use this formula to determine if you will be able to afford a mortgage along with a maintenance fee and other home related expenses.
The GDS Formula and Calculation
Here is the basic formula to help you self-evaluate your eligibility or affordability to buy a condo.
GDS Ratio = Your Mortgage payment + Heating Costs + Property taxes + 50% of your condo fees ÷ Your Annual Income
For example, you and your partner earn $100,000 per month and wish to buy an 800 sq. ft condo worth $500,000 with a condo fee of $0.64/ sq.ft. Let us suppose you are planning to purchase this condo at a 10 percent down payment with a 20-year fixed mortgage at 1.89%. In this scenario, your total monthly cost of a mortgage will be as follows.
The breakup of Your Monthly Payment
| Expense | Per Month | Per Year |
|---|---|---|
| Mortgage | $2,321 | $27,852 |
| Property tax | $417 | $5,004 |
| Utilities | $50 | $600 |
| Maintenance fee | $512 | $6,144 |
| Total Cost | $3,354 | $40,248 |
Now use this data to find out your GDS ratio.
Your GDS Ratio = $27,852 + $600 + $5,004 + ($6,144 x 0.50%)/$100,000= 36.52%
You can see that a maintenance fee can make up a large chunk of your monthly and yearly mortgage repayments. The higher your maintenance fee, the more your GDS ratio will be. This will also make it difficult for you to secure a loan from the lenders.
Special Assessments: An Additional Cost to Consider
There is a fair chance for you to find a condo with lower maintenance. However, there may be a catch here. The lower fee may indicate that the building’s management may not have enough cash to carry out extensive repairs instantly.
While your monthly maintenance fee may be lower, the condo maintenance corporation may ask you to pay an upfront fee known as a special assessment. Typically, these charges go towards specific projects such as roof replacement, parking area repairs, etc. Therefore, special assessment fees may sometimes reach thousands of dollars.
Status Certificate: A Must-Read Document
One way to avoid high maintenance fees is to look for a condo in relatively new projects. This will ensure that you do not have to pay hefty special assessments. You can also gauge the health of the condo corporation’s existing cash flow.
Additionally, feel free to verify this by requesting the condo corporation to share their status certificate with you. This is a report that contains all the details about the current financial state of the condo maintenance corporation. A status certificate will also mention any details of the existing size of their reserve fund and ongoing lawsuits.
Therefore, if you are considering buying a condo, experts recommend a status certificate as a must-read document before closing the deal. It is better to be safe than sorry, right?
As a first-time homebuyer , you must find a property that can offer you a good dwelling with a reasonable maintenance fee. This will help you bring down your overall GDS because every cent you save can help you secure a mortgage deal with a lender. So yes, maintenance will inevitably have a significant impact on your mortgage plan.
Conclusion
It is always a good idea to double-check your numbers before applying with your lender. Additionally, you must remember that condo fees are subject to change, i.e., they may increase without any prior notice. That said, you must reduce the chances of ending up in the financial pickle of paying special assessments.
If you are a homebuyer in Canada, you should take maintenance fees seriously. No matter which province you are in, you will be paying hefty condo fees. Therefore, ensure that your finances have enough room to accommodate this cost in your monthly budget.
