Many first-time homebuyers assume their mortgage payment is the only monthly payment to worry about but that’s not true. While your mortgage payment will be the largest monthly financial commitment, you’ll also need to pay other fees including property tax, insurance, utilities, and condo fees. These costs can add up, especially in older buildings, where condo fees have been known to skyrocket in order to pay for expensive building repairs.
To determine whether you can afford a condo with high maintenance fees, let’s take a look at average maintenance fees, what they cover, and some calculations you can do to determine if a condo with high maintenance fees is affordable to you.
What are condo fees?
Condo fees (often called strata fees) are a mandatory monthly payment you make to your condo corporation (the organization that runs your condo building) to cover these costs:
- Utilities—Your condo corporation may pay some or all of your utilities. For example, it may pay for your water and electricity but not heat.
- The reserve fund—Your condo fees will partially go towards maintaining a fund that will cover building maintenance.
- Common area maintenance—Your condo fees will pay for trash removal, snow removal, and upkeep of the common spaces in the building.
Condo fees can vary. In Toronto, the average is $0.50 per square foot but can go as high as $1.00 per square foot in older buildings. That means the condo fees for an 800-square-foot condo could easily cost between $400 and $800 a month.
Committing to a home with condo fees of $800 per month could seriously affect your ability to pay down debt and save for the future so it’s important to determine whether you can afford a condo with high maintenance fees. Let’s look at how lenders use condo fees to determine affordability.
Can you afford high condo fees?
When you’re deciding whether or not you can afford a condo with high maintenance fees, the first thing you should look at is a formula called your gross debt service (GDS) ratio. Your GDS ratio is used by lenders to determine whether you can afford a mortgage and maintenance fees. As long as the ratio comes out to less than 32% of your income, your condo is considered affordable.
We can calculate your GDS ratio using the following formula:
Mortgage payments + Property taxes + Heating costs + 50% of condo fees ÷ Annual income
Let’s look at two examples of a $450,000 condo with very different condo fees. The first condo is 800 square feet and has low condo fees at $0.50 per square foot. We’ll assume you and your spouse combined earn $100,000 annually and plan to purchase this condo with a 5% down payment and a five-year fixed mortgage at 2.34%.
Using Ratehub.ca’s mortgage calculator, we’ve determined that your costs will be:
Now let’s plug these numbers into the GDS ratio formula:
$23,388 + $3,180 + $600 + ($4,800 x 50%) = $29,568
$29,568 ÷ $100,000 = 29.57%
As you can see, according to this formula, you and your spouse can afford this home comfortably on a combined $100,000 salary.
In our second example, let’s assume you’re buying a condo with much higher condo fees at $1.00 per square foot. This condo is also 800 square feet and you can purchase it for $450,000 with 5% down. Here are your new costs:
Let’s plug these new numbers into the GDS ratio formula:
$23,388 + $3,180 + $1,200 + ($9,600 x 50%) = $31,968
$31,968 ÷ $100,000 = 31.97%
As you can see, the higher condo fees push you right to the brink of affordability according to the GDS formula. If you add in other debt obligations like student loans or car loans, your lender may consider this particular home purchase too risky, especially because the condo corporation sets the condo fees and can increase them at any time without notice. While you may be able to afford this condo now, an increase in condo fees could make it unaffordable in the future.
Can you afford special assessments?
It’s easier to afford a property with lower condo fees but there’s one caveat here: If the fees are too low, the condo corporation may not have enough cash flow to pay for larger repairs.
In this case, you may be faced with a special assessment, which is a payment you must make to the condo corporation. Usually, a special assessment is tied to a particular project, such as replacing the roof or repairing the parking garage. A special assessment can cost you thousands of dollars so make sure you’re prepared for this very large one-time maintenance fee!
Avoiding high maintenance fees and special assessments
Fortunately, healthy condo corporations shouldn’t have to levy special assessments as long as they keep a large reserve fund. Verify this yourself before buying by requesting a status certificate.
A status certificate is a report on the current state of the condo corporation. The status certificate includes information on the condo corporation’s overall financial position, the size of the reserve fund and any pending lawsuits. A status certificate also includes a copy of the condo by-laws and rules and regulations. This document is considered a must-read before any condo purchase.
Buying a condo with high maintenance fees shouldn’t be taken lightly. Make sure there’s plenty of room in your budget to afford these fees. If you aren’t sure, use Ratehub.ca’s mortgage affordability calculator and mortgage payment calculator to double check your math. Be aware that your condo fees could increase at any time and make sure to read through the status certificate carefully to determine the likelihood of being hit with a special assessment in the near future.
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Flickr: Michael Coté