Can you afford to upsize?
A bigger house comes with bigger costs you might not have considered. Here’s how to add them all up.
In 2016, Clare Bucknall and Neb Dostic’s newly blended family of seven needed more space. Her twins were eight at the time and his three children, 11, 13 and 17, were making Dostic’s 1,500 square foot Toronto home a tight fit.
So they upsized to a 2,500 square foot, four-bedroom abode in the city’s Beach neighbourhood, which also came with a finished basement where the older kids now hang out. “We love the house and it’s big enough for everyone,” says Bucknall, 48, director of a pension administration firm in Toronto.
With two incomes and money from the sale of two homes – Bucknall sold her place a couple of years earlier – the two were able to afford the house they wanted. Sometimes, though, upsizing – whether it’s to make space for more kids, co-habitate with parents or to accommodate a home-based business – can really stretch a family’s budget.
Indeed, upsizing in areas like Toronto or Vancouver, where property values continue to rise, is a major financial decision and one that doesn’t get talked about nearly as much as downsizing, says Todd Sigurdson, director, tax and estate planning at IG Wealth Management.
Dostic, a 49-year-old IT director, agrees that upsizing can come with financial downsides. “You don’t want to overextend yourself,” he says. “You need to do your homework.”
Calculate the new mortgage
Deciding whether or not to buy a bigger home starts with the mortgage and whether you can afford to pay what’s likely a higher monthly payment. To figure it out, look at the purchase price of what you might buy, the down payment you can make, your amortization period, the interest rate you think you might be able to obtain and then plug it into an online mortgage calculator. This will give you an idea of how much you could end up paying.
That’s essentially what Bucknall and Dostic did. Their realtor helped them figure out what they could sell their smaller house for and how much of that could be used for a down payment. They then looked only at properties where that down payment amount would cover roughly 75% of the purchase price. That would leave them with a comfortable monthly payment, and a mortgage they could pay down reasonably quickly. “Given our ages, that’s what we thought was best,” says Bucknall.
There’s one thing to take into account: rising interest rates. If you take out a variable rate mortgage, or need to renew a fixed one, then your monthly payment could rise as interest rates climb. “You need to be sure not only that you can afford your mortgage payments now, but also maintain those payments into the future if rates go up,” says Sigurdson.
Add in related expenses
Aside from the legal and land transfer fees that go along with any home purchase, there are other less obvious expenses that come with moving to a larger property, such as higher utility costs and property taxes, says Sigurdson. Similarly, your household’s transportation costs could rise or fall depending on how close your new place is to work.
A larger property might also require more furnishings and ongoing maintenance, while older homes could need renovations. That wasn’t a concern for Bucknall and Dostic, since their rebuild was less than 10 years old, but it’s a cost to consider.
Look at your larger financial plan
If you do want to go bigger, then see how additional payments might impact other parts of your financial plan. If you’re paying a larger mortgage, can you still afford to take your two trips a year? Would you want to give that up?
As well, don’t think of a larger house as a retirement plan, which many people do. While you can downsize later and possibly use the sale proceeds to fund a nest egg, you never know where real estate prices might end up. “That could provide a substantial amount to fund retirement, but I wouldn’t recommend it be the entire retirement plan,” says Sigurdson. “Buyers need to meet the costs of the new home without neglecting their other financial responsibilities, including retirement savings.”
Bucknall agrees a holistic approach is key. “If you’re younger, and your incomes are going up, you may be OK with a larger mortgage and taking longer to pay it off,” she says. “It’s important to know your financial goals.”